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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
SUPERIOR NATIONAL INSURANCE GROUP, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and O-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11:*
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
O-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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* Set forth the amount on which the filing fee is calculated and state how it
was determined.
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[LOGO]
SUPERIOR NATIONAL INSURANCE GROUP, INC.
26601 AGOURA ROAD
CALABASAS, CALIFORNIA 91302
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 17, 1999
TO THE STOCKHOLDERS OF SUPERIOR NATIONAL INSURANCE GROUP, INC:
The 1999 Annual Meeting of Stockholders of Superior National Insurance
Group, Inc., a Delaware corporation ("Superior National"), will be held at 10:00
a.m., Pacific Time, on Thursday, June 17, 1999 at our principal executive
offices at 26601 Agoura Road, Calabasas, California 91302, for the following
purposes:
1. To elect eleven directors of Superior National, each to serve during the
ensuing year and until their successors are elected and qualified;
2. To ratify the appointment of KPMG LLP as Superior National's independent
auditors for the fiscal year ending December 31, 1999; and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement. Only the stockholders of record at the close of business on May 19,
1999 are entitled to receive notice of and to vote at the Annual Meeting or any
adjournment or postponement thereof.
A copy of our Annual Report to Stockholders for the fiscal year ended
December 31, 1998 is being mailed with this Notice, but is not to be considered
part of the proxy solicitation.
By Order of the Board of Directors
ROBERT E. NAGLE
SECRETARY
May 20, 1999
Calabasas, California
YOU ARE URGED TO VOTE UPON THE MATTERS PRESENTED AND TO SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED OR, IF YOUR SHARES
ARE HELD IN YOUR BROKER'S NAME, TO VOTE PROMPTLY BY TELEPHONE IN ACCORDANCE WITH
THE INSTRUCTIONS ON YOUR PROXY CARD. IT IS IMPORTANT FOR YOU TO BE REPRESENTED
AT THE ANNUAL MEETING. PROXIES ARE REVOCABLE AT ANY TIME AND THE EXECUTION OF
YOUR PROXY OR YOUR VOTE BY TELEPHONE WILL NOT AFFECT YOUR RIGHT TO VOTE IN
PERSON IF YOU ARE PRESENT AT THE MEETING.
------------------------
REQUESTS FOR ADDITIONAL COPIES OF PROXY MATERIALS OR OUR ANNUAL REPORT TO
STOCKHOLDERS SHOULD BE ADDRESSED TO ROBERT E. NAGLE, SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY, AT THE PRINCIPAL EXECUTIVE OFFICES OF SUPERIOR
NATIONAL, 26601 AGOURA ROAD, CALABASAS, CALIFORNIA 91302.
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC.
26601 AGOURA ROAD
CALABASAS, CALIFORNIA 91302
------------------------
PROXY STATEMENT
1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 17, 1999
------------------------
GENERAL INFORMATION
This Proxy Statement is being furnished to you in connection with the
solicitation of proxies by the Board of Directors of Superior National Insurance
Group, Inc., a Delaware corporation ("Superior National"), for use at our 1999
Annual Meeting of Stockholders to be held on Thursday, June 17, 1999 at 10:00
a.m., Pacific Time, at our principal executive offices at 26601 Agoura Road,
Calabasas, California 91302, and any adjournment or postponement of that
meeting. This Proxy Statement and the form of proxy to be used at the Annual
Meeting were mailed or delivered to our stockholders on or about May 20, 1999.
MATTERS TO BE CONSIDERED
The Annual Meeting has been called:
1. To elect eleven directors of Superior National, each to serve during the
year to come and until their successors are elected and qualified;
2. To ratify the appointment of KPMG LLP as our independent auditors for
the fiscal year ending December 31, 1999; and
3. To transact any other business that may properly come before the Annual
Meeting or any adjournment or postponement of that meeting.
RECORD DATE AND VOTING
Our directors have fixed the close of business on May 19, 1999 as the record
date for the determination of stockholders entitled to vote at our Annual
Meeting and any adjournment or postponement of that meeting. Only holders of
record of our common stock on the record date are entitled to receive notice of
and to vote at our Annual Meeting and any adjournment or postponement of that
meeting. On the record date, 17,936,291 shares of our common stock were
outstanding.
QUORUM AND VOTING REQUIREMENTS
The holders of record of a majority of the outstanding shares of our common
stock will constitute a quorum for the transaction of business at our Annual
Meeting. As to all matters, except the election of directors, each stockholder
is entitled to one vote for each share of our common stock held. Superior
National Insurance Company ("SNIC"), a subsidiary of ours, currently holds
245,000 shares of our common stock for investment purposes. Under Delaware law,
common stock of ours held by SNIC will not be voted at the Annual Meeting nor
counted as outstanding for purposes of determining whether there is a quorum.
Upon the request of any person entitled to vote, all holders of common stock
voting in the election of directors may cumulate their votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of shares you hold, or distribute your votes on the
same principle among as many candidates as you may select, provided that, for
purposes of the Annual Meeting, votes cannot be cast for more than eleven
candidates. However, no stockholder shall be entitled to cumulate votes for any
candidate unless, under the terms of our Bylaws, the candidate's name has been
placed in nomination prior to the voting.
All proxies that are properly completed, signed, and returned prior to the
Annual Meeting will be voted. If you specify how your proxy is to be voted on
any of the proposals where a choice is provided, the
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proxy will be voted as you have specified. If you do not specify how you wish to
vote on any of the proposals, the proxy will be voted in accordance with the
recommendations of the Board of Directors. Any proxy you give may be revoked at
any time before it is exercised by filing with our Secretary a written notice
revoking it, by a properly signed proxy bearing a later date, or by your
attending the Annual Meeting and stating that you wish to vote your shares in
person.
YOU ARE URGED TO COMPLETE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY FORM.
VOTE REQUIRED
For "Proposal No. 1--Election of Directors," the eleven nominees who receive
the greatest number of votes cast shall become directors. Stockholders may
cumulate their votes for one or more candidates as described in this Proxy
Statement. Abstentions will have no effect.
Approval of "Proposal No. 2--Ratification of the Appointment of KPMG LLP as
Independent Auditors" requires the affirmative vote of the holders of a majority
of the shares of common stock represented and voting at a meeting at which a
quorum is present. The number of shares voted in favor of Proposal No. 2 amount
to a majority of the required quorum. Abstentions will have no effect.
EFFECT OF BROKER NON-VOTES
"Broker Non-Votes" occur when a broker holding shares of common stock in
street name withholds its vote on certain "non-routine" matters because the
broker has not received instructions from the beneficial owner of those shares
and does not have discretionary authority to vote on non-routine matters without
specific instructions. "Proposal No. 1--Election of Directors," and "Proposal
No. 2--Ratification of the Appointment of KPMG LLP as Independent Auditors" are
"routine" matters upon which brokers holding shares in street name can cast
votes with or without specific instructions from the beneficial holders of those
shares. Shares held by brokers thus will be counted for purposes of electing the
directors under Proposal No. 1 and determining whether Proposal No. 2 has been
approved.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and accordingly file reports,
proxy statements, and other information with the Securities and Exchange
Commission (the "SEC"). Copies of these reports, proxy statements, and other
information can be inspected and copied at the SEC's Public Reference Room,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
public reference facilities maintained by the SEC at its regional offices
located at 500 West Madison Street, Suite 1450, Chicago, Illinois 60661, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of this
material can be obtained from the SEC at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
All of the reports, proxy statements and other information that we have filed
with the SEC is also available for inspection at the Nasdaq Stock Market, Inc.,
1735 K Street, N.W., Washington, D.C. 20006. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy statements, and other
information concerning Superior National that we have filed electronically with
the SEC.
OTHER INFORMATION
Our common stock is listed for trading under the symbol "SNTL" on the Nasdaq
National Market. On May 14, 1999 the last reported trading price for a share of
our common stock on Nasdaq was $20.75.
A member of KPMG LLP, our independent auditors, is expected to be present at
the Annual Meeting, will have an opportunity to make a statement, and will be
available to respond to appropriate questions.
Our principal executive offices are located at 26601 Agoura Road, Calabasas,
California 91302, and our telephone number is (818) 880-1600.
THIS PROXY STATEMENT IS DATED MAY 20, 1999.
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A COPY OF OUR 1998 ANNUAL REPORT TO STOCKHOLDERS IS BEING MAILED TO EACH
STOCKHOLDER OF RECORD TOGETHER WITH THIS PROXY STATEMENT. THE ANNUAL REPORT
CONTAINS INFORMATION CONCERNING US AND OUR OPERATIONS. A COPY OF THE ANNUAL
REPORT WILL BE FURNISHED TO STOCKHOLDERS WITHOUT CHARGE UPON REQUEST IN WRITING
TO: ROBERT E. NAGLE, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, AT
THE PRINCIPAL EXECUTIVE OFFICES OF SUPERIOR NATIONAL, 26601 AGOURA ROAD,
CALABASAS, CALIFORNIA 91302. THE ANNUAL REPORT IS NOT A PART OF OUR SOLICITING
MATERIAL.
PROPOSAL NO. 1--ELECTION OF DIRECTORS
Eleven directors are to be elected at our Annual Meeting to serve until the
next annual meeting of our stockholders and until their respective successors
have been elected and qualified. In the event that any nominee for election as
director becomes unavailable to serve, it is intended that votes will be cast,
in accordance with the enclosed proxy, for the substitute nominee selected by
our Board. We are not aware of any person that we have named as a nominee that
will be unavailable to serve as a director.
DIRECTORS
INFORMATION CONCERNING INCUMBENT NOMINEES TO BOARD OF DIRECTORS
Information is set forth below concerning our incumbent nominee directors
and the year in which each was first elected as a director.
<TABLE>
<CAPTION>
DIRECTOR
DIRECTORS AGE POSITION SINCE
- ------------------------------------------------ --- ------------------------------------------------ -----------
<S> <C> <C> <C>
C. Len Pecchenino(1) 71 Director, Chairman of the Board 1988
Steven D. Germain(2) 45 Director 1995
Steven B. Gruber(3) 41 Director 1997
Thomas J. Jamieson(1)(3) 56 Director 1985
Gordon E. Noble(2) 71 Director 1990
Craig F. Schwarberg(1)(3) 43 Director 1992
Robert A. Spass 43 Director 1992
Bradley E. Cooper(2)(3) 32 Director 1992
William L. Gentz 58 President, Chief Executive Officer and Director 1994
J. Chris Seaman(3) 44 Executive Vice President, Chief Financial 1993
Officer and Director
Roger W. Gilbert(1) 67 Director 1997
</TABLE>
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(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Investment Committee.
No arrangement or understanding exists between any director and any other
person under which a director was or is to be selected as a director or nominee
to be a director, except that Insurance Partners, L.P. ("IP Delaware") and
Insurance Partners Offshore (Bermuda), L.P. ("IP Bermuda") nominated Steven B.
