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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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 Section 240.14a-11(c) or Section 240.14a-12
PAC RIM HOLDING CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(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 0-11.
(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 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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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 0-11(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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(3) Filing Party:
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(4) Date Filed:
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Notes:
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PAC RIM HOLDING CORPORATION
6200 Canoga Avenue
Woodland Hills, California 91367-2402
March 13, 1997
To the Stockholders of PAC RIM HOLDING CORPORATION:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of PAC RIM HOLDING CORPORATION (the "Company") to be
held at 10:00 a.m. on April 8, 1997, at the Company's Headquarters, 6200 Canoga
Avenue, Woodland Hills, California 91367-2402.
As described in the accompanying Proxy Statement, at the Special
Meeting you will be asked to consider and vote upon a proposal to approve and
adopt an Amended and Restated Agreement and Plan of Merger dated February 17,
1997 (the "Amended Agreement"), among the Company, Superior National Insurance
Group, Inc., a California corporation ("Superior"), and SNTL Acquisition Corp.,
a Delaware corporation and a wholly-owned subsidiary of Superior ("Merger Sub"),
pursuant to which Merger Sub will be merged with and into the Company (the
"Merger") and each outstanding share of common stock of the Company ("Common
Stock") will be converted into the right to receive approximately $2.11 in cash
($2.105 unrounded) (the "Merger Price Per Share").
The Special Meeting is a reschedule of the Special Meeting of
Stockholders that was to have taken place on December 11, 1996, to approve and
adopt that certain Agreement and Plan of Merger among the Company, Superior and
Merger Sub dated September 17, 1996 (the "Prior Agreement"). The Amended
Agreement represents a modification and restatement to certain of the terms and
structure of the Prior Agreement, which was the subject of the Company's Proxy
Statement dated November 20, 1996 (the "November Proxy Statement").
The Merger Price Per Share under the Amended Agreement is less than
the $3.00 to $3.10 price per share of the Common Stock that was to be paid under
the Prior Agreement. The adjustment results from the fact that in the fourth
quarter of 1996, the Company strengthened the loss reserves of its wholly-owned
subsidiary, The Pacific Rim Assurance Company (the "Assurance Company") by
approximately $12 million. That reserve strengthening took place due to the
fact that the California Department of Insurance (the "California Department")
linked its routine triennial examination of the Assurance Company to its review
of the Form A Information Statement (the "Form A") filed by Superior to obtain
the California Department's approval to acquire control of the Company under the
Prior Agreement. In connection with the triennial examination, the California
Department raised questions with respect to the adequacy of the Assurance
Company's loss reserves. Although the Company strengthened reserves in the
third quarter of 1996 by $4.5 million and during the first nine months of 1996
by a total of $5.6 million, to address the issues raised by the California
Department, the Company took action to further strengthen reserves by making the
aforementioned increase. Under the Prior Agreement, that increase created a
situation whereby Superior could either terminate the Prior Agreement or
renegotiate its terms. The Company believed it to be in its best interest to
reenter into negotiations with Superior in order to amend and restructure the
Prior Agreement in light of the subject reserve adjustment.
Your Board of Directors has determined that the Merger is in the best
interests of the Company and has approved the Amended Agreement and the Merger
by unanimous vote of those directors voting. THE BOARD RECOMMENDS THAT YOU VOTE
"FOR" APPROVAL AND ADOPTION OF THE AMENDED AGREEMENT.
<PAGE>
In addition, a vote "For" the approval and adoption of the Amended
Agreement will serve to ratify (1) the payment to certain of the Company's
officers, amounts due under the Company's Compensation Plan for Senior
Management Team and (2) the extension of time within which a change of control
of the Company must occur in order for Stanley Braun, the Company's President
and Chief Executive Officer, to be eligible to be paid certain amounts pursuant
to his Employment Agreement, as amended, with the Company.
Consummation of the Merger is subject to certain conditions, including
approval and adoption of the Amended Agreement by the affirmative vote of at
least 70%, in the aggregate, of both the issued and outstanding shares of Common
Stock and the Company's Series A Convertible Debentures (the "Debentures"),
voting together, with such Debentures having a number of votes equal to the
number of shares of Common Stock into which such Debentures may be converted,
and the receipt of certain approvals from regulatory authorities. Only holders
of Common Stock ("Stockholders") and Debentures ("Debenture Holders") of record
at the close of business on March 5, 1997, are entitled to notice of and to vote
at the Special Meeting or any adjournments or postponements thereof.
As of March 12, 1997, the directors and executive officers of the
Company beneficially owned, in the aggregate, 2,797,521 shares of Common Stock,
representing approximately 29.4% of such shares outstanding. To the knowledge
of the Company, all directors and executive officers of the Company intend to
vote their beneficially owned shares of Common Stock eligible to be voted for
the approval and adoption of the Amended Agreement. In addition, Mr. Richard H.
Pickup, a director of the Company and the ultimate controlling person of both an
entity that owns 90% of the Debentures and the Company's Series 1 and 2
Detachable Warrants and entities that own approximately 25.91% of the Common
Stock, has caused those entities to enter into a Voting Agreement with Superior
pursuant to the terms of which such securities will be voted for the approval
and adoption of the Amended Agreement.
If the Merger is consummated, Stockholders who properly demand
appraisal prior to the Stockholder vote on the Amended Agreement, do not vote in
favor of approval of the Amended Agreement and otherwise comply with the
requirements of Section 262 of the Delaware General Corporation Law will be
entitled to statutory appraisal rights.
You are urged to read the accompanying Proxy Statement, which provides
you with a description of the terms of the proposed Merger. A copy of the
Amended Agreement is included as Appendix A to the accompanying Proxy Statement.
In addition, the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 accompanies the Proxy Statement.
IT IS VERY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL
MEETING. THE PROXY CARD THAT YOU MAY HAVE COMPLETED AND RETURNED TO THE COMPANY
IN CONNECTION WITH THE NOVEMBER PROXY STATEMENT IS NOW OF NO FURTHER FORCE OR
EFFECT. ACCORDINGLY, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU
ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE BLUE-STRIPED PROXY CARD IN
THE ENCLOSED POSTAGE-PAID ENVELOPE. FAILURE TO RETURN A PROPERLY EXECUTED BLUE-
STRIPED PROXY CARD OR VOTE AT THE SPECIAL MEETING WOULD HAVE THE SAME EFFECT AS
A VOTE AGAINST THE AMENDED AGREEMENT. EXECUTED PROXIES WITH NO INSTRUCTIONS
INDICATED THEREON WILL BE VOTED "FOR" APPROVAL AND ADOPTION OF THE AMENDED
AGREEMENT.
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Consummation of the Merger will not occur earlier than April 8, 1997.
Please do not send in your stock certificates at this time. In the
event the Merger is consummated, you will be sent a letter of transmittal for
that purpose promptly thereafter.
Sincerely,
/s/ Myrtle L. Solomon /s/ Stanley Braun
MYRTLE L. SOLOMON STANLEY BRAUN
Corporate Secretary President and Chief
Executive Officer
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<PAGE>
PAC RIM HOLDING CORPORATION
6200 Canoga Avenue
Woodland Hills, California 91367-2402
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 8, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Pac Rim Holding Corporation, a Delaware corporation (the "Company")
will be held on April 8, 1997, at 10:00 a.m., at the Company's headquarters,
6200 Canoga Avenue, Woodland Hills, California 91367-2402 for the following
purposes:
(i) To consider and vote upon a proposal to approve and adopt an
Amended and Restated Agreement and Plan of Merger dated February 17, 1997
(the "Amended Agreement"), among the Company, Superior National Insurance
Group, Inc., a California corporation ("Superior"), and SNTL Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Superior
("Merger Sub"). A copy of the Amended Agreement (excluding the exhibits
and schedules thereto) is attached to the accompanying Proxy Statement as
Appendix A. As more fully described in the Proxy Statement, the Amended
Agreement provides that: (A) Merger Sub would be merged with and into the
Company (the "Merger"), with the Company continuing as the surviving
corporation; (B) the Company would thereupon become a direct subsidiary of
Superior; and (C) each outstanding share of common stock, par value $0.01
per share, of the Company (the "Common Stock") (other than certain shares
owned by the Company which would be cancelled and shares held by
stockholders who may elect to exercise their appraisal rights under
Delaware law) would be converted into the right to receive approximately
$2.11 in cash ($2.105 unrounded) (the "Merger Price Per Share").
In addition, a vote "For" the approval and adoption of the Agreement
will serve to ratify (1) the payment to certain of the Company's officers,
amounts due under the Company's Compensation Plan for Senior Management
Team and (2) the extension of time within which a change of control of the
Company must occur in order for Stanley Braun, the Company's President and
Chief Executive Officer, to be eligible to be paid certain amounts pursuant
to his Employment Agreement, as amended, with the Company.
(ii) To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on March 5, 1997, as
the record date for the determination of stockholders entitled to notice of and
to vote at the Special Meeting. Only holders of record of Common Stock and the
Company's Series A Convertible Debentures ("Debentures") at the close of
business on that date will be entitled to notice of and to vote at the Special
Meeting or any adjournments or postponements thereof.
The Special Meeting is a reschedule of the Special Meeting of Stockholders
that was to have taken place on December 11, 1996, to approve and adopt that
certain Agreement and Plan of Merger among the Company, Superior and Merger Sub
dated September 17, 1996 (the "Prior Agreement"). The Amended Agreement
represents a modification and restatement to certain of the terms and structure
of the Prior Agreement, which was the subject of the Company's Proxy Statement
dated November 20, 1996 (the "November Proxy Statement").
-4-
<PAGE>
The Merger Price Per Share under the Amended Agreement is less than the
$3.00 to $3.10 price per share of the Common Stock that was to be paid under the
Prior Agreement. The adjustment results from the fact that in the fourth
quarter of 1996, the Company strengthened the loss reserves of its wholly-owned
subsidiary, The Pacific Rim Assurance Company (the "Assurance Company") by
approximately $12 million. That reserve strengthening took place due to the
fact that the California Department of Insurance (the "California Department")
linked its routine triennial examination of the Assurance Company to its review
of the Form A Information Statement (the "Form A") filed by Superior to obtain
the California Department's approval to acquire control of the Company under the
Prior Agreement. In connection with the triennial examination, the California
Department raised questions with respect to the adequacy of the Assurance
Company's loss reserves. Although the Company strengthened reserves in the
third quarter of 1996 by $4.5 million and during the first nine months of 1996
by a total of $5.6 million, to address the issues raised by the California
Department, the Company took action to further strengthen reserves by making the
aforementioned increase. Under the Prior Agreement, that increase created a
situation whereby Superior could either terminate the Prior Agreement or
renegotiate its terms. The Company believed it to be in its best interest to
reenter into negotiations with Superior in order to amend and restructure the
Prior Agreement in light of the subject reserve adjustment.
The accompanying Proxy Statement describes the Amended Agreement, the
proposed Merger and the actions to be taken in connection with the Merger. To
ensure that your vote will be counted, please complete, date and sign the
enclosed blue-striped proxy card and return it promptly in the enclosed postage-
paid envelope, whether or not you plan to attend the Special Meeting. You may
revoke your proxy in the manner described in the accompanying Proxy Statement at
any time before it is voted at the Special Meeting. The proxy card that you may
have completed and returned to the Company in connection with the November Proxy
Statement is now of no further force or effect. Accordingly, in order for your
vote to be counted with respect to the Merger, you must complete, date, sign and
return to the Company as promptly as possible the enclosed blue-striped proxy
card.
In the event that there are not sufficient votes to approve and adopt the
Amended Agreement, it is expected that the Special Meeting will be postponed or
adjourned in order to permit further solicitation of proxies by the Company.
If the Merger is consummated, holders of Common Stock ("Stockholders") who
properly demand appraisal prior to the Stockholder vote on the Amended
Agreement, do not vote in favor of approval of the Amended Agreement and
otherwise comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to statutory appraisal rights.
By Order of the Board of Directors,
/s/ Myrtle L. Solomon
MYRTLE L. SOLOMON
Secretary
Woodland Hills, California
March 13, 1997
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF
THE AMENDED AGREEMENT.
THE AFFIRMATIVE VOTE OF HOLDERS OF AT LEAST 70%, IN THE AGGREGATE, OF BOTH
THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK AND THE DEBENTURES, VOTING
TOGETHER, WITH SUCH DEBENTURES HAVING A NUMBER OF
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<PAGE>
VOTES EQUAL TO THE NUMBER OF SHARES OF COMMON STOCK INTO WHICH SUCH DEBENTURES
MAY BE CONVERTED, IS REQUIRED TO APPROVE AND ADOPT THE AMENDED AGREEMENT. THE
PROXY CARD THAT YOU MAY HAVE COMPLETED AND RETURNED TO THE COMPANY IN CONNECTION
WITH THE NOVEMBER PROXY STATEMENT IS NOW OF NO FURTHER FORCE OR EFFECT.
ACCORDINGLY, WE URGE YOU TO SIGN AND RETURN THE ENCLOSED BLUE-STRIPED PROXY CARD
AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN
PERSON. YOU MAY REVOKE THE PROXY AT ANY TIME PRIOR TO ITS EXERCISE IN THE MANNER
DESCRIBED IN THE ATTACHED PROXY STATEMENT. ANY STOCKHOLDER PRESENT AT THE
SPECIAL MEETING, INCLUDING ANY ADJOURNMENT OR POSTPONEMENT THEREOF, MAY REVOKE
SUCH HOLDER'S PROXY AND VOTE PERSONALLY ON THE AMENDED AGREEMENT AT THE SPECIAL
MEETING. EXECUTED PROXIES WITH NO INSTRUCTIONS INDICATED THEREON WILL BE VOTED
"FOR" APPROVAL AND ADOPTION OF THE AMENDED AGREEMENT.
A VOTE "FOR" APPROVAL AND ADOPTION OF THE AMENDED AGREEMENT IS A VOTE IN
FAVOR OF THE COMPANY PROCEEDING WITH THE TRANSACTION CONTEMPLATED THEREUNDER.
IF THE REQUIRED VOTE IS OBTAINED, AS DESCRIBED ABOVE, AND THE MERGER IS
CONSUMMATED, EACH OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK WILL BE
EXCHANGED FOR THE MERGER PRICE PER SHARE, WHICH CONSIDERATION WILL BE PAID AFTER
THE CLOSING DATE OF THE MERGER (SUBJECT TO THE RIGHTS OF DISSENTING
SHAREHOLDERS, IF ANY).
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME.
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<PAGE>
PAC RIM HOLDING CORPORATION
6200 Canoga Avenue
Woodland Hills, California 91367-2402
---------------------------------
PROXY STATEMENT
---------------------------------
SPECIAL MEETING OF STOCKHOLDERS
APRIL 8, 1997
------------------------
This Proxy Statement, the accompanying Notice of Special Meeting and the
accompanying proxy are first being furnished to the holders of Common Stock, par
value $0.01 per share (the "Common Stock"), of Pac Rim Holding Corporation, a
Delaware corporation (the "Company"), on or about March 13, 1997, in connection
with the solicitation of proxies by the Board of Directors of the Company (the
"Board") for use at the Special Meeting of Stockholders to be held on April 8,
1997, at 10:00 a.m. at the Company's headquarters, 6200 Canoga Avenue, Woodland
Hills, California 91367-2402, and at any adjournments or postponements thereof
(the "Special Meeting"). The Board has fixed the close of business on March 5,
1997, as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Special Meeting.
At the Special Meeting, the holders of Common Stock (the "Stockholders")
and the holders (the "Debenture Holders") of the Company's 8% Series A
Convertible Debentures (the "Debentures") will consider and vote upon a proposal
to approve and adopt an Amended and Restated Agreement and Plan of Merger dated
February 17, 1997 (the "Amended Agreement"), among the Company, Superior
National Insurance Group, Inc., a California corporation ("Superior"), and SNTL
Acquisition Corp., a Delaware corporation and a direct subsidiary of Superior
("Merger Sub"). A copy of the Amended Agreement (excluding the exhibits and the
schedules thereto) is attached to this Proxy Statement as Appendix A. Pursuant
to the Amended Agreement and subject to satisfaction of the conditions set forth
therein, (i) Merger Sub would be merged with and into the Company (the
"Merger"), with the Company continuing as the surviving corporation (the
"Surviving Corporation"), (ii) the Company would thereupon become a direct
subsidiary of Superior and (iii) each outstanding share of Common Stock (other
than certain shares owned by the Company which would be cancelled and shares
("Dissenting Shares") held by Stockholders who properly exercise their appraisal
rights pursuant to Section 262 of the General Corporation Law of the State of
Delaware (the "DGCL")) would be converted into the right to receive
approximately $2.11 in cash ($2.105 unrounded) (the "Merger Price Per Share").
In addition, a vote "For" the approval and adoption of the Agreement will
serve to ratify (1) the payment to certain of the Company's officers, amounts
due under the Company's Compensation Plan for Senior Management Team and (2) the
extension of time within which a change of control of the Company must occur in
order for Stanley Braun, the Company's President and Chief Executive Officer, to
be eligible to be paid certain amounts pursuant to his Employment Agreement, as
amended, with the Company. See "SUMMARY -- Interests of Certain Persons in the
Transaction."
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION
OF THE AMENDED AGREEMENT.
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<PAGE>
The Special Meeting is a reschedule of the Special Meeting of Stockholders
that was to have taken place on December 11, 1996, to approve and adopt that
certain Agreement and Plan of Merger among the Company, Superior and Merger Sub
dated September 17, 1996 (the "Prior Agreement"). The Amended Agreement
represents a modification and restatement to certain of the terms and structure
of the Prior Agreement, which was the subject of the Company's Proxy Statement
dated November 20, 1996 (the "November Proxy Statement").
The Merger Price Per Share under the Amended Agreement is less than the
$3.00 to $3.10 price per share of the Common Stock that was to be paid under the
Prior Agreement. The adjustment results from the fact that effective as of the
fourth quarter of 1996, the Company strengthened the loss reserves of its
wholly-owned subsidiary, The Pacific Rim Assurance Company (the "Assurance
Company") by approximately $12 million. That reserve strengthening took place
due to the fact that the California Department of Insurance (the "California
Department") linked its routine triennial examination of the Assurance Company
to its review of the Form A Information Statement (the "Form A") filed by
Superior to obtain the California Department's approval to acquire control of
the Company under the Prior Agreement. In connection with the triennial
examination, the California Department raised questions with respect to the
adequacy of the Assurance Company's loss reserves. Although the Company
strengthened reserves in the third quarter of 1996 by $4.5 million and during
the first nine months of 1996 by a total of $5.6 million, to address the issues
raised by the California Department, the Company took action to further
strengthen reserves by making the aforementioned increase. Under the Prior
Agreement, that increase created a situation whereby Superior could either
terminate the Prior Agreement or renegotiate its terms. The Company believed it
to be in its best interest to reenter into negotiations with Superior in order
to amend and restructure the Prior Agreement in light of the subject reserve
adjustment.
Stockholders are urged to read and consider carefully the information
contained in this Proxy Statement. In addition, the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 accompanies this Proxy Statement.
------------------------
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THE PROXY CARD THAT YOU
MAY HAVE COMPLETED AND RETURNED TO THE COMPANY IN CONNECTION WITH THE NOVEMBER
PROXY STATEMENT IS NOW OF NO FURTHER FORCE OR EFFECT. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE BLUE-STRIPED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Proxy Statement is March 13, 1997.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION............................................ 10
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................. 11
SUMMARY.......................................................... 11
Background.................................................. 11
The Parties................................................. 13
The Special Meeting......................................... 13
Appraisal Rights............................................ 14
Solicitation of Proxies..................................... 14
Recommendation of the Board................................. 15
Opinion of Financial Advisor................................ 15
Interests of Certain Persons in the Transaction............. 15
Certain Federal Income Tax Consequences..................... 15
Regulatory Approvals........................................ 16
The Amended Agreement....................................... 16
No Solicitation; Fiduciary Out.............................. 17
Termination................................................. 17
Agreement to Purchase Series A Convertible Debentures
and Series 1, 2 and 3 Detachable Warrants................. 17
Adjustment To The Warrant Exercise Prices................... 18
Series A Convertible Debentures and Series 1, 2 and 3
Detachable Warrant Purchase Agreement..................... 19
Voting Agreement............................................ 19
Series 3 Detachable Warrant Surrender Agreement............. 20
Source and Amount of Funds.................................. 20
Security Ownership of Management and Certain
Beneficial Owners......................................... 20
Market Price and Dividend Information....................... 20
Selected Consolidated Financial Data........................ 21
THE SPECIAL MEETING.............................................. 21
Matters To Be Considered at the Special Meeting............. 21
Record Date and Voting...................................... 21
Vote Required; Revocability of Proxies...................... 22
Appraisal Rights............................................ 23
Solicitation of Proxies..................................... 25
THE COMPANY...................................................... 25
SUPERIOR......................................................... 26
SPECIAL FACTORS.................................................. 26
Background of the Transaction............................... 26
Purpose of the Transaction.................................. 30
Reasons for the Transaction................................. 30
Certain Considerations...................................... 32
Opinion of Financial Advisor................................ 33
Interests of Certain Persons in the Transaction............. 36
Executive Compensation...................................... 40
Certain Federal Income Tax Consequences..................... 41
Regulatory Approvals........................................ 42
Source and Amount of Funds.................................. 42
THE AMENDED AGREEMENT............................................ 43
Effective Time.............................................. 43
The Merger.................................................. 43
Representations and Warranties.............................. 45
Conduct of the Business Pending the Merger.................. 47
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
No Solicitation; Fiduciary Out.............................. 48
Other Agreements of the Company, Superior and Merger Sub.... 48
Employee Benefit Plans...................................... 49
Indemnification and Insurance............................... 49
Conditions to the Merger.................................... 50
Termination................................................. 50
Liquidated Damages and Breakup Fee.......................... 51
Expenses.................................................... 52
Amendment; Waiver........................................... 52
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS... 52
MARKET PRICE AND DIVIDEND INFORMATION............................ 54
CERTAIN TRANSACTIONS IN THE COMMON STOCK......................... 55
SELECTED CONSOLIDATED FINANCIAL DATA............................. 56
CERTAIN EFFECTS OF THE MERGER; OPERATIONS OF THE COMPANY
AFTER THE MERGER............................................... 58
INDEPENDENT PUBLIC ACCOUNTANTS................................... 58
STOCKHOLDER PROPOSALS............................................ 58
</TABLE>
APPENDIX A -- THE AMENDED AGREEMENT
APPENDIX B -- SECTION 262 OF THE DGCL
APPENDIX C -- FAIRNESS OPINION OF SALOMON BROTHERS INC
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act of 1934 (the "Exchange Act"), and the rules and regulations thereunder, and
in accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, at the SEC's New York Regional
Office located at Suite 1300, 7 World Trade Center, New York, New York 10048 and
at the SEC's Chicago Regional Office, Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549. The Common Stock is listed on The
NASDAQ National Market, which is operated by The NASDAQ Stock Market, Inc.
("NASDAQ") and certain reports, proxy statements and other information
concerning the Company also can be inspected at the offices of NASDAQ, at 1735 K
Street, N.W., Washington, D.C. 20006. See "INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE."
This Proxy Statement incorporates by reference documents that are not
presented herein or delivered herewith. Copies of such documents (other than
exhibits thereto which are not specifically incorporated by reference herein)
are available, without charge, to any person, including any beneficial owner of
Common Stock, to whom this Proxy Statement is delivered, upon oral or written
request to Myrtle L. Solomon, Corporate Secretary, 6200 Canoga Avenue, Woodland
Hills, California 91367-2402, telephone (818) 226-6200. Copies of such
documents will be delivered by first class mail or other equally prompt means
within five business days of receipt of such request. In order to ensure
delivery of documents prior to the Special Meeting, requests therefor should be
made no later than April 1, 1997.
All information contained in this Proxy Statement concerning Superior and
its subsidiaries, including Merger Sub, has been supplied by Superior and has
not been independently verified by the Company. Except as otherwise indicated,
all other information contained in this Proxy Statement has been supplied by the
Company.
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<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY STATEMENT
OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT
SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
SUPERIOR SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY STATEMENT
OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS CURRENT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Proxy Statement the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, which
report has been filed by the Company with the SEC.
Such incorporation by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
the Special Meeting shall be deemed to be incorporated by reference and to be a
part hereof from the date of the filing of such documents. Any statement
contained in a document incorporated herein by reference shall be deemed to be
modified or superseded for purposes of this Proxy Statement to the extent that a
statement contained herein (or in any other subsequently filed document which is
also incorporated herein by reference) modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed to constitute a part
of this Proxy Statement except as so modified or superseded. This Proxy
Statement incorporates documents by reference which are not presented or
delivered herewith. The Company will provide without charge to each person to
whom this Proxy Statement is delivered, upon written or oral request of such
person, a copy of any or all of the documents referred to above which have been
or may be incorporated by reference in this Proxy Statement (excluding exhibits
to the information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Proxy
Statement incorporates). Requests for such copies should be directed to Myrtle
L. Solomon, Corporate Secretary, 6200 Canoga Avenue, Woodland Hills, California
91367-2402, telephone (818) 226-6200.
SUMMARY
The following is a summary of material information contained elsewhere in
this Proxy Statement. This summary is not intended to be a complete description
and is qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement or incorporated by reference in this Proxy
Statement or in the documents attached as Appendices hereto.
BACKGROUND
The Company mailed the November Proxy Statement to Stockholders, seeking
approval of the Prior Agreement. Shortly before the meeting was to have taken
place, the California Department, in the course of its triennial examination of
the Assurance Company, the Company's wholly-owned subsidiary, raised issues with
respect to the adequacy of the Assurance Company's loss reserves. As the
California Department had linked the triennial examination with its review of
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Superior's Form A, it became apparent that the resolution of the reserving issue
would delay the California Department's approval of Superior's acquisition of
the Company. Thus, the Special Meeting scheduled for December 11, 1996 was
adjourned by the Company out of concern that the issues raised by the California
Department might require that the structure and terms of the transaction be
changed in certain respects.
Reserving concerns with respect to workers' compensation insurers have not
been limited to the Assurance Company. In July of 1993, the California state
legislature passed certain workers' compensation law reforms in response to the
fraud and abuse of the workers' compensation claims and benefits system by
claimants and vendors. Those laws have significantly impacted the benefits
available under California's workers' compensation system and the premium rates
that insurers may charge for coverage. Nevertheless, there has been significant
volatility in loss and loss adjustment expense development patterns with respect
to the Company and California's workers' compensation industry, in general.
In response to generally improved claims experience since 1993, the
California legislature repealed the minimum rating law effective January 1,
1995, thus, making California an "open or competitive rating" state with respect
to workers' compensation coverage. Beginning January 1, 1995, the Workers'
Compensation Insurance Rating Bureau began publishing advisory pure premium
rates which provide for losses and loss adjustment costs as indicated by prior
history and an actuarial projection of future losses and loss expenses.
California workers' compensation insurers can adopt those rates and apply their
own expense factor or file their own actuarially sound rates.
Prior to its repeal, the minimum rating law existed as a means of
preserving the financial integrity of California's workers' compensation system
by prohibiting insurers from charging premiums below certain minimum levels
established by the California Insurance Commissioner. California's open rating
laws have created an intense level of price competition among workers'
compensation insurers. That, in turn, resulted in an overall erosion of premium
levels beginning in late 1994 and continuing through the present. Having
intensified its financial scrutiny of workers' compensation insurers, in
general, the California Department recently undertook studies of the loss and
loss adjustment expense reserves of the Assurance Company, similar to its review
of other workers' compensation insurers.
Although the Company strengthened reserves in the third quarter of 1996 by
$4.5 million and during the first nine months of 1996 by a total of $5.6
million, to address the issues raised by the California Department, the Company
took further action. Specifically, in February 1997, the Company resolved its
reserving issues with the California Department by strengthening its loss
reserves by an additional $12 million as of December 31, 1996. Under the Prior
Agreement, that increase created a situation whereby Superior could either
terminate such agreement or renegotiate its terms. The Company believed it to
be in its best interest to reenter into negotiations with Superior in order to
amend and restructure the Prior Agreement in light of the subject reserve
adjustment.
On February 17, 1997, the Company entered into the Amended Agreement with
Superior, pursuant to the terms of which the Stockholders would receive
approximately $2.11 per share ($2.105 unrounded) (a total of approximately
$20,063,293), the Debenture Holders would receive face value for the Debentures,
or $20,000,000, and approximately $1,957,739 would be paid to acquire all the
issued and outstanding Warrants (as hereinafter defined) of the Company and
options to purchase Common Stock that are "in-the-money," for a total
consideration of approximately $42,021,032. See "SUMMARY -- Agreement to
Purchase Series A Convertible Debentures and Series 1, 2 and 3 Detachable
Warrants."
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THE PARTIES
The Company. The Company was organized as a Delaware corporation on May
12, 1987. On May 27, 1987, the Company became the immediate parent of the
Assurance Company, its principal subsidiary, which, in turn, in 1995, became the
immediate parent of Regional Benefits Insurance Services, Inc. ("RBIS").
The Company is primarily, and almost exclusively, engaged in the writing of
workers' compensation insurance. The Company markets its policies through
approximately 200 independent insurance agencies and brokerage firms.
Historically, the Company concentrated primarily on the Southern California
market. In connection with efforts to expand its business into additional
geographic areas and increase future revenues, the Assurance Company received
Certificates of Authority to write workers' compensation insurance in Alabama,
Arizona, Georgia and Texas. Unless the context indicates otherwise, the
"Company" refers to the Company, the Assurance Company and RBIS. See "THE
COMPANY."
The address and telephone number of the Company's principal executive
offices are 6200 Canoga Avenue, Woodland Hills, California 91367-2402; (818)
226-6200.
Superior. Superior was organized as a California corporation on March 29,
1985, under the name Coastal Holdings, Ltd. Superior is a holding company that,
through its wholly-owned subsidiary Superior National Insurance Company
("SNIC"), is engaged in writing workers' compensation insurance principally in
the State of California and, until September 30, 1993, was engaged in writing
commercial property and casualty insurance. SNIC is currently licensed to write
business in Arizona, Arkansas, California, Colorado, District of Columbia,
Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nevada, New
Mexico, Oregon, South Dakota, Utah and Wyoming, but virtually all of SNIC's
current premium is generated in California, with immaterial exceptions in
Arizona and Oregon. For a more detailed description of Superior, see
"SUPERIOR."
The address and telephone number of Superior's principal executive offices
are 26601 Agoura Road, Calabasas, California 91302; (818) 880-1600.
THE SPECIAL MEETING
Matters To Be Considered at the Special Meeting. The Special Meeting is
scheduled to be held at 10:00 a.m. on April 8, 1997, at the Company's
headquarters, 6200 Canoga Avenue, Woodland Hills, California 91367-2402. At the
Special Meeting, Stockholders and Debenture Holders will consider and vote upon
(i) a proposal to approve and adopt the Amended Agreement and (ii) such other
matters as may properly be brought before the Special Meeting. See "THE SPECIAL
MEETING -- Matters To Be Considered at the Special Meeting."
In addition, a vote "For" the approval and adoption of the Amended
Agreement will serve to ratify (1) the payment to certain of the Company's
officers, amounts due under the Company's Compensation Plan for Senior
Management Team and (2) the extension of time within which a change of control
of the Company must occur in order for Stanley Braun, the Company's President
and Chief Executive Officer, to be eligible to be paid certain amounts pursuant
to his Employment Agreement, as amended, with the Company. See "SUMMARY --
Interests of Certain Persons in the Transaction."
Record Date and Voting. The Record Date for the Special Meeting is the
close of business on March 5, 1997. At the close of business on the Record
Date, there were 9,528,200 shares of Common Stock outstanding and entitled to
vote, held by approximately 852 Stockholders of record and $20 million in
principal amount of Debentures outstanding and entitled to vote, held by two
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Debenture Holders of record, PRAC Limited Partnership, a Nevada limited
partnership ("Prac") and Allstate Insurance Company, an Illinois insurance
company ("Allstate"). Each Stockholder on the Record Date will be entitled to
one vote for each share held of record and each Debenture Holder will be
entitled to one vote for each share of Common Stock into which the Debentures
may be converted. The presence, either in person or by proxy, of a majority of
the outstanding shares of Common Stock entitled to be voted is necessary to
constitute a quorum at the Special Meeting. The Debentures' voting rights are
exercisable only when the following matters are submitted to a vote of
Stockholders or for written consent: (a) the amendment of the Company's
Certificate of Incorporation; (b) the sale or transfer of all or substantially
all of the Company's assets; (c) the consolidation, reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation,
or winding-up of the Company; (d) changes in the Company's authorized capital
stock or any rights with respect thereto; and (e) changes in the number of
individuals constituting the Board to a number other than seven. Approval of
any of the foregoing matters requires the affirmative vote of the holders of at
least 70%, in the aggregate, of both the issued and outstanding shares of Common
Stock and Debentures, voting together, with such Debentures having a number of
votes equal to the number of shares of Common Stock into which such Debentures
may be converted. See "THE SPECIAL MEETING -- Record Date and Voting." As the
Merger falls within certain of the events described in items (a) through (e),
above, including items (b) and (c), it must be approved by the aforementioned
70% vote of the Common Stock and Debentures.
