<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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 [X] No [ ]
Number of shares of Common Stock, $0.01 par value per share, outstanding as
of close of business on May 11, 1998: 5,874,548 shares.
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<PAGE> 2
SUPERIOR NATIONAL INSURANCE GROUP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Financial Statements........................................ 3
Condensed consolidated balance sheets as of March 31, 1998
(unaudited) and December 31, 1997......................... 3
Condensed consolidated statements of income for the three
months ended March 31, 1998 (unaudited) and March 31, 1997
(unaudited)............................................... 4
Condensed consolidated statement of changes in stockholders'
equity for the three months ended March 31, 1998
(unaudited) and for the twelve months ended December 31,
1997...................................................... 5
Condensed consolidated statements of cash flows as restated
for the three months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited)................................ 6
Notes to condensed consolidated financial statements
(unaudited)............................................... 7
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............. 10
PART II. OTHER INFORMATION
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURE............................................................. 18
EXHIBIT INDEX......................................................... 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997*
----------- ------------
(UNAUDITED)
<S> <C> <C>
INVESTMENTS
Bonds and notes:
Available-for-sale, at market (cost: 1998, $208,077; 1997,
$203,373)............................................... $210,065 $205,214
Equity securities, at market (cost: 1998, $1,837; 1997,
$1,356)................................................... 1,980 1,526
Short-term investments, at cost............................. 5,642 6,634
-------- --------
TOTAL INVESTMENTS.................................. 217,687 213,374
Cash and cash equivalents (restricted cash: 1998, $159;
1997, $651)............................................... 10,848 28,742
Reinsurance recoverable:
Paid claims and claim adjustment expense.................. 2,295 3,927
Unpaid claims and claim adjustment expense................ 53,303 49,155
Premiums receivable (less allowance for doubtful accounts:
1998 & 1997, $800)........................................ 21,655 24,364
Earned but unbilled premiums receivable..................... 12,791 12,524
Accrued investment income................................... 2,331 2,661
Deferred policy acquisition costs........................... 5,987 5,879
Deferred income taxes (less valuation allowance of $8,129,
1998 & 1997).............................................. 23,840 25,104
Funds held by reinsurer..................................... 4,186 5,152
Prepaid reinsurance premiums................................ 5,381 1,598
Goodwill.................................................... 35,583 35,887
Prepaid and other........................................... 17,033 21,106
-------- --------
TOTAL ASSETS....................................... $412,920 $429,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Claims and claim adjustment expenses........................ $180,333 $201,255
Unearned premiums........................................... 14,610 12,913
Reinsurance payable......................................... 7,383 3,412
Long-term debt.............................................. 30 30
Policyholder dividends...................................... 1,370 1,370
Capital lease............................................... 7,191 7,626
Discontinued operations liability........................... 11,412 12,904
Accounts payable and other liabilities...................... 27,492 28,868
-------- --------
TOTAL LIABILITIES.................................. 249,821 268,378
COMPANY-OBLIGATED TRUST PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY SENIOR SUBORDINATED NOTES OF SNIG;
$1,000 face per share; issued and outstanding 105,000
shares in 1997 and 1998................................. 101,291 101,277
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; authorized 25,000,000 shares:
issued and outstanding 5,874,379 shares in 1998; 5,871,279
shares in 1997............................................ 59 59
Paid-in capital excess of par............................. 34,257 34,242
Paid in capital -- warrants................................. 2,206 2,206
Accumulated other comprehensive income; Unrealized gain on
investments, net of taxes................................. 1,407 1,327
Retained earnings........................................... 23,879 21,984
-------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 61,808 59,818
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $412,920 $429,473
======== ========
</TABLE>
- ---------------
* Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES:
Premiums written, net of reinsurance ceded of $12,552 and
$2,777 in 1998 and 1997, respectively..................... $28,501 $20,003
Net change in unearned premiums............................. 2,086 (1,025)
------- -------
Net premiums earned......................................... 30,587 18,978
Net investment income....................................... 4,253 2,086
------- -------
TOTAL REVENUES.................................... 34,840 21,064
EXPENSES:
Claims and claim adjustment expenses, net of reinsurance
recoveries of $7,694 and $2,768 in 1998 and 1997,
respectively.............................................. 18,288 10,271
Commissions, net of reinsurance ceding commissions of $3,252
and $549 in 1998 and 1997, respectively................... 2,964 2,201
Interest expense............................................ -- 1,727
General and administrative expenses
Underwriting.............................................. 7,027 4,803
Other..................................................... 179 181
Goodwill.................................................. 304 --
------- -------
TOTAL EXPENSES.................................... 28,762 19,183
------- -------
INCOME BEFORE INCOME TAXES, PREFERRED SECURITIES DIVIDENDS
AND ACCRETION............................................. 6,078 1,881
Income tax expense.......................................... 2,311 671