Gruber to the Board of Directors in April 1997, under the terms of the Stock
Purchase Agreement entered into when IP Delaware, IP Bermuda and others
purchased our common stock in connection with our acquisition of Pac Rim Holding
Corporation. Under the Stock Purchase Agreement entered into when IP Delaware,
IP Bermuda, and Capital Z Financial Services Fund II, L.P. ("IP II") purchased
our common stock in December 1998 in connection with our acquisition of Business
Insurance Group, Inc. ("BIG"), IP Delaware, IP Bermuda, IP II and other parties
related to them agreed that they would not elect more than five directors to our
eleven-member Board.
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C. LEN PECCHENINO became a director of Superior National in May 1988 and was
elected as our Chairman in June 1994. He served as our Chief Executive Officer
from September 1991 to February 1992 and as our President and Chief Executive
Officer from February 1994 to May 1994. He also served as our Chairman from
September 1991 to August 1992. Until he retired in 1986, Mr. Pecchenino held
various executive officer positions, including President and Chief Operating
Officer, with IC Industries, Inc. and Pneumo Corporation.
STEVEN D. GERMAIN was elected to the Board of Directors in April 1995. Since
1994, he has served as General Counsel of Zurich Centre Group, LLC, a company
that provides management services to certain member companies within the group
of companies controlled by Centre Reinsurance Holdings Limited, an affiliate of
Zurich Centre Group Holdings Limited. At present, he is also a director and
officer of Centre Insurance Company ("CIC") and ZC Specialty Insurance Company.
From June 1988 through November 1998, Mr. Germain was a director of and held
various senior officer positions, including Senior Vice President, General
Counsel and Secretary, with Centre Reinsurance Limited, CentreLine Reinsurance
Limited, and Centre Solutions (Bermuda) Limited. Mr. Germain is also a director
of Home Holdings, Inc.
STEVEN B. GRUBER became a director of Superior National in April 1997. From
November 1998 to present he has served as a Managing Partner of Oak Hill Capital
Management, Inc., investment advisor to Oak Hill Capital Partners, L.P. He was a
founder of, and since February 1994, has served as a Managing Partner of,
Insurance Partners Advisors, L.P. ("IPA"). Since May 1990, Mr. Gruber has served
as a Managing Director of Oak Hill Partners, Inc. and since October 1992, has
served as a Vice President of Keystone, Inc. From 1981 to April 1990 he was
associated with Lehman Brothers Inc., most recently as Managing Director and
Co-Head of high-yield securities. From 1994 to 1997, he served as a director of
Unionamerica Holdings plc. From 1990 to 1996, he served as a director of
National Reinsurance Holding, Corp. He is also a director of Reliant Building
Products, Inc. and Grove Worldwide L.L.C.
THOMAS J. JAMIESON has been a director of Superior National since December
1985. Since 1971, he has served as President of Jaco Oil Company, and since
1993, he has been a director of Berry Oil Co.
GORDON E. NOBLE became a director of Superior National in October 1990.
Since July 1990, he has been Chairman and Chief Executive Officer of Commodore
Insurance Services. Previously he served as Executive Vice President and as a
director and member of the Executive Committee of Sedgwick James, an
international insurance brokerage and risk management firm.
CRAIG F. SCHWARBERG was appointed to the Board of Directors in March 1992.
From 1991 to 1997, Mr. Schwarberg worked for IIA, serving as a Managing Director
through February 1994. From 1994 to April 30 1996, Mr. Schwarberg was a director
and Chairman of the Board of NACOLAH Holding Corporation. Prior to 1991, he held
various positions at Lehman Brothers Inc., most recently as Senior Vice
President.
ROBERT A. SPASS was appointed to the Board of Directors in March 1992. From
1998 to present, Mr. Spass has served as Deputy Chairman of the Board of Capital
Z Management, Inc. and Capital Z Partners, Ltd., and has served as Managing
Partner of IPA since 1994. Mr. Spass served as President and Chief Executive
Officer of International Insurance Advisors, Inc. from 1990 to 1994. Prior to
1990, Mr. Spass held various positions at Salomon Brothers, Inc, most recently
as a Director. Mr. Spass is a director of Highlands Insurance Group, MMI
Companies and Ceres Group, Inc. In addition, he served as director of NACOLAH
Holding Corporation until March 1996 and of National Re Corporation until
October 1996.
BRADLEY E. COOPER became a director of Superior National in May 1992. From
1998 to present, Mr. Cooper has served as Senior Vice President of Capital Z
Management, Inc. and Capital Z Partners, Ltd., and has served as a partner of
IPA since 1994. Mr. Cooper served as Vice President of International Insurance
Advisors, Inc. from 1990 to 1994. Prior to 1990, Mr. Cooper was an analyst with
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Salomon Brothers, Inc. Mr. Cooper is a director of Highlands Insurance Group,
Inc. and Ceres Group, Inc.
WILLIAM L. GENTZ became a director of Superior National in June 1994. Mr.
Gentz has held the position of President and Chief Executive Officer since June
1994. Mr. Gentz joined us after seventeen years at Zenith Insurance Company,
where he was responsible for marketing, underwriting, loss control, and field
operations for Zenith's workers' compensation operations. He began his insurance
career in 1958, and from 1958 to 1968 worked in the marketing and underwriting
departments of a variety of insurance companies in the mid-west and California.
J. CHRIS SEAMAN became a director of Superior National in March 1993. Mr.
Seaman has held the positions of Executive Vice President since February 1995
and Chief Financial Officer since July 1991. Prior to joining us, Mr. Seaman was
the Chief Financial Officer of a private company engaged in insurance company
acquisitions, which he joined after spending ten years with Ernst & Whinney. Mr.
Seaman previously held staff positions at Industrial Indemnity Insurance Company
and management positions at Allianz of America Corporation.
ROGER W. GILBERT became a director of Superior National in April 1997. From
May 1988 until he retired in June 1993, Mr. Gilbert served simultaneously as the
Chief Executive Officer and Chairman of the Board of TIC Indemnity Co., the
Chief Executive Officer of TMIC Insurance Co. Inc., and a California Special
Deputy Insurance Commissioner, a position to which he was appointed by the
California Insurance Commissioner. Prior to 1988, Mr. Gilbert served as Senior
Vice President and director of Great American Insurance Companies, and as
President of Great America West Inc.
COMMITTEES
The standing committees of the Board of Directors are the Audit Committee,
the Compensation Committee, and the Investment Committee.
The Audit Committee recommends to the Board of Directors the engagement or
discharge of our independent auditors; reviews with the independent auditors the
scope, timing and plan for the annual audit, any non-audit services, and the
fees for audit and other services; reviews outstanding accounting and auditing
issues with the independent auditors; and supervises or conducts any additional
projects that may be relevant to its duties. The Audit Committee is also
responsible for reviewing and making recommendations to our Board of Directors
regarding our financial condition, financial controls, and accounting practices
and procedures. The Audit Committee, which presently consists of Messrs.
Pecchenino, Jamieson, Schwarberg, and Gilbert, held three meetings during 1998.
Mr. Gilbert was elected to the Audit Committee in November 1998.
The Compensation Committee reviews and approves our executive compensation
policies and bonus distributions to officers and key employees. The Compensation
Committee, which during 1998 held four meetings, consists of Messrs. Noble,
Cooper, and Germain.
The Investment Committee reviews the investment practices of our primary
insurance subsidiaries and oversees the relationship between these subsidiaries
and their investment manager. The Investment Committee, which presently consists
of Messrs. Jamieson, Cooper, Seaman, Schwarberg, and Gruber, held three meetings
during 1998. Mr. Gruber was elected to the Investment Committee in November
1998.
MEETINGS AND REMUNERATION
During 1998, the Board of Directors held 16 meetings and took various
actions by unanimous written consent. Each incumbent director attended at least
75% of (1) the total number of meetings held by the Board of Directors during
1998 and (2) the total number of meetings held by all Committees of the Board of
Directors on which he served during that period, other than Bradley E. Cooper
and J. Chris Seaman, each of whom attended 66 2/3% of his respective Committee
meetings.
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Each director is elected to hold office until the next annual meeting of
stockholders and until his successor is elected and qualified. Each incumbent
director who is not an officer of Superior National is paid a fee of $4,000 for
each regularly scheduled Board meeting attended and $500 for each regularly
scheduled committee meeting attended. The Board of Directors regularly meets
once each quarter. All directors are reimbursed for their out-of-pocket expenses
in serving on the Board and any committee.
C. Len Pecchenino, the Chairman of the Board, is paid $50,000 per year so
long as he remains Chairman of the Board and serves on the Audit Committee. This
amount is in addition to the fees he normally receives for attendance at
regularly scheduled Board and committee meetings.
Messrs. Spass, Cooper, Gruber, and Germain hold management positions with
several entities that either engaged in transactions with us or are affiliated
with entities that engaged in transactions with us during 1998. These
transactions are described in "Certain Relationships and Related Transactions."
Additionally, Mr. Gentz and Mr. Seaman purchased common stock from us in
connection with the rights offering we completed in December 1998 to help
finance our acquisition of BIG. As employees of Superior National, they were
able to borrow from us the funds they used to purchase this common stock, as
further described in "Certain Relationships and Related Transactions."
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors establishes the general
compensation policies of Superior National, establishes the compensation plans,
establishes the specific compensation of Mr. William Gentz, our Chief Executive
Officer, reviews the Chief Executive Officer's recommendations as to the
specific compensation levels for the other executive officers, and administers
our stock incentive plans.
COMPENSATION POLICY AND PROGRAMS
The Compensation Committee's responsibility is to provide a strong and
direct link among stockholder values, company performance, and executive
compensation through its oversight of the design and implementation of a sound
compensation program that will attract and retain highly qualified personnel.
Compensation programs are intended to complement our short- and long-term
business objectives and to focus executive efforts on the fulfillment of these
objectives.
The Compensation Committee, consistent with its standing policy, has
conducted a full review of our executive compensation program and will repeat
this review as it deems necessary. Advisors with expertise in executive
compensation matters are consulted regularly by the Compensation Committee. It
is the Compensation Committee's practice to establish target levels of
compensation for senior officers consistent with that of companies comparable in
size and complexity to Superior National, as well as companies that are direct
business competitors of ours. After considerable review of extensive data
relating to compensation paid by such groups of companies, actual compensation
of our executive officers is subject to increase or decrease by the Compensation
Committee from targeted levels according to our overall performance and the
individual's efforts and contributions. In 1998, as in previous years, a
significant portion of executive compensation is directly related to our
financial performance and is therefore at risk. Total compensation for our
senior management is composed of base salary, near-term incentive compensation
in the form of bonuses, and long-term incentive compensation in the form of
options and, to a lesser extent, restricted stock grants. The Compensation
Committee retains the discretion to adjust the formula for certain items of
compensation so long as total compensation reflects overall corporate
performance and individual achievement.