Vote Required; Revocability of Proxies. Approval and adoption of the
Amended Agreement will require the affirmative vote of the holders of at least
70%, in the aggregate, of both the issued and outstanding shares of Common Stock
and Debentures, voting together, with such Debentures having a number of votes
equal to the number of shares of Common Stock into which such Debentures may be
converted.
The required vote of the Stockholders and Debenture Holders on the Amended
Agreement is based upon the total number of outstanding shares of Common Stock
and principal amount of Debentures. The failure to submit a blue-striped proxy
card (or vote in person at the Special Meeting) or the abstention from voting by
a Stockholder or Debenture Holder (including broker non-votes) will have the
same effect as a vote against the Amended Agreement. Brokers who hold shares of
Common Stock as nominees will not have discretionary authority to vote such
shares in the absence of instructions from the beneficial owners thereof. See
"THE SPECIAL MEETING -- Vote Required; Revocability of Proxies."
A Stockholder may revoke a proxy at any time prior to its exercise by (i)
delivering to Myrtle L. Solomon, Corporate Secretary, Pac Rim Holding
Corporation, 6200 Canoga Avenue, Woodland Hills, California 91367-2402, a
written notice of revocation prior to the Special Meeting, (ii) delivering prior
to the Special Meeting a duly executed proxy bearing a later date or (iii)
attending the Special Meeting and voting in person. The presence of a
Stockholder at the Special Meeting will not in and of itself automatically
revoke such Stockholder's proxy.
APPRAISAL RIGHTS
Under the DGCL, Stockholders who properly demand appraisal prior to the
Stockholder vote on the Amended Agreement, do not vote in favor of approval of
the Amended Agreement and otherwise comply with the requirements of DGCL Section
262 will be entitled to statutory appraisal rights. See "THE SPECIAL MEETING --
Appraisal Rights" and DGCL Section 262, which is attached hereto as Appendix B.
SOLICITATION OF PROXIES
The Company will bear the costs of soliciting proxies from Stockholders.
In addition to soliciting proxies by mail, directors, officers and employees of
the Company, without receiving
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additional compensation therefor, may solicit proxies by telephone or in person.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares held of record by such persons, and the Company will reimburse
such brokerage firms, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. The Company may
retain an outside service to aid in the solicitation of proxies, if necessary.
See "THE SPECIAL MEETING -- Solicitation of Proxies."
RECOMMENDATION OF THE BOARD
The Board has determined that the Amended Agreement and the Merger are
advisable and fair to and in the best interests of the Company and has approved
the Amended Agreement and the Merger by unanimous vote of those directors
voting. Accordingly, the Board recommends that Stockholders vote "FOR" approval
and adoption of the Amended Agreement.
In determining to approve the Amended Agreement and the Merger and to
recommend that the Stockholders approve the Amended Agreement, the Board
considered a number of factors, as more fully described under "SPECIAL FACTORS
- -- Background of the Transaction" and " -- Reasons for the Transaction."
OPINION OF FINANCIAL ADVISOR
On February 17, 1997, Salomon Brothers Inc ("Salomon"), financial advisor
to the Company, delivered its oral opinion to the Board, which was subsequently
confirmed in writing in an opinion dated March 13, 1997, that, as of the date of
such opinion, the consideration to be received by the Stockholders in the Merger
is fair to such holders from a financial point of view. The full text of the
written opinion of Salomon dated March 13, 1997, which sets forth the
assumptions made, general procedures followed, matters considered and limits on
the review undertaken in connection with the opinion, is attached hereto as
Appendix C. Stockholders should read such opinion carefully and in its
entirety. See "SPECIAL FACTORS -- Opinion of Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Certain directors and executive officers of the Company have interests in
the Merger that may be different from, or in addition to, those of Stockholders
generally, including employee stock options ("Company Options") (all of which
will become exercisable in full if the Amended Agreement is approved at the
Special Meeting), interests in the Compensation Plan for Senior Management Team
(which will become nonforfeitable and payable in full if the Merger is
consummated) and the interests of Mr. Stanley Braun, the Company's President and
Chief Executive Officer, under his Employment Agreement with the Company, and
all amendments thereto, pursuant to the terms of which certain amounts are
payable to Mr. Braun in the event of a change in control of the Company. See
"SPECIAL FACTORS -- Interests of Certain Persons in the Transaction."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger will be a taxable transaction to Stockholders. Stockholders
will recognize gain or loss in the Merger in an amount determined by the
difference between the consideration received in the Merger and their tax basis
in the Common Stock exchanged therefor. For further information, see "SPECIAL
FACTORS -- Certain Federal Income Tax Consequences."
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REGULATORY APPROVALS
The obligation of Superior to consummate the Merger is conditioned upon the
approval of the Merger by the California Department. As of the date of this
Proxy Statement, Superior has filed all required applications with the
California Department, but the Department has not completed its review of the
filing. In addition, the acquisition by Superior of the Common Stock requires
Superior and the Company to comply with the notification and waiting period
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"). In accordance with the requirements of the HSR Act, the Company and
Superior each made the required filings thereunder, and the applicable waiting
period has expired. See "SPECIAL FACTORS -- Regulatory Approvals."
THE AMENDED AGREEMENT
The Amended Agreement provides that Superior and Merger Sub will be merged
with and into the Company and the separate existence of Merger Sub will cease.
Under the Amended Agreement, the Stockholders will receive approximately $2.11
per share ($2.105 unrounded) (a total of approximately $20,063,293), the
Debenture Holders will receive face value for the Debentures, or $20,000,000,
and approximately $1,957,739 will be paid to acquire all the "in-the-money"
Warrants (as hereinafter defined) and Company Options to purchase Common Stock,
for a total cash consideration of approximately $42,021,032 (the "Purchase
Price"). See "SUMMARY -- Agreement to Purchase Series A Convertible Debentures
and Series 1, 2 and 3 Detachable Warrants."
The outstanding shares of Common Stock will be converted into the right to
receive cash, and the outstanding "in-the-money" Company Options and Warrants to
purchase Common Stock will be surrendered in exchange for cash in an amount
equal to the difference between the exercise price of such Company Options or
Warrants and the Merger Price Per Share. At the time the certificate of merger
as to Merger Sub and the Company is filed with the Delaware Secretary of State
(the "Effective Time"), Superior will acquire the $20,000,000 principal amount
Debentures and the Warrants under a Series A Convertible Debenture and Series 1,
2 and 3 Detachable Warrant Purchase Agreement, as amended, among Superior,
Allstate and Prac, dated as of February 17, 1997 (the "Purchase Agreement").
The Debentures will be acquired for face value and will not be converted, as was
contemplated under the Prior Agreement, as such Debentures are no longer "in-
the- money." The Warrants held by Allstate and Prac will be acquired for cash
in an amount equal to the difference between the Merger Price Per Share and the
exercise prices of such Warrants. The exercise prices of the Warrants are
subject to adjustment based upon an evaluation of the Company's loss reserves
for the 1992 and 1993 accident years. Based on the adjustment that took place
effective as of the end of the fourth quarter of 1996, the exercise price of the
Series 1 Warrants (as hereinafter defined) has been reduced to and fixed under
the Amended Agreement at $0.83. All Series 2 and Series 3 Warrants (as
hereinafter defined) held by PRAC and Allstate will have an exercise price
greater than the underlying value of the Common Stock ("out-of-the-money") and
will be cancelled without any additional consideration whatsoever. Also,
certain other holders of the Series 3 Warrants that are expected to be "out-of-
the-money" have agreed to surrender those Warrants to the Company at the
Effective Time under a Series 3 Detachable Warrant Surrender Agreement, as
amended, effective as of February 17, 1997 (the "Surrender Agreement"), and
would not receive any consideration for the "out-of-the-money" Warrants. See
"SUMMARY -- Agreement to Purchase Series A Convertible Debentures and Series 1,
2 and 3 Detachable Warrants."
Subject to the provisions of the Amended Agreement, at the Effective Time:
(i) each issued and outstanding share of Common Stock (other than shares of
Common Stock to be cancelled in accordance with clause (ii) below and other than
Dissenting Shares) will be converted into the right to receive the Merger Price
Per Share; and (ii) each share of Common Stock that is owned by the Company will
be automatically cancelled and retired and will cease to exist, and no
consideration
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will be delivered or deliverable in exchange therefor. See "THE AMENDED
AGREEMENT -- Effective Time" and " -- The Merger."
Consummation of the Merger is subject to various conditions, including,
among others: (i) the approval and adoption of the Amended Agreement by the
affirmative vote of holders of at least 70%, in the aggregate, of both the
issued and outstanding shares of Common Stock and Debentures, voting together,
with such Debentures having a number of votes equal to the number of shares of
Common Stock into which such Debentures may be converted; (ii) the absence of
any injunction preventing consummation of the Merger; (iii) the approval of the
Merger by the California Department; and (iv) expiration of the applicable
waiting periods under the HSR Act, which have already occurred. Consummation of
the Merger will not occur earlier than April 8, 1997. See "THE AMENDED
AGREEMENT -- Conditions to the Merger" and "SPECIAL FACTORS -- Regulatory
Approvals."
NO SOLICITATION; FIDUCIARY OUT
Pursuant to the Amended Agreement, the Company has agreed that it will not
authorize or permit any of its officers, directors, employees, agents or
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its subsidiaries) to (i) solicit,
initiate or encourage or make or implement any proposal or offer which
constitutes an Acquisition Proposal (as defined below) or (ii) participate in
any discussions or negotiations regarding any Acquisition Proposal, except under
certain circumstances to the extent required so that the Board may, in its good
faith judgment, comply with its fiduciary duties to Stockholders. The term
"Acquisition Proposal" is defined in the Amended Agreement to mean any inquiry,
proposal or offer from any person (other than Superior or any of its
subsidiaries) relating to any merger, acquisition, consolidation, tender offer,
exchange offer, business combination or similar transaction involving, or any
purchase of more than 40% of the assets or any equity securities of, the Company
or any of its subsidiaries, other than the Merger. See "THE AMENDED AGREEMENT
- -- No Solicitation; Fiduciary Out."
TERMINATION
The Amended Agreement may be terminated at any time prior to the Effective
Time, whether before or after the approval by the Stockholders, as follows: (i)
by the mutual written consent of the Company and Superior; (ii) by either the
Company or Superior in the event of (A) the failure of the Company's
Stockholders to approve the Amended Agreement or the failure of Superior's
stockholders to approve the issuance of shares of its common stock in order to
finance the Merger or (B) a material breach by the other party thereto of any
representation, warranty, covenant or agreement contained in the Amended
Agreement which, in the case of a covenant or agreement, is not cured within
twenty business days following receipt by the breaching party of notice of such
breach; (iii) by either the Company or Superior if any permanent injunction or
other order of a court or other competent authority preventing the consummation
of the Merger has become final and nonappealable; (iv) by either the Company or
Superior in the event the Merger is not consummated by May 15, 1997; (v) by the
Company under certain circumstances with respect to an Acquisition Proposal; or
(vi) by Superior if the holders of more than 1,500,000 shares of Common Stock
demand appraisal rights in connection with the Merger. See "THE AMENDED
AGREEMENT -- Termination."
AGREEMENT TO PURCHASE SERIES A CONVERTIBLE DEBENTURES AND SERIES 1, 2 AND 3
DETACHABLE WARRANTS
Pursuant to the terms of an Agreement to Purchase Series A Convertible
Debentures and Series 1, 2 and 3 Detachable Warrants dated as of April 15, 1994,
and all amendments thereto (collectively, the "Debenture/Warrant Agreement"),
Prac acquired from the Company $20 million
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principal amount of Debentures and the Warrants. The Warrants consist of
1,500,000 Series 1 Warrants each exercisable at the price of $2.50 for one share
of Common Stock (the "Series 1 Warrants"), 1,500,000 Series 2 Warrants each
exercisable at the price of $3.00 for one share of Common Stock (the "Series 2
Warrants") and 800,000 Series 3 Warrants each exercisable at the price of $3.50
for one share of Common Stock (the "Series 3 Warrants") (the Series 1 Warrants,
the Series 2 Warrants and the Series 3 Warrants, collectively, the "Warrants").
Mr. Richard H. Pickup is the ultimate controlling person of Prac.
The current ownership of the securities issued pursuant to the
Debenture/Warrant Agreement is as follows: (1) Prac owns $18 million of
principal amount of Debentures, 1,350,000 Series 1 Warrants and 1,350,000 Series
2 Warrants; (2) Allstate owns $2 million of principal amount of Debentures,
150,000 Series 1 Warrants, 150,000 Series 2 Warrants and 80,000 Series 3
Warrants; (3) Dennis W. Harwood, a member of the Board, owns 103,500 Series 3
Warrants; (4) Carl A. Strunk, a member of the Board, owns 205,500 Series 3
Warrants; (5) Robert M. Anderson, a former member and Chairman of the Board,
owns 205,500 Series 3 Warrants; and (6) the Lenawee Trust dated December 30,
1992, (the "Lenawee Trust"), which is controlled by Timothy A. Busch, the
Chairman of the Board, owns 205,500 Series 3 Warrants. In addition, Mr. Pickup
is the ultimate controlling person of certain entities (the "Pickup
Affiliates"), which in the aggregate, own approximately 25.91% of the Common
Stock.
As discussed below, the Debenture/Warrant Agreement provides that the
exercise prices of the Warrants (excluding the Series 3 Warrants) shall be
adjusted based upon the Assurance Company's ultimate losses and allocated loss
adjustment expenses attributable to the 1992 and 1993 accident years. See
"SUMMARY -- Adjustment to the Warrant Exercise Prices."
In addition, the holders of the Debentures, 90% of which are owned by Prac
and with respect to which Mr. Pickup is the ultimate controlling person,
designated Messrs. Timothy R. Busch, Dennis W. Harwood and Richard H. Pickup as
nominees at the 1996 election of members to the Company's five person Board.
Each of those individuals is currently a member of the Company's Board.
ADJUSTMENT TO THE WARRANT EXERCISE PRICES
Pursuant to the terms of the Debenture/Warrant Agreement, the exercise
prices of the Warrants are subject to a downward adjustment if the Assurance
Company experiences a certain level of adverse development in December 31, 1993
loss and allocated loss adjustment reserves with respect to the 1992 and 1993
accident years. That agreement also provides that the analysis of those
reserves and the adjustment to the exercise prices were to be determined as of
June 30, 1996. Pursuant to an amendment to the Debenture/Warrant Agreement (the
"Warrant Repricing Amendment"), however, the measurement date to ascertain the
loss and allocated loss adjustment reserve was extended until the earlier to
occur of June 30, 1997 or a "change in control" of the Company. The extension
of that date allows for a more accurate determination to be made with respect to
adverse development, if any, in the Assurance Company's reserves for the years
in question.
If the ultimate loss and allocated loss adjustment reserve fixed by the
Assurance Company for the 1992 and 1993 accident years is determined by the
Actuary (as specified under the terms of the Warrant Repricing Amendment) to
exceed a December 31, 1993, base loss of $132 million, plus the additional
amount of $2 million, such excess amount is considered "Adverse Development" as
defined under the Warrant Repricing Amendment and an amount equal to the
percentage of such excess amount, after-tax, allocable to the Warrants will be
utilized to adjust downward the exercise prices of the Warrants (such adjustment
being first attributable to Series 1 Warrants and then to the Series 2
Warrants).
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The Merger represents a "change in control" giving rise to an event
requiring a possible adjustment to the exercise prices of the Warrants under the
Warrant Repricing Amendment. In connection therewith, a meeting of the
Company's Board of Directors was held on February 17, 1997. At that meeting,
Arthur Andersen L.L.P. (the Company and the Assurance Company's independent
auditors and actuaries) provided the Board with information and analysis with
respect to the Assurance Company's ultimate loss and allocated loss adjustment
expenses for those years. Based on that analysis and in accordance with the
adjustment formula specified in the Debenture/Warrant Agreement, the exercise
price of the Series 1 Warrants (the "Series 1 Exercise Price") was reduced from
$2.50 to $0.83. That analysis with respect to such ultimate loss and allocated
loss adjustment reserves was accepted as adverse development under the Warrant
Repricing Amendment. The net effect of the resulting adjustment was the
aforementioned reduction in the Series 1 Exercise Price to and being fixed at
$0.83. That places the Series 1 Warrants "in-the-money" for purposes of the
Merger Price Per Share.
The adjustment to the Series 1 Exercise Price was triggered by the
following events: (1) As of September 30, 1996 and as noted in the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, the
Assurance Company increased by approximately $4,500,000 its loss and allocated
loss adjustment expense reserves for the 1990-1993 accident years; and (2) As
noted in the Company's Form 10-K for the year ended December 31, 1996, such
reserves were further increased by approximately $12 million effective as of the
fourth quarter of 1996.
Under the Amended Agreement, the Series 1 Warrants will, therefore, receive
the difference between the Merger Price Per Share and the Series 1 Exercise
Price. Although the Series 2 Warrants were entitled to consideration under the
Prior Agreement, under the Amended Agreement all the Series 2 Warrants and
Series 3 Warrants are "out-of-the-money," and, therefore, no consideration will
be paid with respect thereto.
SERIES A CONVERTIBLE DEBENTURES AND SERIES 1, 2 and 3 DETACHABLE WARRANT
PURCHASE AGREEMENT
Prac, Allstate and Superior entered into the Purchase Agreement, as
amended, dated as of February 17, 1997. Pursuant to the terms of the Purchase
Agreement, Prac and Allstate, contingent upon the consummation of the Merger,
have agreed to sell their respective Debentures and Warrants to Superior. The
consideration to be received by Prac and Allstate under the Purchase Agreement
for their respective Series 1 Warrants is the difference between the Merger
Price Per Share and the Series 1 Exercise Price. The Series 2 and Series 3
Warrants held by Prac and Allstate will be "out-of-the-money" and cancelled.
The Purchase Agreement also provides that the Debentures will be acquired for
$20 million, their face value, and will not be converted as was contemplated
under the Prior Agreement as such Debentures are no longer "in-the-money." Each
party to the Purchase Agreement has made standard representations and warranties
and has agreed to standard covenants. The Purchase Agreement terminates if the
Amended Agreement terminates.
VOTING AGREEMENT
Prac, Allstate, the Pickup Affiliates and Superior entered into a Voting
Agreement dated as of February 17, 1997 (the "Voting Agreement"). Pursuant to
the terms of the Voting Agreement, Prac, Allstate and the Pickup Affiliates have
agreed to vote for the approval and adoption of the Amended Agreement. This
results in approximately 58% of the outstanding shares of Common Stock being
committed to vote in favor of the subject transaction. In connection therewith,
all the issued and outstanding Debentures are convertible into 7,272,727 shares
of Common Stock for voting purposes.
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Prac, Allstate and the Pickup Affiliates' obligations under the Voting
Agreement do not terminate even if the Company's Board of Directors, in
exercising its fiduciary obligations to the Stockholders, approves an
Acquisition Proposal. In addition, if a breakup fee becomes payable under the
Amended Agreement as a consequence of an Acquisition Proposal, the Debenture
Holders (with the exception of Allstate), will pay to Superior upon consummation
of the competing transaction an amount equal to the difference between the price
received for such persons' Debentures and Warrants under the Acquisition
Proposal and the price that would have been paid for such securities under the
Purchase Agreement. Allstate's obligation under the Voting Agreement terminates
on the earlier to occur of (i) the date of the termination of the Merger
Agreement, (ii) the Effective Time, or (iii) September 30, 1997. The
obligations of Prac and the Pickup Affiliates terminate on the earlier to occur
of (w) the Effective Time; (x) if the Amended Agreement is terminated due to the
failure of the Company to obtain approval of the Merger by the required vote of
the Stockholders and Debenture Holders or the Board's recommendation of an
Acquisition Proposal, on September 30, 1997, (y) if the Amended Agreement is
terminated by mutual consent of the parties or Superior or Merger Sub have
breached any of the representations, warranties or covenants in the Amended
Agreement that would have a "Parent Material Adverse Effect" (as hereinafter
defined), immediately upon such termination, or (z) if the Amended Agreement is
terminated pursuant to any other provision therein, on June 15, 1997.
SERIES 3 DETACHABLE WARRANT SURRENDER AGREEMENT
Messrs. Harwood, Anderson and Strunk and the Lenawee Trust entered into the
Surrender Agreement, as amended, with the Company dated as of February 17, 1997.
Pursuant to the terms of the Surrender Agreement, Messrs. Harwood, Anderson and
Strunk and the Lenawee Trust, contingent upon the consummation of the Merger,
have agreed to surrender their respective Series 3 Warrants to the Company
without cash consideration therefor as such warrants are "out-of-the-money."
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by Superior to effect the Merger, pay
the fees of its legal counsel and advisors, make a capital contribution to the
Assurance Company, and repay or refinance certain long-term indebtedness is
approximately $58,000,000. These amounts are the only expenses related to the
Merger that are expected to be paid by Superior. See "SPECIAL FACTORS -- Source
and Amount of Funds."
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of March 12, 1997, the directors and executive officers of the Company
beneficially owned, in the aggregate, 2,797,521 shares of Common Stock,
representing approximately 29.4% of such shares outstanding. To the knowledge
of the Company, all directors and executive officers of the Company intend to
vote their beneficially owned shares of Common Stock eligible to be voted for
the approval and adoption of the Amended Agreement. In addition, pursuant to
the Voting Agreement, the Common Stock owned by the Pickup Affiliates and the
Debentures owned by Prac and Allstate will be voted for the approval and
adoption of the Amended Agreement. See "SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS."
MARKET PRICE AND DIVIDEND INFORMATION
The Common Stock is listed on NASDAQ under the symbol "PRIM." On February
14, 1997, the last trading day before the public announcement of the execution
of the Amended Agreement, the reported closing sale price per share of the
Common Stock was $2.25. On March 12, 1997, the last full trading day prior to
the date of this Proxy Statement, the reported closing sale price per share of
the Common Stock was $2.03. For additional information concerning
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historical market prices of the Common Stock and the dividends paid thereon, see
"MARKET PRICE AND DIVIDEND INFORMATION."
SELECTED CONSOLIDATED FINANCIAL DATA
Certain selected historical financial data of the Company are set forth
under "SELECTED CONSOLIDATED FINANCIAL DATA." That data should be read in
conjunction with the consolidated financial statements and related notes
incorporated by reference in this Proxy Statement. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE."
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Each copy of this Proxy Statement mailed to Stockholders is accompanied by
a blue-striped proxy card furnished in connection with the solicitation of
proxies by the Board for use at the Special Meeting. The Special Meeting is
scheduled to be held at 10:00 a.m., on April 8, 1997, at the Company's
headquarters, 6200 Canoga Avenue, Woodland Hills, California 91367-2402. At the
Special Meeting, Stockholders will consider and vote upon (i) a proposal to
approve and adopt the Amended Agreement and (ii) such other matters as may
properly be brought before the Special Meeting.
The Board has determined that the Merger and the Amended Agreement are
advisable and in the best interests of the Company and its Stockholders and has
approved the Merger and the Amended Agreement by unanimous vote of those
directors voting. ACCORDINGLY, THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" APPROVAL AND ADOPTION OF THE AMENDED AGREEMENT. See "SPECIAL FACTORS --
Background of the Transaction" and " -- Reasons for the Transaction."
IT IS VERY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL
MEETING. THE PROXY CARD THAT YOU MAY HAVE COMPLETED AND RETURNED TO THE COMPANY
IN CONNECTION WITH THE NOVEMBER PROXY STATEMENT IS NOW OF NO FURTHER FORCE OR
EFFECT. ACCORDINGLY, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU
ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE BLUE-STRIPED PROXY CARD IN
THE ENCLOSED POSTAGE-PAID ENVELOPE. FAILURE TO RETURN A PROPERLY EXECUTED BLUE-
STRIPED PROXY CARD OR VOTE AT THE SPECIAL MEETING WOULD HAVE THE SAME EFFECT AS
A VOTE AGAINST THE AMENDED AGREEMENT. EXECUTED PROXIES WITH NO INSTRUCTIONS
INDICATED THEREON WILL BE VOTED "FOR" APPROVAL AND ADOPTION OF THE AMENDED
AGREEMENT.
RECORD DATE AND VOTING
The Board has fixed the close of business on March 5, 1997, as the Record
Date for the determination of the Stockholders entitled to notice of and to vote
at the Special Meeting. Only Stockholders of record at the close of business on
that date will be entitled to receive notice of or to vote at the Special
Meeting. At the close of business on the Record Date, there were 9,528,200
shares of Common Stock outstanding and entitled to vote at the Special Meeting,
held by approximately 852 Stockholders of record. In addition, the Debentures
have voting rights equal to the number of shares of Common Stock into which such
Debentures are convertible. The Debentures' voting rights are exercisable only
when the following matters are submitted to a vote of Stockholders or for
written consent: (a) the amendment of the Company's Certificate of
Incorporation; (b) the sale or transfer of all or substantially all of the
Company's assets; (c) the
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consolidation, reorganization, reclassification, recapitalization, transfer,
merger, dissolution, liquidation, or winding-up of the Company; (d) changes in
the Company's authorized capital stock or any rights with respect thereto; and
(e) changes in the number of individuals constituting the Board to a number
other than seven. Approval of any of the foregoing matters requires the
affirmative vote of the holders of at least 70%, in the aggregate, of both the
issued and outstanding shares of Common Stock and Debentures, voting together,
with such Debentures having a number of votes equal to the number of shares of
Common Stock into which such Debentures may be converted.
Each Stockholder on the Record Date will be entitled to one vote for each
share held of record and each Debenture Holder will be entitled to one vote for
each share of Common Stock into which such Debentures are convertible. Mr.
Pickup, the ultimate controlling person of the Pickup Affiliates and Prac, is
expected to attend the Special Meeting to vote the Common Stock and Debentures
owned by the Pickup Affiliates and Prac, as the case may be, and, accordingly, a
quorum for the transaction of business at the Special Meeting is assured. The
presence, in person or by proxy, of a majority of the outstanding shares of
Common Stock entitled to be voted at the Special Meeting is necessary to
constitute a quorum for the transaction of business. Abstentions (including
broker non-votes) will be included in the calculation of the number of votes
represented at the Special Meeting for purposes of determining whether a quorum
has been achieved.
If the enclosed blue-striped proxy card is properly executed and received
by the Company in time to be voted at the Special Meeting, the shares
represented thereby will be voted in accordance with the instructions marked
thereon. Executed proxies with no instructions indicated thereon will be voted
"FOR" approval and adoption of the Amended Agreement.
The Board is not aware of any matters other than the matter set forth in
the Notice of Special Meeting of Stockholders that may be brought before the
Special Meeting. If any other matters properly come before the Special Meeting,
including a motion to adjourn the meeting for the purpose of soliciting
additional proxies, the persons named in the accompanying proxy will vote the
shares represented by all properly executed proxies on such matters in their
discretion, except that shares represented by proxies which have been voted
"Against" the Amended Agreement will not be used to vote "For" adjournment of
the Special Meeting for the purpose of allowing additional time for soliciting
additional votes "For" the Amended Agreement. See "THE SPECIAL MEETING -- Vote
Required; Revocability of Proxies."
STOCKHOLDERS SHOULD NOT FORWARD ANY COMMON STOCK CERTIFICATES WITH THEIR
PROXY CARDS. IN THE EVENT THE MERGER IS CONSUMMATED, STOCK CERTIFICATES SHOULD
BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN A LETTER OF
TRANSMITTAL, WHICH WILL BE SENT TO STOCKHOLDERS BY U.S. STOCK TRANSFER
CORPORATION, IN ITS CAPACITY AS THE EXCHANGE AGENT, PROMPTLY AFTER THE EFFECTIVE
TIME.
VOTE REQUIRED; REVOCABILITY OF PROXIES
The affirmative vote of holders of at least 70%, in the aggregate, of both
the issued and outstanding shares of Common Stock and Debentures, voting
together, with such Debentures having a number of votes equal to the number of
shares of Common Stock into which such Debentures may be converted, is required
to approve and adopt the Amended Agreement. Pursuant to the Voting Agreement,
the Common Stock owned by the Pickup Affiliates and the Debentures owned by Prac
and Allstate will be voted for the approval and adoption of the Amended
Agreement.
Because the required vote of the Stockholders and Debenture Holders on the
Amended Agreement is based upon the total number of outstanding shares of Common
Stock and
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Debentures, the failure to submit a blue-striped proxy card (or to vote in
person at the Special Meeting) or the abstention from voting by a Stockholder
will have the same effect as a vote against approval and adoption of the Amended
Agreement. Brokers who hold shares of Common Stock as nominees will not have
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners thereof.
A Stockholder may revoke a proxy at any time prior to its exercise by (i)
delivering to Myrtle L. Solomon, Corporate Secretary, Pac Rim Holding
Corporation, 6200 Canoga Avenue, Woodland Hills, California 91367-2402, a
written notice of revocation prior to the Special Meeting, (ii) delivering prior
to the Special Meeting a duly executed proxy bearing a later date or (iii)
attending the Special Meeting and voting in person. The presence of a
Stockholder at the Special Meeting will not in and of itself automatically
revoke such Stockholder's proxy.
If fewer shares of Common Stock are voted in favor of approval and adoption
of the Amended Agreement than the number required for approval, it is expected
that the Special Meeting will be adjourned for the purpose of allowing
additional time for soliciting and obtaining additional proxies or votes, and,
at any subsequent reconvening of the Special Meeting, all proxies will be voted
in the same manner as such proxies would have been voted at the original
convening of the Special Meeting, except for any proxies which have theretofore
effectively been revoked or withdrawn.
Although no vote of the stockholders of Superior is required in connection
with the Amended Agreement or the Merger, such vote is required with respect to
Superior's issuance of shares of its common stock in order to finance the
Merger. The obligations of the Company and Superior to consummate the Merger
are subject, among other things, to the condition that the Stockholders approve
and adopt the Amended Agreement. See "THE AMENDED AGREEMENT -- Conditions to
the Merger."
APPRAISAL RIGHTS
Under the DGCL, Stockholders of record who follow the procedures set forth
in Section 262 and who have not voted in favor of the Amended Agreement will be
entitled to have their shares of Common Stock appraised by the Delaware Court of
Chancery and to receive payment of the "fair value" of such shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, as determined by such
court. The following is a summary of certain of the provisions of Section 262
of the DGCL and is qualified in its entirety by reference to the full text of
such Section, a copy of which is attached hereto as Appendix B.
Under Section 262, where a merger agreement is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the Special
Meeting, not less than 20 calendar days prior to the meeting, the Company must
notify each of the Stockholders at the close of business on the Record Date that
such appraisal rights are available and include in each such notice a copy of
Section 262. This Proxy Statement constitutes such notice. Any Stockholder who
wishes to exercise appraisal rights should review the following discussion and
Appendix B carefully because failure to timely and properly comply with the
procedures specified in Section 262 will result in the loss of appraisal rights
under the DGCL.
A Stockholder wishing to exercise appraisal rights must deliver to the
Company, before the vote on the approval and adoption of the Amended Agreement
at the Special Meeting, a written demand for appraisal of such holder's shares
of Common Stock. Such demand will be sufficient if it reasonably informs the
Company of the identity of the Stockholder and that the Stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against the
Amended Agreement will not constitute such a demand. In addition, a Stockholder
wishing to exercise
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appraisal rights must hold of record such shares on the date the written demand
for appraisal is made and must continue to hold such shares through the
Effective Time.
Only a Stockholder of record is entitled to assert appraisal rights for the
shares of Common Stock registered in that holder's name. A demand for appraisal
should be executed by or on behalf of the Stockholder of record fully and
correctly, as the Stockholder's name appears on the stock certificates.
Stockholders who hold their shares in brokerage accounts or other nominee forms
and who wish to exercise appraisal rights are urged to consult with their
brokers to determine the appropriate procedures for the making of a demand for
appraisal by such nominee. All written demands for appraisal of Common Stock
should be sent or delivered to Myrtle L. Solomon, Corporate Secretary, Pac Rim
Holding Corporation, 6200 Canoga Avenue, Woodland Hills, California 91367-2402,
so as to be received before the vote on the approval and adoption of the Amended
Agreement at the Special Meeting.
If the shares of Common Stock are owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, execution of the demand should be
made in that capacity, and if the shares of Common Stock are owned of record by
more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on behalf
of a Stockholder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, the agent
is agent for such owner or owners. A record holder such as a broker who holds
Common Stock as nominee for several beneficial owners may exercise appraisal
rights with respect to the Common Stock held for one or more beneficial owners
while not exercising such rights with respect to the Common Stock held for other
beneficial owners; in such case, the written demand should set forth the number
of shares as to which appraisal is sought and where no number of shares is
expressly mentioned the demand will be presumed to cover all Common Stock held
in the name of the record owner.
