<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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:
<TABLE>
<S> <C>
[ ] 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 Rule 14a-11(c) or Rule 14a-12
</TABLE>
RISCORP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(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):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
RISCORP LETTERHEAD
March 3, 1998
To the Shareholders of RISCORP, Inc.:
You are cordially invited to attend a Special Meeting of the Shareholders
of RISCORP, Inc. (the "Company") to be held on March 26, 1998 at 10:00 a.m.,
Eastern Standard Time, at the Sheraton Colony Square, 188 14th Street, N.E.,
Atlanta, Georgia 30361 (the "Special Meeting"). At the Special Meeting,
shareholders of the Company will be asked to consider and vote upon the approval
and adoption of an Asset Purchase Agreement (the "Purchase Agreement") whereby
substantially all of the assets of the Company and certain of its subsidiaries
will be acquired by Zenith Insurance Company (the "Asset Sale"). Pursuant to the
terms of the Purchase Agreement, the purchase price to be paid for the assets
will be the difference between the book value of the assets purchased and the
liabilities assumed by Zenith as of the closing date, including $15 million in
certain indebtedness of the Company, subject to a minimum cash purchase price of
$35 million. The proposed Purchase Agreement and the consummation of the
transactions contemplated therein, have been unanimously approved by the Board
of Directors of the Company as being in the best interests of the Company and
its shareholders.
Beginning in the third quarter of 1996 and continuing thereafter, the
Company began to experience several significant problems principally attributed
to the Company's growth through acquisitions and the inability of its accounting
infrastructure to keep pace with this growth due to, among other things, a
significant turnover of the Company's senior finance and accounting officers
following the Company's initial public offering. The Company also experienced
other adverse developments, including (i) a decision by the Florida Department
of Insurance (the "DOI") on October 4, 1996 ordering insurance providers to
reduce workers' compensation rates by an average of 11.2%, (ii) a significant
loss of the trading value of the Company's Class A Common Stock, (iii) an
inability to timely prepare and file audited financial statements with the
Securities and Exchange Commission and state insurance regulatory authorities,
(iv) the issuance of unfavorable ratings by A.M. Best Company, and (v) numerous
legal proceedings initiated against the Company, certain directors and former
officers. As a result of these and other adverse developments, the DOI set a
final deadline of Noon on June 17, 1997, for the Company to enter into a
definitive purchase agreement with an approved buyer or face seizure of its
Florida insurance subsidiaries by the DOI. Such seizure could have resulted in a
complete loss of shareholder value. Faced with this ultimatum, and after
receiving the opinion of Smith Barney Inc. that the Purchase Agreement was fair,
from a financial point of view, to the Company, on June 17, 1997, the Board
approved the Purchase Agreement with Zenith Insurance Company. The Board also
has received from BT Alex. Brown Incorporated an opinion that the Purchase
Agreement is fair, from a financial point of view, to the Company and its
subsidiaries named in the Purchase Agreement. THE BOARD OF DIRECTORS BELIEVES
THAT ADOPTION OF THE PURCHASE AGREEMENT IS THE BEST WAY TO PROTECT AND MAXIMIZE
SHAREHOLDER VALUE AND URGES YOU TO VOTE "FOR" THE APPROVAL AND ADOPTION OF THE
PURCHASE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREIN.
Enclosed are the (i) Notice of Special Meeting of Shareholders, (ii) Proxy
Statement, and (iii) Proxy for the Special Meeting. The Proxy Statement
describes the proposed Purchase Agreement and the Asset Sale and provides other
information about the Company. We have included as appendices to the Proxy
Statement a copy of the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1996, which includes the Company's audited financial
statements for 1996, and a copy of the Company's Quarterly Report on Form 10-Q/A
for the quarterly period ended September 30, 1997. We urge you to read the
enclosed materials carefully.
Whether you plan to attend the Special Meeting in person or not, we urge
you to complete, sign and date the enclosed Proxy and return it in the enclosed
envelope as soon as possible to ensure that your shares will be voted at the
Special Meeting. If you attend the Special Meeting, you may revoke your Proxy
and vote in person if you wish. The affirmative vote entitled to be cast by
holders of (i) a majority of all of the outstanding
<PAGE> 3
shares of Class A Common Stock and Class B Common Stock of the Company, voting
as a single class, entitled to vote thereon, and (ii) a majority of the
outstanding shares of Class A Common Stock entitled to vote thereon and voting
separately, is required to approve and adopt the Purchase Agreement and the
transactions contemplated therein. Consequently, a failure to vote or an
abstention will have the same effect as a vote against the proposal. As more
fully described in the enclosed Proxy Statement, William D. Griffin and various
partnerships and trusts collectively own, beneficially and of record, all of the
outstanding shares of Class B Common Stock of the Company and have executed a
voting agreement pursuant to which each has agreed to vote their shares in favor
of the approval of the Purchase Agreement. Accordingly, over 95% of the votes
entitled to be cast by the holders of Class A Common Stock and Class B Common
Stock, voting as a single class, will be voted in favor of the Purchase
Agreement and, therefore, shareholder approval as to subpart (i) above is
assured. This voting agreement, however, will have no impact on the voting of
Class A Common Stock voting separately and, accordingly, your vote is important
with respect to obtaining shareholder approval as to subpart (ii) above.
If you have any questions about the Proxy Statement, please let us hear
from you. We look forward to seeing you at the meeting.
Sincerely,
/s/ FREDERICK M. DAWSON
--------------------------------------
FREDERICK M. DAWSON
President, Chief Executive Officer and
Director
2
<PAGE> 4
RISCORP, INC.
1390 MAIN STREET
SARASOTA, FLORIDA 34236
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 26, 1998
---------------------
To the Shareholders of RISCORP, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders of
RISCORP, Inc. (the "Company") will be held at the Sheraton Colony Square, 188
14th Street, N.E., Atlanta, Georgia 30361, on March 26, 1998 at 10:00 a.m.,
Eastern Standard Time (the "Special" Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Asset
Purchase Agreement, dated June 17, 1997, as amended, by and among Zenith
Insurance Company, the Company and the Company's subsidiaries named therein
(the "Purchase Agreement"), and to approve the consummation of the
transactions contemplated therein, including the proposed sale of
substantially all of the assets of the Company and its subsidiaries (the
"Asset Sale"). A copy of the Purchase Agreement is attached as Appendix A
to the accompanying Proxy Statement.
2. To consider and vote upon a proposal to approve an adjournment or
postponement of the Special Meeting for a period of not more than one
hundred twenty days for the purpose of soliciting additional proxies in the
event the number of shares of Class A Common Stock and Class B Common Stock
represented at the meeting in person or by proxy is insufficient to
constitute a quorum or, if a quorum is present, the Company fails to
receive a sufficient number of votes to approve the Purchase Agreement and
Asset Sale described in Item 1 above.
3. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
Only those persons who were holders of record of the Class A Common Stock
and Class B Common Stock of the Company at the close of business on January 28,
1998 are entitled to notice of and to vote at the Special Meeting or any
adjournment or postponement thereof.
Your attention is directed to the accompanying Proxy Statement and its
appendices for more complete information regarding the matters to be acted upon
at the Special Meeting.
<PAGE> 5
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE PURCHASE AGREEMENT AND THE ASSET SALE AND FOR THE
ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING IN THE EVENT THAT MORE TIME
IS NEEDED TO SOLICIT ADDITIONAL PROXIES. SHAREHOLDERS ARE CORDIALLY INVITED TO
ATTEND THE MEETING IN PERSON.
By Order of the Board of Directors,
/s/ Walter E. Riehemann
WALTER E. RIEHEMANN
Secretary
IMPORTANT
WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING OR NOT, PLEASE BE SURE THAT THE
ENCLOSED PROXY IS PROPERLY COMPLETED, DATED, SIGNED, AND RETURNED WITHOUT DELAY
IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
Sarasota, Florida
March 3, 1998
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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INTRODUCTION................................................ 1
General................................................... 1
Matters to be Considered at the Special Meeting........... 1
AVAILABLE INFORMATION....................................... 1
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS.................. 2
SUMMARY..................................................... 3
The Meeting............................................... 3
Proposal 1 -- The Asset Sale.............................. 4
Proposal 2 -- Adjournment or Postponement of the Special
Meeting................................................ 11
THE MEETING................................................. 12
Date, Time and Place...................................... 12
Matters to Be Considered.................................. 12
Record Date; Shares Outstanding and Entitled to Vote...... 12
Votes Required............................................ 12
Revocability of Proxies................................... 13
Proxy Solicitation........................................ 13
Independent Auditors...................................... 14
PROPOSAL 1 -- THE ASSET SALE................................ 15
General................................................... 15
Background of and Reasons for the Asset Sale.............. 15
Summary of the Terms of the Purchase Agreement............ 22
Interim Reinsurance Agreement............................. 29
Trust Agreements.......................................... 29
Opinions as to the Fairness of the Consideration.......... 30
Recommendation of the Board of Directors.................. 40
Regulatory Approvals...................................... 41
Range of Proceeds......................................... 42
Use of Proceeds........................................... 42
Certain Effects of the Asset Sale......................... 43
Personal Holding Company Income........................... 43
Interest of Certain Persons in the Asset Sale............. 44
Accounting Treatment of the Transactions.................. 46
Federal Income Tax Consequences of the Asset Sale......... 46
Operations of the Company Following the Asset Sale........ 47
Operations of the Company if the Asset Sale is Not
Approved............................................... 47
Investment Company Act Considerations..................... 47
Indictments of the Company and Certain of its Former
Officers............................................... 48
Directors Agreement....................................... 48
Dissenters' Rights........................................ 49
Impact of Legislative Changes to the Florida Specialty
Disability Trust Fund.................................. 49
Legal Proceedings Update.................................. 50
Accounting and Information Systems........................ 51
Voting Agreement.......................................... 51
Votes Required to Approve Purchase Agreement.............. 51
PROPOSAL 2 -- POSSIBLE ADJOURNMENT OR POSTPONEMENT OF
SPECIAL MEETING........................................... 52
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
SELECTED FINANCIAL DATA..................................... 53
UNAUDITED PRO FORMA FINANCIAL INFORMATION................... 54
BUSINESS.................................................... 63
MARKET FOR COMPANY'S CLASS A COMMON STOCK AND RELATED SHARE-
HOLDER MATTERS............................................ 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 64
ADDITIONAL INFORMATION ABOUT THE COMPANY.................... 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 65
PROPOSALS OF SHAREHOLDERS FOR THE NEXT ANNUAL MEETING....... 66
APPENDICES
- ----------------
Appendix A -- Asset Purchase Agreement
Appendix B -- Opinion of Smith Barney Inc.
Appendix C -- Opinion of BT Alex. Brown Incorporated
Appendix D -- Florida Statutes Describing Shareholder
Dissenters' Rights
Appendix E -- Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996
Appendix F -- Quarterly Report on Form 10-Q/A for the quarterly
period ended September 30, 1997
</TABLE>
ii
<PAGE> 8
RISCORP, INC.
1390 MAIN STREET
SARASOTA, FLORIDA 34236
---------------------
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 26, 1998
---------------------
INTRODUCTION
GENERAL
This Proxy Statement is being sent to the holders of shares of Class A
Common Stock and Class B Common Stock, par value $.01 per share (collectively,
the "Shareholders"), of RISCORP, Inc. (the "Company") in connection with the
solicitation of proxies by the Board of Directors of the Company to be voted at
the Special Meeting of Shareholders to be held on March 26, 1998, at 10:00 a.m.,
Eastern Standard Time, at the Sheraton Colony Square, 188 14th Street, N.E.,
Atlanta, Georgia 30361, and at any adjournments or postponements thereof (the
"Special Meeting"). The principal executive offices of the Company are located
at 1390 Main Street, Sarasota, Florida 34236. The Company's telephone number is
(941) 906-2000. This Proxy Statement and attached Proxy are first being sent to
Shareholders on or about March 3, 1998.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the Shareholders will be asked to consider and vote
upon a proposal to approve and adopt the Asset Purchase Agreement dated June 17,
1997, as amended on June 26, 1997 and July 11, 1997, by and among Zenith
Insurance Company ("Zenith"), the Company and certain of the Company's
subsidiaries named therein (the "Purchase Agreement"), and to approve the
consummation of the proposed sale of substantially all of the assets of the
Company and its subsidiaries to Zenith and the assumption of certain liabilities
by Zenith pursuant to the Purchase Agreement (the "Asset Sale"). A copy of the
Purchase Agreement is attached hereto as Appendix A, and the description of the
Asset Sale contained in this Proxy Statement is qualified in its entirety by
reference to Appendix A. See "THE ASSET SALE."
The Shareholders also will be asked to consider and vote upon a proposal to
approve an adjournment or postponement of the Special Meeting for a period of
not more than one hundred twenty days for the purpose of soliciting additional
proxies in the event the number of shares of Class A Common Stock and Class B
Common Stock represented at the meeting in person or by proxy is insufficient to
constitute a quorum or, if a quorum is present, the Company fails to receive a
sufficient number of votes to approve the Purchase Agreement and Asset Sale.
The Board of Directors knows of no business that will be presented for
consideration at the Special Meeting other than the matters described in this
Proxy Statement. If any other matters properly come before the Special Meeting,
the persons named in the enclosed form of proxy or their substitutes will vote
in accordance with their best judgment on such matters.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois
<PAGE> 9
60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material can also be obtained at prescribed rates by writing to the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such information may also be accessed
electronically by means of the Commission's home page on the Internet
(http://www.sec.gov).
The Annual Report on Form 10-K/A for the year ended December 31, 1996, as
filed with the Commission on February 27, 1998, has been included at Appendix E
to this Proxy Statement. The Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended September 30, 1997, as filed with the Commission on
February 27, 1998, has been included at Appendix F to this Proxy Statement. Such
appendices (excluding any documents incorporated by reference therein or
exhibits thereto) constitute a part of this Proxy Statement and should be
carefully reviewed for the information contained therein.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Proxy Statement contains statements, particularly in the text under
SUMMARY, THE ASSET SALE and UNAUDITED PRO FORMA FINANCIAL INFORMATION, that
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. Such forward-looking statements involve both
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance, or achievements of the Company or its subsidiaries
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the ability of the Company's insurance subsidiaries to meet
insurance regulatory requirements imposed by state agencies, contingencies
relating to the consummation of the Asset Sale, the actual outcome of pending or
future litigation against the Company, its subsidiaries and their respective
agents, the impact of current and future federal and state regulation of
workers' compensation, the impact of current and future federal regulation of
investment companies, general economic conditions in Florida in particular and
in the United States generally and other factors mentioned elsewhere in this
Proxy Statement.
2
<PAGE> 10
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere herein and in the appendices
hereto. Shareholders are urged to read this Proxy Statement and the appendices
attached hereto carefully and in their entirety.
THE MEETING
Date, Time and Place....... March 26, 1998 at 10:00 a.m., Eastern Standard
Time, at the Sheraton Colony Square, 188 14th
Street, N.E., Atlanta, Georgia 30361.
Matters to be Considered... (1) To approve and adopt the Asset Purchase
Agreement dated June 17, 1997, as amended, by and
among Zenith Insurance Company ("Zenith"), the
Company and certain of the Company's subsidiaries
named therein (the "Purchase Agreement"), and to
approve the consummation of the transactions
contemplated therein and such other matters as may
properly come before the Special Meeting.
(2) To approve a proposal to adjourn or postpone
the Special Meeting for the purpose of soliciting
additional proxies in the event the number of
shares of Class A Common Stock and Class B Common
Stock represented at the meeting in person or by
proxy is insufficient to constitute a quorum or, if
a quorum is present, the Company fails to receive a
sufficient number of votes to approve the Purchase
Agreement and the transactions contemplated
therein.
Record Date................ The close of business on January 28, 1998.
Shares Outstanding and
Entitled to Vote......... Class A Common Stock -- 12,533,671 shares
outstanding entitled to one vote per share;
Class B Common Stock -- 24,334,443 shares
outstanding entitled to ten votes per share.
Required Votes............. The affirmative vote entitled to be cast by holders
of (i) a majority of all outstanding shares of
Class A Common Stock and Class B Common Stock,
voting as a single class, entitled to vote thereon,
and (ii) a majority of the outstanding shares of
Class A Common Stock entitled to vote thereon and
voting separately, is required to approve the
Purchase Agreement and the transactions
contemplated therein. William D. Griffin, The
RISCORP Group Holding Company Limited Partnership,
the William D. Griffin Family Limited Partnership,
the Charlotte K. Griffin Trust Number 3, the Anna
F. Griffin Trust Number 3 and the John Ford Griffin
Trust Number 3 collectively own, beneficially and
of record, all of the outstanding shares of the
Company's Class B Common Stock. (Mr. Griffin
disclaims beneficial ownership of the shares of
Class B Common Stock held by the various family
trusts.) These shareholders, representing in the
aggregate over 95% of the votes entitled to be cast
by holders of Class A Common Stock and Class B
Common Stock, voting as a single class, have
entered into a voting agreement ensuring that all
of their shares will be voted in favor of the
Purchase Agreement and the transactions
contemplated therein and, accordingly, Shareholder
approval as to subpart (i) above is assured.
Because these shareholders are
3
<PAGE> 11
not record holders or beneficial owners of any
shares of Class A Common Stock, this voting
agreement will have no impact on the voting of
shares of Class A Common Stock voting separately
and, accordingly, will not impact voting as to
subpart (ii) above.
Shareholders Thomas K. Albrecht and Peter D. Norman
collectively own approximately 13% of the
outstanding shares of Class A Common Stock. Messrs.
Albrecht and Norman have agreed to vote all of
their shares of Class A Common Stock in favor of
the Purchase Agreement and the transactions
contemplated therein.
The affirmative vote of a majority of all
outstanding shares of Class A Common Stock and
Class B Common Stock, voting as a single class,
entitled to vote thereon is required to approve the
proposal to adjourn or postpone the Special Meeting
in order to solicit additional proxies.
PROPOSAL 1
THE ASSET SALE
The Company and Its
Subsidiaries............. The Company and its subsidiaries offer managed care
workers' compensation insurance and services. On
June 17, 1997, the Company and certain of its
subsidiaries signed the Purchase Agreement whereby
they agreed to sell substantially all of the assets
of the Company and its subsidiaries to Zenith. Such
subsidiaries include RISCORP Management Services,
Inc., RISCORP of Illinois, Inc., Independent
Association Administrators Incorporated, RISCORP
Insurance Services, Inc., RISCORP Managed Care
Services, Inc., CompSource, Inc., RISCORP Real
Estate Holdings, Inc., RISCORP Acquisition, Inc.,
RISCORP West, Inc., RISCORP of Florida, Inc.,
RISCORP Insurance Company, RISCORP Property &
Casualty Insurance Company, RISCORP National
Insurance Company, RISCORP Services, Inc., RISCORP
Staffing Solutions Holding, Inc., RISCORP Staffing
Solutions, Inc. I and RISCORP Staffing Solutions,
Inc. II. See "THE ASSET SALE."
The Purchaser.............. Zenith, the purchaser of the assets, is engaged in
the property-casualty insurance business and is a
wholly owned subsidiary of Zenith National
Insurance Corp.
The Purchase Agreement..... Pursuant to the Purchase Agreement, the Company and
its subsidiaries have agreed to sell and Zenith has
agreed to purchase substantially all of the assets
of the Company and its subsidiaries relating to
their insurance business (the "Asset Sale"). After
the transaction closes, the Company and its
subsidiaries will no longer engage in the workers'
compensation insurance or managed care business.
The Purchase Agreement provides that the Purchase
Price, which will be paid in cash, will be the
difference between the book value of the assets
purchased and the book value of the liabilities
assumed by Zenith as of the Closing Date (as
defined below) subject to a minimum cash purchase
price of $35 million. Within seventy days of the
Closing Date, the Company's representatives are
required to deliver to Zenith a Proposed Business
Balance Sheet representing the audited statement of
Transferred Assets and Transferred Liabilities of
the Business (as such terms are defined in the
Purchase Agreement) as of the Closing Date. If
4
<PAGE> 12
Zenith and the Company are able to agree on the
manner in which items should be treated on the
Proposed Business Balance Sheet, the Proposed
Business Balance Sheet will become the Final
Business Balance Sheet. The excess value of the
Transferred Assets over Transferred Liabilities as
represented on the Final Business Balance Sheet
will be the Purchase Price. If, however, the
Company and Zenith are unable to agree on the
manner in which any item should be treated in the
preparation of the Final Business Balance Sheet,
such disputed items will be submitted to neutral
auditors or actuaries, as appropriate, for a final
and binding determination of such issues. THE
COMPANY IS SEEKING APPROVAL OF A PURCHASE AGREEMENT
THAT DOES NOT CONTAIN A DEFINITIVE PURCHASE PRICE.
See "THE ASSET SALE -- Summary of the Terms of the
Purchase Agreement -- The Purchase Price."
The Purchase Agreement contains various
representations and warranties of the Company, its
subsidiaries and Zenith. Such representations and
warranties cover such areas as corporate
organizational matters, authorization issues, the
absence of certain disqualifiers, the absence of
undisclosed liabilities, material contracts, title
to the assets to be transferred, litigation,
compliance with laws, taxes, solvency, real
property and other areas discussed in greater
detail herein and in Appendix A hereto. See "THE
ASSET SALE -- Summary of the Terms of the Purchase
Agreement -- Representations and Warranties." A
breach of a representation or warranty by any party
may give rise to indemnification obligations which
will survive the Closing Date for a period of
twenty-four months. Although such obligations are
limited in most cases to the amount of the Purchase
Price, under certain circumstances (i.e. a willful
breach of a representation or warranty or losses
relating to defects in the title of the transferred
assets), indemnification obligations may exceed the
Purchase Price. See "THE ASSET SALE -- Summary of
the Terms of the Purchase
Agreement -- Indemnification; Survival of
Representations and Warranties."
The Purchase Agreement also contains certain
covenants made by the Company and its subsidiaries
relating to the conduct of their businesses through
the Closing Date. Such covenants cover such areas,
among others, as the continued operation of the
respective businesses of the Company and its
subsidiaries consistent with past practice, the
care of the assets to be transferred, and certain
prohibitions against the incurrence or termination
of financial obligations of the Company and its
subsidiaries. See "THE ASSET SALE -- Summary of the
Terms of the Purchase Agreement -- Certain
Covenants."
Waiver of Conditions....... The Purchase Agreement further provides that the
respective obligations of the Company, its
subsidiaries and Zenith to consummate the Asset
Sale are conditioned upon, among other things, the
fulfillment of covenants, the continued validity of
the representations and warranties made by the
parties, the receipt of governmental and regulatory
consents, receipt of the required Shareholder
approval, and the absence of injunctions or
restraints preventing consummation of the Asset
Sale. The parties to the Purchase Agreement may
waive conditions to the extent permitted by law.
PERMITTED WAIVERS, EVEN IF MATERIAL, MAY BE MADE BY
THE COMPANY AND ITS SUBSIDIARIES WITHOUT FURTHER
SHAREHOLDER APPROVAL. THIS PROVISION WOULD PERMIT
THE BOARD TO WAIVE A BREACH BY ZENITH OF
5
<PAGE> 13
ANY OF ITS REPRESENTATIONS, WARRANTIES, COVENANTS
OR AGREEMENTS CONTAINED IN THE PURCHASE AGREEMENT,
INCLUDING, WITHOUT LIMITATION, ZENITH'S OBLIGATION
TO ENTER INTO THE ANCILLARY AGREEMENTS (AS SUCH
TERM IS DEFINED IN THE PURCHASE AGREEMENT) IN
SUBSTANTIALLY THE FORM ATTACHED TO THE PURCHASE
AGREEMENT IF, IN THE EXERCISE OF THE BOARD'S
DISCRETION, IT CONCLUDES THAT SUCH WAIVER IS IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
See "THE ASSET SALE -- Summary of the Terms of the
Purchase Agreement -- Conditions to Closing."
Closing Date............... If the Purchase Agreement and the transactions
contemplated therein are approved and adopted at
the Special Meeting, the Company anticipates
consummating the Asset Sale on the third business
day following the satisfaction or waiver of the
conditions specified in the Purchase Agreement (the
"Closing Date"). The Company anticipates that all
such conditions will be satisfied or waived within
a matter of days after the Company receives the
required vote approving the Purchase Agreement and
the transactions contemplated therein. "THE ASSET
SALE -- Summary of the Terms of the Purchase
Agreement -- The Closing."
Termination................ The Purchase Agreement may be terminated at any
time prior to the Closing Date: (a) by mutual
written consent of the Company, Zenith and the
Florida Department of Insurance; (b) by the Company
or Zenith if the Asset Sale shall not have been
consummated on or before March 31, 1998; (c) by the
Company or Zenith upon any court order prohibiting
the Asset Sale becoming final; (d) by the Company
or Zenith if, upon a vote at the Special Meeting
(or any adjournment thereof), Shareholder approval
of the Purchase Agreement as required therein shall
not have been obtained; (e) by the Company if the
Company enters into a definitive agreement
providing for the implementation of an Acquisition
Proposal (as defined under "THE ASSET
SALE -- Summary of the Terms of the Purchase
Agreement -- No Solicitation"); (f) by Zenith if
the Company or any of its subsidiaries materially
breaches their representations or warranties or
fails to perform their covenants or agreements and
such breach would be likely to have a Sellers
Material Adverse Effect, as defined in the Purchase
Agreement, which is not remedied in a timely
manner; and (g) by the Company if Zenith materially
breaches its representations or warranties or fails
to perform its covenants or agreements and such
breach would be likely to have a Purchaser Material
Adverse Effect, as defined in the Purchase
Agreement, which is not remedied in a timely
manner.
In the event of termination of the Purchase
Agreement by any party as provided above, the
Purchase Agreement will become void, and there will
be no liability or obligation on the part of the
Company, its subsidiaries or Zenith, other than
under certain specified provisions of the Purchase
Agreement, which include the payment of a fee to
Zenith under certain circumstances. See "THE ASSET
SALE -- Summary of the Terms of the Purchase
Agreement -- Termination" and "THE ASSET
SALE -- Summary of the Terms of the Purchase
Agreement -- Termination Fees."
Termination Fee............ If the Board of Directors of the Company (a)
approves or recommends an unsolicited Acquisition
Proposal, (b) causes the Company to enter into an
agreement with respect to such proposal, or (c)
terminates the
6
<PAGE> 14
Purchase Agreement pursuant to certain sections of
the Purchase Agreement, the Company will be
obligated to pay to Zenith a termination fee of
$7.5 million, plus expenses. If Shareholder
approval of the Purchase Agreement is not obtained
as required, the Company will be obligated to pay
to Zenith a termination fee of $7.5 million, plus
expenses. See "THE ASSET SALE -- Summary of the
Terms of the Purchase Agreement -- Termination
Fees."
Fairness Opinions.......... Smith Barney Inc. ("Smith Barney") was retained by
the Strategic Alternatives Committee of the
Company's Board of Directors (the "SAC") on
November 21, 1996 to provide independent financial
advice. On June 16, 1997, the date the SAC
unanimously approved the terms of the Purchase
Agreement, Smith Barney delivered to the SAC its
opinion to the effect that, as of the date of its
opinion and subject to the considerations set forth
in such opinion, the consideration to be received
by the Company pursuant to the Purchase Agreement
is fair from a financial point of view to the
Company. A copy of the opinion of Smith Barney is
attached to this Proxy Statement as Appendix B. The
attached opinion sets forth the assumptions made,
the matters considered and the limitations of the
review undertaken by Smith Barney. See "THE ASSET
SALE -- Opinions as to the Fairness of
Consideration."
On June 20, 1997, the SAC retained BT Alex. Brown
Incorporated, formerly Alex. Brown & Sons
Incorporated ("BT Alex. Brown"), to act as
financial advisor to the SAC in connection with the
Asset Sale. At the July 16, 1997 meeting of the
SAC, BT Alex. Brown made a presentation with
respect to the Asset Sale and rendered to the SAC
its written opinion to the effect that, as of the
date of its opinion and subject to certain
assumptions stated in such opinion, the
consideration to be received pursuant to the
Purchase Agreement is fair from a financial point
of view to the Company and certain of its
subsidiaries named in the Purchase Agreement. A
copy of the opinion of BT Alex. Brown is attached
to this Proxy Statement as Appendix C. The attached
opinion sets forth the assumptions made, matters
considered and limitations of the review undertaken
by BT Alex. Brown. See "THE ASSET SALE -- Opinions
as to the Fairness of Consideration."
Recommendation of the Board
of Directors............. Based upon the events leading up to the definitive
Purchase Agreement, contingencies facing the
Company which threatened its continued operation
and existence, and the terms of the Purchase
Agreement (including the Purchase Price to be paid
by Zenith), the Company's Board of Directors
believes the Purchase Agreement and the
transactions contemplated therein are in the best
interests of the Company and its Shareholders. See
"THE ASSET SALE -- Recommendation of the Board of
Directors." THE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE PURCHASE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREIN AND UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL AND
ADOPTION OF THE PURCHASE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREIN.
7
<PAGE> 15
Range of Proceeds.......... The minimum purchase price to be received from
Zenith in connection with the consummation of the
Asset Sale is $35 million. While it is impossible
to determine the actual amount to be received from
Zenith prior to the determination of the Final
Business Balance Sheet (as such term is defined in
the Purchase Agreement), based on the pro forma
financial information contained herein, had the
Asset Sale been consummated on September 30, 1997,
subject to any adjustments resulting from the audit
of the Proposed Business Balance Sheet, the Company
believes the Proposed Business Balance Sheet would
have reflected closing proceeds of $149,083,000 to
be allocated among the Company and those
subsidiaries also selling assets in connection with
this transaction. Pursuant to the terms of the
Purchase Agreement, Zenith will have an opportunity
to dispute the value of any item reflected on the
Proposed Business Balance Sheet and, absent the
mutual agreement of the parties as to the treatment
of such disputed items, any items remaining in
dispute shall be submitted to Neutral Auditors
and/or the Neutral Actuaries (as such terms are
defined in the Purchase Agreement) for a final,
binding and conclusive determination as to such
items. It is currently anticipated that the cash
proceeds to be received from Zenith will be
substantially greater than the minimum purchase
price of $35 million but less than the $149 million
reflected in the pro forma financial information.
See "THE ASSET SALE -- Range of Proceeds."
Use of Proceeds............ Of the cash proceeds to be received from Zenith in
connection with the consummation of the Asset Sale,
eighty-five percent will be used to (i) fund the
working capital requirements of the Company in
connection with the preparation of the Proposed
Business Balance Sheet, the Final Business Balance
Sheet and the ongoing operations of the Company
following the Closing Date, (ii) resolve all claims
and contingencies pending against the Company and
its subsidiaries and to fund all expenses
associated therewith, (iii) fund all other
liabilities not transferred to Zenith, and (iv)
satisfy any statutory reserve or capital
requirements to which the Company's regulated
subsidiaries are subject following the Closing
Date. Fifteen percent of the cash proceeds to be
received from Zenith will be held in escrow until
the second anniversary of the Closing Date. Such
escrowed funds will be used to indemnify Zenith
against liabilities (other than those transferred)
and any misrepresentation, breach or nonfulfillment
of any agreement contemplated in the Purchase
Agreement. After the two year anniversary of the
Closing Date, any remaining amount held in escrow
will be paid to the Company with accrued interest,
and such amount, if any, will be available for the
purposes set forth in items (i), (ii), (iii) and
(iv) above. See "THE ASSET SALE -- Use of Proceeds"
and "THE ASSET SALE -- Operations of the Company
Following the Asset Sale."
The Company anticipates that, after satisfaction of
all claims and contingencies pending against the
Company and its subsidiaries and after funding all
expenses associated therewith, remaining proceeds,
if any, will be distributed to those shareholders
of record on a record date to be established by the
Board in connection with any future dividends or
distributions. Such claims and contingencies
include all litigation pending or hereafter
instituted against the Company, its subsidiaries
and their respective officers, directors and
agents. Based on agreements in principal reached by
the Company with respect to those suits currently
8
<PAGE> 16
pending against the Company, it is estimated that
the amount required to resolve pending litigation
will be approximately $24 million exclusive of
fees, costs and insurance and other proceeds which
may be available to offset settlement amounts. See
"THE ASSET SALE -- Legal Proceedings Update" and
"THE ASSET SALE -- Use of Proceeds." It is
anticipated that an additional shareholder meeting
and shareholder approval will be required before
any final distribution of remaining proceeds to
shareholders. As the controlling shareholder, Mr.
Griffin must approve any such final distribution to
shareholders. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
While the Board of Directors currently anticipates
a distribution of proceeds remaining after all
claims and contingencies are resolved, there can be
no assurance that any portion of the closing
proceeds ultimately will be available for
distribution to shareholders or that shareholder
approval will be obtained. Pending resolution of
all claims and contingencies, the proceeds
available for investment may be invested in
obligations the interest of which is excluded from
gross income for federal income tax purposes in an
effort to avoid unfavorable tax treatment imposed
upon personal holding companies. See "THE ASSET
SALE -- Personal Holding Company Income." Inasmuch
as the Company does not intend to conduct its
affairs in a manner which would require
registration as an investment company under the
Investment Company Act of 1940, as amended, the
provisions of such act will be considered in
determining the use of the proceeds from the Asset
Sale. See "THE ASSET SALE -- Investment Company Act
Considerations."
While the Company believes that a portion of the
proceeds will ultimately be available for
distribution to shareholders, it is currently
anticipated that the resolution of various
contingent liabilities, including the Company's
indemnification obligations to Zenith, will take
not less than two years. Pursuant to the terms of
the Company's Amended and Restated Articles of
Incorporation, the holders of Class A Common Stock
and Class B Common Stock shall be entitled to
participate in any dividends declared or paid by
the Company or distributions to the holders of
common stock in connection with any liquidation,
dissolution or winding up of the Company ratably on
a per share basis. See "THE ASSET SALE -- Use of
Proceeds."
ANY FUTURE DISTRIBUTION OF CLOSING PROCEEDS WILL BE
AT THE DISCRETION OF THE BOARD OF DIRECTORS AND
AVAILABLE ONLY TO SHAREHOLDERS OF THE COMPANY ON A
RECORD DATE TO BE ESTABLISHED AT A LATER TIME IN
CONNECTION WITH ANY SUCH FUTURE DISTRIBUTION.
SHAREHOLDERS THAT CURRENTLY ARE RECORD HOLDERS OF
CLASS A COMMON STOCK OR CLASS B COMMON STOCK WHO
ARE NOT RECORD HOLDERS AT THE TIME A RECORD DATE IS
ESTABLISHED IN CONNECTION WITH A FUTURE
DISTRIBUTION WILL NOT BE ENTITLED TO PARTICIPATE IN
ANY SUCH DISTRIBUTION OF CLOSING PROCEEDS. THE
BOARD OF DIRECTORS INTENDS TO SOLICIT ADDITIONAL
SHAREHOLDER APPROVAL PRIOR TO A FINAL DISTRIBUTION
OF CLOSING PROCEEDS. ALTHOUGH INTERIM DISTRIBUTIONS
OR DIVIDENDS TO SHAREHOLDERS DO NOT REQUIRE
SHAREHOLDER APPROVAL, A FINAL DISTRIBUTION OF
CLOSING PROCEEDS WILL REQUIRE ADDITIONAL
SHAREHOLDER APPROVAL, INCLUDING THE APPROVAL OF MR.
GRIFFIN. SEE "THE ASSET SALE -- USE OF PROCEEDS."
9
<PAGE> 17
Interest of Certain Persons
in the Asset Sale........ Certain members of the Company's management and the
Board may be deemed to have interests in the Asset
Sale in addition to their interests as Shareholders
generally. Certain members of the Company's
management team will be entitled to receive
accelerated payments, employment positions with
Zenith or termination payments pursuant to their
existing employment agreements with RISCORP
Management Services, Inc. upon the consummation of
the Asset Sale. In addition, The Phoenix Management
Company, Ltd. ("Phoenix"), a Florida limited
partnership controlled by Mr. Dawson, has been
retained by the Company to perform certain
management services following the Asset Sale. See
"THE ASSET SALE -- Interest of Certain Persons in
the Asset Sale."
Operations of the Company
Following the Asset
Sale..................... Following the consummation of the Asset Sale, the
Company will continue in existence but will cease
substantially all of its current business
operations. The Company, however, will be actively
engaged in (i) preparing the Proposed Business
Balance Sheet for delivery to Zenith; (ii)
resolving any disputes with Zenith as to the
determination of the Final Business Balance Sheet;
(iii) investing and reinvesting the closing
proceeds; (iv) resolving all contingencies pending
against the Company; (v) evaluating and, where
appropriate, instituting claims on behalf of the
Company against third parties; (vi) maintaining all
statutory filing requirements on behalf of the
Company; and (vii) following the resolution of all
claims and contingencies, subject to shareholder
approval, making a final distribution to the
shareholders. The Company has retained Phoenix to
manage such activities. See "THE ASSET
SALE -- Operations of the Company Following the
Asset Sale."
Operations of the Company
if the Asset Sale is Not
Approved................ If the Purchase Agreement and Asset Sale are not
approved, or if for any other reason the Asset Sale
is not consummated, the Board will evaluate other
strategic alternatives, continue to oversee the
implementation of remedial action to improve the
Company's operations and will evaluate whether it
should commence a winding up of the Company's
business operations in contemplation of a complete
liquidation. The Board believes that it will be
difficult to identify another strategic partner
prepared to negotiate a transaction on more
favorable terms than those contained in the
Purchase Agreement. Furthermore, in the event the
Purchase Agreement and the transactions
contemplated therein are not approved, the Florida
Department of Insurance may institute
administrative proceedings against the Company's
Florida insurance subsidiaries which could
significantly impair, and may result in a complete
loss of, shareholder value.
Directors Agreement........ On May 19, 1997, the directors of the Company
entered into a Directors Agreement which was
amended as of September 18, 1997. As amended, the
Directors Agreement provides certain governance
provisions regarding the future make-up of the
Company's Board of Directors. Until such time as
the Company has no shares of Class A Common Stock
outstanding (at which time the Directors Agreement
will terminate), Mr. Griffin has agreed, among
other things, to refrain from taking any action to
remove any director of the Company. The remaining
directors have agreed not to add any additional
directors to the Board without
10
<PAGE> 18
Mr. Griffin's prior written consent. In addition,
the Directors Agreement provides that Mr. Griffin
will be reelected to the Board at the time the
Asset Sale is completed provided that such
directorship is not objected to by any insurance
commissioner with jurisdiction over any of the
Company's subsidiaries. See "THE ASSET
SALE -- Directors Agreement."
Dissenters' Rights......... Under Florida law, Shareholders have the right to
dissent from the Asset Sale and demand payment of
the fair value of their shares in the event the
Asset Sale is consummated. To exercise such right,
a Shareholder opposing the Asset Sale would be
required to file with the Company a written notice
of his intent to demand payment for his shares,
would not be able to vote any of his shares in
favor of the proposed transaction and would
otherwise be required to follow the procedures
specified in Fla. Stat. Ann. sec.sec. 607.1301,
607.1302 and 607.1320. See "THE ASSET
SALE -- Dissenters' Rights" and Appendix D.
PROPOSAL 2
ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING
The Proposal............... In the event the number of shares of Class A Common
Stock and Class B Common Stock represented at the
Special Meeting is insufficient to constitute a
quorum or, if a quorum is present, the Company
fails to receive a sufficient number of votes to
approve the Purchase Agreement and the transactions
contemplated therein, the Company proposes to
adjourn or postpone the Special Meeting for a
period of not more than one hundred twenty days for
the purpose of soliciting additional proxies.
Proxies initially cast in favor of the Purchase
Agreement and the transactions contemplated therein
will be voted in favor of the approval of such
proposal at the subsequently reconvened Special
Meeting. THE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE ADJOURNMENT OR POSTPONEMENT OF THE
SPECIAL MEETING UNDER SUCH CIRCUMSTANCES AND
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THIS PROPOSAL.
11
<PAGE> 19
THE MEETING
DATE, TIME AND PLACE
The Special Meeting will be held on March 26, 1998, at 10:00 a.m., Eastern
Standard Time, at the Sheraton Colony Square, 188 14th Street, N.E., Atlanta,
Georgia 30361.
MATTERS TO BE CONSIDERED
At the Special Meeting, the Shareholders will be asked to consider and vote
upon a proposal to approve and adopt the Asset Purchase Agreement dated June 17,
1997, as amended on June 26, 1997 and July 11, 1997, by and among Zenith
Insurance Company ("Zenith"), the Company and certain of the Company's
subsidiaries named therein (the "Purchase Agreement"), and to approve the
consummation of the transactions contemplated therein, including the proposed
sale of substantially all of the assets of the Company and its subsidiaries
pursuant to the Purchase Agreement (the "Asset Sale"). A copy of the Purchase
Agreement is attached hereto as Appendix A, and the description of the Asset
Sale contained in this Proxy Statement is qualified in its entirety by reference
to Appendix A. See "THE ASSET SALE."
The Shareholders also will be asked to consider and vote upon a proposal to
approve an adjournment or postponement of the Special Meeting for a period of
not more than one hundred twenty days for the purpose of soliciting additional
proxies in the event the number of shares of Class A Common Stock and Class B
Common Stock represented at the meeting in person or by proxy is insufficient to
constitute a quorum or, if a quorum is present, the Company fails to receive a
sufficient number of votes to approve the Purchase Agreement and the
transactions contemplated therein.