------- -------
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. 3,767 1,210
Preferred Securities dividends and accretion, net of income
tax benefit of $234 in 1997............................... -- (454)
Trust Preferred Securities dividends and accretion, net of
income tax benefit of $964 in 1998........................ (1,872) --
------- -------
NET INCOME.................................................. $ 1,895 $ 756
======= =======
BASIC EARNINGS PER SHARE:
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. $ 0.64 $ 0.35
Preferred securities dividends and accretion................ (0.32) (0.13)
======= =======
NET INCOME.................................................. $ 0.32 $ 0.22
======= =======
DILUTED EARNINGS PER SHARE:
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. $ 0.48 $ 0.23
Preferred securities dividends and accretion................ (0.24) (0.09)
======= =======
NET INCOME.................................................. $ 0.24 $ 0.14
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMPREHENSIVE
INCOME
-------------------
UNREALIZED
NUMBER OF GAIN (LOSS) PAID IN TOTAL
SHARES COMMON ON CAPITAL- COMPREHENSIVE RETAINED STOCKHOLDERS'
OUTSTANDING STOCK INVESTMENTS WARRANTS INCOME EARNINGS EQUITY
----------- ------- ------------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 3,446,492 $16,022 $ (162) $2,206 $27,125 $45,191
Comprehensive income
Net income............. -- -- -- -- (5,141) (5,141) (5,141)
-------
Other comprehensive
income, net of tax
Change in unrealized
gain (loss) on
investments.......... -- -- 1,489 -- 1,489 -- 1,489
-------
Other comprehensive
income............... 1,489
-------
Comprehensive income..... $(3,652)
=======
Common stock issued...... 2,390,438 18,000 -- -- -- 18,000
Stock issued under stock
option plan............ 22,127 105 -- -- -- 105
Common stock issued under
stock incentive plan... 12,222 174 -- -- -- 174
--------- ------- ------ ------ ------- -------
Balance at December 31,
1997................... 5,871,279 34,301 1,327 2,206 21,984 59,818
--------- ------- ------ ------ ------- -------
Comprehensive income
Net income............. -- -- -- -- 1,895 1,895 1,895
-------
Other comprehensive
income, net of tax
Change in unrealized
gain (loss) on
investments.......... -- -- 80 -- 80 -- 80
-------
Other comprehensive
income............... 80
-------
Comprehensive income..... $ 1,975
=======
Common stock issued...... -- -- -- -- -- --
Stock issued under stock
option plan............ 3,100 15 -- -- -- 15
Common stock issued under
stock incentive plan... -- -- -- -- -- --
========= ======= ====== ====== ======= =======
Balance at March 31,
1998................... 5,874,379 $34,316 $1,407 $2,206 $23,879 $61,808
========= ======= ====== ====== ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS AS RESTATED
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,895 $ 756
-------- --------
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Discount (amortization) of bonds and preferred stock...... 2 (161)
Amortization of capital lease obligation.................. (435) --
Gain on sale of investments............................... (400) (9)
Amortization of Goodwill.................................. 304 --
Preferred securities dividends and accretion.............. 1,872 687
Increase in reinsurance balances receivable............... (2,516) (700)
Decrease in premiums receivable........................... 2,709 72
(Increase) decrease in earned but unbilled premiums
receivable............................................. (267) 801
Decrease (increase) in accrued investment income.......... 330 (106)
Increase in deferred policy acquisition costs............. (108) (1,206)
Decrease in deferred income taxes......................... 2,180 433
Decrease (increase) in funds held by reinsurer............ 966 (372)
(Increase) decrease in prepaid reinsurance premiums....... (3,783) 281
Increase in other assets.................................. (3,927) (658)
Decrease in claims and claim adjustment expense
reserves............................................... (20,922) (8,771)
Increase in unearned premium reserves..................... 1,697 744
Increase (decrease) in reinsurance payable................ 3,971 (258)
(Decrease) increase in accounts payable and other
liabilities............................................ (4,197) 494
-------- --------
Total adjustments................................. (22,524) (8,729)
-------- --------
Net cash used in operating activities............. (20,629) (7,973)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in-capital -- restricted stock....................... 15 --
Retirement of long-term debt -- Imperial Bank............. -- (350)
Retirement of long-term debt -- Chase Financing........... -- (1,664)
-------- --------
Net cash provided by (used in) financing
activities...................................... 15 (2,014)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments available-for-sale............................ (58,436) (21,297)
Purchase of equity security............................... (477) (145)
Increase in receivable from reinsurer..................... -- 1,627
Investments and cash for discontinued operations.......... (1,492) --
Sale of property, plant and equipment..................... 8,000 --
Sales of bonds and notes: Investments
available-for-sale..................................... 51,344 9,919
Maturities of bonds and notes:
Investments available-for-sale......................... 2,709 2,683
Net decrease in short-term investments.................... 1,072 53
-------- --------
Net cash provided by (used in) investing
activities...................................... 2,720 (7,160)
-------- --------
Net decrease in cash.............................. (17,894) (17,147)
Cash and cash equivalents at Beginning of Period............ 28,742 34,423
-------- --------
Cash and cash equivalents at End of Period.................. $ 10,848 $ 17,276
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes.................. $ 131 $ 4
======== ========
Cash paid during the year for interest...................... $ -- $ 141
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(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 1998 presentation. Operating results
for the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the year ending December 31, 1998. 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, 1997.