BASE SALARY
In establishing base salary levels for senior officer positions, the
Compensation Committee and Mr. Gentz consider levels of compensation at other
similarly situated companies and at direct competitors,
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levels of responsibility and internal issues of consistency and fairness. In
determining the base salary of a particular executive, the Compensation
Committee and Mr. Gentz consider individual performance, including the
accomplishment of short- and long-term objectives, and various subjective
criteria including initiative, contribution to overall corporate performance,
and leadership ability.
In the fiscal year ended December 31, 1995, the annual base salary of Mr.
Gentz began at $275,000 and increased to $287,500 in September, a level
determined to be appropriate by the Compensation Committee based on comparable
chief executive salaries of a peer group of companies and of direct competitors,
our overall performance and profitability in the relevant fiscal year, and Mr.
Gentz's efforts and contributions to Superior National. Mr. Gentz's annual base
salary of $287,500 did not increase in the fiscal years ended December 31, 1996,
1997 and 1998. However, effective January 1, 1999, Mr. Gentz's annual base
salary was raised to $325,000, a level determined to be appropriate by the
Compensation Committee based on a review of executive compensation commissioned
by the Compensation Committee as a result of Superior National's acquisition of
BIG.
BONUSES
Our executive officers are eligible for annual bonuses based upon
recommendations made by Mr. Gentz (as to the other executive officers) and the
Compensation Committee (as to Mr. Gentz) as to individual performance and our
achievement of certain operating results. Our practice is to determine bonuses
for the prior fiscal year during the first quarter of the following year.
Amounts of individual awards are based principally upon the results of our
financial performance during the relevant fiscal year. The awards for senior
officers are within guidelines established by the Compensation Committee and Mr.
Gentz as a result of their review of total compensation for senior management of
peer companies and competitors. The actual amount awarded within these
guidelines is determined principally by the Compensation Committee and Mr.
Gentz. Consideration is given to factors such as the individual's contribution
to our overall financial performance, the individual's successful completion of
a special project, any significant increase or decrease in the level of the
individual's executive responsibility, and the Compensation Committee's and Mr.
Gentz's evaluation of the individual's overall efforts and ability to discharge
the responsibilities of his position. In 1998, it was determined that no bonuses
would be paid for fiscal 1997 because the financial performance of Superior
National was such that consideration of the other factors was not warranted. In
1999, bonuses were paid with respect to fiscal 1998 performance to all of our
executive officers named in the Summary Compensation Table and to 9 executive
officers in total.
In determining Mr. Gentz's bonus, the Compensation Committee gives
particular consideration to the following factors: (1) Superior National's
underwriting results; (2) Superior National's return on average equity during
the fiscal year; (3) the positive earnings growth of Superior National during
the fiscal year; (4) performance of our common stock during the fiscal year; (5)
the success of Superior National in implementing acquisitions and divestitures;
and (6) the efforts and contributions made by Mr. Gentz in discharging his
responsibilities as Chief Executive Officer. After considering the foregoing
factors with respect to fiscal 1998 performance, the Compensation Committee
determined that it would be appropriate to pay a bonus of $210,000 to Mr. Gentz
for fiscal 1998.
STOCK INCENTIVES
We currently have in place the 1986 Non-Statutory Stock Option and 1986
Non-Statutory Stock Purchase Plan (the "1986 Plan") and the 1995 Stock Incentive
Plan ("1995 Plan"). We ceased issuing options under the 1986 Plan in April 1995.
The purpose of the 1995 Plan is to provide incentives and reward the
contributions of employees, officers, and consultants for the achievement of
long-term company performance, as measured by earnings per share and the market
value of our common stock. The Compensation Committee sets guidelines for the
number and terms of option or restricted stock awards
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based on factors similar to those considered for the other components of our
compensation program, including comparison with the practices of peer group
companies and direct competitors. In the event of unsatisfactory corporate
performance, the Compensation Committee may decide not to award options or
restricted stock in any given fiscal year, although exceptions to this policy
may be made for individuals who have assumed substantially greater
responsibilities and other similar factors. The awards under the 1995 Plan are
designed to align the interests of employees with those of the stockholders.
Generally, options become exercisable in cumulative installments over a period
of five years, but the individual forfeits any installment that has not vested
during the period of his or her service to Superior National. Restricted stock
grants generally vest in equal installments over nine years with unvested shares
subject to repurchase by Superior National at no gain to the participant upon
the termination of his or her employment.
In February 1999, the Compensation Committee approved under the 1995 Plan a
set of option grants and a set of restricted stock grants to a number of
officers then employed based on Superior National's performance during fiscal
1998.
The Compensation Committee has reviewed Superior National's executive
compensation policies and plans in light of the provisions of the Omnibus Budget
Reconciliation Act of 1993 and the rules promulgated under that statute. This
legislation amended Section 162 of the Code by limiting to $1 million the
deductibility of compensation paid to certain executives. Rulemaking has
clarified the impact of the 1993 act on equity incentive plans. It is the
current policy of the Compensation Committee to maximize, to the extent
reasonably possible, Superior National's ability to obtain a corporate tax
deduction for compensation paid to executive officers of Superior National to
the extent consistent with the best interests of Superior National and its
stockholders.
Bradley E. Cooper
Steven D. Germain
Gordon E. Noble
Members of the Compensation Committee
8
<PAGE>
COMPANY PERFORMANCE
The graph below compares the cumulative total stockholder return of Superior
National with the cumulative total return on the Nasdaq National Market
Composite Index and the Nasdaq Insurance Index for the period from June 30, 1995
(the date on which our registration statement under Section 12 of the Exchange
Act became effective) through December 31, 1998:
COMPARISON OF CUMULATIVE TOTAL RETURN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SNTL NASDAQ INSURANCE INDEX NASDAQ NATIONAL MARKET COMPOSITE INDEX
<S> <C> <C> <C>
6/30/95 $100.00 $100.00 $100.00
12/31/95 $113.89 $122.72 $112.72
12/31/96 $283.33 $139.12 $138.97
12/31/97 $322.22 $170.69 $170.08
12/31/98 $445.83 $170.58 $238.52
</TABLE>
<TABLE>
<S> <C>
Superior National Common Stock (SNTL).............................................. $ 445.83
Nasdaq Insurance Index............................................................. $ 170.58
Nasdaq National Market Composite Index............................................. $ 238.52
</TABLE>
Assumes that $100 was invested on June 30, 1995 (the date on which our
registration statement under Section 12 of the Exchange Act became effective) in
each of Superior National's common stock, the Nasdaq National Market Composite
Index, and the Nasdaq Insurance Index, and that all dividends were reinvested.
LEGAL PROCEEDINGS
We are parties to various legal proceedings, all of which are considered
routine and incidental to our business and not material to the financial
condition and operation of our business. We are not party to any litigation that
could reasonably be expected to have a material adverse effect upon our business
or financial position.
We are subject to class action litigation that was filed against all
workers' compensation insurers in California, related principally to claims
paying practices. We are vigorously contesting this litigation. Although we
believe there is a low likelihood of a material adverse result in this matter,
no particular outcome can be assured. If a trial were held, it is possible that
the class plaintiffs could win a substantial award.
9
<PAGE>
EXECUTIVE OFFICERS
Set forth in the table below are the names, ages and current offices held by
our executive officers.
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION SINCE
- ----------------------------------------------- --- ----------------------------------------------- -----------
<S> <C> <C> <C>
William L. Gentz............................... 58 President and Chief Executive Officer 1994
J. Chris Seaman................................ 44 Executive Vice President and Chief Financial 1991
Officer
Arnold J. Senter............................... 57 Executive Vice President and Chief Operating 1997
Officer
Robert E. Nagle................................ 50 Senior Vice President, General Counsel and 1996
Secretary
Thomas I. Boggs, Jr............................ 52 Senior Vice President--Underwriting 1995
Edward C. Shoop................................ 55 Senior Vice President and Chief Actuary 1997
Theresa A. Sealy............................... 50 Senior Vice President--California Operations 1998
Doris K.T. Lai................................. 43 Vice President--Finance and Treasurer 1998
Stephen J. Weiss............................... 51 Senior Vice President--National Field 1999
Operations
Ronald J. Tonani............................... 57 Senior Vice President--Marketing 1997
</TABLE>
Our Board of Directors elects the executive officers, who serve at the
Board's discretion. No arrangement exists between any executive officer and any
other person under which any executive officer was or is to be selected as an
executive officer. None of the executive officers has any family relationship to
any director or to any other executive officer.
WILLIAM L. GENTZ has held the positions of President and Chief Executive
Officer since mid-1994, and has served as a director of Superior National since
June 1994. Mr. Gentz joined us after seventeen years at Zenith Insurance
Company, where he was responsible for marketing, underwriting, loss control, and
field operations for Zenith's workers' compensation operations. He began his
insurance career in 1958, and from 1958 to 1968 worked in the marketing and
underwriting departments of a variety of insurance companies in the mid-west and
California.
J. CHRIS SEAMAN has held the positions of Executive Vice President since
February 1995 and Chief Financial Officer since July 1991, and has served as a
director of Superior National since March 1993. Prior to joining us, Mr. Seaman
was the Chief Financial Officer of a private company engaged in insurance
company acquisitions, which he joined after spending ten years with Ernst &
Whinney. He previously held staff positions at Industrial Indemnity Insurance
Company and management positions at Allianz of America Corporation.
ARNOLD J. SENTER has held the positions of Executive Vice President and
Chief Operating Officer since February 1997. Prior to joining us, Mr. Senter
most recently served as Senior Vice President, Southwest and Southeast
Operations at Zenith National Insurance Company, and had previously held various
operational positions in nearly every functional area for Zenith since 1981. Mr.
Senter has 30 years experience with both regional and national carriers.
THOMAS I. BOGGS, JR. was appointed Senior Vice President--Underwriting on
March 1995. From October 1993 to March 1995, he served as Assistant Vice
President of Fremont Compensation Insurance Company and from October 1991 to
October 1993, served as Business Development Executive for the Southern
California Commercial Insurance Center for Fireman's Fund Insurance Company.
Prior to October 1991, Mr. Boggs held various underwriting and marketing
positions at Cypress Insurance Company, Industrial Indemnity Company, and
Safeco.
10
<PAGE>
ROBERT E. NAGLE has held the positions of Senior Vice President, General
Counsel, and Secretary since January 1996. From 1986 until he joined us, Mr.
Nagle was corporate counsel and senior corporate counsel for Farmers Group, Inc.
EDWARD C. SHOOP was appointed Senior Vice President and Chief Actuary in
October 1997. From April 1995 to August 1997 he served as Senior Vice President
and Actuary with Zenith Insurance Company, and from March 1994 to April 1995
served as Vice President and Actuary with Great States Insurance Company. Prior
to that, Mr. Shoop was Vice President and Actuary with the Workers' Compensation
Insurance Rating Bureau of Massachusetts from November 1991 to March 1994. Mr.
