The Company's principal executive offices and the Los Angeles Branch share approximately 40,000 square feet of space in Calabasas, California pursuant to a lease expiring in 1999. The Company also leases space for branch offices located in South San Francisco, Sacramento, and Fresno (all in California). Such leases expire in 1997, 2001, and 2000, respectively. See Note (12) to Consolidated Financial Statements.
SELECTED FINANCIAL DATA - YEARS ENDED 1987 THROUGH 1996 (Amounts in thousands, except share and per share amounts.)
The following discussion and analysis provides information that management believes to be relevant to an understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and the notes thereto.
The Company's net income was $371,000 for the year ended December 31, 1995, versus $894,000 in 1994. Net income per share was $0.11 for 1995 versus $0.26 in 1994. Income before preferred securities accretion, discontinued operation, and extraordinary loss was $11,701,000 for 1995 versus $3,599,000 in 1994, due principally to favorable adjustments relating to prior year income effects totaling $13.7 million, consisting of favorable workers' compensation reserve development, adjustments to policyholder dividend reserves, and tax benefits resulting from an IRS settlement. Net income for both 1995 and 1994 was impacted by extraordinary items, including a $9,842,000 net of tax charge to discontinued operations in the second quarter of 1995, and $2,022,000 net of tax charge associated with the retirement of the Company's debt incurred in 1992, effective June 30, 1994.
In 1994, after the Company's decision to withdraw from the property and casualty markets late in 1993, the Company's management focused its effort on its workers' compensation operations. Also during 1994, several major financing transactions were completed as discussed in the "Financial Condition" section below.
In September 1993, in addition to discontinuing its property and casualty business, the Company also discontinued writing workers' compensation insurance through its Calabasas Branch due to its poor underwriting results. Management attributed this situation to the prolonged recession in Southern California as well as the litigious
The principal balance of the loan amortizes based on the payout pattern of the underlying claims of the reinsurance receivables. Approximately $6.0 million will be payable in 1997; $33.7 million in 1998; $25.6 million in 1999; $15.2 million in 2000 and immaterial annual amounts thereafter through 2004 totaling approximately $11.2 million. The effective interest rate of the loan will be approximately 6.87%. See Note 8 to Consolidated Financial Statements. The reason for the transaction was its positive impact on liquidity and anticipated positive impact on investment income in future periods. The realization of investment income is dependent on the performance of the Company's portfolio, as well as factors beyond the Company's control, such as interest rates and economic conditions generally.
the acquisition and capital contribution. While the Company believes that an efficient market will have already made appropriate allowances in arriving at the current price of the Company's shares, the issuance of Common Stock upon closing of the PRIM transaction at $7.53 per share represents a significant dilutive event to shareholders based upon the closing price of $13.50 per share on Nasdaq for the Company's Common Stock on March 5, 1997. In addition, certain of the purchasers under the Stock Purchase Agreement will be granted registration rights, and it is likely that all purchasers will be able to sell shares into the public market under Rule 144 under the Securities Act, beginning in limited amounts after one year, and, for purchasers who are not then affiliates, in unlimited amounts after two years.
Total liabilities increased $61.6 million to $237.8 million. The increase in total liabilities is due to the recording of $92 million in long term debt related to the Chase financing agreement.
Policyholder dividends liability decreased $8.1 million due to 1996 dividend payments to policyholders of $1.3 million and adjustment to policyholders dividend reserves of $6.8 million in response to the market change in pricing from a statutory basis to an open rating basis. The Company has discontinued paying policyholder dividends.
Premiums have stabilized in 1996 from the decline in 1995. This stabilization is due to management's focus on small profitable accounts and the renewal of those accounts. Premiums had been declining due to competitive pressures and strategic decisions to focus on smaller accounts. Management is committed to maintaining operating margins by avoiding exchanging margins for market share.
Over the past three years, the underwriting results have fluctuated significantly. The 1996, 1995 and 1994 years returned an underwriting profit of $4.8 million, $12.1 million and $5.0 million, respectively. The 1996 decrease in comparison to the 1995 underwriting results was due primarily to a $5.3 million charge recorded in 1996 related to the settlement of the 1993 Centre Re contract and an increase in net claims and claims adjustment expenses of $1.7 million due to adverse development in the 1995 accident year. The 1995 improvement as compared to 1994 was due to decreases in workers' compensation reserves of $2.2 million and policyholders dividend reserves of $5.7 million. These decreases were partially offset by increased underwriting, overhead and general and administrative expenses.
During the second quarter of 1995, the Company received a $1.7 million tax refund from the Internal Revenue Service, which confirmed the Company's tax net operating loss ("NOL") position. Accordingly, the valuation allowance that was established with the adoption of FAS 109 in 1993 is no longer deemed necessary. The Company's management has reviewed its deferred tax asset balance and concluded it is more likely than not the entire deferred tax asset will be realized. Management's conclusion is based on the utilization of its NOL and its expectation that sufficient taxable income will be generated in future periods. The Company is expected to be profitable in the future and has demonstrated such for the last three years ended December 31, 1996.