A.2 ACQUISITION OF PAC RIM HOLDING CORPORATION
On April 11, 1997, the Company completed its acquisition of Pac Rim Holding
Corporation ("Pac Rim") and its wholly-owned subsidiary, The Pacific Rim
Assurance Company, for total consideration of approximately $42.0 million in
cash. This consideration resulted in payments of approximately $20.0 million to
Pac Rim stockholders; $20.0 million to Pac Rim's convertible debenture holders;
and $2.0 million to Pac Rim's warrant and option holders. In addition, the
Company incurred $2.0 million in transaction fees and related expenses. The
Pacific Rim Assurance Company was renamed Superior Pacific Casualty Company upon
its acquisition by the Company. The Company financed the acquisition of Pac Rim
through a $44.0 million term loan and the sale of $18.0 million in newly issued
shares of common stock in a private transaction. Approximately $6.6 million of
the loan proceeds was used to prepay SNIG's previously outstanding long-term
debt, and approximately $10.0 million was contributed by SNIG to the capital of
SPCC. The $44.0 million term loan was subsequently retired from funds raised
from the sale of $105.0 million of 10.75% Trust Preferred Securities.
The purchase of Pac Rim resulted in $36.9 million of goodwill that is being
amortized on a straight line basis over 27.5 years. The transaction was
accounted for using the purchase method and the results of operations since the
date of acquisition have been included in operations. The designated accounting
date of the purchase of Pac Rim is April 1, 1997.
The balance sheet of Pac Rim at the acquisition date included the following
assets: investments of $105.9 million, cash of $2.6 million, receivables of
$17.3 million, and other assets of $22.3 million. Liabilities assumed in the
acquisition included unearned premiums of $6.9 million, claim and claim
adjustment expense reserves of $107.7 million and other liabilities of $32.3
million.
7
<PAGE> 8
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
A.3 EARNINGS PER SHARE ("EPS"); COMPREHENSIVE INCOME
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 ("FAS No. 128"), "Earnings Per Share",
which requires presentation of basic and diluted earnings per share for all
publicly traded companies effective for fiscal years after December 15, 1997.
The following is an illustration of the reconciliation of the numerators
and denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------ ------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- --------- -------------- ------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before items
below.............. $ 3,767 5,874,054 $ 0.64 $1,210 3,446,735 $ 0.35
Preferred
Securities......... (1,872) (0.32) (454) (0.13)
------- ------ ------ ------
Net Income............ $ 1,895 $ 0.32 $ 756 $ 0.22
======= ====== ====== ======
EFFECT OF DILUTIVE
SECURITIES
Options............... 336,473 344,175
Warrants.............. 1,571,087 1,455,609
DILUTED EPS
Income before items
below.............. $ 3,767 7,781,614 $ 0.48 $1,210 5,246,519 $ 0.23
Preferred
Securities......... (1,872) (0.24) (454) (0.09)
------- ------ ------ ------
Net Income............ $ 1,895 $ 0.24 $ 756 $ 0.14
======= ====== ====== ======
</TABLE>
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 included the
required disclosure of SFAS No. 130 in this filing.
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 the Company's obligations, the amounts reported on the balance sheet are
management's best estimate of that amount.
8
<PAGE> 9
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
A.5 TRUST PREFERRED SECURITIES
In December 1997, SNIG formed a trust, whose sole purpose was to issue
10 3/4% Trust Preferred Securities (the "Trust Preferred Securities"), having an
aggregate liquidation amount of $105 million, and to invest the proceeds thereof
in an equivalent amount of 10 3/4% Senior Subordinated Notes due 2017 of the
Company (the "Senior Subordinated Notes"). The Company owns directly all of the
common securities issued by the Trust, which it purchased for an aggregate
consideration of $3.25 million. The proceeds from the sale of the Trust
Preferred Securities were used solely to purchase SNIG's Senior Subordinated
Notes in the aggregate principal amount of $108.25 million, which are the sole
assets of the trust. In addition, the Company entered into several contractual
undertakings, that when taken together, guarantee to the holders of the Trust
Preferred Securities an unconditional right to enforce the payment of the
distributions with respect to such securities.
NOTE B. DISCONTINUED OPERATIONS
Outstanding discontinued operations claims and claim adjustment expense
reserves were $17.1 million at March 31, 1998, which was consistent with
management's expectations. Offsetting these liabilities are $5.8 million of
reinsurance recoverable on paid and unpaid claim and claim adjustment expenses.
NOTE C. RECONCILIATION WITH PREVIOUSLY REPORTED AMOUNTS
The amounts shown in the Condensed Consolidated Statements of Cash Flows
differ from those previously reported as a result of reclassifications made to
the Condensed Consolidated Balance Sheets. A reconciliation of amounts restated
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
------- --------
<S> <C> <C>
Net cash provided by (used in) financing activities
As previously reported.................................... $(1,477) $ (2,014)
Reclass of investments and cash for discontinued
operations............................................. 1,492 --
------- --------
As restated............................................ $ 15 $ 2,014
======= ========
Net cash (used in) provided by investing activities
As previously reported.................................... $ 3,220 $ (6,970)
Reclass of investments and cash for discontinued
operations............................................. (1,492) --
Reclass of invested cash from cash and cash equivalents to
short-term investments................................. 992 (190)
------- --------
As restated............................................ $ 2,720 $ (7,160)
======= ========
Cash and cash equivalents at the end of the period
As previously reported.................................... $16,490 $ 84,980
Reclass of invested cash from cash and cash equivalents to
short-term investments................................. (5,642) (67,704)
------- --------
As restated............................................ $10,848 $ 17,276
======= ========
</TABLE>
9
<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 acquisitions, 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
$2.3 million in the three month period ended March 31, 1998, versus an
underwriting profit of $1.7 million 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 March 31, 1998, the Company realized
net income of $1.9 million or $0.24 per share on a diluted basis as compared to
$0.8 million or $0.14 per share on a diluted basis for the three months ended
March 31, 1997. In addition to improved underwriting profit, net income
increased due to a $2.2 million increase in investment income, which resulted
from the increase in invested assets. Invested assets increased due to the SPCC
acquisition and the net proceeds of the issuance of the Trust Preferred
Securities discussed below. The increase in underwriting profit and investment
income was offset in part by dividends and accretion on the Trust Preferred
Securities and amortization of goodwill.