Shoop's 31 years of actuarial experience also includes working for Fireman's
Fund Insurance Company and Royal Insurance Company of Canada, as a Vice
President, and for Aetna Life and Casualty Company.
THERESA A. SEALY was appointed Senior Vice President--California Operations
in July 1998. From November 1997 to June 1998 she served as a Vice President of
Superior National. From June 1997 until she joined us, she served as regional
manager for California Compensation Insurance Company and, prior to that, served
as a Senior Vice President of Allianz Insurance Company since February 1992.
DORIS K.T. LAI has held the position of Vice President--Finance and
Treasurer since August 1998. From November 1997 until she joined us, Ms. Lai was
employed by Zenith National Insurance Company as director of financial services.
From October 1996 to November 1997 she served as Vice President and controller
with Fremont Financial Corporation and from May 1994 to October 1996 she served
as a controller with Superior National. Prior to that, Ms. Lai served as SEC
Reporting Manager with TIG Holdings, Inc. from April 1991 to April 1994.
STEPHEN J. WEISS was appointed Senior Vice President--National Field
Operations in December 1998. From May 1997 to December 1998, he was Vice
President--Field Operations at BIG. Prior to that, Mr. Weiss served from January
1993 to May 1996 as resident Vice President of Royal Insurance, plc. He has 29
years experience in insurance management and marketing.
RONALD J. TONANI has held the position of Senior Vice President--Marketing
since April 1997. From 1987 to April 1997, Mr. Tonani held the position of
Senior Vice President--Sales with Pacific Rim Assurance Company. Prior to that,
he held various positions with Fairmont Insurance, Insurance Company of the
West, Pacific Compensation Insurance Company and Employee Benefits Insurance
Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our insiders, who are our
directors, executive officers, and persons who own more than ten percent of our
common stock, to file reports of ownership and changes in ownership with the
SEC. Insiders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file.
Based solely on our review of the copies of the forms we have received, or
written representations from our insiders that no Forms 5 were required to be
filed by those persons, we believe that our insiders complied with Section 16(a)
filing requirements for fiscal 1998, with the exception of Gordon E. Noble, a
director, who filed a late Form 5 to report several gifts of common stock.
11
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information concerning the compensation we paid
for services in all capacities to Superior National for the fiscal years ended
December 31, 1998, 1997, and 1996 to those persons who were, at December 31,
1998, (1) the chief executive officer and (2) the other four most highly
compensated officers of Superior National.
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------
AWARDS
ANNUAL COMPENSATION ------------------------ PAYOUTS
-------------------------------------- RESTRICTED SECURITIES --------
ALL OTHER STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($)(3) SARS(#) ($) ($)(4)
- ----------------------------------- ---- -------- -------- ------------ ----------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William L. Gentz................... 1998 $326,615 $210,000 -- $ --(5) -- -- $ 2,400
President and Chief Executive 1997 298,300 -- -- 121,250 18,800 -- 2,250
Officer 1996 298,300 278,500 -- 46,874 17,875 -- 2,250
J. Chris Seaman.................... 1998 241,997 175,000 -- -- -- -- 2,400
Executive Vice President and 1997 231,616 -- -- 109,125 17,500 -- 2,250
Chief Financial Officer 1996 235,298 128,500 -- 36,223(6) 13,813 -- 2,250
Arnold J. Senter(7)................ 1998 235,128 175,000 -- -- 27,500 -- 2,400
Executive Vice President and 1997 229,335 -- -- -- 25,000 -- 2,250
Chief Operating Officer 1996 -- -- -- -- -- -- --
Thomas I. Boggs, Jr................ 1998 176,731 30,000 -- --(8) 3,000 -- 2,400
Senior Vice 1997 164,261 -- -- 30,313 4,643 -- 2,250
President--Underwriting.......... 1996 155,800 32,000 -- 21,306 8,125 -- 2,163
Robert E. Nagle.................... 1998 153,492 30,000 -- --(9) 5,000 -- 2,400
Senior Vice President, General 1997 144,133 -- -- 18,188 2,786 -- 2,250
Counsel and Secretary 1996 138,165 20,000 -- -- 4,650 -- 1,913
</TABLE>
- ------------------------------
(1) The amounts in this column include salary and other cash compensation paid
in that year, other than amounts listed in the column entitled "Bonus."
(2) Bonus amounts represent cash payments and are presented in the year to which
they apply, although payment typically is made in April of the following
year. No bonus payments were made for fiscal year 1997.
(3) Represents the fair market value of the underlying shares on the date of
grant. All restricted stock grants vest in nine equal annual increments
following the date of grant.
(4) Represents contributions we made on behalf of the employee under our 401(k)
plan.
(5) As of December 31, 1998, Mr. Gentz held an aggregate of 29,950 shares of
restricted stock valued at $600,887, based upon the $20.063 per share fair
market value of the common stock on that date.
(6) As of December 31, 1998, Mr. Seaman held an aggregate of 24,163 shares of
restricted stock valued at $484,782, based upon the $20.063 per share fair
market value of the common stock on that date.
(7) Mr. Senter began his employment with us in February 1997.
(8) As of December 31, 1998, Mr. Boggs held an aggregate of 9,375 shares of
restricted stock valued at $188,091, based upon the $20.063 per share fair
market value of the common stock on that date.
(9) As of December 31, 1998, Mr. Nagle held an aggregate of 1,500 shares of
restricted stock valued at $30,095, based upon the $20.063 per share fair
market value of the common stock on that date.
12
<PAGE>
EMPLOYMENT AGREEMENTS
We have employment agreements with the following executive officers:
WILLIAM L. GENTZ, President and Chief Executive Officer. Mr. Gentz's
agreement expires on June 1, 1999, but automatically renews in one-year
increments unless notification of non-renewal is given sixty days prior to the
expiration of the then-current term. His salary was set as of June 1, 1994 at
$275,000 annually, plus benefits and incidentals generally provided to officers,
and is thereafter determined by the Board. Mr. Gentz's annual salary was
increased to $287,500 effective August 1, 1995. If we terminate Mr. Gentz's
employment other than for cause, we are obligated to pay his salary and benefits
for the then-remaining term of his agreement. This termination benefit shall be
a minimum of two years' salary. In the event of a change in control of Superior
National, Mr. Gentz would be deemed terminated without cause and his employment
agreement would be deemed to have a three-year remaining term.
ARNOLD J. SENTER, Executive Vice President and Chief Operating Officer. Mr.
Senter's agreement expired on February 17, 1999, but was renewed under a
provision providing that the agreement would automatically renew in one-year
increments unless notification of non-renewal is given sixty days prior to the
expiration of the then-current term. His salary was set as of February 17, 1997
at $200,000 annually, plus benefits and incidentals generally provided to
officers, and is thereafter determined by the Board. If we terminate Mr.
Senter's employment other than for cause, we are obligated to pay his salary and
benefits for the then-remaining term of his agreement. This termination benefit
shall be a minimum of two years' salary. In the event of a change in control of
Superior National, Mr. Senter would be deemed terminated without cause and his
employment agreement would be deemed to have a three-year remaining term.
J. CHRIS SEAMAN, Executive Vice President and Chief Financial Officer. Mr.
Seaman's agreement expires on June 1, 1999, but automatically renews in one-year
increments unless notification of non-renewal is given sixty days prior to the
expiration of the then-current term. His annual salary under the agreement is
$200,000, plus benefits and incidentals generally provided to officers, and is
thereafter determined by the Board. If we terminate Mr. Seaman's employment
other than for cause, we are obligated to pay his salary and benefits for the
then-remaining term of his agreement. This termination benefit shall be a
minimum of two years' salary. In the event of a change in control of Superior
National, Mr. Seaman would be deemed terminated without cause and his employment
agreement would be deemed to have a three-year remaining term.
EDWARD C. SHOOP, Senior Vice President and Chief Actuary. Mr. Shoop's
agreement expires on October 6, 1999 and provides that, if his employment is
terminated as a result of a change in control, we will be obligated to pay his
salary and benefits for two years from the date of his termination.
DORIS K.T. LAI, Vice President--Finance and Treasurer. Ms. Lai's agreement
is open-ended. Her compensation and benefits are determined by the Board. If we
terminate Ms. Lai's employment other than for cause, we are obligated to pay her
salary and benefits for one year from the date of the termination. Ms. Lai's
agreement does not provide any special rights in the event of a change in
control.
CHANGE IN CONTROL ARRANGEMENTS
In addition to the rights described above with respect to Messrs. Gentz,
Senter, Seaman, and Shoop, the only change in control arrangements that we have
are in our stock incentive plans. Under the terms of our 1986 Plan, in a
reorganization, merger, or consolidation in which Superior National does not
survive or in which a change in control takes place, unless replacement options
to purchase stock in the new or recapitalized entity are offered, all option
holders will have thirty days to exercise their outstanding options, excluding
those that have then not yet vested. Under the terms of our 1995 Plan, under
similar circumstances, the Compensation Committee may, in its discretion, allow
each person holding an option or share of restricted stock who did not receive a
replacement equity incentive grant to exercise that option
13
<PAGE>
without regard to its vesting provisions, or to retain that share of restricted
stock without regard to Superior National's repurchase right.
EQUITY INCENTIVE GRANTS
Officers, key employees, including directors who are key employees, and
consultants chosen by the Compensation Committee are eligible to participate in
our 1995 Plan.
Under our 1995 Plan, officers, key employees, and consultants of ours or our
subsidiaries may be granted options to purchase shares of our common stock or
they may be given the opportunity to purchase shares of our restricted stock.
Our 1995 Plan allows us to grant both options that qualify for treatment as
incentive stock options under Section 422 of the Internal Revenue Code and those
that do not, referred to as nonqualified stock options. Our 1995 Plan also
allows us to issue shares of restricted stock that we can repurchase upon the
occurrence of certain events such as the termination of a participant's
employment. Our repurchase right expires over time following the grant date of
the restricted stock.
Our 1986 Plan allowed us to issue to employees of ours and our subsidiaries
nonqualified stock options and rights to purchase shares of common stock. The
Board terminated the purchase right aspect of the 1986 Plan in 1989. Following
our adoption of the 1995 Plan, the Board of Directors decided to make no further
grants under the 1986 Plan.
STOCK PURCHASE PLAN
Under our Employee Stock Purchase Plan, which became effective January 1,
1999, we have made available for sale to our employees a total of 500,000 shares
of our common stock. A committee that our Board designates will administer the
plan and we intend for it to qualify as an employee stock purchase plan within
the meaning of the Internal Revenue Code. Any employee of Superior National, or
of a designated subsidiary, whom we have employed for at least thirty continuous
days and whom we have scheduled to work regularly at least twenty hours per week
may participate.
Under the plan, at least fifteen days before the beginning of each calendar
quarter, an employee must designate either a fixed dollar amount or a fixed
percentage of his or her compensation which we will withhold from his or her
paycheck throughout the forthcoming calendar quarter. During that quarter, the
employee may not change this designated amount although he or she may elect, at
any time, to withdraw from the plan. An employee may contribute up to $25,000
during each calendar year with a minimum contribution per payroll period of $10.