Within 10 calendar days after the Effective Time, the Company, as the
Surviving Corporation, must send a notice as to the effectiveness of the Merger
to each person who has satisfied the appropriate provisions of Section 262 and
who has not voted in favor of the Amended Agreement. Within 120 calendar days
after the Effective Time, the Company, or any Stockholder entitled to appraisal
rights under Section 262 and who has complied with the foregoing procedures, may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares of all such Stockholders. The Company is not under
any obligation, and has no present intention, to file a petition with respect to
the appraisal of the fair value of the shares of Common Stock. Accordingly, it
is the obligation of the Stockholders to initiate all necessary action to
perfect their appraisal rights within the time prescribed in Section 262.
Within 120 calendar days after the Effective Time, any Stockholder of
record who has complied with the requirements for exercise of appraisal rights
will be entitled, upon written request, to receive from the Company a statement
setting forth the aggregate number of shares of Common Stock with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such statements must be mailed within 10 calendar days
after a written request therefor has been received by the Company.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the Stockholders
entitled to appraisal rights and will appraise the "fair value" of the shares of
Common Stock, exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. Stockholders
considering seeking appraisal should be aware that the fair value of their
shares of Common Stock as determined under Section 262 could be more than, the
same as or less than the amount that they would otherwise receive if they did
not seek appraisal of their shares of Common Stock. The Delaware Supreme Court
has
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stated that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings. In addition, Delaware
courts have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a dissenter's exclusive remedy. The Court will
also determine the amount of interest, if any, to be paid upon the amounts to be
received by persons whose shares of Common Stock have been appraised. The costs
of the action may be determined by the Court and taxed upon the parties as the
Court deems equitable. The Court may also order that all or a portion of the
expenses incurred by any Stockholder in connection with an appraisal, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the shares of Common Stock entitled to appraisal.
The Court may require Stockholders who have demanded an appraisal and who
hold Common Stock represented by certificates to submit their certificates of
Common Stock to the Court for notation thereon of the pendency of the appraisal
proceedings. If any Stockholder fails to comply with such direction, the Court
may dismiss the proceedings as to such Stockholder.
Any Stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote the shares
of Common Stock subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends or
other distributions payable to Stockholders of record as of a date prior to the
Effective Time).
If any Stockholder who demands appraisal of shares under Section 262 fails
to perfect, or effectively withdraws or loses, the right to appraisal, as
provided in the DGCL, the shares of Common Stock of such holder will be
converted into the right to receive the Merger Price Per Share in accordance
with the Amended Agreement, without interest. A Stockholder will fail to
perfect, or effectively lose, the right to appraisal if no petition for
appraisal is filed within 120 calendar days after the Effective Time. A
Stockholder may withdraw a demand for appraisal by delivering to the Company a
written withdrawal of the demand for appraisal and acceptance of the Merger,
except that any such attempt to withdraw made more than 60 calendar days after
the Effective Time will require the written approval of the Company. Once a
petition for appraisal has been filed, such appraisal proceeding may not be
dismissed as to any Stockholder without the approval of the Court.
SOLICITATION OF PROXIES
The Company will bear the costs of soliciting proxies from Stockholders.
In addition to soliciting proxies by mail, directors, officers and employees of
the Company, without receiving additional compensation therefor, may solicit
proxies by telephone or in person. Arrangements also will be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of shares held of record by such
persons, and the Company will reimburse such brokerage firms, custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection therewith.
THE COMPANY
The Company was organized as a Delaware corporation on May 12, 1987. On
May 27, 1987, the Company became the immediate parent of the Assurance Company,
its principal subsidiary, which, in turn, in 1995 became the parent of RBIS.
The Company is engaged primarily, and almost exclusively, in writing workers'
compensation insurance. In connection therewith, the Company markets its
policies through approximately 200 insurance agencies and brokerage firms.
Historically, the Company concentrated primarily on the Southern California
market. In connection with its efforts to expand into additional geographic
areas and increase
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future revenues, the Assurance Company received Certificates of Authority to
write workers' compensation insurance in Alabama, Arizona, Georgia and Texas.
RBIS is a California corporation that is licensed as an insurance agent
and/or broker in a number of jurisdictions. RBIS places coverage with insurers
that are licensed in states where the Assurance Company is not currently
licensed. RBIS sells both workers' compensation and accident and health
insurance coverage.
The address and telephone number of the Company's principal executive
offices are 6200 Canoga Avenue, Woodland Hills, California 91367-2402; (818)
226-6200.
SUPERIOR
Superior was incorporated in California on March 29, 1985, under the name
Coastal Holdings, Ltd. Superior is a holding company that, through its wholly-
owned subsidiary, SNIC, is engaged in writing workers' compensation insurance
principally in the State of California and, until September 30, 1993, was
engaged in writing commercial property and casualty insurance. SNIC is
currently licensed to write business in Arizona, Arkansas, California, Colorado,
District of Columbia, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri,
Montana, Nevada, New Mexico, Oregon, South Dakota, Utah and Wyoming, but
virtually all of SNIC's current premium is generated in California, with
immaterial exceptions in Arizona and Oregon.
Superior has five wholly-owned subsidiaries in addition to SNIC: InfoNet
Management Systems, Inc. ("InfoNet"), SN Insurance Services, Inc. ("SNIS"),
Pacific Insurance Brokerage, Inc. ("Pacific"), Superior National Capital Holding
Corporation ("SNCHC") and Superior (Bermuda) Ltd. ("SBL"). InfoNet provides
data processing purchasing services to Superior and its subsidiaries. SNIS and
Pacific are inactive. SNCHC's sole function is to act as a general partner of
Superior National Capital, L.P., a Bermuda limited partnership that issued $20
million face amount of preferred securities to Centre Reinsurance Services
(Bermuda) III Limited effective June 30, 1994. The proceeds of that transaction
were loaned to Superior and partially contributed by Superior to the capital of
SNIC. Centre Reinsurance Services (Bermuda) III Limited is an affiliate of
Superior.
SNIC's only subsidiary is wholly-owned Western Select Service Corp.
("WSSC"), which was established in 1987 under the name Superior Western
Insurance Company. WSSC was formed and capitalized to underwrite property,
casualty and workers' compensation insurance, but never received a charter to
commence insurance operations from the California Department. WSSC currently
provides vocational, rehabilitation, legal, paralegal and other services to
SNIC.
The address and telephone number of Superior's principal executive offices
are 26601 Agoura Road, Calabasas, California 91302; (818) 880-1600.
SPECIAL FACTORS
BACKGROUND OF THE TRANSACTION
In early 1993, the Company engaged the services of financial advisors to
explore methods by which the Company could obtain additional operating capital
for the Assurance Company. At that time, the Company believed that to maintain
a competitive position in California's workers' compensation market, the only
jurisdiction in which the Assurance Company was then operating, additional
capital was required.
On August 16, 1994, the Company completed its capital raising effort under
the Debenture/Warrant Agreement. Pursuant to the terms of that agreement, the
Company sold the Debentures
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and Warrants to Prac in exchange for $20 million. Following the close of that
transaction, the Company continued to analyze its need for additional investment
capital, its position in California's workers' compensation market and the
possibility of expanding its operations beyond California.
In July of 1993, the California state legislature passed certain workers'
compensation law reforms in response to the fraud and abuse of the workers'
compensation claims and benefits system by claimants and vendors. Those laws
have significantly impacted the benefits available under California's workers'
compensation system and the premium rates that insurers may charge for coverage.
Nevertheless, there has been significant volatility in loss and loss adjustment
expense development patterns with respect to the Company and California's
workers' compensation industry, in general.
In response to generally improved claims experience since 1993, the
California legislature repealed the minimum rating law effective January 1,
1995, thus, making California an "open or competitive rating" state with respect
to workers' compensation coverage. Beginning January 1, 1995, the Workers'
Compensation Insurance Rating Bureau began publishing advisory pure premium
rates which provide for losses and loss adjustment costs as indicated by prior
history and an actuarial projection of future losses and loss expenses.
California workers' compensation insurers can adopt those rates and apply their
own expense factor or file their own actuarially sound rates.
Prior to its repeal, the minimum rating law existed as a means of
preserving the financial integrity of California's workers' compensation system
by prohibiting insurers from charging premiums below certain minimum levels
established by the California Insurance Commissioner. California's open rating
laws have created an intense level of price competition among workers'
compensation insurers. That, in turn, resulted in an overall erosion of premium
levels beginning in late 1994 and continuing through the present. The Company,
therefore, adopted a strategy of continuing to explore opportunities for
securing additional investment capital and/or possibly merging with a compatible
entity.
Although the Company reduced expenses and was profitable in 1995, it began
to explore all alternatives. On February 17, 1995, the Company announced that
it had retained Salomon to evaluate strategic alternatives. During 1995 and
1996, Salomon contacted a number of companies, including managed care, health
insurance and workers' compensation entities operating in and outside of
California, to ascertain if those entities were interested in acquiring the
Company. Certain of the entities contacted expressed varying levels of interest
in the Company, but agreement with respect to pricing and terms of a transaction
could not be reached.
On July 3, 1996, Superior informed Salomon that it was interested in
reviewing the Company's operations. Shortly thereafter, Superior entered into a
Confidentiality Agreement with the Company and began its due diligence review of
the Company's operations, which included a review of the Assurance Company's
reserves by its independent actuaries. After completing that review, Superior
expressed an interest in entering into discussions with and submitting a
proposal to the Company concerning the possibility of acquiring all the
Company's issued and outstanding Common Stock, Debentures and Warrants. Between
August 28, 1996 and September 17, 1996, discussions were held between counsel
and representatives of both the Company and Superior concerning an acquisition
transaction. During that period of time, members of the Board discussed with
representatives of Superior certain of the terms under which the Company might
be willing to enter into a merger transaction with Superior.
On September 13, 1996, each member of the Board was informed that Superior
would be submitting a formal offer to acquire the Company by means of a merger
transaction and that a Board meeting to discuss the anticipated offer was
scheduled for September 16, 1996. Immediately prior to the September 16, 1996
meeting, Superior submitted to the Board a formal merger
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proposal pursuant to the terms of which Superior would acquire all the issued
and outstanding Common Stock, Debentures and Warrants. On the morning of
September 16, 1996, all members of the Board reviewed and considered the merger
proposal and discussed a number of factors with respect thereto. Later that day,
the Company issued a press release to the effect that it was in discussions with
Superior with respect to a potential merger transaction.
In the process of negotiating the terms of the Prior Agreement, and after
consultation with their respective actuaries, the Company and Superior mutually
agreed that it would be reasonable to increase by approximately $4.5 million the
Assurance Company's loss and loss adjustment expense reserves during the third
quarter of 1996.
Following the Board's discussion of the then subject transaction and
negotiations via telephonic conference call with representatives of Superior
concerning certain remaining unresolved terms of the transaction, the Board
approved the Merger by unanimous vote of those directors voting.
On September 17, 1996, following such unanimous approval of the Merger
proposal by the Board, the Prior Agreement and related documents were signed and
press releases were issued by the Company and Superior with respect thereto.
During the third quarter of 1996, the Company did, in fact, increase its
loss and loss adjustment expense reserves related to accident years 1995 and
prior by approximately $4.5 million. This was done in recognition of the advice
of both its internal and independent actuaries, and the agreement that had been
reached with Superior with respect to reserve strengthening. The total adverse
development recognized on prior accident years during the first nine months of
1996 was approximately $5.6 million. At September 30, 1996, the Company's loss
and loss adjustment expense reserves were within its independent actuary's
reasonable range, and the Company believed that its recorded loss and loss
adjustment expense reserves were adequate.
The Company mailed the November Proxy Statement to Stockholders, seeking
approval of the Prior Agreement at a Special Meeting of Stockholders scheduled
for December 11, 1996. Shortly before the meeting was to have taken place, the
California Department, in the course of its triennial examination of the
Assurance Company which had commenced in July 1996, raised issues with respect
to the adequacy of the Assurance Company's loss reserves. The California
Department informed the Company that it had linked the triennial examination
with its review of Superior's Form A for the Prior Agreement, and that approval
of the Form A would be delayed. That was the first knowledge the Company had
that the transaction contemplated under the Prior Agreement likely would not
close in 1996, as was previously contemplated. Thus, on December 10, 1996 and
January 10, 1997, the Company announced postponements of its then planned
Special Meeting of Stockholders to approve the transaction under the Prior
Agreement.
In connection with its triennial examination, the California Department
undertook studies with regard to the Assurance Company's loss and allocated loss
adjustment expense reserves. In December 1996, the California Department
informed the Company that the California Department's consulting actuaries had a
difference of opinion from that of the Company's internal and independent
actuaries with respect to the adequacy of the Assurance Company's loss and loss
adjustment expense reserves. At the California Department's direction, the
Company and its actuaries met with representatives of the Department and its
actuaries to provide additional data and assist in reconciling the Company's
recorded loss and loss adjustment expense reserves to the preliminary findings
of the California Department's actuaries.
Following approximately two months of extensive meetings with the
California Department and its actuaries, the Company, in conjunction and
consultation with its internal actuaries, reached agreement with the California
Department to increase its loss and loss adjustment expense reserves
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by $12 million to take a more conservative approach for the accident years 1995
and prior. The $12 million increase was greater than the amount that was needed
to be within the range of the Company's independent actuaries; but the Company
believes that it was necessary to put up that amount to avoid further delays to
the subject transaction with Superior and to obtain the Department's approval of
the Form A, which is essential to the transaction. As a result of that increase,
the Company believes that the California Department will approve Superior's
pending Form A with respect to the Amended Agreement, shortly. However, other
unforeseen factors could affect either the regulatory approval process or the
ultimate closing of the subject transaction.
The principal differences between the Company and the California Department
pertained to the 1991, 1992 and 1993 accident years. Those years were among the
most volatile in the history of California workers' compensation insurance
industry claims experience. That volatility was the result of adverse economic
conditions in California, layoffs and unemployment that led to massive numbers
of fraudulent or questionable claims, and the pervasive need for several years
to implement effective legislative changes to the California workers'
compensation system. Essentially, the California workers' compensation
insurance industry, in general, was affected by those conditions. In response
to that experience, the California legislature took the steps described above in
an effort to correct many of the abusive claims situations that befell the
industry and the Company.
Under the Prior Agreement, the $12 million reserve increase created a
situation whereby Superior could either terminate such agreement or renegotiate
its terms. The Company believed it to be in its best interest to reenter into
negotiations with Superior in order to amend and restructure the Prior Agreement
in light of the subject reserve adjustment. At the time it reentered into
negotiations with Superior, the Company was bound by the Prior Agreement, but
the Voting Agreement dated as of September 17, 1996 among Prac, Allstate, the
Pickup Affiliates and Superior terminated on February 16, 1997. Further, since
the Company announced the Merger in connection with the Prior Agreement, no
other offer or inquiry has been received regarding any form of competitive bid
or offer.
On February 14, 1997, each member of the Board was informed that Superior
would be submitting an amended offer to acquire the Company and that a Board
meeting to discuss the anticipated offer was scheduled for the evening of
February 17, 1997. Immediately prior to the February 17, 1997 meeting, Superior
submitted to the Board a formal amended proposal.
During a telephonic conference call with members of the Company and
Superior's respective Boards of Directors and Officers, an offer was presented
whereby the purchase price to be paid under the Prior Agreement would be reduced
by approximately $12 million. That reduction would result in the Stockholders
receiving approximately $2.11 per share ($2.105 unrounded) (a total of
approximately $20,063,293), the Debenture Holders receiving face value for the
Debentures, or $20,000,000, and approximately $1,957,739 being paid to acquire
all the "in-the-money" Warrants and Company Options to purchase Common Stock,
for a total cash consideration of approximately $42,021,032. In connection
therewith, only the Series 1 Warrants would be "in-the-money" and the Debentures
would not be converted as was contemplated under the Prior Agreement as they are
"out-of-the-money" under the Amended Agreement. During that telephonic
conference call, discussions were also held concerning certain other amendments
to the structure and terms of the Prior Agreement.
On the evening of February 17, 1997, all members of the Board reviewed and
considered the merger proposal and related transactions contemplated under the
Amended Agreement and discussed a number of factors with respect thereto. The
Board also discussed the Company's general financial condition and its position
in the workers' compensation industry. Although the Company believed it was
positioned as a viable and competitive entity, the Board believed that if an
acquisition offer was made for the Company at a fair and reasonable price, it
might be in the
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best interest of the Stockholders to seriously consider such an offer. The Board
also considered other alternatives, including rejecting the terms of the Amended
Agreement and continuing its operations as previously conducted and the prospect
or likelihood of receiving offers or proposals from other potential acquirors on
terms more favorable than the terms proposed by Superior.
Salomon then presented to the Board at the Board meeting its analysis of
the offer. See "SPECIAL FACTORS -- Opinion of Financial Advisor." Salomon also
provided the Board with its oral opinion that the cash consideration to be
received by the Stockholders with respect thereto was fair from a financial
point of view. Salomon performed this analysis based on an assumed reduction in
the Series 1 Exercise Price to and being fixed at $0.83. This analysis
indicated the derived per share value allocated to each share of Common Stock
and "in-the-money" equivalents of approximately $2.11 ($2.105 unrounded).
Following the aforementioned discussions and Salomon's oral opinion, the
Company's Board of Directors determined that the Merger is in the best interests
of the Company and approved the Amended Agreement and the Merger by unanimous
vote of those directors voting. Later in the evening on February 17, 1997, the
Company entered into and executed the Amended Agreement with Superior. On the
morning of February 18, 1997, press releases were issued by the Company and
Superior with respect thereto.
The Board determined it would be neither necessary nor effective to create
a special independent committee of the Board to make recommendations for any
separate interests of the Stockholders in connection with the Merger, retain an
unaffiliated representative to advise the Board or to form a committee solely on
behalf of the Stockholders because (1) the holders of the Warrants and Company
Options would receive consideration based on the same methodology used to
determine the consideration to be paid for the Common Stock and (2) the Amended
Agreement and Merger requires approval of the affirmative vote of at least 70%,
in the aggregate, of both the issued and outstanding shares of Common Stock and
Debentures, voting together, with such Debentures having a number of votes equal
to the number of shares of Common Stock into which such Debentures may be
converted, and, therefore, the Merger must be considered by the Stockholders and
Debenture Holders as a unified "class" voting together.
To date, the Company has received no inquiries or expressions of interest
regarding competing bids by any other entity or person.
PURPOSE OF THE TRANSACTION
The purpose of the Merger is to effect the acquisition by Superior of all
the outstanding shares of Common Stock. Superior and the Company did not
consider any alternative means to accomplish this purpose because the Merger is
the most direct means for effecting the acquisition of the shares of Common
Stock held by the Stockholders.
REASONS FOR THE TRANSACTION
The Company. The Board has determined that the Amended Agreement and the
Merger are fair to and in the best interests of the Company and the
Stockholders, has approved the Amended Agreement and the Merger and has
unanimously recommended to the Stockholders that they vote for the approval and
adoption of the Amended Agreement. In taking these actions, the Board
considered many factors, including among others the following:
(i) Management's Recommendation. The Board reviewed presentations
from, and discussed the terms and conditions of the Amended Agreement and
the Merger with, the Company's President, speaking for the Company's Senior
Management, collectively, representatives of its legal counsel and
representatives of its financial advisor. The Board
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considered the view of management that the Company's businesses might
realize certain operational advantages if the Company were no longer an
independent public company (which advantages the Board took into account in
assessing the fairness of the Merger Price Per Share to be received in the
Merger). The Board also considered favorably management's stated belief
that the Merger would not have an adverse effect on the Company's
policyholders.
(ii) The Company's Business, Condition and Prospects. In evaluating
the terms of the Merger, the Board considered, among other things,
information with respect to the financial condition, results of operations,
investment results and businesses of the Company, on both a historical and
a prospective basis, and current industry, economic and market conditions.
The members of the Board were generally familiar with and knowledgeable
about the Company's affairs, including the present and possible future
economic, regulatory and competitive environment in which the Company
operates its workers' compensation insurance business, and further reviewed
these matters in the course of their deliberations. In evaluating the
Company's prospects, the Board considered, among other things, the
opportunities available to the Company to improve its results and capacity
to manage its future growth. The Board also considered the risks facing
the Company, including the repeal of California's minimum rate law
pertaining to premium chargeable for workers' compensation insurance
policies, the subsequent entry of financially stronger and much larger
insurers into the Company's business, and increasing rate competition.
(iii) Historical and Recent Market Prices Compared to the
Consideration to be Received in the Merger. The Board reviewed the
historical market prices and recent trading activity of the Common Stock.
The Board considered as favorable to its determination that the Merger
Price Per Share to be paid in the Merger is within the range of recent
trading prices of the Common Stock.
(iv) Alternative Transactions. The Board determined that it was
unlikely that a combination or other transaction with any other entity
could be structured in a manner that would offer comparable value to the
Stockholders. In making its determination, the Board considered its prior
"exploration" of the market and its evaluation of possible arrangements
with other entities. The Board also considered the fact that the Company
could not reach an agreement with respect to pricing with the entities,
other than Superior, which had been contacted by Salomon and examined the
Company's operations. Thus, the Board did not believe that any other
feasible or viable transaction was available to be considered.
(v) Liquidation of the Company. The Board considered the possible
return to the Stockholders if the Company were to cease operations and
liquidate and distribute its assets to the Stockholders. That analysis
indicated a range of present values at $0.85 to $0.95 per share may be
realized from such liquidation, which amounts are less than the anticipated
Merger Price Per Share.
(vi) Opinion of Salomon. The Board considered the opinion of Salomon
(including the assumptions and financial and other information relied upon
by Salomon) that the consideration to be received by the Stockholders in
the Merger is fair to such holders from a financial point of view, as well
as the presentation made by Salomon to the Board, to support the Board's
determination that the Merger is fair to the Stockholders. Salomon's
opinion and presentation are described below under "SPECIAL FACTORS --
Opinion of Financial Advisor." As described below, Salomon performed
certain valuation analyses on the Company in order to reach its opinion.
(vii) Stockholder Approval Requirement. The Board considered the fact
that the Merger is conditioned on the approval and adoption of the Amended
Agreement by the
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affirmative vote of the holders of at least 70%, in the aggregate, of both
the issued and outstanding shares of Common Stock and Debentures, voting
together, with such Debentures having a number of votes equal to the number
of shares of Common Stock into which such Debentures may be converted.
(viii) Termination Provision; Breakup Fee. The Board considered as
favorable to its determination that the Amended Agreement (a) permits the
Board to approve an Acquisition Proposal that it believes is in the
interests of the Stockholders and (b) is terminable by the Board if an
Acquisition Proposal is so approved. In such case, however, the Company
would be required to pay Superior a $5 million breakup fee.
(ix) No Longer a Public Company. The Board viewed as a negative
factor that, following the consummation of the Merger, the Company would no
longer be a public company.
(x) Taxable Transaction. The Board viewed as a negative factor to its
determination that, like all cash mergers, the Merger would be a taxable
transaction. In addition, for the reasons described under "SPECIAL FACTORS
-- Background of the Transaction," the Board did not believe that it would
be able to effect a tax-free transaction offering comparable value to the
Stockholders.
The foregoing description of the factors considered by the Board is not all
inclusive but covers the principal matters discussed in detail by the Board. In
view of the wide variety of factors considered, the Board did not consider it
practical to, nor did it attempt to, quantify or attach any particular weight to
any of the factors it reviewed in reaching its conclusion to recommend the
Merger to the Stockholders as being in their best interests.
CERTAIN CONSIDERATIONS
While the Board is of the opinion that the Merger is in the best interest
of the Company and the Stockholders, approval of the Amended Agreement involves
certain factors that the Stockholders should consider carefully. These
considerations include the fact that acceptance of the Merger will result in
each Stockholder liquidating and selling his, her or its shares of Common Stock
and, in effect, result in each Stockholder selling his, her, or its interest in
the Company at the Merger Price Per Share. If this transaction were not
completed, it is likely that the Company would, at least in the immediate
future, remain viable. It is conceivable that if the value of the Company were
to increase in the future, such increased value would not be available if the
Amended Agreement is accepted.
Further, although the Board and management, independently and through the
efforts of the Company's financial advisor, have investigated alternative
transactions, there can be no assurance that if the Amended Agreement and Merger
were not accepted, at some time in the future another offer or proposal would be
made by a third party to acquire or merge with the Company, which future
possible offer could conceivably result in a greater sum being paid to the
Stockholders. It should, however, be noted that the Amended Agreement provides
that under certain circumstances, the Company would be required to pay a breakup
fee if any other form of offer or proposal were considered or accepted by the
Company within a specified time period. Further, since the Company has
announced the Merger in connection with the Prior Agreement, no other offer or
inquiry has been received regarding any form of competitive bid or offer. Thus,
at the time the Company's Board of Directors accepted the terms of the Amended
Agreement, no competing or alternate transaction was available for
consideration, notwithstanding the fact that under the Prior Agreement, the
Company was prohibited from soliciting competing offers or proposals.
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In reaching its decision to approve and adopt the Amended Agreement and
make the recommendation to the Stockholders set forth herein, the Board has
considered a number of factors, including (i) the financial information made
available to the Board, including historical trading prices of the Common Stock,
the Common Stock's current per share value, and the per share value based upon
the liquidation of the Company, (ii) the Board's belief that the financial
interests of the Stockholders would be better served by effecting a merger
resulting in a sale of the Company for the Merger Price Per Share, as compared
to continuing operations as an independent company, (iii) the financial
condition of the Company as compared with its competitors, (iv) market
conditions within the workers' compensation industry, particularly in the State
of California and those other states and jurisdictions in which the Assurance
Company currently operates, (v) the terms and conditions of the Amended
Agreement, and (vi) the opinion of Salomon described herein to the effect that
the Merger Price Per Share to be received by the Stockholders in the Merger is
fair, from a financial point of view, to such Stockholders.
OPINION OF FINANCIAL ADVISOR
The Company retained Salomon to assist it in evaluating various strategic
or financial transactions that could be of interest to the Company and to render
a fairness opinion in connection with a sale of the Company. See "SPECIAL
FACTORS -- Background of the Transaction." On February 17, 1997, Salomon
rendered its oral opinion to the Board, which was subsequently confirmed in
writing in an opinion dated March 13, 1997, that the consideration to be
received by the Stockholders in the Merger is fair to such holders from a
financial point of view.
The full text of Salomon's fairness opinion, dated March 13, 1997, which
sets forth the assumptions made, general procedures followed, matters considered
and limits on the review undertaken, is attached as Appendix C to this Proxy
Statement. Salomon's opinion is directed only to the fairness, from a financial
point of view, to the Stockholders, of the consideration to be received by such
holders in the Merger and does not address the Company's underlying business
decision to effect the Merger or constitute a recommendation to any Stockholder
as to how such Stockholder should vote with respect to the Merger. Salomon's
opinion does not address the fairness of the consideration to be received by the
holders of the Debentures and Warrants from the purchase of such securities by
Superior pursuant to the Amended Agreement. The summary of Salomon's opinion
set forth below is qualified in its entirety by reference to the full text of
such opinion attached as Appendix C. STOCKHOLDERS ARE URGED TO READ THE OPINION
IN ITS ENTIRETY.
In connection with rendering this opinion, Salomon reviewed and analyzed,
among other things, the following: (i) the Amended Agreement, including the
Exhibits thereto; (ii) the Purchase Agreement; (iii) the terms and conditions of
the Debentures and Warrants; (iv) certain publicly available information
concerning the Company, including the Annual Reports on Form 10-K of the Company
for each of the years in the six-year period ended December 31, 1996; (v)
statutory financial information regarding the Assurance Company for each of the
years in the six-year period ended December 31, 1996; (vi) a report dated
January 20, 1997 prepared by Arthur Andersen L.L.P. on the Company's reserves
for unpaid losses and loss adjustment expenses as of December 31, 1996; (vii)
certain other internal information, primarily financial in nature, including
projections, concerning the business and operations of the Company furnished to
Salomon by the Company for purposes of its analysis; (viii) certain publicly
available information concerning the trading of, and the trading market for, the
Common Stock; (ix) certain publicly available information with respect to
certain other companies that Salomon believed to be comparable to the Company
and the trading markets for certain of such other companies' securities; and (x)
certain publicly available information concerning the nature and terms of
certain other transactions that Salomon considered relevant to its inquiry.
Salomon also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria which it deemed
relevant. Salomon also met with certain officers and employees of the Company
and met
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with representatives of the California Department to discuss the foregoing as
well as other matters Salomon believed relevant to its inquiry.
In its review and analysis and in arriving at its opinion, Salomon assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to it or publicly available and neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. With respect to the Company's projections, Salomon assumed that
they had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the Company's management as to the
financial performance of the Company for the period covered. Salomon did not
make or obtain any independent evaluations or appraisals of any of the Company's
assets, properties or facilities nor was Salomon furnished with any such
evaluations or appraisals. Salomon's services did not include any actuarial
determinations or evaluations or an attempt to evaluate actuarial assumptions.
Salomon relied, directly and indirectly, on reports and opinions provided to it
by the Company and its independent accountants and actuaries regarding the
reserves of the Assurance Company.
In conducting its analysis and arriving at its opinion, Salomon considered
such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial position and results of operations of the Company; (ii) the
business prospects of the Company; (iii) the historical and current market for
the Common Stock and for the equity securities of certain other companies that
Salomon believes to be comparable to the Company; and (iv) the nature and terms
of certain other acquisition transactions that Salomon believes to be relevant.
Salomon also took into account its assessment of general economic, market and
financial conditions and its knowledge of the insurance industry as well as its
experience in connection with similar transactions and securities valuation
generally. Salomon also considered the process that resulted in negotiation of
the Merger, including Salomon's solicitation of offers to acquire the Company
and the responses received to such solicitations. Salomon's opinion was based
on conditions as they existed and could be evaluated on the date of the opinion.
In connection with a presentation to the Company's Board on February 17,
1997, as updated on February 28, 1997, Salomon advised the Company's Board that,
in evaluating the consideration to be received in the Merger by the holders of
Common Stock, Salomon had performed a variety of financial analyses with respect
to the Company, all as summarized below.
Analysis of Selected Publicly-Traded Comparable Companies. Salomon
compared the Company to four public California workers' compensation insurance
companies determined by Salomon to be engaged in businesses comparable to those
of the Company. In that regard, Salomon noted that although such companies were
considered similar to the Company, none of the companies has the same
management, size and business makeup as the Company. The publicly traded
workers' compensation insurance companies selected by Salomon for purposes of
this analysis were: Argonaut Group, Fremont General Corporation, Zenith
National Insurance Group and SNIC (the "Comparable Companies"). Using publicly
available information (including reported 1996 earnings per share and 1997
estimates obtained from the Institutional Brokers Estimate System as of January
16, 1997) and earnings per share estimates for 1997 obtained from each of the
managements of the Company and SNIC, Salomon analyzed, among other things, the
market values and certain financial data at February 24, 1997 for each of the
Comparable Companies, including (i) the 52-week trading range, (ii) the dividend
yield, (iii) the implied return on equity, (iv) the price to 1996 actual and
1997 estimated earnings per share multiples, (v) the projected change in
estimated earnings per share between 1996 and 1997 and (vi) the price to book
value multiple (based on period end primary shares outstanding). Salomon
derived high, low and median multiples from the foregoing analysis of the
Comparable Companies and applied them to comparable financial data relating to
the Company. This analysis resulted in reference ranges of per share values for
the shares of the Common Stock of (i) using actual 1996 earnings per share
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such range was not meaningful as a result of the Company's net loss, (ii) $1.01
to $1.21 using estimated 1997 earnings per share, (iii) $2.17 to $2.89 using
reported book value per share, and (iv) $2.03 to $2.48 using adjusted fully
diluted book value per share (determined assuming certain one-time expenses
connected with the Merger).
Discounted Cash Flow Analysis. Salomon performed a discounted cash flow
analysis pursuant to which the value of the Company was estimated by adding (i)
the estimated net present value of the Company's future dividends (of which none
were assumed) plus (ii) the estimated net present value of the terminal value of
the Company (utilizing price to earnings multiples and book value multiples),
based upon certain operating and financial assumptions, forecasts and other
information provided to Salomon by the management of the Company. Salomon based
its analysis upon actual and projected income statements for the Company for the
five-year period ended December 31, 1999, as prepared by the management of the
Company. For purposes of such analysis, Salomon utilized discount rates of 16%-
22% and terminal values based on price to earnings multiples of 8.0x-11.0x and
price to book value multiples of 0.8x-1.1x. The discounted cash flow analysis
was conducted using two different sets of projections prepared by the management
of the Company, based upon two scenarios. The "low growth scenario" showed 15%
compound annual growth in premium volume during 1997, 1998 and 1999. The "no
growth scenario" showed no growth in premium volume during 1997, 1998 and 1999.