GENERAL FINANCIAL CONDITION
Total assets increased by $114.9 million or 38.6% to $412.9 million at
March 31, 1998, as compared to the same period in 1997. The increase was due to
approximately $189.3 million in assets recorded related to the acquisition of
SPCC. As a result of the issuance of $105.0 million in Trust Preferred
Securities, assets increased an additional $30.0 million, net of repayment of
existing debt and cost of issuance. Partially offsetting the increase is an
approximately $91.6 million reduction in receivables due from a related party
reinsurer, that were transferred to The Chase Manhattan Bank ("Chase") in
exchange for cancellation of debt.
Total liabilities increased by $98.9 million or 39.2% to $351.1 million at
March 31, 1998, as compared to the same period in 1997. The increase was due to
approximately $171.2 million in liabilities recorded related to the acquisition
of SPCC, which was partially offset by the early extinguishment of the $90
million Chase loan and other debt.
Total equity increased by $16.1 million or 35.2% to $61.8 million at March
31, 1998, as compared to the same period in 1997. Approximately $18 million in
additional capital was related to the April 11, 1997 issuance and sale of common
stock to finance, in part, the SPCC acquisition. This increase was partially
offset by expenditures and increases in claims reserves associated with the
acquisition of SPCC and the $12.9 million loss, net of tax, recognized in
conjunction with the early extinguishment of long-term debt in the periods
following March 31, 1997.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following selected financial data and analysis provide an assessment of
SNIG's financial results for the three months ended March 31, 1998, as compared
to the three months ended March 31, 1997. Certain prior period amounts have been
reclassified to conform to the current period presentation.
Selected financial data as reported for the three months ended March 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gross premiums written...................................... $ 41,053 $ 22,780
Net premiums written........................................ $ 28,501 $ 20,003
Net premiums earned......................................... $ 30,587 $ 18,978
Claims and claim adjustment expenses........................ (18,288) (10,271)
Underwriting expenses....................................... (9,991) (7,004)
Policyholder dividends...................................... -- --
-------- --------
Underwriting profit (loss).................................. $ 2,308 $ 1,703
Net investment income....................................... 4,253 2,086
Underwriting ratios (GAAP Basis)
Claims and claim adjustment expense ratio................. 59.8% 54.1%
Underwriting expense ratio................................ 32.7% 36.9%
Policyholder dividends ratio.............................. 0.0% 0.0%
======== ========
Combined ratio.............................................. 92.5% 91.0%
======== ========
</TABLE>
Gross premiums written increased $18.3 million or 80.2% to $41.1 million in
the first quarter of 1998 as compared to the same period in 1997. Substantially
all of this increase can be attributed to the addition of business written by
SPCC. Net premiums written increased $8.5 million or 42.5% to $28.5 million in
the first quarter of 1998 as compared to the same period in 1997, reflecting the
increase in gross premiums written. Net premiums earned increased $11.6 million
or 61.2% to $30.6 million in the first quarter of 1998 as compared to the same
period in 1997, reflecting the increase in net premiums written.
Net claim and claim adjustment expenses increased $8.0 million or 78.1% to
$18.3 million in the first quarter of 1998 as compared to the same period in
1997. This increase is attributable to the addition of premiums renewed by SNIC
for policies expiring from SPCC. The net claim and claim adjustment expense
ratio increased to 59.8% in the first quarter of 1998 from 54.1% in the same
period of 1997. Although the Company has been experiencing a reduction in the
frequency of claims, at the same time there has been an increase in claims
severity for injuries sustained in 1995 and thereafter. To address the
increasing severity trend, management has put into place a Claims Severity
Management Program that is intended to reduce the Company's average ultimate per
claim and claim adjustment expense for 1995 and subsequent dates of injury.
Underwriting and general and administrative expenses increased $3.0 million
or 42.6% to $10.0 million in the first quarter of 1998, as compared to the same
period in 1997. This increase was due primarily to the acquisition of SPCC. Net
commission expense increased $0.8 million or 34.6% to $3.0 million in the first
quarter of 1998, as compared to the same period in 1997. The increase in net
commission expense is due to an increase in premiums. Net underwriting and
general and administrative expenses increased 45.7% to $10.5 million in the
first quarter of 1998 from $7.2 million in the same period of 1997. The
Company's underwriting expense ratio decreased 4.2 percentage points to 32.7%
for the first quarter of 1998 from 36.9% for the same period in 1997, due
primarily to a reduction in net commission expense relative to the related net
premium level. This reduction in net commission expense relative to the related
net premium level is due to an increase in reinsurance ceding commissions
received. The direct commission expense relative to the related direct premium
level remained unchanged from the prior year.
