Our principal executive offices are located in Agoura Hills, California and are subject to a lease that expires in 2003. We have one other office lease in Denver, Colorado. In order to reduce the potential risk to the lessor, there is a provision in the lease for the Denver office location that the lease is a month-to-month tenancy until such time as the Plan of Reorganization is effective, which is termed the conversion date. The conversion date used in the lease is July 31, 2001. From and after the conversion date, this lease will be converted to a tenancy for a thirty-six month term.
During 2000, the Company was party to two events that significantly changed the direction of the Company. First, the group of five insurance companies that underwrote workers' compensation, and a limited amount of group health insurance throughout the United States and which SNTL was the ultimate parent were seized and conserved by the CDI. See Business-California Insurance Department Seizure and Conservation. We therefore no longer report our financial results as a property and liability insurance company, and instead treat the operations of the five insurance companies as discontinued operations. Second, on April 26, 2000, the Chapter 11 companies filed a petition with the Bankruptcy Court seeking protection under Chapter 11 of the United States Bankruptcy Code. SNTL intends to present a plan of reorganization to the Bankruptcy Court during the third quarter of 2001. See Business-Chapter 11 Petition and Reorganization.
SNTL's income before preferred securities' dividends and accretion and discontinued operations items was $5.6 million in 2000, as compared to a loss of $73.5 million in 1999. This $79.1 million decrease in loss in 2000 over 1999 was primarily the result of the recording in 1999 of a $49.9 million valuation allowance against our deferred tax asset, a $7.6 million expense associated with the recognition of deferred debt acquisition costs, a $5.0 million accrual for litigation expenses associated with the FHC Litigation, see "Legal Proceedings", and the recording in 2000 of $10.5 million of other income due to the considerations received pursuant to the Global Settlement Agreement. See Business-Global Settlement Agreement.
For the year ended December 31, 1999, we recorded a net loss of $453.7 million after preferred securities' dividends and accretion and discontinued operations, as compared to a net loss of $13.6 million for the year ended December 31, 1998. Net loss per share for the year ended December 31, 1999 was $25.61 (diluted) versus net loss per share of $2.01 (diluted) in 1998. During
Net investment income, excluding realized investment gains, increased $1.1 million or 137.5% to $1.9 million for the year ended December 31, 2000 compared to the same period in 1999. The increase in investment income was due to an increase in the average assets available for investment in 2000 as opposed to 1999. In 2000, the net investment income earned on accumulated cash resulting from Chapter 11 proceeding, in the amount of $1.6 million, has been classified on the consolidated statement of operations as a reorganization item.
Interest expense increased $2.1 million or 20.0% to $12.4 million for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The increase in interest expense was primarily due to the increase in the interest rate of the long-term bank debt since the company was in default under the loan documents as a result of the seizure and conservation of the five insurance companies by the CDI and the Bankruptcy filing. See "-Liquidity and Capital Resources."
Discontinued operations for the year ended December 31, 1999 recorded a loss of $368.9 million due to $333.6 million disposal of SNTL's investment in the five insurance companies that the CDI seized and conserved, see "Business-California Insurance Department Seizure and Conservation", as well as, a $35.3 million loss on current year operations. Since the Company wrote-off its investment in discontinued operations in 1999 no such charge was recognized in 2000. See "Business-Discontinued Insurance Company Operations."
Year ended December 31, 1999 as compared to year ended December 31, 1998
Commission income from front company business, see "Business-Front Company Business", for the years ended December 31, 1999 and 1998 was $39.2 million and $7.9 million, respectively. The $31.3 million increase is primarily due to an increase in premiums generated from entering into a fronting arrangement with Centre Insurance Company during 1999.
Other operating expenses increased $5.9 million or 1180.0% to $6.4 million for the year ended December 31, 1999, as compared to the year ended December 31, 1998. The increase is primarily due to a $5.0 million accrual recorded in 1999 for litigation expenses associated with the FHC Litigation. See Item 3 - Legal Proceedings.
Net investment income, excluding realized investment gains, increased $0.2 million or 39.2% to $0.7 million for the year ended December 31, 1999 compared to the same period in 1998. The increase
Interest expense increased $9.7 million or 1616.0% to $10.3 million for the year ended December 31, 1999, as compared to the year ended December 31, 1998. The increase in interest expense was primarily due to the $110.0 million long-term bank debt obtained in December 1998. Consequently, only one month of interest was incurred in 1998 as compared to twelve months in 1999. See "-Liquidity and Capital Resources."