TWELVE MONTHS ENDED DECEMBER 31, -------------------------------- 1996 1995 --------------- -------------- (Dollars in thousands)
Gross premiums written $ 99,282 $ 97,084 Net premiums written 87,715 89,139 Net premiums earned 88,648 89,735
Claims and claim adjustment expenses 55,638 53,970 Underwriting expenses 34,138 29,447 Policyholder dividends (5,927) (5,742)
UNDERWRITING RATIOS (GAAP BASIS) Claims and claim adjustment expense ratio 62.8% 60.1% Underwriting expense ratio 38.5% 32.8% Policyholder dividends ratio (6.7)% (6.4)% --------------- -------------- Combined ratio 94.6% 86.5% --------------- -------------- --------------- --------------
NET PREMIUMS EARNED decreased 1.2% to $88.6 million in 1996 from $89.7 million in 1995. The decrease in net premiums earned, coupled with an increase in gross premiums written, reflects an increase in ceded insurance.
CLAIMS AND CLAIM ADJUSTMENT EXPENSE increased 3.1% to $55.6 million in 1996 from $53.9 million in 1995. The increase of $1.7 million is due to adverse development in the 1995 accident year. The claims and claim adjustment expense ratio as a percentage of net earned premium increased slightly to 62.8% in 1996 from 60.1% in 1995.
UNDERWRITING EXPENSES, excluding policyholder dividends, increased $4.7 million or 16% in 1996 from 1995. The increase was due primarily to a $5.3 million adjustment recorded in the second quarter of 1996 for accrued costs related to the settlement of a reinsurance contract. Underwriting expenses for 1996, excluding the $5.3 million in accrued costs, were $28.8 million as compared to $29.4 million in 1995. The underwriting expense ratio, excluding the $5.3 million in accrued costs, was 32.5% for 1996 which is comparable to 32.8% in 1995.
UNDERWRITING PROFIT from continuing operations decreased $7.2 million to $4.8 million in 1996 from $12.0 million in 1995. The change in underwriting results for 1996 is attributable to a $4.7 million increase in underwriting expense principally due to the cost of canceling the Centre Re contract and a $2.0 million increase in claims and claim adjustment expense due mainly to prior accident year adverse development.
Selected financial data as reported for the twelve months ended December 31, 1995 and 1994 are presented below.
TWELVE MONTHS ENDED DECEMBER 31, -------------------------------- 1995 1994 --------------- -------------- (Dollars in thousands)
Gross premiums written $97,084 $134,769 Net premiums written 89,139 105,946 Net premiums earned 89,735 110,418
Claims and claim adjustment expense 53,970 78,761 Underwriting expenses 29,447 21,660 Policyholder dividends (5,742) 4,983
NET PREMIUMS EARNED decreased $20.7 million or 19% in 1995 from 1994. The decrease in net premiums earned reflects the decrease in net premiums written described above.
UNDERWRITING EXPENSES, excluding policyholder dividends, increased $7.8 million or 36% in 1995 from 1994. The increase was primarily due to a $4.5 million decrease in ceding commissions in 1995 from the quota-share contract with ZRC offset, in part, by a decrease in direct commission expense of $3.0 million due to lower premium production. The remaining increase in underwriting expenses was due to higher general and administrative expenses in 1995.
UNDERWRITING PROFIT from continuing operations increased $7.0 million for the year ended December 31, 1995. The improvement was primarily due to a $10.5 million increase in underwriting profit attributable to a $4.8 million decrease in workers' compensation reserves and $5.7 million reduction in policyholder dividends. In 1995, the Company, based upon internally developed estimates, decreased workers' compensation reserves by $4.8 million due to continued favorable loss reserve development on accident years prior to 1995. The Company's estimates are consistent with reserve estimates of its outside independent actuaries. Also, in 1995, the Company adjusted its reserves for policyholder dividends downward by $5.7 million. This was offset by an increase in underwriting expense of $7.8 million in 1995. The $7.8 million increase in 1995 was primarily due to a $3.0 million decrease in ceding commission as compared to 1994. Underwriting results for the twelve months ended December 31, 1995, excluding the unusual items discussed earlier, decreased $0.9 million due primarily to decreased premium production not commensurate with the decrease in commission and overhead expenses.
The Company believes that it has adequate short-term investments and readily marketable investment grade securities to cover both claim payments and expenses. As of December 31, 1996, the Company had total cash, cash equivalents and investments of $149.4 million. This amount includes $1.45 million in restricted investments. The Company's remaining invested assets were comprised of $46.3 million in bonds and notes, held at market value; $1.2 million in equity securities; and $100.5 million in cash and invested cash, including certificates of deposit with maturities less than one year and money market deposits. It is management's belief that the liquidity of these investments is sufficient to meet the Company's obligations and liabilities through December 31, 1997.