These analyses resulted in an implied value reference range for the Common Stock
of: (i) $1.70 to $1.90 using price to earnings terminal value multiples and of
$1.75 to $1.95 using price to book value terminal value multiples under the "low
growth scenario" and (ii) $1.25 to $1.40 using price to earnings terminal value
multiples and $1.60 to $1.80 using price to book value terminal multiples under
the "no growth scenario."
Analysis of Selected Mergers/Acquisition Transactions. Salomon analyzed
six other merger and acquisition transactions announced since 1992 involving
workers' compensation insurance companies. The acquisition or merger
transactions analyzed were Citation Insurance Group/Physicians Insurance Company
of Ohio; CII Financial, Inc./Sierra Health Services, Inc.; C.E. Heath
plc/CareAmerica HealthPlans; Unicare Financial Corporation/WellPoint Health
Networks; Business Insurance Corporation, a subsidiary of California
Compensation Insurance Company/Foundation Health Corporation; and Great States
Financial Corporation/FHP International Corporation. Using publicly available
information, Salomon (i) calculated the relationship between the consideration
paid in these transactions and each of the acquired companies' (a) GAAP net
operating income, (b) GAAP book value, (c) statutory net operating income and
(d) statutory capital and surplus, and (ii) determined the percentage premium
that such consideration represented when compared to the share trading price of
each acquired public company one month prior to the announcement of such
transaction. Salomon noted that the data provided by such transactions was
unique to the relevant facts and circumstances of each transaction and was of
limited comparability to the Merger. Salomon arrived at appropriate valuation
multiples and applied or compared such multiples to the Company's (i) 1997
estimated earnings as provided by the Company's management, (ii) fully diluted
book value per share, (iii) adjusted fully diluted book value per share and (iv)
statutory capital. This analysis resulted in an implied value reference range
(based on the high and low values resulting from the application of each
methodology) for the Common Stock from $1.05 to $2.90.
Liquidation Analysis. Salomon performed a valuation analysis, using a
discounted cash flow methodology, based on a voluntary liquidation scenario
prepared by the management of the Company. The Company's management projections
assumed, among other things, that there would be no new or renewal business
after December 31, 1996 and the Debentures would be redeemed for cash in August
1999. For purposes of this voluntary liquidation analysis, Salomon applied
discount rates of 16%-22% to shareholders' equity at the end of the projection
period in 1999. This analysis resulted in an implied value reference range for
the shares of the Common Stock of $0.85 to $0.95.
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The foregoing summary does not purport to be a complete description of the
analyses performed by Salomon or of its presentations to the Company's Board.
The preparation of financial analyses and fairness opinions is a complex process
and is not necessarily susceptible to partial analysis or summary description.
Salomon believes that its analyses (and the summary set forth above) must be
considered as a whole, and that selecting portions of such analyses and factors
could create an incomplete view of the processes underlying the analyses
conducted by Salomon and its opinion. Salomon made no attempt to assign
specific weights to particular analyses. Any estimates contained in Salomon's
analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of
values of companies do not purport to be appraisals or necessarily to reflect
the prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, Salomon does not assume responsibility for
their accuracy.
Salomon is an internationally recognized investment banking firm engaged,
among other things, in the valuation of businesses and their securities in
connection with mergers and acquisitions, restructuring, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Salomon has previously rendered certain investment
banking and financial advisory services to the Company for which Salomon
received customary compensation. In addition, in the ordinary course of its
business, Salomon may trade the equity securities of the Company and Superior
from time to time for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Pursuant to the engagement letter with Salomon, the Company previously paid
Salomon $50,000 and has paid or will pay Salomon further cash fees as follows:
(a) $125,000 paid following the delivery of Salomon's fairness opinion in
connection with the Prior Agreement and (b) an additional fee of $630,315,
payable contingent upon the consummation of the Merger. Accordingly, the
payment of a substantial majority of Salomon's fees is subject to the
consummation of the Merger. The Company has also agreed to reimburse Salomon
for certain expenses incurred in connection with its engagement and to indemnify
Salomon and certain related persons against certain liabilities and expenses
relating to or arising out of its engagement, including certain liabilities
under the Federal securities laws. Because a substantial portion of Salomon's
fee is payable upon the consummation of the Merger, Salomon may be deemed to
have a financial interest in the consummation of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the recommendation of the Board with respect to the Amended
Agreement and the transactions contemplated thereby, the Stockholders should be
aware that certain members of the management of the Company and of the Board
have interests in the Merger that are different from, or in addition to, the
interests of the Stockholders generally.
Officers of the Company. Following the Merger, all the officers and
directors of the Company will cease to serve as such at the Effective Time.
Employee Stock Options. The Amended Agreement provides that, at the
Effective Time, each holder of a then outstanding Company Option will, in
settlement thereof, receive from the Company for each share of Common Stock
subject to such Company Option an amount in cash equal to the excess of the
Merger Price Per Share over the per share exercise price of such Company Option
(the "Cash Settlement").
Pursuant to the terms of the Company's 1987 Stock Option Plan (the "1987
Plan") and 1988 Stock Option Plan (the "1988 Plan") (the 1987 Plan and 1988
Plan, collectively, the "Company Stock Option Plans"), the approval of the
Amended Agreement by the Stockholders will result in
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all Company Options under the Company Stock Option Plans becoming exercisable in
full. At March 12, 1997, executive officers of the Company listed below held
outstanding Company Options to purchase 40,000 shares of Common Stock under the
1987 Plan at an exercise price of $1.00 per share, which, as a consequence of
the Amended Agreement, are the only remaining "in-the-money" Company Options.
The consideration attributable to those Company Options under the Amended
Agreement is, however, less than what was to be paid under the Prior Agreement
as a consequence of the reduction of the Merger Price Per Share to approximately
$2.11 ($2.105 unrounded).
In addition, at March 12, 1997, executive officers of the Company listed
below held outstanding Company Options to purchase 695,000 shares of Common
Stock under the 1988 Plan at exercise prices ranging from $2.50 to $7.50 per
share. Although certain of those Company Options were "in-the-money" under the
Prior Agreement, they are "out-of-the-money" under the Amended Agreement. All
but 250,000 of the Company Options outstanding under the Company Stock Option
Plans were fully exercisable prior to the execution of the Amended Agreement.
The following table sets forth information with respect to the number of vested
and unvested Company Options held by the persons named below:
PACIFIC RIM HOLDING CORPORATION
EXECUTIVE STOCK OPTIONS
As of March 12, 1997
<TABLE>
<CAPTION>
1987 PLAN 1988 PLAN
# OF OPTIONS # OF OPTIONS
------------- -------------
EXERCISABLE UNEXERCISABLE PRICE EXERCISABLE UNEXERCISABLE PRICE
<S> <C> <C> <C> <C> <C> <C>
STANLEY BRAUN --- --- $ --- 50,000 $ 2.500
--- --- $ --- 50,000 $ 7.500
--- --- $ --- 250,000 $ 2.750
250,000 $ 5.500
------------ ------------- ---------- -----------
Total --- --- 350,000 250,000
PAUL CRAIG --- --- $ ---
25,000 --- $ 4.000
25,000 --- $ 7.500
---------- ------------
Total 50,000 ---
SANDRA RICHARDS 10,000 --- $1.00 15,000 --- $ 2.500
10,000 --- $ 3.875
10,000 --- $ 4.000
---------- ------------
Total 35,000 ---
RONALD TONANI 30,000 --- $1.00 10,000 --- $ 2.500
------------ ------------- ---------- ------------
GRAND TOTAL 40,000 445,000 250,000
============ ============= ========== ============
TOTAL 1987 40,000
TOTAL 1988 695,000
------------
735,000
============
</TABLE>
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<PAGE>
Compensation Plan for Senior Management. The Company maintains a
Compensation Plan for Senior Management Team (the "SMT Plan"), which team
currently consists of the following officers of the Company: Ronald J. Tonani,
Sandra L. Richards, Paul W. Craig and Dina J. Braun-Puetz. If a change of
control of the Company occurs on or before June 30, 1997, ninety days after such
change in control, those persons then eligible under the SMT Plan will be
entitled to receive a single life annuity retirement benefit vested at age 60
equal to the following present cash values, or cash in the same amount, which,
in the aggregate, shall not exceed $350,000 (the "Aggregate SMT Benefit
Amount"): (a) Ronald J. Tonani - $163,500; (b) Sandra L. Richards - $110,000;
(c) Paul W. Craig - $61,500; and (d) Dina J. Braun-Puetz - $15,000.
The SMT Plan defines a "change of control" as the closing of a transaction
pursuant to the terms of which more than 51% of the Common Stock is acquired by
means of a merger, sale or reorganization of the Company. In addition, the
following conditions must be satisfied in connection therewith: (1) the
transaction must be approved by the required vote of the Board and the
Stockholders; (2) the SMT Plan and all amendments thereto must be approved by
the Stockholders; (3) subject to the SEC's approval, the Company must submit for
Stockholder approval the SMT Plan as a joint resolution with the proposed
transaction effecting a change of control; and (4) each person eligible for
benefits under the SMT Plan must continue to provide services to the Company
unless a cessation of services occurs as a result of such person's resignation
or the termination of such person's employment without cause. Accordingly, a
vote "For" approval and adoption of the Amended Agreement serves to ratify the
payment of amounts due under the SMT Plan.
Employee Severance. The Amended Agreement provides that Superior or the
Surviving Corporation will satisfy all obligations and pay all amounts due under
the Company's severance program (the "Severance Program") in effect as of the
date of the Amended Agreement with respect to any employees whose employment is
terminated as provided in the Amended Agreement within six (6) months following
the first business day after the satisfaction or waiver of all the conditions to
closing set forth in the Amended Agreement (the "Closing Date"). If an employee
of the Company or any of its subsidiaries is terminated within six (6) months
following the Closing Date, and such termination is other than for cause, then
the Company or the Surviving Corporation, as appropriate, will be obligated to
pay to such employee certain termination payments and make available benefits as
follows:
(a) Calculation of Termination Payments for Officers of the Company.
Officers of the Company terminated within the six (6) months following the
Closing Date will receive payment equal to (i) such employee's annual base
salary divided by twelve (12), multiplied by (ii) such employee's years of
service with the Company, rounded to the nearest full year, multiplied by
two. Six months of employment would round to the next highest year. Such
employees will also receive COBRA continuation benefits equal to two months
of benefits for each year of service rounded to the nearest whole year.
(b) Calculation of Termination Payments for Other Employees of the
Company. Other employees of the Company terminated within the six (6)
months following the Closing Date will receive payment equal to (i) such
employee's annual base salary divided by twelve (12), multiplied by (ii)
such employee's years of service with the Company rounded to the nearest
full year. Six months of employment would round to the next highest year.
Such employees will also receive COBRA continuation benefits equal to one
month of benefits for each year of service rounded to the nearest whole
year.
Employees who voluntarily leave the employ of the Company or the Surviving
Corporation within four (4) months following the Closing Date will also receive
a severance payment based on the above formulae. That four-month period is less
than the aforementioned six (6) month period that applies to terminated
employees. Amounts paid under the aforementioned severance
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<PAGE>
arrangement will be borne by the Surviving Corporation and do not constitute
funds that would otherwise be available to the Stockholders under the Amended
Agreement.
Employment Agreement - Stanley Braun. In March of 1995, an amendment (the
"First Amendment") to Stanley Braun's Employment Agreement (the "Employment
Agreement") with the Company was negotiated between Mr. Braun and the Board (in
which Mr. Braun did not participate as a member of the Board). The First
Amendment changed certain terms and provisions of the Employment Agreement,
including the consequences of an event representing a "change in control"
occurring as to the Company prior to June 30, 1996. Pursuant to an amendment to
Mr. Braun's Employment Agreement dated as of March 30, 1996 (the "Second
Amendment") (the Employment Agreement, the First Amendment and the Second
Amendment, collectively, the "Employment Documents"), the time within which a
"change of control" of the Company must occur was extended to June 30, 1997.
The Second Amendment defines a "change in control" as the closing of an
acquisition of more than 51% of the Common Stock through a merger, sale, or
reorganization by an entity, individual or group acting in concert which
satisfies the following conditions: (1) the transaction resulting in a change of
control must be approved by the required vote of the Board and the Stockholders;
(2) the Second Amendment must be approved by the Stockholders; (3) subject to
the SEC's approval, the Company must submit for Stockholder approval certain
elements of the Second Amendment which become effective upon approval as a joint
resolution with the proposed transaction effecting a change of control; and (4)
Mr. Braun must continue to provide services to the Company, unless a cessation
of services occurs as a result of Mr. Braun's termination without cause, as that
term is defined in the Second Amendment. Accordingly, a vote "For" approval and
adoption of the Amended Agreement serves to ratify the extension until June 30,
1997, the date within which a change in control of the Company must occur in
order for Mr. Braun to be eligible for the payment of certain benefits under the
Employment Documents, as amended.
In the event of a change of control the Employment Agreement will be
extended for a term of four years following the event of a "change in control"
and Mr. Braun will continue to receive an annual salary of $400,000 per year for
each of those four years. He need only, however, render services to the Company
for two years following such change in control. In addition, during that four-
year period Mr. Braun is bound by all the terms of the confidentiality provision
of the Employment Documents and may not compete with the Company.
In addition, in the event of a "change of control," Mr. Braun's rights to
all of his Company Options shall vest; however, any Company Options that are not
"in the money" as of the date of a "change of control" shall be valued at the
sum of $100 and may, at the Company's discretion, be purchased by the Company
for that amount.
The First Amendment also provides that in the event of a "change of
control," Mr. Braun will be paid a $475,000 bonus at the closing of the
transaction. The First Amendment also provides for the payment of a $525,000
bonus to Mr. Braun on the 10th day of January of the calendar year following the
closing of a "change of control," which amount will be offset by the outstanding
balance on the loan that Mr. Braun received from the Company. As of March 12,
1997, the outstanding balance on that loan was $450,000.
Employee Benefit Plans. The Amended Agreement provides that from and after
the Effective Time, subject to applicable law, and except as contemplated with
respect to the Company Stock Option Plans, Superior will honor in accordance
with their terms, all the Company's employee benefit plans; provided, however,
the Amended Agreement does not preclude any change effected on a prospective
basis following the Effective Time in any such plans in accordance with
applicable law. The Amended Agreement also provides that Superior will employ
at the Effective Time all employees of the Company who are employed on the
Closing Date, with
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<PAGE>
all material terms of their employment at the Company, under Superior's then-
current employment practices and policies. Such employment shall be at-will and
Superior shall be under no obligation to continue to employ any such
individuals. In addition, the Assurance Company will make a special matching
contribution to its 401(k) plan for the benefit of those employees who remain
with Assurance Company on the Closing Date (the "401(k) Supplemental Program").
The funds used for such matching contribution do not constitute funds that would
otherwise be available to the Stockholders.
Indemnification. The Amended Agreement provides that for a period of three
years from and after the Effective Time, Superior and the Surviving Corporation
will indemnify, defend and hold harmless to the fullest extent permitted under
applicable law and the Certificate of Incorporation or Bylaws of the Company and
any indemnification agreement among the Company, its subsidiaries and their
respective officers and directors (whether current or former) (collectively, the
"Indemnification Documents"), each person who is now, or has been at any time
prior to the date hereof, an officer or director of the Company (or any
subsidiary or division thereof), including, without limitation, each person
controlling any of the foregoing persons (individually, an "Indemnified Party"),
against all loss as to which they are indemnified under the Indemnification
Documents, whether commenced or asserted or claimed before or after the
Effective Time and including, without limitation, liabilities arising under the
Securities Act of 1933, the Exchange Act and state corporation laws in
connection with the Merger.
EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation (1)
Name and ------------------------------------------------------------- ----------------
Principal Other Annual Stock Option
Position Year Salary Bonus Compensation(2) Grants
--------- ----- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Stanley Braun 1996 $492,308 $ 86,657 $106,265 -0-
President and 1995 400,000 100,000 152,901 -0-
CEO 1994 400,000 -0- 164,905 500,000
Paul W. Craig 1996 $186,538 $ 10,000 $ 6,000 -0-
Executive Vice 1995 172,308 10,000 6,000 -0-
President and 1994 160,000 -0- 6,250 -0-
CFO
Sandra L 1996 $158,077 $ 10,000 $ 6,000 -0-
Richards 1995 129,231 10,000 6,000 -0-
Senior Vice 1994 120,000 -0- 6,250 -0-
President
David B 1996 $140,000 $ 2,500 $ 6,000 -0-
Chatfield (3) 1995 128,125 -0- 6,000 15,000
General Counsel 1994 31,250 -0- 1,500 -0-
Ronald J 1996 $130,000 $ 10,000 $ 6,000 -0-
Tonani 1995 111,539 10,000 6,000 -0-
Senior Vice 1994 100,000 -0- 6,250 -0-
President
</TABLE>
(1) Other long-term compensation data is not presented in the summary
compensation table because the Company has no such existing plans, although
the Executive Compensation Committee of the Company and its subsidiary
previously undertook studies, which concerned the implementation of
incentive bonus and long-term compensation plans. See "SPECIAL FACTORS --
Interests Of Certain Persons In The Transaction: Compensation Plan For
Senior Management; and Employee Severance."
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<PAGE>
(2) Except with respect to Mr. Braun, the amounts set forth in the summary
compensation table as other annual compensation represent automobile
allowances paid by the Company as compensation for business use of personal
vehicles. The amounts set forth in the summary compensation table as other
annual compensation for Mr. Braun in 1996 include payments to Mr. Braun of
140% of the interest payable by Mr. Braun to the Company on a loan made by
the Company to Mr. Braun, the amount of which was $29,169 or 27% of all
other annual compensation to Mr. Braun for 1996; an automobile and the
services of a driver, the amount of which was $34,809, or 33% of all other
annual compensation to Mr. Braun for 1996; premiums for disability insurance
for Mr. Braun, the amount of which was $11,701, or 11% of all other annual
compensation payable to Mr. Braun for 1996; and certain other executive
benefits, including an income tax preparation allowance, country club
memberships and executive health insurance benefits.
(3) Mr. Chatfield joined the Assurance Company on October 7, 1994.
Option Grants During 1996
No Company Options were granted to the Chief Executive Officer or to the
other executives of the Company during 1996.
Options Exercised in 1996 and Year-End Option Values
The following table sets forth information concerning Company Options that
were exercised during, or held at the end of, 1996 by the Company's chief
executive officer and the four most highly compensated other executives:
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
At Fiscal Year End at Fiscal Year End (1)
----------------------------- -----------------------------
Shares Acquired
Name On Value Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stanley Braun -0- $-0- 350,000 250,000 $ -0- $-0-
Paul W. Craig -0- -0- 50,000 -0- -0- -0-
Sandra L. Richards -0- -0- 45,000 -0- 13,800 -0-
Ronald J. Tonani -0- -0- 40,000 -0- 41,400 -0-
David B. Chatfield -0- -0- 3,750 11,250 -0- -0-
</TABLE>
(1) Valued at $2.38 per share.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash in exchange for Common Stock pursuant to the Merger
will be a taxable transaction for Federal income tax purposes and may also be a
taxable transaction under applicable state, local and foreign tax laws. A
Stockholder will generally recognize gain or loss for Federal income tax
purposes in an amount equal to the difference between such Stockholder's
adjusted tax basis in such Stockholder's Common Stock and the consideration
received by such Stockholder in the Merger. Such gain or loss will be calculated
separately for each block of Common
-41-
<PAGE>
Stock exchanged by a Stockholder. Such gain or loss will be a capital gain or
loss if a block of Common Stock is held as a capital asset and will be long-term
capital gain or loss if, at the Effective Time, such block of Common Stock has
been held for more than one year.
THE FOREGOING TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS
BASED UPON PRESENT LAW. EACH STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S
OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH
STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN SUCH TAX LAWS. DIFFERENT
RULES MAY APPLY TO COMMON STOCK RECEIVED PURSUANT TO THE EXERCISE OF EMPLOYEE
STOCK OPTIONS OR OTHERWISE AS COMPENSATION, OR WITH RESPECT TO STOCKHOLDERS WHO
ARE NOT CITIZENS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL
TAX TREATMENT.
REGULATORY APPROVALS
State Insurance Regulatory Approvals. State insurance holding company laws
and regulations applicable to the Company generally provide that no person may
acquire control of the Company unless such person has provided certain required
information to, and such acquisition has been approved (or not disapproved) by,
the appropriate insurance regulatory authorities. In accordance with the
insurance holding company laws of California, Superior, on behalf of itself and
certain of its subsidiaries, has filed an application on Form A for the approval
of the Merger with the California Department. As of the date of this Proxy
Statement, Superior has filed all required applications with the California
Department, but the Department has not completed its review of the filing.
Hart-Scott-Rodino Antitrust Improvements Act. The acquisition by Superior of
the voting securities of the Company pursuant to the Prior Agreement required
Superior and the Company to comply with the notification and waiting period
requirements of the HSR Act. In accordance with the requirements of the HSR
Act, the Company and Superior each made the required filings thereunder, and the
applicable waiting period under the HSR Act has expired. No further filings
under the HSR Act are required in connection with the Amended Agreement.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds necessary for payment of the consideration to be
received by the Stockholders in the Merger and Prac and Allstate under the
Purchase Agreement is $42,021,032. The total amount of funds required by
Superior to pay the fees of its legal counsel and advisors is approximately
$6,000,000. In addition, Superior will make a capital contribution to the
Assurance Company of approximately $10 million. These are the only expenses
related to the Merger that are expected to be paid by Superior. Superior
anticipates paying such amount from (1) the sale to certain purchasers in a
private transaction (the "Stock Purchase Agreement") of an aggregate of
2,390,438 shares of Superior's common stock at $7.53 per share, for an aggregate
purchase price of approximately $18 million; and (2) a $44 million Term Loan
Facility from a group of banks, including The Chase Manhattan Bank, N.A., as
agent.
The Amended Agreement provides that all costs and expenses incurred in
connection with the Amended Agreement and the Merger will be paid by the party
incurring the expense.
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<PAGE>
Estimated costs and fees to be incurred by the Company in connection with the
Merger, assuming completion of the Merger, are as follows:
<TABLE>
<S> <C>
Investment Banking Fees........................................... $ 855,000
Legal Fees........................................................ 400,000
SEC Filing Fees................................................... 10,804
Printing Costs.................................................... 30,000
Solicitation Costs................................................ 2,500
Miscellaneous..................................................... 125,000
----------
Total........................................................... $1,423,304
==========
</TABLE>
THE AMENDED AGREEMENT
The following is a summary of certain provisions of the Amended Agreement,
a copy of which is attached hereto as Appendix A and incorporated by reference
herein. All references to and summaries of the Amended Agreement in this Proxy
Statement are qualified in their entirety by reference to the Amended Agreement.
Stockholders are urged to read the Amended Agreement carefully and in its
entirety.
EFFECTIVE TIME
Subject to the provisions of the Amended Agreement on the Closing Date,
which will be the first business day after the satisfaction or waiver of all the
conditions to closing set forth in the Amended Agreement, unless another time or
date is agreed to in writing by the Company and Superior, a certificate of
merger (the "Certificate of Merger") will be filed with the Secretary of State
of the State of Delaware. The Effective Time will be upon the filing of the
Certificate of Merger or at such time thereafter as is provided in the
Certificate of Merger.
THE MERGER
The Amended Agreement provides that, subject to the approval and adoption
of the Amended Agreement by the Stockholders and Debenture Holders, approval by
certain regulatory authorities and compliance with certain other covenants and
conditions, Merger Sub will be merged with and into the Company, at which time
the separate corporate existence of Merger Sub will cease and the Company will
continue as the Surviving Corporation. Following consummation of the Merger,
the Company, as the Surviving Corporation of such Merger, will be a direct
subsidiary of Superior. As a result of the Merger, all the property, rights,
privileges, powers and franchises of the Company and Merger Sub will vest in the
Surviving Corporation, and all debts, liabilities and duties of the Company and
Merger Sub will become the debts, liabilities and duties of the Surviving
Corporation.
Conversion of Securities. At the Effective Time, (i) each share of Common
Stock that is owned by the Company will be automatically cancelled and retired
and will cease to exist, and no consideration will be delivered or deliverable
in exchange therefor, (ii) each issued and outstanding share of Common Stock
(other than shares to be cancelled in accordance with the immediately preceding
clause (i) and other than Dissenting Shares) will be converted into the right to
receive the Merger Price Per Share in cash, without interest thereon, upon
surrender of the certificates representing shares of Common Stock, and (iii)
each share of common stock of Merger Sub will be converted into and become one
share of common stock of the Surviving Corporation.
Debentures. At the Effective Time and in accordance with the terms of the
Purchase Agreement, the holders of the Debentures will be entitled to receive
the aggregate consideration of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000),
which amount constitutes the face amount thereof.
-43-
<PAGE>
Company Options. At the Effective Time, each holder of a then outstanding
"in-the-money" Company Option to purchase shares of Common Stock under the
Company Stock Option Plans, will, in settlement thereof, receive from the
Company for each share of Common Stock subject to such Company Option an amount
in cash equal to the excess of the Merger Price Per Share over the per share
exercise or strike price of such Company Option as of the Effective Time,
multiplied by the total number of shares of Common Stock issuable upon the
exercise of such Company Option. Upon such holder's receipt of such amount,
such Company Option will be cancelled. Such surrender of a Company Option to
the Company will be deemed a release of any and all rights the holder thereof
had or may have had in respect thereof. Each "out-of-the-money" Company Option
will be cancelled without consideration. At March 12, 1997, executive officers
of the Company held outstanding Company Options to purchase 40,000 shares of
Common Stock under the 1987 Plan at an exercise price of $1.00 per share, which,
as a consequence of the Amended Agreement, are the only remaining "in-the-money"
Company Options. The consideration attributable to those Company Options under
the Amended Agreement is, however, less than the amounts that would have been
payable under the Prior Agreement as a consequence of the reduction of the
Merger Price Per Share to approximately $2.11 ($2.105 unrounded).
Warrants. At the Effective Time, each holder of a then outstanding "in-
the-money" Warrant to purchase shares of Common Stock pursuant to the terms of
the Debenture/Warrant Agreement will, in settlement thereof, receive from the
Company for each share of Common Stock subject to such Warrant an amount in cash
equal to the excess of the Merger Price Per Share over the Series 1 Exercise
Price, multiplied by the total number of shares issuable upon the exercise of
such Warrant. Upon such holder's receipt of such amount, such Warrant will be
cancelled. Such surrender of a Warrant to the Company will be deemed a release
of any and all rights the holder thereof had or may have had in respect thereof.
Each "out-of-the-money" Warrant will be cancelled without consideration.
Directors and Officers; Governing Documents. At the Effective Time, the
directors and officers of Merger Sub will become the directors and officers of
the Surviving Corporation until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be. At the Effective Time, the Certificate of Incorporation and the Bylaws
of Merger Sub, as in effect immediately prior to the Effective Time, will be the
Certificate of Incorporation and the Bylaws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
Exchange Procedures. Superior has designated U.S. Stock Transfer
Corporation to act as the Exchange Agent for the payment of the consideration to
be received by Stockholders in the Merger upon surrender of certificates
representing shares of Common Stock. Promptly after the Effective Time, the
Exchange Agent will mail to each holder of record (other than holders of
Dissenting Shares) (i) a letter of transmittal and (ii) instructions for the
surrender of certificates representing ownership of shares of Common Stock
("Certificates") in exchange for the Merger Price Per Share in cash. Upon
surrender of a Certificate for cancellation to the Exchange Agent, together with
such letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
will be entitled to receive in exchange therefor, in cash, the product of (x)
the Merger Price Per Share and (y) the number of shares of Common Stock
represented by such Certificates so surrendered by such holder, and the
Certificate so surrendered will forthwith be cancelled. No interest will be
paid or accrued on the cash payable upon the surrender of any Certificate. If
payment is to be made to a person other than the person in whose name a
surrendered Certificate is registered, it will be a condition to such payment
that the Certificate so surrendered be properly endorsed or otherwise be in
proper form for transfer, and that the person requesting such payment pay any
transfer or other taxes which may be required by reason of such payment to a
person other than the registered holder of the surrendered Certificate, or
establishes to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. After the Effective Time, each Certificate
(other
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<PAGE>
than Dissenting Shares) will represent only the right to receive upon surrender
to the Exchange Agent the amount of cash, without interest, into which the
shares theretofore represented by such Certificate have been converted pursuant
to the Amended Agreement, determined as of the Effective Time. The right of any
Stockholder to receive the Merger Price Per Share in cash will be subject to and
reduced by the amount of any required tax withholding obligation.
Cancellation and Retirement of Common Stock. All cash paid upon the
surrender of Certificates in accordance with the Amended Agreement will be
deemed to have been paid in full satisfaction of all rights pertaining to the
shares of Common Stock theretofore represented by such Certificates. At the
Effective Time, the stock transfer books of the Company will be closed, and
there will be no further registration of transfers on the stock transfer books
of the Surviving Corporation of the shares that were outstanding immediately
prior to the Effective Time.
All interest earned on funds made available to the Exchange Agent pursuant
to the Amended Agreement will be turned over to Superior or the subsidiary
providing such funds, as applicable.
REPRESENTATIONS AND WARRANTIES
The Amended Agreement contains various representations and warranties by
the Company and Superior to the effect that, except as disclosed and subject to
certain exceptions, including exceptions that individually or in the aggregate
would not have a "Pac Rim Material Adverse Effect" (in the case of the Company)
or a "Parent Material Adverse Effect" (in the case of Superior), among other
things: (a) each such party is duly organized and in good standing, and has the
requisite corporate power to own its properties and carry on its business; (b)
each such party has all requisite corporate power and authority to enter into
the Amended Agreement and to consummate the Merger, subject in the Company's
case to the approval of its Stockholders and the Debenture Holders, and the
Amended Agreement has been duly authorized by and constitutes the valid and
binding obligation of each such party; (c) the execution, delivery and
performance of the Amended Agreement by each such party will not conflict with
such party's articles or certificate of incorporation or bylaws or violate any
agreement or law to which such party or its assets are bound; (d) each such
party has no obligations in respect of any fees or commissions to any broker,
finder, investment banker, or other intermediary, except with respect to
Salomon, financial advisor to the Company, and Donaldson, Lufkin, Jenrette
Securities Corporation ("DLJ"), financial advisor to Superior; and (e) that
information provided by each party to the other for inclusion in a proxy
statement will not contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
The Amended Agreement in addition contains various representations and
warranties by the Company to the effect that, except as disclosed and subject to
certain exceptions (including exceptions that individually or in the aggregate
would not have a "Pac Rim Material Adverse Effect"), among other things: (a)
the Company and its subsidiaries are qualified to do business in those
jurisdictions in which the character of their business requires them to be so
qualified; (b) each subsidiary has been duly organized and possesses the
requisite corporate power and authority to carry on its business as now
conducted; (c) the Company has in force each governmental license or permit
required for the operation of its business; (d) the Company is in compliance
with all laws applicable to its business and assets; (e) each subsidiary is in
good standing, and all issued and outstanding capital stock of each such
subsidiary is owned by its parent company; (f) the Company has a certain number
of authorized, issued and outstanding shares, and shares reserved for issuance,
and $20,000,000 principal amount of Debentures outstanding; (g) the provisions
of Section 203 of the DGCL do not apply to the Company's obligations under the
transactions contemplated by the Amended Agreement; (h) the Company has no
equity investment in any entity not a subsidiary; (i) the Company has filed
since December 31, 1993, all reports required to be
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<PAGE>
filed by it with the SEC under the Exchange Act, such reports were accurate,
and, except as disclosed in the financial statements filed with such reports,
the Company has incurred no liabilities, or since the date of the last financial
statement filed with such a report, incurred no liabilities outside the ordinary
course of business; (j) there is no litigation pending or, to the best of the
Company's knowledge, threatened against any party that would prevent or delay
the consummation of the Merger; (k) there have been no changes in its business
since December 31, 1996; (l) its tax returns are accurate and it has paid all
taxes due; (m) its employee benefit plans are as disclosed and there are no
undisclosed liabilities in connection therewith; (n) there are no collective
bargaining agreements with the Company's employees nor attempts to form a
collective bargaining unit pending; (o) Salomon has delivered an opinion to the
effect that the consideration to be received by the Stockholders is fair from a
financial point of view; (p) there are no material liens on the Company's
properties or assets; (q) the Company is in compliance with and unaware of any
defaults under its leases for real property; (r) the Company has no liability
under any environmental laws; (s) the Company owns or has the right to use all
intellectual property utilized in its business; (t) the Company is not a party
to any powers of attorney or guarantees of obligations of third parties; and (u)
the Company has disclosed to Superior all transactions between the Company and
its "affiliates" or "associates" (as such terms are used under the Exchange
Act).
The Amended Agreement in addition contains various representations and
warranties by Superior and Merger Sub to the effect that, except as disclosed
and subject to certain exceptions (including exceptions that individually or in
the aggregate would not have a "Parent Material Adverse Effect"), among other
things, (a) Merger Sub was formed for the purpose of consummating the Merger and
conducts no other business; (b) Superior has entered into the Stock Purchase
Agreement and will have available funds sufficient to consummate the Merger; (c)
Superior has received an opinion of DLJ that the financing arrangements are fair
to Superior's stockholders from a financial point of view; (d) the Surviving
Corporation will be solvent at the Effective Time; and (e) neither Superior nor
Merger Sub own, directly or indirectly, more than five percent (5%) of the
Common Stock.
