<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
(AMENDMENT NO. 2)
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) OCTOBER 16, 1998 (APRIL 11,
1997)
SUPERIOR NATIONAL INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 0-25984 95-4610936
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
26601 AGOURA ROAD, CALABASAS, CALIFORNIA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (818) 880-1600
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
- --------------------------------------------------------------------------------
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<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
On April 25, 1997, Superior National Insurance Group, Inc. ("SNTL") filed a
Current Report on Form 8-K with respect to the April 11, 1997 acquisition of all
outstanding shares of Pac Rim Holding Corporation ("Pac Rim Holding"). 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 September 5, 1997, a Current Report on Form 8-K/A provided such
required information. This Amendment No. 2 provides additional financial
statements and pro forma financial information at, and for the period ended,
March 31, 1997, as required by Item 7 of Form 8-K.
(a) Financial Statements of the Business Acquired.
See index to financial statements beginning on page F-1.
(b) Unaudited Consolidated Financial Statements
See index to financial statements beginning on page F-1.
(c) Pro Forma Financial Information
See index to financial statements beginning on page F-1.
(d) Exhibits
None.
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: October 16, 1998 SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ J. CHRIS SEAMAN
---------------------------------------
Name: J. Chris Seaman
Title: Executive Vice President and
Chief Financial Officer
3
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(a) Financial Statements of Pac Rim Holding Corporation and
Subsidiaries:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996
(restated), and 1995........................................ F-3
Consolidated Financial Statements for Years ended December
31, 1996 (restated), 1995, and 1994:
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
(b) Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996 (restated)............................ F-21
Consolidated Statements of Operations for the Three Months
Ended March 31, 1997 (unaudited) and March 31, 1996
(unaudited)................................................. F-22
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 (unaudited) and March 31, 1996
(unaudited)................................................. F-23
Notes to Unaudited Consolidated Financial Statements........ F-24
(c) Unaudited Consolidated Condensed Pro Forma Financial
Information:
Financial Data.............................................. 1
Balance Sheet as of March 31, 1997.......................... 2
Statements of Operations for the Three Months Ended March
31, 1997.................................................... 4
Statements of Operations for the Year Ended December 31,
1996........................................................ 5
Notes to Financial Data..................................... 6
</TABLE>
F-1
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Superior National Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Pac Rim
Holding Corporation and subsidiaries as of December 31, 1996 (as restated -- see
Note 2) and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996 (restated as to 1996 -- see Note 2). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pac Rim
Holding Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 2, the Company restated the consolidated financial
statements as of and for the year ended December 31, 1996.
KPMG Peat Marwick LLP
Los Angeles, California
August 28, 1997
F-2
<PAGE> 6
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- --------
(RESTATED)
<S> <C> <C>
Investments:
Bonds, available-for-sale at fair value (amortized cost
$55,245 and $119,314).................................. $ 54,759 $121,771
Short-term investments (at cost, which approximates fair
value)................................................. 56,794 7,260
-------- --------
Total investments................................. 111,553 129,031
Cash........................................................ 1,731 773
Reinsurance recoverable on outstanding losses............... 3,124 3,884
Reinsurance receivable on paid losses....................... 785 184
Premiums receivable, less allowance for doubtful accounts of
$2,516 (Restated) and $1,221.............................. 14,278 11,616
Earned but unbilled premiums................................ 4,142 4,880
Investment income receivable................................ 609 2,207
Deferred policy acquisition costs........................... 1,065 974
Property and equipment, less accumulated depreciation and
amortization of $4,978 and $3,803......................... 4,411 2,434
Unamortized debenture issue costs........................... 1,063 1,468
Federal income taxes recoverable............................ -- 1,456
Deferred federal income taxes, net.......................... 8,745 8,348
Prepaid reinsurance premiums................................ 198 227
Other assets................................................ 3,731 1,569
-------- --------
Total Assets...................................... $155,435 $169,051
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses............. $100,588 $ 96,525
Convertible debentures payable, less unamortized discount of
$1,059 and $1,393......................................... 18,941 18,607
Unearned premiums........................................... 6,917 5,715
Reserve for policyholder dividends.......................... 364 381
Obligation under capital lease.............................. 1,203 --
Accrued expenses and accounts payable....................... 8,148 3,668
-------- --------
Total Liabilities................................. 136,161 124,896
Commitments and contingencies
Stockholders' Equity:
Preferred Stock:
$.01 par value -- shares authorized 500,000; none
issued and outstanding................................ -- --
Common Stock:
$.01 par value -- shares authorized 35,000,000 issued
and outstanding 9,528,200............................. 95 95
Additional paid-in capital.................................. 29,624 29,624
Warrants.................................................... 1,800 1,800
Unrealized gain (loss) on available-for-sale securities,
net....................................................... (324) 1,622
Retained earnings (deficit)................................. (11,921) 11,014
-------- --------
Net Stockholders' Equity.................................... 19,274 44,155
-------- --------
Total Liabilities and Stockholders' Equity........ $155,435 $169,051
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 7
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ------- -------
(RESTATED)
<S> <C> <C> <C>
REVENUES:
Net premiums earned...................................... $ 82,654 $76,016 $92,894
Net investment income.................................... 7,013 8,089 6,514
Realized capital gains................................... 1,640 453 --
A&H commission income.................................... 8 -- --
-------- ------- -------
Total revenue.................................... 91,315 84,558 99,408
COSTS AND EXPENSES:
Losses and loss adjustment expenses...................... 79,890 50,957 63,788
Amortization of policy acquisition costs -- net.......... 14,672 18,647 19,565
Administrative, general, and other....................... 16,752 11,662 11,927
Policyholder dividends................................... (11) 132 1,301
Interest expense......................................... 2,341 2,306 857
-------- ------- -------
Total costs and expenses......................... 113,644 83,704 97,438
-------- ------- -------
Income (loss) before income taxes.......................... (22,329) 854 1,970
Income tax expense......................................... 606 279 812
-------- ------- -------
NET INCOME (LOSS).......................................... $(22,935) $ 575 $ 1,158
======== ======= =======
PER SHARE DATA:
NET INCOME (LOSS) PRIMARY AND FULLY DILUTED.............. $ (2.41) $ .06 $ 0.12
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 8
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON
------------------ AVAILABLE-
NUMBER ADDITIONAL FOR-SALE RETAINED
OF PAID-IN SECURITIES, EARNINGS
SHARES AMOUNT CAPITAL WARRANTS NET (DEFICIT) TOTAL
--------- ------ ---------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994......... 9,528,200 $95 $29,624 -- -- $ 9,281 $39,000
Unrealized gain on
available-for-sale securities at
January 1, 1994, net............. -- -- -- -- $ 96 -- 96
Additional paid in
capital-warrants................. -- -- -- $1,800 -- -- 1,800
Net income......................... -- -- -- -- -- 1,158 1,158
Change in unrealized loss of
available-for-sale securities,
net.............................. -- -- -- -- (4,877) -- (4,877)
--------- --- ------- ------ ------- -------- -------
Balance at December 31, 1994....... 9,528,200 95 29,624 1,800 (4,781) 10,439 37,177
--------- --- ------- ------ ------- -------- -------
Net income....................... -- -- -- -- -- 575 575
Change in unrealized gain of
available-for-sale securities,
net............................ -- -- -- -- 6,403 -- 6,403
--------- --- ------- ------ ------- -------- -------
Balance at December 31, 1995....... 9,528,200 95 29,624 1,800 1,622 11,014 44,155
--------- --- ------- ------ ------- -------- -------
Net loss (Restated)................ -- -- -- -- -- (22,935) (22,935)
Change in unrealized loss of
available-for-sale securities,
net.............................. -- -- -- -- (1,946) -- (1,946)
--------- --- ------- ------ ------- -------- -------
Balance at December 31, 1996,
(Restated)....................... 9,528,200 $95 $29,624 $1,800 $ (324) $(11,921) $19,274
========= === ======= ====== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 9
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- -------- -------
(RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss)......................................... $(22,935) $ 575 $ 1,158
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization.......................... 2,001 1,421 930
Provision for losses on premiums receivable............ 1,295 150 (143)
Provision for deferred income taxes.................... 606 1,340 1,188
Realized capital gains................................. (1,640) (453) --
Changes in:
Reserve for losses and loss adjustment expenses...... 4,063 (20,104) (19,336)
Unearned premiums.................................... 1,202 (4,202) 1,655
Reserve for policyholder dividends................... (17) (609) (1,539)
Ceded reinsurance payable............................ -- -- (252)
Premiums receivable.................................. (3,219) 255 5,413
Reinsurance recoverable.............................. 159 (1,936) 13,044
Aggregate excess of loss reinsurance recoverable..... -- -- 10,812
Prepaid reinsurance premiums......................... 29 153 2,435
Deferred policy acquisition costs.................... (91) 1,111 (953)
Income taxes recoverable............................. 1,456 (1,013) 1,916
Accrued expenses and accounts payable................ 4,466 116 319
Investment income receivable......................... 1,598 148 (1,372)
Other assets......................................... (2,162) 229 630
---------- -------- -------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES...................................... (13,189) (22,819) 15,905
---------- -------- -------
INVESTING ACTIVITIES
Purchase of investments -- bonds.......................... (47,622) (40,524) (67,788)
Sales of investments -- bonds............................. 104,172 61,343 --
Maturity and calls of investments -- bonds................ 9,080 1,028 7,228
Additions to property and equipment....................... (1,949) (836) (918)
---------- -------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES....... 63,681 21,011 (61,478)
---------- -------- -------
FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures.......... -- -- 20,000
Debenture issuance costs.................................. -- -- (2,025)
---------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. -- -- 17,975
---------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 50,492 (1,808) (27,598)
Cash and cash equivalents at beginning of period............ 8,033 9,841 37,439
---------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $58,525 $ 8,033 $ 9,841
========== ======== =======
SUPPLEMENTAL DISCLOSURE:
Interest paid............................................. $1,600 $ 1,615 $ -0-
========== ======== =======
Income taxes paid......................................... $-0- $ 37 $ -0-
========== ======== =======
</TABLE>
The Company entered into a capital lease during 1996, to acquire certain
operating system hardware and software; the lease obligation at December 31,
1996 was $1,203,000.