The Board of Directors knows of no business that will be presented for
consideration at the Special Meeting other than the matters described in this
Proxy Statement. If any other matters properly come before the Special Meeting,
the persons named in the enclosed form of proxy or their substitutes will vote
in accordance with their best judgment on such matters.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The Board of Directors of the Company has fixed the close of business on
January 28, 1998 as the record date (the "Record Date") for the determination of
holders of shares of Class A Common Stock and Class B Common Stock entitled to
notice of and to vote on each matter submitted to a vote at the Special Meeting
and any adjournment(s) or postponement(s) thereof. On the Record Date, the
Company had outstanding 12,533,671 shares of $.01 par value Class A Common
Stock, entitled to one vote per share, and 24,334,443 shares of $.01 par value
Class B Common Stock, entitled to ten votes per share.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Class A Common Stock and Class B Common Stock of the
Company entitled to vote is necessary to constitute a quorum at the Special
Meeting. Shares represented by proxies will be counted as shares present for
purposes of establishing a quorum. Shares represented by proxies that are marked
"abstain" also will be counted as shares present for purposes of establishing a
quorum. If a quorum is not present at the Special Meeting, or if the Company
determines that additional time is needed for the solicitation of proxies to
approve the Asset Sale, the Company may adjourn or postpone the Special Meeting
with a vote of Shareholders.
VOTES REQUIRED
If Shareholders specify in the accompanying proxy a choice with respect to
any matter to be acted upon, the shares represented by such proxies will be
voted as specified.
Under the Company's Amended and Restated Bylaws, if a quorum is present at
the Special Meeting, approval of the Purchase Agreement and approval of the
Asset Sale and the proposal to adjourn or postpone the Special Meeting requires
the affirmative vote of the holders of a majority of all outstanding shares of
Class A Common Stock and Class B Common Stock, voting as a single class,
entitled to vote thereon. In addition, pursuant to the terms of the Purchase
Agreement, the affirmative vote of the holders of a majority of
12
<PAGE> 20
the outstanding shares of Class A Common Stock entitled to vote thereon and
voting separately, is required to approve the Purchase Agreement and the
transactions contemplated therein. Proxies which indicate abstentions will have
the same effect as votes against the Purchase Agreement and the transactions
contemplated therein and against the proposal to adjourn or postpone the Special
Meeting. IF NO INSTRUCTIONS ARE INDICATED IN THE PROXIES RETURNED TO THE
COMPANY, SUCH PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE PURCHASE
AGREEMENT AND CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREIN AND FOR THE
PROPOSED ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING TO SOLICIT
ADDITIONAL PROXIES.
As more fully described herein, Mr. Griffin and various partnerships and
trusts own, beneficially and of record, in the aggregate all of the outstanding
shares of Class B Common Stock of the Company and have executed a voting
agreement pursuant to which each has agreed to vote their shares in favor of the
approval of the Purchase Agreement and the Asset Sale. (Mr. Griffin disclaims
beneficial ownership of the shares of Class B Common Stock held by the various
family trusts.) Accordingly, over 95% of the votes entitled to be cast by the
holders of Class A Common Stock and Class B Common Stock, voting as a single
class, will be voted in favor of the Purchase Agreement and the transactions
contemplated therein assuring approval of the Purchase Agreement under the
Company's Amended and Restated Bylaws. Because these shareholders are not record
holders or beneficial owners of any shares of Class A Common Stock, this voting
agreement will have no impact on the voting of shares of Class A Common Stock
voting separately as required by the terms of the Purchase Agreement.
Shareholders Thomas K. Albrecht and Peter D. Norman, however, collectively own
approximately 13% of the outstanding shares of Class A Common Stock. Messrs.
Albrecht and Norman have agreed to vote all of their shares of Class A Common
Stock in favor of the Purchase Agreement and the transactions contemplated
therein.
With respect to all matters to be voted on by the Shareholders, holders of
shares of Class A Common Stock are entitled to one vote per share and holders of
shares of Class B Common Stock are entitled to ten votes per share.
At the Special Meeting, broker "non-votes" may occur. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner votes on one
proposal, but does not vote on another proposal because the nominee does not
have discretionary voting power and has not received instructions from the
beneficial owner. Broker "non-votes" will be treated as votes against the
relevant proposals. Broker "non-votes" will be counted as present for purposes
of determining the existence of a quorum.
SHAREHOLDERS HAVE THE RIGHT TO DISSENT FROM APPROVAL OF THE ASSET SALE AND
OBTAIN PAYMENT OF THE FAIR VALUE OF THEIR SHARES OF CLASS A COMMON STOCK BY
FOLLOWING THE PROCEDURES DESCRIBED IN SECTION 607.1320 OF THE FLORIDA BUSINESS
CORPORATION ACT. SEE APPENDIX D HERETO AND "THE ASSET SALE -- Dissenters'
Rights."
REVOCABILITY OF PROXIES
A Shareholder who signs and returns a proxy may revoke it at any time
before it is voted by taking one of the following three actions: (i) giving
written notice of revocation to Walter E. Riehemann, Secretary of the Company;
(ii) executing and delivering a proxy with a later date; or (iii) voting in
person at the Special Meeting.
Votes cast by proxy or in person at the Special Meeting will be tabulated
by one or more inspectors of election appointed at the Special Meeting, who also
will determine whether a quorum is present for the transaction of business. The
expense of preparing, printing, and mailing proxy materials to Shareholders of
the Company will be borne by the Company.
PROXY SOLICITATION
The Company will bear the costs of solicitation of proxies for the Special
Meeting. In addition to solicitation by mail, directors, officers and regular
employees of the Company may solicit proxies from Shareholders by telephone,
telegram, personal interview or otherwise. Such directors, officers and
employees
13
<PAGE> 21
will not receive additional compensation but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. In addition to solicitation by
directors, officers and regular employees of the Company, the Company intends to
engage a solicitation agent in connection with the solicitation of proxies for
the Special Meeting. The Company will pay the fees and expenses of such
solicitation agent, which are not expected to exceed $25,000. Brokers, nominees,
fiduciaries and other custodians have been requested to forward soliciting
material to the beneficial owners of Class A Common Stock held of record by
them, and such custodians will be reimbursed for their reasonable expense.
INDEPENDENT AUDITORS
The Company has been advised that representatives of KPMG Peat Marwick,
LLP, the Company's independent auditors for 1996 ("KPMG"), will attend the
Special Meeting, make a statement if they have the desire to do so and will be
available to respond to appropriate questions.
14
<PAGE> 22
PROPOSAL 1
THE ASSET SALE
This section of the Proxy Statement describes certain aspects of the
proposed Asset Sale. To the extent that the description relates to the Purchase
Agreement, the following description does not purport to be complete and is
qualified in its entirety by reference to the Purchase Agreement, which is
attached as Appendix A to this Proxy Statement and is incorporated herein by
reference. All Shareholders are urged to read the Purchase Agreement, as well as
other appendices in their entirety.
GENERAL
Shareholders are being asked to consider and vote upon a proposal to
approve and adopt the Asset Purchase Agreement dated June 17, 1997, as amended
on June 26, 1997 and July 11, 1997, by and among Zenith Insurance Company
("Zenith"), the Company and certain of the Company's subsidiaries named therein
(the "Purchase Agreement"), and to approve the consummation of the transactions
contemplated therein, including the proposed sale of substantially all of the
assets of the Company and its subsidiaries (the "Asset Sale"). Such subsidiaries
include RISCORP Management Services, Inc., RISCORP of Illinois, Inc.,
Independent Association Administrators Incorporated, RISCORP Insurance Services,
Inc., RISCORP Managed Care Services, Inc., CompSource, Inc., RISCORP Real Estate
Holdings, Inc., RISCORP Acquisition, Inc., RISCORP West, Inc., RISCORP of
Florida, Inc., RISCORP Insurance Company, RISCORP Property & Casualty Insurance
Company, RISCORP National Insurance Company, RISCORP Services, Inc., RISCORP
Staffing Solutions Holding, Inc., RISCORP Staffing Solutions, Inc. I and RISCORP
Staffing Solutions, Inc. II. A copy of the Purchase Agreement, as amended, is
attached hereto as Appendix A. Zenith, a wholly owned subsidiary of Zenith
National Insurance Corp. ("Zenith National"), is engaged in the
property-casualty insurance business. Zenith's telephone number is (818)
713-1000. The principal executive offices of Zenith are located at 21255 Califa
Street, Woodland Hills, California 91367-5021. There is no present affiliation
between the Company and Zenith or Zenith National, except for affiliations
arising by reason of the transactions contemplated by the Purchase Agreement.
The Purchase Agreement and other agreements contemplated therein were the
product of arms' length negotiations between the Company and Zenith.
Only if the Purchase Agreement and the transactions contemplated therein
are approved at the Special Meeting and all conditions to consummation of the
Asset Sale are either satisfied or waived will the Asset Sale proceed.
BACKGROUND OF AND REASONS FOR THE ASSET SALE
Background of the Asset Sale. Beginning in the third quarter of 1996 and
continuing thereafter, the Company began to experience several significant
problems principally attributed to the Company's growth through acquisitions and
the inability of its accounting infrastructure to keep pace with this growth due
to, among other things, a significant turnover of the Company's senior finance
and accounting officers following the Company's initial public offering. During
the third and fourth quarters of 1996, the Company also experienced several
other adverse developments, including a decision by the Florida Department of
Insurance (the "DOI") on October 4, 1996 ordering insurance providers to reduce
workers' compensation rates by an average of 11.2%. Three days later, on October
7, 1996, research analysts cut their 1997 earnings estimates for the Company by
$0.10 per share, and the Class A Common Stock trading price per share fell
approximately 31%. On October 31, 1996, the trading price of the Class A Common
Stock fell an additional 44% after reports that the Company and two of its
executive officers were subpoenaed to testify before a federal grand jury
investigating political campaign contributions. See "THE ASSET
SALE -- Indictments of the Company and Certain of its Former Officers." The
Class A Common Stock price began the month of October trading at $17.375 per
share but closed the month at $5.00 per share.
On November 14, 1996, the Class A Common Stock trading price fell again,
closing at $4.375, after the Company reported that 1996 third quarter net income
was below analysts' expectations. The Company also
15
<PAGE> 23
reported that it would not meet fourth quarter earnings estimates and that the
Company would consider various strategic alternatives.
Consideration of Strategic Alternatives. In response to the loss of
trading value of the Company's Class A Common Stock, the Company and its Board
considered additional measures to best protect and maximize shareholder value.
Accordingly, on November 9, 1996, the Board voted to explore strategic
alternatives and formed a Strategic Alternatives Committee (the "SAC") whose
primary function was to evaluate possible alternatives to maximize shareholder
value including, without limitation, potential acquisitions, joint ventures,
mergers, strategic alliances and the sale of all or part of the Company. The
directors constituting the SAC, Messrs. Seddon Goode, Jr., George E. Greene III
and Walter L. Revell (the independent directors on the Board) immediately began
a search for an independent financial advisor. The SAC selected three nationally
recognized investment banking firms to interview for the opportunity to provide
financial advice and assistance to the SAC. One firm declined the opportunity.
After discussing the challenges facing the Company and considering the expertise
and initial ideas of the remaining two firms, as well as one additional firm,
the SAC concluded that Smith Barney was the investment banking firm best able to
provide the needed assistance to the SAC and retained Smith Barney as its
financial advisor on November 21, 1996. This decision was based in part on Smith
Barney's general familiarity with the Company and its business due to its
participation as lead underwriter in the initial public offering of the Class A
Common Stock. The SAC also retained a law firm to provide legal advice as to
these matters.
Even before Smith Barney began its work with the SAC, the Company, in
December 1996, entered into discussions with two firms regarding the potential
purchase of an interest in the Company. After due diligence reviews,
representatives of the two firms suspended discussions with the Company in the
early months of 1997. Neither of the two firms made offers regarding a possible
transaction with the Company.
On January 10, 1997, Smith Barney presented the Board with four possible
strategic opportunities for the Company: (1) remain independent; (2) search for
and elicit investment from others; (3) sell the Company; or (4) repurchase
outstanding shares (privatization of the Company). In considering these
alternatives, the SAC determined that the nature and scope of the adverse
developments experienced by the Company had so significantly impaired its
ability to raise capital, write new policies or obtain renewal policies that an
attempt to remain independent had a low probability of success and would likely
result in further deterioration of shareholder value. The SAC also concluded
that a privatization of the Company was unlikely to yield proceeds for
distribution to the holders of Class A Common Stock equivalent to the amount of
proceeds that would be available as a result of a sale of the Company. After
careful consideration, the SAC determined that it was in the best interest of
the Company and its Shareholders to attempt to locate a strategic partner
interested in investing in the Company or, in the alternative, acquiring the
Company. The SAC concluded that this approach was the most viable alternative to
maximize shareholder value and, while moving forward on this basis, was prepared
to consider any other opportunities available to the Company to achieve this
result.
The Board authorized a search for a strategic partner for the Company;
however, this process was complicated by, among other things, the delay in the
preparation of the 1996 audited financial statements, a legislative change with
respect to the Florida Special Disability Trust Fund (the "SDTF"), the issuance
of a "C" (Weak) rating by A.M. Best Company for the Company's Florida insurance
subsidiaries, and several legal proceedings initiated against the Company before
and after January 10, 1997. Each of these factors is discussed in greater detail
below.
Delay in Preparation of 1996 Audited Financial Statements. Following the
initial public offering of Class A Common Stock in February 1996 (the "IPO"),
the Company experienced significant personnel turnover in its finance and
treasury areas. (For example, since the IPO, the Company has had four Chief
Financial Officers.) The rapid growth of the Company, its multiple acquisitions
and the loss of key personnel overloaded the Company's internal accounting
staff, resulting in the Company being unable to prepare auditable financial
statements. On March 25, 1997, the Company announced that it would delay the
release of its previously scheduled 1996 fourth quarter and year end earnings
reports.
On April 1, 1997, the Company filed notification of a delay in the filing
of its Annual Report on Form 10-K for the year ended December 31, 1996 with the
Commission. On May 27, 1997, the Company
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<PAGE> 24
informed the DOI that it would be unable to file on a timely basis the audited
statutory financial statements required by state insurance laws. The Company's
audited financial statements for the year ended December 31, 1996 were first
made publicly available on October 23, 1997. The audited statutory financial
statements of the Company's insurance subsidiaries as amended were filed with
the Missouri Department of Insurance on August 30, 1997 and with the DOI on
September 16, 1997.
Loss of Future SDTF Claims with Accident Dates after December 31, 1997. In
March 1997, the Florida legislature passed a bill substantially changing the
Florida Special Disability Trust Fund (the "SDTF"). While this legislative
action does not preclude the Company from being able to collect prior claims
against the SDTF, it will result in the loss of recovery from the SDTF of funds
relating to future claims occurring on or after January 1, 1998. The Florida
legislature originally set up the SDTF to reimburse Florida employers and
carriers for workers' compensation benefits paid to employees when an employee
is injured on the job and the injury to the physically disabled worker merges
with, aggravates, or accelerates a preexisting impairment. Based on the
legislative change, certain SDTF claims may have to be refiled for reimbursement
and such filing will require a refiling fee. Additionally, companies accruing
SDTF recoveries may be statutorily limited in the level of recoverable claims
they may be allowed to carry. The bill also provides for a funding mechanism
through which companies writing workers' compensation insurance in Florida will
be assessed an annual charge to cover payments made by the SDTF. The SDTF has
not prefunded its claims liability and no reserves currently exist to satisfy
future claims; however, the Company believes that even in the event of a default
by the SDTF, the existing reimbursement obligations of the SDTF would become
general obligations of the State of Florida. As of September 30, 1997, based
upon Company estimates, the ultimate amount recoverable by the Company from the
SDTF was $45.2 million. See "THE ASSET SALE -- Impact of Legislative Changes to
the Florida Specialty Disability Trust Fund."
A.M. Best Company Rating. A.M. Best Company periodically rates certain
insurance companies based upon an evaluation of their financial strength,
operating performance and market profile. The objective of the rating system is
to provide an overall opinion of an insurance company's ability to meet its
obligations to policyholders. On May 12, 1997, A.M. Best Company announced a "C"
(Weak) rating for RISCORP Insurance Company and RISCORP Property & Casualty
Insurance Company. A.M. Best Company stated that the rating was a result of
uncertainties related to unresolved legal issues, the delay in completing the
1996 audit, ongoing state regulatory examinations, and the Company's weakened
financial condition and market viability. The level of written premiums of the
insurance subsidiaries of the Company were affected adversely by the A.M. Best
Company announcement. Recognizing the immediate and long term adverse impact of
a "C" rating, including its effect on the Company's ability to attract new
clients to purchase its insurance policies, obtain renewals from existing
clients, and convince other insurers to provide it with reinsurance
endorsements, the SAC and Smith Barney accelerated their efforts to find a buyer
for the Company. See "BUSINESS -- A.M. BEST COMPANY RATINGS OF INSURANCE
SUBSIDIARIES" at Appendix E.
Legal Proceedings. In April 1996, the Company, RISCORP Insurance Company
and certain officers and directors were named as defendants in a purported class
action filed in the United States District Court for the Southern District of
Florida (the "Vero Cricket Litigation"). In this action, the plaintiffs claimed
that the defendants violated the Racketeer Influenced and Corrupt Organizations
Act ("RICO"), breached fiduciary duties and were negligent in the Company's
acquisition of Commerce Mutual Insurance Company ("CMIC") in 1995. The
plaintiffs sought compensatory and punitive damages and equitable relief and
treble damages for the RICO counts. The named plaintiffs, Vero Cricket Shop,
Inc., Vero Cricket Shop Too, Inc., and Falls Company of Longboat Key, Inc.,
claimed to be former policyholders of CMIC and claimed to represent others
similarly situated. During the search for a buyer of the Company, a motion to
dismiss the RICO counts and to strike the punitive damages claims was pending
before the Court. See "THE ASSET SALE -- Legal Proceedings Update."
Between November 20, 1996 and January 31, 1997, nine shareholder class
action lawsuits were filed against the Company and other defendants in the
United States District Court for the Middle District of Florida. In March 1997,
the Court consolidated these lawsuits. The Plaintiffs subsequently filed a
consolidated complaint (the "Securities Litigation") which named as defendants
the Company, three of its executive
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<PAGE> 25
officers, one non-officer director and three of the Company's underwriters for
the Company's IPO. The Plaintiffs in the consolidated complaint purport to
represent the class of shareholders who purchased the Company's Class A Common
Stock between February 28, 1996 and November 14, 1996. The consolidated
complaint alleges that the Company's registration statement and prospectus dated
February 28, 1996, as well as subsequent statements, contained false and
misleading statements of material fact and omissions, in violation of Sections
11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. The consolidated complaint requests unspecified compensatory
damages. The defendants filed a motion to dismiss the consolidated complaint on
May 19, 1997. This motion to dismiss was pending during the search for a buyer
of the Company. See "THE ASSET SALE -- Legal Proceedings Update."
In October 1996, the Company and two of its executive officers were
subpoenaed to testify before a federal grand jury investigating political
campaign contributions. During that investigation state and federal
investigators interviewed numerous employees and certain representatives of the
Company. Many of those interviewed also testified before the federal grand jury.
Since the proceedings of a federal grand jury are confidential, the proceedings
further complicated the search for a buyer of the Company, due to the
difficulties faced by potential buyers in conducting due diligence
investigations of entities and persons subject to this process.
The indictments, issued on September 18, 1997 by the United States District
Court for the Northern District of Florida, Pensacola Division, charged the
Company, one of its non-regulated subsidiaries and five former officers of the
Company with violating federal laws arising from alleged illegal political
campaign contributions. These entities and individuals were accused of giving
money to employees of the Company (which were reported as "bonuses" in the
financial records of the Company) for the express purpose of contributing such
funds to selected political campaigns. RISCORP Management Services, a
non-regulated Company subsidiary, pled guilty to one count of conspiracy to
commit mail fraud, and all other charges against the Company were subsequently
dismissed. See "THE ASSET SALE -- Indictments of the Company and Certain of its
Former Officers."
These legal proceedings against the Company raised substantial concerns
among potential strategic partners considering the purchase of some or all of
the Company's assets or operations.
For additional information regarding legal proceedings involving the
Company and its subsidiaries, see the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1996 and the Company's Quarterly Report on
Form 10-Q/A for the quarterly period ended September 30, 1997, included as
Appendices E and F, respectively, and "THE ASSET SALE -- Legal Proceedings
Update."
Summary of Preliminary Negotiations With Potential Buyers. By March 24,
1997, Smith Barney had developed a contact list of forty-six potential buyers.
When contacted, twenty of the companies were not interested in further
discussions. After discussions with the remaining companies regarding the delay
in completing the 1996 audit, only five potential buyers remained, all of which
were insurance companies. Smith Barney representatives arranged meetings with
representatives of each of the remaining potential buyers between May 6 and May
22 in Sarasota, Florida. Before the first meeting, one of the remaining parties
withdrew and a second was excluded by the Company because of such party's
interest in an asset transaction as opposed to a stock transaction, which was
the structure preferred by the Company at that time. On May 19, 1997, a third
potential buyer withdrew from the process after entering into an acquisition
agreement with another insurance company, leaving Lumbermens Mutual Insurance
Company, an affiliate of Kemper Insurance Companies ("Kemper"), and Zenith. Both
Kemper and Zenith discussed separate potential stock transactions with the
Company and initiated their due diligence investigations of the Company.
Initial Meeting With Kemper. On May 15, representatives of Kemper,
Kemper's financial advisor, counsel for the SAC and representatives of Smith
Barney met in New York to discuss a possible acquisition of the Company and its
subsidiaries. The issues addressed at this meeting included a possible stock
transaction in which holders of the Company's Class A Common Stock would receive
$2.50 per share in cash. Holders of Class B Common Stock would receive $2.50 per
share consisting of cash and a note payable in an amount not
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<PAGE> 26
to exceed the SDTF receivable value as reflected on the Company's financial
statements. Total cash to be offered to the holders of the Company's Class A
Common Stock was less than $30 million.
Regulatory Deadlines and Possible Administrative Action. On May 19, 1997,
the Florida Department of Insurance (the "DOI") issued a letter informing the
Company of the DOI's inability to complete 1995 and 1996 financial examinations
of the Company's Florida insurance subsidiaries. The DOI imposed a deadline of
June 9, 1997, after which the DOI advised it would take what it deemed
"appropriate administrative action" unless the Company provided information
requested by the DOI for completion of its financial examinations of the
Company. After negotiations between the DOI and Company representatives, the DOI
agreed to extend the deadline for taking administrative action until June 17,
1997. Administrative action, if taken by the DOI, could have resulted in
possible administrative supervision or dissolution of the Company's insurance
subsidiaries and complete loss of shareholder value.
A New Board and New Management. In April 1997, Mr. Griffin had recommended
to the Board of Directors that the Company needed to consider new leadership at
the chief executive officer level in order to help restore the Company's
credibility and integrity with the investing public, the regulatory authorities
and the rating agencies. Mr. Griffin recommended Mr. Frederick M. Dawson, a
seasoned executive with substantial insurance industry expertise, to the Board.
Mr. Griffin believed that Mr. Dawson could provide the leadership necessary for
the Company to achieve its business objectives and substantially improve its
relationships with the insurance regulators and insurance rating agencies. Mr.
Dawson had been strongly recommended to Mr. Griffin by Korn Ferry, the executive
search firm retained by the Company, and by Smith Barney.
The Board approved the recommendation, and on May 20, 1997, Mr. Griffin
agreed to take a leave of absence as CEO and to be relieved of all of his duties
as such until May 31, 1999. Also, Mr. Griffin agreed that during such period he
would forego receiving the salary and incentives set forth in his Employment and
Severance Agreement dated January 1, 1995 which totaled approximately $1.5
million annually.
Mr. Dawson was elected as CEO of the Company and elected as a director on
May 20, 1997. As part of this management restructuring, Messrs. James A. Malone,
Richard Halloy, and L. Scott Merritt, each an executive officer and director of
the Company, were requested by the Board to resign as directors. Each did so on
May 20, 1997. Mr. Halloy also resigned as an officer on May 20, 1997.
In order to facilitate the retention of Mr. Dawson as the new CEO, pursuant
to a letter agreement dated May 20, 1997, Mr. Griffin agreed to vote all of his
shares of Company stock in favor of any action required to be taken by the
shareholders as a result of the commitments made to Mr. Dawson in his Employment
and Severance Agreement with the Company, dated May 19, 1997. In addition, Mr.
Griffin agreed to personally guaranty the indemnification obligations of the
Company under Section 9 of Mr. Dawson's Employment and Severance Agreement for
lawsuits that may be brought against Mr. Dawson for actions that took place
before he became affiliated with the Company as its CEO and a director.
Additionally, Mr. Griffin entered into a Directors Agreement with Mr.
Dawson and the three remaining outside directors, Messrs. Goode, Greene and
Revell (the "Directors Agreement"), providing, in part, for the following: (a)
so long as Mr. Griffin was a director, that he would be Chairman of the Board of
the Company; (b) Mr. Griffin would vote all of his shares for each member of
that Board at the 1997 Annual Shareholders Meeting; and (c) until the Annual
Shareholders Meeting in 1998, no directors would be elected without the
unanimous vote of all of the directors, and Mr. Griffin agreed not to take any
action in his capacity as the controlling shareholder of the Company to remove
any of the directors.
Collectively, these actions resulted in the Company having a new CEO, a
Board of Directors consisting of five members, three of whom were "outside"
directors, and an agreement by the controlling shareholder, Mr. Griffin, to keep
that Board in place.
The Directors Agreement was subsequently amended by the parties following
Mr. Griffin's indictment and the issuance of an order by the Florida Insurance
Commission prohibiting him from having any affiliation with an insurance
company. See "THE ASSET SALE -- Indictments of the Company and Certain of its
Former Officers" and "THE ASSET SALE -- Directors Agreement." As a result of the
issuance of such
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order, on September 18, 1997 Mr. Griffin resigned as a director of the Company
and all other positions with the Company and its subsidiaries.
Further Discussions with the DOI. The Company retained new regulatory
counsel in an effort to prevent possible administrative action against the
Company's insurance subsidiaries. Mr. Dawson, along with regulatory counsel and
in-house counsel, met with representatives of the DOI on May 27, 1997. Following
this meeting, an extension of the June 9, 1997 deadline was granted by the DOI
on the condition that the Company obtain a cut-through endorsement by Noon on
June 13, 1997. (Pursuant to a cut-through endorsement, a reinsurer agrees to
become liable to pay up to 100% of insured losses to a claimant under an
insurance agreement in the event the insurer is unable to pay an insured claim.)
On May 30, 1997, counsel for the SAC, a representative of Smith Barney,
representatives of Kemper and Kemper's financial advisors met at an airport
hotel in Chicago to discuss the terms of a draft definitive agreement sent by
Kemper to counsel for the SAC and representatives of Smith Barney on May 26,
1997.
After receiving the new extension from the DOI, Mr. Dawson turned his
attention to reducing overhead expenses to preserve the current financial
viability of the Company. To this end, on June 5, 1997, the Company announced a
17% reduction of its staff and an expense cutting program resulting in a 34%
reduction in total expenses and the hiring of a forensic accounting firm to
improve the Company's ability to meet all statutory and GAAP financial reporting
requirements. Also, on June 5, 1997, the Company's Treasurer, Chief Financial
Officer and President and Chief Operating Officer resigned. The Board elected a
new Chief Financial Officer, a new General Counsel, and a new Treasurer on June
10, 1997 and also elected Mr. Dawson as President of the Company.
In an effort to meet the June 13, 1997 deadline imposed by the DOI, the
Company entered into negotiations to secure a cut-through endorsement by
American Re-Insurance Company ("AmRe"). On June 12, 1997, however, AmRe failed
to provide the negotiated cut-through endorsement. On that day, the DOI informed
the Company that it planned to order the Company's insurance subsidiaries to
cease writing new or renewal business if the Company failed to deliver the
promised cut-through endorsement by Noon on June 13.
Withdrawal of Zenith. Early discussions regarding a possible transaction
between the Company and Zenith primarily were between Mr. Griffin and Zenith
representatives. On June 12, however, Zenith informed Company representatives
that it was withdrawing from negotiations with the Company. According to Zenith,
its withdrawal was due to (i) the fact that the Company did not respond to a
verbal transaction proposal made by representatives of Zenith to Mr. Griffin
within the time period indicated by the Company, (ii) Zenith's determination
that the Company's subsequent response requesting a draft purchase agreement
describing the specific terms of its proposal was an unsatisfactory response,
and (iii) Zenith's impression that the Company was concentrating its negotiating
efforts on another potential bidder.
Final Negotiations. As a result of Zenith's withdrawal, the Company
focused its negotiations with Kemper. On June 13, 1997, Mr. Dawson, with the
Company's General Counsel and counsel for the SAC, met with representatives of
the DOI and negotiated a third extension of the deadline for taking
administrative action. The DOI, after receiving assurances directly from Kemper
that it was willing to execute a definitive agreement to purchase the Company,
gave the Company until Noon on June 17, 1997, to deliver to the DOI a definitive
purchase agreement approved by the Boards of the Company and Kemper, along with
a cut-through endorsement. If the Company failed to meet this final deadline,
representatives of the DOI stated that the Company's insurance subsidiaries
would be placed under administrative supervision. The Board of Directors
believed that any such action by the DOI would likely result in a complete loss
of shareholder value.
On June 14, 1997, in-house counsel for the Company, counsel for the SAC,
Smith Barney representatives, and counsel for Mr. Griffin and Mr. Griffin's
financial advisors met in Chicago with representatives of Kemper. The purpose of
this meeting was to attempt to reach agreement on the terms of a purchase
agreement before the deadline of Noon on June 17, 1997 imposed by the DOI. At
this point, Kemper modified its prior proposal and offered to purchase the
capital stock of the Company's subsidiaries; however, an acceptable agreement
with respect to a cut-through arrangement and other matters could not be reached
with Kemper. That same day, representatives of the Company received a telephone
call from a representative of
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Zenith indicating that Zenith was interested in making a new proposal. In-house
counsel for the Company, counsel for the SAC, Smith Barney representatives and
counsel for and other representatives of Mr. Griffin negotiated by telephone
with representatives of Zenith, including its counsel and financial advisors, in
an effort to reach agreement on definitive terms. At this point, based on its
belief that Kemper would be unable to reach a definitive agreement with the
Company before the DOI's June 17 deadline, the Company asked Zenith to deliver a
draft purchase agreement, which it did on the morning of June 15, 1997. The
Company and Zenith negotiated certain terms of the draft agreement throughout
the day of June 15, 1997. At 5:00 p.m. that afternoon, after consulting by
telephone with representatives of the DOI, and after not receiving a draft
agreement from Kemper and its representatives, the Company agreed in principle
to an asset purchase agreement with Zenith. The agreement proposed by Zenith
provided, among other things, that Zenith would issue cut-through endorsements
as to new and renewal Florida workers' compensation policies issued by the
Company's Florida insurance subsidiaries. At this point, the Company's
negotiating team left Chicago on June 15 to go to New York City for final
negotiations with Zenith.
On June 16 and 17, Mr. Dawson, in-house counsel for the Company, counsel
for the SAC and Smith Barney representatives met in New York with
representatives of Zenith, including its counsel and financial advisors, and
worked to reach agreement on the terms of the Purchase Agreement. Given the
threat of administrative supervision of the Company's Florida insurance
subsidiaries in the event the Company failed to deliver a definitive purchase
agreement by noon on June 17, 1997 and the fact that Zenith's representatives
were aware of the circumstances, the Company was unable to negotiate material
changes to the draft purchase agreement presented by Zenith on June 15, 1997,
except for changes regarding a minimum purchase price and Zenith's agreement to
assume certain obligations of the Company owed to AmRe. Based on the Company's
general acceptance of the form of this transaction and its general agreement to
the principal terms, including the method by which the purchase price would be
calculated, the changes to the draft purchase agreement were primarily
clarifying in nature to ensure the document accurately described the assets and
liabilities being acquired and the other business terms approved by the parties.
The revised Zenith asset purchase proposal and the Purchase Agreement were
presented to the SAC on June 16, 1997 in New York City. The members of the SAC
unanimously approved the terms of the Purchase Agreement and voted to present
the Purchase Agreement to the Board. Zenith's Board approved the Purchase
Agreement on June 16, 1997. On June 17, 1997, the Company's Board met in New
York City and considered the Asset Sale and the Purchase Agreement. In
connection with their consideration of the terms of the Purchase Agreement,
members of the Board received the verbal opinion from Smith Barney that the
Purchase Agreement and the Asset Sale were fair, from a financial point of view,
to the Company and its Shareholders. See "THE ASSET SALE -- Opinions As To The
Fairness Of The Consideration -- Opinion of Smith Barney." Following discussion
and consideration of their fiduciary duties to the Company and its Shareholders,
and after discussing the fact that the Company's failure to execute a definitive
purchase agreement by Noon on June 17 could result in administrative supervision
or dissolution of the Company's insurance subsidiaries and the implications of
this action on shareholder value, on June 17 the members of the Board
unanimously approved the Purchase Agreement and the Asset Sale. See "THE ASSET
SALE -- Recommendation of the Board of Directors." The Company later received a
written opinion as to the fairness of the transaction from Smith Barney, dated
as of June 16, 1997, and the Purchase Agreement expressly provided that the
Company had the right to terminate the agreement if the Board failed to receive
an opinion from BT Alex. Brown to the effect that the consideration to be
received by the Company and its subsidiaries is fair from a financial point of
view on or before 5:00 p.m., New York City time, on the 30th day after the date
of the Purchase Agreement. Following the execution of the Purchase Agreement by
representatives of the Company and Zenith, a copy of the Purchase Agreement was
sent via facsimile to the DOI prior to the Noon deadline on June 17, 1997. The
written opinion of BT Alex. Brown was delivered to the Company on July 16, 1997.
See "THE ASSET SALE -- Opinion as to the Fairness of the
Consideration -- Opinion of BT Alex. Brown" and Appendices B and C.
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SUMMARY OF THE TERMS OF THE PURCHASE AGREEMENT
Although the Company believes that the following summary of the Purchase
Agreement describes the material terms and conditions of the Purchase Agreement,
such summary is qualified in its entirety by reference to the Purchase
Agreement, a copy of which is attached hereto as Appendix A and is incorporated
herein by reference. Terms which are not otherwise defined in this summary have
the meaning set forth in the Purchase Agreement.
The Purchase Price. Under the terms of the Purchase Agreement, Zenith will
purchase substantially all of the assets of the Company relating to its workers'
compensation insurance business, including the Company's existing in-force
business, as well as the right to all new and renewal policies. In connection
with the Asset Sale, Zenith will assume certain liabilities related to the
Company's insurance business, including $15 million in indebtedness of the
Company owed to AmRe. The purchase price, which will be paid in cash, will be
the difference between the book value of the assets purchased and the book value
of the liabilities assumed by Zenith as of the Closing Date (the "Purchase
Price"), subject to a minimum cash Purchase Price of $35 million. At the closing
of the Asset Sale (the "Closing"), Zenith will pay the Company and its
subsidiaries $35 million minus a base escrow amount of $10 million.
Within seventy days of the Closing Date, the Company's representatives are
required to deliver a Proposed Business Balance Sheet, representing the audited
statement of Transferred Assets and the Transferred Liabilities of the Business
(as such terms are defined in the Purchase Agreement) as of the Closing Date, to
Zenith. If, after Zenith reviews the Proposed Business Balance Sheet, the
Company and Zenith are able to agree in writing on the manner in which items
should be treated on the Proposed Business Balance Sheet, the resulting balance
sheet shall be binding on the parties and the Proposed Business Balance Sheet
will become the Final Business Balance Sheet. The excess of the value of the
Transferred Assets over the value of the Transferred Liabilities as represented
on the Final Business Balance Sheet will be the Purchase Price. After agreement
is reached on the Final Business Balance Sheet, Zenith will pay to the Company
and its subsidiaries an amount, if any, equal to the Purchase Price minus $35
million already paid by Zenith minus an additional escrow amount (the difference
between 15% of the Purchase Price and $10 million). If, however, the Company and
Zenith are unable to agree on the manner in which any item should treated in the
preparation of the final Business Balance Sheet, such disputed items will be
submitted to neutral auditors or actuaries as appropriate for a final and
binding determination of such issues. All fees and expenses relating to the work
of such auditors or actuaries will be borne by the Company. The financial
statements provided in this Proxy Statement and in the appendices hereto, which
have been prepared by the Company, may differ materially from the Proposed
Business Balance Sheet which will be reviewed by Zenith. THE COMPANY IS SEEKING
APPROVAL OF A PURCHASE AGREEMENT THAT DOES NOT CONTAIN A DEFINITIVE PURCHASE
PRICE.
The base escrow amount of $10 million plus any additional escrow amount
will be held by an escrow agent for two years at which time any remaining escrow
amount will be paid out to the Company and its subsidiaries with accrued
interest. The escrowed funds will be used to indemnify Zenith against all
liabilities (other than those transferred) and any misrepresentation, breach or
nonfulfillment of any agreement contemplated in the Purchase Agreement. Based on
information currently available to it, including the pro forma financial
information contained herein, the Board of Directors estimates that the Purchase
Price to be paid by Zenith will be substantially more than the minimum cash
Purchase Price of $35 million. After the transaction closes, the Company and its
subsidiaries will no longer engage in the workers' compensation insurance
business.
Assumption of the AmRe Note Obligations. Under the terms of the Purchase
Agreement, Zenith has agreed to assume the Company's obligations under a $15
million aggregate principal amount senior subordinated promissory note due 2002
currently held by AmRe (the "Note"). Under the terms of the Note, the Company is
obligated to pay interest on the unpaid principal amount at a rate of 12% per
annum. The Note was issued pursuant to an Amended and Restated Note Purchase
Agreement dated as of January 1, 1995, as amended, entered into by a predecessor
of the Company and AmRe (the "Note Agreement"). The Company has assumed any and
all obligations of its predecessor under the Note Agreement. Under the terms of
the Note Agreement, the Company is bound by certain covenants and agreements
that survive as long as
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<PAGE> 30
the Note is outstanding. Such covenants and agreements relate to, among other
things, (1) the continued payment of principal and interest; (2) proper record
keeping by the Company and its subsidiaries; (3) compliance with laws; (4)
payment of taxes; (5) maintenance of properties and insurance thereon; (6) the
Company's continued ownership of insurance subsidiaries; (7) limitations on
certain liens on assets; (8) certain financial covenants relating to leverage
ratios, fixed charge coverage ratios, capital and surplus, consolidated
statutory net premium to surplus ratios, insurance regulatory authority ratios;
(9) indebtedness; (10) dividend payments; (11) transactions with affiliates;
(12) consolidation, merger or disposition of assets as an entirety and the sale
of material assets; (13) business activities; (14) limitations on investments;
(15) the performance of RISCORP Insurance Company under the provisions of the
RISCORP Insurance Surplus Note (as described therein); (16) management
agreements; (17) senior bank loan documents; (18) retrocession agreements and
surplus relief insurance; and (19) subsidiary payments to the Company.
Under the terms of the Note Agreement, default under any covenant or
agreement in turn will constitute a default under the Note Agreement. In the
event of such default, AmRe has the right to declare the unpaid principal amount
of the Note to be due and payable together with interest thereon. The Note
Agreement, however, provides that AmRe may waive acceleration. In addition,
although the Note Agreement permits prepayment of the obligations under the
Note, AmRe will be entitled to a prepayment penalty in the event of such
prepayment. If the Note were prepaid as of March 31, 1998, the prepayment
penalty would be approximately $2,200,000.
Upon the consummation of the Asset Sale, the Company will be in technical
default under the terms of the Note Agreement, and the Company's obligations may
be accelerated by AmRe. Pursuant to the terms of the Purchase Agreement,
however, Zenith has agreed to assume the liabilities and obligations of the
Company arising under the terms of the Note Agreement. The Note Agreement
provides that it shall bind permitted successors and assigns of the Company.
Zenith's assumption of the Company's obligations under the terms of the
Note and the Note Agreement will not legally extinguish the Company's
obligations thereunder. Zenith, however, is obligated under the terms of the
Purchase Agreement to indemnify the Company for any and all damages, losses,
deficiencies, liabilities, costs and expenses incurred or suffered by the
Company that result from, relate to or arise out of the obligations assumed by
Zenith relating to the Note and the Note Agreement.
The Closing. If the Purchase Agreement and Asset Sale are approved by the
affirmative vote entitled to be cast by holders of (i) a majority of all
outstanding shares of Class A Common Stock and Class B Common Stock, voting as a
single class, and (ii) a majority of the outstanding shares of Class A Common
Stock voting as a single class, the closing of the Asset Sale (the "Closing")
will take place on the third business day following the satisfaction or waiver
of the conditions to closing set forth in the Purchase Agreement or at such
other time as the parties may mutually agree. The Company anticipates that all
such conditions will be satisfied or waived within a matter of days after the
Company receives the required vote approving the Purchase Agreement and the
transactions contemplated therein. Both the Company and Zenith have the right to
terminate the Purchase Agreement if the Closing does not occur on or prior to
March 31, 1998, unless the party seeking termination failed to perform covenants
and agreements which prevented the Closing.