The representations and warranties of each party to the Amended Agreement
are qualified to the extent of a "Pac Rim Material Adverse Effect," in the case
of the Company, or a "Parent Material Adverse Effect," in the case of Superior.
A "Pac Rim Material Adverse Effect" is defined in the Amended Agreement as an
adverse effect on the business, results of operations, prospects or financial
condition of the Company and its subsidiaries, taken as a whole, which results
or is reasonably expected to result in a decrease in the GAAP book value of the
Company at the Effective Date or Effective Time versus the GAAP book value of
the Company at December 31, 1996, of more than $2,500,000 or more; provided,
however, the following items shall not be included in determining if a Pac Rim
Material Adverse Effect exists: (1) adverse development in the Assurance
Company's reserves for loss and loss adjustment expenses incurred on or before
December 31, 1996, after taking into account $12 million in reserve
strengthening; provided, further, however, that to the extent the ultimate loss
and loss adjustment expenses used by the Company to book its reserves for loss
and loss adjustment expenses at December 31, 1996 exceed the ultimate loss and
loss adjustment expenses for accident years prior to 1997 used by the Company to
book its reserves for loss and loss adjustment expenses in its then most
recently available financial statements prior to the Effective Date or the
Effective Time, such benefit, if any, shall not be disregarded in calculating a
Pac Rim Material Adverse Effect; (2) changes resulting from market fluctuation
of the Assurance Company's investment portfolio; (3) any amounts that may be
payable under the SMT Plan, the Employment Documents, the Severance Program or
the 401(k) Supplemental Program that are not reflected in the Company's
financial statements or the Company's Preliminary Draft and Unadjusted Balance
Sheet as of December 31, 1996 and Statement of Operations for the year ended
December 31, 1996, both of which do not reflect the effect of any increase in
loss and loss adjustment expenses of the Assurance Company (collectively, the
"Preliminary Documents"); and (4) any reduction in deferred taxes as of December
31, 1996, as reflected in the balance sheet of the Preliminary Documents. A
"Parent
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<PAGE>
Material Adverse Effect" is defined in the Amended Agreement as an adverse
effect on the business, results of operations, prospects or financial condition
of Superior having an economic value of $1 million or more, excluding from the
$1 million calculation changes in the book value of Superior or its subsidiaries
based on an adjustment in the market value of securities carried on the books of
said entities.
CONDUCT OF THE BUSINESS PENDING THE MERGER
During the period from February 17, 1997, until the Effective Time, the
Company has agreed as to itself and its subsidiaries that, except as expressly
contemplated or permitted by the Amended Agreement or as consented to in writing
by Superior, the Company and its subsidiaries will carry on their respective
businesses in the usual regular and ordinary course in substantially the same
manner as conducted prior to February 17, 1997, and will use their best
commercial efforts to preserve intact their present business organizations and
good will, keep available the services of their present officers and employees
and preserve their relationships with those persons having business
relationships with them. The Company has also agreed that it: (i) will confer
on a regular basis with Superior to report operational matters of materiality
and any proposals to engage in material transactions; (ii) will not amend its
Certificate of Incorporation or Bylaws; (iii) will promptly notify Superior of
any material change or event with respect to the Company or any of its
subsidiaries; and (iv) will timely file all reports required by applicable
securities laws, rules or regulations to be filed with the SEC.
The Company also has agreed that it will not (i) except pursuant to the
exercise of options, warrants, conversion rights and other contractual rights
existing as of February 17, 1997, issue any shares of its capital stock, effect
any stock split or other change in capitalization; (ii) grant, confer or award
any option, warrant, conversion right or other right not existing as of February
17, 1997, to acquire any shares of its capital stock from the Company; (iii)
except for normal increases in compensation for employees not earning more than
$85,000 in annual base compensation and not to exceed 5% of such employee's
current base salary, increase any compensation or enter into or amend any
employment severance, termination or similar arrangement with any of its present
or future officers or directors; or (iv) adopt any new employee benefit plan or
amend any existing employee benefit plan.
In addition, the Company will not: (i) declare or pay any dividends or make
any other distribution with respect to its capital stock, other than paying on
the Closing Date all interest accrued but unpaid under the Debenture/Warrant
Agreement; (ii) except in connection with the use of shares of capital stock to
pay the exercise price or tax withholding with respect to stock-based employee
benefit plans of the Company, directly or indirectly redeem, purchase or
otherwise acquire any shares of its capital stock or that of any of its
subsidiaries; or (iii) split, combine or reclassify any of its capital stock.
The Company has also agreed that it will not: (i) enter into any
transaction outside the ordinary course of business consistent with past
practices or any material contract or transaction outside the ordinary course of
business consistent with past practice; (ii) change any of the accounting
principles or practices; (iii) acquire any corporation, partnership or other
business organization or division thereof or any equity interest therein; (iv)
enter into any contract or agreement other than in the ordinary course of
business consistent with past practice; (v) authorize any new capital
expenditure or expenditures which, individually, is in excess of $25,000 or, in
the aggregate, are in excess of $750,000, without the prior consent of Superior
(which consent shall not be unreasonably withheld); (vi) make any tax election
or settle or compromise any income tax liability material to the Company and its
subsidiaries taken as a whole; (vii) pay, discharge or satisfy any claims,
liabilities or obligations other than the payment, discharge or satisfaction of
liabilities reflected or reserved against in, and contemplated by, the
consolidated financial statements of the Company and its subsidiaries incurred
in the ordinary course of business
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<PAGE>
consistent with past practice; (viii) settle or compromise any pending or
threatened suit, action or claim relating to the Amended Agreement; or (ix) take
any action that would make any of the representations and warranties of the
Company contained in the Amended Agreement untrue and incorrect as of the date
when made.
NO SOLICITATION; FIDUCIARY OUT
The Company has agreed that neither it nor any of its subsidiaries nor any
of its or their officers, directors, employees, agents or representatives
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or any of its subsidiaries) will (except to the extent
necessary to comply with fiduciary duties to stockholders) initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including any proposal or offer to its stockholders)
with respect to an Acquisition Proposal or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
The Company has also agreed that as of February 17, 1997, it will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted prior to that date with respect to the
matters described in the preceding sentence and will inform any individuals or
entities with whom an Acquisition Proposal is being discussed on or after
February 17, 1997, of the obligations undertaken with respect to an Acquisition
Proposal pursuant to the Amended Agreement.
The Company also agreed that it will notify Superior immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any negotiations or discussions are sought to be initiated or continued
with the Company or any of its subsidiaries.
Notwithstanding the foregoing, prior to approval of the Amended Agreement
by the Stockholders, the Board will not be prohibited from (i) furnishing
information to or entering into discussions or negotiations with, any person or
entity that makes an unsolicited bona fide written Acquisition Proposal, if, and
only to the extent that (a) such Acquisition Proposal is on terms which the
Board determines, with the assistance of its financial advisors, represents a
financially superior transaction to the Company's Stockholders compared with the
Merger, (b) such Acquisition Proposal is not conditioned upon the acquiror
obtaining financing, (c) the Board determines in good faith, based as to legal
matters on the written opinion of outside legal counsel, that such action is
required for it to comply with its fiduciary duties to the Stockholders imposed
by law, (d) two business days prior to furnishing such information to or
entering into discussions or negotiations with such person or entity, the
Company provides written notice to Superior to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity and furnishes Superior with the terms of and a copy of such
Acquisition Proposal and (e) thereafter, the Company keeps Superior informed of
the status (and terms) of any such discussions or negotiations; and (ii) to the
extent applicable, complying with Rule 14e-2(a) promulgated under the Exchange
Act with regard to an Acquisition Proposal; provided, however, that except as
otherwise provided in the Amended Agreement, the Company may not terminate the
Amended Agreement or affect any other obligation of any party thereunder.
OTHER AGREEMENTS OF THE COMPANY, SUPERIOR AND MERGER SUB
In the Amended Agreement, the Company, Superior and Merger Sub have agreed
to use their best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by the Amended Agreement, including cooperating fully with the
other party, providing information and making all necessary filings under state
insurance laws. In case at any time after the Effective Time any further action
is necessary or desirable to
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<PAGE>
carry out the purposes of the Amended Agreement or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either the Company or Merger Sub, the proper
officers and directors of the Company, Superior and Merger Sub will take all
such necessary action.
EMPLOYEE BENEFIT PLANS
The Amended Agreement provides that from and after the Effective Time,
subject to applicable law, and except as contemplated with respect to the
Company Stock Option Plans, Superior will honor in accordance with their terms,
all the Company's employee benefit plans; provided, however, the Amended
Agreement does not preclude any change effected on a prospective basis following
the Effective Time in any such plans in accordance with applicable law. With
respect to the employee benefit or compensation plan or arrangement, including
each "employee benefit plan" as defined in Section 3(3) of ERISA maintained by
Superior (the "Superior Benefit Plans"), Superior and the Surviving Corporation
will grant all the Company's employees from and after the Effective Time credit
for all service with the Company and its affiliates and predecessors prior to
the Effective Time for all purposes for which such service was recognized by the
Company. To the extent the Superior Benefit Plans provide medical or dental
welfare benefits after the Effective Time to the Company's employees, Superior
or the Surviving Corporation, as the case may be, will use reasonable and best
efforts to ensure that such plan waives any preexisting conditions and actively-
at-work exclusions and will provide that any expenses incurred on or before the
Effective Time shall be taken into account under the Superior Benefit Plans for
purposes of satisfying applicable deductible, coinsurance and maximum out-of-
pocket provisions.
The Amended Agreement also provides that Superior will employ at the
Effective Time all employees of the Company who are employed on the Closing
Date, with all material terms of their employment at the Company, under
Superior's then-current employment practices and policies. Such employment will
be at-will and Superior will be under no obligation to continue to employ any
such individuals.
The Amended Agreement further provides that the Surviving Corporation will
perform its obligations under the SMT Plan, the 401(k) Supplemental Program, and
the Employment Documents.
INDEMNIFICATION AND INSURANCE
The Amended Agreement provides that for a period of three years from and
after the Effective Time, Superior and the Surviving Corporation will indemnify,
defend and hold harmless to the fullest extent permitted under applicable law
each Indemnified Party against all losses as to which they are indemnified under
the Indemnification Documents, whether commenced or asserted or claimed before
or after the Effective Time and including, without limitation, liabilities
arising under the Securities Act of 1933, the Exchange Act and state corporation
laws in connection with the Merger.
In addition, for a period of three (3) years after the Effective Time,
Superior shall cause to be maintained officers' and directors' liability
insurance covering the Indemnified Parties who are currently covered, in their
capacities as officers and directors, by the Company's existing officers' and
directors' liability insurance policies on terms substantially no less
advantageous to the Indemnified Parties than such existing insurance; provided,
however, for a period of three (3) years after the Effective Time, the policy
limits of such coverage shall not be less than the higher of $15 million or such
policy limits then provided by Superior for its officers and directors.
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<PAGE>
CONDITIONS TO THE MERGER
All Parties. Pursuant to the Amended Agreement, the respective obligations
of each party to effect the Merger are subject to the satisfaction or waiver of
the following conditions at or prior to the Closing Date: (i) approval and
adoption of the Amended Agreement by the holders of at least 70%, in the
aggregate, of both the issued and outstanding shares of Common Stock and
Debentures, voting together, with such Debentures having a number of votes equal
to the number of shares of Common Stock into which such Debentures may be
converted; (ii) the issuance of Superior's common stock in order to finance the
Merger shall have been approved by the required vote of Superior's shareholders;
(iii) all authorizations, consents, orders or approvals of, or filings with, or
expirations of waiting periods proposed by, any governmental entity having been
filed, occurred or been obtained; and (iv) neither of the parties shall be
subject to any order or injunction issued by any court of competent jurisdiction
preventing the consummation of the Merger.
Superior and Merger Sub. Pursuant to the Amended Agreement, the
obligations of Superior and Merger Sub to effect the Merger are subject to the
satisfaction or waiver of the following conditions at or prior to the Closing
Date: (i) the representations and warranties of the Company set forth in the
Amended Agreement are true and correct in all material respects as of the
Closing Date and the Company will have performed in all material respects all
obligations required to be performed by it under the Amended Agreement at or
prior to such Closing Date; (ii) Superior and Merger Sub will have received, on
and as of the Closing Date, an opinion of Barger & Wolen LLP, counsel to the
Company, in usual and customary form reasonably acceptable to Superior and
Merger Sub; (iii) the parties to the Purchase Agreement will have sold and
transferred to Superior all such parties' right, title and interest in and to
the Debentures and Warrants and the parties to the Surrender Agreement will have
surrendered and transferred to the Company all of their right, title and
interest in and to the Series 3 Warrants; and (iv) from February 17, 1997,
through the Effective Time, there will not have occurred any change in the
financial condition, business, operations or prospects of Pac Rim and its
subsidiaries, taken as a whole, which changes taken together would have or would
be reasonably likely to have a Pac Rim Material Adverse Effect.
The Company. Pursuant to the Amended Agreement, the obligation of the
Company to effect the Merger is subject to the satisfaction or waiver of the
following conditions at or prior to the Closing Date: (i) the representations
and warranties of Superior and Merger Sub set forth in the Amended Agreement are
true and correct in all material respects as of the Closing Date and Superior
will have performed all obligations required to be performed by it under the
Amended Agreement at or prior to the Closing Date; (ii) the Company will have
received the opinion of Salomon to the effect that as of the date of this Proxy
Statement, the consideration to be received in the Merger by the Stockholders is
fair to such Stockholders from a financial point of view; and (iii) the Company
will have received, on and as of the Closing Date, an opinion of Riordan &
McKinzie, counsel to Superior and Merger Sub, in usual and customary form
reasonably acceptable to the Company.
TERMINATION
All Parties. The Amended Agreement may be terminated at any time prior to
the Effective Time by (i) mutual written consent of the Company and Superior or
(ii) action of the Board of either the Company or Superior if (a) the Merger has
not been consummated on or before May 15, 1997; (b) the approval of the Company
and Superior's respective stockholders required pursuant to the Amended
Agreement shall not have been obtained at meetings duly convened therefore or at
any adjournments thereof; or (c) a United States or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Amended Agreement and such
order,
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<PAGE>
decree, ruling or other action shall have become final and nonappealable. If the
Merger is not consummated by April 15, 1997 and as of such date the Company has
satisfied its conditions to effect the Merger pursuant to the Amended Agreement
and is prepared to consummate the Merger, Superior will pay interest of $5000.00
per day, without offset or deduction for amounts Superior claims are owed to it
by the Company or any of its subsidiaries, for the benefit of the Stockholders
for each day commencing on April 16, 1997 and ending with the earlier to occur
of the Closing Date or the termination of the Amended Agreement.
The Company. Pursuant to the Amended Agreement, the Company may terminate
the Amended Agreement and the Merger may be abandoned at any time prior to the
Effective Time and before the approval by the Stockholders of the Company, by
action of the Board if (i) the Board determines, in exercising its good faith
judgment as to the fiduciary duties to its Stockholders imposed by law, such
termination is required by reason of an Acquisition Proposal; or (ii) there have
been breaches by Superior or Merger Sub of representations or warranties
contained in the Amended Agreement which, in the aggregate, would have or would
be reasonably likely to have a Parent Material Adverse Effect; or (iii) there
has been a material breach of any of the covenants or agreements in the Amended
Agreement on the part of Superior or Merger Sub, which breach is not curable or,
if curable, is not cured within 20 days after written notice of such breach is
given by the Company to Superior.
Superior. Pursuant to the Amended Agreement, Superior may terminate the
Amended Agreement and the Merger may be abandoned at any time prior to the
Effective Time by action of the Board of Directors of Superior if (i) there have
been breaches by the Company of the representations or warranties contained in
the Amended Agreement which, in the aggregate would have or would be reasonably
likely to have a Pac Rim Material Adverse Effect; (ii) there has been a material
breach of any of the covenants or agreements set forth in the Amended Agreement
on the part of the Company, which breach is not curable or, if curable, is not
cured within 20 days after written notice of such breach is given by Superior to
the Company; or (iii) the holders of more than 1,500,000 shares of the Common
Stock have demanded appraisal rights in accordance with the DGCL.
LIQUIDATED DAMAGES AND BREAKUP FEE
Payment of Liquidated Damages. The Amended Agreement provides that
liquidated damages are payable under the following circumstances: (i) the
Company or Superior fails to satisfy certain conditions set forth in the Amended
Agreement; or (ii) after satisfying such conditions and requirements of the
Amended Agreement either party refuses to consummate the transactions
contemplated under the Amended Agreement; or (iii) Superior fails to obtain
approval for the issuance of Superior's common stock under the Stock Purchase
Agreement by the holders of the issued and outstanding shares of capital stock
of Superior entitled to vote thereon in the manner required by applicable law or
by applicable regulations of any stock exchange or other regulatory body. In
the event of such a breach by Superior, Superior must pay to the Company $5
million and in the event of such breach by the Company, the Company must pay to
Superior the sum of $2.5 million.
Breakup Fee. If (i) the Board terminates the Amended Agreement by reason
of an Acquisition Proposal or (ii) following public announcement of an
Acquisition Proposal, the Board terminates the Amended Agreement due to the
failure to obtain the required vote in favor of the Amended Agreement from the
Stockholders and Debenture Holders at a meeting duly called therefor, and in
either event, the definitive transaction documents with respect to such
Acquisition Proposal are executed by the Company within six months following any
such termination, the Company shall pay Superior a breakup fee of $5 million.
Such breakup fee is not separately payable in the event that liquidated damages
are due and paid under the Amended Agreement.
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<PAGE>
EXPENSES
The Amended Agreement provides that whether or not the Merger is
consummated all costs and expenses incurred in connection with the Amended
Agreement and the transactions contemplated thereby will be paid by the party
incurring such costs and expenses.
AMENDMENT; WAIVER
The Amended Agreement provides that it may be amended by written instrument
signed on behalf of each of the Company, Superior and Merger Sub pursuant to
action taken or authorized by their respective boards of directors at any time
before or after Stockholder approval of the Amended Agreement, but after any
such approval, no amendment will be made which by law requires further approval
by the Stockholders without obtaining such further approval in accordance with
the Amended Agreement. The Amended Agreement further provides that, at any time
prior to the Effective Time, the parties to the Amended Agreement, by action
taken or authorized by their respective boards of directors, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties thereto, (ii) waive any
inaccuracies in the representations and warranties of any other party contained
in the Amended Agreement or in any document delivered pursuant to the Amended
Agreement or (iii) waive compliance with any of the conditions or agreements
contained in the Amended Agreement.
SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of March 12, 1997 (unless otherwise
indicated), information concerning beneficial ownership of the Common Stock by
any person known to the Company to be the beneficial owner of more than 5% of
such stock, by each director, by the Chief Executive Officer of the Company, by
each of the four other most highly compensated executive officers of the
Company, individually, and by directors and executive officers of the Company as
a group. Individuals have sole voting and investment power over such stock
unless otherwise indicated in the footnotes.
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<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned (1) Class (2)
- ---- --------------------------- ----------
<S> <C> <C> <C>
Stanley Braun 595,071 (3) 6.02%
Timothy R. Busch 258,750 (8) (13) 2.66
Dennis W. Harwood 116,750 (9) 1.21
Richard H. Pickup 11,714,005 (10) (11) (14) 62.40
Carl A. Strunk 211,500 (8) 2.17
Paul W. Craig 51,000 (4) *
Sandra L. Richards 45,400 (5) *
Ronald J. Tonani 50,000 (6) *
All officers and
directors as a group
(8 persons) 13,042,476 (7) (12) (10) 65.96
</TABLE>
(1) Number of shares of Common Stock beneficially owned includes shares
subject to Company Options held by the individual or group, as applicable, which
are exercisable within 60 days of March 12, 1997.
(2) Percent of class for each person and all executive officers and
directors as a group is based on shares of Common Stock outstanding on March 12,
1997, plus shares subject to Company Options held by the individual or the
group, as applicable, which are exercisable within 60 days of such date.
Ownership of less than one percent is indicated by an asterisk.
(3) Includes 350,000 shares of Common Stock covered by Company Options
that are currently exercisable. Does not include 250,000 shares of Common Stock
covered by Company Options that are not currently, and will not within the next
60 days be, exercisable.
(4) Includes Company Options to purchase 50,000 shares of Common Stock
granted under the 1988 Plan.
(5) Includes Company Options to purchase 35,000 shares of Common Stock
granted under the 1988 Plan and 10,000 shares of Common Stock granted under the
1987 Plan.
(6) Includes Company Options to purchase 10,000 shares of Common Stock
granted under the 1988 Plan and 30,000 shares of Common Stock granted under the
1987 Plan.
(7) Includes Company Options to purchase 360,000 shares of Common Stock.
(8) Includes Series 3 Warrants to purchase 205,500 shares of Common Stock
at $3.50 per share.
(9) Includes Series 3 Warrants to purchase 103,500 shares of Common Stock
at $3.50 per share.
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<PAGE>
(10) Includes 6,545,455 shares of Common Stock issuable upon conversion of
Debentures.
(11) Includes Series 1 Warrants to purchase 1,350,000 shares of Common
Stock at $2.50 per share and Series 2 Warrants to purchase 1,350,000 shares of
Common Stock at $3.00 per share, provided by the Debenture/Warrant Agreement.
(12) Includes Series 1, 2 and 3 Warrants to purchase 3,420,000 shares of
Common Stock.
(13) All shares attributable to Mr. Busch are held in the Lenawee Trust.
(14) 1,421,550 shares of Common Stock attributable to Mr. Pickup are owned
by Dito-Devcar Corporation, which is controlled 100% by Mr. Pickup; 896,000
shares of Common Stock attributable to Mr. Pickup are owned by Dito Caree L.P.
Holding which is controlled 100% by Mr. Pickup; 92,000 shares of Common Stock
attributable to Mr. Pickup are owned by The Pickup Family Trust; 29,000 shares
attributable to Mr. Pickup are owned by the TMP Charitable Unitrust; and 30,000
shares attributable to Mr. Pickup are owned by the DRP Charitable Unitrust.
MARKET PRICE AND DIVIDEND INFORMATION
The Common Stock is listed on NASDAQ under the symbol PRIM. The following
table sets forth, for the fiscal quarters indicated, the high and low sales
price per share of the Common Stock on NASDAQ and the quarterly cash dividends
paid by the Company on such shares.
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<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDEND
------ ----- --------
<S> <C> <C> <C>
1992
First Quarter.......................... $ 8 3/4 4 3/4 None
Second Quarter......................... $ 5 1/4 3 5/8 None
Third Quarter.......................... $ 3 7/8 3 None
Fourth Quarter......................... $ 3 1/2 3 None
1993
First Quarter.......................... $ 5 3/4 3 1/2 None
Second Quarter......................... $ 5 1/4 3 1/2 None
Third Quarter.......................... $ 4 1/2 3 1/4 None
Fourth Quarter......................... $ 4 2 1/2 None
1994
First Quarter.......................... $ 2 3/4 1 7/8 None
Second Quarter......................... $ 3 2 None
Third Quarter.......................... $ 3 2 1/8 None
Fourth Quarter......................... $ 3 1/8 2 1/4 None
1995
First Quarter.......................... $ 3 1/4 2 1/4 None
Second Quarter......................... $ 2 7/8 2 3/8 None
Third Quarter.......................... $ 3 3/8 2 5/8 None
Fourth Quarter......................... $ 3 5/16 2 1/8 None
1996
First Quarter.......................... $ 2 5/8 2 3/16 None
Second Quarter......................... $ 2 7/16 2 None
Third Quarter.......................... $ 3 1 3/4 None
Fourth Quarter......................... $2 31/32 2 5/16 None
1997
First Quarter through March 12, 1997... $ 2 9/16 1 3/4 None
</TABLE>
On February 14, 1997, the last trading day before the public announcement
of the execution of the Amended Agreement, the reported closing sale price per
share of the Common Stock on NASDAQ was $2.25. On March 12, 1997, the last full
trading day prior to the date of this Proxy Statement, the reported closing sale
price per share of the Common Stock on NASDAQ was $2.03. Stockholders are
urged to obtain a current price quotation for the Common Stock.
The Company's ability to pay dividends depends in part upon the ability of
the Company's insurance company subsidiaries to pay dividends to the Company.
Dividend payments by an insurance company are subject to statutory limitations
and in certain cases to the approval of insurance regulatory authorities.
Generally, annual dividends in excess of maximum amounts prescribed by the state
statutes may not be paid without the approval of the insurance commissioner of
the insurance company's state of domicile.
CERTAIN TRANSACTIONS IN THE COMMON STOCK
The Company has not effected any repurchases of Common Stock during the 60
days preceding the initial filing of this Proxy Statement with the SEC.
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SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is certain historical consolidated financial information of
the Company. The selected financial information for, and as of the end of, each
of the years in the five year period ended December 31, 1996 is derived from,
and should be read in conjunction with, the historical consolidated financial
statements of the Company and its subsidiaries, which consolidated financial
statements have been audited by Arthur Andersen L.L.P., independent auditors,
for the years ended December 31, 1994, 1995 and 1996; and by Ernst & Young
L.L.P., independent auditors for the years ended December 31, 1992 and 1993.
More comprehensive financial information is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and the financial
information that follows is qualified by reference to such reports and the
financial statements and related notes incorporated by reference herein.
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SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
In Thousands, Except Per Share Data
Revenues: Restated Restated
Net premiums earned $ 86,488 $ 76,016 $ 92,894 $ 99,917 $117,829
Net investment income 7,013 8,089 6,514 5,989 6,416
Realized investment gains (losses) 1,640 453 3,905 (14)
A&H commission income 8
-------- -------- -------- -------- --------
Total revenue 95,149 84,558 99,408 109,811 124,231
Costs and Expenses:
Losses and loss adjustment expenses 79,890 50,957 63,788 87,689 100,595
Amortization of policy acquisition costs - net 14,853 18,647 19,565 11,646 12,864
Administrative, general, and other 13,370 11,662 11,927 13,257 12,647
Policyholder dividends (11) 132 1,301 1,258 1,722
Interest expense 2,341 2,306 857
-------- -------- -------- -------- --------
Total costs and expenses 110,443 83,704 97,438 113,850 127,828
Income (loss) before income taxes and cumulative
effect of a change in accounting principle (15,294) 854 1,970 (4,039) (3,597)
Income tax expense (benefit) 606 279 812 (2,658) (3,027)
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of a change
in accounting principle (15,900) 575 1,158 (1,381) (570)
Cumulative effect of a change in
accounting for income taxes 278
-------- -------- -------- -------- --------
Net income (loss) $(15,900) $ 575 $ 1,158 $ (1,381) $ (292)
======== ======== ======== ======== ========
Per Share Data:
Income (loss) before cumulative effect of a change
in accounting principle $ (1.67) $ 0.06 $ 0.12 $ (0.14) $ (0.06)
Cumulative effect of a change in
accounting for income taxes 0.03
-------- -------- -------- -------- --------
Net income (loss) $ (1.67) $ 0.06 $ 0.12 $ (0.14) $ (0.03)
======== ======== ======== ======== ========
Weighted average number of shares outstanding 9,528 9,528 9,528 9,528 9,624
GAAP Combined Ratio Data:
Loss ratio 92.4% 67.0% 68.7% 87.8% 85.4%
Underwriting expense ratio 32.6 39.9 33.9 24.9 21.6
Policyholder dividend ratio 0.2 1.4 1.2 1.5
-------- -------- -------- -------- --------
Combined ratio 125.0% 107.1% 104.0% 113.9% 108.5%
======== ======== ======== ======== ========
Balance Sheet Data-at end of year:
Cash and total investments $113,284 $129,804 $143,075 $117,173 $121,441
Premiums receivable 15,739 11,616 11,855 15,197 20,037
Earned but unbilled premiums 7,904 4,880 5,046 6,974 7,923
Total assets 161,605 169,051 186,570 189,241 198,501
Reserve for losses and loss adjustment expenses 100,588 96,525 116,629 135,965 135,460
Unearned premiums 6,917 5,715 9,917 8,262 7,233
Reserve for policyholder dividends 364 381 990 2,529 3,069
Total liabilities 135,296 124,896 149,393 150,241 158,120
Total stockholders' equity 26,309 44,155 37,177 39,000 40,381
Book value per share 2.56* 3.51* 3.14* 4.09 4.20
</TABLE>
*Fully diluted calculation reflecting impact of convertible debentures and
warrants.
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CERTAIN EFFECTS OF THE MERGER; OPERATIONS OF
THE COMPANY AFTER THE MERGER
If the proposed Merger is consummated, the Stockholders will no longer have
an equity interest in the Company and, therefore, will not share in its future
earnings and growth. Instead, each Stockholder will have the right to receive
the Merger Price Per Share in cash.
As a result of the Merger, the Company will become a direct wholly-owned
subsidiary of Superior. The Common Stock will be delisted from NASDAQ, the
registration of Common Stock under the Exchange Act will terminate and the
Company will be relieved of the obligation to comply with the proxy rules of
Regulation 14A under Section 14 of the Exchange Act, and its officers, directors
and beneficial owners of more than 10% of the Common Stock will be relieved of
the reporting requirements and restrictions on insider trading under Section 16
of the Exchange Act. Accordingly, less information will be required to be made
publicly available than presently is the case. Certain information about the
Company will continue to be available through the public reports of Superior.
Immediately after the Merger, all of the then outstanding Common Stock will
be beneficially owned by Superior and Superior will have a 100% interest in the
assets and liabilities of the Company. The officers and directors of Merger Sub
immediately prior to the Effective Time (who will be designees of Superior) will
be the directors of the Company from and after the Effective Time (until their
successors are duly elected or appointed and qualified).
Except as otherwise described in this Proxy Statement, Superior expects
that the Company will be operated after the Merger in a manner substantially the
same as its current operations.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen L.L.P. serves as the Company's independent certified public
accountants. A representative of Arthur Andersen L.L.P. will be at the Special
Meeting to answer questions by Stockholders and will have the opportunity to
make a statement, if so desired.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the Company's 1997 annual
meeting (which will only be held if the Merger has not been consummated prior
thereto), pursuant to Rule 14a-8(a)(3)(i) promulgated by the SEC, must be
received by the Company at its principal office, 6200 Canoga Avenue, Woodland
Hills, California 91367-2402, attention Myrtle L. Solomon, Corporate Secretary,
on or before March 28, 1997.
By Order of the Board of Directors,
/s/ Stanley Braun
STANLEY BRAUN
President and Chief Executive Officer
Woodland Hills, California
March 13, 1997
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APPENDIX A - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement")
is entered into as of February 17, 1997 (the "Effective Date"), by and among
SUPERIOR NATIONAL INSURANCE GROUP, INC., a California corporation ("Parent"),
SNTL ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of
Parent ("Merger Sub"), and PAC RIM HOLDING CORPORATION, a Delaware corporation
("Pac Rim"), with reference to the following recitals:
R E C I T A L S
A. The Boards of Directors of Parent and Pac Rim each have determined that
a business combination between Parent and Pac Rim is in the best interests of
their respective companies and stockholders and presents an opportunity for
their respective companies to achieve long-term strategic and financial benefits
and, accordingly, have agreed to effect the merger provided for herein upon the
terms and subject to the conditions set forth herein.
B. Parent, Merger Sub and Pac Rim entered into that certain Agreement and
Plan of Merger dated as of September 17, 1996 (the "Prior Agreement"). Parent,
Merger Sub and Pac Rim desire to amend and restate the Prior Agreement in
accordance with the terms hereof.
C. Parent, Merger Sub and Pac Rim desire to make certain representations,
warranties, covenants and agreements in connection with the merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with
and into Pac Rim in accordance with this Agreement and the separate corporate
existence of Merger Sub shall thereupon cease (the "Merger"). Pac Rim shall be
the surviving corporation in the Merger (sometimes hereinafter referred to as
the "Surviving Corporation"). The Merger shall have the effects specified in
Section 259 of the Delaware General Corporation Law (the "DGCL").
1.2 THE CLOSING. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at the offices of
Riordan & McKinzie, 300 South Grand Avenue, 29th Floor, Los Angeles, California
90071 at 9:00 a.m., local time, on the first business day immediately following
the day on which the last to be fulfilled or waived of the conditions set forth
in Article 8 shall be fulfilled or waived in accordance herewith, or at such
other time, date or place as Parent and Pac Rim may agree. The date on which
the Closing occurs is hereinafter referred to as the "Closing Date."
1.3 EFFECTIVE TIME. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, the parties
hereto shall cause a Certificate of Merger meeting the requirements of Section
251 of the DGCL to be properly executed and filed in accordance with such
Section on the Closing Date. The Merger shall become effective at the time of
filing of the
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Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the DGCL or at such later time which the parties hereto shall
have agreed upon and designated in such filing as the effective time of the
Merger (the "Effective Time").