See notes to consolidated financial statements.
F-6
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1996
(RESTATED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Pac Rim Holding Corporation ("Pac Rim Holding") is a holding
company that was incorporated in 1987 in Delaware. The accompanying consolidated
financial statements include the accounts and operations of the holding company
and its subsidiary, The Pacific Rim Assurance Company ("Pacific Rim Assurance")
and its subsidiary, Regional Benefits Insurance Services, Inc., (collectively
referred to herein as "the Company"). All significant intercompany transactions
and balances are eliminated in consolidation. Pacific Rim Assurance is engaged
exclusively in the business of writing workers' compensation insurance in
California, Arizona, Georgia, Alabama and Texas. Regional Benefits Insurance,
Inc. ("RBIS") is an insurance agency.
Sale of Pac Rim Holding: The previously announced acquisition of Pac Rim
Holding by Superior National Insurance Group, Inc. ("SNTL") was completed on
April 11, 1997. Pac Rim Holding was acquired for aggregate consideration of $42
million in cash. The $42 million payment by SNTL resulted in the payment of
approximately $20 million ($2.105 per share) to Pac Rim Holding's common
stockholders, $20 million to Pac Rim Holding's convertible debenture holders,
and $2 million to Pac Rim Holding's warrant and option holders.
Accounting Principles: The accompanying consolidated financial statements
are presented on the basis of generally accepted accounting principles ("GAAP"),
which differ in some respects from prescribed and permitted statutory accounting
practices followed in reports to the Insurance Departments. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners, as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. The principal differences relate to
the non-admission of certain assets, examples are, deferred income taxes,
deferred policy acquisition costs, earned but unbilled premiums, premiums
receivable, and software.
Earned Premiums: Earned premiums and the liability for unearned premiums
are calculated by formula such that the premium written is earned pro rata over
the term of the policy. The insurance policies currently written by the Company
are for a period of one year or less. Premiums earned include an estimate for
earned but unbilled premiums.
Reserve for Losses and Loss Adjustment Expenses: The reserve for losses and
loss adjustment expenses ("LAE") is based on the accumulation of cost estimates
for each loss reported prior to the close of the accounting periods and
provision for the probable cost of losses that have occurred but have not yet
been reported. The Company does not discount such reserves for financial
reporting purposes. The methods for making such estimates and for establishing
the resulting liabilities are continually reviewed and updated and any
adjustments resulting therefrom are included in current operations when
determined. While the ultimate amount of losses incurred and the related expense
is dependent on future developments, management is of the opinion that, given
the inherent variability in any such estimates, the reserve for unpaid losses,
and LAE is within a reasonable range of adequacy.
Policy Acquisition Costs: Policy acquisition costs, such as commissions,
premium taxes, and other underwriting costs related to the production and
retention of business, are deferred and amortized as the related premiums are
earned. Anticipated investment income is considered in determining the
recoverability of this asset. Other policy acquisition costs that do not vary
with the production of new business are expensed when incurred and are included
in administrative, general, and other expenses.
Policyholder Dividends: Certain policies written by the Company are
eligible for policyholder dividends. An estimated provision for policyholder
dividends is accrued as the related premiums are earned. Such
F-7
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
dividends do not become a legal liability of Pacific Rim Assurance unless, and
until, declared by the board of directors.
Investments: The Company has designated all of its portfolio as
"available-for-sale" and accordingly, bonds are carried at market with the
unrealized gain (loss) reflected in equity, net of the applicable income taxes.
The cost of investments sold is determined by specific identification.
Property and Equipment: Property and equipment is stated at cost.
Depreciation of property and equipment is computed using the straight-line
method over an estimated useful life of five years for financial reporting
purposes. Leasehold improvements are amortized on the straight-line method over
the life of the lease.
Taxes: The Company recognizes deferred tax assets and liabilities based on
the expected future tax consequences of existing differences between financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carry forwards for tax purposes. The insurance subsidiary pays
premium taxes on gross premiums written in California in lieu of state income
taxes.
Cash and Cash Equivalents: For purposes of the statements of cash flows,
certificates of deposit and short-term investments with an original maturity of
three months or less, at date of purchase, are considered to be cash
equivalents.
Stockholders' Equity: The issuance of the convertible debentures included
issuing detachable warrants to purchase common stock (See Note 6). The value of
these warrants was $1,800,000, which was recorded as warrants in the
Consolidated Balance Sheets.
Earnings Per Share: Net income (loss) per share is computed on the basis of
the weighted average shares of common stock, plus common stock equivalent shares
arising from the effect of the stock options, warrants, and convertible
debentures to the extent they are dilutive. (See Notes 6 and 7). The number of
shares used in the computation of primary and fully diluted earnings per share
for the years ended December 31, 1996, 1995 and 1994 was 9,528,200.
New Accounting Standards: In October 1995, FASB issued Statement No. 123,
"Accounting For Stock-Based Compensation" which established a fair value based
method of accounting for stock-based compensation plans. This statement is
effective for financial statements with fiscal years beginning after December
15, 1995. The Company elected to continue accounting for stock-based
compensation based on Accounting Principles Board (APB) No. 25; and thus, the
Company adopted only the disclosure provision of FASB Statement No. 123.
Fair Values of Financial Instruments: The carrying amounts of financial
instruments, other than investment securities, approximate their fair values.
For investment securities, the fair values for fixed maturity securities are
based on quoted market prices. The carrying amounts and fair values for all
investment securities are disclosed in Note 3.
Reclassifications: Certain prior year amounts in the accompanying financial
statements have been reclassified to conform with the 1996 presentation.
F-8
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
NOTE 2 -- RESTATEMENT OF 1996 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NET
STOCKHOLDERS'
NET LOSS EQUITY
-------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
As originally stated at December 31, 1996............ $(15,900) $26,309
Change in EBUB....................................... (3,385) (3,385)
Change in allowance for doubtful accounts............ (1,460) (1,460)
Write-off of deferred merger expenses................ (479) (479)
Additional accrued expenses and accounts payable..... (1,278) (1,278)
Write-off of gain contingencies...................... (433) (433)
-------- -------
As restated at December 31, 1996..................... $(22,935) $19,274
======== =======
</TABLE>
Earned But Unbilled Premiums: Earned but unbilled premiums ("EBUB")
represent management's estimate of future additional or return premiums
generated by interim and final audits of payroll and rate classification data
associated with the Company's expired and inforce workers' compensation
policies. EBUB is generally based upon estimated and actual payrolls and rates
provided by policyholders, and historical billing patterns adjusted for changes
in regulations, pricing, and billing practices and procedures. The Company's
former management recorded $7.9 million in EBUB at December 31, 1996.