11
<PAGE> 12
The Company recorded an underwriting profit from continuing operations of
$2.3 million in the first quarter of 1998, versus $1.7 million for the same
period in 1997. The increase in underwriting profit from continuing operations
was primarily the result of the increase in premiums discussed above, coupled
with a decrease in underwriting and general and administrative expenses relative
to the premium level.
Net investment income, excluding realized investment gains/losses,
increased $1.8 million or 85.5% to $3.9 million in the first quarter of 1998
compared to the same period in 1997. The improvement was due to the increase in
assets available for investment resulting from the SPCC acquisition and the
availability of $30.0 million in invested assets as a result of the issuance of
the Trust Preferred Securities. Excluding SPCC and the increase in invested
assets due to the issuance of the Trust Preferred Securities, net investment
income decreased $0.3 million or 18.4% to $1.8 million in the first quarter of
1998 as compared to the same period in 1997. This 18.4% decrease was due to a
change in portfolio mix as compared to the same period in 1997.
No interest expense was incurred in the first quarter of 1998 as compared
to $1.7 million for the same period in 1997, due to the repayment of all long
term debt with funds obtained through the sale of the Trust Preferred
Securities.
Distributions and accretion on preferred securities increased by $2.1
million as compared to $0.7 million in the first quarter of 1998, as a result of
the issuance of the Trust Preferred Securities and the redemption of preferred
securities issued by an affiliate in December 1997.
A summary of net investment income, excluding capital gains (losses), for
the three months ended March 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Interest on bonds and notes................................. $3,643 $ 858
Interest on short-term investments, cash and cash
equivalents............................................... 318 1,346
Other....................................................... 76 --
------ ------
Total investment income..................................... 4,037 2,204
Capital gains............................................... 400 9
Investment expense.......................................... 184 127
====== ======
Net investment income....................................... $4,253 $2,086
====== ======
</TABLE>
The distribution of SNIG's consolidated investment portfolio is as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
CARRYING MARKET CARRYING MARKET
AVAILABLE FOR SALE: VALUE VALUE VALUE VALUE
------------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
U.S. Government Agencies and
Authorities........................... $ 77,836 $ 77,836 $ 90,097 $ 90,097
Collateralized Mortgage Obligations..... 36,721 36,721 73,481 73,481
Corporate Instruments................... 45,101 45,101 41,636 41,636
Special Revenue and Special
Assessment............................ 50,407 50,407 -- --
State and Political Subdivisions........ -- -- -- --
-------- -------- -------- --------
Total Available for Sale................ $210,065 $210,065 $205,214 $205,214
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
---------------- ------------------
MARKET MARKET
EQUITY SECURITIES COST VALUE COST VALUE
----------------- ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Corporate....................................... $1,837 $1,980 $1,356 $1,526
------ ------ ------ ------
Total........................................... $1,837 $1,980 $1,356 $1,526
====== ====== ====== ======
</TABLE>
The Company's management monitors the matching of assets and liabilities
and attempts to maintain the Company's portfolio's investment duration at the
mid-point of the length of its net claim and claim adjustment
12
<PAGE> 13
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 March 31, 1998 was 3.05 years compared to 2.90 years at
December 31, 1997. At March 31, 1998, 97.1% 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
Discontinued operations had claim and claim adjustment expense reserves of
$17.1 million as of March 31, 1998, 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 the Company's 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 the
Company's claims activity. There can be no assurance, however, that further
upward development of ultimate loss costs associated with construction defect
claims will not occur, the Company will continue to closely monitor the adequacy
of its loss reserves in the discontinued operations. Offsetting these
liabilities are $5.8 million in reinsurance recoverable on paid and unpaid claim
and claim adjustment expenses.
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, the Company's
subsidiaries 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 three months of 1998, the Company used $20.6 million of
cash in its operations versus $8.0 million during the same period in 1997. The
$12.6 million increase in cash used in operations during the first three months
of 1998 is primarily due to the addition of SPCC operations beginning April 1,
1997. 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 and higher than expected payments of claims and claim adjustment expenses
in the 1995 and 1996 accident years. 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.
In addition, the reduction in net written premium arising out of a February
1, 1998 "Quota-Share Arrangement" with United States Life Insurance Company
(rated "A+" by A.M. Best) under which the Company cedes 100% of premiums and
claim and claim adjustment expenses associated with policies having $100,000 or
more of estimated annual premium, will increase negative cash flow
substantially. The Company receives a 35.0% ceding commission on premiums ceded
under the Quota Share Arrangement. Although the Company has implemented its
Claims Severity Management Program to control cash outflows related to the 1995
and 1996 accident years at acceptable levels, there can be no assurance that it
will be successful. In any event, 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 March 31, 1998, the Company had
total cash, cash equivalents and investments of $228.5 million and had 99.1% of
its investment portfolio invested in cash, cash equivalents, and fixed
maturities. In addition, 92.0% of the Company's fixed-income portfolio had
ratings of "AA" or equivalent or better and 98.1% had ratings of "BBB" or
equivalent or better.