ARTICLE 2
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Merger Sub (a copy of which is attached hereto as Exhibit A) in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance with
applicable law.
2.2 BYLAWS. The Bylaws of Merger Sub (a copy of which is attached hereto
as Exhibit B) in effect immediately prior to the Effective Time shall be the
Bylaws of the Surviving Corporation, until duly amended in accordance with
applicable law.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 DIRECTORS. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time to serve until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
3.2 OFFICERS. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time to serve until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
ARTICLE 4
CONVERSION OF PAC RIM COMMON STOCK AND
OPTIONS; DEBENTURES AND WARRANTS
4.1 CONVERSION OF PAC RIM COMMON STOCK. (a) At the Effective Time, each
share of the common stock, $0.01 par value, of Merger Sub outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock, $0.01 par value, of the Surviving Corporation.
(b) At the Effective Time, each share of the common stock, $0.01 par
value, of Pac Rim (the "Pac Rim Common Stock") issued and outstanding
immediately prior to the Effective Time, other than the Dissenting Shares (as
defined below), shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive cash in the
amount of the "Merger Price Per Share" (as defined in Section 4.5(c) hereof),
without interest except for that certain interest payable under Section 9.2
hereof, which interest shall be distributed pro rata on a per share basis.
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(c) As a result of the Merger and without any action on the part of the
holders thereof, all shares of Pac Rim Common Stock shall cease to be
outstanding and shall be cancelled and retired and shall cease to exist, and
each holder of a certificate (a "Certificate") representing any shares of Pac
Rim Common Stock shall thereafter cease to have any rights with respect to such
shares of Pac Rim Common Stock, except the right to receive the Merger Price Per
Share upon the surrender of such Certificate.
(d) Each share of Pac Rim Common Stock issued and held in Pac Rim's
treasury at the Effective Time shall, by virtue of the Merger, cease to be
outstanding and shall be cancelled and retired without payment of any
consideration therefor.
4.2 CONVERTIBLE DEBENTURES. At the Effective Time and in accordance with
the terms of that certain Series A Convertible Debentures and Series 1, 2 and 3
Detachable Warrant Purchase Agreement dated as of September 17, 1996 and that
certain First Amendment to Series 1, 2 and 3 Detachable Warrant Purchase
Agreement of even date herewith, copies of which are attached hereto as Exhibit
C (collectively, the "Purchase Agreement"), the holders of the Convertible
Debentures (as defined in Section 5.3 hereof) shall be entitled to receive the
aggregate consideration of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00)
(the "Debenture Consideration").
4.3 OPTIONS. At the Effective Time, each holder of a then outstanding "In
The Money Option" (as defined in Section 4.5(a) hereof) to purchase shares of
Pac Rim Common Stock under the Pac Rim Holding Corporation 1987 Stock Option
Plan (the "1987 Plan") and the Pac Rim Holding Corporation 1988 Stock Option
Plan (the "1988 Plan") (the 1987 Plan and 1988 Plan, collectively, the "Pac Rim
Stock Option Plans") shall, in settlement thereof, receive from Pac Rim for each
share of Pac Rim Common Stock subject to such option an amount (subject to
applicable withholding tax) in cash equal to the excess of the Merger Price Per
Share over the per share exercise or strike price of such option as of the
Effective Time, multiplied by the total number of shares of Pac Rim Common Stock
issuable upon the exercise of such option (such amount being hereinafter
referred to as the "Option Consideration"). At the Effective Time, each In The
Money Option shall be cancelled and converted into the right to receive the
Option Consideration. The surrender of an In The Money Option shall be deemed a
release of any and all rights the holder had or may have had in respect of such
option. Each "Out Of The Money Option" (as defined in Section 4.5(e) hereof)
shall be cancelled without consideration.
4.4 WARRANTS. At the Effective Time, each holder of a then outstanding
"In The Money Warrant" (as defined in Section 4.5(b) hereof) to purchase shares
of Pac Rim Common Stock pursuant to the terms of the Debenture/Warrant Agreement
(as defined in Section 5.3 hereof) shall, in settlement thereof and pursuant to
the terms of the Purchase Agreement, receive from Pac Rim for each share of Pac
Rim Common Stock subject to such warrant an amount in cash equal to the excess
of the Merger Price Per Share over the per share exercise or strike price of
such warrant as of the Effective Time (after adjustment of the exercise or
strike price, if applicable, under the Debenture/Warrant Agreement, which
adjustments have been finalized), multiplied by the total number of shares
issuable upon the exercise of such warrant (such amount being hereinafter
referred to as the "Warrant Consideration"). At the Effective Time, each In The
Money Warrant shall be cancelled and converted into the right to receive the
Warrant Consideration. The surrender of a warrant shall be deemed a release of
any and all rights the holder had or may have had in respect of such warrant.
Each Out Of The Money Warrant (as defined in Section 4.5(f) hereof) shall be
cancelled without consideration.
4.5 DEFINITIONS. The following terms shall, when used in this Agreement,
have the following meanings:
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(a) "In The Money Option" means an option issued under the Pac Rim Stock
Option Plans whose exercise price per share as of the Effective Time is less
than the Merger Price Per Share.
(b) "In The Money Warrant" means a warrant issued pursuant to the
Debenture/Warrant Agreement (as defined in Section 5.3 hereof) whose exercise
price per share as of the Effective Time is less than the Merger Price Per
Share.
(c) "Merger Price Per Share" is $22,021,032 (the "Purchase Price") plus
the aggregate exercise price for the In The Money Options and In The Money
Warrants divided by the "Deemed Number of Shares" (as defined in Section 4.5(d)
hereof). The Merger Price Per Share" shall be rounded to the nearest $0.0025.
In no event will the Merger Price Per Share cause the amounts calculated
pursuant to Sections 4.1, 4.2, 4.3 and 4.4 hereof to exceed $42,021,032 in the
aggregate, subject to the effect of rounding discussed in the preceding
sentence.
(d) "Deemed Number of Shares" is the actual number of outstanding shares
of Pac Rim Common Stock as of the Effective Time plus the total number of
shares of Pac Rim Common Stock that would be issued upon exercising all of the
In The Money Options and In The Money Warrants outstanding as of the Effective
Time.
(e) "Out Of The Money Options" means all options issued under the Pac Rim
Stock Option Plans that are not In The Money Options.
(f) "Out Of The Money Warrants" means all warrants issued under the
Debenture/Purchase Agreement that are not In The Money Warrants.
4.6 EXCHANGE OF CERTIFICATES REPRESENTING PAC RIM COMMON STOCK.
(a) On the Closing Date, Parent shall deposit, or shall cause to be
deposited, with a bank or trust company selected by Parent, which shall be
Parent's paying and transfer agent (the "Exchange Agent"), for the benefit of
the holders of shares of Pac Rim Common Stock and to settle the In The Money
Options, for payment in accordance with this Article 4, $22,021,032 less the
Warrant Consideration, and any amounts attributable to the Dissenting Shares (as
hereinafter defined), such amount being hereinafter referred to as the "Exchange
Fund", to be paid pursuant to this Section 4.6 in exchange for outstanding
shares of Pac Rim Common Stock and pursuant to Section 4.3 upon settlement of
the In The Money Options.
(b) Promptly after the Effective Time, Parent shall cause the Exchange
Agent to mail to each holder of record of a Certificate or Certificates (i) a
letter of transmittal which shall specify that delivery of such Certificates
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for payment of the Merger Price Per Share hereunder. Upon surrender of
a Certificate for cancellation to the Exchange Agent together with such letter
of transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of such Certificate shall be entitled to receive in exchange
therefor, in cash, the product of (x) the Merger Price Per Share and (y) the
number of shares of Pac Rim Common Stock represented by such Certificates so
surrendered by such holder, and the Certificate so surrendered shall forthwith
be cancelled. In the event of a transfer of ownership of Pac Rim Common Stock
which is not registered in the transfer records of Pac Rim, the Exchange Agent
may condition payment hereunder upon the surrender of the Certificate
representing such Pac Rim Common Stock to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.
A-4
<PAGE>
(c) At or after the Effective Time, there shall be no transfers on the
stock transfer books of Pac Rim of the shares of Pac Rim Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged for payment in accordance with the procedures set forth
in this Article 4.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the former stockholders of Pac
Rim nine (9) months after the Effective Time shall be delivered to the Surviving
Corporation. Any former stockholders of Pac Rim who have not theretofore
complied with this Article 4 shall thereafter look only to the Surviving
Corporation as general creditors thereof for payment of the Purchase Price in
respect of each share of Pac Rim Common Stock that such stockholder holds as
determined pursuant to this Agreement, in each case, without any interest
thereon.
(e) None of Parent, Pac Rim, the Exchange Agent or any other person shall
be liable to any former holder of shares of Pac Rim Common Stock for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will pay in exchange for such lost, stolen or destroyed Certificate the Merger
Price Per Share as provided in Section 4.6(a), deliverable in respect thereof
pursuant to this Agreement.
4.7 DISSENTING SHARES.
(a) Notwithstanding anything in this Agreement to the contrary, shares of
Pac Rim Common Stock which are held by any recordholder who has not voted in
favor of the Merger or consented thereto in writing and who has demanded
appraisal rights in accordance with Section 262 of the DGCL ("the Dissenting
Shares") shall not be converted into the right to receive the Merger Price Per
Share hereunder but shall become the right to receive such consideration as may
be determined due in respect of such Dissenting Shares pursuant to the DGCL;
provided, however, that any holder of Dissenting Shares who shall have failed to
perfect, or shall have withdrawn or lost, his rights to appraisal of such
Dissenting Shares, in each case under the DGCL, shall forfeit the right to
appraisal of such Dissenting Shares, and such Dissenting Shares shall be deemed
to have been converted into the right to receive, as of the Effective Time, the
Merger Price Per Share in accordance with this Article 4, without interest.
Notwithstanding anything contained in this Section 4.7, if (i) the Merger is
rescinded or abandoned or (ii) the stockholders of Pac Rim revoke the authority
to effect the Merger, then the right of any stockholder to be paid the fair
value of such stockholder's Dissenting Shares shall cease. The Surviving
Corporation shall be the only obligor with respect to and shall comply with all
of its obligations under the DGCL with respect to holders of Dissenting Shares.
(b) Pac Rim shall give Parent (i) prompt notice of any demands for
appraisal, and any withdrawals of such demands, received by Pac Rim and any
other related instruments served pursuant to the DGCL and received by Pac Rim,
and (ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under the DGCL. Pac Rim shall not, except with the
prior written consent of Parent, make any payment with respect to any demands
for appraisal or offer to settle any such demands.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PAC RIM
Except as set forth in the disclosure letter delivered by or on behalf of
Pac Rim to Parent at or prior to the execution hereof in form and substance
satisfactory to Parent (the "Pac Rim Disclosure Letter") and except to the
extent qualified by Section 11.16(b) hereof, Pac Rim represents and warrants to
Parent as of the date of this Agreement as follows:
5.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH LAW.
Pac Rim is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware. Pac Rim is duly licensed or
qualified to do business as a foreign corporation and is in good standing under
the laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary. Pac Rim has all requisite
corporate power and authority to own, operate and lease its properties and carry
on its business as now conducted. Each of Pac Rim's "Subsidiaries" (as defined
in Section 11.15 hereof) is a corporation duly organized, validly existing and
in good standing under the laws of its respective jurisdiction of incorporation
or organization, has the corporate power and authority to own its properties and
to carry on its business as it is now being conducted, and is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the ownership of its property or the conduct of its business requires such
qualification. The Pac Rim Disclosure Letter sets forth the states in which Pac
Rim and its Subsidiaries are incorporated and licensed or qualified to do
business. Neither Pac Rim nor any of its Subsidiaries is in violation of any
order of any court, governmental authority or arbitration board or tribunal.
Neither Pac Rim nor any of its Subsidiaries is in violation of any law,
ordinance, governmental rule or regulation to which Pac Rim or any Pac Rim
Subsidiary or any of their respective properties or assets is subject. Pac Rim
and its Subsidiaries have obtained all licenses, permits and other
authorizations and have taken all actions required by applicable law or
governmental regulations in connection with their business as now conducted.
The copies of Pac Rim's Certificate of Incorporation and Bylaws previously
delivered to Parent are true and correct.
5.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS.
(a) Pac Rim has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby.
Subject only to the approval of this Agreement and the transactions contemplated
hereby by the affirmative vote of at least seventy percent (70%) in the
aggregate of (i) the issued and outstanding shares of Pac Rim Common Stock and
(ii) the number of shares of Pac Rim Common Stock into which the outstanding
Convertible Debentures (as hereinafter defined) may be converted, voting
together, the consummation by Pac Rim of the transactions contemplated hereby
has been duly authorized by all requisite corporate action. This Agreement
constitutes, and all agreements and documents contemplated hereby (when executed
and delivered pursuant hereto) will constitute, the valid and legally binding
obligations of Pac Rim, enforceable in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
(b) The provisions of Section 203 of the DGCL do not apply to Pac Rim's
obligations under the transactions contemplated by this Agreement.
5.3 CAPITALIZATION. The authorized capital stock of Pac Rim consists of
35,000,000 shares of Pac Rim Common Stock, and 500,000 shares of preferred stock
(the "Pac Rim Preferred Stock"). As of December 31, 1996, there were 9,528,200
shares of Pac Rim Common Stock issued and outstanding and no shares of Pac Rim
Preferred Stock issued and outstanding. Since such date, no additional shares
of capital stock of Pac Rim have been issued, except pursuant to the
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<PAGE>
Pac Rim Stock Option Plans. All options outstanding under the Pac Rim Stock
Option Plans and the exercise price and vesting status thereof (assuming a
Closing occurs) are set forth in Exhibit D. In addition, pursuant to the terms
of that certain Agreement to Purchase Series A Convertible Debentures and Series
1, 2 and 3 Detachable Warrants dated as of April 15, 1994, as amended (the
"Debenture/Warrant Agreement"), Pac Rim has issued and outstanding (i) TWENTY
MILLION AND NO/100 DOLLARS ($20,000,000.00) aggregate amount of its eight
percent (8%) Series A Convertible Debentures (the "Convertible Debentures");
(ii) 1,500,000 detachable warrants each exercisable at the price of $2.50 for
one share of Pac Rim Common Stock (the "Series 1 Warrants"), which, following
all adjustments required under the Debenture/Warrant Agreement, will be
exercisable at the Effective Time for $0.83 per share of Pac Rim Common Stock;
(iii) 1,500,000 detachable warrants each exercisable at the price of $3.00 for
one share of Pac Rim Common Stock (the "Series 2 Warrants"); and (iv) 800,000
detachable warrants each exercisable at the price of $3.50 for one share of Pac
Rim Common Stock (the "Series 3 Warrants"). The Series 1 Warrants, Series 2
Warrants and Series 3 Warrants shall be referred to, collectively, as the
"Warrants." The Series 3 Detachable Warrant Surrender Agreement dated as of
September 17, 1996 and the First Amendment to Series 3 Detachable Warrant
Surrender Agreement of even date herewith, both of which are attached hereto as
Exhibit E (collectively, the "Surrender Agreement"), and the Purchase Agreement
will transfer, if consummated, title to all the outstanding Warrants and
Convertible Debentures.
Except as set forth above, Pac Rim has no outstanding bonds, debentures,
notes or other obligations the holders of which have the right to vote (or which
are convertible into or exercisable for securities having the right to vote)
with the stockholders of Pac Rim on any matter. All such issued and outstanding
shares of Pac Rim Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Other than as contemplated by this
Agreement, the Pac Rim Stock Option Plans, the Convertible Debentures and the
Warrants, there are not at the date of this Agreement any existing options,
warrants, calls, subscriptions, convertible securities, or other rights,
agreements or commitments which obligate Pac Rim or any of its Subsidiaries to
issue, transfer or sell any shares of capital stock of Pac Rim or any of its
Subsidiaries. As of December 31, 1996, 12,487,730 shares of Common Stock were
reserved for issuance and are issuable upon or otherwise deliverable in
connection with options outstanding under the Pac Rim Stock Option Plans, the
Convertible Debentures and the Warrants; since that date, no options have been
granted under the Pac Rim Stock Option Plans, no new option plans have been
authorized or adopted and no new warrants or convertible debentures with respect
to the Common Stock have been issued. After the Effective Time, the Surviving
Corporation will have no obligation to issue, transfer or sell any shares of
capital stock of Pac Rim or the Surviving Corporation pursuant to any Pac Rim
Benefit Plans (as defined in Section 5.11). There are no outstanding
obligations of Pac Rim or any of its Subsidiaries to purchase, redeem or
otherwise acquire any shares of Pac Rim Common Stock, any capital voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of Pac Rim. No shares of Pac Rim Common Stock are held in the
Pac Rim Benefit Plans.
5.4 SUBSIDIARIES. Pac Rim owns directly or indirectly each of the
outstanding shares of capital stock of each of Pac Rim's Subsidiaries. Each of
the outstanding shares of capital stock of each of Pac Rim's Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable, and is owned,
directly or indirectly, by Pac Rim free and clear of all liens, pledges,
security interests, claims or other encumbrances. The following information for
each Subsidiary of Pac Rim is set forth in the Pac Rim Disclosure Letter: (i)
its name and jurisdiction of incorporation or organization; (ii) its authorized
capital stock or share capital; and (iii) the number of issued and outstanding
shares of capital stock or share capital.
5.5 OTHER INTERESTS. Except for interests in the Pac Rim Subsidiaries and
The Pacific Rim Assurance Company's (the "Assurance Company") interest in its
wholly-owned subsidiary, Regional Benefits Insurance Services, Inc., a
California corporation, neither Pac Rim nor any Pac
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Rim Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity.
5.6 NO VIOLATION. Neither the execution and delivery by Pac Rim of this
Agreement nor the consummation by Pac Rim of the transactions contemplated
hereby in accordance with the terms hereof will: (i) conflict with or result in
a breach of any provisions of the respective certificates of incorporation or
bylaws (or similar governing documents) of Pac Rim or its Subsidiaries; (ii)
except as disclosed in the Pac Rim Reports (as defined in Section 5.7), result
in a breach or violation of, a default under, or the triggering of any payment
or other obligations pursuant to, or accelerate vesting under, any of its
existing Pac Rim Stock Option Plans, or any grant or award made under any of the
foregoing other than accelerated vesting of outstanding options under stock
option agreements in existence on the date hereof with certain employees of Pac
Rim or any of its Subsidiaries by reason of, in whole or in part, the
consummation of the Merger; (iii) violate, or conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination or in a right of termination or cancellation of, or accelerate
the performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of Pac Rim or its
Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which Pac Rim or any of its Subsidiaries is a party, or by which Pac Rim or any
of its Subsidiaries or any of their properties is bound or affected; (iv)
violate any order, writ, injunction, decree, law, statute, rule or regulation
applicable to Pac Rim or any of its Subsidiaries or any of their respective
properties or assets; or (v) other than the filings provided for in Article 1,
certain federal, state and local regulatory filings, filings required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), state
insurance law (including California Insurance Code Sections 1215 et seq.), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or applicable
state securities and "Blue Sky" laws or filings in connection with the
maintenance of qualification to do business in other jurisdictions
(collectively, the "Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority.
5.7 SEC DOCUMENTS; PRELIMINARY DOCUMENTS. (a) Pac Rim has delivered to
Parent each registration statement, report, proxy statement or information
statement prepared by it since December 31, 1993, including, without limitation,
(i) its Annual Report on Form 10-K for the years ended December 31, 1993, 1994
and 1995, (ii) its Quarterly Report on Form 10-Q for the periods ended March 31,
June 30, and September 30, 1996, and (iii) its Proxy Statements for the Annual
Meeting of Stockholders held in 1994, 1995 and on July 10, 1996, each in the
form (including exhibits and any amendments thereto) filed with the Securities
and Exchange Commission (the "SEC") (collectively, the "Pac Rim Reports"), which
constitute all such Reports that were required to be filed during such period.
As of their respective dates, the Pac Rim Reports (including, without
limitation, any financial statements or schedules included or incorporated by
reference therein) (i) were prepared in all respects in accordance with the
applicable requirements of the Exchange Act and the rules and regulations
thereunder and (ii) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. Each of the consolidated balance sheets of Pac Rim
included in or incorporated by reference into the Pac Rim Reports (including the
related notes and schedules) and the Preliminary Documents (as defined in
Section 5.7(b) hereof) fairly presents the consolidated financial position of
Pac Rim and the Pac Rim Subsidiaries as of its date and each of the consolidated
statements of income, retained earnings and cash flows of Pac Rim included in or
incorporated by reference into the Pac Rim Reports (including any related notes
and schedules) fairly presents the results of operations, retained earnings or
cash flows, as the case may be, of Pac
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Rim and the Pac Rim Subsidiaries for the periods set forth therein (subject, in
the case of unaudited statements, to normal year-end audit adjustments which
would not be material in amount or effect), in each case in accordance with
generally accepted accounting principles ("GAAP") consistently applied during
the periods involved, except as may be noted therein. To the knowledge of Pac
Rim and its Subsidiaries and except as qualified in the Pac Rim Disclosure
Letter, the financial statements of Assurance Company fairly present the
financial condition, results of operations, retained earnings and cash flows of
Assurance Company in accordance with Statutory Accounting Principles, except as
may be noted therein. Except as provided in Section 5.7(b) hereof and reflected
or reserved against or disclosed in the financial statements of Pac Rim (and the
notes thereto) included in the Pac Rim Reports and the Preliminary Documents and
incurred subsequent to December 31, 1996 in the ordinary course of business
consistent with past practice, neither Pac Rim nor any of its Subsidiaries has
any liabilities, of any nature, whether accrued, absolute, contingent or
otherwise, whether due or to become due and whether required to be recorded or
reflected on a balance sheet (or the notes thereto) under GAAP. Except as
described in the Pac Rim Disclosure Letter, since December 31, 1996, neither Pac
Rim nor any Subsidiary of Pac Rim has incurred any liabilities other than
liabilities which have been incurred in the ordinary course of business
consistent with past practice.
(b) Pac Rim has delivered to Parent its Preliminary Draft and Unadjusted
Balance Sheet as of December 31, 1996 and Statement of Operations for the year
ended December 31, 1996, both of which do not reflect the effect of any increase
in loss and loss adjustment expenses of Assurance Company (collectively, the
"Preliminary Documents"). Prior to the issuance of Assurance Company's
financial statements for the year ended December 31, 1996, Assurance Company
will recognize additional reserve strengthening of approximately $12 million for
1995 and prior accident years.
5.8 LITIGATION. Except as disclosed in the Pac Rim Reports filed with the
SEC prior to the date hereof and as otherwise set forth in this Section 5.8,
neither Pac Rim nor its Subsidiaries have been notified that any governmental
investigations are being conducted with respect to their respective properties,
assets, permits or licenses, and there are no actions, suits or proceedings
pending against Pac Rim or the Pac Rim Subsidiaries or, to the knowledge of Pac
Rim, threatened against Pac Rim or the Pac Rim Subsidiaries or any of their
respective properties or assets, at law or in equity, or before or by any
federal or state commission, board, bureau, agency or instrumentality, that
would prevent or delay the consummation of the transactions contemplated by this
Agreement. Except as disclosed in the Pac Rim Reports filed with the SEC prior
to the date hereof, neither Pac Rim nor any of its Subsidiaries are subject to
any outstanding order, writ, injunction or decree which would prevent or delay
the consummation of the transactions contemplated hereby. The California
Department of Insurance (the "California Department") is currently conducting a
triennial examination of the Assurance Company and the Assurance Company was
named as a defendant in the following actions: (1) NPI Medical Group, et al. v.
State Compensation Insurance Fund, et al., Case No. BC 116099, Superior Court of
the State of California, Los Angeles County; and (2) FWHC Medical Group, et al.
v. State Compensation Insurance Fund, et al, Case No. BC 089361, Superior Court
of the State of California, Los Angeles County.
5.9 ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, each of Pac Rim
and its Subsidiaries has conducted its business only in the ordinary course of
such business and there has not been (i) any event or changes with respect to
Pac Rim and its Subsidiaries, excluding changes due to general economic
conditions, (ii) any declaration, setting aside or payment of any dividend or
other distribution with respect to its capital stock or any repurchase,
redemption or other acquisition by Pac Rim or its Subsidiaries of any
outstanding shares of capital stock or other securities in, or other ownership
interests in, Pac Rim or any of its Subsidiaries, (iii) any change in its
accounting principles, practices or methods or (iv) any event or changes or
action taken which would constitute a breach of Section 7.2 of this Agreement if
it had occurred or been taken after
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the date hereof; provided, however, this Section 5.9(iv) shall not apply to
subsections (c) or (e) of Section 7.2.
5.10 TAXES.
(a) FILING OF TAX RETURNS. Pac Rim (including, for purposes of this
Section 5.10, each of its Subsidiaries from time to time) has timely filed with
the proper taxing or other governmental authorities all returns (including,
without limitation, information returns and other tax-related information) in
respect of Taxes (as such term is defined in Section 5.10(f)) required to be
filed through the date hereof. Such returns and information filed are, to the
knowledge of Pac Rim, complete, correct and accurate in all respects. Pac Rim
has delivered to Parent complete and accurate copies of all of Pac Rim's
federal, state and local Tax returns filed for its taxable years ended 1991
through 1995. Pac Rim has not filed any federal, state or local tax returns for
its taxable year ended December 31, 1996, or delivered to Parent complete and
accurate copies of all such returns that have been filed for such taxable year.
(b) PAYMENT OF TAXES. All Taxes for which Pac Rim is shown as owing on
any Tax return for any period or portion thereof ending on or before the Closing
Date, shall have been paid, or an adequate reserve (in conformity with GAAP
applied on a consistent basis and in accordance with Pac Rim's past custom and
practice) has been established therefor, and Pac Rim has no liability (whether
or not due and payable) for Taxes in excess of the amounts so paid or reserves
so established. All Taxes that Pac Rim has been required to collect or withhold
have been duly collected or withheld and, to the extent required when due, have
been or will be duly paid to the proper taxing or other governmental authority.
Pac Rim had, as of December 31, 1995, a net operating loss carryover of
$2,676,000 for federal income tax purposes (the "NOL").
(c) AUDIT HISTORY. Except as set forth in the Pac Rim Disclosure Letter:
(i) No deficiencies for Taxes or adjustments to the NOL of Pac Rim
have been claimed, proposed or assessed by any taxing or other governmental
authority.
(ii) There are no pending or, to the best of Pac Rim's knowledge,
threatened audits, investigations or claims for or relating to any
liability in respect of Taxes of Pac Rim, and there are no matters under
discussion with any taxing or other governmental authority with respect to
Taxes of Pac Rim.
(iii) All audits of federal, state and local returns for Taxes by the
relevant taxing or other governmental authority have been completed for all
periods.
(iv) Pac Rim has not been notified in writing that any taxing or
other governmental authority intends to audit a return for any other
period.
(v) No extension of a statute of limitations relating to Taxes is in
effect with respect to Pac Rim.
(d) TAX ELECTIONS. Except as set forth in the Pac Rim Disclosure Letter:
(i) There are no material elections with respect to Taxes affecting
Pac Rim.
(ii) Pac Rim has not made an election and is not required to treat
any asset of Pac Rim as owned by another person or as tax-exempt bond
financed property or tax-exempt use property within the meaning of Section
168 of the Internal Revenue Code of 1986, as amended (the "Code"), or under
any comparable state or local income Tax or other Tax provision.
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(iii) Pac Rim is not a party to or bound by any binding tax sharing,
tax indemnity or tax allocation agreement or other similar arrangement with
any other person or entity.
(iv) Pac Rim has not filed a consent pursuant to the collapsible
corporation provisions of Section 341(f) of the Code (or any corresponding
provision of state or local law) or agreed to have Section 341(f)(2) of the
Code (or any corresponding provision of state or local law) apply to any
disposition of any asset owned by it.
(e) ADDITIONAL TAX REPRESENTATIONS. Except as set forth in the Pac Rim
Disclosure Letter:
(i) There are no liens for Taxes (other than for Taxes not yet
delinquent) upon the assets of Pac Rim.
(ii) Pac Rim has never been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code, nor has Pac
Rim or any present or former Subsidiary of Pac Rim, or any predecessor or
affiliate of any of them, become liable (whether by contract, as transferee
or successor, by law or otherwise) for the Taxes of any other person or
entity under Treasury Regulation Section 1.1502-6 or any similar provision
of state, local or foreign law.
(iii) Pac Rim has not made, requested or agreed to make, nor is it
required to make, any adjustment under Section 481(a) of the Code by reason
of a change in accounting method or otherwise for any taxable year.
(iv) Pac Rim is not a party to any agreement, contract, arrangement
or plan that has resulted or would result, separately or in the aggregate,
in the payment of any "excess parachute payments" within the meaning of
Section 280G of the Code or would require payment of any amount as to which
a deduction may be denied under Section 162(m) of the Code.
(v) Pac Rim is not a party to any joint venture, partnership, or
other arrangement or contract which could be treated as a partnership for
federal, state, local or foreign Tax purposes.
(vi) Pac Rim has prepared and made available to Parent all of Pac
Rim's books and working papers that clearly demonstrate the income and
activities of Pac Rim for the last full reporting period ending prior to
the date hereof.
(vii) Pac Rim has not been a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii).
(f) DEFINITION OF TAXES. For purposes of this Agreement, the term "Taxes"
shall mean all federal, state, local, foreign and other taxes, assessments or
other governmental charges, including, without limitation, income, estimated
income, gross receipts, profits, occupation, franchise, capital stock, real or
personal property, sales, use, value added, transfer, license, commercial rent,
payroll, employment or unemployment, social security, disability, withholding,
alternative or add-on minimum, customs, excise, stamp or environmental taxes,
and further including all interest, penalties and additions in connection
therewith for which Pac Rim may be liable.
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5.11 CERTAIN EMPLOYEE PLANS.
(a) With respect to each employee benefit plan (including, without
limitation, any "employee benefit plan," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), and any
bonus, profit sharing, deferred compensation, incentive compensation, stock
ownership, stock purchase, stock option, phantom stock, vacation, severance,
death benefit, insurance or other plan, arrangement or understanding (whether or
not legally binding), in each case maintained or contributed to for the benefit
of employees of Pac Rim or any of its Subsidiaries (all the foregoing being
herein called the "Pac Rim Benefit Plans"), individually and in the aggregate,
no event has occurred, and to the knowledge of Pac Rim or any of its
Subsidiaries, there exists no condition or set of circumstances, in connection
with which Pac Rim or any of its Subsidiaries could be subject to any liability
(except liability for benefits claims and funding obligations payable in the
ordinary course), under ERISA or any other applicable law.
(b) With respect to the Pac Rim Benefit Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, established in accordance with
GAAP, or otherwise properly footnoted in accordance with GAAP, on the financial
statements of Pac Rim or any of its Subsidiaries. Pac Rim has not been nor is
it currently obligated under any multi-employer plans as defined in ERISA.
(c) Except as required by applicable law, neither Pac Rim nor any of its
Subsidiaries provides any health, welfare or life insurance benefits to any of
their former or retired employees.
(d) Except for changes due to increases in the length of employment,
Schedule 5.11(d) of the Pac Rim Disclosure Letter lists the employees of Pac Rim
and its Subsidiaries who are eligible for severance benefits and the amounts
that would be due such employees if they were terminated as of February 7, 1997.
5.12 LABOR MATTERS.
(a) Neither Pac Rim nor any of its Subsidiaries is a party to, or bound
by, any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization. There is no unfair
labor practice or labor arbitration proceeding pending or, to the knowledge of
Pac Rim, threatened against Pac Rim or its Subsidiaries relating to their
business. To the knowledge of Pac Rim, there are no organizational efforts with
respect to the formation of a collective bargaining unit presently being made or
threatened involving employees of Pac Rim or any of its Subsidiaries.
(b) Pac Rim has delivered to Parent copies of all employment agreements,
consulting agreements, severance agreements, bonus and incentive plans, profit-
sharing plans and other agreements, plans or arrangements with respect to
compensation of the employees of Pac Rim and its Subsidiaries (the "Compensation
Arrangements") and, to the extent required by applicable regulation, all
Compensation Arrangements are described in the Pac Rim Reports.
5.13 NO BROKERS. Pac Rim has not entered into any contract, arrangement
or understanding with any person or firm which may result in the obligation of
Pac Rim or Parent to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that Pac Rim has retained Salomon Brothers Inc ("Salomon"), whose fees and
expenses will be paid by Pac Rim, as its financial advisor to render a fairness
opinion with respect to the Purchase Price, which arrangement has been disclosed
in writing to Parent prior to the date hereof. Other than the foregoing
arrangement, Pac Rim is not aware of any claim for payment of any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
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negotiations leading to this Agreement or the consummation of the transaction
contemplated hereby.
5.14 FAIRNESS OPINION. Pac Rim has received the opinion of Salomon to the
effect that the consideration to be received in the Merger by the stockholders
of Pac Rim is fair to such stockholders from a financial point of view.