Current management attempted to reconcile its estimates with that of prior
management's recorded EBUB, and found prior management's methodology to be
fundamentally flawed. In light of the flawed methodology used by prior
management, current management reduced EBUB by $3.385 million.
Premiums receivable: At December 31, 1996, the Company had recorded
premiums receivable of $15.7 million, net of an allowance of doubtful accounts
of $1.1 million. Further, included in the $15.7 million premiums receivable, net
of the allowance for doubtful accounts were $1.6 million in premiums receivable
that had been turned over to an attorney for collection.
Based upon information contained in the December 31, 1996, 10-(K) and other
sources available to prior management, it was apparent to current management
that an additional allowance was required.
Deferred merger expenses: GAAP provides that certain costs related to an
acquisition of another company may be deferred by the acquiring Company. Costs
related to the acquisition of the company being acquired may not be deferred.
Pac Rim Holdings at December 31, 1996, had improperly deferred $0.479 million in
legal and investment banking costs related to its acquisition by SNTL.
Accrued expenses and accounts payable: At December 31, 1996, former
management estimated it had unpaid liabilities of $7.3 million. The current
management identified an additional $1.278 million in accrued liabilities and
accounts payable relating to legal, commissions, and miscellaneous general and
administrative expenses that were substantially known at year-end.
Gain contingencies: GAAP does not provide for the recognition of a gain
prior to its realization. At December 31, 1996, the Company recorded $433,000 in
such contingent gains. These gains related to anticipated legal actions that had
not gone to trial or had not been settled at December 31, 1996. Therefore, in
accordance with GAAP these contingent gains were eliminated from the
Consolidated Statements of Operations.
F-9
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
NOTE 3 -- INVESTMENTS
Major categories of investment income, net of investment expenses, for
1996, 1995 and 1994 are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Investment Income:
U.S. Treasury and Other Governmental Agency
Securities.................................. $4,065 $5,365 $5,508
Money Market Funds............................. 418 309 291
Funds Held by Reinsurer........................ -- -- 169
Corporate Bonds................................ 2,762 2,655 700
Tax-Exempt Bonds............................... -- 4 102
Certificates of Deposit........................ 31 22 9
------ ------ ------
Investment Income.............................. 7,276 8,355 6,779
Less: Investment Expenses...................... 263 266 265
------ ------ ------
Net Investment Income............................ $7,013 $8,089 $6,514
====== ====== ======
</TABLE>
Proceeds from the sales of investments in bonds during 1996 were
$104,172,000; gross gains of $1,888,000 and gross losses of $248,000 were
realized on those sales. Proceeds from the sales of investments in bonds during
1995 were $61,343,000; gross gains of $657,000 and gross losses of $204,000 were
realized on those sales. There were no sales of investments in bonds during
1994.
F-10
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The amortized cost and fair values of investments in debt securities are
summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1996
U.S. Treasury and other governmental $ 28,808 $ 5 $(184) $ 28,629
agencies..............................
Corporates.............................. 13,765 2 (204) 13,563
U.S. agencies........................... 12,341 8 (118) 12,231
Asset backed............................ 331 5 -- 336
-------- ------ ----- --------
Total......................... $ 55,245 $ 20 $(506) $ 54,759
======== ====== ===== ========
1995
U.S. Treasury and other governmental $ 68,963 $ 17 $(157) $ 68,823
agencies..............................
Corporates.............................. 33,793 1,886 -- 35,679
U.S. agencies........................... 10,546 418 -- 10,964
Asset backed............................ 6,012 293 -- 6,305
-------- ------ ----- --------
Total......................... $119,314 $2,614 $(157) $121,771
======== ====== ===== ========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1996,
by contractual maturity are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in 1997....................................... $10,701 $10,696
Due 1998 - 2001................................... 44,544 44,063
------- -------
$55,245 $54,759
======= =======
</TABLE>
The expected maturities will differ from contractual maturities in the
preceding table, because borrowers have the right to call or prepay certain
obligations with or without call or prepayment penalties. At December 31, 1996,
debt securities and short-term investments with a fair value of $105,301,000
were on deposit to meet the Company's statutory obligation under insurance
department regulations.
NOTE 4 -- RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company recognized adverse development during 1996, for the accident
years 1995 and prior. Despite experiencing favorable trends in the overall
frequency and severity of claims for the 1995 and 1996 accident years, the
Company and its internal and independent actuaries observed development patterns
in the 1990-1994 accident years that were volatile when compared to previous
historical patterns. In particular, 1990-1992, were very difficult accident
years to predict, due to the impact of fraud and stress claims from adverse
economic conditions. The 1993-1994 accident years were very favorable transition
years, following legislative reforms to the workers' compensation benefits
system. Nevertheless, it was unclear how each of those years ultimately would
develop, and how subsequent accident year patterns would thus be affected, given
paid loss and case reserve activity during 1996.
F-11
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The following table provides a reconciliation of beginning and ending loss
and LAE reserves for the years 1996, 1995, and 1994. All reserve totals are net
of reinsurance deductions. There are no material differences between the
Company's reserves for losses and LAE calculated in accordance with GAAP and
those reserves calculated based on statutory accounting practices.
RECONCILIATION OF RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- -------- --------
(RESTATED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Liability for losses and LAE, net of
reinsurance recoverables on unpaid
losses, at beginning of year........... $ 92,641 $114,709 $111,109
Provisions for losses and LAE, net of
reinsurance recoverable:
Current accident year.................. 62,244 49,962 60,989
Prior accident years................... 17,646 995 2,799
-------- -------- --------
Incurred losses during the current year,
net of reinsurance recoverable......... 79,890 50,957 63,788
Losses and LAE payment for claims, net of
reinsurance recoverable, occurring
during:
Current year........................... 16,398 13,473 13,641
Prior years............................ 58,669 59,552 46,547
-------- -------- --------
75,067 73,025 60,188
-------- -------- --------
Liability for losses and LAE, net of
reinsurance recoverable on unpaid
losses, at end of year................. 97,464 92,641 114,709
Reinsurance recoverable, at end of
year................................... 3,909 4,068 2,132
Less reinsurance recoverable on paid
losses................................. (785) (184) (212)
-------- -------- --------
Reinsurance recoverable on unpaid losses,
at end of year......................... 3,124 3,884 1,920
-------- -------- --------
Liability for losses and LAE, gross of
reinsurance recoverable on unpaid
losses, at end of year................. $100,588 $ 96,525 $116,629
======== ======== ========
</TABLE>
During 1991 through 1994, the Company, and the workers' compensation
industry in California in general, went through a dramatically changing
experience in losses and LAE incurred. During 1991 and 1992, the Company
experienced a substantial number of claims related to adverse economic
conditions, particularly for the 1990 and 1991 accident years.
In addition, there were "stress and strain" claims that did not involve
traumatic physical loss or injury, many of which were suspected by the Company
to be fraudulently submitted.
Throughout 1994, 1995 and 1996, the Company continued to experience a
favorable trend in the frequency of new claims. The positive trends and
experience related to new claims since the second half of 1992 have been
consistent with favorable experience of other workers' compensation insurance
specialty companies in California. In addition, the level of claims closed was
in excess of the level of new claims reported during 1994 and 1995. As a result,
the Company's estimate of loss and LAE reserves for the 1993, 1994, 1995 and
1996 accident years is based on substantially lower loss ratios than the 1991
and prior accident years. Nevertheless, despite improved frequency and lower
overall loss and LAE ratios in those years, the volatile changes in legislative,
economic, managed medical care, and litigation expense factors, affecting
historical paid loss and case reserve development patterns, have made it more
difficult to estimate the ultimate
F-12
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
dollar cost of those reported claims. Thus, the inherent variability has
increased, and recognition of adverse development of prior years' estimates has
occurred.