Representations and Warranties. The Purchase Agreement contains various
representations and warranties of the Company, its subsidiaries and Zenith.
These include representations and warranties by the Company and its subsidiaries
relating to, among other things: (a) organization and similar corporate matters
of the Company and its subsidiaries; (b) authorization, execution, delivery,
performance and enforceability of the Purchase Agreement and the ancillary
agreements thereto; (c) absence of certain regulatory and third party
disqualifiers; (d) the Company's provision of certain corporate documents to
Zenith, including corporate books and records, documents filed with the
Commission, and statutory financial statements required by state insurance
regulatory agencies; (e) absence of undisclosed liabilities; (f) insurance
contracts and other material contracts primarily related to the business of the
Company and its subsidiaries; (g) title to and condition of the assets to be
transferred to Zenith; (h) litigation; (i) compliance with laws; (j) benefit
plans; (k) brokers and advisors; (l) reinsurance contracts; (m) disputed claims;
(n) computer software; (o) accounting and information systems; (p) databases;
(q) environmental matters; (r) taxes; (s) intellectual
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<PAGE> 31
property; (t) agents and brokers; (u) solvency of the Company and its
subsidiaries after the Closing; and (v) real property of the Company and its
subsidiaries.
Zenith's representations and warranties include those relating to, among
other things: (a) Zenith's organization and similar corporate matters; (b)
authorization, execution, delivery, performance and enforceability of the
Purchase Agreement and the ancillary agreements thereto; (c) absence of certain
regulatory and third party disqualifiers; (d) compliance with laws; and (e)
brokers and advisors.
Certain Covenants. Pursuant to the terms of the Purchase Agreement, the
Company, its subsidiaries and Zenith have made certain covenants including,
among others, that from the date of the Purchase Agreement through the Closing,
except as permitted by or contemplated in the Purchase Agreement, the Company
and its subsidiaries shall carry on their respective businesses in the ordinary
course consistent with past practice and, to the extent consistent therewith,
use reasonable efforts to preserve intact their current business organizations,
keep available the services of the key employees directly involved in the
business and preserve their relationships with agents, brokers, intermediaries,
insureds, reinsurers and others having business dealings with them. In addition,
except (a) as permitted by or contemplated in the Purchase Agreement and (b) as
otherwise consented to in writing by Zenith, the Company and its subsidiaries
have agreed not to: (i) transfer or dispose of any assets which would otherwise
be transferred to Zenith other than investment assets transferred or disposed of
in the ordinary course of business consistent with past practices; (ii) enter
into, modify or change in any material respect any agreement to be assigned and
assumed by Zenith; (iii) permit or allow any transferred asset to become subject
to any liens; (iv) waive any claims or rights relating to the business of the
Company and its subsidiaries except in the ordinary course of business
consistent with past practices; (v) grant any increase in compensation or
benefits or change or amend, modify or establish any new employee benefit plan
relating to any employee whose employment will be assumed by Zenith; (vi) make
any material change in accounting methods; (vii) enter into or renew any
insurance contract except in the ordinary course in accordance with existing
underwriting policies, procedures and guidelines; (viii) enter into any
transaction with any entity affiliated with the Company; (ix) declare, set aside
or pay any dividends on or make any other distributions in respect of any of the
Company's capital stock or otherwise acquire any shares of outstanding capital
stock or any rights, warrants or options to acquire such shares; (x) incur any
indebtedness for borrowed money or guarantee any such indebtedness of any person
or make any loans or advancements to any person or repay the promissory note
held by AmRe in the amount of $15,000,000; (xi) invest any funds unless in
accordance with specified guidelines; (xii) acquire any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof or any additional assets material to the
business of the Company and its subsidiaries, except for investment assets in
the ordinary course of business; (xiii) discharge, settle or satisfy any claims,
liabilities or obligations other than in the ordinary course of business
consistent with past practice; (xiv) make or agree to make any new capital
expenditures in excess of $100,000 in the aggregate; (xv) settle or compromise
specified litigation involving payments in excess of $100,000; (xvi) terminate
the employment of any employee that is material to the operation of the business
of the Company or its subsidiaries; or (xvii) commit or agree to take any of the
foregoing actions.
No Solicitation. The Purchase Agreement provides that the Company shall
not, nor shall it knowingly permit any of its subsidiaries or any of their
respective officers, directors, employees, agents, investment bankers,
attorneys, financial advisors or other representatives or agents to (a) solicit,
initiate or encourage the submission of any Acquisition Proposal (as defined
below) or (b) enter into any agreement with respect to, participate in any
discussions regarding, or furnish to any person any information with respect to,
or take any other action to facilitate the making of, any Acquisition Proposal;
provided, however, that the Company may, at any time prior to receiving
Shareholder approval as to the Asset Sale, following the receipt of an
unsolicited Acquisition Proposal, if the Board of Directors determines in good
faith, based upon the written advice of outside counsel, that it is necessary to
do so in order to comply with its fiduciary duties to Shareholders, participate
in negotiations regarding such Acquisition Proposal subject to certain
additional specified conditions and obligations. The Company and its
subsidiaries may not enter into any agreement with any party in respect of any
Acquisition Proposal unless the other party agrees to indemnify fully Zenith on
terms reasonably acceptable to Zenith for any and all liabilities arising
pursuant to certain cut-through agreements
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<PAGE> 32
contemplated in the Purchase Agreement. As defined in the Purchase Agreement,
the term "Acquisition Proposal" means any proposal or offer for a merger,
consolidation or other business combination involving the Company or any
subsidiary or any proposal or offer to acquire all or substantially all of the
business, assets or capital stock of the Company or any of its subsidiaries.
Notwithstanding anything to the contrary in the Purchase Agreement, the
Board of Directors of the Company shall be permitted from time to time to take
the following actions in the circumstances described below: (a) to withdraw or
modify its approval or recommendation of the Purchase Agreement and the
transactions contemplated thereby; or (b) to approve, recommend or enter into an
Acquisition Proposal; if, in each such case, prior to Shareholder approval of
the Purchase Agreement and the transactions contemplated therein, the Company
receives an unsolicited Acquisition Proposal and the Board of Directors
determines in good faith, based on the advice of outside counsel, that it is
necessary to do so to comply with its fiduciary duties under applicable law. No
action by the Board of Directors of the Company permitted by the preceding
sentence shall constitute a breach of the Purchase Agreement by the Company;
provided, however, that the Company shall be obligated to pay fees as described
under "THE ASSET SALE -- Summary of the Terms of the Purchase
Agreement -- Termination Fees."
Employment Solicitation Restrictions; Non-Compete Obligations. Pursuant to
the Purchase Agreement, the Company and its subsidiaries agree, that for a
period of three years following the Closing Date, without the prior written
consent of Zenith, (a) the Company and its subsidiaries will not, directly or
indirectly, solicit for employment or knowingly hire any employee of the Company
or of its subsidiaries whose employment is assumed by Zenith or any employee,
agent or broker of the business of Zenith; (b) the Company and its subsidiaries
will not, directly or indirectly, own, manage, operate, join, control or
participate in the ownership, management, operation or control of, any workers'
compensation insurance business in the United States.
Obligations as to Licensed Software. Prior to the Closing Date, with
respect to any licensed software that requires consents to assignment or
sub-license to Zenith pursuant to the Purchase Agreement, at Zenith's request,
the relevant licensee shall use its best efforts to obtain from the licensors of
the licensed software the right for Zenith to operate the licensed software. The
Company and its subsidiaries shall pay all costs and expenses associated with
obtaining such right from the licensors. Zenith shall assume responsibility for
complying with the terms and conditions of the licenses governing such software,
including responsibility for the payment of the costs and expenses of all
ongoing contractual responsibilities, including licensing, upgrade and
maintenance fees.
Conditions to Closing. The respective obligations of the parties to
consummate the Asset Sale are subject to the satisfaction or waiver of the
closing conditions as specifically set forth in the Purchase Agreement. Such
conditions to Zenith's obligation to close include, among others, (a) the
representations and warranties of the Company and its subsidiaries contained in
the Purchase Agreement are true and correct in all material respects on and as
of the Closing Date; (b) the Company and its subsidiaries shall have performed
or complied in all material respects with all covenants and agreements required
by the Purchase Agreement to be performed or complied with on or prior to the
Closing Date; (c) the absence of any event or condition which individually or in
the aggregate resulted in or could reasonably be expected to adversely affect:
(i) the Company or its subsidiaries' ability to consummate the transactions
contemplated by the Purchase Agreement, or (ii) Zenith's ability to operate the
Company's business after the Closing substantially as it was operated on June
17, 1997; (d) all ancillary agreements contemplated in the Purchase Agreement
shall have been duly executed and delivered by the Company and its subsidiaries
on the Closing Date and shall be in full force and effect with respect to the
Company and its subsidiaries on such date; (e) the receipt of governmental and
regulatory consents and approvals of the transactions contemplated by the
Purchase Agreement, including regulatory approval required by the following
states: Arkansas, Florida, Georgia, Illinois, Kansas, Minnesota, Missouri,
Nebraska, North Carolina, Texas, Virginia and Wisconsin; (f) the receipt of
consent or certain waivers of third parties relating to assigned and assumed
agreements and contracts; (g) no temporary restraining orders, preliminary
injunctions or other orders preventing the consummation of the transactions
contemplated in the Purchase Agreement shall be in effect or threatened; (h) the
waiting period applicable to the Asset Sale under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR
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<PAGE> 33
Act"), shall have expired or been terminated; and (i) the Purchase Agreement
shall have been approved and adopted by the Shareholders as required.
Conditions to the Company's and its subsidiaries' obligation to close
include, among others, (a) the representations and warranties of Zenith
contained in the Purchase Agreement are true and correct in all material
respects on and as of the Closing Date; (b) Zenith shall have performed or
complied in all material respects with all covenants and agreements required by
the Purchase Agreement to be performed or complied with by Zenith on or prior to
the Closing Date; (c) all ancillary agreements contemplated in the Purchase
Agreement shall have been duly executed and delivered by Zenith on the Closing
Date and shall be in full force and effect with respect to Zenith on such date;
(d) all filings required to have been made and all consents, approvals, permits
and authorizations required to be obtained prior to the Closing Date shall have
been made or obtained; (e) the waiting period applicable to the Asset Sale under
the HSR Act shall have expired or been terminated; (f) the Purchase Agreement
shall have been approved and adopted by the Shareholders as required; and (g) no
temporary restraining orders, preliminary injunctions or other orders preventing
the consummation of the transactions contemplated in the Purchase Agreement
shall be in effect or threatened.
The Purchase Agreement provides that both the Company and Zenith may waive
any conditions precedent to their respective obligations to close the Asset Sale
to the extent such waiver is permitted by law. This provision grants the Board
the contractual authority to waive a condition precedent to closing in the
discharge of its fiduciary duties to the Company and the Shareholders. Any such
determination will be made after consideration of the nature of the condition
and the facts and circumstances surrounding its inability to be satisfied, as
well as an evaluation of the alternatives available to the Company if the
condition is not waived. This provision would permit the Board, after
consultation with its advisors if the Board deems appropriate, to waive, among
other things, a breach by Zenith of any of its representations, warranties,
covenants or agreements contained in the Purchase Agreement, including, without
limitation, Zenith's obligation to enter into the Ancillary Agreements (as such
term is defined in the Purchase Agreement) in substantially the form attached to
the Purchase Agreement if, in the exercise of the Board's discretion, it is
concluded that such waiver is in the best interests of the Company and the
Shareholders. Permitted waivers, if exercised, do not require additional
shareholder approval. THE COMPANY DOES NOT INTEND TO RESOLICIT PROXIES IN THE
EVENT A MATERIAL CONDITION IS WAIVED.
On February 18, 1998, the Company received notification that the Federal
Trade Commission granted a request for early termination of the waiting period
applicable to the Asset Sale under the HSR Act. No assurances can be provided as
to when, or if, all of the remaining conditions precedent to the Asset Sale can
or will be satisfied or waived by the party permitted to do so. The Purchase
Agreement provides that either party has the right to terminate such agreement
if the Asset Sale has not closed on or prior to December 31, 1997, unless such
failure of consummation shall be due to the failure of the party seeking such
termination to perform or observe in all material respects the covenants and
agreements to be performed or observed by such party; provided, however, that if
despite its diligent efforts the Company shall not have cleared its proxy with
the Commission on or prior to such date, such date may be extended to March 31,
1998. On December 23, 1997, the Company exercised its right to extend the
termination date to March 31, 1998 pursuant to this provision.
Termination of the Purchase Agreement. The Purchase Agreement may be
terminated at any time prior to the Closing Date:
(a) by mutual written consent of the Company, Zenith and the Florida
Insurance Department;
(b) by the Company or Zenith, upon written notice to the other party,
if the Closing shall not have occurred on or prior to December 31, 1997,
unless such failure of consummation shall be due to the failure of the
party seeking such termination to perform or observe in all material
respects the covenants and agreements hereof to be performed or observed by
such party; provided, however, that, if despite its diligent efforts, the
Company shall not have cleared its proxy with the Commission on or prior to
such date, such date may be extended by either party up to March 31, 1998
(ON DECEMBER 23, 1997, THE
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<PAGE> 34
COMPANY EXERCISED ITS RIGHT TO EXTEND THE TERMINATION DATE TO MARCH 31,
1998 PURSUANT TO THIS PROVISION);
(c) by the Company or Zenith, upon written notice to the other
parties, if a governmental authority of competent jurisdiction shall have
issued a final and non-appealable injunction, order or decree enjoining or
otherwise prohibiting the consummation of the transactions contemplated by
the Purchase Agreement, or if a governmental authority has otherwise made a
final determination that any required regulatory consent would not be
forthcoming; provided, however, that the party seeking to terminate the
Purchase Agreement pursuant to this clause has used all commercially
reasonable efforts to remove such injunction, order or decree;
(d) by the Company or Zenith, if, upon a vote at a duly held
shareholders' meeting of the Company or any adjournment thereof, the
Shareholder approval required shall not have been obtained;
(e) by Zenith if the Company or any of its subsidiaries that are a
party to the Purchase Agreement (i) breaches or fails in any material
respect to perform or comply with any of its material covenants and
agreements contained therein, or (ii) breaches any of the representations
and warranties in any material respect referred to in Section 6.01 of the
Purchase Agreement and such breach would reasonably be likely to have a
Sellers Material Adverse Effect (as such term is defined in the Purchase
Agreement) and such breach has not been remedied within 20 days after
receipt of notice thereof from Zenith;
(f) by the Company if Zenith (i) breaches or fails in any material
respect to perform or comply with any of its material covenants and
agreements contained in the Purchase Agreement, or (ii) breaches its
representations and warranties in any material respect referred to in
Section 6.01 of the Purchase Agreement and such breach would reasonably be
likely to have a Purchaser Material Adverse Effect (as such term is defined
in the Purchase Agreement) and such breach has not been remedied within 20
days after receipt of notice thereof from the Sellers' Representative (as
such term is defined in the Purchase Agreement);
(g) by the Company or Zenith, if, prior to Shareholder approval of the
Purchase Agreement, the Board of Directors of the Company shall have
exercised certain rights upon receipt of an unsolicited Acquisition
Proposal under certain specified circumstances set forth in Section 5.04 of
the Purchase Agreement; or
(h) by the Company or Zenith, if the Board of Directors has failed to
receive an opinion of BT Alex. Brown Incorporated to the effect that the
consideration to be received by the Company and certain of its subsidiaries
pursuant to the Purchase Agreement is fair to the Company from a financial
point of view.
The Purchase Agreement provides that it will become void and have no effect,
except as to certain enumerated provisions, if terminated as set forth above.
Termination Fees. If the Board of Directors of the Company (a) approves or
recommends an unsolicited Acquisition Proposal as defined above, (b) causes the
Company to enter into an agreement with respect to such Acquisition Proposal, or
(c) terminates the Purchase Agreement (i) upon receipt of an unsolicited
Acquisition Proposal under certain circumstances or (ii) upon the failure of the
Board to receive an opinion from BT Alex. Brown that the consideration to be
received by the Company is fair from a financial point of view, the Company
shall, concurrently with the taking of such action or termination, pay to Zenith
upon demand $7.5 million, plus expenses, as liquidated damages. In the event
that Shareholder approval of the Asset Sale is not obtained at the Special
Meeting, the Company shall pay to Zenith upon demand $7.5 million, plus
expenses.
Indemnification; Survival of Representations and Warranties. From and
after the Closing, the Company and its subsidiaries, jointly and severally, will
remain obligated to reimburse, indemnify and hold harmless Zenith, its
affiliates, and their respective successors, assigns, directors, officers,
employees and agents (collectively the "Indemnified Purchaser Party") against
and in respect of certain losses. These losses include, but are not limited to:
(a) any and all damages, losses, deficiencies, liabilities, costs and expenses
incurred or suffered by the Indemnified Purchaser Party that result from, relate
to or arise out of: (i) any and all liabilities
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<PAGE> 35
and obligations of the Company and its subsidiaries except for liabilities
transferred to Zenith, or (ii) any misrepresentation, breach of warranty or
non-fulfillment of any agreement or covenant on behalf of the Company or its
subsidiaries under the Purchase Agreement or in any ancillary agreement or from
any misrepresentation in or omission from any certificate, schedule, statement,
document or instrument furnished to Zenith pursuant to the Purchase Agreement or
in conjunction with the negotiation, execution or performance of the Purchase
Agreement; (b) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses) incident to
any of the foregoing or to the enforcement of indemnification obligations.
From and after the Closing, Zenith will remain obligated to reimburse,
indemnify and hold harmless the Company, its subsidiaries, and their respective
successors, assigns, directors, officers, employees and agents (collectively the
"Indemnified Seller Party") against and in respect of certain loses. Such losses
include, but are not limited to: (a) any and all damages, losses, deficiencies,
liabilities, costs and expenses incurred by any Indemnified Seller Party that
result from, relate to or arise out of: (i) any liability transferred to Zenith,
or (ii) any misrepresentation, breach of warranty or non-fulfillment of any
agreement or covenant by Zenith under the Purchase Agreement or from any
misrepresentation in or omission from any certificate, schedule, statement,
document or instrument furnished to the Company pursuant to the Purchase
Agreement or in conjunction with the negotiation, execution or performance of
the Purchase Agreement; and (b) any and all actions, suits, claims, proceedings,
investigations, demands, assessments, audits, fines, judgments, costs and other
expenses (including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of indemnification
obligations.
Under the terms of the Purchase Agreement, the Company and its subsidiaries
will have no obligation to indemnify Zenith and its related individuals and
entities until the total of all damages actually paid or incurred by an
Indemnified Purchaser Party exceeds $350,000. Neither Zenith nor the Company and
its subsidiaries will be liable for indemnification in an amount in excess of
the Purchase Price; provided, however, that this limitation will not apply to
(i) willful breaches of any covenant or agreement set forth in the Purchase
Agreement, (ii) any liability attributable to a breach by the Company or its
subsidiaries to representations regarding title to the transferred assets, or
(iii) any claims for indemnification relating to liabilities and obligations
arising out of liabilities transferred to Zenith. See "THE ASSET SALE -- Summary
of the Terms of the Purchase Agreement -- Ancillary Agreements" for a discussion
of the terms of the Escrow Agreement and its effect on indemnity obligations of
the Company.
The representations and warranties of the parties in the Purchase Agreement
shall survive the Closing and shall terminate and expire at the close of
business on the second anniversary of the Closing Date.
Ancillary Agreements. At the Closing, the Purchase Agreement provides that
the parties will execute and deliver certain ancillary agreements, including but
not limited to, a reinsurance agreement, an escrow agreement, an assumption
agreement, and a tax matters agreement. Under the terms of the reinsurance
agreement, the insurance subsidiaries of the Company will cede to Zenith and
Zenith will assume 100% of the liabilities arising under or in connection with
the treaties, policies, binders, slips and other agreements of insurance written
by the insurance subsidiaries. Under the terms of the assumption agreement,
Zenith will assume and agree to pay, perform, and discharge certain assumed
liabilities. Under the terms of the Escrow Agreement, Zenith agrees to pay a
certain portion of the Purchase Price relating to the Asset Sale into escrow to
be held, invested and, in the event that certain conditions are met, distributed
to the Company and its subsidiaries by an escrow agent. The amount held in
escrow may be released and delivered to Zenith, under certain specified
conditions, in the event that the Company and its subsidiaries fail to indemnify
Zenith as required under the terms of the Purchase Agreement or the tax matters
agreement. Upon the second anniversary of the Closing Date or, if Zenith has an
unspecified claim for indemnification or reasonably expects in good faith to
have a claim for indemnification, the date on which such claim is resolved to
the reasonable satisfaction of Zenith, the escrow agent shall distribute to the
Company and its subsidiaries an amount equal to the undistributed portion of the
amount deposited in escrow. Under the terms of the tax matters agreement (i)
Zenith will indemnify and hold harmless the Company and its subsidiaries against
liabilities for taxes attributable to the business of the Company and its
subsidiaries after the Closing and
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<PAGE> 36
(ii) the Company and its subsidiaries will indemnify and hold harmless Zenith
against tax liabilities attributable to the business of the Company and its
subsidiaries up to and including the Closing.
Expenses. The Purchase Agreement provides that the parties thereto shall
bear their respective expenses incurred in connection with the preparation,
execution and performance of the Purchase Agreement and the consummation of the
transactions contemplated therein, including, without limitation, the
preparation of this Proxy Statement. Such expenses include printing costs and
the fees and expenses of its agents, representatives, legal counsel, financial
advisors, actuaries and accountants. The Company estimates that its fees and
expenses will total approximately $4,250,000.
Amendments. The Purchase Agreement has been amended twice to extend time
deadlines imposed by Section 5.18 thereof relating to the final delivery of
disclosure schedules. Copies of these amendments are attached as part of
Appendix A. The parties currently are negotiating a possible third amendment to
the Purchase Agreement to: (i) add 1390 Main Street, a wholly owned subsidiary
of the Company, as a party to the Purchase Agreement, and (ii) correct certain
defined terms and other references in the Purchase Agreement, none of which,
either individually or in the aggregate, modify the terms of the Asset Sale in
any material respect.
INTERIM REINSURANCE AGREEMENT
Effective June 18, 1997, Zenith also entered into an interim reinsurance
agreement with the Company's Florida insurance subsidiaries. Under the terms of
this agreement, Zenith reinsured all of the liabilities of such Florida
insurance subsidiaries on or after June 18, 1997, as to new, renewal, and
in-force Florida workers' compensation policies in the event such insurance
subsidiaries were declared insolvent under applicable insurance law pursuant to
court order. The Florida insurance subsidiaries have assigned to Zenith their
right to receive certain payments from other reinsurers in respect of the
business Zenith has reinsured.
TRUST AGREEMENTS
RISCORP Insurance Company and RISCORP Property & Casualty Insurance
Company, the Company's Florida insurance subsidiaries, each entered into a trust
agreement with Zenith and First Union National Bank, as trustee ("First Union"),
dated as of June 18, 1997 in conjunction with the interim reinsurance agreement
discussed above. The trusts created pursuant to these trust agreements were
established for the benefit of Zenith to provide Zenith with access to
sufficient assets to reimburse Zenith in the event that such insurance
subsidiaries become unable to meet their obligations to Zenith under the interim
reinsurance agreement. The DOI has approved these trust agreements. Pursuant to
the terms of the trust agreement by and among RISCORP Insurance Company, Zenith
and First Union, as amended, on July 10, 1997, RISCORP Insurance Company
delivered to First Union cash, cash equivalents, treasuries and securities with
a market value of approximately $35 million. Pursuant to the terms of the trust
agreement by and among RISCORP Property & Casualty Insurance Company, Zenith and
First Union, as amended, on July 10, 1997, RISCORP Property & Casualty Insurance
Company delivered to First Union cash, cash equivalents, treasuries and
securities with a market value of approximately $15 million.
The trust agreements contain various representations and warranties of the
Company's Florida insurance subsidiaries. These include, among other things, (a)
assurances as to notice to be given to Zenith and First Union regarding suits,
actions, proceedings or events which could adversely affect Zenith's interests
in the trust funds or the interests of First Union; (b) waivers of rights of
offsets, recoupments and counterclaims as to certain reinsurance obligations;
(c) future delivery of various instruments, powers of attorney and other
documents and the taking of further actions at Zenith's request in order to
provide the benefits to Zenith contemplated under the terms of the trust
agreements; (d) assurances as to the avoidance of actions which could impair
Zenith's beneficial interests in the trust amounts; (e) the absence or
elimination of liens upon or encumbrances to the trust assets; and (f)
assurances that the insurance subsidiaries will not sell, transfer, lease or
otherwise dispose of any of the trust assets. In addition, the Florida insurance
subsidiaries agreed to various indemnity obligations relating to losses arising
out of the trust agreements.
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<PAGE> 37
The trust agreements shall be terminated upon First Union's receipt of a
certificate executed by representatives of the respective Florida insurance
subsidiary of the Company and Zenith stating that the interim re-insurance
agreement has been terminated in accordance with the provisions thereof and that
First Union is directed to transfer all assets remaining in the trust accounts
to the appropriate insurance subsidiary or Zenith, as the case may be. Such
transfer must be made by First Union within ten days of the termination of the
respective trust agreement.
OPINIONS AS TO THE FAIRNESS OF THE CONSIDERATION
Opinion of Smith Barney
On November 21, 1996, the SAC retained Smith Barney to act as its financial
advisor with respect to its consideration of strategic alternatives to enhance
shareholder value. In connection with this engagement, Smith Barney delivered to
the SAC its written opinion, dated as of June 16, 1997, to the effect that, as
of such date based upon and subject to certain matters as stated therein, the
consideration to be received by the Company pursuant to the Purchase Agreement
is fair to the Company from a financial point of view.
In rendering its opinion, Smith Barney reviewed the Purchase Agreement and
held discussions with the Company's management to discuss the business and
prospects of the Company. Smith Barney also examined certain publicly available
business and financial information relating to the Company, as well as certain
other unaudited information (including actuarial reports) provided by the
Company including unaudited 1996 Company financial information. At the request
of the SAC, Smith Barney contacted and solicited bids from a number of potential
acquirers of the Company.
Due to the delay on the part of the Company to file with the Commission its
Form 10-K and accompanying financial statements for the year ended December 31,
1996, or to complete any other financial statements for any subsequent period,
Smith Barney reviewed only the unaudited financial information supplied to it by
the Company for all periods beginning after December 31, 1995. Smith Barney also
reviewed certain stock market data of the Company and similar data and financial
information for other publicly held companies in businesses similar to those of
the Company. Smith Barney also considered the financial terms of certain other
business combinations which had recently been consummated and such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which Smith Barney deemed relevant.
Smith Barney also considered the fact that A.M. Best Company, an insurance
company rating agency, issued a "C" rating ("Weak") for the Company's insurance
subsidiaries on their ability to pay claims, as well as the fact that the DOI
had placed such subsidiaries under close regulatory scrutiny and that the DOI
had set a final deadline of noon on June 17, 1997, for the Company to enter into
a definitive stock purchase agreement or asset purchase agreement with an
approved buyer. As a result of these and other factors, including existing
litigation involving the Company and certain of its existing officers, Smith
Barney concluded that the ability of the Company to operate in the future was
uncertain.
In connection with its review, Smith Barney assumed and relied, without
independent verification, upon the completeness and accuracy of all information
supplied to it by the Company. In addition, Smith Barney did not make an
independent evaluation or appraisal of the assets of the Company, nor has Smith
Barney been furnished with any such appraisal. Further, Smith Barney's opinion
is expressly based on economic, monetary and market conditions existing on June
16, 1997.
Smith Barney expressed no opinion with respect to the adequacy of the
reserves of the Company, as to whether the Company is impaired or is not solvent
under applicable law, or as to whether the Company is in such condition that the
further transaction of business by the Company would be limited under applicable
law.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATION ON THE REVIEW UNDERTAKEN, IS
ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. SMITH BARNEY HAS CONSENTED TO THE INCLUSION OF ITS OPINION LETTER AS
APPENDIX B AND TO THE INCLUSION OF THE
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SUMMARY THEREOF HEREIN. SHAREHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN
ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY THE COMPANY PURSUANT TO THE PURCHASE AGREEMENT
FROM A FINANCIAL POINT OF VIEW TO THE COMPANY, AND HAS BEEN PROVIDED FOR THE USE
OF THE SAC IN ITS EVALUATION OF THE ASSET SALE AND THE PURCHASE AGREEMENT AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE ON THE ADOPTION OF THE PURCHASE AGREEMENT. THE
SUMMARY OF THE OPINION OF SMITH BARNEY SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the SAC, Smith Barney performed a variety of
financial and comparative analyses, including those described below. The summary
of such analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not necessarily susceptible to summary description. In arriving at its opinion,
Smith Barney did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of such analyses and factors. Accordingly, Smith Barney believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying such analyses
and opinion. In its analyses, Smith Barney made numerous assumptions with
respect to the Company, industry performance, general business, economic, market
and financial conditions and other matters, many of which are beyond the control
of the Company. The estimates contained in such analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of actual future results or values, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of the businesses or securities do not
purport to be appraisals or to reflect the prices at which the business or
securities may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
The following is a summary of the material financial analysis performed by
Smith Barney in connection with its written opinion dated as of June 16, 1997:
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
Zenith and three other selected publicly traded comparable companies in the
insurance industry, consisting of: Argonaut Group, Fremont General and Superior
National (collectively, together with Zenith, the "Selected Companies"). Smith
Barney compared, among other things, market values of the Selected Companies as
multiples of, among other things, last twelve months ("LTM") earnings, estimated
calendar 1997 and estimated calendar 1998 net operating income computed in
accordance with generally accepted accounting principles ("GAAP"), and estimated
GAAP book values as of December 31, 1996. For the Company, book value was based
on the Company's unaudited draft December 31, 1996 balance sheet, dated May 29,
1997. LTM net income and projected net income had been adjusted for an
anticipated fronting arrangement. A fronting arrangement allows an insurance
company, such as the Company, to cede the (insurance) risk it has underwritten
to a reinsurer, with the ceding insurance company retaining none or a very small
portion of such risk for its own account. The amount of the adjustment was
determined by multiplying year-end 1996 Premiums Earned (based on the Company's
unaudited draft December 31, 1996 income statement dated May 29, 1997) by 6% and
tax affecting the resulting number. All multiples were based on closing stock
prices as of June 13, 1997. Applying a range of selected multiples for the
Selected Companies of LTM earnings, estimated calendar 1997 and 1998 GAAP net
operating income of 13.1x to 14.4x, 9.0x to 16.2x, and 7.3x to 15.4x,
respectively, to corresponding financial data of the Company resulted in an
equity reference range of $71.0 million to $127.9 million. Applying a range of
selected multiples for the Selected Companies of estimated GAAP book value as of
December 31, 1996 of 1.27x to 1.95x to corresponding financial data of the
Company resulted in an equity reference range of $214.2 million to $328.9
million.
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Selected Merger and Acquisition Transaction Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction multiples paid in seven selected transactions in the insurance
industry, consisting of (acquirer/target): Fremont General/Industrial Indemnity,
HIH Winterthur/CareAmerica Compensation, Superior National/Pac Rim Holding,
Delphi Financial/SIG Holdings, W.R. Berkley/MECC, Sierra Health Services/CII
Financial, and Fremont General/Casualty Insurance Company (collectively, the
"Selected Transactions"). Smith Barney compared the purchase price in such
transactions as multiples of, among other things, LTM net income, one-year
forward GAAP net income and latest reported book value. All multiples for the
Selected Transactions were based on information available at the time of
announcement of the transaction. For the Company, book value was based on the
Company's unaudited draft December 31, 1996 balance sheet, dated May 29, 1997.
LTM net income and projected net income have been adjusted for an anticipated
fronting arrangement. The amount of the adjustment was determined by multiplying
year-end 1996 Premiums Earned (based on the Company's unaudited draft December
31, 1996 income statement dated May 29, 1997) by 6% and tax affecting the
resulting number. Applying a range of selected multiples for the Selected
Transactions of LTM net income and one-year forward GAAP net income of 5.8x to
16.7x and 9.1x to 11.8x, respectively, to corresponding financial data for the
Company resulted in a median equity reference range of $55.7 million to $103.5
million. Applying a range of selected multiples for the Selected Transactions of
latest reported book value of 0.76x to 1.36x, to corresponding financial data of
the Company resulted in an equity reference range of $128.2 million to $229.4
million.
The selected company analysis and selected merger and acquisition
transaction analysis performed by Smith Barney utilized Company information,
such as future income projections and unaudited draft financial statements,
provided to Smith Barney by the Company. In applying such analyses to the
Company, Smith Barney noted that the Company did not have recent audited balance
sheet or income statement data, or reliable projections of net income for the
future, making a direct comparison of multiples or ratios to Company information
more difficult. Smith Barney also noted the belief of Company management that in
the absence of a negotiated acquisition of the Company acceptable to its
regulators, there was a substantial risk that the equity of the Company would be
rendered valueless.
Smith Barney determined that estimates of Company value based on book
value, as opposed to projections of Company value based on net income, were more
suitable estimates of the equity value of the Company because Smith Barney did
not have reliable projections of future net income for the Company. In addition,
Smith Barney noted that in certain acquisitions of troubled insurance companies
with minimal earnings or losses from operations, estimates of value based on
book value proved to be the preferred way to value such companies.
The Company and Smith Barney believed that potential buyers, in assessing
transactions with the Company, determined that they would pay a lower multiple
of the estimated GAAP book value and net operating income for the Company due to
uncertainties surrounding the Company and its operations, including the impact
of A.M. Best Company's "C" (Weak) rating for insurance subsidiaries of the
Company, the Company's failure to provide investors and regulators with timely
1996 year-end audited financial statements, the various legal suits pending
against the Company, and the uncertainty surrounding the Company's ability to
collect SDTF and other receivables. Smith Barney noted that book value and net
operating income multiples were less meaningful than is the case in many
comparable transactions in light of the impending seizure of the Company's
Florida insurance subsidiaries by the DOI. Further, when evaluating the fairness
of the consideration received by the Company pursuant to the Purchase Agreement,
Smith Barney considered the Company's lack of negotiating leverage with
potential buyers due to the threat of the DOI to assume administrative
supervision of the Company on June 17 if no sale of the Company had occurred by
that time.
In summary, combining the median of the equity ranges for comparable
transactions and comparable companies determined by a book value multiple
analysis, with the equity range for comparable transactions determined by a net
income multiple analysis and the equity range for comparable companies
determined by a net income multiple analysis, results in a median equity
reference range of $71.0 million to $127.9 million, or on a price to book basis,
0.42x to 0.76x the Company's December 31, 1996 unaudited book value. Smith
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Barney noted, however, that the estimated GAAP book value, LTM net income and
estimated calendar 1997 and 1998 net income of the Company were based on
unaudited draft financial statements for the Company and projections of the
Company's future performance prepared by the Company's prior management that did
not take into account the problems then facing the Company, and therefore the
equity reference ranges for the Company derived from such numbers were
unreliable.
No company, transaction or business used as a comparison in the "Selected
Company Analysis" or "Selected Merger and Acquisition Transaction Analysis" is
identical to RISCORP, or the acquisition by Zenith. Accordingly, an analysis of
the results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the Selected Companies, Selected Transactions
or the business segment, company or transaction to which they are being
compared.
Compensation of Smith Barney. Pursuant to Smith Barney's engagement by the
SAC, the Company agreed to pay Smith Barney a transaction fee with respect to
certain transactions with a strategic partner, including, among other things,
the sale of all or a significant portion of the assets of the Company and its
subsidiaries (a "M&A Transaction"). The transaction fee is calculated based on a
certain percentage (ranging from 0.20% to 2.00%) of the sum of (a) the total
proceeds and other consideration received by the Company in a M&A Transaction
with a strategic partner, and (b) all liabilities assumed or extinguished by
such strategic partner. The Smith Barney engagement letter also requires the
Company to pay Smith Barney an opinion fee for its opinion rendered with respect
to the Asset Sale, which opinion fee will be credited against any transaction
fee ultimately received by Smith Barney. This opinion fee will be 25% of the
transaction fee.
The Company also agreed to reimburse Smith Barney for reasonable travel and
out-of-pocket expenses incurred in performing its services thereunder, including
the reasonable fees and expenses of its legal counsel, and to indemnify Smith
Barney and its affiliates, their respective directors, officers, agents and
employees and each person, if any, controlling Smith Barney or any of its
affiliates against certain liabilities, including liabilities under the federal
securities laws and expenses related to Smith Barney's engagement.
In addition, Smith Barney acted as an underwriter of the Class A Common
Stock in February 1996 and received usual and customary compensation for such
services, and is a defendant, along with the Company and certain of its
executive officers and others in litigation relating to such offering. In the
ordinary course of its business, Smith Barney may actively trade the equity
securities of the Company for its own account and for the accounts of customers
and, accordingly, may at any time hold or acquire a long or short position in
such securities. In addition, Smith Barney and its affiliates (including
Travelers Group Inc. and its affiliates) may maintain other business
relationships with the Company and Zenith.
The letter agreement, dated as of November 14, 1996, pursuant to which
Smith Barney was retained by the SAC (the "Smith Barney Engagement Letter"), and
Smith Barney's fairness opinion with respect to the Asset Sale, state that such
opinion is rendered by Smith Barney solely for the benefit and use of the SAC
and the Company's Board of Directors and may not be relied upon by any other
person. It is Smith Barney's position that its duties in connection with its
fairness opinion are solely to the SAC and the Company's Board of Directors, and
that it has no legal responsibility to any other persons, including the
Company's shareholders, under New York state law, the governing law of the Smith
Barney Engagement Letter. Smith Barney intends to assert the substance of the
foregoing disclaimer as a defense to any claims that might be brought against it
by Shareholders with respect to its fairness opinion. However, since no New York
state court has definitively ruled on the availability to a financial advisor of
an express disclaimer as a defense to shareholder liability with respect to its
fairness opinion, this issue necessarily would have to be resolved by a court of
competent jurisdiction. In any event, the availability or non-availability of
such a defense will have no effect on Smith Barney's rights and responsibilities
under the federal securities laws, or the rights and responsibilities of the
Company's Board of Directors under governing state law or under federal
securities laws.
Smith Barney is an internationally recognized investment banking firm and
was selected by the SAC based on its experience, expertise and familiarity with
the Company and its business. Smith Barney regularly engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
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negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes.
Opinion of BT Alex. Brown
On June 20, 1997, the SAC retained BT Alex. Brown to act as financial
advisor to the SAC in connection with the Asset Sale, including rendering its
opinion to the SAC as to the fairness, from a financial point of view, of the
consideration to be received by the Company and certain of its subsidiaries
named in the Purchase Agreement.
At the July 16, 1997 meeting of the SAC, representatives of BT Alex. Brown
made a presentation with respect to the Asset Sale and rendered to the SAC and
the Board of Directors of the Company (the "Board") its written opinion that, as
of such date, and subject to certain assumptions stated in such opinion below,
the consideration to be received was fair, from a financial point of view, to
the Company and certain of its subsidiaries named in the Purchase Agreement.
THE FULL TEXT OF BT ALEX. BROWN'S OPINION DATED JULY 16, 1997 (THE "BT
ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO
AS APPENDIX C AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO
READ THE BT ALEX. BROWN OPINION IN ITS ENTIRETY. THE BT ALEX. BROWN OPINION IS
DIRECTED TO THE SAC AND THE BOARD, ADDRESSES ONLY THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY THE COMPANY AND CERTAIN OF ITS SUBSIDIARIES
NAMED IN THE PURCHASE AGREEMENT FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE AT THE SPECIAL MEETING. THE DISCUSSION OF THE BT ALEX. BROWN OPINION IN
THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE BT ALEX. BROWN OPINION. BT ALEX BROWN HAS CONSENTED TO THE INCLUSION OF
ITS OPINION LETTER AS APPENDIX C AND TO THE INCLUSION OF THE SUMMARY THEREOF
HEREIN.