5.15 LIENS. Other than liens, mortgages, security interests, pledges and
encumbrances which do not materially interfere with Pac Rim's or any of its
Subsidiaries' use and enjoyment of their property or assets or diminish or
detract from the value thereof, neither Pac Rim nor any of its Subsidiaries has
granted, created or suffered to exist with respect to any of its assets, any
mortgage, pledge, charge, hypothecation, collateral, assignment, lien (statutory
or otherwise), encumbrance or security agreement of any kind or nature
whatsoever.
5.16 LEASED REAL PROPERTY. Neither Pac Rim nor any Subsidiary owns any
real property. The Pac Rim Disclosure Letter sets forth a list of all of the
leases and subleases (the "Real Property Leases") under which, as of the date
hereof, Pac Rim or any of its Subsidiaries has the right to occupy space. Pac
Rim has heretofore delivered to the Parent a true, correct and complete copy of
all of the Real Property Leases, including all amendments thereto. All Real
Property Leases and leases pursuant to which Pac Rim or any of its Subsidiaries
leases personal property from others are valid, binding and enforceable in
accordance with their terms; neither Pac Rim nor any Subsidiary has received
notice of any default by Pac Rim or any Subsidiary under any Real Property
Lease; there are no existing defaults, or any condition or event which with the
giving of notice or lapse of time would constitute a default, by any party to
the Real Property Leases.
5.17 ENVIRONMENTAL MATTERS. Attached to the Pac Rim Disclosure Letter are
copies of all environmental audits or other studies or reports that Pac Rim has
in its possession, which were prepared by third parties to assess Hazardous
Material (as hereinafter defined) risks at any site or facility owned or leased
presently or within the last three (3) years by Pac Rim or any of its
Subsidiaries (a "Site"). Pac Rim and each of its Subsidiaries is in compliance
with all, and has no liability under, any Environmental Laws (as defined below).
Neither Pac Rim nor any of its Subsidiaries has been alleged to be in violation
of, or has been subject to any administrative or judicial proceeding pursuant
to, such Environmental Laws either now or any time during the past three (3)
years. There are no facts or circumstances which Pac Rim reasonably expects
could form the basis for the assertion of any Claim (as defined below) against
Pac Rim or any of its Subsidiaries relating to environmental matters including,
but not limited to, any Claim arising from past or present environmental
practices asserted under any Environmental Laws.
For purposes of this Section 5.17, the following terms shall have the
following meanings:
(a) "Hazardous Materials" shall mean asbestos, petroleum products,
underground tanks of any type and all other materials now or hereafter
defined as "hazardous substances," "hazardous wastes," "toxic substances"
or "solid wastes," or otherwise now or hereafter listed or regulated
pursuant to (collectively, the "Environmental Laws"): the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
(S)9601 et seq., and any amendments thereto; the Resource Conservation and
-- ---
Recovery Act, 42 U.S.C. (S)6901 et seq., and any amendments thereto; the
-- ---
Hazardous Materials Transportation Act, 49 U.S.C. (S)1801 et seq.; and any
-- ---
other similar federal, state or local statute, regulation, ordinance,
order, decree, or any other law, common law theory or reported decision of
any state or federal court, as now or at any time hereafter in effect,
relating to, or imposing liability or standards of conduct concerning, any
hazardous, toxic or dangerous waste, substance or material.
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(b) "Claim" shall mean any and all claims, demands, causes of
actions, suits, proceedings, administrative proceedings, losses, judgments,
decrees, debts, damages, liabilities, court costs, attorneys' fees and any
other expenses incurred, assessed or sustained by or against Pac Rim or any
of its Subsidiaries.
5.18 INTELLECTUAL PROPERTY. The Pac Rim Disclosure Letter identifies all
registered trademarks, copyrights and patents owned or licensed by Pac Rim and
its Subsidiaries as of the date hereof. To Pac Rim's best knowledge, Pac Rim or
its Subsidiaries own, or are licensed or otherwise have adequate right to use,
all patents, patent rights, trademarks, trademark rights, service marks, service
mark rights, trade names, trade name rights, copyrights, know-how, technology,
trade secrets and other proprietary information (collectively, the "Intellectual
Property") which are material to the conduct of the business of Pac Rim and its
Subsidiaries. Neither Pac Rim nor any of its Subsidiaries have received any
written claims by any person, and neither Pac Rim nor any of its Subsidiaries
has asserted a claim against any person, with respect to any of the Intellectual
Property owned or used by Pac Rim or its Subsidiaries or challenging or
questioning the validity or effectiveness of any license or agreement relating
thereto to which Pac Rim or any Subsidiary is a party.
5.19 POWERS OF ATTORNEY; GUARANTEES. Neither Pac Rim nor any of its
Subsidiaries has any power of attorney outstanding, nor any liability as
guarantor, surety, co-signer, endorser (other than for purposes of collection in
the ordinary course of business) or co-maker in respect of the obligation of any
person, corporation (other than wholly-owned Subsidiaries of Pac Rim),
partnership, joint venture, association, organization or other entity.
5.20 RELATED PARTY TRANSACTIONS. No director, officer, partner, employee,
"affiliate" or "associate" (as such terms are defined in rule 12b-2 under the
Exchange Act) of Pac Rim or any of its Subsidiaries (i) has borrowed any monies
from or has outstanding any indebtedness or other similar obligations to Pac Rim
or any of its Subsidiaries; (ii) except as disclosed in Pac Rim's Proxy
Statement for its 1996 annual meeting, owns, directly or indirectly, any
interest of any kind in, or is a director, officer, employee, partner, affiliate
or associate of, or consultant or lender to, or borrower from or has the right
to participate in the management, operations or profits of, any person or entity
which is (x) a competitor, supplier, customer, distributor, lessor, tenant,
creditor or debtor of Pac Rim or any of its Subsidiaries, (y) engaged in a
business related to the business of Pac Rim or any of its Subsidiaries or (z)
participating in any transaction to which Pac Rim or any of its Subsidiaries is
a party; or (iii) is otherwise a party to any contract, arrangement or
understanding with Pac Rim or any of its Subsidiaries.
5.21 INFORMATION IN PROXY STATEMENT. None of the information supplied by
Pac Rim or its Subsidiaries for inclusion or incorporation by reference in
Parent's "Proxy Statement" (as hereinafter defined) for the special meeting of
its stockholders to be called to consider the Stock Purchase Agreement referred
to in Section 6.5 hereof will, at the date mailed to stockholders and at the
time of the meeting of Parent's stockholders to be held in connection with the
such Stock Purchase Agreement, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the disclosure letter delivered by or on behalf of
Parent and Merger Sub to Pac Rim at or prior to the execution hereof in form and
substance satisfactory to Pac Rim (the "Parent Disclosure Letter") and except to
the extent qualified by Section 11.16(b) hereof,
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Parent and Merger Sub represent and warrant to Pac Rim as of the date of this
Agreement as follows:
6.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH LAW.
Each of Parent and Merger Sub is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Parent has all requisite corporate power and authority to own,
operate and lease its properties and carry on its business as now conducted.
6.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. Each of Parent and
Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby.
Subject only to the approval of the Stock Purchase Agreement described in
Section 6.5 hereof by the holders of a majority of the outstanding shares of
Parent's common stock, the consummation by Parent and Merger Sub of the
transactions contemplated hereby has been duly authorized by all requisite
corporate action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of Parent
and Merger Sub, enforceable in accordance with their respective terms, subject
to applicable bankruptcy, insolvency, moratorium or other similar laws relating
to creditors' rights and general principles of equity.
6.3 NO VIOLATION. Neither the execution and delivery by Parent and Merger
Sub of this Agreement, nor the consummation by Parent and Merger Sub of the
transactions contemplated hereby in accordance with the terms hereof, will: (i)
conflict with or result in a breach of any provisions of the Articles of
Incorporation of Parent, the Certificate of Incorporation of Merger Sub or
Bylaws of Parent or Merger Sub; (ii) violate, or conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default), under or result in
the termination or in a right of termination or cancellation of, or accelerate
the performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of Parent or its
"Subsidiaries" (as defined in Section 11.15 hereof) under, or result in being
declared void, voidable, or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any license, franchise, permit, lease, contact, agreement or other
instrument, commitment or obligation to which Parent or any of its Subsidiaries
is a party, or by which Parent or any of its Subsidiaries or any of their
properties is bound or affected; or (iii) other than the Regulatory Filings,
require any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority.
6.4 INTERIM OPERATIONS OF MERGER SUB. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated hereby, has engaged in
no other business activities and has conducted its operations only as
contemplated hereby.
6.5 FINANCING. In obtaining the funds necessary to enable Parent and
Merger Sub to consummate the Merger on the terms contemplated by this Agreement,
Parent has entered into a Stock Purchase Agreement dated as of September 17,
1996 (the "Stock Purchase Agreement") with Insurance Partners, L.P., a Delaware
limited partnership ("IP") and Insurance Partners Offshore (Bermuda), L.P., a
Bermuda limited partnership ("IP Bermuda") (IP and IP Bermuda, collectively,
"Insurance Partners"), and the additional equity investors a party thereto, for
the sale of shares of Parent's common stock, an executed copy of which is
attached hereto as Exhibit F. At the Effective Time, Parent and the Merger Sub
will have available all funds necessary (a) for the acquisition of all the
Convertible Debentures and In The Money Warrants, (b) for the acquisition of all
shares of Pac Rim Common Stock and In The Money Options pursuant to the Merger
and (c) to perform their respective obligations under this Agreement.
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6.6 NO BROKERS. Parent has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of Pac
Rim or Parent to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that Parent has retained Donaldson, Lufkin, Jenrette Securities Corporation
("DLJ"), whose fees and expenses will be paid by Parent, as its financial
advisor and to render a fairness opinion with respect to the sale of Parent's
common stock pursuant to the Stock Purchase Agreement, which arrangement has
been disclosed in writing to Pac Rim prior to the date hereof. Other than the
foregoing arrangement, Parent is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
6.7 FAIRNESS OPINION. Parent has received the opinion of DLJ to the
effect that the financing arrangements described in Sections 6.5 and 7.14 hereof
are fair to Parent's stockholders from a financial point of view.
6.8 SURVIVING CORPORATION AFTER THE MERGER. Immediately after the
Effective Time and after giving effect to any change in the Surviving
Corporation's assets and liabilities as a result of the Merger, the Surviving
Corporation will not (i) be insolvent (either because its financial condition is
such that the sum of its debts is greater than the fair value of its assets or
because the fair saleable value of its assets is less than the amount required
to pay its probable liability on existing debts as they become absolute and
mature), (ii) have unreasonably small capital with which to engage in its
business or (iii) have incurred liabilities beyond its ability to pay as they
become due.
6.9 NO OWNERSHIP OF COMPANY CAPITAL STOCK. Neither Parent nor Merger Sub
own, directly or indirectly, more than five percent (5%) of Pac Rim Common
Stock.
6.10 INFORMATION IN PROXY STATEMENT. None of the information supplied by
Parent or Merger Sub for inclusion or incorporation by reference in Pac Rim's
"Proxy Statement" (as hereinafter defined) for the special meeting of its
stockholders to be called to consider the Merger will, at the date mailed to
stockholders and at the time of the meeting of Pac Rim's stockholders to be held
in connection with the Merger, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
ARTICLE 7
COVENANTS
7.1 ACQUISITION PROPOSALS. Prior to the Effective Time, Pac Rim agrees
(a) that neither Pac Rim nor any of its Subsidiaries nor its or their officers,
directors, employees, agents and representatives (including, without limitation,
any investment banker, attorney or accountant retained by it or any of its
Subsidiaries) shall (except to the extent necessary to comply with fiduciary
duties to stockholders as provided in this Section 7.1) initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its stockholders) with respect to a merger, acquisition, consolidation,
tender offer, exchange offer, business combination or similar transaction
involving, or any purchase of more than forty percent (40%) of the assets or any
equity securities of, Pac Rim or any of its Subsidiaries (any such proposal or
offer being hereinafter referred to as an "Acquisition Proposal") or engage in
any negotiations concerning, or provide any confidential information or data to,
or have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
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Proposal; (b) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and will inform any individuals
or entities with whom an Acquisition Proposal is currently being discussed or
hereinafter making an Acquisition Proposal of the obligations undertaken in this
Section 7.1; and (c) that it will notify Parent immediately if any such
inquiries or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with Pac Rim or its Subsidiaries; provided, however, that nothing contained in
this Section 7.1 shall, prior to approval of the transaction described herein by
the holders of Pac Rim Common Stock, prohibit the Board of Directors of Pac Rim
from (i) furnishing information to or entering into discussions or negotiations
with, any person or entity that makes an unsolicited bona fide written
Acquisition Proposal, if, and only to the extent that, (A) such Acquisition
Proposal is on terms that the Board of Directors of Pac Rim determines, with the
assistance of its financial advisors, represents a financially superior
transaction to the holders of Pac Rim Common Stock compared with the Merger, (B)
such Acquisition Proposal is not conditioned upon the acquiror obtaining
financing, (C) the Board of Directors of Pac Rim determines in good faith, based
as to legal matters on the written opinion of outside legal counsel, that such
action is required for the Board of Directors to comply with its fiduciary
duties to stockholders imposed by law, (D) two (2) business days prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, Pac Rim provides written notice to Parent to the
effect that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity, and furnishes Parent with the terms of
and a copy of such Acquisition Proposal and (E) thereafter, Pac Rim keeps Parent
informed of the status (and the terms) of any such discussions or negotiations;
and (ii) to the extent applicable, complying with Rule 14e-2(a) promulgated
under the Exchange Act with regard to an Acquisition Proposal. Nothing in this
Section 7.1 shall (x) permit any party to terminate this Agreement (except as
specifically provided in Article 9 hereof) or (z) affect any other obligation of
any party under this Agreement.
7.2 CONDUCT OF BUSINESSES. From the date hereof to the Effective Time,
except as set forth in the Pac Rim Disclosure Letter or as contemplated by any
other provision of this Agreement, unless Parent has consented in writing
thereto, Pac Rim and its Subsidiaries:
(a) shall conduct their operations according to their usual, regular
and ordinary course in substantially the same manner as heretofore
conducted;
(b) shall use their best commercial efforts to preserve intact their
business organization and goodwill, keep available the services of their
officers and employees and maintain satisfactory relationships with those
persons having business relationships with them;
(c) shall confer on a regular basis with one or more representatives
of Parent to report operational matters of materiality and any proposals to
engage in material transactions;
(d) shall not amend their Certificates of Incorporation or Articles
of Incorporation, as the case may be, or Bylaws;
(e) shall promptly notify Parent of (i) any material emergency or
other material change in the condition (financial or otherwise), of Pac
Rim's or any of its Subsidiaries' business, properties, assets,
liabilities, prospects or the normal course of its businesses or in the
operation of its properties, (ii) any material litigation or material
governmental complaints, investigations or hearings, or (iii) the breach in
any respect of any representation or warranty or covenant contained herein;
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(f) shall timely file all reports required by applicable securities
laws, rules or regulations to be filed with the SEC and promptly deliver to
Parent true and correct copies of any report, statement or schedule filed
by Pac Rim with the SEC subsequent to the date of this Agreement;
(g) shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, issue any shares of
its capital stock, effect any stock split or otherwise change its
capitalization as it exists on the date hereof, (ii) grant, confer or award
any option, warrant, conversion right or other right not existing on the
date hereof to acquire any shares of its capital stock from Pac Rim, (iii)
increase any compensation or enter into or amend any employment severance,
termination or similar agreement with any of its present or future officers
or directors, except for normal increases in compensation to employees not
earning more than $85,000 in annual base compensation consistent with past
practice and the payment of cash bonuses to employees pursuant to and
consistent with existing plans or programs; provided, however, any such
increases in annual base compensation shall not exceed five percent (5%) of
such employees' current annual base compensation without the prior consent
of Parent, which consent shall not be unreasonably withheld, or (iv) adopt
any new employee benefit plan (including any stock option, stock benefit or
stock purchase plan) or amend any existing employee benefit plan in any
respect, except for changes which may be required by applicable law;
(h) shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock for purposes other than satisfying its obligation to pay interest
when due under the Debenture/Warrant Agreement; provided, however, on the
Closing Date, Pac Rim shall pay all interest accrued but unpaid as of such
date under the Debenture/Warrant Agreement; (ii) except in connection with
the use of shares of capital stock to pay the exercise price or tax
withholding in connection with stock-based Pac Rim Benefit Plans, directly
or indirectly redeem, purchase or otherwise acquire any shares of its
capital stock or capital stock of any of its Subsidiaries, or make any
commitment for any such action or (iii) split, combine or reclassify any of
its capital stock;
(i) shall not acquire, sell, lease or otherwise dispose of any of its
assets (including capital stock of Subsidiaries) which are material,
individually or in the aggregate, except in the ordinary course of
business, consistent with past practice;
(j) shall not (i) incur or assume any long-term or short-term debt or
issue any debt securities except for borrowings under existing lines of
credit in the ordinary course of business; (ii) except for obligations of
wholly-owned Subsidiaries of Pac Rim; assume, guaranty, endorse or
otherwise become liable or responsible (whether directly, indirectly,
contingently or otherwise) for the obligations of any other person except
in the ordinary course of business consistent with past practices in an
amount not material to Pac Rim and its Subsidiaries, taken as a whole;
(iii) other than wholly-owned Subsidiaries of Pac Rim, make any loans,
advances or capital contributions to or investments in, any other person;
(iv) pledge or otherwise encumber shares of capital stock of Pac Rim or its
Subsidiaries; (v) except for purchase money liens, mortgage or pledge any
of its assets, tangible or intangible, or create or suffer to create any
mortgage, lien, pledge, charge, security interest or encumbrance of any
kind of respect to such asset; or (vi) forgive any loans to officers,
directors, employees or their affiliates and associates;
(k) Except as provided in Section 7.1 hereof, enter into any
commitment, contract or transaction outside the ordinary course of business
consistent with past practices which would be material to Pac Rim and its
Subsidiaries taken as a whole;
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(l) except as may be required as a result of a change in law or in
GAAP shall not change any of the accounting principles or practices used by
Pac Rim;
(m) shall not (i) acquire (by merger, consolidation or acquisition of
stock or assets) any corporation, partnership or other business
organization or division thereof or any equity interest therein; (ii) enter
into any contract or agreement other than in the ordinary course of
business consistent with past practice which would be material to Pac Rim
and its Subsidiaries taken as a whole; (iii) without the prior consent of
Parent, which consent shall not be unreasonably withheld, authorize any new
capital expenditure or expenditures which, individually, is in excess of
$25,000 or, in the aggregate, are in excess of $750,000; provided, that
none of the foregoing shall limit any capital expenditure within the
aggregate amount previously authorized by Pac Rim's Board of Directors for
capital expenditures; or (iv) enter into or amend any contract, agreement,
commitment or arrangement providing for the taking of any action which
would be prohibited hereunder;
(n) shall not make any tax election or settle or compromise any
income tax liability material to Pac Rim and its Subsidiaries taken as a
whole;
(o) shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of business
or liabilities reflected or reserved against in, and contemplated by, the
consolidated financial statements (or the notes thereto) of Pac Rim and its
Subsidiaries or incurred in the ordinary course of business consistent with
past practice;
(p) shall not settle or compromise any pending or threatened suit,
action or claim relating to the transaction contemplated hereby; or
(q) shall not take, or agree in writing or otherwise to take, any of
the actions described in Sections 7.2(a) through 7.2(p) or any action that
would make any of the representations and warranties of Pac Rim contained
in this Agreement untrue and incorrect as of the date when made.
7.3 MEETING OF STOCKHOLDERS. Pac Rim and Parent (to the extent and if
required on the part of Parent) shall each take all action necessary in
accordance with applicable law and their Certificate of Incorporation or
Articles of Incorporation, as the case may be, and Bylaws to convene a meeting
of their stockholders as promptly as practicable to consider and vote upon the
approval, in the case of Pac Rim, of this Agreement and the transactions
contemplated hereby, and, in the case of Parent, the Stock Purchase Agreement in
connection with the transaction contemplated hereby. The Boards of Directors of
Pac Rim and Parent shall each recommend such approval and take all lawful action
to solicit such approval, including, without limitation, timely mailing of the
Proxy Statements (as defined in Section 7.7); provided, however, that Pac Rim's
Board of Directors' recommendation or solicitation is subject to any action
taken by, or upon authority of, the Board of Directors of Pac Rim in the
exercise of its good faith judgment as to its fiduciary duties to its
stockholders imposed by law and consistent with Section 7.1 hereof. Following
approval of this Agreement by Pac Rim's Board of Directors in connection with
the vote of Pac Rim Common Stock, holders of the Convertible Debentures shall
execute that certain Voting Agreement as of the date hereof, a copy of which
will then be attached hereto as Exhibit G (the "Voting Agreement"). Pursuant to
the terms thereof, the parties to the Voting Agreement shall agree to vote in
favor of this Agreement and the Merger at a meeting of Pac Rim's stockholders.
7.4 FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, Pac Rim and Parent shall: (a) promptly, to the extent necessary, make
their respective filings and thereafter make any other required submissions
under the HSR Act with respect to the Merger; (b) use all reasonable efforts to
cooperate with one another in (i) determining which Regulatory Filings are
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required to be made prior to the Effective Time with, and which consents,
approvals, permits or authorizations are required to be obtained prior to the
Effective Time from, third parties or governmental or regulatory authorities of
the United States, the several states and foreign jurisdictions in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and (ii) timely making all such filings and
timely seeking all such consents, approvals, permits or authorizations; and (c)
use all reasonable efforts to take, or cause to be taken, all other action and
do, or cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
Each of Parent and Pac Rim will use its best efforts to resolve such objections,
if any, as may be asserted with respect to the Merger under the HSR Act or other
antitrust laws. In the event a suit is instituted challenging the Merger as
violative of the HSR Act or other antitrust laws, each of Parent and Pac Rim
will use its best efforts to resist or resolve such suit. Each of Parent and
Pac Rim will use its best efforts to take such action as may be required (a) by
the Antitrust Division of the Department of Justice or the Federal Trade
Commission in order to resolve such objections as either of them may have to the
Merger under the HSR Act or other antitrust Laws or (b) by any federal or state
court of the United States, in any suit challenging the Merger as violative of
the HSR Act or other antitrust laws, in order to avoid the entry of, or to
effect the dissolution of, any injunction, temporary restraining order or other
order which has the effect of preventing the consummation of the Merger. In
complying with the foregoing, each of Parent and Pac Rim shall use all
reasonable and appropriate measures available to them, including, if
appropriate, "hold-separate" agreements or divestitures of Subsidiaries, assets
or operations if necessary to consummate the transactions contemplated hereby,
so long as such actions do not, in the aggregate, have a Pac Rim Material
Adverse Effect (after giving effect to the Merger). If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors of Parent and Pac
Rim shall take all such necessary action. Within four (4) days following the
date of this Agreement, Parent and Merger Sub shall make all necessary filings
with state insurance regulatory authorities, including the filing with the
California Department of a Form A Information Statement (the "Form A") pursuant
to California Insurance Code Section 1215 et seq. or supplementing or amending
the Form A that was filed with the California Department in connection with the
Prior Agreement. Parent and Merger Sub shall use their respective best efforts
to promptly resolve any objections and respond to any inquiries that may arise
in connection with any such filings. Pac Rim shall cooperate with Parent in
connection with the preparation and filing of the Form A.
7.5 INSPECTION OF RECORDS; ACCESS. From the date hereof to the Effective
Time, Pac Rim shall allow all designated officers, attorneys, accountants and
other representatives of Parent ("Parent's Representatives") access, during
normal business hours during the period prior to the Effective Time, to all
employees, offices and other facilities and to the records and files, including
claim files and litigation files, correspondence, audits and properties, to the
accountants and auditors of Pac Rim and their work-papers, and to all
information relating to commitments, contracts, titles and financial position
(including, without limitation, results of operations and financial condition in
fiscal year 1997), or otherwise pertaining to the business and affairs, of Pac
Rim and its Subsidiaries; provided, however, Parent's Representatives shall use
their reasonable best efforts to avoid interfering with, hindering or otherwise
disrupting the employees of Pac Rim in the execution of their employment duties
during any visit to, or inspection of, Pac Rim's facilities or offices;
provided, further, that with respect to the work-papers of Pac Rim's accountants
and auditors, Parent's Representatives shall execute all necessary documents
reasonably required and satisfy all conditions reasonably imposed by such
accountants and auditors in order to obtain such documentation.
7.6 PUBLICITY. Pac Rim and Parent shall, subject to their respective
legal obligations (including requirements of stock exchanges and other similar
regulatory bodies), consult with each other, and use reasonable efforts to agree
upon the text of any press release, before issuing any such press release or
otherwise making public statements with respect to the transactions
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contemplated hereby and in making any filings with any federal or state
governmental or regulatory agency or with any national securities exchange with
respect thereto; provided, however, without Pac Rim's prior written consent, any
such press release or public statement by Parent shall not contain discussions
concerning or references to the reserves or financial condition of Pac Rim or
any of its Subsidiaries.
7.7 PROXY STATEMENT. Pac Rim and Parent (to the extent and if required on
the part of Parent) shall each promptly prepare and then file with the SEC their
respective proxy statements with respect to the meetings of their respective
stockholders as provided in Section 7.3 hereof (collectively, the "Proxy
Statements"). Pac Rim and Parent shall each cause their respective Proxy
Statements to comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder. Pac
Rim and Parent each agree that their respective Proxy Statements and each
amendment or supplement thereto at the time of mailing thereof and at the time
of the meeting of the stockholders of Pac Rim or Parent, as the case may be,
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
7.8 FURTHER ACTION. Each party hereto shall, subject to the fulfillment
at or before the Effective Time of each of the conditions of performance set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger.
7.9 EXPENSES. Whether or not the Merger is consummated, except as
provided in Article 10 hereof, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such costs and expenses.
7.10 INDEMNIFICATION AND INSURANCE.
(a) For a period of three (3) years from and after the Effective Time,
Parent and the Surviving Corporation shall indemnify, defend and hold harmless
to the fullest extent permitted under applicable law, which law shall be
reflected in the Certificate of Incorporation and Bylaws (as amended or
restated, as the case may be) of Pac Rim, and any indemnification agreement
among Pac Rim, its Subsidiaries and their respective officers and directors
(whether current or former) (such Certificate of Incorporation, Bylaws and
indemnification agreements, collectively, the "Indemnification Documents") and
each person who is now, or has been at any time prior to the date hereof, an
officer or director of Pac Rim (or any Subsidiary or division thereof),
including, without limitation, each person controlling any of the foregoing
persons (individually, an "Indemnified Party" and collectively, the "Indemnified
Parties"), against all losses to which they are indemnified under the
Indemnification Documents, whether commenced, asserted or claimed before or
after the Effective Time and including, without limitation, liabilities arising
under the Securities Act of 1933, the Exchange Act and state corporation laws in
connection with the Merger. In the event of any indemnifiable claim, action,
suit, proceeding or investigation, the Indemnified Party shall promptly notify
the Surviving Corporation thereof (the failure to give notice, however, shall
not relieve the Surviving Corporation of its duty to indemnify the Indemnified
Party unless the failure to give notice causes the Surviving Corporation to be
unable to assume the defense of such claim, action, suit, proceeding or
investigation reasonably promptly or otherwise prejudices the Surviving
Corporation). Upon receipt of notice (i) the Surviving Corporation shall have
the right to assume the defense thereof and shall not be liable to such
Indemnified Party for any legal expenses of other counsel or any other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof, except that if the Surviving Corporation elects not to assume the
defense thereof or counsel for the Indemnified Party advises in writing that
there are issues which raise conflicts of interest between Parent or Surviving
Corporation and the Indemnified Party, the Indemnified Party may retain counsel
satisfactory to it,
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and the Surviving Corporation shall pay all reasonable fees and expenses of such
counsel for the Indemnified Party; provided, however, that in no event shall the
Surviving Corporation be required to pay fees and expenses, including
disbursements or other charges, for more than one firm of attorneys in any one
legal action or group of related legal actions unless (A) counsel for the
Indemnified Party advises that there is a conflict of interest that requires
more than one firm of attorneys, or (B) local counsel of record is needed in any
jurisdiction in which any such action is pending, (ii) the Surviving Corporation
and the Indemnified Party shall cooperate in the defense of any matter, and
(iii) the Surviving Corporation shall not be liable for any settlement effected
without its prior written consent (which consent shall not be unreasonably
withheld); and provided, further, that the Surviving Corporation shall not have
any obligation hereunder to any Indemnified Party if and to the extent a court
of competent jurisdiction ultimately determines, and such determination shall
have become final, that the indemnification of such Indemnified Party in the
manner contemplated hereby is prohibited by applicable law or beyond the scope
of this Agreement.
(b) For a period of three (3) years from and after the Effective Time,
Parent shall cause the Surviving Corporation to keep in effect provisions in its
Certificate of Incorporation and Bylaws providing for exculpation of director
and officer liability and indemnification of the Indemnified Parties to the
fullest extent permitted under the DGCL, which provisions shall not be amended
except as required by applicable law or except to make changes permitted by law
that would enlarge the Indemnified Parties' right of indemnification.
(c) For a period of three (3) years after the Effective Time, Parent shall
cause to be maintained officers' and directors' liability insurance covering the
Indemnified Parties who are currently covered, in their capacities as officers
and directors, by Pac Rim and its Subsidiaries' existing officers' and
directors' liability insurance policies on terms substantially no less
advantageous to the Indemnified Parties than such existing insurance; provided,
however, for a period of three (3) years after the Effective Time, the policy
limits of such coverage shall not be less than the higher of $15 million or such
policy limits then provided by Parent for its officers and directors.
(d) Parent shall pay all expenses, including attorneys' fees, that may be
incurred by any Indemnified Parties in enforcing the indemnity and other
obligations provided for in this Section 7.10.
(e) The provisions of this Section shall survive the consummation of the
Merger and expressly are intended to benefit each of the Indemnified Parties.
7.11 CERTAIN BENEFITS.
(a) From and after the Effective Time, subject to applicable law, and
except as contemplated hereby with respect to the Pac Rim Stock Option Plans,
Parent and its Subsidiaries will honor in accordance with their terms, all Pac
Rim Benefit Plans; provided, however, that nothing herein shall preclude any
change effected on a prospective basis following the Effective Time in any Pac
Rim Benefit Plan in accordance with applicable law. With respect to the
employee benefit or compensation plan or arrangement, including each "employee
benefit plan" as defined in Section 3(3) of ERISA maintained by Parent or any of
its Subsidiaries (the "Parent Benefit Plans"), Parent and the Surviving
Corporation shall grant all Pac Rim employees from and after the Effective Time
credit for all service with Pac Rim and its affiliates and predecessors prior to
the Effective Time for all purposes for which such service was recognized by Pac
Rim. To the extent Parent Benefit Plans provide medical or dental welfare
benefits after the Effective Time to Pac Rim and its Subsidiaries' employees,
Parent or the Surviving Corporation, as the case may be, shall use reasonable
and best efforts to ensure that such plan shall waive any pre-existing
conditions and actively-at-work exclusions and shall provide that any expenses
incurred on or before the
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Effective Time shall be taken into account under Parent Benefit Plans for
purposes of satisfying applicable deductible, coinsurance and maximum out-of-
pocket provisions.
(b) Parent agrees to employ at the Effective Time all employees of Pac Rim
and its Subsidiaries who are employed on the Closing Date, with all material
terms of their employment at Pac Rim, under Parent's then-current employment
practices and policies. Such employment shall be at-will and Parent shall be
under no obligation to continue to employ any such individuals.
(c) For purposes of this Section 7.11, the term "employees" shall mean all
current employees of Pac Rim and its Subsidiaries (including those on lay-off,
disability or leave of absence, paid or unpaid).
(d) Notwithstanding the provisions of Section 7.11(a), at the Effective
Time, Surviving Corporation shall perform its obligations as the surviving
corporation of the Merger under:
(i) the "Pac Rim Holding Corporation and The Pacific Rim Assurance
Company Compensation Plan For Senior Management" (the "SMT Plan") (a copy
of which is attached hereto as Exhibit H);
(ii) Immediately following the Closing, Assurance Company shall make a
contribution to its "401K Plan" in the amount of $200,000.00, which amount
shall be for the benefit of all eligible plan participants of Assurance
Company's 401K Plan who are employees of Assurance Company as of the
Closing Date and such contributions shall be made in accordance with all
applicable laws and regulations and the terms of the 401K Plan and the
parties hereto shall take all necessary action to effect the intent and
purpose of this Section 7.11(d)(ii) (the "401K Supplemental Program").
(iii) that certain Employment Agreement dated as of April 15, 1994
(the "Employment Agreement") by and among Pac Rim, Assurance Company and
Stanley Braun ("Braun"), the Amendment to Employment Agreement dated as of
March 27, 1995 (the "First Amendment") and the Second Amendment to
Employment Agreement dated as of March 30, 1996 (the "Second Amendment")
with respect thereto (copies of which are attached hereto as Exhibit I).