The Company used $14.9 million in cash from operating activities for the year ended December 31, 1996 compared to $23.8 million during the year ended December 31, 1995. The improved cash flow from operations was primarily the result of lower claim and claim adjustment expense payments and policyholder dividends. This positively impacts liquidity and investment income in future periods. See OVERVIEW.
Early in 1995, SNIC entered into a reverse repurchase facility with a national securities brokerage firm ("broker") that allows SNIC to engage in up to $5 million in reverse repurchase transactions secured either by U.S. Treasury instruments or U.S. Agency debt. This arrangement provides SNIC with additional short-term liquidity. Under the facility, SNIC contacts the broker and indicates the size of the reverse repurchase transaction desired, and the nature of the security SNIC proposes to "sell" to the broker. Based upon the characteristics of the security, the broker indicates at what price it will purchase the security and what rate they will sell the security back to SNIC in 30 days. SNIC then transfers the security to the broker in exchange for the agreed-upon proceeds. SNIC repurchases the security from the broker at a later date at a previously agreed-upon price. SNIC may roll over any reverse repurchase transaction, and the transaction is repriced at the time of roll over. This type of financing allows SNIC a great deal of flexibility to manage short-term investments, avoiding the unnecessary realization of losses to satisfy short-term cash needs. Further, this method of financing is relatively inexpensive as compared to bank debt. Reverse repurchase transactions are viewed as short-term financing both by the DOI and current accounting literature. As of December 31, 1996, SNIC had no obligation outstanding under this facility. Historically, for long-term financing, the Company required borrowings in order to meet its obligations.
Excluding the Company's commitment to acquire PRIM, the Company has no significant cash commitments beyond its obligations to pay claims, ceded reinsurance premiums, lease expenses and the Company's commitments to pay principal and interest on the bank debt.
Effective June 30, 1994, the Company entered into a $10 million term loan agreement (the "1994 Loan") with Imperial Bank, which was used to retire subordinated notes issued during 1992. This term loan is to be fully amortized over seven years with quarterly payments of $300,000 plus interest per quarter for years one and two, $350,000 plus interest per quarter for years three and four, and $400,000 plus interest per quarter for years five, six and seven. Effective July 1, 1995, the borrowing rate was changed from Imperial Bank's prime rate plus one half percent to a fixed rate of 8% per annum. Additionally, under the amended terms of the 1994 Loan, the Company could not prepay the Loan until July 1, 1996. At such time, the Loan may be prepaid based upon an agreed upon premium which varies by year. The premium for 1997 is 3.5%; 1998 is 2.5%; 1999 is 1%; and 2000 is none.
The Company must adhere to certain requirements and provisions to be in compliance with the terms of the Imperial Bank notes. The provisions require SNIC to maintain certain financial ratios and SNIG to maintain Imperial Bank certificates of deposit in an amount equal to 20% of SNIG's outstanding balance under the 1994 Loan. At December 31, 1996, the Imperial Bank certificates of deposit were $1.5 million, all of which was restricted. The Company is in compliance with all loan covenants as of December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
As of December 31, 1995, the Company had total cash, cash equivalents, and investments of $163.9 million. Included in these amounts is an aggregate of $114.9 million in funds withheld from Centre Re. As of December 31, 1995, the Company's investment balances were comprised of $42.1 million in bonds and notes available-for-sale, $.7 million in common equity securities, $114.9 million in funds withheld from reinsurers and $6.3 million in cash and invested cash, including certificates of deposit with maturities of less than one year and money market deposits.
The Company used $23.8 million in cash from operating activities for the twelve months ended December 31, 1995 compared to cash generated of $6.2 million for the comparable period of the prior year. The $30.0 million decline in cash from operating activities was primarily due to $23.1 million decrease in premiums received net of reinsurance in 1995.
Net cash provided by investing activities was $28.8 million in 1995 which was used to fund the Company's operations. In 1994 net cash used in investing activities in 1994 was primarily due to the purchase of short-term investments with funds obtained from the sale of the preferred securities and warrants described above.