In connection with the BT Alex. Brown Opinion, BT Alex. Brown reviewed
certain publicly available financial information and other information
concerning the Company and Zenith and certain internal analyses and other
information furnished to it by the Company. BT Alex. Brown also (i) reviewed the
reported prices and trading activity for the common stock of the Company; (ii)
compared certain financial and stock market information for the Company with
similar information for certain other companies whose securities are publicly
traded; (iii) reviewed the Agreement, the Voting Agreement dated June 17, 1997,
the Interim Reinsurance Agreement dated June 18, 1997, the Trust Agreement dated
June 18, 1997 and related agreements, and discussed such documents with the
Company's management and the independent counsel to the SAC ("SAC's Counsel");
(iv) reviewed the letter from the Treasurer of the State of Florida Department
of Insurance ("DOI") to the Company dated May 19, 1997 and certain attached
correspondence from the DOI, including a letter dated April 30, 1997 documenting
a particular response to a request for information and discussed such documents
with Company management, the SAC's Counsel and Company regulatory counsel; (v)
reviewed the letter from the State of Missouri Department of Insurance dated
March 14, 1997 which was a notice that the Company had failed to file the 1996
SVO Compliance Certification, Annual Statement, Actuarial Certification and EDP
Equipment Listing documents by the statutory date and that the state would begin
imposing a fine within 15 days and discussed such document with Company
management, the SAC's Counsel and Company regulatory counsel; (vi) reviewed
certain publicly available financial information concerning the Company as well
as the unaudited 1996 financial statements prepared as of May 29, 1997 and
discussed such financial statements with Company management, as well as the
Company's inability to prepare audited 1996 financial statements; (vii) reviewed
the Company's five year projections as presented to the Board on January 10,
1997 and the Company's updated 1997-1998 cash flow projections prepared in May
1997 and discussed such projections with Company management and Smith Barney,
the Company's financial advisor; (viii) reviewed the Minutes of the Board
meetings dated November 9, 1996,
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November 13, 1996, December 20, 1996, January 10, 1997, January 14, 1997 and
February 18, 1997, draft Minutes of the Board meetings dated March 26, 1997 and
April 30, 1997 and the Written Action of the Board of Directors dated May 19,
1997 and held discussions on the matters contained therein with Company
management, the SAC and the SAC's Counsel; (ix) reviewed the Minutes of the SAC
meetings dated November 14, 1996, November 20, 1996, November 21, 1996, December
4, 1996, January 10, 1997, January 14, 1997, February 4, 1997, February 18,
1997, February 19, 1997 and March 31, 1997 and held discussions on the matters
contained therein with Company management, the SAC and the SAC's Counsel; (x)
reviewed the minutes of the Audit Committee meetings dated November 13, 1996,
December 4, 1996, February 19, 1997, March 26, 1997 and March 31, 1997,
including attached correspondence between the Company and KPMG, the Company's
outside auditors, dated October 23, 1996, November 13, 1996 and December 13,
1996 and between the Company and Holland & Knight dated October 16, 1996 and
held discussions on the matters contained in these documents with Company
management, the Audit Committee of the Board, KPMG, and the SAC; (xi) discussed
the operating situation in the finance, treasury, sales and marketing,
management information systems and development areas of the Company with senior
members of management in each of these areas as well as representatives of KPMG,
Buttner Hammock Ranes & Co., P.A. ("Buttner Hammock"), Smith Barney, and the
SAC; (xii) discussed the outstanding litigation against the Company and
management and the Company's regulatory compliance posture with Company
management, the Company's regulatory counsel, the SAC's Counsel and the SAC;
(xiii) reviewed presentation materials prepared and presented by Smith Barney to
the Board and the SAC, including status reports prepared by Smith Barney, dated
between February 26, 1997 and March 31, 1997 and discussed such materials and
reports with representatives of Smith Barney, Company management, the SAC and
the SAC's Counsel; (xiv) discussed with Company management, the Audit Committee
of the Board, the SAC and KPMG, the deficiencies in the Company's financial
systems and reviewed and discussed with them unaudited drafts of financial
statements; (xv) discussed with Company management, Smith Barney, the SAC's
Counsel and the SAC the negotiations that occurred between (a) the Company and
Zenith and (b) the Company and a third party in June 1997, as well as the sale
process in its entirety; (xvi) discussed the conversations between the Company
and the DOI that occurred following the receipt by the Company of the May 19,
1997 letter from the DOI, the attached letters from the DOI to the Company and
the deadlines imposed by the DOI on the Company with Company management, Company
regulatory counsel and the SAC; (xvii) reviewed information concerning the
claims paying rating history of RISCORP Insurance Company ("RIC"), RISCORP
Property & Casualty Insurance Company ("RPC") and RISCORP National Insurance
Company ("RNIC") and discussed with Company management the changes since January
1996 in the ratings for RIC and RPC by A.M. Best Company the latest of which was
a "C" rating (Weak) on their ability to write new business and pay claims, the
effects thereof and possible effects of any such additional changes; (xviii)
reviewed the Loss Reserve Analysis as of December 31, 1996 of RNIC and the Loss
Reserve Analysis as of December 31, 1996 of RIC and RPC, each dated April 21,
1997, prepared by Tillinghast-Towers Perrin, the Company's outside actuarial
advisor ("Tillinghast"), and discussed such documents with Company management,
the Company's internal actuaries and representatives of Tillinghast; (xviv)
reviewed other historical Company events, including, among other things, (a) the
departure of most of the crucial employees in the finance, treasury and control
departments, including the departure of three CFOs since the Company's IPO on
February 28, 1996, (b) the preparation of the Company's financial statements,
(c) the 8-K filed April 1, 1997 and (d) the data made available to potential
buyers of the Company and discussed such matters and the status of financial
controls at the Company with Company management, the SAC, Company regulatory
counsel, representatives of Buttner Hammock representatives of KPMG and
representatives of Smith Barney; (xx) reviewed information concerning the
Company's financial position and results of operations in relation to the
financial position, results of operations and stock market performance of
certain other publicly traded insurance companies whose businesses BT Alex.
Brown believed to be generally comparable to the Company, including certain
companies in regulatory and financial distress; (xxi) reviewed the financial and
other terms of certain business combinations of other companies that BT Alex.
Brown believed to be relevant; and (xxii) performed other such studies and
analyses and considered other such factors as BT Alex. Brown deemed appropriate.
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As described in the BT Alex. Brown Opinion, BT Alex. Brown assumed and
relied upon, without independent verification, the accuracy, completeness and
fairness of the information furnished to or otherwise reviewed by or discussed
with it by the Company and its representatives and advisors for purposes of its
opinion. BT Alex. Brown is not an actuarial firm and, except as otherwise stated
herein, BT Alex. Brown relied upon the Company and reports of and discussions
with the Company's internal actuary and Tillinghast for all actuarial related
information. With respect to the information relating to the Company and its
prospects, BT Alex. Brown assumed that such information reflected the judgments
and estimates of the management of the Company available at that time as to the
likely future financial performance of the Company and in rendering its opinion,
BT Alex. Brown expressed no opinion as to the reasonableness of such
projections, as supplemented, or the assumptions on which they were based. BT
Alex. Brown did not make and it was not provided with an independent evaluation
or appraisal of the assets of the Company, nor was BT Alex. Brown furnished with
any such evaluations or appraisals. As to legal matters, BT Alex. Brown relied
upon the Company's internal counsel, Company regulatory counsel and the SAC's
Counsel. BT Alex. Brown also relied to the extent deemed appropriate on the
assessments and conclusions of the firms and individuals referred to in the
written opinion. As to accounting matters, BT Alex. Brown relied upon the Audit
Committee minutes since November 1996, KPMG, Buttner Hammock and Company
management. For purposes of rendering its opinion, BT Alex. Brown assumed that,
in all respects material to its analysis, the representations and warranties of
the Company contained in the Purchase Agreement were true and correct, that the
Company would perform all of the covenants and agreements to be performed by it
under the Purchase Agreement and all conditions to the obligations of it to
consummate the Asset Sale would be satisfied without any waiver thereof.
The BT Alex. Brown Opinion is based on market, economic and other
conditions as they existed and could be evaluated as of the date of the opinion
letter. The BT Alex. Brown Opinion took into account, among other things, the
following factors, as they existed at the signing of the Agreement on June 17,
1997: (a) the Company's non-compliance with significant insurance regulatory
requirements, the administrative actions available to the relevant insurance
regulatory authorities and communications to the effect that administrative
actions would have been taken imminently had the signing of the Agreement not
occurred; (b) the implications of such regulatory actions for the Company's
business; (c) the impact on the structure of the Asset Sale and the sales
process of the inability of the Company to prepare financial statements in
accordance with generally accepted or statutory accounting principles and the
status of financial controls at the Company; (d) the impact of RIC's and RPC's
lower claims paying ratings on the Company's ability to market its insurance
products; (e) the high turnover in senior management of the Company since
February 1996; and (f) the uncertainty of the Company's ability to continue as a
going concern. This opinion assumed that the Asset Sale would be approved in its
entirety by the Company's shareholders, the Commissioner of Insurance of the
State of Florida and the Director of the Department of Insurance of the State of
Missouri without any material changes and that the Asset Sale would be completed
on or prior to December 31, 1997 on the bases set forth in the Agreement.
In arriving at its opinion, BT Alex. Brown was not authorized to solicit,
and did not solicit, interest from any party with respect to the acquisition of
the Company or any of its assets, nor did BT Alex. Brown have discussions or
negotiate with any parties in connection with the Asset Sale.
The following is a summary of materials presented by BT Alex. Brown in
connection with the BT Alex. Brown Opinion.
Executive Summary. In rendering its opinion, BT Alex. Brown reviewed
several significant events since the IPO in February 1996, including a cut in
workers' compensation rates by the Florida DOI, the lowering of the estimates of
the analysts following the Company and the announcement of the grand jury
investigation into two of the Company's executives in October 1996, the
formation of the SAC and the hiring of Smith Barney in November 1996, the
inability of the Company to complete the preparation of its 1996 financial
statements or provide the support and back-up necessary for its independent
auditor to complete the audit of the Company's 1996 financial statements, the
Company's inability to timely file its periodic reports with the Commission as
required by the Exchange Act, the June 1997 indication from the DOI that the
Company's Florida insurance subsidiaries would be placed into administrative
supervision if a definitive agreement was
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not executed by June 17, 1997, and the June 17, 1997 announcement of a
transaction with Zenith. BT Alex. Brown also reviewed an estimated value of the
transferred assets and liabilities based on estimates of unaudited book value of
the Company as of December 31, 1996 prepared in accordance with generally
accepted accounting principles and approximations provided by Company management
and Buttner Hammock regarding estimated write-offs. These write-offs included,
among others, a portion of the approximately $50 million receivable from the
SDTF. These estimated write-offs related to the SDTF resulted from the
uncertainty surrounding the Company's ability to collect fully on this
receivable based on conversations with Company management and Buttner Hammock in
June and July of 1997. BT Alex. Brown calculated a range of estimated book value
of $102 million to $128 million. BT Alex. Brown then used this adjusted book
value to calculate the estimated purchase price based on the formula described
in the Asset Purchase Agreement ("Estimated Purchase Price"). BT Alex. Brown
noted that this estimated purchase price ranged from $80 million to $130
million.
Issues of Distress. BT Alex. Brown reviewed a number of regulatory,
management, operating, financial and litigation issues relating to the
difficulties facing the Company operating as an independent company. The
regulatory issues related to the numerous and multiple requests received from
the DOI seeking answers to questions regarding the errors identified in the
Company's previously submitted financial statements and the DOI issuing
deadlines for the Company, including the June 17, 1997 deadline, whereby the
Company was to deliver an executed definitive sale agreement as well as
reinsurance and cut-through agreements or face "administrative supervision." The
management issues related to the significant turnover experienced by the Company
at both the senior management level, including the hiring of four Chief
Financial Officers ("CFOs") since February 1996, and within the finance,
treasury and control staff. BT Alex. Brown noted that most of the management,
finance and development staff employed at the time of the IPO were no longer
employees of the Company and that the announcements by the Company prior to June
17, 1997 had made it difficult to replace these employees. The operating issues
related to the "C" rating imposed by A.M. Best Company. BT Alex. Brown also
noted that the Company did not appear to have the necessary personnel or systems
to produce auditable financial statements without the assistance of Buttner
Hammock. The financial issues related to the Company's inability to provide the
support and back-up necessary for completion of the audit of its 1996 financial
statements, its inability to timely file its periodic reports with the
Commission or correctly file its statutory financial statements since the third
quarter of 1996. BT Alex. Brown also noted that there were significant financial
control problems relating to the multiple CFOs and the departure of a number of
employees in the finance, treasury and control departments and the impact of
this on, among other things, the receivables aging and unreconciled bank
accounts. The litigation issues related primarily to the civil racketeering
lawsuit, the federal grand jury investigation and the securities litigation
faced by the Company.
Remain Independent. BT Alex. Brown reviewed the results of discussions
with Company regulatory counsel, Company management and the SAC's Counsel
regarding prospects for the Company to remain independent. BT Alex. Brown noted
that an independent operating strategy did not appear a viable alternative
because the DOI and the Missouri Department of Insurance would have seized the
insurance subsidiaries and placed them into administrative supervision, the
current Chief Executive Officer had not been retained to run the Company over
the longer term, there was no permanent, qualified financial department and the
A.M. Best Company rating of C would preclude much in the way of new or renewal
business.
Smith Barney Sale Process. BT Alex. Brown reviewed with representatives of
Smith Barney, Company management, the SAC and the SAC's Counsel the process of
the Company's sale. BT Alex. Brown noted that Smith Barney contacted a total of
46 potential acquirors over a period of four months (beginning in February
1997). The final negotiations involved two parties.
Company Overview. BT Alex. Brown reviewed and analyzed the daily closing
per share market prices and trading volume for the Company, from February 29,
1996 (the date of the Company's IPO) to July 11, 1997. BT Alex. Brown also
reviewed the daily closing per share market prices of the Class A Common Stock
and compared the movement of such daily closing prices with the movement of the
S&P 500, the NASDAQ composite, and the Workers' Compensation Peer Index
composite average over the periods from February 29, 1996 through July 11, 1997
and the period from November 14, 1996 through July 11, 1997. The Workers'
Compensation Peer Index included Zenith National, RTW, Inc., Argonaut Group and
Fremont General. BT
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Alex. Brown noted that, on a relative basis, the Company underperformed the
NASDAQ composite average, the S&P 500 and the Workers' Compensation Peer Index.
This information was presented to give the SAC background information regarding
the stock prices of the Company over the periods indicated.
Zenith Business Overview. BT Alex. Brown reviewed the business of Zenith
and analyzed Zenith's ability to pay for the Company. BT Alex. Brown noted that,
based on public financial statements, Zenith would need to raise additional debt
to pay the maximum Estimated Purchase Price calculated by BT Alex. Brown as
described above. BT Alex. Brown also noted that it learned through conversations
with the management of Zenith that any such financing would be accomplished
through Zenith's existing bank facilities or the public issuance of securities.
Company Financial Summary. BT Alex. Brown also reviewed the Company's
historical financial statements, including its unaudited 1996 financial
statements, and certain financial projections. BT Alex. Brown reviewed both the
Company's "Old" projections ("Old Projections") and "New" projections ("New
Projections"). The Old Projections were prepared by the Corporate Development
Group and presented to the Board in early January 1997 then adjusted in March
1997 to reflect market conditions. The New Projections were prepared in draft
form in May 1997 and reflected the projected impact, including but not limited
to lower levels of revenue and earnings, of the C rating from A.M. Best Company.
Analysis of Certain Other Publicly Traded Companies. This analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. BT Alex. Brown
compared certain financial information (based on the commonly used valuation
measurements described below) relating to the Company, based on the last
reported financial statements dated September 30, 1996, to certain corresponding
information from a group of five publicly traded workers' compensation
insurance-related companies, based on the last reported financial statements
dated March 30, 1997, (which consisted of Argonaut Group, Inc., Fremont General,
RTW Inc., Zenith National Insurance, and Summit Holding Southeast (collectively,
the "Selected Companies")). Such financial information included, among other
things, (i) common equity market valuation; (ii) capitalization ratios; (iii)
operating performance; and (iv) ratios of common equity market prices per share
("Equity Value") to earnings per share ("EPS") and Common Equity Book Value. The
estimated EPS for the Company and the Selected Companies for calendar years 1997
and 1998 was as reported by the Institutional Brokers Estimating System
("IBES"). BT Alex. Brown noted that the multiple of Equity Value to Common
Equity Book Value was 0.2x for the Company and that the multiple of Estimated
Purchase Price to Common Equity Book Value was 1.0x, compared to a range of 1.1x
to 2.4x, with a mean of 1.6x, for the Selected Companies. BT Alex. Brown also
noted that the multiple of Equity Value to trailing twelve month operating EPS
was 1.2x for the Company, compared to a range of 11.2x to 18.6x, with a mean of
14.8x, for the Selected Companies; the multiple of Equity Value to calendar year
1997 EPS was 1.5x for the Company, compared to a range of 13.0x to 17.9x, with a
mean of 14.4x, for the Selected Companies; and the multiple of Equity Value to
calendar year 1998 EPS was 0.9x for the Company, compared to a range of 9.4x to
16.0x, with a mean of 11.9x, for the Selected Companies. EPS projections for the
Selected Companies and the Company were based on IBES estimates. The IBES EPS
estimates, as of July 15, 1997 for the calendar year 1997 for the Company was
$0.50 and for the calendar year 1998 for the Company was $0.80. BT Alex. Brown
noted that the multiples for the Company were lower than the range of the
multiples for the Selected Companies.
BT Alex. Brown noted that the Company had not reported December 1996
year-end results and used the last reported statements as of September 1996. BT
Alex. Brown also noted that securities analysts had not made revisions to their
earnings estimates after the Company had announced its inability to furnish
year-end audited financial statements and therefore the IBES estimates did not
likely reflect the current financial situation at the Company.
Analysis of Selected Mergers and Acquisitions. BT Alex. Brown reviewed the
financial terms, to the extent publicly available, of eleven pending or
completed mergers and acquisitions since April 1993 in the workers' compensation
insurance industry (the "Selected Workers' Compensation Transactions") and nine
pending or completed mergers and acquisitions since February 1993 of distressed
insurance companies ("the Selected Distressed Insurance Transactions"). BT Alex.
Brown calculated various financial multiples and the
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premiums over market value based on certain publicly available information for
each of the Selected Workers' Compensation Transactions and Selected Distressed
Insurance Transactions and compared them to corresponding financial multiples
for the Asset Sale based on the minimum and maximum Estimated Purchase Price.
The eleven Selected Workers' Compensation Transactions reviewed, in reverse
chronological order of public announcement were: Liberty Mutual's acquisition of
Golden Eagle announced in June 1997; Fremont General's acquisition of Industrial
Indemnity announced in May 1997; H H Wintertur's acquisition of Care America
Compensation announced in January 1997; Superior National Insurance Group's
acquisition of Pac Rim Holding Corp. announced in September 1996; Delphi
Financial Group's acquisition of SIG Holdings announced in October 1995; W.R.
Berkeley's acquisition of MECC Inc. announced in September 1995; Sierra Health
Service's acquisition of CII Financial announced in June 1995; Fremont General's
acquisition of Casualty Insurance Company announced in October 1994; Care
America Health Plan's acquisition of Health Cal announced in March 1994;
WellPoint Health Networks' acquisition of UniCare Financial Corp. announced in
October 1993; and Foundation Health Plan's acquisition of Business Insurance
Company announced in April 1993. The nine Selected Distressed Insurance
Transactions reviewed, in reverse chronological order of public announcement
were: Liberty Mutual's acquisition of Golden Eagle announced in April 1997;
Progressive Corporation's acquisition of Midland Financial Group announced in
November 1996; Queensway Financial Holdings acquisition of International
Indemnity Group announced in September 1996; Superior National Insurance Group,
Inc.'s acquisition of Pac Rim Holding Corporation announced in September 1996;
Highlands Insurance Group's acquisition of Vik Brothers Insurance Inc. announced
in June 1996; Fairfax Financial's acquisition of Skandia America Reinsurance
announced in March 1996; CNA Financial Corp.'s acquisition of Continental Corp.
announced in December 1994; Vik Brothers Insurance Inc.'s acquisition of Armco
Inc. announced in August 1994; and Vik Brothers' acquisition of American
Reliance announced in February 1993. BT Alex. Brown noted that the multiple of
Estimated Purchase Price to GAAP Book Value was 1.0x for the Asset Sale versus a
range of 3.0x to 0.9x with a mean of 1.5x for the Selected Workers' Compensation
Insurance Transactions and a range of 1.2x to 0.9x with a mean of 1.0x for the
Selected Distressed Insurance Transactions. BT Alex. Brown noted that the
multiple of Estimated Purchase Price to GAAP Book Value was within the range of
the Selected Workers' Compensation Insurance Transactions and the Selected
Distressed Insurance Transactions and was equal to the mean and median of the
Selected Distressed Insurance Transactions.
Relevant Market and Economic Factors. In rendering its opinion, BT Alex.
Brown considered, among other factors, the condition of the U.S. stock markets,
particularly in the insurance sector, and the current level of economic
activity. BT Alex. Brown also considered the significant distress that RISCORP
was under, the pressure by the Florida Insurance Department to enter into a
transaction and the evidence of a lack of financial controls.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions summarized
above is identical to the Company or the Asset Sale, nor is an evaluation of the
results of such analyses entirely mathematical; rather, such analyses involve
complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, businesses or transactions being
analyzed.
The summary set forth does not purport to be a complete description of the
presentation made by BT Alex. Brown to the SAC, financial analyses performed and
factors considered by BT Alex. Brown in connection with the BT Alex. Brown
Opinion. The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the applications of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. BT Alex. Brown believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the BT Alex. Brown Opinion. In performing its analyses, BT Alex.
Brown considered general economic, market and financial conditions and other
matters, many of which are beyond the control of the Company. The analyses
performed by BT Alex. Brown are not necessarily indicative of actual values or
future
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results, which may be significantly more or less favorable than those suggested
by such analyses. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty. Additionally, analyses relating to the value
of a business do not purport to be appraisals or to reflect the prices at which
the business actually may be sold.
The SAC retained BT Alex. Brown to act as its advisor based upon BT Alex.
Brown's qualifications, reputation, experience and expertise. BT Alex. Brown is
an internationally recognized investment banking firm and, as a customary part
of its investment banking business, is engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwriting, private placements and valuations for corporate and other
purposes. BT Alex. Brown may actively trade the equity securities of the Company
and Zenith National for its own account and for the account of its customers and
accordingly may at any time hold a long or short position in such securities. BT
Alex. Brown regularly publishes research reports regarding the insurance
industry and the businesses and securities of publicly traded companies in the
insurance industry. BT Alex. Brown was a member of the underwriting syndicate in
the offering of the Class A Common Stock in February 1996 and received usual and
customary compensation for such services.
Pursuant to a letter agreement dated June 20, 1997 among the Company, the
SAC and BT Alex. Brown, the fees to date paid to BT Alex. Brown consist of a
cash retainer fee of $250,000 and a fee of $650,000 in connection with the
delivery of the BT Alex. Brown Opinion. In addition, the Company has reimbursed
BT Alex. Brown for its reasonable out-of-pocket expenses incurred in connection
with rendering the BT Alex. Brown Opinion, including fees and disbursements of
its legal counsel. The Company has agreed to indemnify BT Alex. Brown and its
directors, officers, agents, employees and controlling persons, for certain
costs, expenses, losses, claims, damages and liabilities related to or arising
out of its rendering of services under its engagement.
Audited Versus Reviewed Unaudited Financial Information
Neither Smith Barney nor BT Alex. Brown reviewed audited 1996 financial
information of the Company in connection with their review of the fairness of
the consideration to be received by the Company pursuant to the Purchase
Agreement. The primary differences between the 1996 audited financial
information and the unaudited financial information provided by the Company to
Smith Barney and BT Alex. Brown were (1) an increase of approximately $14
million in the audited financial information in expenses for the allowance for
doubtful accounts and the recording of the impairment of goodwill, and (2) a
reclassification in the audited financial information of unallocated loss
adjustment expenses of approximately $10 million from other expenses to claims
settlement expenses.
RECOMMENDATION OF THE BOARD OF DIRECTORS
At the meeting of the Board of Directors held on June 17, 1997, after
consultation with Smith Barney, the Company's legal counsel, counsel for the SAC
and counsel for Mr. Griffin, and following receipt of Smith Barney's opinion
that the consideration to be received by the Company pursuant to the Purchase
Agreement is fair from a financial point of view, the Board of Directors
approved the Purchase Agreement and the transactions contemplated therein,
authorized the execution, delivery and performance of the Purchase Agreement and
adopted a resolution recommending to the Shareholders the approval of the
Purchase Agreement and the consummation of the Asset Sale.
In reaching its conclusion that the terms of the Purchase Agreement are in
the best interests of the Company and its Shareholders, the Board of Directors
considered the following factors:
(a) the June 17, 1997 deadline imposed by the DOI for delivery of a
definitive purchase agreement approved by the Boards of both the Company
and the purchaser, along with a cut-through endorsement, or face
administrative supervision of the Company's Florida insurance subsidiaries
in the event the Company failed to meet this deadline;
(b) the terms and conditions of the Purchase Agreement, including the
Purchase Price which will be paid in cash in an amount equal to the
difference between the book value of the assets purchased and
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the book value of the liabilities assumed by Zenith as of the Closing Date,
including $15 million in indebtedness of the Company owed to AmRe, subject
to a minimum cash Purchase Price of $35 million;
(c) the harm to the reputation of the Company and its subsidiaries as
a result of the negative publicity related to the Company and certain of
its former officers, and the perceived effect this negative publicity would
have on the Company's ability to raise capital, write new policies or
obtain renewal policies;
(d) the financial condition, assets, liabilities, businesses and
operations of the Company and its subsidiaries, both on a historical and
prospective basis given the numerous material adverse developments
experienced by the Company since its initial public offering;
(e) the significant loss in the trading value of the Class A Common
Stock;
(f) the regulatory orders issued by the DOI decreasing workers'
compensation insurance rates and the perceived effect of this reduction by
investors and the investment community;
(g) the negative impact on written premiums as a result of the A.M.
Best Company rating of "C" (Weak) and the corresponding negative
implications for RISCORP Insurance Company and RISCORP Property & Casualty
Insurance Company;
(h) Smith Barney's presentation to the Board of Directors on June 17,
1997 and Smith Barney's written opinion dated as of June 16, 1997 that the
consideration to be received by the Company pursuant to the Purchase
Agreement is fair from a financial point of view;
(i) BT Alex. Brown's presentation to the Board of Directors on July
16, 1997 and BT Alex. Brown's written opinion that the consideration to be
received by the Company and certain of its subsidiaries named in the
Purchase Agreement is fair from a financial point of view;
(j) the fact that, although the Company may not solicit Acquisition
Proposals, the Company may, in accordance with the Purchase Agreement, at
any time prior to Shareholder approval of the Purchase Agreement and the
transactions contemplated thereby, furnish information to, and discuss and
negotiate with, third parties in accordance with the terms of the Purchase
Agreement, and that the Company may terminate the Purchase Agreement and
enter into an agreement with respect to an Acquisition Proposal if the
Board of Directors determines in good faith that it is necessary to do so
to comply with its fiduciary duties, subject to the payment of certain fees
to Zenith (See "THE ASSET SALE -- Summary of the Terms of the Purchase
Agreement -- No Solicitation;" "THE ASSET SALE -- Summary of the Terms of
the Purchase Agreement -- Termination of the Purchase Agreement;" "THE
ASSET SALE -- Summary of the Terms of the Purchase Agreement -- Termination
Fees"); and
(k) the fact that the Closing of the Asset Sale is conditioned upon
obtaining Shareholder approval of the Purchase Agreement;
In reaching its conclusion, the Board considered each of the foregoing
factors assigning the greatest weight to the deadline imposed by the DOI
described in (a) above, the consideration to be received from Zenith described
in (b) above and the fairness opinions provided by Smith Barney and BT Alex.
Brown as described in (h) and (i) above. The Board also considered other
alternatives available to the Company in light of all the other information
available to it and concluded that the Purchase Agreement and the transactions
contemplated therein provided the greatest opportunity to maximize value to the
shareholders. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS APPROVE AND ADOPT THE PURCHASE AGREEMENT AND APPROVE THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREIN.
REGULATORY APPROVALS
Under the terms of the Purchase Agreement, the obligations of the Company,
its subsidiaries and Zenith to consummate the transactions contemplated therein
are subject to filings with, and receipt of all consents, approvals, permits and
authorizations required to be obtained prior to the Closing Date from, any court
or
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governmental regulatory authority or agency needed for Zenith to conduct the
business of the Company and its subsidiaries in substantially the manner
conducted prior to the Closing. Furthermore, such consents, approvals, permits
and authorizations must be subject to no conditions that would materially impair
Zenith's management of the business after the Asset Sale or the future
profitability of such business.
The insurance regulatory authorities in the following states must approve
the transactions contemplated by the Purchase Agreement: Arkansas, Florida,
Georgia, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Carolina,
Texas, Virginia and Wisconsin. The attorney-general in the State of Iowa must
approve all assumption reinsurance transactions involving Iowa citizens engaged
in by non-domestic insurers. Additionally, the transfer of policyholder
obligations from one insurer to another in an assumption reinsurance transaction
must be affirmatively consented to by the affected policyholders in many of the
states listed above. The Company and Zenith are in the process of making the
necessary filings or giving the required notices in these states; however, there
can be no assurance that required regulatory approvals will be obtained.
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Asset Sale may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the applicable waiting period has expired or been terminated. On
February 18, 1998, the applicable waiting period was terminated by the FTC.
RANGE OF PROCEEDS
The minimum purchase price to be received from Zenith in connection with
the consummation of the Asset Sale is $35 million. While it is impossible to
determine the actual amount to be received from Zenith prior to the
determination of the Final Business Balance Sheet (as such term is defined in
the Purchase Agreement), based on the pro forma financial information contained
herein, had the Asset Sale been consummated on September 30, 1997, subject to
any adjustments resulting from the audit of the Proposed Business Balance Sheet,
the Company believes the Proposed Business Balance Sheet would have reflected
closing proceeds of $149,083,000 to be allocated among the Company and those
subsidiaries also selling assets in connection with this transaction. Pursuant
to the terms of the Purchase Agreement, Zenith will have an opportunity to
dispute the value of any item reflected on the Proposed Business Balance Sheet
and, absent the mutual agreement of the parties as to the treatment of such
disputed items, any items remaining in dispute shall be submitted to Neutral
Auditors and/or the Neutral Actuaries (as such terms are defined in the Purchase
Agreement) for a final, binding and conclusive determination as to such items.
It is currently anticipated that the cash proceeds to be received from Zenith
will be substantially greater than the minimum purchase price of $35 million but
less than the $149 million reflected in the pro forma financial information.
USE OF PROCEEDS
Of the cash proceeds to be received from Zenith in connection with the
consummation of the Asset Sale, eighty-five percent will be used to (i) fund the
working capital requirements of the Company in connection with the preparation
of the Proposed Business Balance Sheet, the Final Business Balance Sheet and the
ongoing operations of the Company following the Closing Date, (ii) resolve all
claims and contingencies pending against the Company and its subsidiaries and to
fund all expenses associated therewith, (iii) fund all other liabilities not
transferred to Zenith, and (iv) satisfy any statutory reserve or capital
requirements to which the Company's regulated subsidiaries are subject following
the Closing Date. Fifteen percent of the cash proceeds to be received from
Zenith will be held in escrow until the second anniversary of the Closing Date.
Such escrowed funds will be used to indemnify Zenith against liabilities (other
than those transferred) and any misrepresentation, breach or nonfulfillment of
any agreement contemplated in the Purchase Agreement. After the two year
anniversary of the Closing Date, any remaining amount held in escrow will be
paid to the Company with accrued interest, and such amount, if any, will be
available for the purposes set forth in items (i), (ii) (iii) and (iv) above.
See "THE ASSET SALE -- Operations of the Company Following the Asset Sale."
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The Company anticipates that after satisfaction of all claims and
contingencies pending against the Company and its subsidiaries and after funding
all expenses associated therewith, remaining proceeds, if any, will be
distributed to those shareholders of record on a record date to be established
by the Board in connection with any future dividends or distributions. Such
claims and contingencies include all litigation pending or hereafter instituted
against the Company, its subsidiaries and their respective officers, directors
and agents. Based on agreements in principal reached by the Company with respect
to those suits currently pending against the Company, it is estimated that the
amount required to resolve pending litigation will be approximately $24 million
exclusive of fees, costs and insurance and other proceeds which may be available
to offset settlement amounts. It is anticipated that an additional shareholder
meeting and shareholder approval will be required before any final distribution
of remaining proceeds to shareholders. As the controlling shareholder, Mr.
William D. Griffin must approve any final distribution of remaining proceeds to
shareholders. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
While the Board of Directors currently anticipates a distribution of any
assets remaining after all claims and contingencies are resolved, there can be
no assurance that any portion of the closing proceeds ultimately will be
available for distribution to shareholders or that shareholder approval will be
obtained. Pending resolution of all claims and contingencies, the proceeds
available for investment may be invested in obligations the interest of which is
excluded from gross income for federal income tax purposes in an effort to avoid
unfavorable tax treatment imposed upon personal holding companies. See "THE
ASSET SALE -- Personal Holding Company Income." Inasmuch as the Company does not
intend to conduct its affairs in a manner which would require registration as an
investment company under the Investment Company Act of 1940, as amended, the
provisions of such act will be considered in determining the use of the proceeds
from the Asset Sale. See "THE ASSET SALE -- Investment Company Act
Considerations."
While the Company believes that a portion of the proceeds will ultimately
be available for distribution to shareholders, it is currently anticipated that
the resolution of various contingent liabilities, including the Company's
indemnification obligations to Zenith, will take not less than two years.
Pursuant to the terms of the Company's Amended and Restated Articles of
Incorporation, the holders of Class A Common Stock and Class B Common Stock
shall be entitled to participate in any dividends declared or paid by the
Company or distributions to the holders of common stock in connection with any
liquidation, dissolution or winding up of the Company ratably on a per share
basis.
ANY FUTURE DISTRIBUTION OF CLOSING PROCEEDS WILL BE AT THE DISCRETION OF
THE BOARD OF DIRECTORS AND AVAILABLE ONLY TO SHAREHOLDERS OF THE COMPANY ON A
RECORD DATE TO BE ESTABLISHED AT A LATER TIME IN CONNECTION WITH ANY SUCH FUTURE
DISTRIBUTION. SHAREHOLDERS THAT CURRENTLY ARE RECORD HOLDERS OF CLASS A COMMON
STOCK OR CLASS B COMMON STOCK WHO ARE NOT RECORD HOLDERS AT THE TIME A RECORD
DATE IS ESTABLISHED IN CONNECTION WITH A FUTURE DISTRIBUTION WILL NOT BE
ENTITLED TO PARTICIPATE IN ANY SUCH DISTRIBUTION OF CLOSING PROCEEDS. THE BOARD
OF DIRECTORS INTENDS TO SOLICIT ADDITIONAL SHAREHOLDER APPROVAL PRIOR TO A FINAL
DISTRIBUTION OF CLOSING PROCEEDS. ALTHOUGH INTERIM DISTRIBUTIONS OR DIVIDENDS TO
SHAREHOLDERS DO NOT REQUIRE SHAREHOLDER APPROVAL, A FINAL DISTRIBUTION WILL
REQUIRE ADDITIONAL SHAREHOLDER APPROVAL, INCLUDING THE APPROVAL OF MR. GRIFFIN.
CERTAIN EFFECTS OF THE ASSET SALE
The Asset Sale will not affect the Shareholders' equity interest in the
Company or their status as shareholders of the Company. Accordingly, the
Company's Class A Common Stock will continue to be registered under the Exchange
Act and the Company will continue to be required to file periodic reports and
other financial information with the Commission, including the requirement of
furnishing a proxy or information statement in connection with meetings of its
shareholders. See "THE ASSET SALE -- Use of Proceeds."
PERSONAL HOLDING COMPANY INCOME
Following the consummation of the Asset Sale, the Company will cease
substantially all of its current business operations and will invest the
proceeds of the sale in interest bearing obligations at the discretion of
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the Board pending satisfaction of outstanding claims and other contingencies.
Under the Internal Revenue Code of 1986, as amended (the "Code"), corporations
that have 60% or more of their income from various passive sources, including
dividends and interest, and that have 50% or more of their outstanding stock
held by five or fewer individuals, are subject to a tax of 39.6% on their
undistributed personal holding company income, as defined in the Code, in
addition to their regular income tax. Because the Company will cease to have
active business income, but will not be able to liquidate or make other
distributions promptly, it is anticipated that in one or more tax years the
Company would be considered to be a personal holding company and will either be
subject to the personal holding company tax in addition to the regular income
tax or will be required to distribute an amount equal to the taxable income
earned by the Company, net of certain expenses and with certain other
adjustments, as regular dividends taxable as ordinary income to shareholders to
avoid the imposition of such a tax. In an effort to avoid unfavorable tax
treatment, the Company, pending resolution of claims or contingencies, may
invest in obligations the interest of which is excluded from gross income for
federal income tax purposes. The Company's failure to make such investments or
in the alternative to make distributions of net investment income, if any, could
have a material adverse affect on the amount distributable to shareholders.
INTEREST OF CERTAIN PERSONS IN THE ASSET SALE
Certain members of the Company's management and the Board identified below
may be deemed to have interests in the Asset Sale in addition to their interests
as Shareholders generally. In each case, the Board was aware of these conflicts
of interest or potential conflicts, and considered them, among other matters, in
approving the Purchase Agreement and the transactions contemplated thereby.
The Company entered into a Management Agreement (the "Management
Agreement") as of February 18, 1998, with The Phoenix Management Company, Ltd.
("Phoenix") for the provision of various management services to the Company
immediately following the consummation of the Asset Sale. Mr. Dawson owns a
majority interest in Phoenix, a Florida limited partnership, and will control
its operations as president of the general partner. Walter E. Riehemann owns a
minority interest in Phoenix and will serve as vice president and secretary of
the general partner. While neither Mr. Dawson nor Mr. Riehemann will be
employees of the Company following the consummation of the Asset Sale, the
Management Agreement specifically provides that Mr. Dawson will hold the titles
of president and chief executive officer and Mr. Riehemann will hold the titles
of chief investment officer, treasurer and secretary. Pursuant to the terms of
the Management Agreement, Phoenix will be paid $100,000 per month, plus
expenses, and granted a restricted stock award for 1,725,000 shares of Class A
Common Stock (subject to certain vesting provisions) in consideration for its
management services. The Management Agreement will have an initial term of three
years commencing immediately following the consummation of the Asset Sale, and
the Company will have the right to extend the term for an additional year. The
Company will pay Phoenix a retainer of $600,000 immediately following the
consummation of the Asset Sale which will be applied by Phoenix against the fees
payable by the Company during the final six months of the initial term. The
restricted stock grant will vest monthly over the initial term of the Management
Agreement, and Phoenix will be entitled to all rights applicable to holders of
shares of Class A Common Stock with respect to all such shares from the date of
grant including, without limitation, the right to receive any dividends or
distributions payable on the restricted stock. Pursuant to the terms of the
Management Agreement, the Company will pay Phoenix an amount which, on an
after-tax basis, is sufficient to reimburse the partners of the Management
Company for all taxes (exclusive of state taxes) incurred in connection with the
Section 83(b) election expected to be filed with respect to such grant. It is
currently anticipated that the amount of this payment will be approximately
$1,300,000, payable in installments as the taxes are due. In the event the
Management Agreement is terminated by the Company prior to the expiration of its
initial term due to (i) the complete liquidation, dissolution and winding up of
all of the business and affairs of the Company including, without limitation,
the final distribution to all shareholders of the Company, or (ii) the final
distribution to the holders of the Series A Common Stock of the Company, the
vesting under the restricted stock grant will accelerate immediately prior to
such event and the Company will make a lump sum payment to Phoenix equal to the
unpaid balance of the amount it would have received in monthly management fees
during the initial term of the Management Agreement.
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Pursuant to the terms of the Management Agreement, Phoenix will, among
other things, provide the following services to the Company after the
consummation of the Asset Sale: (i) manage the day-to-day operations of the
Company and its subsidiaries; (ii) manage the preparation, negotiation and
defense of the Final Business Balance Sheet; (iii) provide assistance in the
overall planning and coordination of the business of the Company; (iv) assist in
the resolution of all claims and contingencies pending or subsequently asserted
against the Company; (v) coordinate the finance, accounting and tax requirements
of the Company with the specific duties to be delegated, at the expense of the
Company, to competent professionals approved by the Board; (vi) prepare an
investment policy plan for the Company and coordinate the investment
transactions through one or more investment advisors; (vii) perform such other
duties as may from time to time be requested by the Board of Directors not
inconsistent with the terms of the Management Agreement. Based on Mr. Dawson's
contributions to the Company to date, as well as his experience and knowledge of
the Company and its unique circumstances, the Board of Directors has concluded
that the terms of the Management Agreement are reasonable and in the best
interests of the Company and the Shareholders.
On May 19, 1997, subject to shareholder approval, the Company granted to
Mr. Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of
the Company's Class A Common Stock. The options granted consist of four
tranches: Tranche A consists of 1,447,615 shares at a per share exercise price
of $2.75; Tranche B consists of 542,855 shares at a per share exercise price of
$5.00; Tranche C consists of 361,904 shares at a per share exercise price of
$7.50; and Tranche D consists of 180,952 shares at a per share exercise price of
$10.00. The options designated as Tranches B, C and D vested and became
exercisable from and after May 19, 1997. A portion of the shares designated as
Tranche A (723,807 shares) vest on May 19, 1998, and the remainder become
exercisable on May 19, 1999. Pursuant to the terms of the Management Agreement,
immediately following the consummation of the Asset Sale and the receipt of the
applicable cash payments as described below, the Company and Mr. Dawson will
enter into a Termination Agreement evidencing the termination of each party's
rights, duties and obligations under Mr. Dawson's employment agreement,
including the termination of the stock option grants and Mr. Dawson's right to
receive any of the shares thereunder. (Upon the consummation of the Asset Sale
and after Mr. Riehemann receives termination benefits summarized below, the
Company and Mr. Riehemann also will enter into a Termination Agreement
evidencing the termination of Mr. Riehemann's employment agreement.) The options
granted will expire at the earlier of May 19, 2007 or three years after Mr.