We deposit these funds into separate accounts for each employee and on or about
the end of each calendar quarter, based upon the end of our payroll period,
automatically purchase shares of our common stock using the accumulated amounts.
The price of each share purchased under the plan is the lesser of 85% of the
closing price of our common stock on Nasdaq on either the first day or the final
day of this purchase period.
Our Board may amend or terminate the plan at any time, except as to then
outstanding rights to purchase common stock under the plan. However, our
stockholders must approve any change that pertains either to the class of
employees who may participate or to the maximum number of shares that employees
may purchase under the plan.
14
<PAGE>
OPTION GRANTS IN 1998
The following table provides information on options we granted during 1998
to each executive officer named in the Summary Compensation table set forth
above under "--Executive Compensation."
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
PERCENTAGE OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASUMED
SECURITIES OPTIONS/SARS EXERCISE ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO OR BASE PRICE APPLICATION FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION -----------------------------------
NAME GRANTED(#) FISCAL YEAR(%) ($/SH)(1) DATE 0%(2) 5%($)(3) 10%($)(3)
- ------------------------------ --------------- ------------------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William J. Gentz.............. -- -- -- -- -- -- --
J. Chris Seaman............... -- -- -- -- -- -- --
Arnold J. Senter.............. 12,500(4) 5.5 16.375 02/24/08 -- 128,728 326,210
............... 15,000(4) 6.6 16.875 11/20/08 -- 159,190 403,405
Thomas I. Boggs, Jr........... 3,000(4) 1.3 16.375 02/24/08 -- 30,895 78,290
Robert E. Nagle............... 5,000(4) 2.2 16.375 02/24/08 -- 51,491 130,484
</TABLE>
- ------------------------------
(1) Represents the fair market value of the underlying shares of common stock at
the time of the grant.
(2) Unless our common stock price increases, which will benefit all stockholders
commensurately, an option holder will realize no gain.
(3) Represents the value of the shares of common stock issuable upon the
exercise of the option, assuming the stated rates of price appreciation for
ten years, compounded annually, with the aggregate exercise price deducted
from the final appreciated value. The 5% and 10% rates are established by
the SEC as examples only and are not intended to forecast future
appreciation in the common stock price.
(4) Represents a ten-year, incentive stock option grant, vesting at a rate of
20% per year for five years from the date of grant, granted under the 1995
Plan.
OPTION EXERCISES AND YEAR-END VALUE
The following table sets forth information about the aggregate number of
options exercised during 1998 by each executive officer named in the Summary
Compensation table set forth above under "--Executive Compensation," and about
outstanding options that each of these officers held on December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS/SARS
NUMBER OF UNEXERCISED OPTIONS/SARS AT AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ----------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------- --------------- ----------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C>
William L. Gentz.................. -- -- 47,415/39,685 $ 681,051/$489,226
J. Chris Seaman................... 57,619/28,019 851,975/322,232
Arnold J. Senter.................. -- -- 5,000/47,500 43,415/267,578
Thomas I. Boggs, Jr............... -- -- 11,471/16,447 165,120/186,830
Robert E. Nagle................... -- -- 2,426/10,010 32,138/77,530
</TABLE>
- ------------------------
(1) Uses a fair market value at December 31, 1998 of $20.063 per share, with the
aggregate exercise price deducted from the total value of the common stock
underlying the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the Compensation Committee consisted of Messrs. Noble, Cooper,
and Germain, each of whom is a non-employee director. Mr. Cooper is an employee
of IIA, which we paid $250,000 in 1998 for investment banking and financial
consulting services. Mr. Germain is an officer of Zurich Centre Group, LLC and
CIC. CIC and several affiliates of Zurich Centre Group, LLC were involved in
15
<PAGE>
transactions with Superior National during 1998 involving payments in excess of
$60,000. See "Certain Relationships and Related Transactions."
During 1998, no officers participated in deliberations of the Compensation
Committee concerning executive officer compensation, except Mr. Gentz, our
President and Chief Executive Officer.
SECURITY OWNERSHIP OF PRINCIPAL BENEFICIAL OWNERS
The table below sets forth certain information regarding the beneficial
ownership of our common stock as of April 30, 1999 by each person we know to own
beneficially more than 5% of the outstanding shares of our common stock.
PRINCIPAL BENEFICIAL OWNERS
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES PERCENT(1)
- ------------------------------------------------------------ ----------- ----------------
<S> <C> <C>
"IP II" .................................................... 5,276,960(2) 29.42%
Capital Z Financial Services Fund II, L.P.
One Chase Manhattan Plaza
New York, New York 10005
"IP Delaware" .............................................. 4,554,895(3) 25.07
Insurance Partners, L.P.
201 Main Street
Suite 2600
Ft. Worth, Texas 76102
"IP Bermuda" ............................................... 2,055,098(4) 11.40
Insurance Partners Offshore (Bermuda), L.P.
Cedar House
41 Cedar Avenue
P.O. Box HM 1179
Hamilton HM HX, Bermuda
"IIA" ...................................................... 1,230,149(5) 6.42
International Insurance Advisors, Inc.
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
"TJS" ...................................................... 986,406(6) 5.44
TJS Partners, L.P.
115 East Putnam Avenue
Greenwich, Connecticut 06830
"Centre Solutions" ......................................... 974,484(7) 5.15
Centre Solutions (Bermuda) Limited
One Victoria Street
Seventh Floor
Hamilton HM HX, Bermuda
</TABLE>
- ------------------------
(1) Percent ownership is based on 17,936,291 shares of common stock outstanding
on April 30, 1999, plus any shares issuable with respect to warrants held by
the entity in question that may be exercised within 60 days after April 30,
1999.
(2) Robert A. Spass and Bradley E. Cooper, who are directors of Superior
National, are officers of Capital Z Partners, Ltd. ("Capital Z"), the
ultimate general partner of IP II. In addition,
16
<PAGE>
Messrs. Spass and Cooper each owns 9.9% of the voting capital stock of
Capital Z. No person or entity owns 10% or more of the voting capital stock
of Capital Z. Messrs. Spass and Cooper each disclaims beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of all shares of our
common stock that are beneficially owned by IP II. Some members of our
management are investors in an investment fund that is a limited partner of
IP II.
(3) Includes 229,754 shares issuable upon exercise of warrants. Robert A. Spass
and Steven B. Gruber, who are directors of Superior National, are the
President and a Vice President, respectively, of the ultimate general
partner of IP Delaware. Mr. Spass owns 40% and Messrs. Gruber and Daniel L.
Doctoroff each owns 30% of the voting capital stock of the ultimate general
partner of IP Delaware. In addition, Messrs. Spass, Gruber, Doctoroff, and
Bradley E. Cooper, a director of Superior National, own direct or indirect
limited partnership interests in some of the limited partnerships that are
the direct or indirect general partners of IP Delaware. Messrs. Spass,
Gruber, Cooper, and Doctoroff each disclaims beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of the warrants and all shares
of our common stock beneficially owned by IP Delaware. See "Certain
Relationships and Related Transactions--Sale of Common Stock to the IP
Partnerships and Limitations on Related Party Control of Superior National,"
regarding restrictions on IP Delaware's ability to acquire additional equity
securities of Superior National.
(4) Includes 93,206 shares issuable upon exercise of warrants. Robert A. Spass
and Steven B. Gruber, who are directors of Superior National, are the
President and a Vice President, respectively, of the ultimate general
partner of IP Bermuda. Robert A. Spass owns 40% and Messrs. Gruber and
Doctoroff each owns 30% of the voting capital stock of the ultimate general
partner of IP Bermuda. In addition, Messrs. Spass, Gruber, and Doctoroff and
Bradley E. Cooper, a director of Superior National, own direct or indirect
limited partnership interests in some of the limited partnerships that are
the direct or indirect general partners of IP Bermuda. Messrs. Spass,
Gruber, Cooper, and Doctoroff each disclaims beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of the warrants and all shares
of our common stock beneficially owned by IP Bermuda. See "Certain
Relationships and Related Transactions--Sale of Common Stock to the IP
Partnerships and Limitations on Related Party Control of Superior National,"
regarding restrictions on IP Bermuda's ability to acquire additional equity
securities of Superior National.
(5) Represents warrants to purchase shares of common stock that are subject to a
revocable agency relationship that IIA has with Centre Solutions and the
limited partners and the general partner of International Insurance
Investors, L.P. As agent, IIA has the revocable authority to exercise rights
set forth in the warrants and to vote any shares of common stock issuable
upon exercise of the warrants. Robert A. Spass, a director of Superior
National, is an officer of IIA and, as such, has the authority to exercise
these rights. See "Certain Relationships and Related Transactions--Sale of
Common Stock to the IP Partnerships and Limitations on Related Party Control
of Superior National," regarding restrictions on IIA's ability to acquire
additional equity securities of Superior National.
(6) Includes 186,406 shares issuable upon exercise of warrants. TJS Corporation
and its controlling stockholder, sole director, and executive officer,
Thomas J. Salvatore, are the general partners of TJS Management, L.P., the
general partner of TJS. TJS Corporation, Mr. Salvatore, and TJS Management,
L.P. exercise voting control and dispositive power over all warrants and
shares of common stock owned by TJS and are the beneficial owners of all
those securities. The information contained in this footnote is based, in
part, on an Amendment No. 3 to Schedule 13D/A that was filed by TJS and
others with the SEC in December 1998.
(7) Represents warrants to purchase 395,128 shares of common stock held by
Centre Solutions and warrants to purchase 579,356 shares of common stock
held by CentreLine. The warrants held by Centre Solutions are subject to
IIA's revocable agency relationship, which is described in footnote 5 above.
CentreLine is an affiliate of Centre Solutions. Tara Leonard and Paul
Hellmers are directors and officers of Centre Solutions and CentreLine and
Richard Weech is an officer of both entities.
17
<PAGE>
Messrs. Hellmers and Weech and Ms. Leonard disclaim any beneficial interest
in the warrants held by Centre Solutions and CentreLine and the shares of
common stock issuable upon their exercise. However, as officers and/or
directors of both Centre Solutions and CentreLine, they share voting and/or
investment power over these securities (subject to IIA's agency relationship
with respect to the warrants held by Centre Solutions). See "Certain
Relationships and Related Transactions--Sale of Common Stock to the IP
Partnerships and Limitations on Related Party Control of Superior National,"
regarding restrictions on Centre Solution's and CentreLine's ability to
acquire additional equity securities of Superior National. The reported
number of shares issuable upon exercise of warrants does not include
warrants to purchase 75,262 shares of common stock held by International
Insurance Investors, L.P. (subject to IIA's revocable agency relationship)
in reserve for the payment by Centre Solutions to IIA and Centre Reinsurance
Limited ("Centre Re") of their incentive fee under International Insurance
Investors, L.P.'s investment advisory agreements with IIA and Centre Re.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock on April 30, 1999 by (1) each director and the
executive officers named in the Summary Compensation table set forth under
"--Executive Compensation" and (2) all directors and executive officers as a
group.
OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
NAME SHARES PERCENT(1)
- -------------------------------------------------- -------- ----------
<S> <C> <C>
William L. Gentz.................................. 260,175(2) 1.45%
J. Chris Seaman................................... 393,449(3) 2.18
Arnold J. Senter.................................. 39,730(4) *
Thomas I. Boggs, Jr............................... 64,940(5) *
Robert E. Nagle................................... 28,315(6) *
Thomas J. Jamieson................................ 300(7) *
Gordon E. Noble................................... 1,200 *
C. Len Pecchenino................................. 14,250 *
Robert A. Spass................................... 43,041(8) *
Craig F. Schwarberg............................... 2,790(9) *
Bradley E. Cooper................................. 21,343(10) *
Steven D. Germain................................. 10,160(11) *
Steven B. Gruber.................................. --(12) --
Roger W. Gilbert.................................. -- --
Directors and Executive Officers as a Group (19
persons)........................................ 879,693(13) 4.90%
</TABLE>
- ------------------------
* Less than 1%
(1) Percent ownership is based on the 17,936,291 shares of common stock
outstanding on April 30, 1999, plus any shares issuable with respect to
options or warrants held by the person in question that may be exercised
within 60 days after April 30, 1999.
(2) Includes 64,835 shares issuable upon exercise of options that are
exercisable within 60 days of April 30, 1999, and 37,356 shares of
restricted stock awarded under our 1995 Plan, 27,331 of which remain
subject to our repurchase right.
18
<PAGE>
(3) Includes 58,795 shares issuable upon exercise of warrants and 66,747 shares
issuable upon exercise of options, each of which is exercisable within 60
days of April 30, 1999, and 31,447 shares of restricted stock awarded under
our 1995 Plan, 23,524 of which remain subject to our repurchase right.
(4) Includes 12,500 shares issuable upon exercise of options that are
exercisable within 60 days of April 30, 1999, and 7,284 shares of
restricted stock awarded under our 1995 Plan, all of which are subject to
our repurchase right.
(5) Includes 17,054 shares issuable upon exercise of options that are
exercisable within 60 days of April 30, 1999, and 9,375 shares of
restricted stock awarded under our 1995 Plan, 6,234 of which remain subject
to our repurchase right.
(6) Includes 4,911 shares issuable upon exercise of options that are
exercisable within 60 days of April 30, 1999, and 1,500 shares of
restricted stock awarded under our 1995 Plan, 1,162 of which remain subject
to our repurchase right.
(7) Represents shares owned of record by Jaco Oil Company, which is controlled
by Mr. Jamieson.
(8) Includes 8,000 shares of common stock owned directly by Mr. Spass. Also
includes (1) warrants to purchase 32,825 shares of common stock held by Mr.
Spass and (2) warrants to purchase 7,216 shares of common stock owned by
Mr. Spass that are subject to IIA's revocable agency relationship, which is
described in footnote 5 of the preceding "Principal Beneficial Owners"
table. Also see footnotes 2 through 5 of the same table for information on
Mr. Spass' relationship to IP II, IP Delaware, IP Bermuda, and IIA.
(9) Represents warrants to purchase common stock that are subject to a
revocable agency relationship with IIA, which is described in footnote 5 of
the preceding "Principal Beneficial Owners" table.
(10) Includes 4,000 shares of common stock owned directly by Mr. Cooper. Also
includes (1) warrants to purchase 16,413 shares of common stock and (2)
warrants to purchase 930 shares of common stock that are subject to a
revocable agency relationship with IIA, which is described in footnote 5
of the preceding "Principal Beneficial Owners" table. Also see footnotes
2, 3, and 4 of the same table for information on Mr. Cooper's relationship
to IP II, IP Delaware and IP Bermuda.
(11) Represents (1) 8,400 shares of common stock owned directly and (2) 1,760
shares of common stock owned indirectly as custodian for the benefit of
his children.
(12) See footnotes 3 and 4 to the preceding "Principal Beneficial Owners" table
for information concerning Mr. Gruber's relationship to IP Delaware and IP
Bermuda.
(13) Includes (1) 118,969 shares issuable upon exercise of warrants and (2)
171,797 shares issuable upon exercise of options, all of which are
exercisable within 60 days of April 30, 1999. Also includes 86,962 shares
of restricted stock awarded under our 1995 Plan, 65,535 of which remain
subject to our repurchase right. See footnotes 2, 3, 4 and 5 to the
preceding "Principal Beneficial Owners" table for information on several
of the directors' relationships to some of the principal beneficial owners
of our common stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH IIA
Messrs. Spass and Cooper, who are directors of Superior National, are
employees of IIA. Mr. Spass is also an officer and director of IIA. Mr.
Schwarberg, who is a director of Superior National, is a former employee of IIA.
We paid $250,000 to IIA during 1998 for investment banking and financial
consulting services. We made this payment under a consulting agreement that we
entered into with IIA in 1992. This agreement will terminate at the end of 1999.
See the preceding "Principal Beneficial Owners" table for information concerning
IIA's beneficial ownership of shares of our common stock.
19
<PAGE>
TRANSACTIONS WITH AFFILIATES OF ZURICH CENTRE GROUP HOLDINGS LIMITED
Zurich Centre Group Holdings Limited ("ZCGH"), Centre Solutions, CentreLine,
CIC, ZC Insurance Company ("ZCIC"), and Zurich Reinsurance (North America), Inc.
("ZRNA") are affiliates of each other.
Mr. Germain, who is a director of Superior National, is an officer of Zurich
Centre Group, LLC, a company that provides management services to certain member
companies within the group of companies controlled by Centre Reinsurance
Holdings Limited, an affiliate of ZCGH, and an officer and director of CIC. From
June 1988 through November 1998, Mr. Germain was a director of and held various
senior officer positions, including Senior Vice President, General Counsel and
Secretary, with Centre Reinsurance Limited, CentreLine, and Centre Solutions.
See the preceding "Principal Beneficial Owners" table for information concerning
Centre Solutions' and CentreLine's beneficial ownership of shares of our common
stock.
FINANCING TRANSACTIONS
Effective June 11, 1998, ZRNA advanced to SNIC $5.5 million of a reinsurance
commutation amount to be paid to SNIC in July 1998. SNIC used the proceeds of
the advance to purchase shares of our common stock from a director and for other
investments. See "--Purchase of Common Stock by SNIC from Thomas J. Jamieson,
Director." ZRNA received interest on the funds that it advanced at short-term
borrowings rates.
REINSURANCE
Under a 1993 aggregate excess of loss reinsurance contract, we owe Centre
Reinsurance International Company ("Centre International"), an affiliate of
ZCGH, $45.0 million of funds withheld premiums, and Centre International owes us
$45.0 million of experience refunds, neither of which have been accruing
interest or accreting since June 30, 1996. Because Superior National and Centre
International enjoy the right of offset under this contract, the two amounts
offset to zero in the balance sheet. This contract has no further economic
effect on either us or Centre International, and we will neither receive from
nor pay to Centre International any cash at the future commutation date of the
contract.
Effective January 1, 1994, SNIC entered into the "ZRNA Quota-Share." Under
the ZRNA Quota-Share, ZRNA may provide SNIC and Superior Pacific Casualty
Company ("SPCC"), subsidiaries of ours, with an Assumption of Liability
Endorsement facility ("ALE"), or, effective January 1, 1997, SNIC and SPCC may
write directly on policy forms of ZCIC (the "ZCIC Underwriting Agreement"). The
ceding rate under the contract was 20% for 1994, and we and ZRNA agreed to
reduce the quota-share participation to 5% for 1995 and 1996. Further, Superior
National received ceding commissions ranging between 22.5% and 24.5% for
premiums ceded to ZRNA under the 1994-1997 contracts. The purpose of the ceding
commission is to cover SNIC's and SPCC's cost of acquiring new business and may
be changed as a result of changes in market conditions on a quarterly basis.
Effective January 1, 1997, the terms of the ZRNA Quota-Share were amended to
increase ZRNA's participation from 5% of premiums written in 1996 to 6.5% in
1997. In exchange for the increased participation, ZRNA no longer received a
separate fee for policies written on ALEs, but received an additional 2% of
premiums written on ZCIC Underwriting Agreement policies only.
Effective January 1, 1998, the terms of the ZRNA Quota-Share again were
amended to increase the ceding commission to 27.5% for non-ZCIC policies and on
ALE premium. The ceding commission on ZCIC policies remained at 20%. Further,
the additional 2% of premium paid to ZCIC for its underwriting was eliminated.
20
<PAGE>
Effective June 30, 1998, SNIC entered into an agreement with ZRNA to settle
and commute all obligations and liabilities known and unknown associated with
the ZRNA Quota-Share contract and its related ALE facility for the contract
years incepting January 1, 1994 through 1997. ZRNA paid SNIC $5.6 million and
SNIC reassumed from ZRNA all of its workers' compensation claim and allocated
claim adjustment expense reserves previously ceded to ZRNA for contract years
1994 through 1997.
Effective July 1, 1998, SNIC and SPCC entered into an Aggregate Excess of
Loss Agreement with ZRNA. SNIC and SPCC will cede to ZRNA $11.0 million of claim
and allocated claim adjustment expenses for each 12-month period ended June 30,
1999 through June 30, 2001 to the extent SNIC's and SPCC's claim and allocated
claim adjustment expenses exceed 105% of earned premium during this 12-month
period. SNIC and SPCC paid ZRNA cash and securities with a fair market value of
$15.6 million during 1998, and will pay ZRNA eight installments of $1.4 million
at the beginning of each quarter beginning January 1, 1999. This agreement is
accounted for as a deposit due to the absence of certain risk transfer factors
under the terms of the agreement. SNIC and SPCC receive an interest credit from
ZRNA on the premium paid, and will receive the balance of a notional experience
account from ZRNA when the contract is commuted. The balance of the deposit at
December 31, 1998 was $16.1 million, including advance reinsurance premiums of
$2.8 million.
Effective June 30, 1997, SNIC entered into a contract with ZRNA. ZRNA
assumed $10.0 million of reserves associated with claims open for future medical
payments from SNIC in consideration of $1.0 million in cash and the assignment
of SNIC's rights of contribution and subrogation recoveries during the term of
the contract. In 1997, the contract was accounted for as a deposit and no gain
would be recognized until net cash payments from ZRNA are greater than SNIC's
$1.0 million premium. Effective December 31, 1998, the contract was commuted and
ZRNA paid SNIC $250,000 to commute and settle all obligations and liabilities
associated with this contract.