As of December 31, 1996, the Company had available $86.1 million in NOLs to offset taxable income recognized by the Company in periods after December 31, 1996. For federal income tax purposes, these NOLs will expire in material amounts beginning in the year 2006. If the issuance of 2,390,438 shares of Common Stock to IP and the other purchasers is completed, any additional 5% shift of ownership in the Company may result in a "change of ownership" under Section 382 of the Code, and severely limit the Company's ability to utilize NOLs. In order to issue the new stock and complete the PRIM acquisition, the Company must obtain shareholder approval of a charter amendment that would prohibit 5% owners of the Company's Common Stock (including holders of options and warrants) from acquiring additional stock and prohibit any additional person or entity from becoming a 5% holder of Common Stock. The prohibition against 5% changes in ownership would expire three years after the closing of the PRIM acquisition, which is expected to occur in April 1997. The Company would also reincorporate in Delaware, in part to better implement the charter amendment.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 is effective for fiscal year beginning in 1996. The Company has adopted the disclosure method of accounting for SFAS 123. SFAS 123 will not have a material impact on the consolidated financial statements.
Information is set forth below concerning the directors of the Company, and the year in which each director was first elected as a director of the Company.
J. Chris Seaman (3) 42 Executive Vice President, Chief 1993 Financial Officer and Director
C. LEN PECCHENINO became a director of the Company in May 1988 and was elected as Chairman in June 1994. He served as the Company's Chief Executive Officer from September 1991 to February 1992 and as the President and Chief Executive Officer from February 1994 to May 1994. He also served as the Chairman from
September 1991 to August 1992. Mr. Pecchenino was President and Chief Operating Officer of IC Industries, Inc. from November 1985 until he retired in 1986. From 1984 to November 1985, he was President and Chief Executive Officer of Pneumo Corporation, which was acquired by IC Industries in October 1984. Prior to 1984, he was Executive Vice President of Pneumo Corporation. IC Industries and Pneumo Corporation operated a number of companies in various industries, including manufacturing, aerospace and retailing.
CRAIG F. SCHWARBERG was appointed to the Board of Directors in March 1992. From 1991 to the present, Mr. Schwarberg has worked for International Insurance Advisors, Inc. ("IIA"), serving as a Managing Director through February 1994. From 1994 to March 1996, Mr. Schwarberg was a director and Chairman of the Board of NACOLAH Holding Corporation. From 1983 to 1990, he was associated with Lehman Brothers, a division of Shearson Lehman Brothers Inc. He was an associate from 1983 to 1986, Vice President from 1986 to 1990 and Senior Vice President during 1990.
J. CHRIS SEAMAN became a director of the Company in March 1993. Mr. Seaman has held the positions of Executive Vice President since February 1995 and Chief Financial Officer since July 1991. Prior to joining the Company, Mr. Seaman was the CFO of a private company engaged in insurance company acquisitions following ten years with Ernst & Whinney. Mr. Seaman previously held staff and management positions at Industrial Indemnity Insurance Company and Allianz of America Corporation, respectively.
Set forth in the table below are the names, ages and current offices held by all executive officers of the Company and SNIC. Unless specifically noted, the positions named are held at both the Company and at SNIC.
NAME AGE POSITION WITH THE COMPANY EXECUTIVE OFFICER - ---- --- ------------------------- SINCE -----
Executive officers of the Company are elected by and serve at the discretion of the Board. No arrangement exists between any executive officer and any other person or persons pursuant to which any executive officer was or is to be selected as an executive officer. None of the executive officers has any family relationship to any nominee for director or to any other executive officer of the Company. Set forth below is a brief description of the business experience for the previous five years of all of the executive officers.
J. CHRIS SEAMAN has held the positions of Executive Vice President since February 1995 and Chief Financial Officer since July 1991, and has served as a director of the Company since March 1993. Prior to joining the Company, Mr. Seaman was the CFO of a private company engaged in insurance company acquisitions following ten years with Ernst & Whinney. Mr. Seaman previously held staff and management positions at Industrial Indemnity Insurance Company and Allianz of America Corporation, respectively.
ARNOLD J. SENTER has held the position of Executive Vice President and Chief Operating Officer since February 1997. Prior to joining the Company, Mr. Senter most recently served as Senior Vice President, Southwest and Southeast Operations, at Zenith National Insurance Company, and had previously held various operational positions in nearly every functional area for Zenith since 1981. Mr. Senter has 30 years experience with both regional and national carriers.
DOUGLAS R. ROCHE was appointed Senior Vice President - Management Information Systems in 1994, prior to which he served as Vice President of Internal Operations from the time he joined the Company in 1990. From 1987 to 1990, Mr. Roche sold software and provided systems consulting services to the insurance industry. From 1969 to 1987 he held a variety of management positions in various insurance companies' systems analysis operations.
ROBERT E. NAGLE has held the position of Senior Vice President, General Counsel and Secretary since January 1996. From 1986 until he joined the Company, Mr. Nagle was corporate counsel and senior corporate counsel for Farmers Group, Inc.