13
<PAGE> 14
On December 3, 1997, the Superior National Capital Trust I (the "Trust"), a
wholly owned subsidiary of SNIG, issued its 10 3/4% Trust Preferred Securities,
having an aggregate liquidation amount of $105 million, in a private placement
and also issued to SNIG, for an aggregate consideration of approximately $3.25
million, all of the Trust's common securities. The proceeds from the sale of
these securities were used to purchase SNIG's 10 3/4% Senior Subordinated Notes
due 2017 (the "Senior Subordinated Notes"), all of which were issued in
connection with such transaction. In addition, the Company entered into several
contractual undertakings which, the Company believes, when taken together,
guarantee (the "Company Guarantee") to the holders of such securities a full and
unconditional right to enforce the payment of the distributions with respect to
such securities. On January 16, 1998, SNIG and the Trust completed the
registration with the Securities and Exchange Commission of an exchange offer
for the outstanding Trust Preferred Securities, Senior Subordinated Notes and
Company Guarantee, pursuant to which substantially all of such securities were
exchanged for substantially similar securities. SNIG used the proceeds it
received from the issuance of the Senior Subordinated Notes to repay the $40.3
million outstanding balance on the term loan used to acquire SPCC, to redeem
approximately $27.7 million in preferred stock issued by a SNIG affiliate to
Centre Reinsurance (Bermuda) Ltd., an affiliate of Zurich, to pay approximately
$4.0 million in related transaction costs, and for general corporate purposes,
including a $15.0 million contribution to the surplus of SNIC.
Distributions on the Trust Preferred Securities (and interest on the
related Senior Subordinated Notes) are payable semi-annually, in arrears, on
June 1 and December 1 of each year, commencing June 1, 1998. Subject to certain
conditions, on or after December 1, 2005, SNIG has the right to redeem the
Senior Subordinated Notes, in whole or in part at any time, at call prices
ranging from 105.375% at December 1, 2005 to 101.792% at December 1, 2007, and
100% thereafter. The proceeds from any such redemption will be immediately
applied by the Trust to redeem Trust Preferred Securities and the Trust's common
securities at such redemption prices. In addition, SNIG has the right, at any
time, subject to certain conditions, to defer payments of interest on the Senior
Subordinated Notes for Extension Periods (as defined in the related Indenture),
each not exceeding 10 consecutive semi-annual periods; provided that no
Extension Period may extend beyond the maturity date of the Senior Subordinated
Notes. As a consequence of any such extension by SNIG of the interest payment
period, distributions on the Trust Preferred Securities would be deferred
(though such distributions would continue to accrue interest at a rate of 10.75%
per annum compounded semi-annually). Upon the termination of any Extension
Period and the payment of all amounts then due, SNIG may commence a new
Extension Period, subject to certain requirements.
In November 1996, the Company entered into a financing transaction
involving Centre Reinsurance Limited ("Centre Re"), an affiliate of Zurich, and
Chase pursuant to which Chase extended a $93.1 million term loan, net of
transaction costs. The Company used the proceeds from the transaction to
purchase from SNIC reinsurance receivables due from Centre Re. As a result, the
Company's investable assets increased $93.1 million. The additional investments
contributed to the increase in investment income in 1997.
In June 1997, the term loan was retired when $110.5 million of receivables
from Centre Re were transferred to Chase in exchange for cancellation of the
Company's $94.9 million debt due to Chase under the term loan. The retirement of
the term loan resulted in the Company recognizing a $15.7 million charge.
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 March 31, 1998, 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, principally the Trust Preferred Securities. Absent
other sources of cash flow, SNIG cannot expend funds materially in excess of the
amount of dividends or tax
14
<PAGE> 15
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 three months ended March 31, 1998.
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 1998, is
approximately $7.6 million. These leases expire from 2000 to 2003.
With the exception of the approximately $285 million in cash outlays
necessary to complete the announced acquisition of Business Insurance Group,
Inc., the Company does not foresee any expenditures during the next twelve
months other than those arising in the normal course of business.
TAXES
As of March 31, 1998, the Company had available approximately $126.4
million in net operating loss carryforwards ("NOLs") to offset taxable income
recognized by the Company in periods after March 31, 1998. For federal income
tax purposes, these NOLs will expire in material amounts beginning in the year
2006. Any 5% shift in the current ownership of the Company may result in a
"change of ownership" under Section 382 of the Internal Revenue Code of 1986, as
amended, and severely limit the Company's ability to utilize NOLs. In an effort
to protect these NOLs, the Company's charter documents prohibit 5% owners of the
Company's common stock (including holders of options and warrants) from
acquiring additional stock and prohibit any additional person or entity from
becoming a 5% holder of common stock. The prohibition against changes in
ownership by the 5% holders of common stock expires in April 2000.
YEAR 2000 STRATEGY
A significant percentage of the software that runs most of the computers in
the United States and the rest of the world relies on two-digit date codes to
perform computations and decision making functions. Commencing January 1, 2000,
these computer programs may fail from an inability to interpret date codes
properly, misinterpreting "00" as the year 1900 rather than 2000. The Company is
in the process of identifying all necessary software and hardware changes to
ensure that it does not experience any loss of critical business functionality
due to the year 2000 issue. The Company has appointed an internal Year 2000
project manager and adopted a three phase approach of assessment, correction and
testing. The scope of the project includes all internal software, hardware, and
operating systems, and assessment of risk to the business from producers,
vendors and other partners in Year 2000 issues. The Company believes that this
formal assessment of risk (including the prioritization of business risk),
correction (including conversions to new software), and testing of necessary
changes will minimize the business risk of Year 2000 from internal systems. The
Company plans to complete its Year 2000 conversion not later than December 31,
1998. Although the Company has not completed its Year 2000 project, the Company
does not believe the Year 2000 issue will cause any system problems that could
have a material adverse effect on the operations of the Company. The Company
does not expect the cost associated with its year 2000 project to be material.