NOTE 5 -- REINSURANCE
Under the Company's specific excess of loss reinsurance treaty, the
reinsurers assume the liability on that portion of workers' compensation claims
between $350,000 and $80,000,000 per occurrence.
The components of net premiums written are summarized as follows (amounts
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ------- --------
(RESTATED)
<S> <C> <C> <C>
Direct.................................... $85,796 $75,553 $101,661
Assumed................................... 2,568 375 112
Ceded..................................... (4,479) (3,962) (4,789)
------- ------- --------
Net premiums written...................... $83,885 $71,966 $ 96,984
------- ------- --------
</TABLE>
The components of net premiums earned are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ------- --------
(RESTATED)
<S> <C> <C> <C>
Direct.................................... $84,916 $79,920 $100,008
Assumed................................... 2,247 209 110
Ceded..................................... (4,509) (4,113) (7,224)
------- ------- --------
Net premiums earned....................... $82,654 $76,016 $ 92,894
------- ------- --------
</TABLE>
The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Direct....................................... $79,840 $ 54,454 $64,700
Assumed...................................... 1,559 188 149
Ceded........................................ (1,509) (3,685) (1,061)
------- -------- -------
Net losses and loss adjustment expenses...... $79,890 $ 50,957 $63,788
------- -------- -------
</TABLE>
A contingent liability exists to the extent that losses recoverable under a
reinsurance treaty are not paid to the Company by the reinsurer.
NOTE 6 -- LONG TERM DEBT
The Company had $20,000,000 in principal outstanding on its August 16,
1994, issue of Series A Convertible Debentures, with detachable warrants to
purchase 3,800,000 shares of the Company's common stock, of which 90% were owned
by PRAC, Ltd., a Nevada limited partnership. PRAC, Ltd. is controlled by Mr.
Richard Pickup, a former director. Mr. Pickup controlled approximately 26% of
the outstanding shares of the Company through various investment entities, which
together were the Company's largest stockholder. The remaining 10% were held by
the Company's primary reinsurer.
F-13
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The Debentures carried an 8% rate of interest, payable semi-annually and
were due on August 16, 1999. The Debentures were convertible at the holder's
option, into shares of common stock at a conversion price of $2.75 per share.
The Debentures were subject to automatic conversion if, after three years from
issuance, the price of the Common Stock exceeds 150% of the conversion price for
a period of 20 out of 30 consecutive trading days.
The Debenture Agreement also provided for the issuance to the Investor of
detachable warrants (the "Warrants") to acquire 1,500,000 shares of the
Company's common stock at an exercise of $2.50 per share (the "Series 1
Warrants"), 1,500,000 shares at an exercise price of $3.00 per share (the
"Series 2 Warrants"), and 800,000 shares at an exercise price of $3.50 per share
(the "Series 3 Warrants"). The Warrants expired on August 16, 1999, and the
exercise price of the Warrants was subject to downward adjustment in the event
of adverse development in the Company's December 31, 1993 loss and allocated
adjustment expense reserves related to the 1992 and 1993 accident years,
measured as of June 30, 1997. Under the terms of the Debenture Agreement, the
maximum adverse development that would impact the exercise price of the Warrants
is $20,000,000. In the event that the adverse development of reserves for those
periods exceeds $20,000,000, the exercise price of Series 1 Warrants would be
reduced to $0.01, and the exercise price of the Series 2 Warrants would be
reduced to $1.39 per share.
The Debenture Agreement includes covenants, which provide, among other
things, the Company maintain at least $32,200,000 in total stockholders' equity.
At December 31, 1996, the Company was not in compliance with certain of the
covenants. In April 1997, the debentures were repaid and the warrants purchased
in connection with the acquisition of the Company by SNTL.
The Debentures are carried on the balance sheet net of unamortized discount
of $1,059,000 at December 31, 1996. The effective average interest rate of this
debt after consideration of debt issuance costs and discount was 13.3%.
During 1996, the Company completed design and implementation of an
enhancement to it's electronic data processing system. That system created
electronic files of claim and policyholder information, which substantially
decreases the need to access paper files and allows for more efficient handling
of claims and other underwriting activities. The project included an investment
in electronic data processing equipment, as well as software. The investment was
financed through a capital lease obligation covering a period of 36 months. The
lease contains a bargain purchase option at the end of the lease term. The total
cost of the equipment and software, $1,203,000, has been included in property
and equipment, and the present value of the capital lease obligation has been
recorded as a liability. Minimum lease payments are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997................................................ $504
1998................................................ 504
1999................................................ 307
</TABLE>
NOTE 7 -- STOCK OPTIONS
The Company has stock option plans that provide for options to purchase Pac
Rim Holding common stock at a price not less than fair values as of the date of
the grant. The options under those plans are
F-14
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
exercisable over a period of up to ten years, at which time they expire. A
summary of the activity in the stock option plans is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
--------------------------------
SHARES PRICE RANGE
--------- -----------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1994................... 1,214,000 $1.00 - $11.41
Granted........................................ 500,000 2.75 - 5.50
Exercised...................................... --
Cancelled...................................... (736,375) 2.50 - 11.41
---------
Outstanding at December 31, 1994................. 977,625 1.00 - 8.50
Granted........................................ 65,000 2.50 - 3.19
Exercised...................................... --
Cancelled...................................... (85,000) 3.25 - 8.50
---------
Outstanding at December 31, 1995................. 957,625 1.00 - 8.50
Granted........................................ -- -- --
Exercised...................................... -- -- --
Cancelled...................................... (52,750) 2.50 - 8.50
---------
Outstanding at December 31, 1996................. 904,875 1.00 - 8.50
=========
</TABLE>
Under the 1988 stock option plan, 510,125 shares of common stock are
available for future grants of options. As of December 31, 1996, options to
purchase 676,000 shares of the Company's common stock at a price range of $1.00
to $8.50 were vested and were exercisable under the Company's stock option plan.
Subject to certain conditions, such as continued employment, the exercise of the
options is not restricted. The options expire at various dates through 2003. The
Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income (loss)
and earnings (loss) per share would not have been materially different from that
reported.
Certain current officers and directors of the Company purchased as
aggregate of 136,000 shares of common stock at a purchase price of $1.00 per
share pursuant to the Pac Rim Holding 1987 Stock Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan was terminated in 1988. Shares
purchased pursuant to the Stock Purchase Plan may be repurchased by Pac Rim
Holding in the event that the purchaser's service to the Company terminates
prior to specified points of time.
NOTE 8 - COMMITMENT AND CONTINGENCIES
The Company currently leases office facilities in Woodland Hills, and
Fresno, California as well as Phoenix, Arizona under noncancellable operating
leases that are subject to escalation clauses. Minimum rental commitments on the
operating leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997................................................ 2,430
1998................................................ 2,381
1999................................................ 2,297
2000................................................ 2,269
2001................................................ 2,226
All Years Thereafter................................ 742
</TABLE>
Rent expense for 1996, 1995 and 1994, was $2,468,000, $2,461,000 and
$2,491,000, respectively.
F-15
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The Company is a party to two industrywide lawsuits, involving two medical
facilities. This litigation claims the insurance industry conspired to delay
payments of claims. While the ultimate outcome of this litigation is uncertain,
management believes that such litigation will not have a material adverse
financial effect on the Company's financial position and results of operations.
In addition, in the ordinary course of business, the Company is named as a
defendant in legal proceedings relating to policies of insurance that have been
issued and other incidental matters. Management does not believe that any such
litigation, taken as a whole, will have a material adverse financial effect on
the Company's financial position and results of operations.
NOTE 9 -- REGULATORY MATTERS
Under regulatory restrictions the ability of Pacific Rim Assurance to pay
dividends to its stockholders is limited. Generally, dividends payable during a
twelve month period, without prior regulatory approval, is limited to the
greater of net income for the preceding year or 10% of policyholders' surplus as
of the preceding December 31. The payment of dividends without prior California
Insurance Department ("DOI") approval can only be paid out of "earned surplus".
Under these provisions, Pacific Rim Assurance paid $1,100,000 in dividends in
1996 to Pac Rim Holding.