JAMES L. CINNEY has held the position of Senior Vice President - Loss Control of SNIC since 1994. Before joining the Company, Mr. Cinney was self-employed in the hospitality industry for one year. Prior to that, he was Vice President, responsible for Loss Control, at Industrial Indemnity Insurance Company. Mr. Cinney has 30 years of workers' compensation loss control experience in a variety of staff and management positions with Industrial Indemnity Insurance Company, Zenith Insurance Company, Employee Benefits Insurance Company, and Hanover Cal/Comp Insurance Company.
CURTIS H. CARSON has held the position of Vice President Human Resources since January 1997. From 1984 until he joined the Company, Mr. Carson was employed by Farmers Insurance, most recently as Manager Human Resources.
JACK W. SOLOMON has held the position of Vice President of SNIC and Phoenix Manager since 1995 and was the Sacramento Branch Manager from 1990 until 1995. Prior to joining the Company, Mr. Solomon had 30 years experience in workers' compensation underwriting, marketing, and executive level management in a variety of insurance companies, principally in the mid-west.
ROBERT J. NIEBUR became Resident Vice President of SNIC, in charge of the South San Francisco branch in July, 1995. Prior to joining the Company, he was Workers' Compensation Manager for Flinn, Gray & Herterich, an insurance brokerage, from 1994 to 1995, and operated his own insurance consulting business from 1993 to 1994. For three years prior to that, Mr. Niebur was an operating executive with Great States Insurance Company and, earlier, he held various staff and executive positions over eleven years with Zenith Insurance Company.
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's Directors and certain of its officers, and persons who own more than ten percent of a registered class of the Company's equity securities (collectively, "Insiders"), to file reports of ownership and changes in ownership with the SEC. Insiders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
- -------------- (1) The amounts set forth for fiscal year 1996 include salary and other cash compensation paid in that year, other than amounts listed in the column entitled "Bonus." (2) Bonus amounts represent cash payments and are presented in the year in which they are earned, although payment typically is made in March of the subsequent year. Bonus amounts for fiscal year 1996 have not yet been declared. (3) Represents the fair market value of the underlying shares on the date of grant. (4) Other than as specifically noted, represents the employer's contribution under the Company's 401(k) Plan. (5) Mr. Furman K. Stanley resigned as President, Chief Executive Officer and director of the Company in February 1994. Mr. Pecchenino served as interim President, Chief Executive Officer and Chairman from February 1994 until Mr. Gentz's appointment to those positions in June 1994. During his tenure, Mr. Pecchenino received a total of $136,858 in cash compensation, with no bonus, long term compensation or other compensation earned or paid. Mr. Pecchenino was re-appointed as Chairman in June 1994 and continues to serve in that capacity. (6) Represents a grant of 9,625 shares of restricted stock that vests in nine equal annual increments following the date of grant. As of December 31, 1996, Mr. Gentz held an aggregate of 19,950 shares of restricted stock valued at $254,363, based upon the $12.75 per share fair market value of the Common Stock on such date.
(1) William L. Gentz, President and Chief Executive Officer. Mr. Gentz's agreement expires on June 1, 1997, but is subject to automatic renewal in one-year increments unless notification of non-renewal is given sixty days prior to the expiration of the then-current term. His salary was set as of June 1, 1994 at $275,000 annually, plus benefits and incidentals generally provided to officers of the Company, and is thereafter as determined by the Board. Mr. Gentz's annual salary was increased to $287,500 effective August 1, 1995. If Mr. Gentz's employment is terminated by the Company other than for cause, he is entitled to payments of his salary and benefits for the then-remaining term of his agreement. In the event of a change in control of the Company, Mr. Gentz would be deemed terminated without cause and his employment agreement would be deemed to have a three-year remaining term.
(3) Arnold J. Senter, Executive Vice President and Chief Operating Officer. Mr. Senter's agreement expires on February 17, 2000, but is subject to automatic renewal in one-year increments unless notification of non-renewal is given sixty days prior to the expiration of the then-current term. His salary was set as of February 17, 1997 at $200,000 annually, plus benefits and incidentals generally provided to officers of the Company, and is thereafter as determined by the Board. If Mr. Senter's employment is terminated by the Company other than for cause, he is entitled to payments of his salary and benefits for the then-remaining term of his agreement. In the event of a change in control of the Company, Mr. Senter would be deemed terminated without cause and his employment agreement would be deemed to have a three-year remaining term.
Key employees, including directors who are key employees, chosen by the Compensation Committee (which acts as the Option Committee under the terms of the 1986 Plan and 1995 Plan) are eligible to participate in the 1995 Plan.
Under the 1995 Plan, officers and key employees of the Company or its subsidiaries may be granted options to purchase shares of Common Stock or they may be given the opportunity to purchase restricted stock of the Company. The 1995 Plan permits the granting both of options that qualify for treatment as incentive stock options ("Incentive Stock Options") under Section 422 of the Code, and options that do not qualify as Incentive Stock Options ("Nonqualified Stock Options").