The effect of inflation on the revenues and net income during the three
months ended March 31, 1998 was not significant.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 5, 1998, the Company and Foundation Health Corporation ("FHC"), a
wholly owned subsidiary of Foundation Health Systems, Inc., entered into a
Purchase Agreement under which the Company agreed to purchase for approximately
$256.5 million in cash ($285 million less the cost of a Loss Reserves Guarantee
(described below) provided through reinsurance) (the "Acquisition") all
outstanding shares of the capital stock of Business Insurance Group, Inc.
("BIG"), an insurance holding company that, through its wholly owned insurance
subsidiaries, California Compensation Insurance Company, a California stock
insurance company, Business Insurance Company, a Delaware stock insurance
company, Combined Benefits Insurance Company, a California stock insurance
company, and Commercial Compensation Insurance Company, a New York stock
insurance company, writes workers' compensation and group health insurance,
principally in California, with branch operations throughout the continental
United States. The Company will offset the reduction in BIG's surplus resulting
from the cost of reinsurance for the Loss Reserves Guarantee with a capital
contribution to BIG, so the total cash outlays by the Company in connection with
the Acquisition will be $285.0 million, excluding transaction expenses.
In connection with the Acquisition, FHC will provide a "Loss Reserves
Guarantee" through the purchase of reinsurance, which will provide $175 million
of adverse development protection on BIG's loss and loss adjustment expense
reserves. The Loss Reserves Guarantee will be obtained by FHC at FHC's cost. The
reinsurance policy will be procured by BIG's insurance subsidiaries and its cost
will be deducted from the purchase price payable to FHC. The Company anticipates
contributing to the capital of the BIG insurance subsidiaries an amount equal to
the cost of the reinsurance policy. The Company will also enter into a three-
year quota share reinsurance agreement with a reinsurer rated "A+" by A.M. Best,
an independent insurance rating agency, under which the Company and BIG will
reinsure accounts with premiums in excess of $25,000. The Company has also
agreed to enter into long-term contracts with affiliates of FHC under which such
affiliates will continue to provide bill review and other claims control
services to the Company and BIG.
The Company will finance the Acquisition through the issuance of $200
million of Common Stock and approximately $110 million in aggregate principal
amount of senior notes. The amount raised in excess of $285 million will be used
to pay related transaction costs and for general corporate purposes. The Company
will offer $106 million of Common Stock through a rights offering (the "Rights
Offering") to the Company's existing Common Stock, warrant, and option holders
on a pro-rata basis, excluding IP (as defined below) and other securities
holders related to the Zurich Insurance Company. The Company will offer the
remaining $94 million of Common Stock to Insurance Partners, L.P. ("IP
Delaware"), Insurance Partners Offshore (Bermuda), L.P. ("IP Bermuda") and
Capital Z Partners, Ltd. (the general partner of a successor fund of IP Delaware
and IP Bermuda, which shall be formed prior to the consummation of the
Acquisition, collectively referred to herein with IP Delaware and IP Bermuda as
"IP") in a private transaction pursuant to a Stock Purchase Agreement between IP
and the Company dated as of May 5, 1998 (the "Stock Purchase Agreement") under
which IP has also committed to purchase, in addition to the $94 million of
Common Stock, up to $106 million of Common Stock. This latter commitment is to
purchase the number of shares of Common Stock for which subscription rights are
not exercised in the Rights Offering. By providing this "backstop," the Company
was able to provide FHC with satisfactory assurances that all of the anticipated
proceeds of the Rights Offering would be available to complete the Acquisition.
All of the Common Stock will be issued at a price of $16.75 per share. In
connection with its investment, IP has agreed to certain restrictions protecting
minority stockholders.
The $16.75 price and other terms of the Rights Offering were set by the
Company's board of directors, in consultation with its financial advisors, and
will be materially the same as the terms of the IP transaction, subject to
adjustments determined by the Company's board of directors to be reasonable and
appropriate. This description does not constitute an offer of any securities.
Any offering of securities in the transactions described above, other than the
issuance and sale of Common Stock to IP under the Stock Purchase Agreement, will
be made only by means of prospectus. Stockholders are cautioned, however, that
the mere decision to undertake a transaction does not change the contingencies
that apply to these prospective
16
<PAGE> 17
transactions, or the likelihood that an offering will, in fact, occur.
Registration statements will be filed with the Securities and Exchange
Commission relating to the Rights Offering and the senior notes offering, and
none of these securities may be sold before the registration statements are
declared effective.