Effective October 1, 1998, SNIC entered into a contract with Centre
Reinsurance (U.S.) Limited ("Centre US") under which SNIC assumed $30.0 million
of property and casualty reserves from Centre US in return for cash
consideration of $28.9 million. The contract was commuted effective December 15,
1998, at which time SNIC paid Centre US $30.5 million and Centre US reassumed
all of the reserves ceded to SNIC.
CLAIM SEVERITY MANAGEMENT PROGRAM
Effective December 31, 1997, we entered into agreements with Risk Enterprise
Management Limited ("REM") and ZRNA, affiliates of ZCGH, to provide claim
management services for our claim severity management program. Under this
program, REM, acting as a third party administrator, provides claim processing
and management services to SNIC and SPCC, and ZRNA provides SNIC and SPCC with
protection predicated on REM's ability to reduce SNIC and SPCC's claim severity.
We may terminate the contract with six months notice after the initial
three-year term of the contract, with a penalty that will not exceed $250,000
plus REM's reasonable expenses to unwind the agreement. The total costs of this
program to us is expected to be approximately the same as our regular claim
management functions would have cost us over the expected five-year life of the
program. We believe our operating costs would have been similar had we not
determined to pursue the program, while our claim severity risk has been
reduced. In 1998 we paid an aggregate of $8.3 million to REM and ZRNA under the
terms of the program.
SALE OF BICO; ISSUANCE OF WARRANTS; UNDERWRITING ARRANGEMENT WITH CIC
In mid-December 1998, we sold Business Insurance Company ("BICO") to Centre
Solutions Holdings (Delaware) Limited ("Centre Holdings") for approximately
$11.7 million. We arrived at the BICO purchase price by means of arm's length
bargaining with Centre Holdings. BICO was a subsidiary of BIG, both of which we
acquired in early December 1998 along with California Compensation Insurance
21
<PAGE>
Company ("CalComp"), Combined Benefits Insurance Company and Commercial
Compensation Insurance Company. An additional $0.6 million of the purchase price
was withheld by Centre Holdings and, subject to possible downward adjustments
specified in the purchase agreement, will be paid to us in September 1999. Prior
to the sale of BICO, under the terms of the Loss Portfolio Transfer and 100%
Quota Share Reinsurance Contract among BICO, CalComp and SNIC, CalComp, as the
reinsurer, assumed BICO's insurance business (excluding BICO's licenses and
statutory capital) and liabilities, and received assets with the fair market
value equal to the liabilities assumed. SNIC unconditionally guarantees the
performance and payment of CalComp's obligations under this contract.
Effective December 18, 1998, CalComp entered into a 100% Quota Share
Reinsurance Agreement with CIC (formerly BICO) in support of an underwriting
arrangement with SN Insurance Services, Inc. ("SNIS"), a subsidiary of Superior
National, under which CIC will provide SNIS with the ability to issue policies
on CIC policy forms. Under this agreement CalComp assumes from CIC, for a fee of
2.5% of written premium, all of the premium and claims and underwriting expenses
associated with insurance policies written on CIC policies. SNIS will underwrite
and price the policies, bear the expense of settling all of the claims incurred
on the policies, and be responsible for all of the underwriting expenses
associated with the policies. Superior National receives several benefits from
this arrangement with CIC. Policyholders evaluate the creditworthiness of their
insurance policy based on the rating of the company issuing the policy. In this
case, CIC should ultimately have a rating similar to that of Centre Solutions,
which will be a higher rating than Superior National's "B++" rating from A.M.
Best. In addition, Superior National will be able to use CIC's extensive rate
and form filings throughout the United States. It would be extremely time
consuming and expensive for Superior National to refile all of CIC's rates and
forms. The total amount of premium that Superior National can underwrite through
CIC is currently limited to $50.0 million of annual gross written premium.
Centre Holdings is an affiliate of ZCGH and ZCGH is an affiliate of
CentreLine and Centre Solutions, both of which have invested in our securities.
In addition, several affiliates of ZCGH are significant investors in IP II, IP
Delaware and/or IP Bermuda. IP II, IP Delaware, and IP Bermuda purchased a
significant percentage of the common stock we sold to finance our acquisition of
BIG. See "--Sale of Common Stock to the IP Partnerships and Limitations on
Related Party Control of Superior National" below.
In December 1998, we issued warrants to purchase 205,520 shares of common
stock to Zurich Centre Group Holdings Limited, which is an affiliate of ZCGH.
The warrants have an exercise of $16.75 per share and expire on December 10,
2003. These warrants represented a portion of the warrants to purchase an
aggregate of 734,000 shares of common stock that we simultaneously issued to IP
Delaware, IP Bermuda, and to designees of the general partner of IP II in
connection with our December 1998 sale of common stock to help fund our
acquisition of BIG. See "--Sale of Common Stock to the IP Partnerships and
Limitations on Related Party Control of Superior National" below for additional
information concerning these warrants.
PURCHASE OF COMMON STOCK BY SNIC FROM THOMAS J. JAMIESON, DIRECTOR
Effective June 11, 1998, SNIC agreed to purchase an aggregate of 245,000
shares of our common stock from Thomas J. Jamieson, who is a director of
Superior National, and Jaco Oil Company, an entity controlled by Mr. Jamieson.
The price per share paid was $21.00, for total consideration of $5,145,000. The
closing sales price per share of common stock on June 10, 1998 was $22.88. The
common stock purchased by SNIC is held as an investment on a GAAP basis. The
Board of Directors, with disclosure of the conflicts of interest of Mr.
Jamieson, and also Mr. Germain, due to ZRNA's advance of funds discussed above,
unanimously approved SNIC's purchase of our common stock from Mr. Jamieson and
Jaco Oil Company.
22
<PAGE>
SALE OF COMMON STOCK TO THE IP PARTNERSHIPS AND LIMITATIONS ON RELATED PARTY
CONTROL OF SUPERIOR NATIONAL
SALE OF COMMON STOCK TO THE IP PARTNERSHIPS
In December 1998, we privately sold approximately $158 million of our common
stock to IP II, IP Delaware, and IP Bermuda. At the same time we also completed
our public rights offering under which we offered subscription rights to
purchase our common stock to all of our stockholders (except for IP Delaware and
IP Bermuda), warrant holders and to holders of our stock options and shares of
restricted stock. Those directors and executive officers of Superior National
who owned common stock and warrants, by virtue of these holdings, had the
opportunity to purchase shares of common stock in the rights offering. These
offerings provided a significant portion of the financing we needed to purchase
BIG.
Robert A. Spass and Bradley E. Cooper, who are directors of Superior
National, are officers of the ultimate general partner of IP II and each owns
9.9% of its voting capital stock. In addition, some members of our management,
including William L. Gentz, Arnold J. Senter, and J. Chris Seaman, are investors
in an investment fund that is a limited partner of IP II.
Mr. Spass and Steven B. Gruber, who is a director of Superior National, are
executive officers of the ultimate general partner of IP Delaware and IP
Bermuda. In addition, Messrs. Spass, Gruber, and Cooper own direct or indirect
limited partnership interests in some of the limited partnerships that are the
direct or indirect general partners of IP Delaware and IP Bermuda.
The Board of Directors, without Messrs. Spass, Gruber, and Cooper, who
disclosed their conflict of interest, withdrew from the discussion, and
abstained from the voting, unanimously approved the terms of the sale of common
stock to the IP partnerships.
Under the terms of our stock offering to the IP partnerships, they agreed to
purchase 5,611,940 shares of our common stock at $16.75 per share, for a total
of $94.0 million. They also agreed to provide a standby commitment under which
they would purchase up to an additional 6,328,358 shares of common stock at
$16.75 per share in an amount of shares necessary to bring the total proceeds of
the private sale to the IP partnerships and the public sale of common stock
under the rights offering to $200.0 million. Our independent directors, on
behalf of Superior National, negotiated the $16.75 subscription price and the
terms of the stock purchase agreement governing the sale to the IP partnerships.
Because the $16.75 price equaled the subscription price in the rights offering
and this price was set with the intention of inducing participation by our
stockholders, the $16.75 price represented a discount to the market price of our
common stock at the time the price was determined.
On December 10, 1998 the IP partnerships exercised their standby commitment,
which, combined with the minimum number of shares of common stock they agreed to
purchase, resulted in (1) IP II purchasing 5,276,960 shares of common stock for
$88.4 million, (2) IP Delaware purchasing 2,949,594 shares of common stock for
$49.4 million, and (3) IP Bermuda purchasing 1,196,588 shares of common stock
for $20.0 million.
On December 10, 1998 we paid a commitment fee to the IP partnerships in the
form of warrants to purchase an aggregate of 734,000 shares of common stock at
$16.75 per share for agreeing to provide the standby commitment. The warrants
expire on December 10, 2003. IP II assigned 205,520 of the warrants it was
entitled to receive to Zurich Centre Group Holdings Limited as compensation for
its providing certain financing commitments to the IP partnerships under the
stock purchase agreement. We paid this commitment fee by issuing (1) 229,754
warrants to IP Delaware, (2) 93,206 warrants to IP Bermuda, (3) 205,520 warrants
to Zurich Centre Group Holdings Limited, and (4) 205,520 warrants to various
principals and designees of the ultimate general partner of IP II. Robert A.
Spass and Bradley E. Cooper, who are directors of Superior National and officers
and equity holders of that general partner, received 32,825 warrants and 16,413
warrants, respectively, from the general partner. See footnotes 2, 3 and 4 to
the
23
<PAGE>
preceding "Principal Beneficial Owners" table for additional information
concerning the relationship of Messrs. Spass, Gruber, and Cooper to IP Delaware,
IP Bermuda, and IP II.
In connection with our stock offering to the IP partnerships, we also
entered into a Registration Rights Agreement under which we agreed to provide
the IP partnerships and some of their affiliates with registration rights that
allow them to require Superior National to prepare and file with the SEC
registration statements under the Securities Act covering the public offer and
sale of shares they hold and to use its best efforts to cause these registration
statements to be declared effective. We also agreed under this agreement to
provide these same stockholders with customary "piggyback" registration rights
that allow them to register shares if and when Superior National proposes to
sell any of its common stock to the public in a transaction registered under the
Securities Act. This agreement superseded an earlier Registration Rights
Agreement that we entered into in 1996 with IP Delaware and IP Bermuda that
contained similar provisions.
In addition, we paid to designees of the IP partnerships fees totaling $3.9
million in consideration of the IP partnerships providing us with the
opportunity to undertake the BIG acquisition, originating a portion of the
financing for the acquisition, and assisting us in negotiating the terms of the
acquisition.
LIMITATIONS ON RELATED PARTIES CONTROL OF SUPERIOR NATIONAL
The stock purchase agreement governing the terms of the stock sale to the IP
partnerships contains, in addition to customary terms and provisions, including
customary representations and warranties, covenants, and reciprocal
indemnification provisions, several covenants by the IP partnerships that shall
remain effective so long as the IP partnerships and their associates
beneficially own an aggregate of 15% or more of our common stock on a diluted
basis. As used in the stock purchase agreement, the term "associates" means
CentreLine, Centre Re, Centre Solutions, IIA, and any person or entity that
controls, is under common control with, or is controlled by any of the IP
partnerships or those persons or entities, and all individuals who are officers,
directors, or control persons of any those entities, including IP II, IP
Delaware and IP Bermuda.