The following table sets forth information concerning options granted during fiscal 1996 to each of the executive officers named in the Summary Compensation Table set forth above under "Executive Compensation."
BASE SALARY. In establishing base salary levels for senior officer positions, the Compensation Committee and Mr. Gentz consider levels of compensation at other similarly situated companies and at direct competitors, levels of responsibility, and internal issues of consistency and fairness. In determining the base salary of a particular executive, the Compensation Committee and Mr. Gentz consider individual performance, including the accomplishment of short- and long-term objectives, and various subjective criteria including initiative, contribution to overall corporate performance, and leadership ability.
In the fiscal year ended December 31, 1995, the annual base salary of Mr. Gentz began at $275,000 and increased to $287,500 in September, a level determined to be appropriate by the Compensation Committee based on comparable chief executive salaries of a peer group of companies and of direct competitors referred to above, the Company's overall performance and profitability in the prior fiscal year, and Mr. Gentz's efforts and contributions to the Company. Mr. Gentz's annual base salary of $287,500 did not increase in the fiscal year ended December 31, 1996.
Amounts of individual awards are based principally upon the results of the Company's financial performance during the prior fiscal year. The awards for senior officers are within guidelines established by the Compensation Committee and Mr. Gentz as a result of their review of total compensation for senior management of peer companies and competitors. The actual amount awarded within these guidelines is determined principally by the Compensation Committee's and Mr. Gentz's assessment of the individual's contribution to the Company's overall financial performance. Consideration is also given to factors such as the individual's successful
completion of a special project, any significant increase or decrease in the level of the participant's executive responsibility, and the Compensation Committee's and Mr. Gentz's evaluation of the individual's overall efforts and ability to discharge the responsibilities of his position. In fiscal 1996, bonuses were paid with respect to fiscal 1995 performance to all of the continuing executive officers named in the Summary Compensation Table and to eleven executive officers in total. Bonuses earned related to fiscal 1996 have not been declared. The Company's practice has been to declare and pay these bonuses in the second quarter.
Under the 1995 Plan, the Compensation Committee during 1996 approved a set of stock option grants to all executive officers then employed, and restricted stock grants to thirteen executive officers. These approvals were acted upon by the Compensation Committee in its capacity as the "Option Committee" under the terms of the 1995 Plan. Agreements reflecting these option grants and restricted stock grants have been prepared and delivered to the recipient employees. The share certificates representing the restricted stock are only issued when restrictions lapse, hence the bulk of those share grants are not reflected in the Company's total outstanding shares number.
BRADLEY E. COOPER STEVEN D. GERMAIN GORDON E. NOBLE MEMBERS OF THE COMPENSATION COMMITTEE
The table below sets forth certain information regarding the beneficial ownership of the Company's voting securities as of March 5, 1997 by each person who is known by the Company to be the beneficial owner of more than 5% of the indicated classes of the Company's voting securities. On March 31, 1992, the Company issued its 14.5% Senior Subordinated Voting Notes due April 1, 2002 (the "Voting Notes") in connection with a transaction wherein the Company issued its 14.5% Senior Subordinated promissory notes in an aggregate principal amount of $11 million,
(1) Includes warrants expiring on April 1, 2002 to purchase 1,566,465 shares of Common Stock (the "Warrants") and a warrant expiring on June 30, 2001 to purchase 579,356 shares of Common Stock described more fully in footnote 5, below. The Warrants were issued on March 31, 1992 in a transaction in which the Company issued (a) Warrants to purchase approximately 1,616,886 shares of Common Stock and (b) promissory notes in the aggregate principal amount of $11 million to III and certain members of the Company's management. The Warrants are exercisable at $4.00 per share. The Warrants purchased by III, exercisable into 1,474,306 shares of Common Stock, were originally issued to IIA, as agent for each of the limited partners and the general partner of III. The Warrants have since been distributed to the partners of III; however, IIA's revocable agency relationship