As reported to insurance regulatory authorities, statutory-basis capital
and surplus of Pacific Rim Assurance at December 31, 1996 and 1995, was
$27,216,000 and $46,549,000, respectively, and the net income (loss) amounted to
$(13,069,000), $4,879,000, and $(2,878,000) for 1996, 1995, and 1994,
respectively. At December 31, 1996, Pacific Rim Assurance had a deficit balance
of $(17,202,000) in its earned surplus account. Accordingly, Pacific Rim
Assurance cannot pay dividends to its parent during 1997, without prior DOI
approval.
Subsequent to Pacific Rim Assurance filing its 1995 annual statement with
regulatory authorities, the DOI issued its triennial report for the three years
ended December 31, 1995. As a result of the DOI's triennial report the Company
was required to reduce its statutory surplus by $27 million, leaving Pacific Rim
Assurance with a statutory surplus of $19 million at December 31, 1995. Pacific
Rim Assurance did not reflect or only partially reflected the DOI required
adjustments in their 1996 annual statement. The following table summarizes the
amounts required to be recorded and the amounts reflected in the Pacific Rim
Assurance 1996 annual statement. As the table reflects, Pacific Rim Assurance's
statutory surplus would have been reduced by an additional $4.626 million.
<TABLE>
<CAPTION>
REDUCTION IN
SURPLUS RECORDED
REDUCTION IN SURPLUS IN THE ANNUAL UNRECORDED
PER EXAMINATION STATEMENT REDUCTIONS IN SURPLUS
-------------------- ------------------ ---------------------
<S> <C> <C> <C>
Premiums and agents' balances due in
the course of collections........... $ 2,918 $ 2,918 --
Federal income tax recoverable........ 1,318 1,318 --
Electronic data processing
equipment........................... 1,626 -- $1,626
Loss and Loss Adjustment Expense...... 21,500 18,500 3,000
------- ------- ------
Total................................. $27,362 $22,736 $4,626
======= ======= ======
</TABLE>
The Risk Based Capital Model (RBC) for property and casualty companies was
adopted by the National Association of Insurance Commissioners in December 1993,
requiring companies to calculate and report their RBC ratios annually. RBC is a
company's statutory surplus adjusted through a formula for trends in premiums
written and claims activities, credit risk, asset risk, and underwriting risk.
The Company's total adjusted capital is compared to its authorized control
level. Pacific Rim Assurance previously reported that it had met its RBC
requirements for 1996.
F-16
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
As a result of the adjustments discussed in Note 2 that have been recorded
as part of this restatement and adjustments indicated to be recorded as a result
of the DOI's triennial examination not reflected in its 1996 annual statement
filed with the DOI and other regulatory bodies, the RBC level of Pacific Rim
Assurance would have placed it in an action level. Depending upon the action
level that Pacific Rim Assurance would be categorized as, the DOI could have
required it to develop a rehabilitation plan, restrict or eliminate its ability
to write additional premiums, require additional surplus to be raised or take
other actions considered necessary. As a result of SNTL's acquisition of Pacific
Rim Assurance with the DOI's approval and SNTL's contribution of $10 million to
its surplus, Pacific Rim Assurance's adjusted statutory capital exceeds the
minimal RBC level.
NOTE 10 -- INCOME TAXES
The components of the provision for total income tax expense are summarized
as follows (amount in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---------- ------- ------
(RESTATED)
<S> <C> <C> <C>
Current..................................... $ 0 $(1,061) $ (376)
Deferred.................................... 606 1,340 1,188
---- ------- ------
Total............................. $606 $ 279 $ 812
==== ======= ======
</TABLE>
A reconciliation of income tax computed at the U.S. federal statutory tax
rates to total income tax expense is as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(RESTATED)
<S> <C> <C> <C>
Federal statutory rate............................. $(7,592) $290 $670
Increase (decrease) in taxes resulting from:
Valuation allowance.............................. 8,129 -- --
Tax-exempt interest.............................. -- (1) (30)
Other............................................ 69 (10) 172
------- ---- ----
Total tax expense........................ $ 606 $279 $812
======= ==== ====
</TABLE>
At December 31, 1996, the Company has an alternative minimum tax credit of
$334,000 for tax purposes. Alternative minimum tax credits may be carried
forward indefinitely to offset future regular tax liabilities. At December 31,
1996, the Company has a tax net operating loss of $23,403,000 (restated) which
can be used to offset taxable income in future years, of which $2,676,000
expires in 2010 and $20,727,000 (restated) expires in 2011.
F-17
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are summarized as follows
(amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- ------
(RESTATED)
<S> <C> <C>
Deferred tax assets
Discounting of loss reserves.......................... $ 7,273 $7,189
Unearned premiums..................................... 470 373
Allowance for doubtful accounts....................... 855 415
Rental expense........................................ 512 518
Unrealized loss of securities......................... 167 --
Net operating loss carry forward...................... 7,957 910
Alternative minimum tax credit carry forward.......... 334 334
Policyholder dividends................................ 121 --
Other -- net.......................................... 21 93
------- ------
Total deferred tax assets............................... 17,710 9,832
Less: Valuation allowance............................... 8,129 --
Deferred tax liabilities:
Deferred policy acquisition........................... 362 331
Earned but unbilled premiums.......................... 282 165
Prepaid insurance..................................... 56 86
Unrealized gain on securities......................... -- 835
Other -- net.......................................... 136 67
------- ------
Total deferred tax liabilities.......................... $ 836 $1,484
------- ------
Net deferred tax assets................................. $ 8,745 $8,348
======= ======
</TABLE>
There were no taxes paid in 1995 and 1996.
Because of the significant operating loss during 1996, management believed
that it was prudent to record a valuation allowance of $8.1 million. Management
believes that it is more likely than not the net deductible temporary
differences not supported by the valuation allowance will reverse during periods
in which the Company generates net taxable income. However, there can be no
assurance the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning strategies could be
implemented to supplement income from operations to fully realize recorded
benefits.
NOTE 11 -- DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Nature of Operations
During the year ended December 31, 1996, the Company wrote 88% of its
business in the state of California. The workers' compensation industry in the
state of California has seen many changes to regulations in the past few years
including the adoption of open rating. The Company cannot predict what
regulatory changes will be made in the future; therefore, the Company cannot
with certainty predict what material effects any potential changes will have on
the Company.
F-18
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
At December 31, 1996, 35% of the Company's premiums in force had been
generated by its five highest producing agencies and brokerage firms, two of
which accounted for 17% of total premiums in force at that date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reporting amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses are based on case-basis estimates of
reported claims and on estimates, based on experience and industry data, for
unreported loss and loss adjustment expenses. The provision for unpaid loss and
loss adjustment expenses, net of estimated salvage and subrogation, has been
established to cover the estimated net cost of incurred claims. The amounts are
necessarily based on estimates, and accordingly, there can be no assurance the
ultimate liability will not differ from such estimates.
There is a high level of uncertainty inherent in the evaluation of the
required loss and loss adjustment expense reserves. Management has selected
ultimate loss and loss adjustment expense that it believes will reasonably
reflect anticipated ultimate experience. The ultimate costs of such claims are
dependent upon future events, the outcomes of which are affected by many
factors. Claims reserving procedures and settlement philosophy, current and
perceived social and economic factors, inflation, current and future court
rulings and jury attitudes, and many other economic, scientific, legal,
political, and social factors all can have significant effects on the ultimate
costs of claims. Changes in Company operations and management philosophy also
may cause actual developments to vary from the past.
NOTE 12 -- RELATED PARTY TRANSACTIONS
The Company had a five-year employment contract with its former president
that expired on August 16, 1997. Under the provisions of the contract, the
President received annual compensation of $400,000 and a possible bonus, based
on achievement by the Company of various earnings-based performance criteria.
The agreement also provided for the payment of certain other fringe benefits.
The Company loaned to the former President $150,000 annually in 1991, 1992,
1993. As of December 31, 1996 and 1995, the loan balance was $450,000. The loan
bore interest at 6.3% on the principal amount, which was secured by the
President's pledge of shares of the Company's common stock, and payable in full
by February 16, 1998. As of December 31, 1996, the loan was secured by shares of
the Company's common stock with a market value equal to 100% of the principal
balance. The loan was eliminated on April 11, 1997, in conjunction with the
purchase of Pac Rim Holding.
The Company granted the former President options to purchase 250,000 shares
of the Company's common stock at an exercise price of $2.75 per share and
250,000 shares at $5.50 per share.