Dawson's employment is terminated (or one year in the event of the termination
of Mr. Dawson's employment due to death), subject to immediate expiration upon
Mr. Dawson's voluntary resignation without "good reason" or involuntary
termination for "cause" (as such terms are defined in Mr. Dawson's employment
agreement). In addition, under the terms of Mr. Dawson's employment agreement
with the Company, Mr. Dawson will receive certain payments upon a Change of
Control of the Company which is defined in Mr. Dawson's employment agreement to
include, among other things, a sale of at least a majority of the assets of the
Company. First, Mr. Dawson will be entitled to receive a cash payment of
deferred compensation upon a Change of Control of the Company ($750,000 if the
Change of Control occurs prior to December 31, 1997, $375,000 if the Change of
Control occurs prior to May 31, 1999), and such payment shall become immediately
due and payable within five days of the Change of Control. If a Change of
Control occurs on or before May 31, 1998, Mr. Dawson will also be entitled to
receive an amount equal to the difference between (a) $1,050,000 and (b) the
amounts received by Mr. Dawson as base salary through the date of the Change of
Control. Such amount will also be paid in a lump sum within five days following
the Change of Control. Mr. Dawson's annual base salary through May 31, 1998 is
$450,000. If a Change of Control occurs on or after June 1, 1998, Mr. Dawson
will be entitled to receive an amount equal to the difference between (a)
$600,000 and (b) the amounts received by Mr. Dawson as base salary after June 1,
1998 through the date of the Change of Control. During the period June 1, 1998
through May 31, 1999, Mr. Dawson's annual base salary shall be increased to
$600,000.
At various times during the two years prior to the execution of the
Purchase Agreement, RISCORP Management Services, Inc., a wholly owned subsidiary
of the Company ("RMS"), entered into employment agreements with certain of the
Company's management employees, including the following executive officers:
Steven J. Berling, Gregory Kuzma, Stephen C. Rece and Walter E. Riehemann. See
MANAGEMENT -- DIRECTOR AND EXECUTIVE OFFICER INFORMATION at Appendix E for
biographical information regarding the named officers. Upon the consummation of
the transactions contemplated in the Purchase
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Agreement, Messrs. Kuzma, Rece and Riehemann will have the right to terminate
their employment agreements with RMS and receive termination benefits. The
termination benefits for Messrs. Kuzma, Rece and Riehemann (which may be paid in
a lump sum within five days of termination or in equal monthly installments over
a thirty-six month period) would be three times their base salary (using current
salary levels, the termination benefits would be $450,000, $525,000, and
$450,000, respectively). Also, each of the foregoing officers would be entitled
to receive outplacement services at RMS's expense for one year past termination.
However, it is currently anticipated that the RMS agreements between Messrs.
Berling, Kuzma and Rece will be assumed by Zenith and that the relevant officers
will elect to become employed by Zenith rather than exercise their termination
rights. It is anticipated that Steven J. Berling will be employed by Zenith at
an expected annual salary of $225,000, plus bonuses and benefits. If Zenith so
employs Mr. Berling, it is currently anticipated that Zenith will assume and
fund all obligations of RMS under the terms of Mr. Berling's current employment
agreement with RMS, including the obligation to fund a termination payment upon
the termination of Mr. Berling's employment equal to up to three times Mr.
Berling's base salary of $225,000. It is anticipated that Gregory P. Kuzma will
be employed by Zenith at an expected annual salary of $150,000, plus bonuses and
benefits. It is anticipated that Stephen C. Rece will be employed by Zenith at
an expected annual salary of $175,000, plus bonuses and benefits. If the
employment agreements of Messrs. Rece and Kuzma are assigned to Zenith, it is
currently anticipated that Zenith and RMS will share certain costs of the
obligations under the terms of those employment agreements for a period of two
years. Specifically, it is currently anticipated that RMS would fund 66.67% of
the employer obligations under these agreements and Zenith would fund 33.33% of
such obligations. Messrs. Rece and Kuzma would be entitled to receive a
termination payment upon the termination of their employment with Zenith of up
to three times the base salaries of these executive officers.
ACCOUNTING TREATMENT OF THE TRANSACTIONS
At the Closing Date, the Company and certain of its subsidiaries will
transfer substantially all of their assets and non-contingent liabilities to
Zenith at book value in accordance with generally accepted accounting principals
("GAAP"), consistently applied. The Purchase Price will be paid in cash and will
be the net of the Transferred Assets minus Transferred Liabilities, as defined
in the Purchase Agreement. The transactions contemplated in the Purchase
Agreement are not expected to generate any gain or loss as determined in
accordance with GAAP and reported on the Company's consolidated financial
statements.
The Company anticipates that the consummation of the transactions
contemplated in the Purchase Agreement will generate a tax loss due to the
differences in the tax basis of the Transferred Assets and Transferred
Liabilities and their related book values.
FEDERAL INCOME TAX CONSEQUENCES OF THE ASSET SALE
The following summary of the federal income tax consequences of the Asset
Sale by the Company is included for general information purposes only. This
summary is not intended to be tax advice to any person, nor is it binding upon
the Internal Revenue Service. In addition, no information is provided herein
with respect to the tax consequences of the Asset Sale under applicable foreign,
state or local laws. Each Shareholder is urged to consult his own tax advisor as
to the specific federal income tax consequences to such Shareholder, based on
such Shareholder's own particular status and circumstances, and also as to any
state, local, foreign or other tax consequences arising out of the sale to him.
The Company will recognize a gain or loss on the Asset Sale equal to the
amount realized by the Company from the sale less the Company's adjusted basis
in the assets sold. The amount realized will equal the sum of money received by
the Company in consideration for the assets. The amount realized will also
include the amount of liabilities from which the Company is discharged as a
result of the sale. The sale of the assets will not have any federal income tax
consequences to the Shareholders. The Shareholders will not have any taxable
income or loss until the Company makes a distribution to the Shareholders.
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OPERATIONS OF THE COMPANY FOLLOWING THE ASSET SALE
Following the consummation of the Asset Sale, the assets of the Company
will consist of the cash proceeds of the sale received from Zenith, deferred tax
assets totaling approximately $22,248,000, and the insurance licenses currently
held by certain of the Company's regulated subsidiaries. As a result, on the
Closing Date the Company will cease substantially all of its current business
operations; however, it will, among other things, be actively engaged in the
following activities: (i) preparing the Proposed Business Balance Sheet for
delivery to Zenith; (ii) resolving any disputes with Zenith as to the
determination of the Final Business Balance Sheet; (iii) investing and
reinvesting the closing proceeds; (iv) resolving all contingencies pending
against the Company; (v) evaluating and, where appropriate, instituting claims
on behalf of the Company against third parties; (vi) maintaining all statutory
filing requirements on behalf of the Company; and (vii) following the resolution
of all claims and contingencies, subject to shareholder approval, making a final
distribution to the shareholders. The Board of Directors has evaluated the
infrastructure that will be required by the Company to carry out these
operations and has determined that it is in the best interests of the Company
and the Shareholders to retain Phoenix, a management company controlled by Mr.
Dawson, to undertake day-to-day operating responsibility for these tasks. See
"THE ASSET SALE -- Interest of Certain Persons in the Asset Sale."
OPERATIONS OF THE COMPANY IF ASSET SALE IS NOT APPROVED
In the event the Company fails to receive Shareholder approval for the
Asset Sale or if for any other reason the Asset Sale fails to close, the Board
of Directors will once again evaluate all appropriate alternatives to maximize
shareholder value. The following alternatives appear most viable at this time:
(a) Evaluate other strategic alternatives, including attempts to
identify another strategic partner or purchaser of the Company or its
assets;
(b) Continue to operate the Company in the ordinary course of business
while continuing to implement remedial action to correct the adverse
developments experienced by the Company; or
(c) Initiate run-off of the Company's existing insurance policies and
commence an orderly process of winding up the Company's business operations
in contemplation of a complete liquidation.
The Company's ability to pursue any of the foregoing alternatives could be
significantly impaired if the DOI elects to institute administrative proceedings
against the Company or otherwise subjects the Company to further regulatory
scrutiny in the event the Asset Sale fails to close. In addition, given the
significant adverse developments experienced by the Company and the material
adverse effect these developments have had on the Company's ability to attract
qualified buyers, the Board believes it will be difficult to identify another
strategic partner prepared to negotiate a transaction on more favorable terms
than those contained in the Purchase Agreement. Notwithstanding the foregoing,
if the Asset Sale fails to close, the Board of Directors will explore and
evaluate all alternatives available to the Company in its continuing effort to
maximize shareholder value.
INVESTMENT COMPANY ACT CONSIDERATIONS
Following the Closing, the Company does not intend to conduct its affairs
in a manner which would require registration as an investment company under the
Investment Company Act of 1940.
The Investment Company Act places restrictions on the capital structure,
business activities and corporate transactions of companies registered
thereunder. Generally, an issuer is deemed to be an investment company subject
to registration if its holdings of "investment securities" (generally,
securities other than securities issued by majority controlled, non-investment
company subsidiaries and government securities) exceed 40% of the value of its
total assets exclusive of government securities and cash items on an
unconsolidated basis. Pursuant to a rule of the Commission under the Investment
Company Act, a company that otherwise would be deemed to be an investment
company may be excluded from such status for a one-year period provided that
such company has a bona fide intent to be engaged primarily, as soon as
reasonably possible (and in any event within that one-year period), in a
business other than that of investing, reinvesting,
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owning, holding or trading in securities. If the Company would otherwise be
deemed to be an investment company under the Investment Company Act, the Company
intends to rely on such exemption while it attempts to resolve all contingencies
pending against the Company, and will not register as an investment company
under the Investment Company Act during the one-year period commencing with the
closing of the Asset Sale.
Registration by the Company under the Investment Company Act would require
the Company to comply with various reporting and other requirements under the
Investment Company Act, would subject the Company to certain additional expense
and could limit the Company's options for future operations.
If the Company has not resolved all contingencies pending against it within
the one-year period referred to above, the Company may be required either to (i)
apply to the Commission for exemptive relief from the requirements of the
Investment Company Act, or (ii) invest certain of its assets in government
securities and cash equivalents that are not considered "investment securities"
under the Investment Company Act. There can be no assurance that the Company
will be able to obtain exemptive relief from the Commission. Alternatively,
investments in government securities and cash equivalents could yield a
significantly lower rate of return than other investments which the Company
could make if it chose to register as an investment company.
INDICTMENTS OF THE COMPANY AND CERTAIN OF ITS FORMER OFFICERS
On September 18, 1997, the U.S. Attorney's Office in Pensacola, Florida
announced that a United States grand jury had indicted the Company, RISCORP
Management Services, Inc. (a wholly owned, non-regulated subsidiary of the
Company) and five former officers, including Mr. Griffin, founder and former
Chairman of the Board, for various charges stemming from alleged illegal
political campaign contributions. On September 18, 1997, the Board of Directors
approved a guilty plea by RISCORP Management Services, Inc. to a single count of
conspiracy to commit mail fraud. The guilty plea was entered by RISCORP
Management Services, Inc. and accepted by the court on October 9, 1997. As a
result of an agreement negotiated with the U.S. Attorney, the court dismissed
the indictment against the Company on October 9, 1997. The Company has recorded
a provision of $1 million for the payment of fines and other costs related to
this matter. On February 18, 1998, a second superseding indictment was issued
against the five former officers including Mr. Griffin. Neither the Company nor
any of its subsidiaries were named as defendants in the second indictment. The
charges asserted in the second indictment, like those asserted in the first
indictment, stem from alleged illegal political campaign contributions. See
"Legal Proceedings" at Appendix E.
DIRECTORS AGREEMENT
On May 19, 1997, the directors of the Company entered into a Directors
Agreement. See "THE ASSET SALE -- Background of and Reasons for the Asset
Sale -- A New Board and New Management." This agreement was amended effective as
on September 18, 1997 following the issuance of an order of the Florida
Insurance Commissioner prohibiting Mr. Griffin from having any affiliation with
an insurance company because of the recent indictment brought against him by a
Federal grand jury constituted in the Pensacola Division of the Northern
District of Florida. See "THE ASSET SALE -- Indictments of the Company and
Certain of its Former Officers." After the issuance of such order, Mr. Griffin
resigned as a director of the Company and all other positions with the Company
and its subsidiaries. In connection with those resignations, Mr. Griffin and the
Company also agreed that Mr. Griffin retained his right to seek a Termination
Payment under his Employment and Severance Agreement dated January 1, 1995, as
if he had not resigned, and the Company retained the right to contest any
Termination Payment as if no resignation had occurred.
The Directors Agreement, as amended, provides certain governance provisions
regarding the future make-up of the Board. Under the terms of this agreement,
until such time as the Company has no shares of Class A Common Stock outstanding
(at which time the Directors Agreement will terminate), Mr. Griffin agreed to
cause all of his shares of Common Stock to be voted in favor of the election of
Messrs. Dawson, Goode, Greene and Revell as directors and in favor of no other
nominees at all meetings of the Company at which directors are elected. In
addition, Mr. Griffin agreed to refrain from taking any action to remove any
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director of the Company. Messrs. Dawson, Goode, Greene and Revell agreed not to
add any additional directors to the Board without the prior written consent of
Mr. Griffin. Finally, the Directors Agreement provides that Mr. Griffin will be
reelected to the Board at the time the Asset Sale is completed pursuant to the
Purchase Agreement, provided that such directorship is not objected to by any
insurance commissioner with jurisdiction over any of the Company's subsidiaries.
DISSENTERS' RIGHTS
Pursuant to the provisions of sections 607.1302 and 607.1320 of the Florida
Business Corporation Act, if the Asset Sale is consummated, any holder of the
Company's Class A Common Stock or Class B Common Stock who (i) gives to the
Company, prior to the vote at the Special Meeting with respect to the Asset
Sale, written notice of his intent to demand payment for his shares, and (ii)
does not vote in favor thereof, shall be entitled to receive, upon compliance
with the statutory requirements summarized below, the fair value of his shares
as of the close of business on the day prior to the date on which the vote
approving the Asset Sale and the Purchase Agreement is taken. Shareholders will
have no right to dissent from the Asset Sale if the Asset Sale is not
consummated.
The written objection requirement referred to in clause (i) of the
preceding paragraph will not be satisfied by merely voting against the approval
of the Asset Sale by proxy or in person at the Special Meeting. In addition to
not voting in favor of the dispositions, a shareholder wishing to preserve the
right to dissent and seek appraisal must give a separate written notice of his
intent to demand payment for his shares if the Asset Sale is effected.
Any written objection to the Asset Sale satisfying the requirements of
clause (i) above should be addressed as follows: RISCORP, Inc., 1390 Main
Street, Sarasota, Florida 34236, Attention: Walter E. Riehemann, Secretary.
The foregoing is a summary of the material rights of a dissenting
Shareholder, but it is qualified in its entirety by reference to Fla. Stat. Ann.
sec.sec. 607.1301, 607.1302, and 607.1320, copies of which are attached hereto
as Appendix D. Any Shareholder who intends to dissent from approval of the Asset
Sale should carefully review the text of these provisions and should also
consult with his attorney. No further notice of the events giving rise to
dissenters' rights or any steps associated therewith will be furnished to
Shareholders, except as indicated above or otherwise required by law.
Any dissenting Shareholder who perfects his right to be paid the value of
his shares will recognize taxable gain or loss upon receipt of cash for such
shares for federal income tax purposes.
IMPACT OF LEGISLATIVE CHANGES TO THE FLORIDA SPECIALTY DISABILITY TRUST FUND
On May 30, 1997, significant legislative changes to the SDTF adopted in
March 1997 by the Florida legislature became effective. Such changes created new
filing and additional fee requirements relating to certain claims submitted by
the Company for reimbursement from the SDTF. In the several months immediately
following the effective date of such legislative changes, the Company's new
management team and recently retained forensic accountants began the process of
ensuring compliance with the new filing and fee requirements. By the end of
August 1997, it was determined that the Company was in substantial compliance
with these requirements. Accordingly, at such time, various uncertainties
regarding the total amount collectable from the SDTF were resolved.
The net amount recoverable from the SDTF as reported in the Company's
audited consolidated balance sheet as of December 31, 1996, totaled $49,505,000.
Based upon the analysis of the Company's actuarial consultants, representatives
of the Company have confirmed that the amount estimated to be recoverable from
the SDTF as reflected on the Unaudited Pro Forma Balance Sheet in this Proxy
Statement as of September 30, 1997 has been determined in accordance with GAAP
and is fairly presented in all material respects. Under the terms of the
Purchase Agreement, the SDTF receivable as reflected on the Final Business
Balance Sheet will be transferred to Zenith upon the consummation of the Asset
Sale. Zenith is not bound by the Company's determination of the net amount
recoverable from the SDTF in connection with its review of
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<PAGE> 57
the Proposed Business Sheet and, accordingly, any dispute with respect to the
amount actually recoverable by the Company is expected to be submitted to the
Neutral Auditors and/or the Neutral Actuaries for final determination pursuant
to the procedure set forth in the Purchase Agreement. After the Closing Date,
the Company will no longer be assessed under SDTF legislation.
LEGAL PROCEEDINGS UPDATE
Vero Cricket Litigation. On December 5, 1997, counsel for the parties
reached an agreement to recommend to their respective clients a settlement of
the claims asserted in the Vero Cricket Litigation. Plaintiff's counsel has
confirmed that the terms of the settlement are acceptable to the named
plaintiffs. The Company's Board of Directors has approved the terms of the
settlement, and the final settlement documents are being reviewed by the parties
and counsel. The settlement is contingent upon preliminary approval by the court
as to the fairness of the settlement, certification of a settlement class,
notice to the settlement class, opportunity of the settlement class members to
object and withdraw, no termination by either party and final approval by the
court. Pursuant to the terms of the settlement agreement and subject to the
satisfaction of the contingencies discussed above, RISCORP Insurance Company
will pay to the plaintiffs a settlement amount of $475,000. The Company
estimates that approximately 75% of the settlement amount will be covered by
insurance. Given the preliminary nature of this settlement and the various
contingencies relating to its consummation, there can be no assurance that this
litigation will ultimately be settled on this basis.
Securities Litigation. Pursuant to court ordered mediation, counsel for
the parties have engaged in discussions in an effort to resolve the Securities
Litigation. On January 14, 1998, counsel for the Company, counsel for Mr.
William D. Griffin and counsel for the plaintiffs reached an oral agreement on
terms to recommend to their clients to settle this litigation. The proposed
settlement is contingent upon the following: consummation of the Asset Sale,
certification of a settlement class, payment by the Company to the settlement
class, disclosure of certain documents, interviews of individuals to verify
information relating to the settlement and a release against all defendants.
Counsel to the parties are in the process of drafting initial settlement
documents. The settlement will require preliminary approval by the court as to
the fairness of the terms of the settlement. Notice to the settlement class and
an opportunity for class members to object to the terms of the settlement and to
exclude themselves from the settlement class also is required. The settlement
must receive final court approval after notice to the class and an opportunity
to object or opt out is provided. Not all of the terms of the settlement have
been finalized as of this date. Counsel to the parties have agreed to recommend
to their respective clients a settlement amount of $21 million. The Company
estimates that approximately $8 million of insurance proceeds will be available
for contribution to the settlement amount as well as related costs and expenses.
Given the preliminary nature of this settlement and the various contingencies
relating to its consummation, there can be no assurance that this litigation
will ultimately be settled on this basis.
Alabama Litigation. On July 17, 1997, Plaintiffs Thomas K. Albrecht and
Peter D. Norman filed, in the Circuit Court of Montgomery County, Alabama, an
action against the Company, Mr. William D. Griffin, and several other former
officers of the Company. The suit alleged violations of federal and state
securities laws and breach of contract resulting from the purchase of
Independent Association Administrators, Inc. by the Company in 1996. The
plaintiffs sought compensatory and punitive damages and equitable relief. On or
about December 2, 1997, counsel for the Company and counsel for plaintiffs
negotiated a settlement of this action. Settlement documents have been approved
and executed by all parties. As part of the settlement agreement, the Company
paid $2 million to plaintiffs, advanced $2.3 million to plaintiffs against an
anticipated final distribution to shareholders and accelerated a distribution of
790,336 additional shares of Class A Common Stock to plaintiffs. Such shares
were contemplated under the terms of the Agreement and Plan of Merger by and
among the Company, RISCORP-IAA, Inc., Independent Association Administrators,
Inc., Thomas K. Albrecht and Peter D. Norman dated as of September 17, 1996. The
Company estimates that approximately $2 million of insurance proceeds will be
available to offset the total settlement amount as well as related costs and
expenses. As part of the settlement agreement, plaintiffs have agreed to vote
all their shares of Class A Common Stock in favor of the Purchase Agreement and
the transactions contemplated therein. Plaintiffs are
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record holders of 1,586,672 shares of Class A Common Stock, and thus these
plaintiffs hold approximately 13% of the outstanding shares of Class A Common
Stock.
ACCOUNTING AND INFORMATION SYSTEMS
Zenith representatives have raised certain issues with respect to the
Company's accounting and financial reporting systems, including issues regarding
(i) year 2000 readiness, (ii) controls with respect to the Company's claims
information database and financial processes, (iii) whether all reportable
conditions and material weaknesses previously identified by the Company's
independent auditors have been corrected, (iv) controls with respect to the
accuracy of reporting SDTF and other recoveries, (v) timeliness of bank
reconciliations, (vi) billing errors and related issues in the billing and
collections process, (vii) systems integrity, and (viii) reporting and claims
data transfer issues in connection with the integration of certain of the
Company's acquisitions. In disclosing these issues, certain representatives of
Zenith have informed the Company that Zenith does not intend to close the Asset
Sale without a complete assessment of the year 2000 compliance issues and a
resolution of certain of the internal control weaknesses it has identified. The
Company believes it will meet all of the conditions precedent to Zenith's
obligation to close this transaction. While representatives of the Company are
working with Zenith in an effort to understand and address the specific concerns
raised, the Company believes it complies in all material respects with its
obligations under the Purchase Agreement and, subject to obtaining shareholder
approval, intends to perform its obligations under the Purchase Agreement in a
timely manner. Management of the Company does not believe that any of the issues
identified by Zenith will have a material adverse effect on the historical
financial statements of the Company.
VOTING AGREEMENT
On June 17, 1997, all shareholders of the Company's Class B Common Stock
and William D. Griffin entered into a voting agreement with Zenith. Such
shareholders include The RISCORP Group Holding Company Limited Partnership, the
William D. Griffin Family Limited Partnership, the Charlotte K. Griffin Trust
Number 3, the Anna F. Griffin Trust Number 3 and the John Ford Griffin Trust
Number 3. These shareholders are not record holders or beneficial owners of any
shares of Class A Common Stock. William D. Griffin is the beneficial owner of
all outstanding shares of Class B Common Stock except for such shares owned by
the various family trusts. Under the terms of the voting agreement, these
shareholders and Mr. Griffin agreed, among other things, to vote all of their
shares held beneficially or of record (i) in favor of the Purchase Agreement,
(ii) against any action or agreement that would result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation of the Company under the Purchase Agreement or which is reasonably
likely to result in any conditions to the Company's obligations under the
Purchase Agreement not being fulfilled, and (iii) against any action or
agreement that would impede, interfere with or attempt to discourage the
transactions contemplated by the Purchase Agreement. In addition, such
shareholders and Mr. Griffin agreed that in the event they fail to comply with
the obligations described in the previous sentence, such failure shall result in
the irrevocable appointment of Zenith as the attorney-in-fact and proxy of such
shareholders and Mr. Griffin with full power of substitution, to vote, and
otherwise act with respect to the shares that such shareholders and Mr. Griffin
are entitled to vote at any meeting of the Company's shareholders. This
execution and delivery of the voting agreement was a condition to the
willingness of Zenith to enter into the Purchase Agreement.
VOTES REQUIRED TO APPROVE PURCHASE AGREEMENT
Under the Company's Amended and Restated Bylaws, if a quorum is present at
the Special Meeting, approval of the Purchase Agreement and the Asset Sale
requires the affirmative vote of the holders of a majority of all outstanding
shares of Class A Common Stock and Class B Common Stock, voting as a single
class, entitled to vote thereon. In addition, pursuant to the terms of the
Purchase Agreement, the affirmative vote of the holders of a majority of the
outstanding shares of Class A Common Stock entitled to vote thereon and voting
separately, is required to approve the Purchase Agreement and the Asset Sale.
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As discussed above, Mr. Griffin and various partnerships and trusts own,
beneficially or of record, in the aggregate all of the outstanding shares of
Class B Common Stock of the Company and have executed a voting agreement
pursuant to which each has agreed to vote their shares in favor of the approval
of the Purchase Agreement and the Asset Sale. See "THE ASSET SALE -- Voting
Agreement." Accordingly, over 95% of the votes entitled to be cast by the
holders of Class A Common Stock and Class B Common Stock, voting as a single
class, will be voted in favor of the Purchase Agreement and the transactions
contemplated therein assuring approval of the Purchase Agreement under
applicable Florida law. Because the parties to the voting agreement are not
record holders or beneficial owners of any shares of Class A Common Stock this
voting agreement will have no impact on the voting of shares of Class A Common
Stock voting separately as required by the terms of the Purchase Agreement. Mr.
Griffin disclaims beneficial ownership of the shares of Class B Common Stock
held by the various family trusts.
Messrs. Thomas K. Albrecht and Peter D. Norman have agreed to vote all
their shares of Class A Common Stock in favor of the Purchase Agreement and the
transactions contemplated therein. These individuals are record holders of
approximately 13% of all of the outstanding shares of Class A Common Stock.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE PURCHASE
AGREEMENT AND THE ASSET SALE.
PROPOSAL 2
POSSIBLE ADJOURNMENT OR POSTPONEMENT OF SPECIAL MEETING
In the event the number of shares of Class A Common Stock and Class B
Common Stock represented at the meeting is insufficient to constitute a quorum
or, if a quorum is present, the Company fails to receive a sufficient number of
votes to approve the Purchase Agreement and the transactions contemplated
therein, the Company proposes to adjourn or postpone the Special Meeting for a
period of not more than one hundred twenty days for the purpose of soliciting
additional proxies. Proxies initially cast in favor of the Purchase Agreement
and the transactions contemplated therein will be voted in favor of the approval
of such items at any Special Meeting subsequently convened within one hundred
twenty days of the initial date of the Special Meeting.
Under the Company's Bylaws, if a quorum is present at the Special Meeting,
approval of the proposal to adjourn or postpone the Special Meeting for the
purpose of soliciting additional proxies requires the affirmative vote of the
holders of a majority of all outstanding shares of Class A Common Stock and
Class B Common Stock, voting as a single class, entitled to vote thereon.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE ADJOURNMENT OR
POSTPONEMENT OF THE SPECIAL MEETING TO SOLICIT ADDITIONAL PROXIES.
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SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996 has been derived from
audited consolidated financial statements of the Company. The selected
consolidated income statement data presented below as of and for the periods
ended September 30, 1996 and 1997 has been derived from the unaudited
consolidated financial statements of the Company. The selected consolidated
financial data set forth below should be read in conjunction with the financial
statements of the Company contained in Appendices E and F and the items
referenced under the heading "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premiums earned............ $133,882 $131,855 $173,557 $135,887 $ 1,513 $ 1,964 $ 4,257
Fee and other income....... 17,969 23,079 31,838 23,413 56,712 40,948 19,301
Net Investment income...... 12,557 7,592 12,194 6,708 1,677 873 982
-------- -------- -------- -------- ------- ------- -------
Total revenues..... 164,408 162,526 217,589 166,008 59,902 43,785 24,540
-------- -------- -------- -------- ------- ------- -------
Expenses:
Losses and loss adjustment
expenses................ 87,140 89,517 114,093 82,532 (716) 3,571 1,584
Unallocated loss adjustment
expenses................ 11,295 9,214 12,916 10,133 8,804 7,637 4,839
Commissions, general and
administrative
expenses................ 51,862 39,327 65,560 48,244 35,869 20,775 10,401
Interest................... 1,442 2,121 2,795 4,634 1,750 1,218 202
Depreciation and
amortization............ 6,257 6,270 11,625 1,683 1,330 1,116 545
-------- -------- -------- -------- ------- ------- -------
Total expenses..... 157,996 146,449 206,989 147,226 47,037 34,317 17,571
-------- -------- -------- -------- ------- ------- -------
Income before income taxes... 6,412 16,077 10,600 18,782 12,865 9,468 6,969
Income taxes(1).............. 2,602 6,776 8,202 5,099 5,992 3,714 1,183
-------- -------- -------- -------- ------- ------- -------
Net income......... $ 3,810 $ 9,301 $ 2,398 $ 13,683 $ 6,873 $ 5,754 $ 5,786
======== ======== ======== ======== ======= ======= =======
Net income per share......... $ 0.10 $ 0.26 $ 0.07 $ 0.45 $ 0.23 $ 0.20 $ 0.20
======== ======== ======== ======== ======= ======= =======
Weighted average common
shares and common share
equivalents
outstanding(2)(3).......... 37,164 35,828 36,406 30,093 30,093 28,554 28,554
======== ======== ======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- -------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments................ $255,258 $281,963 $ 92,713 $47,037 $30,157 $19,622
Total assets........................ 769,276 828,442 443,242 93,908 54,551 34,402
Long-term debt...................... 15,802 16,303 46,417 27,840 17,015 19,599
Shareholders' equity (deficit)...... 161,948 157,308 16,157 3,895 1,996 (5,289)
</TABLE>
- ---------------
(1) Certain subsidiaries of the Company were S Corporations prior to the
Reorganization (as defined in note 1 to the Company's consolidated financial
statements) and were not subject to corporate income taxes.
53
<PAGE> 61
(2) 1995 amount excludes 2,556,557 shares of Class A Common Stock reserved for
issuance pursuant to the exercise of stock options outstanding as of
December 31, 1995, having a weighted average exercise price of $3.96 per
share.
(3) The December 31, 1996 and the September 30, 1996 and 1997 amounts include
225,503, 114,160 and 790,336 shares of Class A Common Stock, respectively,
pursuant to the contingency clause in the acquisition agreement with IAA.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma balance sheet estimates the pro forma
effect of the Asset Sale to Zenith as if the Asset Sale and the transactions
contemplated in the Purchase Agreement had been consummated on September 30,
1997. The following unaudited pro forma income statements estimate the pro forma
income statements based on the pro forma effects of the Asset Sale as if such
Asset Sale had occurred on January 1, 1996. The pro forma adjustments are
described in the following notes and are based upon available information and
certain assumptions that the Company believes are reasonable. The pro forma data
may not be indicative of the results of operations and financial position of the
Company, as it may be in the future or as it might have been had the
transactions been consummated on the respective dates assumed. The information
should be read in conjunction with the Company's historical financial statements
and accompanying notes incorporated by reference in the Proxy Statement and the
Company's unaudited interim financial data appearing elsewhere in this Proxy
Statement. See "SELECTED FINANCIAL DATA."
The actual amount of the purchase proceeds is the excess of the Transferred
Assets over the Transferred Liabilities, as such terms are defined in the
Purchase Agreement, of the Company on the Closing Date as determined by the
audited statement of Transferred Assets and the Transferred Liabilities of the
Company prepared in conformity with generally accepted accounting principles
consistently applied. The actual amount of such purchase proceeds may differ
materially from the amount of purchase proceeds reflected in the pro forma
consolidated balance sheet presented below. See "THE ASSET SALE -- Summary of
the Terms of the Purchase Agreement -- The Purchase Price" for a description of
the method of determining the Purchase Price under the Purchase Agreement.
The unaudited pro forma financial statements included in this Proxy
Statement should be read in conjunction with the accompanying notes.
54
<PAGE> 62
RISCORP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
SEPTEMBER 30, FOR PROPOSED AFTER PROPOSED
1997 SALE TO ZENITH SALE TO ZENITH
------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale.................. $151,200 $(151,200) $ --
Fixed maturities available for sale -- restricted.... 34,633 (24,633) 10,000
Fixed maturities held to maturity.................... 21,765 (21,765) --
Equity securities, at fair value..................... 1,536 (1,536) --
-------- --------- --------
Total investments............................ 209,134 (199,134) 10,000
Cash and cash equivalents.............................. 29,750 (4,750) 25,000
Cash and cash equivalents -- restricted................ 16,374 (16,374) --
Premiums receivable, net............................... 109,295 (109,295) --
Receivable from Asset Sale............................. -- 668,275 668,275
Accounts receivable -- other........................... 3,724 (3,724) --
Recoverable from Florida Special Disability Trust Fund,
net.................................................. 45,215 (45,215) --
Reinsurance recoverables............................... 190,871 (190,871) --
Prepaid reinsurance premiums........................... 39,039 (39,039) --
Prepaid managed care fees.............................. 22,174 (22,174) --
Accrued reinsurance commissions........................ 27,153 (27,153) --
Deferred income taxes.................................. 22,248 -- 22,248
Property and equipment, net............................ 27,281 (27,281) --
Goodwill............................................... 19,629 (19,629) --
Other assets........................................... 7,389 (7,389) --
-------- --------- --------
Total assets................................. $769,276 $ (43,753) $725,523
======== ========= ========
</TABLE>
See accompanying notes.
55
<PAGE> 63
RISCORP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
SEPTEMBER 30, FOR PROPOSED AFTER PROPOSED
1997 SALE TO ZENITH SALE TO ZENITH
------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTES 1 & 3)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses.................. $460,428 $ -- $460,428
Unearned premiums.................................... 73,252 -- 73,252
Notes payable of parent company...................... 15,000 -- 15,000
Notes payable of subsidiaries........................ 802 (802) --
Deposit balances payable............................. 5,512 -- 5,512
Accrued expenses and other liabilities............... 42,291 (27,218) 15,073
Net assets in excess of cost of business acquired.... 10,043 (10,043) --
-------- --------- --------
607,328 (38,063) 569,265
-------- --------- --------
Shareholders' equity:
Class A Common Stock................................. 120 -- 120
Class B Common Stock................................. 243 -- 243
Additional paid-in capital........................... 139,691 -- 139,691
Net unrealized gains on investments.................. 2,274 (2,274) --
Retained earnings.................................... 21,720 (3,416) 18,304
Treasury stock -- at cost............................ (2,100) -- (2,100)
-------- --------- --------
Total shareholders' equity................... 161,948 (5,690) 156,258
-------- --------- --------
Total liabilities and shareholders' equity... $769,276 $ (43,753) $725,523
======== ========= ========
</TABLE>
See accompanying notes.
56
<PAGE> 64
RISCORP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
SEPTEMBER 30, FOR PROPOSED AFTER PROPOSED
1997 SALE TO ZENITH SALE TO ZENITH
------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTES 2, 5 & 7)
<S> <C> <C> <C>
Revenues:
Premiums earned...................................... $ 133,882 $(133,882) $ --
Fee and other income................................. 17,969 (17,969) --
Net investment income................................ 12,557 (12,557) --
----------- --------- -----------
Total revenue................................ 164,408 (164,408) --
----------- --------- -----------
Expenses:
Losses and loss adjustment expenses.................. 87,140 (87,140) --
Unallocated loss adjustment expenses................. 11,295 (11,295) --
Commissions, underwriting and administrative
expenses.......................................... 51,862 (47,952) 3,910
Interest expense..................................... 1,442 (1,442) --
Depreciation and amortization........................ 6,257 (6,257) --
----------- --------- -----------
Total expenses............................... 157,996 (154,086) 3,910
----------- --------- -----------
Income (loss) before income taxes...................... 6,412 (10,322) (3,910)
Income taxes........................................... 2,602 (4,110) (1,508)
----------- --------- -----------
Net income............................................. $ 3,810 $ (6,212) $ (2,402)
=========== ========= ===========
Net income per common share............................ $ 0.10 $ (0.06)
=========== ===========
Weighted average common and common share equivalents
outstanding.......................................... 37,164,143 37,164,143
=========== ===========
</TABLE>
See accompanying notes.
57
<PAGE> 65
RISCORP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
HISTORICAL FOR PROPOSED AFTER PROPOSED
1996 SALE TO ZENITH SALE TO ZENITH
----------- -------------- --------------
(UNAUDITED) (UNAUDITED)
(NOTES 2, 5 & 7)
<S> <C> <C> <C>
Revenues:
Premiums earned...................................... $ 173,557 $(173,557) $ --
Fee and other income................................. 31,838 (31,838) --
Net investment income................................ 12,194 (12,194) --
----------- --------- -----------
Total revenue................................ 217,589 (217,589) --
----------- --------- -----------
Expenses:
Losses and loss adjustment expenses.................. 114,093 (114,093) --
Unallocated loss adjustment expenses................. 12,916 (12,916) --
Commissions, general and administrative expenses..... 65,560 (61,530) 4,030
Interest............................................. 2,795 (2,795) --
Depreciation and amortization........................ 11,625 (11,625) --
----------- --------- -----------
Total expenses............................... 206,989 (202,959) 4,030
----------- --------- -----------
Income (loss) before income taxes...................... 10,600 (14,630) (4,030)
Income taxes........................................... 8,202 (9,757) (1,555)
----------- --------- -----------
Net income (loss).................................... $ 2,398 $ (4,873) $ (2,475)
=========== ========= ===========
Per share data:........................................ $ 0.07 $ (0.07)
=========== ===========
Weighted average common and common share equivalents
outstanding.......................................... 36,785,453 36,785,453
=========== ===========
</TABLE>
See accompanying notes.
1. PRO FORMA BALANCE SHEET ADJUSTMENTS FOR PROPOSED SALE
The pro forma balance sheet reflects proceeds from the Asset Sale of
approximately $149,083,000 in cash and a corresponding receivable from Zenith
for the $539 million of insurance obligations of the Company and Zenith's
assumption of the Company's $15 million obligation to AmRe under the Note
Agreement. The cash from the proposed sale to Zenith will be allocated among the
Company and those subsidiaries also selling assets in connection with this
transaction as follows:
- $25 million will be paid to the Company on the Closing Date.
- $10 million will be placed, at the Closing Date, in an interest bearing
escrow account. Within 130 days after the Closing Date, based on the final
statement of Transferred Assets and Transferred Liabilities of the
Business as of the Closing Date, as defined in the Purchase Agreement, the
balance in the escrow account (excluding interest) will be increased to an
amount equal to 15 percent of the Purchase Price. The amount of cash that
is estimated to be placed into the escrow account (excluding interest) is
$21.3 million. The proceeds from the escrow account will be paid to the
Company as described below.
- Within 130 days after the Closing Date, the balance of the cash proceeds,
based on the final statement of Transferred Assets and Transferred
Liabilities of the Business as of the Closing Date, will be paid to the
Company, less the additional amounts placed in the escrow account.
58
<PAGE> 66
- The cash held in escrow, including investment earnings on the escrowed
funds, will be paid to the Company twenty-four (24) months from the date
of the Closing. The escrowed amount to be remitted to the Company is
subject to certain adjustments that may arise during the period the cash
is held in escrow.
The receivable from the Asset Sale included on the Pro Forma Consolidated
Balance Sheet consists of the following items (in thousands):
<TABLE>
<S> <C>
Estimated proceeds receivable after the initial payment of
$35 million............................................... $114,083
Assumption of loss and loss adjustment expense reserves..... 460,428
Assumption of unearned premiums............................. 73,252
Assumption of notes payable of parent company............... 15,000
Assumption of deposit balances.............................. 5,512
--------
TOTAL RECEIVABLE FROM ASSET SALE............................ $668,275
========
</TABLE>
The Company will transfer all of its remaining assets, except deferred
income taxes, its liability for accrued expenses (other than its liability for
certain one time charges described in Notes 3 and 5) and the liability for net
assets in excess of costs of business acquired to Zenith at the Closing Date.
The pro forma balance sheet includes $22 million in deferred tax assets
that are currently expected to be recovered from the tax loss related to the
Zenith transaction. The conversion of this deferred tax asset to cash is
projected to occur within 18 months after the date of the sale.
2. PRO FORMA ADJUSTMENT FOR THE STATEMENTS OF OPERATIONS
The pro forma income statements reflect adjustments as if the Asset Sale
had occurred on January 1, 1996. After the Asset Sale is consummated, the
Company will no longer have any insurance operations or other operating
entities. All activities will be focused on concluding the business of the
Company, the sale of the insurance licenses of the insurance subsidiaries, the
defense of lawsuits filed against the Company and the eventual liquidation of
the assets to the shareholders.
The Company is required to establish an escrow account in an amount equal
to 15% of the cash proceeds of the Asset Sale. These funds will be invested in
U.S. Treasury securities with a duration of up to two years from the Closing
Date, in accordance with the terms of the Escrow Agreement. The Company projects
it will realize a yield of 5.6% on the amounts placed in the escrow account. The
remaining 85% of the proceeds from the Asset Sale, less $5,690,000 necessary to
pay certain one time charges and $2,430,000 to fund the first three months of
the post closing operating expenses of the Company, will be invested in U.S.
Treasury securities similar to those in the escrow account. The Company projects
it will realize a yield of 5.6% on the other invested balances beginning 130
days after the Closing Date (see Note 1 above). Post closing, the Company will
liquidate its investment portfolio to the extent that operating and other costs
exceed the investment income generated by the invested assets.