with such partners was reestablished after the distribution. See footnote 4 below. The Company has retired certain Warrants issued to members of management no longer employed by the Company. (2) Percent ownership is based on the number of shares outstanding as of March 5, 1997, which number was 3,446,706 shares, plus any shares issuable pursuant to options or warrants held by the person in question that may be exercised within 60 days after March 5, 1997. (3) Robert A. Spass, Craig F. Schwarberg and Bradley E. Cooper, directors of the Company, beneficially own limited partnership interests in III of 0.583%, 0.225%, and 0.075%, respectively. In addition, Mr. Spass has voting power over all of the voting capital stock of International Insurance Investors (Bermuda) Limited, the general partner of III. (4) Represents Warrants to purchase shares of Common Stock that are held by IIA, as agent for each of the limited partners and for the general partner of III, as discussed in footnote 1 above. As agent for such partners, IIA has the revocable authority to exercise rights set forth in the Warrants and to vote any shares of Common Stock issuable upon exercise of the Warrants. Robert A. Spass, a director of the Company, is an officer of IIA and as such has the authority to exercise these rights. The partners who, upon revocation of IIA's authority, would be entitled to exercise Warrants covering more than 5% of the Common Stock are Centre Re and Bishop Estate, in the share amounts and percentages stated. (5) Represents a warrant to purchase 579,356 shares of Common Stock issued as of June 30, 1994 (the "CentreLine Warrant"). CentreLine is an affiliate of Centre Re. The CentreLine Warrant was issued in connection with an investment in the Company (and its affiliate, Superior National Capital, L.P.) by CentreLine and a second Centre Re affiliate, Centre Reinsurance Services, aggregating $20 million. The CentreLine Warrant is exercisable at $5.20 per share. Steven D. Germain, a director of the Company, is an officer and a director of both Centre Re and CentreLine. In addition to Mr. Germain, each of Steven M. Gluckstern, Michael D. Palm, Laurence Cheng, David A. Brown and Jay S. Ralph is an officer and a director of both Centre Re and CentreLine. Messrs. Germain, Gluckstern, Palm, Cheng, Brown and Ralph disclaim any beneficial interest in the CentreLine Warrant and the Common Stock issuable upon its exercise, or in the Warrants held by IIA, as agent for Centre Re, as described in footnote 6 below, or the shares of Common Stock issuable upon the exercise of such Warrants. However, as officers and directors of both Centre Re and CentreLine, such persons share voting and/or investment power over such securities (subject to the agency appointment described in footnotes 1 and 4 above). (6) Represents Warrants to purchase shares of Common Stock received upon the distribution by III to its partners of the Warrants as described in footnote 1 above. See footnote 4 above for information concerning Centre Re's agency relationship with IIA with respect to such Warrants and see footnote 5 above for information concerning
(7) Based on a Form 4 filed with the SEC in July 1996, TJS is the direct beneficial owner of 396,950 shares of Common Stock. TJS Corporation and its controlling stockholder, sole director and executive officer, Thomas J. Salvatore, are the general partners of TJS Management, L.P., the general partner of TJS Partners, L.P., and exercise voting control and dispositive power over all 396,950 shares presently owned, and are beneficial owners of those shares. (8) Represents Warrants to purchase shares of Common Stock received upon the distribution by III to its partners of the Warrants as described in footnote 1 above. Richard S.H. Wong, Oswald K. Stender, Lokelani Lindsey, Gerard A. Jervis and Henry H. Peters, the trustees of the Bishop Estate, share voting and/or investment power over securities held by the Bishop Estate. Mr. Peters is a director of IIA. The number of shares reported for the Bishop Estate is based on a Schedule 13G with the SEC in February 1996. (9) Includes 98,050 shares owned of record by Jaco Oil Company, an entity controlled by Mr. Jamieson. (10) According to a report on Schedule 13D dated July 5, 1995, The Ravenswood Investment Company is the direct beneficial owner of 83,546 shares of Common Stock and has a contractual right to buy 122,500 additional shares from the receiver of AMS Life Insurance Company, an Arizona insurer in liquidation. The Company believes that acquisition has occurred. The general partners of The Ravenswood Investment Company, Robert E. Robotti and Kenneth R. Wasiak, exercise voting control and dispositive power over all 206,046 shares presently owned or subject to the contract to purchase, and are beneficial owners of those shares.