The Company used the law firm of Barger & Wolen for legal services. Dennis
W. Harwood was a member of the Company's Board of Directors, and Richard D.
Barger was a member of Pacific Rim Assurance's Board of Directors, as well as
being a partner with Barger & Wolen. During 1996, the Company paid Barger &
Wolen $711,000 for legal services. The fees paid for these services were charged
to the Company at the normal rates charged to the firm's other clients.
F-19
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The Company also used the legal services of The Busch Firm. Timothy R.
Busch, former Chairman of the Company's Board of Directors, is a partner in The
Busch Firm. During 1996, the Company paid the Busch Firm $20,000 for legal
services. The fees paid for these services are charged to the Company at the
normal rates charged to the firm's other clients.
NOTE 13 -- 401(K) PLAN
The Pacific Rim Assurance Company 401(K) Plan (the "Plan") permits
employees of the Company who attain the age of 21 and complete 30 days of
employment to elect to make tax-deferred contributions of a specified percentage
of their compensations during each year through payroll deductions. Under the
Plan, the Company has discretion to make additional contributions. The Company
has not yet made any discretionary employer contributions to the plan.
F-20
<PAGE> 24
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED) (RESTATED)
----------- ------------
<S> <C> <C>
Investments:
Bonds, available-for-sale, at fair value.................. $ 54,358 $ 54,759
Cash and Short-term investments (at cost, which
approximates fair value)............................... 54,182 58,525
-------- --------
Total Investments................................. 108,540 113,284
Reinsurance recoverable on outstanding losses............... 3,486 3,124
Reinsurance receivable on paid losses....................... 534 785
Premiums receivable, less allowance for doubtful accounts... 13,126 14,278
Earned but unbilled premiums................................ 4,142 4,142
Investment income receivable................................ 661 609
Deferred policy acquisition costs........................... -- 1,065
Property and equipment less accumulated depreciation and
amortization.............................................. 3,907 4,411
Unamortized debenture issuance costs........................ -- 1,063
Deferred income taxes....................................... 8,860 8,745
Prepaid reinsurance premiums................................ (292) 198
Other assets................................................ 5,116 3,731
-------- --------
Total Assets...................................... $148,080 $155,435
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses........... $107,743 $100,588
Debentures payable, less unamortized discount............. 19,030 18,941
Unearned premiums......................................... 6,859 6,917
Reserve for policyholder dividends........................ 1,370 364
Obligation under capital lease............................ -- 1,203
Accrued expenses and accounts payable..................... 11,889 8,148
-------- --------
Total Liabilities................................. 146,891 136,161
Commitments and contingencies
Stockholders' Equity
Preferred Stock:
$.01 par value -- shares authorized 500,000; none
issued and outstanding................................ -- --
Common Stock
$.01 par value -- shares authorized 35,000,000; issued
and outstanding 9,528,200............................. 95 95
Additional paid-in capital.................................. 29,624 29,624
Warrants.................................................... 1,800 1,800
Unrealized (loss) on available-for-sale securities, net..... (548) (324)
Retained (deficit).......................................... (29,782) (11,921)
-------- --------
Total Stockholders' Equity........................ 1,189 19,274
-------- --------
Total Liabilities and Stockholders' Equity........ $148,080 $155,435
======== ========
</TABLE>
F-21
<PAGE> 25
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
REVENUES:
Net premiums earned....................................... $ 19,507 $18,885
Net investment income..................................... 1,449 1,901
-------- -------
Total revenue..................................... 20,956 20,786
COSTS AND EXPENSES:
Losses and allocated loss adjustment expenses............. 25,841 14,675
Administrative, general, and other........................ 10,769 6,288
Policyholder dividends.................................... 1,006 40
Interest expense.......................................... 589 581
-------- -------
Total costs and expenses.......................... 38,205 21,584
Income (loss) before income taxes........................... (17,249) (798)
Income tax expense (benefit)................................ 612 (257)
-------- -------
Net (loss).................................................. (17,861) (541)
======== =======
Per common share:
Income (loss)............................................... $ (1.87) $ (0.06)
======== =======
</TABLE>
F-22
<PAGE> 26
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income................................................ $(17,861) $ (541)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 488 421
Provision for losses on accounts receivable............ (921) (139)
Provision (benefit) for deferred income taxes.......... (115) (252)
Realized capital gains................................. -- (88)
Changes in:
Reserve for losses and loss adjustment expenses...... 7,155 (3,497)
Unearned premiums.................................... (58) 354
Reserve for policyholders' dividends................. 1,006 40
Premiums receivable.................................. 1,152 (1,481)
Reinsurance receivable............................... (111) (296)
Prepaid reinsurance premiums......................... 490 13
Deferred policy acquisition costs.................... 1,065 (320)
Income taxes recoverable............................. -- 476
Accrued expenses and accounts payable................ 3,741 814
Investment income receivable......................... (52) 274
Other assets......................................... (322) (54)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.. (4,343) (4,276)
INVESTING ACTIVITIES
Purchase of Investments -- bonds.......................... -- (23,943)
Sales of investments -- bonds............................. -- 24,400
Net additions to property and equipment................... -- (912)
-------- --------
NET CASH PROVIDED (USED) IN INVESTMENT
ACTIVITIES...................................... -- (455)
Increase (decrease) in cash and cash equivalents............ (4,343) (4,731)
Cash and cash equivalents at beginning of period............ 58,525 8,033
-------- --------
Cash and cash equivalents at end of period.................. $ 54,182 $ 3,302
======== ========
Supplemental Disclosure:
Interest paid............................................. -- $ 800
</TABLE>
F-23
<PAGE> 27
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pac Rim
Holding Corporation ("Pac Rim Holding") and its subsidiary, The Pacific Rim
Assurance Company ("Pacific Rim Assurance"), and its subsidiary, Regional
Benefits Insurance Services, Inc., (collectively referred to herein as "the
Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the Instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the consolidated financial statements for the year ended December 31, 1996,
and notes thereto, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
Certain amounts in the accompanying financial statements have been
reclassified to conform with current period presentation.
NOTE 2 -- EARNINGS PER SHARE
Earnings per common and common equivalent shares are based on the weighted
average number of common shares outstanding during each period, plus common
stock equivalent shares arising from the effects of stock options, warrants, and
convertible debentures. (See Note 4.)
The number of shares used in the three months ended March 31, 1997 and 1996
in the computation of primary earnings per share was 9,528,000. The number of
shares used in the three months ended March 31, 1997 and 1996 in the computation
of fully diluted earnings per share was 9,528,000.
NOTE 3 -- REINSURANCE
Under the Company's specific excess of loss reinsurance treaties, the
reinsurers assume the liability on that portion of workers' compensation claims
between $350,000 and $80,000,000 per occurrence.
The Company accounts for reinsurance transactions in accordance with the
Financial Accounting Standards Board ("FASB") Statement 113, "Accounting and
Reporting for Reinsurance Short-Duration and Long-Duration Contracts", which
established the conditions required for a contract with a reinsurer to be
accounted for as reinsurance and prescribes accounting and reporting standards
for those contracts.
The components of net premiums written are summarized as follows (amounts
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Direct................................................... $19,045 $19,918
Assumed.................................................. 1,315 294
Ceded.................................................... (929) (961)
------- -------
Net premiums written..................................... $19,431 $19,251
======= =======
</TABLE>
F-24
<PAGE> 28
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- REINSURANCE (CONTINUED)
The components of net premiums earned are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Direct................................................... $19,583 $19,596
Assumed.................................................. 835 264
Ceded.................................................... (911) (975)
------- -------
Net premiums earned...................................... $19,507 $18,885
======= =======
</TABLE>
The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Direct................................................... $26,103 $14,899
Assumed.................................................. 343 160
Ceded.................................................... (605) (384)
------- -------
Net losses and loss adjustment expenses.................. $25,841 $14,675
======= =======
</TABLE>
NOTE 4 -- LONG TERM DEBT
The Company has $20,000,000 in outstanding principal on its August 16, 1994
issue of Series A Convertible Debentures, with detachable warrants to purchase
3,800,000 shares of the Company's common stock, which are primarily owned by
PRAC, Ltd., a Nevada limited partnership (which is controlled by Mr. Richard
Pickup), and other individuals and entities. Mr. Pickup presently controls
approximately 26% of the outstanding shares of the Company through various
investment entities, which together are the Company's largest stockholder.