The Company expects that its statutory tax rates for the periods covered by
these pro forma statements will be:
<TABLE>
<S> <C>
State Income Tax rate....................................... 5.50%
Federal Income Tax rate..................................... 33.08
-----
Combined rate............................................... 38.58%
=====
</TABLE>
59
<PAGE> 67
3. ONE TIME CHARGES INCURRED IN CONNECTION WITH THE ASSET SALE
The Company's estimate (in thousands) of certain one time charges resulting
from the Asset Sale are described below. These charges will be incurred at the
closing and have been reflected in the accompanying Pro Forma Consolidated
Balance Sheet as a charge to retained earnings. (See Footnote 5 for further
discussion of one time charges). In addition, the Company will realize its
unrealized investment gains upon transfer of its investment portfolio to Zenith.
<TABLE>
<S> <C> <C> <C>
- - Estimated retained earnings before one time charges......... $21,720
- - Less:
Fees to Smith Barney...................................... $ 1,500
Change in control payments to Mr. Dawson.................. 1,650
Personnel costs relating to change in control............. 2,540
Change in unrealized capital gains........................ (2,274) 18,304
-------
$ 3,416 $ 3,416
======= -------
- - Estimated retained earnings after one time charges.......... $18,304
=======
</TABLE>
4. ASSETS AND LIABILITIES REMAINING AFTER CLOSING
The Pro Forma Balance Sheets after proposed sale to Zenith includes the
following: (in thousands)
<TABLE>
<S> <C> <C> <C>
- - Assets:
Fixed maturities for sale -- restricted................... $ 10,000
Cash and cash equivalents................................. 25,000
Receivable from Asset Sale................................ 668,275
Deferred income taxes..................................... 22,248
--------
Total Assets................................................ $725,523
========
- - Liabilities and Shareholders' Equity
Losses and loss adjustment expenses....................... $460,428
Unearned premiums......................................... 73,252
Notes payable of parent company........................... 15,000
Deposit balances payable.................................. 5,512
Accrued expenses and other liabilities
Accrued Legal Fees..................................... $ 1,000
Accured Income Taxes................................... 2,601
Accrued Restructure Costs.............................. 5,782
Fees to Smith Barney................................... 1,500
Change in control payments to Mr. Dawson............... 1,650
Personnel costs related to change in control........... 2,540
-------
$15,073 $ 15,073
======= --------
Total Liabilities 569,265
Shareholders' Equity........................................ 156,258
--------
- - Total Liabilities & Shareholders' Equity.................... $725,523
========
</TABLE>
5. POST CLOSING EXPENSES
The Company anticipates that the post closing expenses will be related to
the ongoing administration of the three insurance subsidiaries as well as the
parent company. The Purchase Agreement calls for Zenith to reinsure the in-force
book of business through an indemnity reinsurance agreement. This form of
reinsurance requires that the Company continue to have limited involvement in
the claims adjudication process as well as recording claims activity in the
statements of its insurance subsidiaries.
60
<PAGE> 68
The Company will have continued obligations regarding the liquidation of
the restructure costs through the first post closing year, in addition to the
costs associated with the settlement of the various legal proceedings.
The components of the post closing expenses are (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C> <C>
(1) Legal.......................................... $1,500 $1,000
(2) Finance, accounting & regulatory reporting..... 1,000 1,000
(3) Audit & Actuarial.............................. 300 770
(4) Salary & benefits.............................. 650 800
(5) Tax planning & return preparation.............. 200 200
(6) Rent and utilities............................. 100 100
(7) Computer equipment & maintenance............... 160 160
------ ------
$3,910 $4,030
====== ======
</TABLE>
The Company expects to contract with finance, accounting, legal, tax, audit
and actuarial professionals for their services to fulfill most of the post
closing functions. Estimates have been obtained from several sources for each of
the required services. Audit and actuarial costs include cost estimates from
KPMG and Tillinghast Towers Perrin for the completion of the audit and loss
reserve certification of the Proposed Business Balance Sheet.
6. SETTLEMENT EXPENSES
As more fully described above in "THE ASSET SALE -- Legal Proceedings
Update," the Company has reached a conditional settlement of the two class
action lawsuits; however, there are future events that must occur before the
conditional settlements can be consummated. At the present time, the Company
will record both the conditional settlements and the related insurance proceeds
receivable in the December 31, 1997 balance sheet and record a net charge to
earnings of $13 million in the 1997 income statement. Because of the conditional
nature of the settlement offers and the uncertainties relating to the future
events that must occur before they can be consummated, the Company will continue
to monitor the status of the settlements and will continue to assess the
probability of the actual consummation of the settlements until preparation of
the 1997 financial statements is completed.
7. POST CLOSING REINSURANCE AGREEMENT
Upon the consummation of the Asset Sale, Zenith and the Company will enter
into an Assumption and Indemnity Reinsurance Agreement (the "Assumption and
Indemnity Agreement") covering 100% of the insurance business of the Company's
insurance subsidiaries. Zenith will assume the Company's obligations under the
insurance policies issued by the Company's insurance subsidiaries and, upon
novation of the policies, the Company's insurance subsidiaries will be relieved
of primary liability under the policies and will no longer carry the insurance
liabilities relating to those insurance policies. In some states, a policy can
be deemed to be novated if a policyholder fails to reject the transfer and
assumption after receipt of notice or takes action evidencing the policyholder's
acceptance. The Company estimates that a minimum of 88% of the Company's
insurance liabilities will be assumed in this fashion.
In other states, the individual policyholder's acceptance of the assumption
and novation requires affirmative consent. In these states, the Company's
insurance subsidiaries will continue to be primarily responsible for the
insurance liabilities until such time as such consent is provided. Under the
Assumption and Indemnity Agreement, Zenith will reinsure a 100% quota share of
such liabilities until the assumption and novation can be completed. If a
policyholder rejects the transfer and assumption, the Company will remain
primarily responsible for the insurance liabilities, but such liabilities will
be reimbursed under the 100% quota share reinsurance. The liabilities relating
to the 100% reinsured policies at closing are reflected gross of
61
<PAGE> 69
reinsurance on the accompanying Pro Forma Balance Sheet at September 30, 1997,
and the amounts recoverable under the Assumption and Indemnity Agreement are
reflected as offsetting assets.
The Company will not write any new or renewal insurance business after the
Closing Date. Earned premiums and incurred losses for the twelve months
following the closing are reflected on the Pro Forma Consolidated Statement of
Income (Loss) for the year ended December 31, 1996 net of reinsurance. There
will be no net premium earned or net losses incurred beyond the Closing Date of
the Asset Sale.
62
<PAGE> 70
BUSINESS
For a discussion of the Company's business, properties and legal
proceedings, see the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 (attached as Appendix E to this Proxy Statement) under the
headings "PART I, ITEM 1 -- BUSINESS," "PART I, ITEM 2 -- PROPERTIES," and "PART
I -- ITEM 3 -- LEGAL PROCEEDINGS."
MARKET FOR COMPANY'S CLASS A COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Following the Company's initial public offering on February 29, 1996, the
Company's Class A Common Stock ($.01 par value) was traded on the NASDAQ Stock
Market's National Market under the symbol "RISC." As of January 28, 1998, there
were 253 record holders of Class A Common Stock, and the closing price per share
for the Company's Class A Common Stock was $1.125. On June 16, 1997, the last
full trading day prior to the public announcement of the Purchase Agreement and
the Asset Sale, the closing price in the over-the-counter market for the Class A
Common Stock was $3.125 per share. Due to the fact that required financial
statements had not been filed with the Securities and Exchange Commission, the
Company's Class A Common Stock was delisted on July 2, 1997, and currently
trades in the over-the-counter market. The following table sets forth the high
and low closing sales prices for the Company's Class A Common Stock for each
full quarterly period.
<TABLE>
<CAPTION>
PER SHARE PRICE OF COMMON STOCK
------------------------------------------------------------------------------
1996 1997
------------------------------------- -------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High............................ 21 1/2 23 7/8 19 1/4 18 3/4 4 3/8 3 3/4 1 1/8 1 1/2
Low............................. 19 15 10 3/4 3 15/64 1 7/8 15/16 3/8 1/2
</TABLE>
No dividends have been declared or paid since the Company's initial public
offering and it is not anticipated that dividends will be paid in the
foreseeable future.
63
<PAGE> 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Consolidated financial statements, footnotes and supplementary schedules
for the Company are included in this Proxy Statement in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1996 (attached as Appendix
E to this Proxy Statement) (on pages F-1 to F-45), and in the Company's
Quarterly Report on Form 10-Q/A for the quarter ending September 30, 1997
(attached as Appendix F to this Proxy Statement) (under the heading "PART
I -- FINANCIAL INFORMATION -- FINANCIAL STATEMENTS"). The discussion and
analysis of such financial statements by the Company's management is also found
in such reports under the heading "PART II, ITEM 7 -- MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1996, and under the
heading "PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" in the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30, 1997.
ADDITIONAL INFORMATION ABOUT THE COMPANY
Additional information about the Company, including audited financial
statements for the fiscal year ended December 31, 1996, and the nine months
ended September 30, 1997, can be found at Appendices E and F which are
incorporated herein by reference. Shareholders are encouraged to read these
appendices and all financial information contained therein.
The Company intends to call its Annual Meeting of Shareholders for 1998
within 60 days following the filing of its Annual Report on Form 10-K for the
year ended December 31, 1997. Separate proxies will be solicited in connection
with such Annual Meeting.
64
<PAGE> 72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Class A Common Stock
and Class B Common Stock of the Company held beneficially, directly or
indirectly, as of the Record Date by (a) any person who is known by the Company
to be the beneficial owner of more than five percent (5%) of the outstanding
shares of Class A Common Stock or Class B Common Stock; (b) each director of the
Company, (c) the Company's Chief Executive Officer ("CEO") and the Company's
four most highly compensated executive officers other than the CEO who were
serving as executive officers on December 31, 1997, whose total salary and bonus
for 1997 exceeded $100,000 (collectively, the "Named Executive Officers"); and
(d) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
---------------------------------------------
CLASS A COMMON CLASS B COMMON
-------------------- ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------ --------- ------- ---------- -------
<S> <C> <C> <C> <C>
William D. Griffin(2)............................. -- --% 22,176,052 91.1%
L. Scott Merritt(3)............................... -- -- 2,158,391 8.9
Massachusetts Financial Services Company(4)....... 996,196 8.5 -- --
Directors and Named Executive Officers:
Frederick Dawson(5)............................... 1,085,711 8.5 -- --
Steven J. Berling................................. -- -- -- --
Stephen C. Rece................................... -- -- -- --
Reed Killets...................................... -- -- -- --
Gregory P. Kuzma(6)............................... 50 * -- --
Walter E. Riehemann............................... -- -- -- --
Seddon Goode, Jr. ................................ -- -- -- --
George E. Greene II............................... 200 * -- --
Walter L. Revell.................................. -- -- -- --
All directors and current executive officers as a
group (9 persons)(7)............................ 1,085,961 8.5% -- --%
</TABLE>
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* Less than 1%
(1) Beneficial ownership of shares, as determined in accordance with applicable
Securities and Exchange Commission Rules, includes shares as to which a
person has or shares voting power and/or investment power. The Company has
been informed that all shares shown are held of record with sole voting and
investment power, except as otherwise indicated.
(2) Mr. Griffin's business address is 1830 Osprey Avenue, Suite 100A, Sarasota,
Florida 34239. Mr. Griffin's shares of Class B Common Stock are owned of
record by RISCORP Group Holding Company L.P. (17,268,841 shares) and William
D. Griffin Family Limited Partnership (4,907,211 shares). The general
partners of such limited partnerships are Gryphus Company I ("GI") and
Gryphus Company II ("GII"), respectively. Mr. Griffin is the president, a
director and the controlling shareholder of GI and GII. The business address
of GI and GII is Bank of America Plaza, Suite 1100, 300 N. Fourth Street,
Las Vegas, Nevada 89101. All of the shares of Class B Common Stock noted may
be converted into shares of Class A Common Stock, on a one for one basis. If
all of the Class B Common Stock shares noted were so converted into Class A
Common Stock, Mr. Griffin would beneficially own 65.4% of the shares of
Class A Common Stock. The information herein regarding the stock ownership
of Mr. Griffin, GI and GII was obtained from a Schedule 13G filed by such
persons with the Commission on February 20, 1997. The Company makes no
representation as to the accuracy or completeness of the information
reported regarding Mr. Griffin, GI and GII.
(3) Mr. Merritt's business address is 4711 Meadowview Circle, Sarasota, Florida
34233. Mr. Merritt resigned as a director and officer of the Company on May
20, 1997. Mr. Merritt has sole voting and investment power with respect to
2,158,391 shares of Class B Common Stock as trustee of certain irrevocable
trusts created by Mr. Griffin for the benefit of his children. Mr. Griffin
disclaims beneficial ownership of those
65
<PAGE> 73
shares. All of the shares of Class B Common Stock noted may be converted
into shares of Class A Common Stock, on a one for one basis. If all of the
Class B Common Stock shares noted were so converted into Class A Common
Stock, Mr. Merritt would beneficially own 15.5% of the shares of Class A
Common Stock. The information herein regarding the stock ownership of Mr.
Merritt was obtained from a Schedule 13G filed by Mr. Merritt with the
Commission on February 20, 1997. The Company makes no representation as to
the accuracy or completeness of the information reported regarding Mr.
Merritt.
(4) The business address of Massachusetts Financial Services Company ("MFSC") is
500 Boylston Street, Boston, Massachusetts 02116. MFSC is an investment
advisor that (along with certain other entities not identified in MFSC's
most recent Schedule 13G) has sole voting power with respect to 923,365
shares and sole investment power with respect to 996,165 shares. The
information herein regarding the stock ownership of MFSC was obtained from a
Schedule 13G filed by MFSC with the Commission on February 11, 1997. The
Company makes no representation as to the accuracy or completeness of the
information reported regarding MFSC.
(5) Mr. Dawson's shares include 1,085,711 shares subject to options that are
currently exercisable.
(6) Mr. Kuzma shares voting and investment power of these shares with his wife.
(7) Includes 1,085,711 shares subject to options held by all directors and
executive officers that are exercisable within 60 days.
PROPOSALS OF SHAREHOLDERS FOR THE NEXT ANNUAL MEETING
The Company's Articles of Incorporation require advance notice to the
Company of any shareholder proposal and of any nominations by shareholders of
persons to stand for election as directors at a shareholders' meeting. Notice of
shareholder proposals and of director nominations must be timely given in
writing to the Secretary of the Company prior to the meeting at which the
directors are to be elected. To be timely, notice must be received at the
principal executive office of the Company not less than 60 days prior to the
meeting of shareholders; provided, however, that in the event that less than 70
days notice prior to public disclosure of the date of the meeting is given or
made to the shareholders, notice by the shareholder, in order to be timely, must
be so delivered or received not later than the close of business on the tenth
day following the day on which such notice of the date of the annual meeting was
mailed or public disclosure of the date of the annual meeting was made,
whichever first occurs.
In addition to the matters required to be set forth by the rules of the
Securities and Exchange Commission, a shareholders notice with respect to a
proposal to be brought before the annual meeting must set forth (a) a brief
description of the proposal and the reasons for conducting such business at the
annual meeting, (b) the name and address, as they appear on the Company's books,
of the shareholder proposing such business and any other shareholders known by
such shareholder to be supporting such proposal, (c) the class and number of
shares of the Company that are beneficially owned by such shareholder on the
date of such shareholder notice and by other shareholders known to such
shareholder to be supporting such proposal on the date of such shareholder
notice, and (d) any financial interest of the shareholder in such proposal.
A shareholders notice with respect to a director nomination must set forth
(a) as to each director nominee (i) the name, age, business address, and
residence address of the person, (ii) the principal occupation or employment of
the person, (iii) the class and number of shares of the Company that are
beneficially owned by such person, (iv) all information that would be required
to be included in the proxy statement soliciting proxies for the election of the
nominee director (including such persons written consent to serve as a director
if so elected), and (b) as to the shareholder providing such notice (i) the name
and address, as they appear on the Company's books, of the shareholder, and (ii)
the class and number of shares of the Company that are beneficially owned by
such shareholder on the date of such shareholder notice.
The complete Articles of Incorporation provisions governing these
requirements are available to any Shareholder without charge upon request from
the Secretary of the Company.
66
<PAGE> 74
APPENDIX A
ASSET PURCHASE AGREEMENT
<PAGE> 75
ASSET PURCHASE AGREEMENT
by and among
ZENITH INSURANCE COMPANY
and
RISCORP, INC.,
RISCORP MANAGEMENT SERVICES, INC.,
RISCORP OF ILLINOIS, INC.,
INDEPENDENT ASSOCIATION ADMINISTRATORS INCORPORATED,
RISCORP INSURANCE SERVICES, INC.,
RISCORP MANAGED CARE SERVICES, INC.,
COMPSOURCE, INC.,
RISCORP REAL ESTATE HOLDINGS, INC.,
RISCORP ACQUISITION, INC.,
RISCORP WEST, INC.,
RISCORP OF FLORIDA, INC.,
RISCORP INSURANCE COMPANY,
RISCORP PROPERTY & CASUALTY INSURANCE COMPANY,
RISCORP NATIONAL INSURANCE COMPANY,
RISCORP SERVICES, INC.,
RISCORP STAFFING SOLUTIONS HOLDING, INC.,
RISCORP STAFFING SOLUTIONS, INC. I
and
RISCORP STAFFING SOLUTIONS, INC. II
Dated as of June 17, 1997
<PAGE> 76
TABLE OF CONTENTS
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ARTICLE I DEFINITIONS.................................................2
1.01. Definitions........................................................2
ARTICLE II TRANSFER AND ACQUISITION OF ASSETS AND STOCK...............11
2.01. Transfer and Acquisition..........................................11
2.02. Payment of Purchase Price.........................................12
2.03. Place and Date of Closing.........................................14
2.04. Transactions to be Effected at the Closing........................14
2.05. Nonassignability of Assets........................................14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS..................15
3.01. Organization, Standing and Authority..............................15
3.02. Authorization.....................................................15
3.03. No Conflict or Violation, etc.....................................16
3.04. Books and Records.................................................16
3.05. SEC Documents and Statutory Financials............................17
3.06. No Undisclosed Liabilities........................................17
3.07. Contracts.........................................................17
3.08. Title to Assets; Sufficiency......................................18
3.09. Litigation; Orders................................................18
3.10. Compliance with Laws..............................................18
3.11. Employee Matters..................................................18
3.12. Brokers...........................................................19
3.13. Reinsurance Contracts.............................................19
3.14. Disputed Claims...................................................20
3.15. Computer Software.................................................20
3.16. Environmental Matters.............................................22
3.17. Taxes.............................................................22
3.18. Condition of Tangible Assets......................................25
3.19. Intellectual Property, Computer Software and Database.............25
3.20. Agents and Brokers................................................25
3.21. Solvency..........................................................26
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE
PURCHASER...............................................29
4.01. Organization, Standing and Authority..............................29
4.02. Authorization.....................................................29
4.03. No Conflict or Violation, etc.....................................29
4.04. Brokers...........................................................30
ARTICLE V COVENANTS..................................................30
5.01. Conduct of Business...............................................30
5.02. RISCORP Shareholders Meeting......................................32
5.03. Acquisition Proposals.............................................33
5.04. Fiduciary Duties..................................................34
5.05. Certain Fees and Expenses.........................................34
5.06. Non-Solicitation/Non-compete......................................35
5.07. Access to Information; Confidentiality; Renewal Business..........35
5.08. Reasonable Best Efforts...........................................36
5.09. Consents, Approvals and Filings...................................36
5.10. Notification......................................................37
5.11. Further Assurances................................................37
</TABLE>
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TABLE OF CONTENTS (cont'd)
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5.12. Expenses..........................................................38
5.13. Employees and Employee Benefits...................................38
5.14. Computer Software.................................................39
5.15. Accounting and Information Systems................................39
5.16. Cut-Through Agreement.............................................40
5.17. Use of Name.......................................................40
5.18. Disclosure Schedules..............................................40
ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE PURCHASER........................................41
6.01. Representations and Covenants.....................................41
6.02. No Material Adverse Change........................................41
6.03. Secretary's Certificate...........................................42
6.04. Legal Opinion.....................................................42
6.05. Other Documents...................................................42
6.06. Other Agreements..................................................42
6.07. Governmental and Regulatory Consents and
Approvals......................................................42
6.08. Third Party Consents..............................................42
6.09. No Injunctions or Restraints......................................43
6.10. RISCORP Shareholder Approval......................................43
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE SELLERS..........................................43
7.01. Representations and Covenants.....................................43
7.02. Secretary's Certificate...........................................43
7.03. Other Agreements..................................................44
7.04. Governmental and Regulatory Consents and
Approvals......................................................44
7.05. RISCORP Shareholder Approval......................................44
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................44
8.01. Survival of Representations and Warranties........................44
ARTICLE IX INDEMNIFICATION............................................44
9.01. General Indemnification Obligation of Sellers.....................44
9.02. General Indemnification Obligation of Purchaser...................45
9.03. Method of Asserting Claims, Etc...................................46
9.04. Payment...........................................................47
9.05. Other Rights and Remedies Not Affected............................47
9.06. Limitations on Amount.............................................47
ARTICLE X TERMINATION PRIOR TO CLOSING...............................48
10.01. Termination.......................................................48
10.02. Effect of Termination.............................................49
ARTICLE XI GENERAL PROVISIONS.........................................50
11.01. Publicity.........................................................50
11.02. Dollar References.................................................50
11.03. Notices...........................................................50
11.04. Entire Agreement..................................................51
11.05. Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies......................................51
11.06. Governing Law; Choice of Forum....................................51
</TABLE>
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11.07. Binding Effect; Assignment........................................51
11.08. Interpretation....................................................52
11.09. No Third Party Beneficiaries......................................52
11.10. Counterparts......................................................52
11.11. Exhibits and Schedules............................................52
11.12. Headings..........................................................53
11.13. Compliance with Bulk Sales Laws...................................53
</TABLE>
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<PAGE> 79
EXHIBITS
Exhibit A - Form of Reinsurance Agreement
Exhibit B - Form of Bill of Sale and General Assignment
Exhibit C - Form of Assumption Agreement
Exhibit D - Form of Escrow Agreement
Exhibit E - Tax Matters Agreement
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<PAGE> 80
SCHEDULES
Schedule 1.01(a) - Assigned and Assumed Contracts
Schedule 1.01(d) - Description of the Business
Schedule 3.1(h) - Net Operating Losses
Schedule 3.03 - Necessary Consents, etc.
Schedule 3.06 - Undisclosed Liabilities
Schedule 3.07 - Contracts
Schedule 3.08(a) - Liens - Tangible Assets
Schedule 3.9 - Litigation; Orders
Schedule 3.10 - Compliance with Laws
Schedule 3.11 - Employee Matters
Schedule 3.13 - Reinsurance Contracts
Schedule 3.14 - Disputed Claims
Schedule 3.15 - Computer Software
Schedule 3.15A - Database
Schedule 3.17 - Tax Matters
Schedule 3.18 - Condition of Tangible Assets
Schedule 3.20 - Agents and Brokers
Schedule 4.03 - Necessary Consents, etc.
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ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of June 17,
1997, is entered into by and among Zenith Insurance Company, a California
Corporation (the "Purchaser"), RISCORP, Inc., a Florida corporation ("RISCORP"),
RISCORP Management Services, Inc., a Florida corporation ("RMS"), RISCORP of
Illinois, Inc., an Illinois corporation ("RI"), Independent Association
Administrators Incorporated, an Alabama corporation ("IAA"), RISCORP Insurance
Services, Inc., a Florida corporation ("RIS"), RISCORP Managed Care Services,
Inc. ("RMCS"), CompSource, Inc., a North Carolina corporation ("CompSource"),
RISCORP Real Estate Holdings, Inc., a Florida corporation ("RRE"), RISCORP
Acquisition, Inc., a Florida corporation ("RA"), RISCORP West, Inc., an Oklahoma
corporation ("RW"), RISCORP of Florida, Inc., a Florida Corporation ("RF"),
RISCORP Insurance Company, a Florida corporation ("RIC"), RISCORP Property &
Casualty Insurance Company, a Florida corporation ("RP&C"), RISCORP National
Insurance Company, a Missouri corporation ("RNIC"), RISCORP Services, Inc., a
Florida corporation ("RS"), RISCORP Staffing Solutions Holding, Inc., a Florida
corporation ("RSS Holding"), RISCORP Staffing Solutions, Inc. I, a Florida
corporation ("RSSI") and RISCORP Staffing Solutions, Inc. II, a Florida
corporation ("RSSII"). RISCORP, RMS, RI, IAA, RIS, RMCS, CompSource, RRE, RA,
RW, RF, RIC, RP&C, RNIC, RS, RSS Holding, RSSI and RSSII are from time to time
hereinafter referred to collectively as the "Sellers."
W I T N E S S E T H:
WHEREAS, the Sellers are affiliated entities that are engaged in
workers compensation insurance, managed care and related businesses;
WHEREAS, upon the terms and subject to the conditions of this
Agreement, the Sellers desire to sell, and the Purchaser desires to acquire,
certain of the assets associated with the business of each of the Sellers, and
in connection therewith the Purchaser is willing to assume certain liabilities;
and
WHEREAS, as a condition and inducement to Purchaser's entering into
this Agreement and incurring the obligations set forth herein, concurrently with
the execution and delivery of this Agreement, (i) the Purchaser is entering into
the Voting Agreement, dated the date hereof (the "Voting Agreement"), with
William D. Griffin, The RISCORP Group Holding Company Limited Partnership,
William D. Griffin Family Limited Partnership, Charlotte K. Griffin Trust Number
3, Anna F. Griffin Trust Number 3 and John Ford Griffin Trust Number
3(collectively, the "Shareholders"), pursuant to which, among other things, the
Shareholders have agreed to vote all of their shares of Class B Common Stock,
$.01 par value ("Class B Common Stock"), of RISCORP
<PAGE> 82
in favor of this Agreement and the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. The following terms shall have the
respective meanings set forth below throughout this Agreement:
"Accounting Principles" means United States generally accepted
accounting principles consistently applied.
"Acquisition Proposal" shall have the meaning set forth in Section 5.03
hereof.
"Action" shall have the meaning set forth in Section 3.09 hereof.
"Actuarial Principles" shall have the meaning set forth in Section
2.02(a) hereof.
"Additional Escrow Amount" shall mean an amount equal to the
difference, if positive, between 15% of the Purchaser Price and $10 million.
"Affiliate" means, with respect to any person, at the time in question,
any other person controlling, controlled by or under common control with such
person. For purposes of the foregoing, "control", including the terms
"controlling", "controlled by" and "under common control with", means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of an institution, whether through the ownership of
voting securities, by contract or otherwise.
"Ancillary Agreements" means the Reinsurance Agreement, the Assumption
Agreement, the Tax Matters Agreement, the Escrow Agreement and the Transfer
Documents.
"Antitrust Division" shall have the meaning set forth in Section
5.09(c) hereof.
"Assignable Licensed Software" means the Licensed Software as to which
(i) no consent to the assignment thereof is required or (ii) consent to the
assignment thereof has been obtained on or prior to the Closing Date.
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<PAGE> 83
"Assigned and Assumed Contracts" means all outstanding agreements with
agents and brokers and all rights of renewal with respect to Insurance Contracts
and those contracts and other agreements set forth on Schedule 1.10(a) (other
than Insurance Contracts, contracts and other agreements set forth on Schedules
3.15 and 3.15(A) hereto and any agreement with Affiliates or employment
contracts to which any of the Sellers is a party other than the Included
Affiliate Agreements and the Included Employment Contracts set forth in
Schedules 1.01(b) and 1.01(c), respectively) to which each of the Sellers or any
of their respective Affiliates is a party and which relate primarily to the
Business.
"Assumption Agreement" means an Assumption Agreement substantially in
the form of Exhibit D hereto.
"Base Escrow Amount" shall mean $10 million plus the amount of all Loss
Estimate.
"Benefit Plans" shall have the meaning set forth in Section 3.11(a)
hereof.
"Bill of Sale and General Assignment" means a Bill of Sale and General
Assignment substantially in the form of Exhibit C hereto.
"Books and Records" means the originals or copies of all records
(including computer generated, recorded or stored records) relating primarily to
the Business, including customer lists, policy information, Insurance Contract
forms, claim records, sales records, underwriting records, financial records,
tax records, personnel records related to Transferred Employees and compliance
records in the possession or control of each of the Sellers or any of their
respective Affiliates and relating primarily to the operation of the Business,
including the database maintained by each of the Sellers relating to and
containing the customer lists, claim records and underwriting records related to
the Business and any other database or other form of recorded, computer
generated or stored information or process relating primarily to the operation
of the Business.
"Business" means the businesses conducted by each of the Sellers on the
Closing Date as more fully described in Schedule 1.01(d) hereto; provided,
however, that the "Business" shall not include any of the foregoing to the
extent that it relates to any Excluded Liability or any asset other than a
Transferred Asset.
"Business Day" means any day other than a Saturday, Sunday, a day on
which banking institutions in either of the State of Florida or the State of New
York are permitted or obligated by law to be closed or a day on which the New
York Stock Exchange is closed for trading.
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<PAGE> 84
"Business Employees" shall have the meaning set forth in Section
5.11(a) hereof.
"Claim Notice" shall have the meaning set forth in Section 9.03(a)
hereof.
"Class A Common Stock" means the Class A Common Stock, $.01 par value,
of RISCORP.
"Class B Common Stock" has the meaning specified in the recitals
hereof.
"Closing" means the closing of the transactions contemplated by this
Agreement.
"Closing Date" means the third Business Day following the satisfaction
or waiver of the conditions set forth in Articles 6 and 7 of this Agreement.
"COBRA" shall have the meaning set forth in Section 5.13(b)(iv) hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Database" shall have the meaning set forth in Section 3.15A(a).
"Database License" shall have the meaning set forth in Section
3.15A(b).
"Commonly Controlled Entity" shall have the meaning set forth in
Section 3.11(a) hereof.
"ERISA" shall have the meaning set forth in Section 3.11(a) hereof.
"Escrow Agent" shall mean the Escrow Agent defined in the Escrow
Agreement, which Escrow Agent shall be a commercial banking institution with
capital equal to at least $100 million selected by the Purchaser.
"Escrow Agreement" means an Escrow Agreement substantially in the form
of Exhibit E hereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Excluded Assets" shall mean the stock of all direct or indirect
subsidiaries of RISCORP (other than the stock of Third Coast Holding Company,
Third Coast Insurance Services Company and Third Coast Insurance Company), any
claims related to the matters at issue in the Excluded Litigation and any tax
related assets (including deposits for current taxes) and recoveries on
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<PAGE> 85
insurance policies that do not relate to Transferred Assets or Transferred
Liabilities.
"Excluded Liability" means any liability or obligation arising in
connection with the Business which does not constitute an Other Assumed
Liability or an Insurance Liability.
"Excluded Litigation" means any liabilities or obligations relating to
any present or future litigation claims, actions or proceedings, and any present
or future governmental and/or criminal actions or investigations, in which any
Seller is named as a defendant other than claims litigation occurring in the
ordinary course of the Sellers' business.
"Expenses" shall have the meaning set forth in Section 5.05(b) hereof.
"Extra Contractual Obligations" means all liabilities for
consequential, exemplary, punitive or similar damages which relate to or arise
in connection with any alleged or actual act, error or omission by the Sellers
or any of their respective Affiliates prior to the Closing Date, whether
intentional or otherwise, or from any alleged or actual reckless conduct or bad
faith by any such Seller or any of its Affiliates, in connection with the
handling of any claim under any of the Insurance Contracts or in connection with
the issuance, delivery, cancellation or administration of any of the Insurance
Contracts.
"Final Business Balance Sheet" shall have the meaning set forth in
Section 2.02(a) hereof.
"First Call Assets" means any and all assets owned by the Sellers, both
tangible and intangible, related to the operation of the First Call system.
"FTC" shall have the meaning set forth in Section 5.09(c) hereof.
"Governmental Entity" shall have the meaning set forth in Section 3.03
hereof.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
"Included Affiliate Contracts" shall mean those contracts between any
of the Sellers and their respective Affiliates which the Purchaser expressly
agrees in writing to assume prior to the Closing Date.
"Included Employment Contracts" shall mean those contracts between any
of the Sellers and their respective employees which the Purchaser expressly
agrees in writing to assume prior to the Closing Date.
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<PAGE> 86
"Indemnified Purchaser Party" shall have the meaning set forth in
Section 9.01 hereof.
"Indemnified Seller Party" shall have the meaning set forth in Section
9.02 hereof.
"Insurance Contracts" means the treaties, policies, binders, slips and
other agreements of insurance written by the Insurance Subsidiaries in
connection with the Business to the extent in effect on or prior to the Closing
Date (including all supplements, endorsements, riders and ancillary agreements
in connection therewith).
"Insurance Liabilities" means all liabilities and obligations arising
under or in connection with the Insurance Contracts, to the extent the same are
unpaid or unperformed on or after the Closing Date, including (i) the gross
amount of all liability for losses and loss adjustment expenses before any
deduction for reinsurance ceded, (ii) all amounts payable for returns or refunds
of premiums under the Insurance Contracts, including all liability for unearned
premiums, (iii) all liability for commission payments and other fees or
compensation payable with respect to the Insurance Contracts to or for the
benefit of intermediaries, brokers and service providers, (iv) all liabilities
for retrospective payments or adjustments under Insurance Contracts, (v) all
Extra Contractual Obligations and (vi) all guaranty fund assessments and similar
charges which are required to be paid under or in respect of the Insurance
Contracts.
"Insurance Subsidiaries" shall mean RIC, RNIC and RP&C.
"Intangible Assets" means those intangible assets of each of the
Sellers, including, without limitation, Intellectual Property and intangible
First Call Assets.
"Intellectual Property" means all trade names, trademarks and service
marks and registrations and applications therefor, trademarks, copyrights,
copyright applications and registrations, rights to renew copyrights and
copyright renewals, any patents and patent applications and registrations and
all imprints and logos, trade secrets, customer lists or know-how owned by any
of the Sellers or used in the Business, including without limitation all right,
title and interest of the Sellers in and to the names "RISCORP" and "First
Call".
"knowledge" means, as to the Sellers, the actual knowledge after
reasonable inquiry of any of the officers of the Sellers, and as to the
Purchaser, the actual knowledge after reasonable inquiry of any of the officers
of the Purchaser.
"Liabilities" shall have the meaning set forth in Section 3.06 hereof.
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<PAGE> 87
"License Agreements" shall have the meaning set forth in Section
5.12(a) hereof.
"Licensed Software" shall have the meaning set forth in Section 3.15(a)
hereof.
"Lien" means any pledge, claim, lien, charge, mortgage, encumbrance,
security interest of any nature, option, right of first refusal, warrant, or
restriction of any kind, including any restriction on use, voting, transfer,
alienation, receipt of income, or exercise of any other attribute of ownership.
"Neutral Auditors" shall mean one of the six largest nationally
recognized independent auditing firms selected by the Purchaser, not to include
Coopers & Lybrand, L.L.P. or KPMG Peat Marwick, L.L.P.
"Neutral Actuary" shall mean a nationally recognized independent
actuarial firm selected by the Purchaser, not to include Tillinghast-Towers
Perrin or the Purchaser's principal actuarial firm.
"Notice Period" shall have the meaning set forth in Section 9.03(a)
hereof.
"Order" shall have the meaning set forth in Section 3.09 hereof.
"Other Assumed Liabilities" means the following liabilities and
obligations of all of the Sellers, to the extent the same are unpaid or
unperformed on or after the Closing Date: (i) all liabilities and obligations of
all of the Sellers to the extent relating to the Transferred Assets, including
liabilities and obligations under the Assigned and Assumed Contracts and the
Assignable Licensed Principally Used Software; (ii) all liabilities and
obligations in respect of employee relations and benefits to the extent
expressly assumed by the Purchaser pursuant to Section 5.13 of this Agreement;
(iii) the $15 million aggregate principal amount promissory note held by
American Re-Insurance Company; and (iv) all other liabilities and obligations
relating to the Business (other than any Insurance Liability); provided,
however, that notwithstanding anything in this Agreement to the contrary, the
Other Assumed Liabilities shall not include: (a) any Excluded Litigation, (b)
any indemnification obligations to any Seller's officers and directors,
accountants, financial advisers, underwriters or attorneys, (c) any liabilities
under (1) the Stock Purchase Agreement dated November 4, 1994 between RISCORP
Acquisition, Inc. and W. Gerald Fiser, (2) the Agreement of Purchase and Sale of
Stock dated July 10, 1996 by and among Atlas Insurance Company, RISCORP of
Florida, Inc., Atlas Financial Corporation and Haas Wilkerson Wohlberg, Inc.,
(3) the Agreement of Purchase and Sale of Stock dated December 15, 1995 among
CompSource Acquisition, Inc. and James K. Secunda, Bruce A. Flacks, James K.
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and Deborah W. Secunda Charitable Remainder Unitrust Number One, the James K.
and Deborah W. Secunda Charitable Remainder Unitrust Number Two, and the Bruce
Flacks Charitable Remainder Unitrust, (4) the Stock Purchase Agreement dated
September 17, 1996 between RISCORP and Thomas Albrecht, Peter Norman and Hugh D.
Langdale, Jr., (5) the Independent Association Administrators, Incorporated and
Risk Inspection and Consulting Services Agreement and Plan of Merger dated
September 1996 among RISCORP, RISCORP-IAA, Inc., Independent Association
Administrators, Incorporated and the shareholders of Independent Association
Administrators, Incorporated, or (6) any liability of any Seller under any other
stock purchase agreement, asset acquisition agreement or merger agreement; (d)
any contingent liability, whether known or unknown, on the date hereof and any
contingent liability, whether known or unknown, to the extent not accrued or
reserved for on the Final Business Balance Sheet; (e) except as provided in the
Tax Matters Agreement, any obligation of Sellers for Taxes for all periods
ending on, before or after the Closing Date and any balance sheet liability in
respect of Taxes; (f) any obligation or liability of Sellers arising from its
failure to perform any of its agreements contained herein or incurred by Sellers
in connection with the consummation of the transactions contemplated hereby; (g)
any expenses of Sellers, including Taxes, incurred in connection with the sale
contemplated by this Agreement, except as otherwise explicitly provided in this
Agreement; (h) any liability or obligation under any Benefit Plans except as
provided in Section 5.11 hereof to the Employees or under any employment
contract with any officer, director or employee of any of the Sellers except for
Included Employment contracts; (i) any liability or obligation of Sellers
arising from or resulting from its non-compliance prior to the Closing Date with
any Federal, state, local or foreign laws, regulations, orders, or
administrative or judicial determinations, including without limitation those
relating to the environment and to employment practices applicable to Sellers'
employees; (j) any fines, penalties or liabilities imposed on any of the Sellers
by any Governmental Entity; (k) any brokerage or finder's fee payable by Sellers
in connection with the transactions contemplated hereby; (l) any liability or
obligation under any contract with an Affiliate of any of the Sellers except for
Included Affiliate Contracts.
"Owned Software" shall have the meaning set forth in Section 3.15
hereof.
"Permitted Liens", as to any asset, means: (i) Liens for taxes not yet
due and payable or being contested in good faith by appropriate proceedings;
(ii) Liens arising by operation of law; (iii) Liens arising from letters of
credit and other similar insurance security devices entered into by or for the
benefit of the Sellers in connection with the Business in the ordinary course of
business; and (iv) other Liens that do not in the aggregate materially detract
from the value or materially
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interfere with the present or reasonably contemplated use of any material asset
in the Business.
"person" means any individual, corporation, partnership, firm, joint
venture, association, limited liability company, limited liability partnership,
joint-stock company, trust, unincorporated organization, governmental, judicial
or regulatory body, business unit, division or other entity.
"Proposed Business Balance Sheet" shall have the meaning set forth in
Section 2.02(b) hereof.
"Proxy Statement" shall have the meaning set forth in Section 5.09
hereof.
"Purchaser Material Adverse Effect" means a material adverse effect on
the ability of the Purchaser to perform its obligations under this Agreement or
any Ancillary Agreement or the enforceability of this Agreement or any Ancillary
Agreement.
"Quarterly Statements" means the Quarterly Statement for the period
indicated of each Insurance Subsidiary together with all exhibits and schedules
thereto.
"Reinsurance Agreement" means the Reinsurance Agreement substantially
in the form of Exhibit A hereto.
"Review Period" shall have the meaning set forth in Section 2.02(b)
hereof.
"RISCORP Shareholders Meeting" shall have the meaning set forth in
Section 5.02 hereof.
"RISCORP Shareholders Approval" shall have the meaning set forth in
Section 5.02 hereof.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning set forth in Section 3.05
hereof.
"Section 5.05 Fee" shall have the meaning set forth in Section 5.05(a)
hereof.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Sellers Material Adverse Effect" means any material adverse effect on
the Transferred Assets or the business, financial condition or results of
operations of the Business, the ability of the Sellers to perform their
respective obligations under this Agreement or any Ancillary Agreement or the
validity or the enforceability of this Agreement or any Ancillary Agreement.
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"Sellers' Representative" shall have the meaning set forth in Section
2.01(d) hereof.
"Statutory Financials" means the Annual Statement for the year
indicated of each Insurance Subsidiary together with all exhibits and schedules
thereto, and any actuarial opinion, affirmation or certification filed in
connection therewith.
"Shareholders" shall have the meaning set forth in the recitals hereof.
"subsidiary" means, with respect to any person on a given date, any
other person of which a majority of the voting power of the equity securities or
equity interests is owned directly or indirectly by such person.
"Systems Loans" shall have the meaning specified in Section 2.02
hereof.