PERCENT OF NAME SHARES OWNED COMMON STOCK(1) - --------------------------------------------- -------------- --------------- William Gentz . . . . . . . . . . . . . . . . 56,445(2) 1.62%
J. Chris Seaman . . . . . . . . . . . . . . . 133,049(3) 3.74%
Joseph P. Wolonsky . . . . . . . . . . . . . 43,502(4) 1.25%
Gordon E. Noble . . . . . . . . . . . . . . . 10,000 *
Craig F. Schwarberg . . . . . . . . . . . . . 3,321(9) *
Bradley E. Cooper . . . . . . . . . . . . . . 3,107(10) *
(1) Percent ownership is based on the number of shares outstanding as of March 5, 1997, which number was 3,446,706 shares, plus any shares issuable pursuant to options or warrants held by the person in question which may be exercised within 60 days after March 5, 1997. (2) Includes 23,745 shares issuable upon exercise of stock options that are exercisable within sixty days of March 5, 1997. Also includes 19,950 restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of which the restrictions have lapsed as to 3,361 shares. (3) Includes 58,795 shares issuable upon exercise of Warrants and 42,691 shares issuable upon exercise of stock options, each of which is exercisable within sixty days of March 5, 1997. Also includes 15,163 restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of which the restrictions have lapsed as to 2,557 shares. (4) Includes 10,582 shares issuable upon exercise of Warrants and 22,645 shares issuable upon exercise of stock options, both of which are exercisable within sixty days of March 5, 1997. Also includes 1,000 shares held by his spouse, the ownership of which is subject to community property laws. Also includes 9,125 restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of which the restrictions have lapsed as to 1,556 shares. (5) Includes 4,262 shares issuable upon exercise of Warrants and 16,895 shares issuable upon exercise of stock options, each of which is exercisable within sixty days of March 5, 1997. Also includes 7,625 restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of which the restrictions have lapsed as to 1,218 shares. (6) Includes 8,667 shares issuable upon exercise of stock options exercisable within sixty days of March 5, 1997. Also includes 4,687 restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of which the restrictions have lapsed as to 804 shares. (7) Includes 98,050 shares owned of record by Jaco Oil Company, an entity controlled by Mr. Jamieson. (8) Represents 8,000 shares of Common Stock owned directly by Mr. Spass. In addition, Mr. Spass is the beneficial owner of Warrants held by IIA, as agent, representing the right to purchase 8,591 shares of Common Stock as described in footnote 4 of the preceding "Certain Beneficial Owners After the Stock Issuance" table. Mr. Spass is an officer of IIA and is the beneficial owner of less than one percent of the equity securities of IIA. IIA holds, as agent for the partners of III, Warrants to purchase 1,474,306 shares of Common Stock. In addition, see footnote 3 to the preceding "Certain Beneficial Owners After the Stock Issuance" table concerning Mr. Spass' voting power with respect to the Voting Notes. The number of shares reported for Mr. Spass is based on an Amendment No. 1 to Schedule 13G filed with the SEC in February 1997. (9) Comprised of Warrants representing the right to purchase 3,321 shares of Common Stock held by IIA, as agent, as described in footnote 4 of the preceding "Certain Beneficial Owners After the Stock Issuance" table. In addition, Mr. Schwarberg is the beneficial owner of less than one percent of the equity securities of IIA. (10) Represents 2,000 shares of Common Stock. Also includes Warrants to purchase 1,107 shares of Common Stock held by IIA, as agent, as described in footnote 4 of the preceding "Certain Beneficial Owners After the Stock Issuance" table. In addition, Mr. Cooper is the beneficial owner of less than one percent of the equity securities of IIA. (11) Represents (i) 3,600 shares of Common Stock owned directly, (ii) 600 shares of Common Stock owned indirectly as custodian for the benefit of his children under the New York Uniform Gift to Minors Act, and (iii) warrants to purchase Common Stock, consisting of the CentreLine Warrant to purchase 579,356 shares issued to CentreLine and the Warrants held by IIA, as agent for Centre Re. See the preceding "Security Ownership of Certain Beneficial Owners" table and footnotes 4 and 5 thereto. Mr. Germain is an officer and director of both Centre Re and CentreLine. As such, he shares voting and/or dispositive control over such securities (subject to the termination of the agency relationship with IIA by Centre Re). Mr. Germain disclaims any beneficial interest in the CentreLine Warrant, the Warrants held by IIA, as agent for Centre Re, and the Common Stock issuable upon their exercise. (12) Includes (i) 1,136,404 shares issuable upon exercise of warrants and (ii) 145,498 shares issuable upon exercise of stock options, each of which is exercisable within sixty days of March 5, 1997. Also includes 76,598 shares subject to the Company's right of repurchase, of which restrictions have lapsed as to 12,624 shares. Refer to footnotes 8 and 11 for information regarding beneficial interests in the Warrants and the Centreline Warrant held by certain directors.
Condensed Financial Information of Registrant, Superior National Insurance Group, Inc. Supplemental Insurance Information Reinsurance Valuation and Qualifying Accounts and Reserves Supplemental Property and Casualty Insurance Information
2.1 Amended and Restated Agreement and Plan of Merger dated as of February 17, 1997 among the Company, SNTL Acquisition Corp., and PRIM***** 2.2 Series A Convertible Debentures and Series 1, 2 and 3 Detachable Warrant Purchase Agreement, ("Debenture Purchase Agreement") dated September 17, 1997 among the Company, Prac Limited Partnership and Allstate Insurance Company**** 2.3 First Amendment to Debenture Purchase Agreement, dated as of February 17, 1997***** 2.4 Voting Agreement dated as of February 17, 1997 among the Company and certain stockholders and debenture holders of PRIM*****
3.1 Articles of Incorporation of the Company, as amended and restated by the Company and currently in effect* 3.2 Bylaws of the Company, to date*
* Previously filed as an exhibit to SNIG's Registration Statement on Form 10 as filed with the Securities and Exchange Commission ("SEC") on May 1, 1995 (File No. 0-25984).
(c) The page numbers of the Exhibits filed in response to this portion of Item 14 are listed on an Index of Exhibits that follows the signature page.