The Acquisition is subject to the expiration of the waiting period under
the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended, and
approval by several state insurance regulatory authorities. In addition, the
Rights Offering and the issuance and sale of Common Stock to IP under the Stock
Purchase Agreement are each subject to stockholder approval, which the Company
intends to solicit at its 1998 Annual Meeting of Stockholders, presently
scheduled to occur in late September 1998. Assuming the preceding approvals are
obtained and that no unforeseen impediments arise, the Company anticipates that
the Acquisition will be consummated in late October to early November of 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2 Purchase Agreement dated as of May 5, 1998 by and between
FHC and the Company.+
10.56 Stock Purchase Agreement dated as of May 5, 1998 among the
Company, IP Delaware, IP Bermuda and Capital Z Partners
Ltd., with forms of a Registration Rights Agreement and
Common Stock Purchase Warrant exercisable to purchase an
aggregate of 734,000 shares of Common Stock attached as
exhibits thereto.+
10.57 Voting Agreement dated as of May 5, 1998 between FHC and
Insurance Partners, L.P.+
10.58 Voting Agreement dated as of May 5, 1998 between FHC and
Insurance Partners Offshore (Bermuda), L.P.+
10.59 Voting Agreement dated as of May 5, 1998 between FHC and
Thomas J. Jamieson.+
10.60 Voting Agreement dated as of May 5, 1998 between FHC and
Jaco Oil Company.+
10.61 Form of Voting Agreement dated as of May 5, 1998 between FHC
and the other parties set forth on the schedule attached
thereto.+
11 Summary of the calculation of EPS.*
27 Financial Data Schedule.*
99.1 Press Release dated May 5, 1998 announcing the Acquisition.+
</TABLE>
- ---------------
+ Filed with original 10-Q filing.
* Filed with this 10-Q/A.
(b) REPORTS ON FORM 8-K: No reports were filed on Form 8-K during the first
quarter of 1998.
17
<PAGE> 18
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: 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
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
2 Purchase Agreement dated as of May 5, 1998 by and between
FHC and the Company+........................................
10.56 Stock Purchase Agreement dated as of May 5, 1998 among the
Company, IP Delaware, IP Bermuda and Capital Z Partners
Ltd., with forms of a Registration Rights Agreement and
Common Stock Purchase Warrant exercisable to purchase an
aggregate of 734,000 shares of Common Stock attached as
exhibits thereto+...........................................
10.57 Voting Agreement dated as of May 5, 1998 between FHC and
Insurance Partners, L.P.+...................................
10.58 Voting Agreement dated as of May 5, 1998 between FHC and
Insurance Partners Offshore (Bermuda), L.P.+................
10.59 Voting Agreement dated as of May 5, 1998 between FHC and
Thomas J. Jamieson+.........................................
10.60 Voting Agreement dated as of May 5, 1998 between FHC and
Jaco Oil Company+...........................................
10.61 Form of Voting Agreement dated as of May 5, 1998 between FHC
and the other parties set forth on the schedule attached
thereto+....................................................
11 Summary of the calculation of EPS*..........................
27 Financial Data Schedule*....................................
99.1 Press Release dated May 5, 1998 announcing the
Acquisition+................................................
</TABLE>
- ---------------
+ Filed with original 10-Q filing.
* Filed with this 10-Q/A.
19
<PAGE> 1
EXHIBIT 11
SUMMARY OF THE CALCULATION OF EPS
The following is an illustration of the reconciliation of the numerators
and denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------ ------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- --------- -------------- ------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before items
below.............. $ 3,767 5,874,054 $ 0.64 $1,210 3,446,735 $ 0.35
Preferred
Securities......... (1,872) (0.32) (454) (0.13)
------- ------ ------ ------
Net Income............ $ 1,895 $ 0.32 $ 756 $ 0.22
======= ====== ====== ======
EFFECT OF DILUTIVE
SECURITIES
Options............... 336,473 344,175
Warrants.............. 1,571,087 1,455,609
DILUTED EPS
Income before items
below.............. $ 3,767 7,781,614 $ 0.48 $1,210 5,246,519 $ 0.23
Preferred
Securities......... (1,872) (0.24) (454) (0.09)
------- ------ ------ ------
Net Income............ $ 1,895 $ 0.24 $ 756 $ 0.14
======= ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 210,065
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,980
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 217,687
<CASH> 10,848
<RECOVER-REINSURE> 2,295
<DEFERRED-ACQUISITION> 5,987
<TOTAL-ASSETS> 412,920
<POLICY-LOSSES> 180,333
<UNEARNED-PREMIUMS> 14,610
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 30
101,291
0
<COMMON> 34,316
<OTHER-SE> 27,492
<TOTAL-LIABILITY-AND-EQUITY> 412,920
30,587
<INVESTMENT-INCOME> 4,253
<INVESTMENT-GAINS> 400
<OTHER-INCOME> 0
<BENEFITS> 18,288
<UNDERWRITING-AMORTIZATION> 5,123
<UNDERWRITING-OTHER> 4,868
<INCOME-PRETAX> 6,078
<INCOME-TAX> 2,311
<INCOME-CONTINUING> 3,767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,895
<EPS-PRIMARY> 0.32<F1>
<EPS-DILUTED> 0.24
<RESERVE-OPEN> 152,100
<PROVISION-CURRENT> 18,280
<PROVISION-PRIOR> 7
<PAYMENTS-CURRENT> 1,165
<PAYMENTS-PRIOR> 42,194
<RESERVE-CLOSE> 127,028
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
<F2> RESERVES FOR UNPAID CLAIMS, PROVISION FOR INSURED
EVENTS, AND PAYMENTS OF CLAIMS ARE STATED NET OF
REINSURANCE.
</FN>
</TABLE>