"Tangible Assets" means the furniture, fixtures, equipment, supplies
and other tangible personal and real property of each of the Sellers, including,
without limitation, the tangible First Call Assets.
"Tax" shall have the meaning set forth in Section 3.17(b) hereof.
"Taxation" shall have the meaning set forth in Section 3.17(b) hereof.
"Tax Matters Agreement" means the Tax Matters Agreement substantially
in the form of Exhibit E.
"Transfer Documents" means the Bill of Sale and General Assignment and
such other documents and instruments as the Purchaser may reasonably request in
order to transfer all of the Sellers' right, title and interest in the
Transferred Assets to the Purchaser.
"Transferred Assets" means each of the Sellers' right, title and
interest in: (i) the Assigned and Assumed Contracts; (ii) all receivables in
respect of the Insurance Contracts; (iii) all recoverables and other receivables
with respect to reinsurance, coinsurance and retrocession contracts relating to
insurance ceded by any Seller; (iv) the Tangible Assets; (v) the Intangible
Assets; (vi) all prepaid premiums and fees (other than with respect to insurance
policies or other assets that constitute Excluded Assets); (vii) the Assignable
Licensed Software; (viii) the Owned Software; (ix) cash, cash equivalents and
invested assets owned by the Sellers; (x) the Books and Records; (xi) all
Intellectual Property; (xii) all rights in respect of Insurance Contracts and
all rights of renewal with respect thereto; (xiii) the stock of Third Coast
Holding Company, Third Coast Insurance Services Company and Third Coast
Insurance
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Company; and (xiv) all other assets relating to the Business, including, without
limitation, assets supporting the Insurance Liabilities, provided, however, that
the Transferred Assets shall not include the Excluded Assets; and provided,
further, that the Transferred Assets shall not include any of the foregoing to
the extent they are terminated, transferred or otherwise disposed of as
permitted by Section 5.01 of this Agreement between the date hereof and the
Closing Date.
"Transferred Employees" shall have the meaning set forth in Section
5.13 hereof.
"Transferred Liabilities" means the Insurance Liabilities and the Other
Assumed Liabilities.
"Vote Items" shall have the meaning set forth in Section 5.02 hereof.
"Voting Agreement" shall have the meaning set forth in the recitals
hereof.
ARTICLE II
TRANSFER AND ACQUISITION OF ASSETS AND STOCK
Section 2.01. Transfer and Acquisition. (a) Upon the terms and subject
to the conditions of this Agreement, on the Closing Date, each of the Sellers
shall sell, assign and transfer to the Purchaser, and the Purchaser shall
purchase from each of the Sellers, all of each of the Sellers' right, title and
interest in the Transferred Assets. All sales, assignments and transfers of the
Transferred Assets shall be effected by the Transfer Documents.
(b) Upon the terms and subject to the conditions of this Agreement, on
the Closing Date, the Purchaser shall assume the Other Assumed Liabilities
pursuant to the Assumption Agreement.
(c) Upon the terms and subject to the conditions of this Agreement, on
the Closing Date, the Purchaser and each of the Sellers shall enter into the
Reinsurance Agreement pursuant to which the Purchaser shall reinsure the
Insurance Liabilities.
(d) Any transfer, premium or sales tax imposed in connection with the
transfer, sale, assumption or recording of the Transferred Assets to be
transferred pursuant to paragraph (a) of this Section 2.01 or the Transferred
Liabilities to be assumed pursuant to paragraph (b) or (c) of this Section 2.01
(or in connection with any transfer of cash under Sections 2.02 hereof, shall be
paid by RISCORP, acting on behalf of the Sellers (the "Sellers'
Representative").
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Section 2.02. Payment of Purchase Price. (a) On the Closing Date, in
consideration of the sale, assignment and transfer under Section 2.01(a) hereof,
the Purchaser shall (i) pay to the Seller's Representative, on behalf of the
Sellers, an amount in cash equal to $35 million minus the Base Escrow Amount
minus the principal amount of, and any accrued and unpaid interest on, any
Systems Loans, and (ii) pay to the Escrow Agent pursuant to the terms of the
Escrow Agreement an amount in cash equal to the Base Escrow Amount.
(b) As promptly as practicable after the Closing Date, but not later
than 70 days after the Closing Date, the Sellers' Representative will prepare
and deliver to the Purchaser at the Sellers' cost and expense, audited statement
of Transferred Assets and the Transferred Liabilities of the Business as of the
Closing Date (the "Proposed Business Balance Sheet"), prepared in conformity
with the Accounting Principles, which shall represent the Sellers' proposal for
the Final Business Balance Sheet and shall be accompanied by (i) the report of
KPMG Peat Marwick L.L.P. thereon, addressed to the Sellers' Representative and
the Purchaser, which report shall state that the Proposed Business Balance Sheet
presents fairly the assets and liabilities of the Business at the Closing Date
in conformity with the Accounting Principles, and (ii) the report of
Tillinghast-Towers Perrin addressed to the Sellers' Representative and the
Purchaser, setting forth Tillinghast-Towers Perrin's determination of the
liability for loss and loss adjustment expenses net of reinsurance recoveries as
of the date of, and for inclusion in, the Proposed Business Balance Sheet for
the Insurance Subsidiaries. In determining such amounts, Tillinghast-Towers
Perrin shall apply actuarial methods and assumptions that are consistent with
generally accepted actuarial principles (the "Actuarial Principles"). The
Sellers' Representative will deliver or make available to the Purchaser copies
of all material work papers used as the basis for determining the Proposed
Business Balance Sheet. In addition, Sellers' Representative shall afford the
Purchaser and its representatives access to such information and to the auditors
as they are preparing the Proposed Business Balance Sheet for purposes of
discussing the methodology and related matters pertaining to the preparation of
the Proposed Business Balance Sheet. The Purchaser and its representatives shall
have 30 days (the "Review Period") to review the Proposed Business Balance Sheet
and all supporting papers and documentation and to suggest changes, if any,
therein. If at the end of the Review Period, the Sellers' Representative and the
Purchaser are able to agree in writing on the manner in which all items on the
Proposed Business Balance Sheet should be treated then the resulting balance
sheets shall be binding on the Sellers and the Purchaser and the Proposed
Business Balance Sheet shall be referred to as the "Final Business Balance
Sheet." If at the end of the Review Period, the Seller's Representative and the
Purchaser are unable to agree on the manner in which any item or items should be
treated in the preparation of the Final Business Balance Sheet in accordance
with the Accounting
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Principles and the Actuarial Principles, consistently applied, then all items
remaining in dispute shall be submitted to the Neutral Auditors and/or the
Neutral Actuary, as appropriate. The Neutral Auditors and the Neutral Actuaries
shall act as experts and not as arbitrators to determine the resolution, based
on the Accounting Principles and Actuarial Principles, as the case may be, of
those issues (and only those issues) still in dispute. The Neutral Auditors'
and/or the Neutral Actuaries' determination shall be made within 30 days after
the end of the Review Period, shall be set forth in a written statement
delivered to the Sellers' Representative and the Purchaser and shall be final,
binding and conclusive and the Proposed Business Balance Sheet, adjusted to give
effect to such determination and any other agreement of the parties, shall in
that case be referred to as the Final Business Balance Sheet. Each party agrees
to execute, if requested by the Neutral Auditors or the Neutral Actuaries, a
reasonable engagement letter. All fees and expenses relating to the work, if
any, to be performed by the Neutral Auditors and the Neutral Actuaries shall be
borne by the Sellers.
(c) Within five Business Days after the Final Business Balance Sheet
has been determined in accordance with Section 2.02(a) the Purchaser shall pay
to the Sellers' Representative on behalf of the Sellers, (i) an amount equal to
the excess of the value (as reflected on the Final Business Balance Sheet) of
the Transferred Assets over the value of the Transferred Liabilities (such
excess, the "Purchase Price") minus $35 million minus the Additional Escrow
Amount and (ii) pay to the Escrow Agent pursuant to the terms of the Escrow
Agreement an amount in cash equal to the Additional Escrow Amount. Cash
transferred to the Sellers pursuant to Section 2.02(a) and 2.02(b) shall be by
wire transfer of immediately available funds to an account designated by the
Sellers' Representative.
(d) Any amount due pursuant to paragraph (b) of this Section 2.02 shall
include interest thereon from the Closing Date through the payment date
calculated at the London Interbank Offered Rate quoted for six month periods as
reported in The Wall Street Journal on the Closing Date plus 50 basis points.
Section 2.03. Place and Date of Closing. The Closing shall take place
at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street,
New York, New York, at 10:00 a.m. New York time on the Closing Date or such
other time or place as the parties may mutually agree.
Section 2.04. Transactions to be Effected at the Closing. (a) At the
Closing, the Sellers shall execute (where appropriate) and deliver to the
Purchaser: (i) the Reinsurance Agreement; (ii) the Insurance Administration
Agreement; (iii) the Escrow Agreement; (iv) the Assumption Agreement; (v) the
Bill of Sale and General Assignment and the other Transfer Documents (vi) the
Tax Matters Agreement; and (vii) such other agreements,
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instruments and documents as are required by this Agreement to be delivered by
the Sellers at the Closing.
(b) At the Closing, the Purchaser shall execute and deliver to the
Sellers': (i) the Reinsurance Agreement; (ii) the Insurance Administration
Agreement; (iii) the Escrow Agreement; (iv) the Assumption Agreement; (v) the
Transfer Documents; (vi) the Tax Matters Agreement; and (vii) such other
agreements, instruments and documents as are required by this Agreement to be
delivered by the Purchaser at the Closing.
Section 2.05. Nonassignability of Assets. Notwithstanding anything to
the contrary contained in this Agreement, to the extent that the assignment or
transfer or attempted assignment or transfer to the Purchaser of any Assigned
and Assumed Contract, Licensed Software or any benefit arising thereunder or
resulting therefrom is prohibited by any applicable law or would require any
governmental or third party authorizations, approvals, consents or waivers and
such authorizations, approvals, consents or waivers shall not have been obtained
prior to the Closing, this Agreement shall not constitute a sale, assignment,
transfer, conveyance or delivery, or any attempted sale, assignment, transfer,
conveyance or delivery, thereof. Following the Closing, the parties shall use
reasonable best efforts, and cooperate with each other, to obtain promptly such
authorizations, approvals, consents or waivers; provided, however, that neither
the Sellers nor the Purchaser shall be required to pay any consideration
therefor. Pending such authorization, approval, consent or waiver, the parties
shall cooperate with each other in any mutually agreeable, reasonable and lawful
arrangements designed to provide to the Purchaser the benefits of any such
Assigned and Assumed Contracts, Licensed Software. Once authorization, approval,
consent or waiver for the assignment or transfer of any such Assigned and
Assumed Contract or Licensed Software not assigned, subleased or transferred at
the Closing is obtained, the Sellers shall assign or transfer such Assigned and
Assumed Contract, or Licensed Software to the Purchaser at no additional cost.
To the extent that any such Assigned and Assumed Contract or Licensed Software
cannot be transferred or the full benefits of use of any such Assigned and
Assumed Contract cannot be provided to the Purchaser following the Closing
pursuant to this Section 2.05, then the Purchaser and the Sellers shall enter
into such arrangements (including subleasing or subcontracting if permitted) to
provide to the parties the economic (taking into account Tax costs and benefits)
and operational equivalent, to the extent permitted, of obtaining such
authorization, approval, consent or waiver and the performance by the Purchaser
of the obligations thereunder to the extent that entering into any such
arrangements would not be materially burdensome to the Sellers as a whole or the
Purchaser.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
The Sellers hereby represent and warrant to the Purchaser that the
following statements are true and correct as of the date hereof and as of the
Closing Date or such other time as may be specified in such statements.
Section 3.01. Organization, Standing and Authority. Each Seller is duly
organized, validly existing and in good standing under the laws of the state of
its incorporation and has the requisite corporate power and authority to carry
on the operations of the Business as they are now being conducted.
Section 3.02. Authorization. Each Seller has the requisite corporate
power and authority to execute, deliver and, subject to the RISCORP Shareholders
Approval, perform its obliga tions under this Agreement and under each of the
Ancillary Agreements to be executed by it. The execution and delivery by each
Seller of this Agreement and the Ancillary Agreements to be executed by it, and
the performance by each Seller of its obligations hereunder and thereunder, have
been duly authorized by all necessary corporate action on the part of each
Seller, subject to the RISCORP Shareholders Approval. This Agreement has been
duly executed and delivered by each Seller and, subject to the due execution and
delivery hereof by the Purchaser and the RISCORP Shareholder Approval, this
Agreement is a valid and binding obligation of each Seller, enforceable against
each Seller in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law). As of the
Closing Date, the Ancillary Agreement(s) to be executed and delivered by each
Seller on such Closing Date will have been duly executed and delivered by each
such Seller and, subject to the due execution and delivery of such agreements by
the Purchaser, the Ancillary Agreement(s) to be executed by each Seller is a
valid and binding obligation of each Seller, enforceable against each Seller in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally and by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
Section 3.03. No Conflict or Violation, etc. Except as disclosed in
Schedule 3.03, the execution and delivery by each Seller of this Agreement and
of the Ancillary Agreements to which it is a party do not, and the consummation
by each Seller of the transactions contemplated by this Agreement and by such
Ancillary Agreements and compliance with the provisions hereof and thereof will
not, (i) conflict with any of the provisions of the Articles
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of Incorporation or By-laws of such Seller, (ii) subject to the matters referred
to in the next sentence, conflict with, result in a breach of or default (with
or without notice or lapse of time, or both) under, give rise to a right of
termination, cancellation or acceleration of any obligation or loss of a benefit
under, require the consent of any person under, or result in the creation of any
Lien on any property or asset of such Seller, under, any indenture or other
agreement, permit, franchise, license or other instrument or undertaking to
which any Seller is a party or by which any Seller or any of its assets is bound
or affected, or (iii) subject to the matters referred to in the next sentence,
contravene any statute, law, ordinance, rule, regulation, order, judgment,
injunction, decree, determination or award applicable to such Seller or any of
its properties or assets, which, in the case of clauses (ii) and (iii) above,
individually or in the aggregate, could not reasonably be expected to have a
Sellers Material Adverse Effect. No consent, approval or authorization of, or
declaration or filing with, or notice to, any court or governmental or
regulatory authority or agency, domestic or foreign, including, without
limitation, the Florida Agency for Health Care Administration (a "Governmental
Entity"), is required to be obtained or made by or with respect to any Seller,
in connection with the execution and delivery of this Agreement by each Seller
or the consummation by each Seller of the transactions contemplated hereby,
except for (i) the filing of a proxy statement and such reports under Section
13(a) of the Exchange Act as may be required in connection with this Agreement
and the transactions contemplated hereby, (ii) the filing of premerger
notification and report forms under the HSR Act, (iii) the approvals, filings or
notices required under the insurance laws of the jurisdictions set forth in
Schedule 3.03,(iv) such other consents, approvals, authorizations, declarations,
filings or notices as are set forth in Schedule 3.03 and (v) such other
consents, approvals, authorizations, declarations, filings or notices the
failure to obtain or make which, in the aggregate, could not reasonably be
expected to have a Sellers Material Adverse Effect.
Section 3.04. Books and Records. Each Seller has provided or made
available to the Purchaser on or prior to the date hereof copies of all Books
and Records and written policies, procedures and guidelines relating to the
Business, including all underwriting policies, procedures and guidelines other
than those policies, procedures and guidelines which are not material to the
conduct or operation of the Business.
Section 3.05. SEC Documents and Statutory Financials Each Seller has
provided or made available to the Purchaser on or prior to date hereof copies of
all reports, schedules, forms, statements and other documents filed with the SEC
(such reports, schedules, forms, statements and other documents are hereinafter
referred to as the "SEC Documents") and all Statutory Financials for periods
ended after January 1, 1995 and all Quarterly
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Statements for periods ended after January 1, 1995 through September 30, 1996.
Section 3.06. No Undisclosed Liabilities. There is no debt, liability,
commitment or obligation of any kind, character or nature whatsoever, whether
known or unknown, choate or inchoate, secured or unsecured, accrued, fixed,
absolute, contingent or otherwise, and whether due or to become due arising from
or relating to the Business (collectively, "Liabilities") which is to be
included in the Other Assumed Liabilities, except as described in Schedule 3.06,
or to the extent that reserves therefor are required to be and are set forth in
the Final Business Balance Sheet in accordance with the Accounting Principles
and other than Liabilities that in the aggregate could not reasonably be
expected to have a Sellers Material Adverse Effect.
Section 3.07. Contracts. Schedule 3.07 contains a complete and correct
list of all Insurance Contracts in force on the date hereof, and all other
material contracts, agreements and commitments to which each Seller is a party
as of the date hereof which primarily relate to the Business, other than (i)
contracts, agreements and commitments that relate exclusively to any asset that
is not a Transferred Asset and (ii) contracts, agreements and commitments that
relate to Owned Software and Licensed Software. True and complete copies of each
contract, agreement or commitment listed on any Schedule hereto have been made
available to the Purchaser for its review. To the knowledge of the Sellers, each
of the contracts, agreements and commitments listed on Schedule 3.07 is in full
force and effect and is the valid and binding obligation of each party thereto,
except where the failure to be in full force and effect or valid and binding
could not reasonably be expected to have, individually or in the aggregate, a
Sellers Material Adverse Effect, and except as the enforceability of any thereof
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Except as set
forth in the Schedules hereto, none of the Sellers or to the knowledge of the
Sellers any other person is (or, with the giving of notice or the lapse of time
or both, will be) in violation or breach of or default under any of the
contracts, agreements and commitments listed on Schedule 3.07, except for such
violations, breaches or defaults which individually or in the aggregate could
not reasonably be expected to have, a Sellers Material Adverse Effect.
Section 3.08. Title to Assets; Sufficiency. (a) Each Seller has good
title to all of the Transferred Assets other than the Assigned and Assumed
Contracts and the Assignable Licensed Owned Software, free and clear of all
Liens, except for (i) Liens disclosed in Schedule 3.08(a) and (ii) Permitted
Liens. At the Closing, the Purchaser will acquire the Transferred Assets other
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than the Intangible Assets, free and clear of all Liens, except for Liens
disclosed in Schedule 3.08(a) and Permitted Liens and except for any Liens
arising from acts of the Purchaser or any of their respective Affiliates.
(b) Other than insurance licenses and qualifications necessary to
conduct the Business, the Transferred Assets together with the rights of the
Purchaser and their respective Affiliates under the Ancillary Agreements
constitute all the assets, properties and rights of the Sellers necessary for
the Purchaser to conduct the Business immediately following the Closing in all
material respects as currently conducted.
Section 3.09. Litigation; Orders. Except as disclosed in Schedule
3.09, there is no action, suit, proceeding or arbitration (each, an "Action")
pending or, to the knowledge of the Sellers, threatened against or affecting any
of the Sellers that, individually or in the aggregate, could reasonably be
expected to have a Sellers Material Adverse Effect, nor is there any judgment,
decree, injunction or order of any Governmental Entity or arbitrator (each, an
"Order") outstanding against any of such persons having, or which could
reasonably be expected to have, any such effect. The Sellers have delivered or
made available to the Purchaser copies of all pleadings, correspon dence and
other documents relating to each Action and Order listed in Schedule 3.10.
Section 3.10. Compliance with Laws. Except as disclosed in Schedule
3.10 or as otherwise disclosed in writing to the Purchaser, each Seller is in
compliance with all applicable statutes, laws, ordinances, rules, regulations
and orders of any Governmental Entity, and no Seller has received any effective
notice or other communication whether oral or written from any Governmental
Entity, arbitrator or any other person regarding any such violation or failure,
in each case except for such noncompliance which, individually or in the
aggregate, could not reasonably be expected to have a Sellers Material Adverse
Effect.
Section 3.11. Employee Matters. (a) Except as set forth in Schedule
3.11, neither RISCORP nor any other person or entity that together with RISCORP
is treated as a single employer under Section 414(b), (c), (m) or (o) of the
Code (each a "Commonly Controlled Entity") maintains, sponsors or contributes
to, or has, or in the future may have, any liability for any employee benefit
plan (as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or any other plan, arrangement or policy (written
or oral) relating to stock options, stock purchases, compensation, deferred
compensation, fringe benefits for any current or former employee, director,
agent or independent contractor of RISCORP, its subsidiaries or related
entities, to which, or for which, RISCORP or any of its subsidiaries or related
entities sponsors, contributes or has any liability ("Benefit Plans"). Copies of
all
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documents, financial statements, summaries, reports, filings and correspondence
to participants related to each Benefit Plan have been made available to
Purchaser.
(b) All Benefit Plans have been maintained and operated in all material
respects in accordance with their terms and provisions and with all applicable
laws and regulations.
(c) All contributions for benefits accrued for the period though the
date hereof have been made for each Benefit Plan except as set forth in Schedule
3.11.
(d) None of the Benefit Plans is subject to Title IV of ERISA or
subject to the funding standards of Section 412 of the Code.
(e) Neither RISCORP or any Commonly Controlled Entity contributes to or
has contributed to a multiemployer plan (as defined in Section 4001(a)(3) of
ERISA.
(f) Except as set forth in Schedule 3.11, the transactions contemplated
by this Agreement will not result in any acceleration of any funding, vesting or
benefits under any of the Benefit Plans.
(g) Except as required pursuant to Section 4980B of the Code, none of
the Benefits Plans provides benefits to former employees and neither RISCORP nor
any Commonly Controlled Entity does, or has any obligation to do, so.
Section 3.12. Brokers. No broker, investment banker, financial advisor
or other person, other than Smith Barney Inc. and Alex Brown & Sons,
Incorporated, the fees and expenses of which will be paid by the Sellers, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Sellers.
Section 3.13. Reinsurance Contracts. Except as noted on Schedule 3.13,
to the knowledge of the Sellers no party to any contract for reinsurance with
any of the Sellers is in default in any material respect as to any provision
thereof.
Section 3.14. Disputed Claims. Schedule 3.14 sets forth a complete and
accurate list of all claims where payment is in dispute pursuant to any
Insurance Contract that were unpaid as of _______________, 1997, where the
amount claimed exceeds $100,000, or, where the aggregate amount of such payment
is not determinable and there is a specific reserve established with respect to
such claim, the amount of such reserve exceeds $100,000.
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Section 3.15. Computer Software. (a) Schedule 3.15 hereto contains a
true and complete listing of all computer software programs owned by Seller
and/or used in the conduct of the Business. Schedule 3.15 hereto also sets forth
whether each such computer software program is (i) owned by a Seller (the "Owned
Software") or (ii) licensed by Seller from a third Party (the "Licensed
Software").
(b) On the Closing Date, Sellers will sell, convey, assign, transfer,
and deliver to Purchaser, its successors, legal representatives and assigns, all
right, title, and interest throughout the world in perpetuity in and to the
Owned Software and Code (as hereinafter defined) including, but not limited to,
the sole and exclusive rights to all copyrights, patent rights, copyright
registrations, copyright applications, patents and patent applications, rights
to reproduce, display, use, modify and make derivative works (as such term is
defined in the U.S. Copyright Act, 15 U.S.C. ss.3701 et seq.) Sellers agree to
execute any and all documents necessary to perfect Purchaser's rights in and to
the Owned Software and Code. Upon the Closing Date, Sellers shall deliver to
Purchaser all copies of the Owned Software and Code.
(c) Sellers hereby grant to Purchaser an exclusive license to use,
reproduce, modify and create derivative works based on the Owned Software and
Code and shall promptly enter into a license agreement therefor ("Owned Software
License"). The term of the Owned Software License shall commence on the date of
this Agreement and shall terminate on the earlier of the Closing Date or the
termination of this Agreement. Sellers shall immediately deliver to Purchaser
copies of all computer programming code, database architecture, table attribute
definitions and documentation, including all source code and object code for the
Owned Software as well as all other programs, modifications, and derivative
works developed prior to the Closing Date, including translations, compilations,
partial copies, and up-dates and all related documentation (collectively, the
"Code"), but shall retain until the Closing Date sufficient copies thereof for
operation of their businesses.
(d) On the Closing Date, the Purchaser will have, pursuant to an
assignment of the relevant Seller's rights to the Licensed Software and subject
to the terms and conditions of the assigned licenses to the Licensed Software,
the right to use the Licensed Software in the same manner as used by the
relevant Seller prior to the Closing Date and free and clear of any royalty or
other similar payment obligations or Lien, other than maintenance fees. If a
vendor refuses to assign, license or sub-license any Licensed Software to the
Purchaser, the Sellers shall assist the Purchaser in attempting to locate
suitable substitute software.
(e) Sellers represent and warrant that they are and will as of the
Closing Date be the authors and sole proprietors of all
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rights in and to the Owned Software and Code and that they have the ability to
sell, convey, assign, transfer and deliver all such rights to Purchaser. Sellers
represent and warrant that they will be the sole authors and sole proprietors of
all rights in and to all modifications of or derivative works based on the Owned
Software and created pursuant hereto and that such modifications and derivative
works will not violate or infringe any patent, copyright, trade secrets, or any
other proprietary rights of any other person. Sellers further represent and
warrant that Sellers are not in conflict with or violation or infringement of,
nor have such Sellers received any notice of any such conflict with, or
violation or infringement of, any patent, copyright, trade secret rights, or any
other proprietary right of any other Person with respect to any Owned Software
or Licensed Software. In the event that the Owned Software or Licensed Software
is or becomes the subject of a claimed or alleged infringement of another
Person's patent, copyright, trade secret rights or any other proprietary right
on or prior to the Closing Date, then the relevant Seller at its option and
cost, will either (i) defend the Purchaser against such infringement claim, (ii)
secure a license to such person's software for the benefit of the Purchaser,
(iii) modify the software so as to make it non-infringing, or (iv) secure a
license to reasonably comparable substitute software for the Purchaser.
At Closing, Purchaser shall grant to Sellers a royalty-free,
non-transferable license to use such of the Owned Software and Code as Sellers
may reasonably need in order to conduct their remaining businesses and
operations after the Closing, including, without limitation, such Owned Software
and Code as may be necessary for Sellers to prepare the Proposed Business
Balance Sheet, to file tax returns, to defend the Excluded Litigation, and
similar matters.
Section 3.15A. Database. (a) Upon the Closing Date, Sellers shall sell,
convey, assign, transfer and deliver to Purchaser full right, title and interest
(free and clear of any liens, limitations or restrictions whatsoever) to the
records, data, files, input materials, reports, forms and other data disclosed
on Schedule 3.15A (collectively, the "Database"). The Database will therefore be
the exclusive property of Purchaser and Sellers will no longer possess any
interest, title, lien or right to the Database except as provided in this
Agreement. Sellers agree that upon the Closing Date, Sellers will deliver to
Purchaser all copies of the Database (including all updates thereto) as well as
all records, lists, schedules and other documents relating to the Database and
the Database License (defined herein).
(b) Sellers hereby grant to Purchaser an exclusive license to use and
update the Database and will promptly enter into a license agreement for the
Database (the "Database License"). The Database License will terminate at the
earlier of the Closing Date or the termination of the Purchase Agreement.
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(c) Sellers agree to maintain and update the Database and to input any
and all relevant transactions into the Database.
(d) Sellers further agree that, upon request by Purchaser from time to
time, Sellers will furnish, free of charge, to Purchaser the Database and any
and all updates thereto in whatever format Purchaser may desire.
(e) Sellers represent and warrant that they are and will as of the
Closing Date be the authors and sole proprietors of all rights in and to the
Database and that they have the ability to license, sell, convey, assign,
transfer and deliver all such rights to Purchaser. Sellers represent and warrant
that they will be the sole authors and sole proprietors of all rights in and to
all modifications of or derivative works based on the Database and created
pursuant hereto and that such modifications and derivative works will not
violate or infringe any patent, copyright, trade secrets, or any other
proprietary right of any other person. Sellers further represent and warrant
that Sellers are not in conflict with or violation or infringement of, nor have
such Sellers received any notice of any such conflict with, or violation or
infringement of, any patent, copyright, trade secret rights, or any other
proprietary right of any other Person with respect to the Database. In the event
that the Database is or becomes the subject of a claimed or alleged infringement
of another Person's patent, copyright, trade secret rights or any other
proprietary right on or prior to the Closing Date, then the relevant Seller at
its option and cost, will either (i) defend the Purchaser against such
infringement claim, (ii) secure a license to such Person's database for the
benefit of the Purchaser, or (iii) modify the database so as to make it
non-infringing.
At Closing, Purchaser shall grant to Sellers a royalty-free,
non-transferable license to use such of the Database as Sellers may reasonably
need in order to conduct their remaining businesses and operations after the
Closing, including, without limitation, such portions of the Database as may be
necessary for Sellers to prepare the Proposed Business Balance Sheet, to file
tax returns, to defend the Excluded Litigation, and similar matters.
Section 3.16. Environmental Matters. Except for any violation which,
individually or in the aggregate, could not reasonably be expected to have a
Sellers Material Adverse Effect, the Sellers are not in violation of any laws,
rules or regulations relating to pollution or protection of the environment,
including regulations relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes into the environment (including, without
limitation, ambient air, surface water, groundwater, or land), or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of
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pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
Section 3.17. Taxes. (a) Except for such matters that, individually or
in the aggregate, will not have a Sellers' Material Adverse Effect or for such
matters that have been disclosed in Schedule 3.17: (i) each of the Sellers (x)
has prepared in good faith and duly and timely filed (taking into account any
applicable extensions) all Tax Returns (as defined below) that it was required
to file (whether separately or on a combined or consolidated basis) and all such
Tax Returns are complete and accurate in all material respects; (y) has timely
paid in full all Taxes (as defined below) it was or is required to pay and duly
and timely withheld and paid over to the appropriate recipient all Taxes that it
was or is obligated to withhold from amounts paid or owing to any employee,
creditor or third party; and (z) has not waived or agreed to waive any statute
of limitations with respect to Taxes or agreed to any extension of time with
respect to the assessment or collection of any Tax (unless such waiver or
extension is not currently effective); (ii) no audits, examinations,
investigations, assessments or proposed assessments of deficiencies, refund
claims or other proceedings relating to the Taxes of any of the Sellers is
pending or, to the knowledge of any of the executive officers of any of the
Sellers, threatened; (iii) there are not, to the knowledge of the executive
officers of any of the Sellers, unresolved actual claims concerning any
Sellers's Tax liability; (iv) all Taxes due with respect to completed and
settled examinations or concluded litigation relating to any of the Sellers have
been timely paid in full; (v) each of the Sellers has made available to the
other party true, correct and complete copies of all United States federal
income Tax Returns (including all consolidated Tax Returns) filed with respect
to the taxable periods ending on or after December 31, 1992, together with true,
correct and complete copies of any audit or other examination reports and any
notices or proposed notices of deficiency relating to such Tax Returns; (vi)
none of the Sellers has any liability with respect to accrued but unpaid Taxes
(whether or not assessed or shown as due on any Tax Return) in excess of the
reserves therefor reflected in the financial statements included in the most
recently filed SEC Documents (as adjusted for any time elapsed since the date of
such SEC Documents in accordance with past customary practice); (vii) no liens
or other security interests have been imposed on any of the assets of any Seller
in connection with any failure (or alleged failure) to pay any Tax; (viii) none
of the Sellers is a party to any Tax allocation or sharing agreement, is or has
been a member of an affiliated group filing a consolidated or combined Tax
Return (other than a group of which it or one of the Subsidiaries of RISCORP is
or was the common parent) or otherwise has any liability for Taxes other than
its Taxes or Taxes of one of its Subsidiaries; (ix) none of the Sellers has
filed a consent under Section 341(f) of the Code, or has made or is a party to
any agreement under which it is or may become obligated to make any payments
that will be
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nondeductible under Section 280G of the Code (assuming it cannot be established
that any such payments are "reasonable compensation" within the meaning of
Section 280G(B)(4) of the Code); (x) each of the Sellers has complied (and until
the Closing Date will comply) in all material respects with the provisions of
the Code relating to the payment and withholding of Taxes, including without
limitation the withholding and reporting requirements under Sections 1441
through 1464, 3401 through 3406, and 6041 and 6049 of the Code, as well as
similar provisions under any other laws; (xi) the statute of limitations for the
assessment of all Taxes has expired for all applicable Tax Returns of each of
the Sellers for taxable years ending on or before the date three years before
the date of this Agreement; (xii) no power of attorney currently in force has
been granted by any of the Sellers concerning any Tax matter; (xiii) no property
of any of the Sellers is tax-exempt use property within the meaning of Section
168 of the Code; (xiv) none of the Sellers is required to include in income any
adjustment pursuant to Section 481(a) of the Code by reason of a voluntary
change in accounting method initiated by it, and to the best of the knowledge of
its executive officers, the IRS has not proposed any such adjustment or change
in accounting method; (xv) each of the Sellers has or had substantial authority
(within the meaning of Section 6661 of the Code for Tax Returns filed on or
before December 31, 1990, and within the meaning of Section 6662 of the Code for
Tax Returns filed after December 31, 1990) for all transactions that could give
rise to an understatement of federal income tax (within the meaning of Section
6661 of the Code, for Tax Returns filed on or before December 31, 1990, and
within the meaning of Section 6662 of the Code, for Tax Returns filed after
December 31, 1990); (xvi) as of December 31, 1995, each of the Sellers has net
operating loss carryovers available to offset future income as disclosed in
Schedule 3.1(h); (xvii) Schedule 3.1(h) discloses the amount of and year of
expiration of each company's net operating loss carryovers; (xviii) each of the
Sellers has tax credit carryovers available to offset future tax liability as
disclosed in Schedule 3.1(h); (xix) Schedule 3.1(h) discloses the amount and
year of expiration of each company's tax credit carryovers; (xx) no election
under Section 338 of the Code (or any predecessor provision) has been made by or
with respect to each of the Sellers or any of their respective assets or
properties; (xxi) no indebtedness of any of the Sellers is "corporate
acquisition indebtedness" within the meaning of Section 279(b) of the Code; and
(xxii) none of the Sellers has engaged in any intercompany transactions within
the meaning of Treasury Regulations Sec. 1.1502-13 for which any income or gain
will remain unrecognized as of the close of the last taxable year prior to the
Closing Date.
(b) As used in this Agreement, (i) the term "Tax" (including, with
correlative meaning, the terms "Taxes" and "Taxable") includes all federal,
state, local and foreign income, profits, franchise, gross receipts,
environmental, customs duty, capital stock, severances, premium, stamp, payroll,
sales,
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employment, unemployment, disability, use, property, withholding, excise,
production, value added, occupancy and other taxes, duties or assessments of any
nature whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts and any interest in respect of such penalties and
additions, and (ii) the term "Tax Return" includes all returns and reports
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be supplied to a Tax authority relating to
Taxes.
Section 3.18. Condition of Tangible Assets. All buildings, structures,
facilities, equipment and other material items of tangible property and assets
which are included in the Transferred Assets are in good operating condition and
repair, subject only to normal wear and maintenance, are usable in the regular
and ordinary course of business and conform to all applicable laws, ordinances,
codes, rules and regulations, and authorizations relating to their construction,
use and operation. No person other than Seller owns any equipment or other
tangible assets or properties situated on the premises of Sellers or necessary
to the operation of the Business, except for leased items disclosed on Schedule
3.18.
Section 3.19. Intellectual Property, Computer Software and Database.
(a) The Sellers own or possess sufficient legal rights to all the Intellectual
Property, Owned Software, Licensed Software, Database and other related
proprietary business information as are necessary to conduct the Business as
currently conducted, except where the failure to own or possess such legal
rights could not, individually or in the aggregate, reasonably be expected to
have a Sellers Material Adverse Effect.
(b) None of the Sellers is using any confidential information, patents,
copyrights, trademarks, service marks, trade names, trade secrets, licenses,
computer software, computer software databases and other proprietary rights and
processes of any other person without such persons permission.
(c) None of the Sellers has violated, or has received any written or
oral communications alleging that any such Seller has violated or, by conducting
the Business, would violate, any patents, copyrights, trademarks, service marks,
trade names, trade secrets or other proprietary rights of any other person. None
of the Sellers has knowledge (i) that any such proprietary right which might be
so violated has been applied for by another, or (ii) that any of the
Intellectual Property, Owned Software, Licensed Software or Database has been
legally declared invalid or is the subject of a pending or threatened action for
opposition, cancellation or a declaration of invalidity or is infringed by the
activities of another.
(d) The Sellers have the right to use free and clear of any
interference by others all of the Intellectual Property, Owned Software,
Licensed Software and Database.
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(e) Except as provided in this Agreement and licenses, authorizations,
and permissions granted by a Seller to any other Seller, none of the Sellers has
granted a license or authorization or otherwise permitted any person to use,
reproduce, display or distribute any of the Intellectual Property, Owned
Software, Licensed Software or Database.
Section 3.20. Agents and Brokers. Schedule 3.20 is a true, complete and
accurate list of the agents and brokers which have generated Business that is
currently in-force with the Sellers.
Section 3.21. Solvency. After giving effect to the transactions
contemplated by this Agreement, the Sellers, individually and on a consolidated
basis, will be solvent, able to pay their debts as they mature, have capital
sufficient to carry on their businesses and all businesses in which they are
about to engage, and:
(i) the assets of the Sellers, individually and on a consolidated
basis, at a fair evaluation, exceed the total liabilities
(including contingent, subordinated, unmatured and
unliquidated liabilities other than any such liabilities
arising pursuant to Article IX of this Agreement) of the
Sellers;
(ii) current projections which are based on underlying assumptions
which provide a reasonable basis for the projections and which
reflect the Sellers' judgment based on present circumstances,
the most likely set of conditions and the Sellers most likely
course of action for the period projected, demonstrate that
the Sellers, individually and on a consolidated basis, will
have sufficient cash flow to enable them to pay their debts as
they mature or the Sellers are reasonably satisfied that they
will be able to refinance such debt at or prior to maturity on
commercial reasonable terms; and
(iii) the Sellers, individually and on a consolidated basis, do not
have unreasonably small capital base with which to engage in
their anticipated businesses.
Section 3.22. Properties. Except as disclosed on Schedule 3.22:
(a) The Sellers are the sole owners of, and have good and marketable
fee simple title to, the real property listed on Schedule 3.22 (collectively,
the "Property"), free and clear of all liens, encumbrances, claims, demands,
easements, covenants, conditions, restrictions and encroachments of any kind or
nature.
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Sellers have not entered into any agreement to lease, sell, mortgage or
otherwise encumber or dispose of, directly or indirectly, its interest in the
Property or any part thereof, except for this Agreement.
(b) Any and all improvements constructed on the Property (the
"Improvements") were constructed in a good and workmanlike manner, in conformity
with all rules, regulations, laws and ordinances applicable at the time of
construction. The Sellers have obtained and paid for all permits and
certificates required under any federal, state or local law, ordinance, rule or
regulation or by any governmental or quasi-governmental agency, and all of the
same are in good standing.
(c) The Improvements, including without limitation the water, sewer,
heating, electrical, plumbing, sprinkler, air conditioning and other mechanical
and electrical systems and any personal property used in connection therewith,
are in good condition, repair and working order and the roofs, walls and
foundations of the Improvements are free from defects and leaks.
(d) The schedule of insurance policies furnished by the Sellers to the
Purchaser contains a true and complete list and description of all insurance
policies owned by or on behalf of Sellers with respect to the Property or any
part thereof. Such policies are in full force and effect. The Sellers are
current on all premium payments thereunder and has satisfied all policy
conditions precedent thereto. No notice has been received by the Sellers from
any insurer with respect to any defects or inadequacies of all or any part of
the Property or the use or operation thereof.
(e) The Sellers have not received from any governmental authority
notice of any violation of any zoning, building, fire or health code or any
other statute, ordinance, rule or regulation applicable (or alleged to be
applicable) to the Property, or any part thereof, that will not have been
corrected prior to the Closing Date solely at the Sellers' expense.
(f) Without limiting any other warranty or representation of any
Seller:
(i) the existing use and occupation of the Property do not
violate applicable zoning laws;
(ii) there is no plan, study or effort by any governmental
authority or agency which in any way affects or would affect the
present use or zoning of the Property; and there is no existing,
proposed or contemplated plan to widen, modify or realign any street or
highway or any existing, proposed or contemplated eminent domain
proceeding that would adversely affect the Property in any way
whatsoever;
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(iii) all laws, ordinances, rules and regulations of any
government, or any agency, body or subdivision thereof, bearing on the
construction, maintenance, repair or operation of the Property have
been complied with by Sellers at their sole cost; and
(iv) the Property is not located in any area designated by
any governmental authority or agency as being a flood prone or flood
risk area (whether pursuant to the Flood Disaster Act of 1973 as
amended, or otherwise), and requirements of the National Flood
Insurance Program are not applicable to the Property.
(g) None of the Sellers is in default in respect of any of its
obligations or liabilities pertaining to the Property, or any part thereof, and
there is not any state of facts or circumstances or condition or event which,
after notice or lapse of time, or both, would constitute or result in any such
default.
(h) The leases disclosed in Schedule 3.22 (collectively, the "Leases")
comprise all existing Lease. The Purchaser has been provided with exact copies
of the originals of the Leases, as executed and delivered by all of the parties
thereto. Each tenant under the Leases is a bona fide tenant in possession or has
a right to possession of the premises demised thereunder. No default exists or
is claimed to exist on the part of the tenant under any of the Leases and no
event or condition exists which, with the giving of notice, passage of time or
both could constitute such a default.