Some of the covenants provide that:
1. The IP partnerships and their associates will not elect more than five
directors or the highest number that is less than a majority of the Board
of Directors.
2. The IP partnerships will not transfer any of their shares of our common
stock except in specified types of transactions.
3. Except for the election of directors, with respect to any other vote of
the stockholders of Superior National on a particular matter, if the
aggregate number of all shares that are voted in like manner by the IP
partnerships and their associates shall be greater than 35% of the total
number of shares voted, then those votes that exceed the 35% threshold
shall be voted in the same proportion as the other stockholders voted
their shares with respect to that matter.
4. With limited exceptions, the IP partnerships and their associates will
not (a) acquire additional shares of our common stock, (b) enter into a
business combination involving Superior National, (c) participate in any
solicitation of proxies with respect to our common stock, or (d)
participate in any group with respect to any of the foregoing.
Covenant number 4 above may be waived by a two-third majority vote of (1)
the directors not affiliated with the IP partnerships or their associates or (2)
the stockholders other than the IP partnerships and their associates.
This stock purchase agreement superseded a previous stock purchase agreement
that we entered into in 1996 with IP Delaware, IP Bermuda, and others that
contained similar covenants.
24
<PAGE>
PARTICIPATION BY MANAGEMENT IN THE RIGHTS OFFERING
In approving the rights offering to Superior National's stockholders
described above, the Board of Directors decided to allow employees and
consultants of Superior National who held stock options and shares of restricted
stock to receive similar subscription rights. We distributed to these holders
the same form of subscription right issued in the rights offering, including an
identical $16.75 subscription price, except that each employee and consultant
was required to agree that his or her rights were non-transferable.
In addition, the Board of Directors authorized Superior National to lend
funds to the participants sufficient to pay the purchase price for the common
stock and any resulting tax liability if the participant signed a promissory
note, and pledged to Superior National, as collateral, stock options, warrants
and shares of common stock and restricted stock (including shares of common
stock purchased in the rights offering). The amount of money that could be
borrowed was limited to 66% of the total value of the collateral that was
pledged. The value of a share of our common stock was based on an average of the
closing sales price and the value of an option or warrant was equal to this
value minus its exercise price. The annual interest rate on the promissory notes
is 5.4% and accrued interest is payable on each December 31. The principal
amount of each promissory note will be due in a lump sum on the earlier of
December 10, 2008, or the date on which the borrower is no longer an employee or
consultant of Superior National (unless his or her termination results from
death or permanent disability, in which case the payment terms extend). The loan
can be partially or entirely prepaid at any time without penalty.
Under the terms of this pledge, if the amount outstanding under any
promissory note (including interest) exceeds the value of the collateral, then
the borrower is obligated to either prepay a portion of the promissory note or
pledge additional securities as collateral, in either case, in an amount equal
to the shortfall. If a borrower decides to sell any of the securities he or she
has pledged as collateral, then a portion of the proceeds must be used to pay
all accrued and unpaid interest and a percentage of the outstanding principal of
the promissory note based upon the number of shares sold and the number of
shares purchased with the promissory note. In addition, if a borrower should
default under the terms of the pledge, which includes his or her ceasing to be
an employee or consultant of Superior National (other than in the case of death
or permanent disability), then Superior National shall have the right to sell
all or any part of the pledged securities.
Employees and consultants of Superior National purchased a total of 618,309
shares of common stock under this portion of the rights offering and borrowed a
total of $10.4 million from Superior National to pay for them. All of the
participants borrowed money from us and pledged to us a sufficient number of
stock options, warrants and shares of our common stock and restricted stock. The
following table provides information concerning our executive officers and their
participation in this offering.
EXECUTIVE OFFICER PARTICIPATION
<TABLE>
<CAPTION>
SHARES AMOUNT
NAME PURCHASED BORROWED
- ---------------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
William L. Gentz........................................................................ 120,000 $ 2,010,000
J. Chris Seaman......................................................................... 193,828 3,246,619
Arnold J. Senter........................................................................ 17,946 300,595
Thomas I. Boggs, Jr..................................................................... 35,191 589,449
Robert E. Nagle......................................................................... 17,920 300,160
Edward C. Shoop......................................................................... 3,592 60,166
Theresa A. Sealy........................................................................ 1,106 17,018
Ronald J. Tonani........................................................................ 1,698 28,442
</TABLE>
25
<PAGE>
PROPOSAL NO. 2--RATIFICATION OF THE APPOINTMENT OF
KPMG LLP AS INDEPENDENT AUDITORS
The Audit Committee of the Board has selected KPMG LLP as independent public
accountants to audit the consolidated financial statements of Superior National
and our consolidated subsidiaries for the fiscal year ending December 31, 1999.
KPMG LLP has audited our financial statements annually since the fiscal year
ended December 31, 1985. A member of that firm is expected to be present at the
Annual Meeting, will have an opportunity to make a statement if so desired, and
will be available to respond to appropriate questions. If the stockholders do
not ratify the selection of KPMG LLP, if it should decline to act or otherwise
become incapable of acting, or if its employment is discontinued, the Audit
Committee will appoint independent public accountants for the fiscal year ending
December 31, 1999. Proxies solicited by the Board will be voted in favor of
ratification unless stockholders specify otherwise.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL NO. 2.
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<PAGE>
OTHER BUSINESS
We are not aware of any other business to be presented at the Annual
Meeting. All shares represented by proxies we have solicited will be voted in
favor of the proposals described in this Proxy Statement unless the stockholder
has otherwise indicated on the form of proxy. If any other matters properly come
before the meeting, the proxies we solicited will be voted according to the best
judgment of the Board of Directors.
SUBMISSION OF STOCKHOLDER PROPOSALS
Any stockholder who wishes to present a proposal for action at the 2000
Annual Meeting of Stockholders and who wishes to have it set forth in the
corresponding proxy statement and identified in the corresponding form of proxy
prepared by management must notify us no later than February 10, 2000 in such
form as required under the rules and regulations promulgated by the SEC.
Nominations for the Board of Directors of Superior National are required to
be made in advance of the 2000 Annual Meeting. Nominations are governed by our
bylaws. A copy of our bylaws may be obtained by writing the Senior Vice
President, General Counsel, and Secretary of Superior National, Robert E. Nagle,
at our principal executive offices.
If a stockholder proposal is introduced at the 2000 Annual Meeting without
any discussion of the proposal in our proxy statement for that meeting, and if
the proponent does not notify Superior National on or before April 6, 2000 of
his or her intent to raise the proposal at the 2000 Annual Meeting, then proxies
received by Superior National for the 2000 Annual Meeting will be voted by the
persons named as proxies in their discretion in regard to that proposal.
Any proposal, notice or request regarding any of the above matters must be
in writing and delivered to Robert E. Nagle, Senior Vice President, General
Counsel, and Secretary at the principal executive offices of Superior National
at 26601 Agoura Road, Calabasas, California 91302.
PROXIES AND SOLICITATION
Proxies for the Annual Meeting are being solicited by mail directly and
through brokerage and banking institutions. We will pay all expenses in
connection with the solicitation of proxies. In addition to the use of the
mails, proxies may be solicited by our directors, officers and regular employees
personally or by telephone. We may reimburse brokers and other persons holding
stock in their names, or in the names of nominees, for their expenses in sending
proxy materials to principals and obtaining their proxies.
All stockholders are urged to complete, sign and promptly return the
enclosed proxy card.
By Order of the Board of Directors
ROBERT E. NAGLE
SECRETARY
May 20, 1999
Calabasas, California
27
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC.
1999 ANNUAL MEETING OF STOCKHOLDERS
JUNE 17, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned stockholder of Superior National Insurance Group, Inc., a
Delaware corporation ("Superior National"), hereby acknowledges receipt of the
Notice of Annual Meeting of Stockholders and Proxy Statement, each dated May 20,
1999, and hereby appoints Steven D. Germain, Thomas J. Jamieson, Gordon E.
Noble, C. Len Pecchenino, Craig F. Schwarberg, Robert A. Spass, Bradley E.
Cooper, William L. Gentz, J. Chris Seaman, Steven B. Gruber, and Roger W.
Gilbert, and each of them, proxies and attorneys-in-fact, with full power to
each of substitution, on behalf and in the name of the undersigned, to represent
the undersigned at the 1999 Annual Meeting of Stockholders of Superior National
to be held on Thursday, June 17, 1999 at 10:00 a.m., Pacific Time, at Superior
National's principal executive offices at 26601 Agoura Road, Calabasas,
California, 91302 and at any postponements or adjournments of that meeting, and
to vote all shares of common stock at the Annual Meeting the undersigned would
be entitled to vote if personally present, on the matters set forth below:
<TABLE>
<S> <C> <C> <C>
1. Proposal No. 1--Election of Directors: For all nominees listed below Withhold authority
(except as indicated). / / for all nominees
listed below. / /
If you wish to withhold authority for any individual nominee(s), strike a line through his or
their name(s) in the list below:
</TABLE>
Steven D. Germain, C. Len Pecchenino, Bradley E. Cooper, Thomas J. Jamieson,
Craig F. Schwarberg, William L. Gentz,
Gordon E. Noble, Robert A. Spass, J. Chris Seaman, Steven B. Gruber, Roger W.
Gilbert
2. Proposal No. 2--Ratification of the Appointment of KPMG LLP as Independent
Auditors.
/ / FOR / / AGAINST / / ABSTAIN
In their discretion, upon such other matter or matters that may properly
come before the meeting or any postponements or adjournments of that
meeting.
THIS PROXY WILL BE VOTED AS DIRECTED AND AS THE PROXIES DEEM ADVISABLE ON ANY
OTHER MATTER THAT MAY COME BEFORE THE MEETING. WITH RESPECT TO THE ELECTION OF
DIRECTORS, IF NO CONTRARY OBJECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
THE NOMINEES LISTED.
<PAGE>
Dated _______________________, 1999
Printed name(s) as shown on Stock
Certificate
___________________________________
___________________________________
Signature of Stockholder
THIS PROXY SHOULD BE MARKED AND SIGNED BY THE STOCKHOLDER(S) EXACTLY AS HIS,
HER, THEIR OR ITS NAME APPEARS ON THE STOCK CERTIFICATE AND RETURNED PROMPTLY IN
THE ENCLOSED ENVELOPE. PERSONS SIGNING IN A FIDUCIARY CAPACITY SHOULD SO
INDICATE. IF SHARES ARE HELD BY TWO PEOPLE (FOR EXAMPLE, AS JOINT TENANTS OR
COMMUNITY PROPERTY) BOTH PARTIES SHOULD SIGN.