The Debentures carry an 8% annual rate of interest, payable semiannually,
and are due on August 16, 1999. The Debentures are convertible at the holder's
option, into shares of common stock at a conversion price of $2.75 per share.
The Debentures are subject to automatic conversion if, after three years from
issuance, the price of the Common Stock exceeds 150% of the conversion price for
a period of 20 out of 30 consecutive trading days.
The Debenture Agreement also provided for the issuance to the Investor of
detachable warrants (the "Warrants") to acquire 1,500,000 shares of the
Company's Common Stock at an exercise price of $2.50 per share (the "Series 1
Warrants"), 1,500,000 shares at an exercise price of $3.00 per share (the
"Series 2 Warrants"), and 800,000 shares at an exercise price of $3.50 per share
(the "Series 3 Warrants"). The Warrants expire on August 16, 1999, and the
exercise price of the Warrants is subject to downward adjustment in the event of
adverse development in the Company's December 31, 1993 loss and allocated loss
adjustment expense reserves related to the 1992 and 1993 accident years,
measured as of June 30, 1996, which date has been extended to the earlier of
June 30, 1997 or the date of a change in control of the Company, by agreement of
the parties. Under the terms of the Debenture Agreement, the maximum adverse
development that would impact the exercise price of the Warrants is $20,000,000.
In the event that the adverse development of reserves for those periods exceeds
$20,000,000, the exercise price of the Series 1 Warrants would be reduced to
$0.01, and the exercise price of the Series 2 Warrants would be reduced to $1.39
per share.
F-25
<PAGE> 29
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG TERM DEBT (CONTINUED)
The Debentures are carried on the balance sheet net of the unamortized
discount of $970,000 at March 31, 1997. The effective average interest rate of
this debt after consideration of debt issuance costs and discount was 13.3%.
Pacific Rim Assurance has an unsecured line of credit for $2,000,000 at
Imperial Bank of California. Borrowing under the line of credit bears interest
at a rate of 1% in excess of prime rate. No borrowing has occurred under the
line of credit.
NOTE 5 -- NEW ACCOUNTING STANDARDS
In October 1995, FASB issued Statement 123, "Accounting For Stock-Based
Compensation" which established a fair value based method of accounting for
stock-based compensation plans. This statement is effective for financial
statements with fiscal years beginning after December 15, 1995. The Company
elected to continue accounting for stock-based compensation based on Accounting
Principles Board Opinion 25; and thus, the Company adopts only the disclosure
provision of FASB Statement 123. The Company does not expect the implementation
of this pronouncement to have a material effect on the Company's financial
position or results of operations, as the Company does not anticipate having any
stock based compensation.
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 than
that historically presented.
NOTE 6 -- DEFINITIVE AGREEMENT AND PLAN OF MERGER
On September 17, 1996, the Company executed a Definitive Agreement and Plan
of Merger with Superior National Insurance Group, Inc., a California
corporation, and SNTL Acquisition Corp., a Delaware corporation ("Superior"),
regarding an acquisition of the Company by Superior for total consideration of
approximately $42,000,000 in cash upon closing of the transaction.
F-26
<PAGE> 30
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL INFORMATION
FINANCIAL DATA
The accompanying unaudited consolidated condensed pro forma balance sheet
presents the consolidated financial position of Superior National Insurance
Group, Inc. ("SNTL") and Pac Rim Holding Corporation ("Pac Rim Holding") at
March 31, 1997, assuming that the acquisition had occurred as of March 31, 1997.
Such pro forma information is based upon the historical balance sheet data of
the companies, at that date, giving effect to the acquisition using the purchase
method of accounting described in the accompanying notes to unaudited
consolidated condensed pro forma financial data.
The accompanying unaudited consolidated condensed pro forma statement of
operations give effect to the acquisition by consolidating the results of
operations of SNTL and Pac Rim Holding for the three months ended March 31, 1997
and for the year ended December 31, 1996, using the purchase method of
accounting and by giving effect to the acquisition described in the accompanying
notes to unaudited consolidated condensed pro forma financial data.
Certain reclassifications have been made to the historical financial data
of SNTL for certain periods to conform to its current presentation. Certain
reclassifications have been made to the historical financial data of Pac Rim
Holding to conform to SNTL's current presentation.
The accompanying unaudited consolidated condensed pro forma financial data
should be read in conjunction with the separate historical financial statements
and notes thereto of SNTL and Pac Rim Holding. The following unaudited
consolidated condensed pro forma financial data is presented for information
purposes only and is not necessarily indicative of the results of future
operations of the consolidated entity or the actual results that would have been
achieved had the acquisition been consummated on the dates presented.
1
<PAGE> 31
ACQUISITION OF PAC RIM HOLDING CORPORATION BY
SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PURCHASE
PAC RIM ACCOUNTING PRO FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Investments
Bonds and notes:
Available-for-sale, at market.......................... $ 54,755 $ 54,358 $ (158)(a) $108,955
Equity securities, at market............................. 1,177 -- (499)(b) 678
Cash and short-term market............................... 83,600 54,182 11,665(b) 149,447
Restricted investment.................................... 1,380 -- -- 1,380
-------- -------- -------- --------
Total Investments................................... 140,912 108,540 11,008 260,460
Reinsurance recoverable:
Paid claims and claim adjustment expense............... 131 534 -- 665
Unpaid claims and claim adjustment expense............. 25,843 3,486 -- 29,329
Premiums receivable (less allowance for doubtful
account)............................................... 9,318 13,126 -- 22,444
Earned but unbilled premiums receivable.................. 4,450 4,142 -- 8,592
Accrued investment income................................ 1,141 661 (21)(c) 1,781
Deferred policy acquisition costs........................ 4,248 -- -- 4,248
Property and equipment, less accumulated depreciation and
amortization........................................... 4,757 3,907 (2,525)(d) 6,139
Deferred income taxes.................................... 9,202 8,860 6,073(e) 24,135
Funds held by reinsurer.................................. 2,320 -- -- 2,320
Goodwill................................................. -- -- 27,419(f) 27,419
Receivable from reinsurer................................ 91,639 -- -- 91,639
Prepaid reinsurance premiums............................. 758 (292) -- 466
Prepaid and other........................................ 3,265 5,116 (1,938)(g) 6,443
-------- -------- -------- --------
Total Assets........................................ $297,984 $148,080 $ 40,016 $486,080
======== ======== ======== ========
</TABLE>
See explanatory notes to pro forma financial statements.
2
<PAGE> 32
ACQUISITION OF PAC RIM HOLDING CORPORATION BY
SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET (CONTINUED)
AS OF MARCH 31, 1997
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PURCHASE
PAC RIM ACCOUNTING PRO FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Liabilities
Claims and claim adjustment expenses..................... $106,758 $107,743 331 (h) $214,832
Unearned premiums........................................ 10,446 6,859 -- 17,305
Policyholder dividends payable........................... -- 1,370 -- 1,370
Convertible debentures payable, less unamortized
discount............................................... -- 19,030 (19,030)(b) --
Long-term debt........................................... 96,947 -- 37,100 (b) 134,047
Accounts payable and other liabilities................... 13,851 11,889 5,495 (i) 31,235
-------- -------- -------- --------
Total Liabilities................................... 228,002 146,891 23,896 398,789
Preferred securities issued by affiliate; authorized
1,100,000 shares: issued and outstanding 1,013,753
shares in 1997 and 1996................................ 24,258 -- -- 24,258
Shareholders' Equity
Common stock, no par value; authorized 25,000,000 shares:
issued and 3,446,492 shares in 1997 and 1996........... 16,022 29,719 (11,719)(b) 34,022
Unrealized gain on equity securities, net of taxes....... (110) -- -- (110)
Unrealized gain (loss) on available-for-sale investments,
net of income taxes.................................... (275) (548) 653 (b) (170)
Paid in capital -- warrants.............................. 2,206 1,800 (1,800)(j) 2,206
Retained earnings........................................ 27,881 (29,782) 28,986 (j) 27,085
-------- -------- -------- --------
Total Shareholders' Equity............................... 45,724 1,189 16,120 63,033
-------- -------- -------- --------
Total Liabilities and Shareholders' Equity............. $297,984 $148,080 $ 40,016 $486,080
======== ======== ======== ========
</TABLE>
See explanatory notes to pro forma financial statements.