In December 1998, the acquisition of BIG was funded with (a) senior debt financing in the amount of $110.0 million and (b) equity financing in the amount of $200.1 million. The senior debt financing was obtained pursuant to the terms of a Credit Agreement dated as of December 10, 1998, among SNTL, Chase, as administrative agent, and various lending institutions ("long-term bank debt"). Prior to incurring the indebtedness, we obtained the consent of holders of the outstanding Trust Preferred Securities of the Trust, a subsidiary of SNTL, authorizing the Preferred Trustee of the Trust to waive a provision of the covenant limiting the incurrence of indebtedness set forth in the Senior Subordinated Indenture dated as of December 3, 1997 between SNTL, as issuer, and Wilmington Trust Company, as trustee. This waiver was effected pursuant to the First Supplemental Indenture, dated as of November 17, 1998, between SNTL and the Wilmington Trust Company, as trustee. However, on April 26, 2000 we filed for relief under Chapter 11 of the United States Bankruptcy Code, as described in Business-Chapter 11 Petition and Reorganization. As a result of the Chapter 11 filing, all required repayments of principal and interest under the terms of the Credit Agreement for the long-term bank debt have been suspended, except for a $5.4 million distribution, less certain bank expenses charged to SNTL, plus interest, all netting to $5.2 million, was paid to the bank syndicate on December 4, 2000, pursuant to a November 9, 2000, order by the Bankruptcy Court. See "Business-Commercial Compensation Casualty Company Merger and Distribution." We have continued to accrue interest on the long-term bank debt, per the terms of SNTL being in default of the Credit Agreement, at a rate
that equals the Prime Rate plus 2%. The long-term bank debt principal and interest are classified on our consolidated balance sheet at December 31, 2000, under the category of liabilities subject to compromise under reorganization proceedings.
The equity financing was obtained pursuant to (a) the sale of 1,902,233 shares of our common stock for $31.9 million, in connection with the exercise of subscription rights ("Rights") to purchase common stock distributed to existing stockholders (other than IP Delaware and IP Bermuda) and warrant holders (the "Rights Offering"), (b) the sale of 620,610 shares of common stock for $10.4 million, all paid in the form of promissory notes in favor of SNTL, in connection with the Rights Offering to holders of SNTL's stock options and restricted common stock (the "Employee Participation"), and (c) the private placement (the "IP Stock Issuance") pursuant to the Stock Purchase Agreement (as defined below) of (i) 5,276,960 shares of common stock for $88.4 million to IP II, (ii) 2,949,594 shares of common stock for $49.4 million to IP Delaware and (iii) 1,196,588 shares of common stock for $20.0 million to IP Bermuda. All of the shares were sold at $16.75 per share. Employees purchasing common stock in the Employee Participation included William L. Gentz and J. Chris Seaman, who are directors and executive officers of Superior National. Prior to the consummation of the acquisition of BIG, IP Delaware and IP Bermuda beneficially owned approximately 23% and 13%, respectively, of the then outstanding shares of common stock. IP II owned no shares of common stock prior to the consummation of the acquisition of BIG. Robert A. Spass, Steven B. Gruber and Bradley E. Cooper, directors of SNTL, own certain direct and indirect limited partnership interests some of the limited partnerships that are the direct or indirect general partners of IP Delaware and IP Bermuda. Messrs. Gruber and Spass are officers of the ultimate general partners of IP Delaware and IP Bermuda and Messrs. Spass and Cooper are officers of Capital Z Partners, Ltd. ("Cap Z"), the ultimate general partner of IP II. Certain members of SNTL's management are investors in an investment fund that is a limited partner of IP II.
We are party to two leases principally associated with our home and branch office in Denver. Our minimum lease commitment with respect to these leases in 2001 is approximately $212 thousand. These leases expire in 2003 and 2004, respectively.
Our 1999 and prior consolidated federal income tax returns reflected approximately $762.4 million of NOLs. The Internal Revenue Code ("IRC") permits NOLs to be carried back two years, or carried forward 20 years, to offset any consolidated taxable income in those years. Approximately $569.4 million of SNTL's $762.4 million of NOLs was generated in 1999, and, if not used in future years, will expire at the end of 2019. The remaining $193.0 million of NOLs expire between 2000 and 2018. SNTL's 1997 and 1998 consolidated returns did not generate taxable income, so there is no benefit to be gained from carrying-back any of our NOLs. We expect that our 2000 consolidated return will result in a net operating loss of at least $200.0 million, increasing total NOLs to at least $962.4 million at December 31, 2000. The NOLs have value to the extent they can be used in future years to offset SNTL's taxable income, if any, prior to the NOL's expiration dates. Our ability to continue as a going concern is contingent upon, among other things, its ability to formulate a plan of reorganization that will be confirmed by the Bankruptcy Court, to achieve satisfactory levels of profitability and cash flow from operations and the preservation for, and utilization by, one or more of SNTL's former stockholders or creditors, of SNTL's NOLs, See Business-Tax Net Operating Loss Carryforwards. Since there is no assurance that a plan of reorganization will be proposed, approved or confirmed by the Bankruptcy Court, we recorded on our consolidated financial statements a valuation allowance against all of our deferred tax asset for the years ended December 31, 1999 and 2000.
Summarized quarterly financial data for 2000 and 1999 is as follows (in thousands, except per share data):