The Employment Agreement, the First Amendment and the Second Amendment
shall hereinafter be referred to, collectively, as the "Employment
Documents." Parent and its Subsidiaries unconditionally guaranty the
obligations of Pac Rim, Assurance Company, Surviving Corporation and any
successors to any of them (each, an "Employer") under the Employment
Documents. If any Employer breaches any of its obligations or otherwise
fails to perform under the Employment Documents, Parent and its
Subsidiaries unconditionally promises to perform such obligations. Upon a
change in control of more than fifty-one percent (51%) of Parent's voting
securities, whether effected by reorganization, consolidation, merger, sale
or otherwise, all amounts unpaid (including amounts for services or
obligations to be performed after the change of control date) to Braun
under the Employment Documents shall be accelerated and immediately due and
payable to Braun on the date of such change in control (excepting the
proposed sale of Parent's common stock to Insurance Partners, L.P.
previously announced). Braun shall be a third party beneficiary with
respect to the immediately preceding sentence.
On and following the Closing Date and for a period of one (1) year
thereafter, neither Parent nor the Surviving Corporation shall, without the
prior written consent of each of the respective parties or participants thereto,
amend or modify the terms of the SMT Plan, 1996 Incentive Plan or Severance
Program (as defined in Section 7.11(e) hereof).
(e) At the Closing, Pac Rim shall provide Parent with a list of all
persons employed by Pac Rim and its Subsidiaries on the Closing Date (each, a
"Pac Rim Employee" and, collectively, the
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"Pac Rim Employees"). In accordance with Pac Rim and its Subsidiaries' Severance
Program, a copy of which is attached hereto as Schedule 7.11(e) (the "Severance
Program"), Parent or Surviving Corporation, as appropriate, shall pay funds due
thereunder in order to satisfy the severance obligations with respect to any Pac
Rim Employees.
7.12 RESTRUCTURING OF MERGER. Upon the mutual agreement of Parent and Pac
Rim, the Merger shall be restructured in the form of a forward triangular merger
of Pac Rim into Merger Sub, with Merger Sub being the surviving corporation, or
as a merger of Pac Rim into Parent, with Parent being the surviving corporation.
In such event, this Agreement shall be deemed appropriately modified to reflect
such form of merger.
7.13 ADDITIONAL AGREEMENTS; BEST EFFORTS. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use best
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including cooperating fully with the other party, including by
provision of information and making of all necessary filings under the HSR Act
and state insurance laws. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either Pac
Rim or Merger Sub, the proper officers and directors of each party to this
Agreement shall take all such necessary action.
7.14 FINANCING. Parent and Merger Sub shall take all action necessary
prior to the Closing in order to obtain financing from Chase Manhattan Bank N.A.
and/or other financial institutions in order to raise the funds required to
consummate the transaction contemplated hereunder.
ARTICLE 8
CONDITIONS
8.1 CONDITIONS OF EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall
have been approved in the manner required by applicable law or by
applicable regulations of any stock exchange or other regulatory body by
the holders of the issued and outstanding shares of capital stock of Pac
Rim entitled to vote thereon and the issuance of Parent's common stock
under the Stock Purchase Agreement shall have been approved in the manner
required by applicable law or by applicable regulations of any stock
exchange or other regulatory body by the holders of the issued and
outstanding shares of capital stock of Parent entitled to vote thereon.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(c) The required state insurance regulatory approvals, including the
California Department's approval of the consummation of the transaction
contemplated hereunder pursuant to California Insurance Code Section 1215
et seq., shall have been obtained.
(d) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions
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contemplated by this Agreement. In the event any such order or injunction
shall have been issued, each party agrees to use its reasonable efforts to
have any such injunction lifted.
(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to
be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a Pac Rim Material Adverse Effect following
the Effective Time.
8.2 CONDITIONS TO OBLIGATIONS OF PAC RIM TO EFFECT THE MERGER. The
obligation of Pac Rim to effect the Merger shall be subject to the fulfillment
at or prior to the Closing Date of the following conditions:
(a) Parent shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of Parent and Merger Sub contained in this
Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing Date, and Pac Rim shall have received a
certificate of the President or a Vice President of Parent, dated the
Closing Date, certifying to such effect; provided, however, that
notwithstanding anything herein to the contrary, this Section 8.2(a) shall
be deemed to have been satisfied even if such representations or warranties
are not true and correct, unless the failure of the representations or
warranties to be so true and correct, individually or in the aggregate,
would have or would be reasonably likely to have a Parent Material Adverse
Effect.
(b) Pac Rim shall have received the opinion of Salomon, dated as of
the date of delivery of Pac Rim's Proxy Statement, to the effect that, as
of such date, the consideration to be received in the Merger by the
stockholders of Pac Rim is fair to such stockholders from a financial point
of view.
(c) Pac Rim shall have received, on and as of the Closing Date, an
opinion of Riordan & McKinzie, counsel to Parent and Merger Sub, in usual
and customary form reasonably acceptable to Pac Rim.
8.3 CONDITIONS TO OBLIGATION OF PARENT AND MERGER SUB TO EFFECT THE
MERGER. The obligations of Parent and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Pac Rim shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of Pac Rim contained in this Agreement and
in any document delivered in connection herewith shall be true and correct
as of the Closing Date and Parent shall have received a certificate of the
President or a Vice President of Pac Rim, dated the Closing Date,
certifying to such effect; provided, however, that notwithstanding anything
herein to the contrary, this Section 8.3(a) shall be deemed to have been
satisfied even if such representations or warranties are not true and
correct, unless the failure of the representations or warranties to be so
true and correct, individually or in the aggregate, would have or would be
reasonably likely to have a Pac Rim Material Adverse Effect.
(b) From the date of this Agreement through the Effective Time, there
shall not have occurred any changes in the financial condition, business,
operations or prospects of Pac Rim and its Subsidiaries, taken as a whole,
which changes taken together, would have or would be reasonably likely to
have a Pac Rim Material Adverse Effect.
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(c) The parties to the Purchase Agreement shall have sold and
transferred to Parent all of such parties' right, title and interest in and
to the Convertible Debentures and Warrants and the parties to the Surrender
Agreement shall have surrendered and transferred to Pac Rim all of their
right, title and interest in and to the Series 3 Warrants, and Parent,
thereby, upon the Effective Time, will own or control all of the
Convertible Debentures and Warrants.
(d) Parent and Merger Sub shall have received, on and as of the
Closing Date, an opinion of Barger & Wolen LLP, counsel to Pac Rim, in
usual and customary form reasonably acceptable to Parent and Merger Sub.
ARTICLE 9
TERMINATION
9.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of Pac Rim, by the
mutual consent of Parent and Pac Rim.
9.2 TERMINATION BY EITHER PARENT OR PAC RIM. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Parent or Pac Rim if (a) the Merger shall not have been consummated by
May 15, 1997 (the "Termination Date") or (b) the required approval of Pac Rim
and Parent's respective stockholders required by Section 7.3 shall not have been
obtained at meetings duly convened therefor or at any adjournments thereof, or
(c) a United States or state court of competent jurisdiction or United States
federal or state governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and nonappealable; provided, that the party seeking to
terminate this Agreement pursuant to this clause (c) shall have used all
reasonable efforts to remove such injunction, order or decree; and provided, in
the case of a termination pursuant to clause (a) above, that the terminating
party shall not have breached in any material respect its representations or
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure referred to in said clause. If the
Merger shall not have been consummated on or before April 15, 1997 and as of
such date Pac Rim has satisfied its conditions to effect the Merger set forth in
Article 8 hereof and is prepared to consummate the Merger, Parent shall pay
interest of $5,000.00 per day, without offset or deduction for amounts Parent
claims owed to it by Pac Rim or any of its Subsidiaries, for the benefit of the
holders of shares of Pac Rim Common Stock (the "Extension Consideration") for
each day commencing on April 16, 1997 and ending with the earlier to occur of
the Closing Date or the termination of this Agreement. Parent shall pay the
Extension Consideration to the Exchange Agent on the Closing Date in order to
effect pro rata distribution of such amount to the holders of shares of Pac Rim
Common Stock, or if the Closing does not occur and this Agreement is terminated,
Parent shall promptly, but in no event later than two (2) days after such
termination, pay the same by wire transfer to Pac Rim of same day funds.
9.3 TERMINATION BY PAC RIM. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before the
adoption and approval by the stockholders of Pac Rim referred to in Section 7.3,
by action of the Board of Directors of Pac Rim, if (i) in the exercise of its
good faith judgment as to its fiduciary duties to its stockholders imposed by
law the Board of Directors of Pac Rim determines that such termination is
required by reason of an Acquisition Proposal complying with Section 7.1 hereof
being made, or (ii) there have been breaches by Parent or Merger Sub of
representations or warranties contained in this Agreement
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which, in the aggregate, would have or would be reasonably likely to have a
Parent Material Adverse Effect, or (iii) there has been a material breach of any
of the covenants or agreements set forth in this Agreement on the part of
Parent, which breach is not curable or, if curable, is not cured within twenty
(20) days after written notice of such breach is given by Pac Rim to Parent.
9.4 TERMINATION BY PARENT. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of the
Board of Directors of Parent, if (a) there have been breaches by Pac Rim of
representations or warranties contained in this Agreement which, in the
aggregate, would have or would be reasonably likely to have a Pac Rim Material
Adverse Effect, (b) there has been a material breach of any of the covenants or
agreements set forth in this Agreement on the part of Pac Rim, which breach is
not curable or, if curable, is not cured within twenty (20) days after written
notice of such breach is given by Parent to Pac Rim or (c) the holders of more
than 1,500,000 shares of Pac Rim Common Stock have demanded appraisal rights in
accordance with Section 4.7 hereof.
9.5 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article 9, all
obligations of the parties hereto shall terminate, except the obligations of the
parties pursuant to this Section 9.5 and Sections 7.9, Article 10 and Sections
11.3, 11.4, 11.6, 11.10, 11.13 and 11.17 and the Confidentiality Agreement
referred to in Section 11.4.
9.6 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by or on behalf of the party granting such extension or waiver.
ARTICLE 10
LIQUIDATED DAMAGES AND BREAKUP FEE
10.1 PAYMENT OF LIQUIDATED DAMAGES BY PARENT. The parties hereto agree
that if this Agreement shall not be consummated in accordance with its terms and
conditions as a result of: (a) the occurrence of the events described in Section
9.3(ii) and (iii); (b) Parent or Merger Sub's failure to comply with the
covenants described in Sections 7.3, 7.4, 7.7, 7.8, 7.13 or 7.14 or the
conditions described in Section 8.2(a) or (c); (c) the failure of Parent to
obtain approval for the issuance of Parent's common stock under the Stock
Purchase Agreement by the holders of the issued and outstanding shares of
capital stock of Parent entitled to vote thereon in the manner required by
applicable law or by applicable regulations of any stock exchange or other
regulatory body; or (d) Parent refusing to consummate the transaction
contemplated hereunder after satisfying each of the covenants, conditions and
events referred to in subsections (a), (b) and (c) of this Section 10.1, then
the resulting damages would be impracticable or extremely difficult to
determine. Because of the difficulty in determining the damages resulting from
the acts described in subsections (a), (b), (c) and (d) of this Section 10.1,
the parties hereto agree that in such event, Parent must pay the sum of
$5,000,000.00 to Pac Rim immediately upon demand therefor as liquidated damages.
10.2 PAYMENT OF LIQUIDATED DAMAGES BY PAC RIM. The parties hereto agree
that if this Agreement shall not be consummated in accordance with its terms and
conditions as a result of: (a) the occurrence of the events described in Section
9.4(a) or (b); (b) Pac Rim's failure to comply
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with the covenants described in Sections 7.2, 7.3, 7.4, 7.5, 7.7, 7.8 or 7.13,
or the conditions described in Section 8.3(a) or (d); or (c) Pac Rim refusing to
consummate the transaction contemplated hereunder after satisfying each of the
covenants, conditions or events referred to in subsections (a) and (b) of this
Section 10.2, then the resulting damages would be impracticable or extremely
difficult to determine. Because of the difficulty in determining the damages
resulting from the acts described in subsections (a), (b) and (c) of this
Section 10.2, the parties hereto agree that in the event of such breach, Pac Rim
must pay the sum of $2,500,000.00 to Parent immediately upon demand therefor as
liquidated damages.
10.3 PAYMENT OF BREAKUP FEE BY PAC RIM. In the event that (a) Pac Rim's
Board of Directors terminates this Agreement pursuant to Section 9.3(i) hereof
by reason of an Acquisition Proposal or (b) following public announcement of an
Acquisition Proposal, Pac Rim's Board of Directors terminates this Agreement
pursuant to Section 9.2(b) due to the failure to obtain the required vote in
favor of this Agreement from the holders of Pac Rim Common Stock and Convertible
Debentures at a meeting duly called therefor, and, in either event, the
definitive transaction document with respect to such Acquisition Proposal is
executed by Pac Rim within six (6) months following any such termination, Pac
Rim shall pay Parent a breakup fee of $5 million (the "Breakup Fee"). The
Breakup Fee is not separately payable in the event that liquidated damages are
due and paid under Section 10.2 hereof.
ARTICLE 11
GENERAL PROVISIONS
11.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, provided, however, that the agreements contained in Article 4 and in
Sections 7.10, 7.11 and 7.13 and this Article 11 and the agreements delivered
pursuant to this Agreement shall survive the Merger.
11.2 NOTICES. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
(a) if to Parent or Merger Sub, to
Superior National Insurance
Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Attention: William L. Gentz
Telecopy No.: 818-880-8615
with a copy to
Dana M. Warren, Esq.
Riordan & McKinzie
5743 Corsa Avenue
Suite 116
Westlake Village, California 91362
Telecopy No.: 818-706-2956
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(b) if to Pac Rim, to
Pac Rim Holding Corporation
6200 Canoga Avenue
Woodland Hills, California 91367
Attention: Stanley Braun
Telecopy No.: 818-595-0099
with a copy to
Dennis W. Harwood, Esq.
Barger & Wolen LLP
19800 MacArthur Boulevard
8th Floor
Irvine, California 92612
Telecopy No. 714-752-6313
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
11.3 ASSIGNMENT; BINDING EFFECT; BENEFIT. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions in
Article 4 and Sections 7.10, 7.11, and 7.13 (collectively, the "Third Party
Provisions"), nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement, and no Third
Party Provision shall be enforceable until after the Effective Time.
11.4 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Pac Rim
Disclosure Letter, the Parent Disclosure Letter, the Confidentiality Agreement
between Pac Rim and Parent and any documents delivered by the parties in
connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings (oral and written) among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
During the term of this Agreement, neither party hereto shall terminate the
foregoing Confidentiality Agreement.
11.5 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of Pac Rim, but after any such stockholder approval, no amendment
shall be made which by law requires the further approval of stockholders without
obtaining such further approval. This Agreement may not be amended except by an
instrument in writing signed by or on behalf of each of the parties hereto.
11.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws.
11.7 VENUE. Any action concerning or dispute arising out of or concerning
this Agreement, regarding the interpretation of this Agreement, or regarding the
relationships among
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the parties created pursuant to this Agreement shall be filed only in the United
States District Court for the Central District of California or in the Superior
Court of the State of California for the County of Los Angeles.
11.8 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies of this
Agreement, each of which may be signed by less than all of the parties hereto,
but together all such copies are signed by all of the parties hereto.
11.9 HEADINGS. Headings of the Articles and Sections of this Agreement
are for the convenience of the parties only, and shall be given no substantive
or interpretive effect whatsoever.
11.10 INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
11.11 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitations, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
11.12 INCORPORATION OF EXHIBITS. The Pac Rim Disclosure Letter, the
Parent Disclosure Letter and all Exhibits and Schedules attached hereto and
referred to herein are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
11.13 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
11.14 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any California Court, this being
in addition to any other remedy to which they may be entitled at law or in
equity.
11.15 SUBSIDIARIES. As used in this Agreement, the word "Subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization, or any organization of which such party is a
general partner. When a reference is made in this Agreement to Significant
Subsidiaries, the words "Significant Subsidiaries" shall refer to Subsidiaries
(as defined above) which constitute "significant subsidiaries" under Rule 405
promulgated by the SEC under the Securities Act.
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11.16 MATERIAL ADVERSE EFFECT. (a) As used in this Agreement, the term
"Pac Rim Material Adverse Effect" means an adverse effect on the business,
results of operations, prospects or financial condition of Pac Rim and its
Subsidiaries, taken as a whole, which results or is reasonably expected to
result in a decrease in the GAAP book value of Pac Rim at the Effective Date or
Effective Time versus the GAAP book value of Pac Rim at December 31, 1996, of
more than $2,500,000.00; provided, however, the following items shall not be
included in determining if a Pac Rim Material Adverse Effect exists: (1)
adverse development in Assurance Company's reserves for loss and loss adjustment
expenses incurred on or before December 31, 1996, after taking into account the
$12 million in reserve strengthening referred to in Section 5.7(b) hereof;
provided, further, however, that to the extent the ultimate loss and loss
adjustment expenses used by Pac Rim to book its reserves for loss and loss
adjustment expenses at December 31, 1996 exceed the ultimate loss and loss
adjustment expenses for accident years prior to 1997 used by Pac Rim to book its
reserves for loss and loss adjustment expenses in its then most recently
available financial statements prior to the Effective Date or the Effective
Time, such benefit, if any, shall be disregarded in calculating a Pac Rim
Material Adverse Effect; (2) changes resulting from market fluctuation of the
Assurance Company's investment portfolio; (3) any amounts that may be payable
under the SMT Plan, the Employment Documents, the Severance Program or the 401k
Supplemental Program that are not reflected in Pac Rim's financial statements or
the Preliminary Documents; and (4) any reduction in deferred taxes as of
December 31, 1996, as reflected in the balance sheet of the Preliminary
Documents. As used in this Agreement, the term "Parent Material Adverse Effect"
means an adverse effect on the business, results of operations, prospects or
financial condition of Parent and its Subsidiaries, taken as a whole, having an
economic value of $1,000,000 or more; provided, however, any change in the book
value of Parent or any of its Subsidiaries based on an adjustment of the market
value of securities valued at book value on such companies' books and records
shall not be included in determining if a Parent Material Adverse Effect exists.
(b) The existence of facts or circumstances which would constitute a
breach of the representations and warranties set forth in Article 5 hereof shall
not be considered to be a breach of any representation and warranty if all such
facts and circumstances do not have, individually or in the aggregate, a Pac Rim
Material Adverse Effect. The existence of facts or circumstances which would
constitute a breach of the representations and warranties set forth in Article 6
hereof shall not be considered to be a breach of any representation and warranty
if all such facts and circumstances do not have, individually or in the
aggregate, a Parent Material Adverse Effect.
11.17 ATTORNEY'S FEES. In any legal action to enforce this Agreement or
any provision hereof, the prevailing party in such action shall, in addition to
any other remedy to which it may be entitled hereunder, receive from the party
from which enforcement was sought reasonable attorney's fees and its court costs
in connection with such action.
11.18 PERFORMANCE BY MERGER SUB. Parent hereby agrees to cause Merger Sub
to comply with its obligations hereunder and to cause Merger Sub to consummate
the Merger as contemplated herein.
11.19 PRIOR AGREEMENT. Parent, Merger Sub and Pac Rim hereby rescind and
terminate the Prior Agreement, and such agreement shall have no further force or
effect as of the Effective Date.
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IT WITNESS WHEREOF, the parties have caused this Agreement and caused the
same to be duly delivered on their behalf as of the day and year first written
above.
PARENT: SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ J. Chris Seaman
----------------------------------
Name: J. Chris Seaman
Title: Executive Vice President
MERGER SUB: SNTL ACQUISITION CORP.
By: /s/ J. Chris Seaman
----------------------------------
Name: J. Chris Seaman
Title: Executive Vice President
PAC RIM: PAC RIM HOLDING CORPORATION
By: /s/ Stanley Braun
----------------------------------
Name: Stanley Braun
Title: President and Chief
Executive Officer
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SCHEDULE 7.11(e)
----------------
SEVERANCE PROGRAM
-----------------
1. Termination.
-----------
(a) A Pac Rim Employee's employment may be terminated by the
Surviving Corporation or Parent, as appropriate, or a Pac Rim Employee may
resign for any reason by written notice. The Pac Rim Employee will be treated,
for purposes of the Severance Program, as having been terminated if the Pac Rim
Employee's employment is terminated by Surviving Corporation or Parent, as
appropriate, within six (6) months following the Closing Date or if the Pac Rim
Employee resigns within four (4) months following the Closing Date.
(b) Subject to any benefit continuation requirements of applicable
laws, in the event a Pac Rim Employee's employment is terminated or the Pac Rim
Employee resigns for any reason whatsoever within the applicable periods
specified in Section 1(a) of this Schedule 7.11(e), all compensation and benefit
obligations of the Surviving Corporation or Parent, as appropriate, shall cease
as of the effective date of such termination, except for any compensation and
benefits earned or accrued but unpaid through such date. Payments under The Pac
Rim Assurance Company 1996 Annual Incentive Plan due such terminated Pac Rim
Employee shall be pro rated for any partial year, and paid on the basis of the
actual performance level achieved prior to the Closing Date without reduction
for any additional reserves, restructuring charges or other accounting charges
that the Surviving Corporation or Parent, as appropriate, deems to be in its
best interest following the Closing Date.
2. TERMINATION PAYMENTS AND BENEFITS.
---------------------------------
(a) If a Pac Rim Employee's employment hereunder is terminated by
Parent or Surviving Corporation, as appropriate, other than for Cause (as
defined herein), within six (6) months following the Closing Date or if the Pac
Rim Employee resigns within four (4) months following the Closing Date, then the
Surviving Corporation or Parent, as appropriate, shall be obligated to pay to
the Pac Rim Employee certain termination payments and make available benefits as
follows:
(i) Calculation of Termination Payments for Officers of Pac Rim
or its Subsidiaries. Pac Rim Employees who are officers of Pac Rim or
its Subsidiaries who are terminated or who resign within the
applicable periods specified in Section 2(a) of this Schedule 7.11(e),
shall receive payment equal to (y) the Pac Rim Employee's annual base
salary divided by twelve (12), multiplied by (z) the Pac Rim
Employee's years of service with Pac Rim and/or its Subsidiaries,
rounded to the nearest full year, multiplied by two. Six months of
employment would round to the next highest year.
(ii) Calculation of Termination Payments for Other Employees of
Pac Rim and its Subsidiaries. Other employees of Pac Rim or its
Subsidiaries who are terminated or who resign within the applicable
periods specified in Section 2(a) of this Schedule 7.11(e) shall
receive payment equal to (y) the Pac Rim Employee's annual base salary
divided by twelve (12), multiplied by (z) the Pac Rim Employee's years
of service with Pac Rim and/or its Subsidiaries rounded to the nearest
full year. Six months of employment would round to the next highest
year.
(c) Method of Payment. Termination payments shall be paid to the Pac
Rim Employee in a lump sum on the Pac Rim Employee's final date of service.
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(d) Benefits. Parent or the Surviving Corporation, as appropriate,
shall pay on behalf of terminated Pac Rim Employees all costs associated with
Consolidated Omnibus Reconciliation Act of 1985 (COBRA) healthcare continuation
benefits for the periods described below:
(i) Officers of Pac Rim and its Subsidiaries shall receive COBRA
continuation benefits equal to two months of benefits for each year of
service rounded to the nearest whole year.
(ii) Other Employees of Pac Rim and its Subsidiaries shall
receive COBRA continuation benefits equal to one month of benefits for
each year of service rounded to the nearest whole year.
TERMINATION FOR CAUSE.
- ---------------------
For purposes of the Severance Program, "Cause" shall mean (i) the willful
engaging by the Pac Rim Employee in misconduct which is materially injurious to
the Parent or the Surviving Corporation, as the case may be, monetarily or
otherwise, (ii) stealing from the Parent or the Surviving Corporation, as the
case may be, or (iii) the conviction of a felony while in the employ of Parent
or the Surviving Corporation, as the case may be.
No act, or failure to act, on the Pac Rim Employee's part shall be
considered "willful" unless done, or omitted to be done, by the Pac Rim Employee
not in good faith and without reasonable belief that his or her action or
omission was in the best interest of the Parent or the Surviving Corporation, as
the case may be.
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APPENDIX B -- SECTION 262 OF
THE DELAWARE GENERAL CORPORATION LAW
SECTION 262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsections (f) or (g) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
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d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares of fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any
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stockholder shall have the right to withdraw his demand for appraisal and to
accept the terms offered upon the merger or consolidation. Within 120 days after
the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving the merger
or resulting from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates
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representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX C
[LETTERHEAD OF SALOMON BROTHERS INC]
March 13, 1997
Board of Directors
Pac Rim Holding Corporation
6200 Canoga Avenue
Woodland Hills, CA 91367
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of shares of common stock, $.01
par value (the "Company Common Stock"), of Pac Rim Holding Corporation (the
"Company"), of the consideration to be received by such shareholders in the
proposed merger of SNTL Acquisition Corp. ("Merger Sub"), a subsidiary of
Superior National Insurance Group, Inc. ("Superior"), with and into the Company
pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of
February 17, 1997 (the "Merger Agreement"), among the Company, Merger Sub and
Superior (the "Proposed Merger").
As more specifically set forth in the Merger Agreement, in the Proposed
Merger each issued and outstanding share of the Company Common Stock (other than
the Company Common Stock whose holders exercise their dissenters' rights) will
be converted into the right to receive an amount in cash equal to the Merger
Price Per Share (as defined in the Merger Agreement), without interest. We
understand that the Merger Price Per Share will be equal to approximately $2.11
($2.105 unrounded).
In connection with the Proposed Merger, Superior, PRAC Limited Partnership
("PRAC") and Allstate Insurance Company ("Allstate") (collectively, the
"Security Holders") have entered into a Series A Convertible Debentures and
Series 1, 2 and 3 Detachable Warrant Purchase Agreement dated as of February 17,
1997 (the "Purchase Agreement"). Pursuant to the Merger Agreement and the
Purchase Agreement, Superior shall purchase all of the outstanding Series A
Convertible Debentures of the Company (the "Debentures") for the aggregate
amount of $20 million and all of the outstanding Series 1, 2 and 3 Detachable
Warrants of the Company (the "Warrants" and, together with the Debentures, the
"Securities") held by the Security Holders for cash equal to the Warrant
Consideration (as defined in the Merger Agreement). The Company has informed
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<PAGE>
[2ND PAGE LETTERHEAD OF SALOMON BROTHERS INC]
Board of Directors
Pac Rim Holding Corporation
March 13, 1997
Page 2
us that the Warrant Consideration to be received by the Security Holders will be
equal, when expressed as a price per common share equivalent, to the Merger
Price Per Share. The Merger Agreement provides that the aggregate price to be
paid by Superior to acquire the outstanding shares of Company Common Stock,
together with all "in the money" options and warrants through the Merger and
pursuant to the Purchase Agreement will be approximately $22,021,032.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) the Merger Agreement, including the
Exhibits thereto; (ii) the Purchase Agreement, including the Exhibits thereto;
(iii) the terms and conditions of the Securities; (iv) certain publicly
available information concerning the Company, including the Annual Reports on
Form 10-K of the Company for each of the years in the six year period ended
December 31, 1996; (v) statutory financial information regarding the Company's
insurance subsidiary for each of the years in the six year period ended December
31, 1996; (vi) a report dated January 20, 1997 prepared by Arthur Andersen
L.L.P. on the Company's reserves for unpaid loss and loss adjustment expense as
of December 31, 1996; (vii) certain other internal information, primarily
financial in nature, including projections, concerning the business and
operations of the Company furnished to us by the Company for purposes of our
analysis; (viii) certain publicly available information concerning the trading
of, and the trading market for, the Company Common Stock; (ix) certain publicly
available information with respect to certain other companies that we believe to
be comparable to the Company and the trading markets for certain of such other
companies' securities; and (x) certain publicly available information concerning
the nature and terms of certain other transactions that we consider relevant to
our inquiry. We have also considered such other information, financial studies,
analyses, investigations and financial, economic and market criteria that we
deemed relevant. We have also met with certain officers and employees of the
Company and met with representatives of the California Department of Insurance
to discuss the foregoing as well as other matters we believe relevant to our
inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not made or obtained any independent evaluations or
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<PAGE>
[2ND PAGE LETTERHEAD OF SALOMON BROTHERS INC]
Board of Directors
Pac Rim Holding Corporation
March 13, 1997
Page 3
appraisals of any of the Company's assets, properties or facilities, nor have we
been furnished with any such evaluations or appraisals. We are not actuaries
and our services did not include any actuarial determinations or evaluations by
us or an attempt to evaluate actuarial assumptions. We have relied, directly
and indirectly, on reports and opinions provided to us by the Company and its
independent accountants and actuaries regarding the loss reserves of the
Company's insurance subsidiary. With respect to projections, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of the Company as to the
future financial performance of the Company and we express no view with respect
to such projections or the assumptions on which they were based.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of operations of the
Company; (ii) the business prospects of the Company; (iii) the historical and
current market for the Company Common Stock and for the equity securities of
certain other companies that we believe to be comparable to the Company; and
(iv) the nature and terms of certain other acquisition transactions that we
believe to be relevant. We have also taken into account our assessment of
general economic, market and financial conditions and our knowledge of the
insurance industry as well as our experience in connection with similar
transactions and securities valuation generally. We have also considered the
process that resulted in the negotiation of the Proposed Merger, including our
solicitation of offers to acquire the Company and the responses received to such
solicitation.
As you are aware, Salomon Brothers Inc has acted as financial advisor to
the Company in connection with the Proposed Merger and will receive a fee for
services, a substantial portion of which is contingent upon consummation of the
Proposed Merger. Additionally, Salomon Brothers Inc has previously rendered
certain investment banking and financial advisory services to the Company
including, but not limited to, the sale of the Securities to PRAC in 1994 and
the Company's initial public offering in 1991, for which we received substantial
compensation. We have also previously rendered certain investment banking and
financial advisory services to Insurance Partners L.P., a holder of a
controlling interest in Superior. In addition, in the ordinary course of our
business, we may trade the equity securities of the Company and Superior from
time to time for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
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<PAGE>
[2ND PAGE LETTERHEAD OF SALOMON BROTHERS INC]
Board of Directors
Pac Rim Holding Corporation
March 13, 1997
Page 4
Our opinion necessarily is based upon conditions as they exist and can be
evaluated on the date hereof and we assume no responsibility to update or revise
our opinion based upon circumstances or events occurring after the date hereof.
Our opinion is, in any event, limited to the fairness, from a financial point of
view, of the consideration to be received by the holders of the Company Common
Stock in the Proposed Merger and does not address the Company's underlying
business decision to effect the Proposed Merger or constitute a recommendation
to any holder of Company Common Stock as to how such holder should vote with
respect to the Proposed Merger. In addition, our opinion does not address the
fairness of the consideration to be received by the Security Holders from the
purchase of the Securities by Superior pursuant to the Purchase Agreement.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that the consideration to be received by the holders of the
Company Common Stock in the Proposed Merger is fair, from a financial point of
view, to such holders.
Very truly yours,
/s/ SALOMON BROTHERS INC
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<PAGE>
PROXY
PAC RIM HOLDING CORPORATION
6200 CANOGA AVENUE
WOODLAND HILLS, CALIFORNIA 91367-2402
(818) 226-6200
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Stanley Braun and Timothy R. Busch, or either of them, with full power of
substitution, are hereby appointed proxies (the "Proxies") of the undersigned
and authorized to represent and to vote, as designated below, all shares of
Common Stock of Pac Rim Holding Corporation held of record by the undersigned
on March 5, 1997, at the Special Meeting of Stockholders to be held at the
Company's headquarters, 6200 Canoga Avenue, Woodland Hills, California 91367-
2402 on April 8, 1997, at 10:00 a.m., Pacific Standard Time, and at any
adjournment or postponement thereof, on the following:
(Continued and to be signed on other side)
FOLD AND DETACH HERE
<PAGE>
Please mark
[X] your votes
as this
1. PROPOSAL TO APPROVE AND ADOPT THE AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER AMONG SUPERIOR NATIONAL INSURANCE GROUP, INC., SNTL ACQUISITION
CORP., AND PAC RIM HOLDING CORPORATION dated as of February 17, 1997, all as
more fully described in the accompanying Proxy Statement.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting, unless such
authority is withheld.
GRANT WITHHELD
[_] [_]
THIS PROXY IS GIVEN WITH AUTHORITY TO VOTE FOR ITEM (1) UNLESS A CONTRARY
CHOICE IS SPECIFIED.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM (1).
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT TEN-
ANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, AS EXECUTOR, ADMINISTRATOR,
TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
Signature(s) ___________________________ Dated: ______________________ , 1997
PLEASE MARK, SIGN EXACTLY AS NAME APPEARS ABOVE, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