3
<PAGE> 33
PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF PAC RIM HOLDING CORPORATION
BY SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------
PRO PRO
PAC RIM FORMA FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned................................. $ 18,978 $ 19,507 $ 38,485
Net investment income and capital................... 2,086 1,449 3,535
---------- -------- ------- ----------
Total Revenues............................ 21,064 20,956 -- 42,020
Expenses:
Claims and claim adjustment expenses, net of
reinsurance....................................... 10,271 25,841 36,112
Underwriting and general and administrative
expenses.......................................... 7,185 10,769 17,954
Policyholder dividends.............................. -- 1,006 1,006
Goodwill amortization............................... -- -- 249 (a) 249
Interest expense.................................... 1,727 589 (589)(b) 2,277
(140)(c)
690 (d)
---------- -------- ------- ----------
Total Expenses...................................... 19,183 38,205 210 57,598
---------- -------- ------- ----------
Income (loss) before income taxes, preferred
securities dividends and accretion, and
extraordinary items............................... 1,881 (17,249) (210) (15,578)
Income tax expense (benefit)........................ 671 612 13 (e) 1,296
---------- -------- ------- ----------
Income (loss) before preferred securities dividends
and accretion, and extraordinary items............ 1,210 (17,861) (223) (16,874)
Preferred securities dividends and accretion, net of
income tax benefit................................ (454) -- -- (454)
Extraordinary loss on redemption of Pac Rim's
outstanding debentures, net of tax................ -- -- (635) (635)
Extraordinary loss on early redemption of Imperial
Bank Loan, net of tax............................. -- -- (161) (161)
---------- -------- ------- ----------
Net income (loss)................................... $ 756 $(17,861) $(1,019) $ (18,124)
========== ======== ======= ==========
Per common share:
Income (loss)....................................... $ 0.15 $ (1.87) $ (2.31)
Weighted average shares outstanding................. 5,465,459 9,528,200 7,855,897
</TABLE>
See explanatory notes to pro forma financial statements.
4
<PAGE> 34
PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF PAC RIM HOLDING CORPORATION
BY SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
PRO PRO
PAC RIM FORMA FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned..................................... $ 88,648 $ 82,654 $ 171,302
Net investment income and capital gains................. 7,769 8,661 16,430
---------- ---------- ------- ----------
Total Revenues........................................ 96,417 91,315 -- 187,732
Expenses:
Claims and claim adjustment expenses, net of
reinsurance........................................... 55,638 79,890 135,528
Underwriting and general and administrative expenses.... 33,952 31,424 65,376
Policyholder dividends.................................. (5,927) (11) (5,938)
Goodwill amortization................................... -- -- 997 (a) 997
Interest expense........................................ 7,527 2,341 (2,341)(b) 10,043
(621)(c)
3,137 (d)
---------- ---------- ------- ----------
Total Expenses.......................................... 91,190 113,644 1,172 206,006
---------- ---------- ------- ----------
Income (loss) before income taxes, preferred securities
dividends and accretion, and extraordinary items...... 5,227 (22,329) (1,172) (18,274)
Income tax expense (benefit)............................ 1,597 606 (60)(e) 2,143
---------- ---------- ------- ----------
Income (loss) before preferred securities dividends and
accretion, and extraordinary items.................... 3,630 (22,935) (1,112) (20,417)
Preferred securities dividends and accretion, net of
income tax benefit.................................... (1,667) -- -- (1,667)
---------- ---------- ------- ----------
Extraordinary loss on redemption of Pac Rim's
outstanding debentures, net of tax.................... -- -- (635) (635)
Extraordinary loss on early redemption of Imperial Bank
loan, net of tax...................................... -- -- (161) (161)
---------- ---------- ------- ----------
Net income (loss)....................................... $ 1,963 $ (22,935) $(1,908) $ (22,880)
========== ========== ======= ==========
Per common share:
Income (loss)........................................... $ 0.40 $ (2.41) $ (2.97)
Weighted average shares outstanding..................... 5,315,670 9,528,200 7,706,108
</TABLE>
See explanatory notes to pro forma financial statements.
5
<PAGE> 35
NOTES TO FINANCIAL DATA
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed pro forma balance sheet
presents the consolidated financial position of SNTL and Pac Rim Holding as of
March 31, 1997, assuming that the Merger had occurred as of March 31, 1997. The
accompanying unaudited consolidated condensed pro forma statements of operations
give effect to the Merger by consolidating the results of operations of the
respective companies for the three months ended March 31, 1997 and for the year
ended December 31, 1996 assuming that the Merger had occurred as of the
beginning of each period.
On April 11, 1997, SNTL acquired Pac Rim Holding's for aggregate
consideration of $44 million in cash, that resulted in the payment of $20
million to Pac Rim Holding's common stockholders, $20 million to Pac Rim
Holding's convertible debenture holders, $2 million to Pac Rim Holding's warrant
and option holders, and $2 million in fees and related expenses.
SNTL financed the acquisition of Pac Rim Holding's with a $44 million term
loan from a consortium of banks and the sale of $18 million of newly issued
shares. In addition to the $42 million in cash SNTL paid for Pac Rim Holding's,
$6.6 million of the proceeds were used to redeem SNTL's previously existing long
term debt, $10 million was contributed to Pacific Rim Assurance.
SNTL agreed to pay Pac Rim Holding's former Chief Executive Officer (CEO)
$2.6 million in severance, covenant not to compete and other related
compensation. Compensation due Pac Rim Holding's former CEO at closing were
in-part offset against amounts the former CEO owed Pac Rim Holding. Further,
SNTL agreed to pay all other employees and officers of the Company $3.4 million
in severance benefits.
NOTE 2 -- PRO FORMA ADJUSTMENTS
EXPLANATORY NOTES
(1) Description of Pro Forma Adjustments
The following descriptions reference the adjustments as labeled on the
unaudited consolidated condensed pro forma balance sheet as of March 31, 1997:
(a) Adjustment to bonds and notes to reflect the fair market value as of
April 11, 1997.
(b) Represent funds received and amounts paid related to the purchase of
Pac Rim Holding.
(c) Adjustment to investment income receivable to write-off interest
receivable relating to the former CEO's loan of $450,000.
(d) Adjustment to fixed assets to reflect their fair market valuation as
of March 31, 1997.
(e) Adjustment to Pac Rim Holding's deferred tax assets to recognize its
recoverability in light of the acquisition and to reflect the related
tax effect of the extraordinary items.
(f) The excess of the purchase price paid for Pac Rim Holding over the
amounts assigned to identifiable assets acquired less liabilities
assumed is recorded as goodwill.
(g) Adjustment to other assets to reflect repayment of loan receivable due
from the former CEO of Pac Rim Holding, and to reflect accrued costs
relating to the Pac Rim acquisition.
(h) Adjustment to claims and claim adjustment expenses related to
out-of-state operations.
(i) Adjustment to accounts payable and other liabilities to accrue for
costs relating to the Pac Rim Holding acquisition, severance costs and
other miscellaneous expenses; which was offset in part by the
elimination of certain facility liabilities.
(j) Adjustment to common stock and additional paid-in-capital to reflect
the elimination of Pac Rim Holding stockholder equity interest.
6
<PAGE> 36
NOTES TO FINANCIAL DATA
EXPLANATORY NOTES
(1) Description of Pro Forma Adjustments
The following descriptions reference the adjustments as labeled on the
unaudited consolidated condensed pro forma statements of operations:
(a) Adjustment represents amortization of goodwill on a straight line
basis over an estimated 27.5-year period.
(b) Adjustment represents the elimination of interest expense on Pac Rim
Holding's convertible debentures payable.
(c) Adjustment represents the elimination of interest expense on SNTL's
term loan with Imperial Bank as if the repayment of such term loan had
been effective as of the beginning of the period.
(d) Adjustment represents the interest expense on SNTL's new term loan
with Chase as if the term loan had been effective as of the beginning
of the period. Interest expense is calculated based upon one month
Libor at each month-end plus 200 basis point.
(e) Adjustment represents the tax effect of pro forma adjustments,
excluding goodwill, at an effective tax rate of 34%.
7