(i) The Property, and each part thereof, has been duly, correctly and
fully valued and assessed for tax purposes (whether for real estate, personal
property or otherwise) and taxed in accordance with the applicable statutes,
laws, regulations, codes, rules and ordinances. With respect to the Property, or
any part thereof, there are no unpaid taxes, fees or assessments of any kind or
nature whatsoever that are presently due and payable.
(j) There is no gasoline, petroleum products, explosives, radioactive
materials, hazardous materials, hazardous wastes, hazardous or toxic substances,
polychlorinated biphenyl or related or similar materials, asbestos or any
material containing asbestos, or any other substance or material as may be
defined as a hazardous or toxic substance by any environmental laws, ordinances,
rules or regulations of any governmental authority, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the
Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801, et
seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C.
Sections 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C.
Sections 1251 et seq.), the Clean Air Act (42 U.S.C. Sections 7401 et seq.) and
in the regulations adopted
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and publications promulgated pursuant thereto (collectively, "Hazardous
Materials") at the Property, and the Property has never been used to generate,
manufacture, refine, transport, treat, store, handle, dispose, transfer,
produce, process or in any manner deal with Hazardous Materials.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Sellers that the
following statements are true and correct as of the date hereof, and will be
true and correct as of the Closing Date or such other time as may be specified
in such statements.
Section 4.01. Organization, Standing and Authority. The Purchaser is
duly organized, validly existing and in good standing under the laws of the
state of California and has the requisite corporate power and authority to carry
on the operations of its business as they are now being conducted.
Section 4.02. Authorization. The Purchaser has the requisite corporate
power and authority to execute, deliver and perform its obligations under this
Agreement or under each of the Ancillary Agreements to be executed by it, as the
case may be. The execution and delivery by the Purchaser of this Agreement and
the execution and delivery by the Purchaser, of the Ancillary Agreements to be
executed by it, and the performance by the Purchaser of its obligations
hereunder and thereunder, have been duly authorized by all necessary corporate
action on the part of the Purchaser and its Shareholders. This Agreement has
been duly executed and delivered by the Purchaser and, subject to the due
execution and delivery hereof by the Sellers, this Agreement is a valid and
binding obligation of the Purchaser, enforceable against the Purchaser in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally and by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law). As of the Closing Date, each
Ancillary Agreement executed and delivered by the Purchaser will have been duly
executed and delivered by the Purchaser and, subject to the due execution and
delivery of such agreements by the Sellers, each Ancillary Agreement executed by
the Purchaser is a valid and binding obligation of the Purchaser enforceable
against the Purchaser in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
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Section 4.03. No Conflict or Violation, etc. Except as disclosed in
Schedule 4.03, the execution and delivery by the Purchaser of this Agreement and
the Ancillary Agreements to which it is a party do not, and the consummation by
the Purchaser of the transactions contemplated by this Agreement and of such
Ancillary Agreements and compliance with the provisions hereof and thereof will
not, (i) conflict with any of the provisions of the Certificate of Incorporation
or By-laws of the Purchaser, (ii) subject to the matters referred to in the next
sentence, conflict with, result in a breach of or default (with or without
notice or lapse of time, or both) under, give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a benefit under,
require the consent of any person under, or result in the creation of any Lien
on any property or asset of the Purchaser under, any indenture or other
agreement, permit, franchise, license or other instrument or undertaking to
which it is a party or by which it or any of its assets is bound or affected, or
(iii) subject to the matters referred to in the next sentence, contravene any
statute, law, ordinance, rule, regulation, order, judgment, injunction, decree,
determination or award applicable to the Purchaser or any of its subsidiaries or
any of their respective properties or assets, which, in the case of clauses (ii)
and (iii) above, singly or in the aggregate, could not reasonably be expected to
have a the Purchaser Material Adverse Effect. No consent, approval or
authorization of, or declaration or filing with, or notice to, any Governmental
Entity, is required to be obtained or made by or with respect to the Purchaser
or any of its subsidiaries in connection with the execution and delivery of this
Agreement by the Purchaser or the consummation by the Purchaser of the
transactions contemplated hereby, except for (i) the filing of premerger
notification and report forms under the HSR Act, (ii) the approvals, filings or
notices required under the insurance laws of the jurisdictions set forth in
Schedule 4.03, (iii) such other consents, approvals, authorizations,
declarations, filings or notices as are set forth in Schedule 4.03 and (iv) such
other consents, approvals, authorizations, declarations, filings or notices the
failure to obtain or make which, in the aggregate, could not reasonably be
expected to have a the Purchaser Material Adverse Effect.
Section 4.04. Brokers. No broker, investment banker, financial advisor
or other person, other than Credit Suisse First Boston Corporation, the fees and
expenses of which will be paid by the Purchaser, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Purchaser or an Affiliate.
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ARTICLE V
COVENANTS
Section 5.01. Conduct of Business. (a) Except as contemplated by this
Agreement, during the period from the date of this Agreement to the Closing
Date, the Sellers shall carry on the Business only in the ordinary course of
business consistent with past practice and, to the extent consistent therewith,
use its reasonable best efforts to preserve intact the current business
organization of the Business, keep available the services of the employees
directly involved principally in the Business and preserve their relationships
with agents, brokers, intermediaries, insureds, reinsurers and others having
business dealings with the Business. Without limiting the generality of the
foregoing, during the period from the date of this Agreement to the Closing
Date, the Sellers except as contemplated by this Agreement, shall not, without
the prior consent of the Purchaser:
(i) (A) terminate, transfer or otherwise dispose of any
assets which would otherwise be Transferred Assets other than
investment assets in the ordinary course of business consistent with
past practices, or (B) enter into, modify or change in any material
respect any Assigned and Assumed Contract;
(ii) (A) permit or allow any of the Transferred Assets to
become subject to any Liens except Permitted Liens, (B) waive any
claims or rights relating to the Business, except in the ordinary
course of business consistent with past practices and except for
waivers of intercompany obligations or of claims or rights which are
not included in the Transferred Assets, or (C) grant any increase in
the compensation or benefits of, or amend, modify or establish any new
employee benefit plan or plan of compensation for, Transferred
Employees (including any such increase pursuant to any new or existing
bonus, pension, profit-sharing or other plan or commitment);
(iii) make any material change in accounting methods,
principles or practices used in connection with the Business, including
but not limited to any material change with respect to establishment of
reserves for losses and loss adjustment expenses, except insofar as may
be required by a change in generally accepted accounting principles,
tax accounting principles or statutory accounting practices or as may
be required by law or any Governmental Entity;
(iv) enter into or renew any Insurance Contract except in
the ordinary course in accordance with the existing underwriting
policies, procedures and guidelines relating to the Business; or
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(v) enter into any transaction with an Affiliate; or
(vi) declare, set aside or pay any dividends on or make
any other distributions in respect of any of such Seller's capital
stock or purchase, redeem, or otherwise acquire any shares of
outstanding capital stock or any rights, warrants or options to acquire
such shares; or
(vii) incur any indebtedness for borrowed money or
guarantee any such indebtedness of any Person or make any loans or
advances to any other Person or repay the promissory note held by Am
Re-Insurance Company in the amount of $15,000,000;
(viii) invest any funds in any investments other than cash
equivalent assets or in investments having a duration not in excess of
three years (consisting of U.S. government issued or guaranteed
securities, or commercial paper rated A-1 or P-1, except (x) as
otherwise required by law, (y) as required to provide cash (in the
ordinary course of business and consistent with past practice) to meet
its actual or anticipated obligations, (z) publicly traded corporate
bonds that are investment grade by at least two nationally recognized
institutional rating organizations;
(ix) acquire (x) any business or any corporation,
partnership, joint venture, association or other business organization
or division thereof or (y) any assets that are material, individually
or in the aggregate, to the Business, except purchases of investment
assets in the ordinary course of business as provided in clause (viii);
(x) without first consulting with Purchaser, pay,
discharge, settle or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted, unasserted, contingent or
otherwise) other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practices, of claims,
liabilities or obligations under Insurance Contracts;
(xi) make or agree to make any new capital expenditures in
excess of $100,000 in the aggregate;
(xii) without first consulting with Purchaser, settle or
comprise any litigation if the settlement thereof involves payment of
in excess of $100,000 (other than undisputed claims for contractual
benefits under any Insurance Contract);
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(xiii) terminate the employment of any employee or employees
that is/are material, individually or in the aggregate, to operation of
the Business; or
(xiv) commit or agree to take any of the foregoing actions.
Section 5.02. RISCORP Shareholders Meeting. As soon as practicable
following the date of this Agreement, RISCORP will duly call, give notice of,
convene and hold a meeting of its shareholders (the "RISCORP Shareholders
Meeting") for the purpose, among other things, of obtaining approval of and
adoption of this Agreement and the transactions contemplated hereby by not less
than (i) a majority of the outstanding shares of Class A Common Stock and Class
B Common Stock, voting as a class entitled to vote thereon and (ii) a majority
of the outstanding shares of Class A Common Stock entitled to vote thereon (the
"RISCORP Shareholder Approval"). Subject to Section 5.04 hereof, RISCORP will,
through its Board of Directors, recommend to its shareholders the approval and
adoption of this Agreement and the transactions contemplated hereby (the "Vote
Items") and will refrain from taking, and will cause all its representatives not
to take, any action inconsistent with such favorable recommendation. Without
limiting the generality of the foregoing, (x) RISCORP agrees that, subject to
its right to terminate this Agreement pursuant to Section 5.04, its obligations
pursuant to the first sentence of this Section 5.02 shall not be affected by (i)
the commencement, public proposal, public disclosure or communication to RISCORP
of any Acquisition Proposal (as defined in Section 5.03, or (ii) the withdrawal
or modification by the Board of Directors of RISCORP if its approval or
recommendation of this Agreement or the transactions contemplated hereby.
Section 5.03. Acquisition Proposals. (a) RISCORP shall not, nor shall
it permit any of its subsidiaries to, nor shall it authorize or permit any
officer, director or employee of, or any investment banker, attorney or other
advisor, representative or agent of, RISCORP or any of its subsidiaries to,
directly or indirectly, (i) solicit, initiate or encourage the submission of any
Acquisition Proposal (as hereinafter defined) or (ii) enter into any agreement
with respect to, participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, or take any other action
to facilitate the making of any proposal or offer that constitutes, or may
reasonably be expected to lead to, any Acquisition Proposal; provided, however,
that, at any time prior to the RISCORP Shareholder Approval, RISCORP may,
following the receipt of an unsolicited Acquisition Proposal, if the Board of
Directors of RISCORP determines in good faith, based on the written advice of
outside counsel, that it is necessary to do so in order to comply with its
fiduciary duties to shareholders under applicable law, participate in
negotiations regarding such Acquisition Proposal or furnish information
regarding RISCORP,
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the Sellers or the Business, pursuant to an appropriate confidentiality
agreement, to the person making such Acquisition Proposal. Notwithstanding
anything in this Agreement to the contrary, RISCORP shall promptly advise the
Purchaser orally and in writing of the receipt by it (or any of the other
persons referred to above) after the date hereof of any Acquisition Proposal.
Such notice shall identify the offeror and the terms and conditions of the
Acquisition Proposal, and thereafter RISCORP shall keep the Purchaser fully
informed of the status and details of such Acquisition Proposal. Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth in the first sentence of this Section 5.03 by any officer, director or
employee of RISCORP or any of its subsidiaries or any investment banker,
attorney or other advisor, representative or agent of RISCORP or any of its
subsidiaries, whether or not such person is purporting to act on behalf of
RISCORP or any of its subsidiaries or otherwise, shall be deemed to be a breach
of this Section 5.03 by RISCORP. For purposes of this Agreement, "Acquisition
Proposal" means any proposal or offer for a merger, consolidation or other
business combination involving RISCORP or any subsidiary or any proposal or
offer to acquire or cause to be acquired in any manner, directly or indirectly,
all or substantially all of the business, assets or capital stock of RISCORP or
any subsidiary, other than the transactions contemplated by this Agreement.
(b) The Sellers shall not enter into any agreement with any party in
respect of any Acquisition Proposal unless such other party shall have agreed to
indemnify fully the Purchaser (and its Affiliates) on terms reasonably
acceptable to the Purchaser for any and all liabilities arising pursuant to the
cut-through agreements contemplated by Section 5.16.
Section 5.04. Fiduciary Duties. The Board of Directors of RISCORP shall
not (i) withdraw or modify, in a manner adverse to the Purchaser, the approval
or recommendation by such Board of Directors of the Vote Items, (ii) approve or
recommend any Acquisition Proposal or (iii) cause RISCORP or any Seller to enter
into any agreement with respect to any Acquisition Proposal. Notwithstanding the
foregoing, if RISCORP receives an unsolicited Acquisition Proposal and the Board
of Directors of RISCORP determines in good faith, based on the advice of outside
counsel, that it is necessary to do so in order to comply with its fiduciary
duties to shareholders under applicable law, prior to the RISCORP Shareholder
Approval the Board of Directors of RISCORP may (w) withdraw or modify its
approval or recommendation of the Vote Items, (x) approve or recommend such
Acquisition Proposal, (y) cause RISCORP to enter into an agreement with respect
to such Acquisition Proposal or (2) terminate this Agreement pursuant to this
Section. In the event the Board of Directors of RISCORP takes any action
described in clause (y) or (z) of the preceding sentence or the Purchaser
exercises its right to terminate this Agreement pursuant to Section 10.01(g)
hereof, RISCORP shall, concurrently with the taking of such
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action or termination pay to the Purchaser the Section 5.05 fee, plus all
expenses of the Purchaser payable pursuant to Section 5.05(a).
Section 5.05. Certain Fees and Expenses.
(a) RISCORP shall pay to the Purchaser upon demand $7.5 million (the
"Section 5.05 Fee"), payable in same-day funds, plus Expenses, as liquidated
damages and not as a penalty, (i) if the Section 5.05 Fee is payable pursuant to
Section 5.04, (ii) this Agreement is terminated pursuant to Section
10.01(a)(vii) or Section 10.01(a)(viii), or (iii) the RISCORP Shareholder
Approval is not obtained at the RISCORP Shareholders Meeting.
(b) For purposes of this Section 5.05, with respect for any person,
"Expenses" shall mean all reasonable out-of-pocket fees and expenses incurred or
paid by or on behalf of such person in connection with the consummation of the
transactions contemplated by this Agreement.
Section 5.06. Non-Solicitation/Non-compete. (a) Each Seller hereby
covenants and agrees that, for a period of three years following the Closing
Date, it will not, without the prior written consent of the Purchaser, directly
or indirectly, solicit for employment or knowingly hire any Transferred Employee
or any employee, agent, broker or distributor of the Business or the Purchaser.
(b) Each Seller agrees that for a period of three years after the
Closing Date, such Seller will not, directly or indirectly, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of, any workers' compensation insurance business in the United States
whether in corporate, proprietorship or partnership form or otherwise as more
than 5% owner in such business. The parties hereto specifically acknowledge and
agree that the remedy at law for any breach of the foregoing will be inadequate
and that the Purchaser, in addition to any other relief available to it, shall
be entitled to temporary and permanent injunctive relief without the necessity
of proving such damage. In the event that the provisions of this Section 5.06
should ever be deemed to exceed the non-competition restrictions provided by
applicable law, then the parties hereto agree that such provisions shall be
reformed to set forth the maximum limitations permitted.
Section 5.07. Access to Information; Confidentiality; Renewal Business.
(a) The Sellers shall afford to the Purchaser and to the officers, employees,
counsel, financial advisors, accountants, actuaries and other representatives of
the Purchaser reasonable access during normal business hours during the period
prior to the Closing Date to all of the (i) Insurance Contracts, Books and
Records and Transferred Assets, including without limitation all of their
records relating to the agents and
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brokers who produced the Business and shall otherwise assist Purchaser and its
Affiliates in determining whether to enter into agreements with any such agents
and brokers; and (ii) personnel involved in the Business and, during such
period, shall furnish as promptly as practicable to the Purchaser such
information concerning the Business as the Purchaser may from time to time
reasonably request. The Purchaser agrees that it will hold, and will cause their
respective Affiliates and each of their respective directors, officers,
employees, partners, counsel, financial advisors, accountants, actuaries and
other representatives and affiliates to hold, any information so obtained in
confidence except as otherwise required by law. After the Closing Date, the
Sellers shall cooperate with Purchaser and its Affiliates as reasonably
requested by them to assist them in writing, in the name of Purchaser or a
Purchaser Affiliate, such renewals of the Business as they shall seek to write.
(b) Purchaser shall afford to the Sellers and to the officers,
employees, counsel, accountants, actuaries and other representatives of the
Sellers reasonable access during business hours after the Closing Date to all of
the Database, the Insurance Contracts, Books and Records and Transferred Assets
and to personnel of Purchaser for the purpose of enabling Sellers to conduct
their remaining businesses and operations after the Closing, including, without
limitation, to prepare the Proposed Business Balance Sheet, to file tax returns,
to defend the Excluded Litigation, and similar matters. Sellers agree that they
will hold, and will cause their respective directors, officers, employees,
counsel, accountants, actuaries and other representatives to hold, any
information so obtained in confidence except as otherwise required by law or to
the extent reasonably necessary.
Section 5.08. Reasonable Best Efforts. Upon the terms and subject to
the conditions and other agreements set forth in this Agreement, each of the
parties agrees to use its reasonable best efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, and to assist and cooperate with
the other parties in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
transactions contemplated by this Agreement.
Section 5.09. Consents, Approvals and Filings. (a) The Sellers and the
Purchaser will make all necessary filings, as soon as practicable, including,
any filing required under state insurance laws in order to facilitate prompt
consummation of the transactions contemplated by this Agreement. In addition,
the Sellers and the Purchaser will each use their reasonable best efforts
(without the payment of money or the commencement of litigation), and will
cooperate fully with each other (i) to comply as promptly as practicable with
all governmental requirements applicable to the transactions contemplated by
this Agreement and (ii) to obtain as promptly as
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practicable all necessary consents, approvals, permits or authorizations of
Governmental Entities and consents or waivers of all third parties necessary or
advisable for the consummation of the transactions contemplated by this
Agreement. Each of the Sellers and the Purchaser shall use its reasonable best
efforts to provide such information and communications to Governmental Entities
as such Governmental Entities may reasonably request.
(b) Without limiting the generality of Section 5.09(a), RISCORP and the
Purchaser will, as promptly as practicable, cooperate to prepare and file with
the SEC a proxy statement in connection with the RISCORP Shareholder Approval
(such proxy statement, together with any amendments thereof or supplements
thereto, in each case in the form of forms mailed to RISCORP's shareholders, is
herein called the "Proxy Statement"). RISCORP will notify the Purchaser promptly
of the receipt of any comments from the SEC or its staff and of any request by
the SEC or its staff for amendments of or supplements to the Proxy Statement or
for additional information, will use its best efforts, in consultation with the
Purchaser, to respond to any comments of the SEC or its staff and will supply
the Purchaser with copies of all correspondence between RISCORP or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement. RISCORP and the Purchaser will use
commercially reasonable efforts to have or cause the Proxy Statement to become
definitive as promptly as practicable following the clearance of the Proxy
Statement by the SEC. RISCORP and the Purchaser will also take any other related
action required to be taken under federal or state securities laws, and RISCORP
will use commercially reasonable efforts to cause the Proxy Statement to be
mailed to shareholders of RISCORP at the earliest practicable date. RISCORP will
not mail any Proxy Statement, or any amendment or supplement thereto, to which
the Purchaser reasonably objects on the grounds that such Proxy Statement, or
amendment or supplement thereto, violates applicable law.
(c) The Sellers and the Purchaser will, as promptly as practicable,
file, or cause to be filed, Notification and Report Forms under the HSR Act with
the Federal Trade Commission (the "FTC") and the Antitrust Division of the
United States Department of Justice (the "Antitrust Division") in connection
with the transactions contemplated by this Agreement, and will use their
respective reasonable best efforts to respond as promptly as practicable to all
inquiries received from the FTC or the Antitrust Division for additional
information or documentation and to cause the waiting periods under the HSR Act
to terminate or expire at the earliest possible date. The Sellers and the
Purchaser will each furnish to the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of necessary filings or submissions to any governmental or
regulatory agency, including any filings necessary under the provisions of the
HSR Act.
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(d) Each of the Sellers Representatives and the Purchaser shall notify
the other party and keep it advised as to the status of all applications to, and
proceedings before, Governmental Entities in connection with the transactions
contemplated by this Agreement.
Section 5.10. Notification.
(a) The Seller's Representative shall notify the Purchaser and the
Purchaser shall notify the Seller's Representative and keep the other advised as
to (i) any litigation or administrative proceeding pending and known to it or,
to its knowledge, threatened which challenges or seeks to restrain or enjoin the
consummation of any of the transactions contemplated by this Agreement, (ii) the
breach of any representation or warranty of the Sellers or the Purchaser, as the
case may be, contained in this Agreement and (iii) any event, condition, result
in change that has been or could reasonably be expected to result in any Sellers
Material Adverse Effect or Purchaser Material Adverse Effect.
(b) Prior to the Closing, Purchaser shall notify Sellers of any
determination by Purchaser that Sellers have or may have breached any of the
Sellers' representation warranties, covenants or agreements contained in this
Agreement (a "Violation Notice"), which Violation Notice may contain Purchaser's
best estimate of the amount of indemnifiable damages, losses, deficiencies,
costs and expenses in respect thereof (a "Loss Estimate"); provided, that in
determining whether a representation or warranty of Sellers has been breached
for purposes of the foregoing determination, such representation or warranty
shall be deemed to exclude any material qualification or exception and any
exception thereto which refers to a Sellers' Material Adverse Effect. The
parties shall cooperate prior to closing in pursuit of cure of the matters
reflected in the Violation Notice and, if such Violation Notice contains a Loss
Estimate, to refine the amount of the Loss Estimate. The Base Escrow Amount
shall be increased by the amount of the Loss Estimate finally determined in good
faith by Purchaser, after reasonably considering the views of Sellers.
Section 5.11. Further Assurances. On and after the Closing Date, the
Sellers and the Purchaser shall take all reasonably appropriate action and
execute any additional documents, instruments or conveyances of any kind which
may be reasonably necessary to carry out any of the provisions of this Agreement
or consummate any of the transactions contemplated by this Agreement.
Section 5.12. Expenses. Except as otherwise specifically provided in
this Agreement, the parties to this Agreement shall bear their respective
expenses incurred in connection with the preparation, execution and performance
of this Agreement and consummation of the transactions contemplated
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hereby, including all fees and expenses of agents, representatives, counsel,
financial advisors, actuaries and accountants.
Section 5.13. Employees and Employee Benefits. (a) At any time after
the date hereof, the Purchaser may make a written offer of employment, effective
as of the Closing Date, to employees of Sellers (the "Business Employees"). The
Business Employees who accept, on or prior to the Closing Date, employment with
the Purchaser, shall be referred to as the "Transferred Employees". The Sellers
shall terminate the employment of all Transferred Employees effective as of the
Closing Date. The Sellers makes no representation as to whether or not any
Business Employee will accept employment with the Purchaser. With respect to the
Transferred Employees, the Sellers shall be responsible for all accrued but not
taken vacation and all accrued salary and wages and for all accrued bonuses, in
each case as of the Closing Date. Nothing in this Agreement shall be construed
as limiting in any way the right of the Purchaser on and after the Closing Date,
to terminate the employment of any Transferred Employee, to change his or her
salary or wages or to modify benefits or other terms and conditions of
employment of Transferred Employees.
(b) With respect to each Transferred Employee:
(i) The Sellers' welfare benefit plans shall be
responsible for welfare benefit claims relating to the Transferred
Employees incurred on or prior to the Closing Date. For this purpose, a
claim is incurred when the medical or other service giving rise to the
claim is performed, except that in the case of death or disability, a
claim is incurred on the date of death or date of disability as the
case may be.
(ii) The Sellers shall be responsible for satisfying
obligations under Section 601 et seq. of ERISA and Section 4980B of the
Code ("COBRA"), to provide continuation coverage to or with respect to
any Business Employee who does not become a Transferred Employee, his
spouse or his dependents and any Transferred Employee, his spouse or
his dependents in accordance with law with respect to any "qualifying
event" occurring on or before the Closing Date.
(iii) Except as otherwise expressly provided in this
Section 5.13, (A) the Purchaser shall be responsible for, and shall
indemnify and hold harmless the Sellers against, any actions, claims or
proceedings brought by or on behalf of any Transferred Employee at any
time with respect to any event occurring or condition arising after the
Closing and (B) the Sellers shall be responsible for, and shall
indemnify and hold harmless the Purchaser against, any actions, claims
or proceedings brought by or on behalf of any Transferred
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Employee at any time with respect to any event occurring or condition
existing prior to the Closing.
(c) The Sellers shall be responsible for all deferred compensation due
to Transferred Employees under the Sellers' deferred compensation plans with
respect to services rendered prior to the Closing Date by any Transferred
Employee.
Section 5.14. Computer Software. Prior to the Closing Date, with
respect to any Licensed Software that requires consents to assignment or
sub-license, at the Purchaser's request, the relevant Seller shall use its best
efforts to obtain from the licensors of the Licensed Software the right for the
Purchaser to operate the Licensed Software. The Sellers shall pay all costs and
expenses associated with obtaining such right from the licensors of the Licensed
Software. The Purchaser shall be entitled to participate fully in any
negotiation with any such licensors. With respect to the Licensed Software for
which the Purchaser obtains licenses pursuant to this Section 5.14, the
Purchaser shall assume responsibility for complying with the terms and
conditions of the licenses governing such software, including responsibility for
the payment of the costs and expenses of all ongoing contractual
responsibilities, including licensing, upgrade and maintenance fees.
Section 5.15. Accounting and Information Systems. (a) RISCORP shall:
(i) take such actions (including the expenditure of money) as the Purchaser
shall reasonably request to upgrade its accounting and information systems
(including outsourcing of information and accounting systems) so that the
Purchaser may comply with its reporting requirements under the Exchange Act and
applicable law, including with respect to historical information regarding the
Business, and in order to eliminate reporting and control weaknesses in its
accounting systems; (ii) use its 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
to complete the audit of its statutory and GAAP financial statements as at and
for the year ended December 31, 1996 and to prepare financial statements
covering subsequent interim periods; and (iii) as requested by the Purchaser,
prepare such historical and pro forma accounting statements for the Business on
a timely basis as may be requested by the Purchaser for purposes of complying
with its reporting requirements under the Exchange Act and applicable law. In
addition, the Sellers agree to use their best efforts to cooperate with
Purchasers to provide Purchasers with such information as Purchaser may
reasonably require to satisfy its reporting obligations under the Exchange Act.
(b) The Purchaser may in its sole discretion make loans to the Sellers
for the purpose of funding up to one-half of the costs of improvements to the
Sellers' information and accounting systems ("System Loans"). Any System Loans
shall be on market terms and conditions to be agreed by the parties. Any System
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Loans outstanding at the time payments are due under Section 2.02 shall reduce
the amount of such payments as set forth in Section 2.02. In the event that this
Purchase Agreement is terminated without Closing, any outstanding System Loans,
together with any accrued and unpaid interest thereon, shall become immediately
due and payable.
Section 5.16. Cut-Through Agreement. The Purchaser shall issue
cut-through endorsements, effective as of the date following the date of this
Agreement, in customary language, on all Florida new and renewal workers'
compensation policies, except retrospectively rated policies, in which case the
prior approval of the Purchase must be obtained. As soon as practicable after
the date hereof, the Purchaser, RIC and RP&C shall enter into an agreement in
respect of such endorsements. Such agreement shall (i) provide for a reasonable
arm's-length premium to be paid by RIC and RP&C to the Purchaser and for an
appropriate assignment of reinsurance to the Purchaser and shall contain such
other customary terms and conditions as shall be reasonably acceptable to the
Purchaser, RIC and RP&C and (ii) be subject to the approval of the Florida
Insurance Department. The Purchaser, RIC and RP&C agree that they shall consult
with expert advisers and the Florida Department of Insurance in order to prepare
an agreement that contains customary terms and conditions and is reasonably
responsive to the interests of all parties. The Purchaser shall be entitled to
participate and consult in the underwriting of the risks covered by such
agreement and the Purchaser, RIC and RP&C shall, as soon as practicable after
the date hereof, negotiate in good faith, execute and deliver an agreement more
fully setting forth the terms of such participation and consultation.
Section 5.17. Use of Name. Within 6 months following the Closing, at
the request of the Purchaser, each of the Sellers shall file an amendment to its
articles of incorporation, and shall take all other actions necessary, to change
its name (for any and all uses, whether internal or external, wherever used and
for any and all purposes whatsoever) to a name that does not include "RISCORP"
or any word or expression similar in whole or in part to "RISCORP", and shall
deliver to the Purchaser a copy of such amendment to the articles of
incorporation effecting such name change, all at the Purchaser's expense.
Section 5.18. Disclosure Schedules. (a) Within ten days following the
date of execution of this Agreement, the Sellers' Representative on behalf of
the Sellers shall deliver to Purchaser schedules prepared in consultation with
the Purchaser and reasonably satisfactory to the parties ("Disclosure
Schedules"), which shall be accompanied by a certificate signed by the chief
executive officer of RISCORP stating that the Disclosure Schedules are being
delivered pursuant to this Section 5.18. The Disclosure Schedules, when so
delivered, shall be deemed to constitute an integral part of this Agreement and
to modify the respective representations, warranties, covenants or
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agreements of the parties hereto contained herein to the extent that such
representations, warranties, covenants or agreements expressly refer to
schedules. Anything to the contrary contained herein or in the Disclosure
Schedules notwithstanding, any and all statements, representations, warranties
or disclosures set forth in the Disclosure Schedules shall be deemed to have
been made on and as of the date hereof.
(b) The parties hereby agree to cooperate in good faith to complete
within 30 days from the date hereof the schedules to the Purchase Agreement
pertaining to Assigned and Assumed Contracts, Included Affiliate Agreements,
Included Employment Contracts, Insurance Contracts and other Transferred Assets
and Other Assumed Liabilities.
ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE PURCHASER
The obligations of the Purchaser under this Agreement are subject to
the satisfaction on or prior to the Closing Date of the following conditions,
any one or more of which may be waived by the Purchaser to the extent permitted
by law:
Section 6.01. Representations and Covenants. (a) The representations
and warranties of the Sellers contained in Sections 3.01, 3.02, 3.03, 3.04, 3.08
and 3.21 of this Agreement shall be true and correct in all material respects on
and as of the Closing Date with the same force and effect as though made on and
as of the Closing Date, except to the extent that any such representation and
warranty is made as of a particular date, in which case such representation and
warranty shall have been true and correct as of such date except to the extent
that any such statement is qualified as to materiality in which case such
statement shall be true and correct in all respects as of the Closing Date or
such other time as may be specified in such statement.
(b) The Sellers shall have performed or complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by each of the Sellers on or prior to the Closing
Date.
(c) On the Closing Date, each of the Sellers shall have delivered to
the Purchaser a certificate of the Sellers, dated as of the Closing Date and
signed by an executive officer of such Sellers, as to the matters set forth in
this Section 6.01.
Section 6.02. No Material Adverse Change. Since the date of this
Agreement, there shall have been no event or condition which individually or in
the aggregate resulted in or
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could reasonably be expected to adversely affect the Sellers' ability to
consummate the transactions contemplated hereby or the Purchaser's ability to
operate the Business after the Closing substantially as it is being operated on
the date hereof.
Section 6.03. Secretary's Certificate. Each of the Sellers shall have
delivered to the Purchaser a certificate of the secretary or assistant secretary
of such Seller, dated as of the Closing Date, as to the resolutions of the Board
of Directors of such Sellers authorizing the execution, delivery and performance
of the agreements to which it is a party, as to the status and signature of each
of its officers who executed and delivered the agreements to which it is a party
and any other document delivered by it in connection with the consummation of
the transactions contemplated by this Agreement, as to its charter and by-laws,
and as to its due organization, existence and good standing.
Section 6.04. Legal Opinion. The Purchaser shall have received a
written opinion from counsel to the Sellers reasonably acceptable to the
Purchaser, dated the Closing Date, in form and substance reasonably satisfactory
to the Purchaser.
Section 6.05. Other Documents. The Purchaser shall have received such
other instruments and certificates as the Purchaser may reasonably request.
Section 6.06. Other Agreements. The Ancillary Agreements and each of
the other agreements and instruments contemplated hereby and thereby to which
any Seller is a party shall have been duly executed and delivered by such Seller
on the Closing Date and each of such agreements and instruments shall be in full
force and effect with respect to the Sellers on the Closing Date.
Section 6.07. Governmental and Regulatory Consents and Approvals. (a)
All filings required to be made prior to the Closing Date with, and all
consents, approvals, permits and authorizations required to be obtained prior to
the Closing Date from, Governmental Entities, including those set forth in
Schedules 3.03 and 4.03 hereto, in connection with the execution and delivery of
this Agreement, the consummation of the transactions contemplated hereby and to
enable Purchaser to conduct the Business in substantially the manner conducted
prior to Closing shall have been made or obtained (as the case may be) and such
consents, approvals, permits and authorizations shall be subject to no
conditions that would materially impair the Purchaser's management of the
Business or the future profitability of the Business.
(b) The waiting period prescribed by the HSR Act shall have expired or
been terminated.
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Section 6.08. Third Party Consents. All consents or waivers of third
parties to the consummation of the transactions contemplated by this Agreement,
including those set forth on Schedule 3.03, shall have been obtained, other than
any consents to assignment on sublicense of Licensed Software and other than
those that, if not obtained, could not reasonably be expected to have a Sellers
Material Adverse Effect or a Purchaser Material Adverse Effect.
Section 6.09. No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order or decree shall be
issued by any Governmental Entity nor shall any other legal restraint or
prohibition preventing, restricting or which is reasonably likely to prevent or
restrict the consummation of any of the transactions contemplated hereby be in
effect.
Section 6.10. RISCORP Shareholder Approval. RISCORP shall have
obtained the RISCORP Shareholder Approval.
Section 6.11. Certain Agreements. The Purchaser shall have received
from such Affiliates of Sellers as Purchaser may designate agreements, in form
and substance reasonably acceptable to Purchaser, pursuant to which each such
Affiliate agrees to restrictions consistent with those to which the Sellers are
subject under Section 5.06.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE SELLERS
The obligations of the Sellers under this Agreement are subject to the
satisfaction on or prior to the Closing Date of the following conditions, any
one or more of which may be waived by the Sellers to the extent permitted by
law:
Section 7.01. Representations and Covenants. (a) The representations
and warranties of the Purchaser contained in this Agreement shall be true and
correct in all material respects on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date, except to the
extent that any such representation and warranty is made as of a particular
date, in which case such representation and warranty shall have been true and
correct as of such date.
(b) The Purchaser shall have performed or complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by the Purchaser on or prior to the Closing Date.
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(c) On the Closing Date, the Purchaser shall have delivered to the
Sellers a certificate of the Purchaser, dated as of the Closing Date and signed
by an executive officer of the Purchaser, as to the matters set forth in this
Section 7.01.
Section 7.02. Secretary's Certificate. The Purchaser shall have
delivered to the Sellers a certificate of the secretary or assistant secretary
of the Purchaser, dated as of the Closing Date, as to the resolutions of the
Board of Directors of the Purchaser authorizing the execution, delivery and
performance of the agreements to which it is a party, as to the status and
signature of each of its officers who executed and delivered the agreements to
which it is a party and any other document delivered by it in connection with
the consummation of the transactions contemplated by this Agreement, as to its
charter and by-laws, and as to its due organization, existence and good
standing.
Section 7.03. Other Agreements. The Ancillary Agreements and each of
the other agreements and instruments contemplated hereby and thereby to which
the Purchaser or any of their respective Affiliates is a party shall have been
duly executed and delivered by the Purchaser on the Closing Date and each of
such agreements and instruments shall be in full force and effect with respect
to the Purchaser on the Closing Date.
Section 7.04. Governmental and Regulatory Consents and Approvals. (a)
All filings required to be made prior to the Closing Date with, and all
consents, approvals, permits and authorizations required to be obtained prior to
the Closing Date from, Governmental Entities, including those set forth in
Schedules 3.03 and 4.03, in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby shall
have been made or obtained (as the case may be).
(b) The waiting period prescribed by the HSR Act shall have expired or
been terminated.
Section 7.05. RISCORP Shareholder Approval. RISCORP shall have obtained
the RISCORP Shareholder Approval.
Section 7.06. No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order or decree shall have
been issued by any Governmental Entity nor shall any other legal restraint or
prohibition preventing, restricting or which is reasonably likely to prevent or
restrict the consummation of any of the transactions contemplated hereby be in
effect.
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ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Section 8.01. Survival of Representations and Warranties. All
representations and warranties contained in this Agreement shall survive the
Closing and shall terminate and expire at the close of business on the second
anniversary of the Closing Date.
ARTICLE IX
INDEMNIFICATION
Section 9.01. General Indemnification Obligation of Sellers. From and
after the Closing, each of the Sellers, jointly and severally, will reimburse,
indemnify and hold harmless the Purchaser and its Affiliates, their respective
successors and assigns and their respective directors, officers, employees,
agents (each an "Indemnified Purchaser Party") against and in respect of:
(a) Any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Purchaser Party that result
from, relate to or arise out of:
(i) any and all liabilities and obligations of Sellers or
their successors and assigns of any nature whatsoever, except for the
Transferred Liabilities; or
(ii) any misrepresentation, breach or warranty or
nonfulfillment of any agreement or covenant on the part of any of the
Sellers under this Agreement or in an Ancillary Agreement, or from any
misrepresentation in or omission from any certificate, schedule,
statement, document or instrument furnished to the Purchaser pursuant
hereto or in connection with the negotiation, execution or performance
of this Agreement; and
(b) Any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses) incident to
any of the foregoing or to the enforcement of this Section 9.01.
In determining whether a representation or warranty hereunder has been
breached and damages suffered as a result, for purposes of this Section 9.01,
such representation or warranty shall be deemed to exclude any materiality
qualification or exception and any exception thereto which refers to a Sellers
Material Adverse Effect.
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Section 9.02. General Indemnification Obligation of Purchaser. From and
after the Closing, the Purchaser will reimburse, indemnify and hold harmless the
Sellers, their successors or assigns and their respective directors, officers,
employees, agents (each an "Indemnified Seller Party") against and in respect
of:
(a) Any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Seller Party that result from,
relate to or arise out of (i) the Transferred Liabilities; or (ii) any
misrepresentation, breach or warranty or nonfulfillment of any agreement or
covenant on the part of any of the Purchaser under this Agreement, or from any
misrepresentation in or omission from any certificate, schedule, statement,
document or instrument furnished to Sellers pursuant hereto or in connection
with the negotiation, execution or performance of this Agreement; and
(b) Any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses) incident to
any of the foregoing or to the enforcement of this Section 9.02.
In determining whether a representation or warranty hereunder has been
breached and damages suffered as a result, for purposes of this Section 9.02,
such representation or warranty shall be deemed to exclude any materiality
qualification or exception and any exception thereto which refers to a Purchaser
Material Adverse Effect.
Section 9.03. Method of Asserting Claims, Etc. (a) In the event that
any claim or demand for which the Sellers would be liable to an Indemnified
Purchaser Party hereunder is asserted against or sought to be collected from an
Indemnified Purchaser Party by a third party, the Indemnified Purchaser Party
shall promptly notify the Sellers Representative of such claim or demand,
specifying the nature of such claim or demand and the amount or the estimated
amount thereof to the extent then feasible (which estimate shall not be
conclusive of the final amount of such claim and demand) (the "Claim Notice").
The Sellers Representative shall have ten days from the personal delivery or
mailing of the Claim Notice (the "Notice Period") to notify the Indemnified
Purchaser Party, (A) whether or not the Sellers dispute their liability to the
Indemnified Purchaser Party hereunder with respect to such claim or demand and
(B) notwithstanding any such dispute, whether or not they desire, at their sole
cost and expense, to defend the Indemnified Purchaser Party against such claims
or demand.
(b) In the event that the Sellers Representative notifies the
Indemnified Purchaser Party within the Notice Period that the Sellers desire to
defend the Indemnified Purchaser Party against such claim or demand then, except
as hereinafter
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provided, the Sellers shall have the right to defend the Indemnified Purchaser
Party by appropriate proceedings, which proceedings shall be promptly settled or
prosecuted by them to a final conclusion in such a manner as to avoid any risk
of Indemnified Purchaser Party becoming subject to liability for any other
matter; provided, however, the Sellers shall not, without the prior written
consent of the Indemnified Purchaser Party, consent to the entry of any judgment
against the Indemnified Purchaser Party or enter into any settlement or
compromise which does not include, as an unconditional term thereof, the giving
of the claimant or plaintiff to the Indemnified Purchaser Party of a release, in
form and substance satisfactory to the Indemnified Purchaser Party, as the case
may be, from all liability in respect of such claim or litigation. If any
Indemnified Purchaser Party desires to participate in, but not control, any such
defense or settlement, it may do so at its sole cost and expense; provided,
however, if the named parties to the action or proceeding include both the
Indemnified Purchaser Party and any Seller and representation of both parties by
the same counsel would be inappropriate under applicable standards of
professional conduct, the expenses of one separate counsel for the Indemnified
Purchaser Party shall be paid by the Sellers.
(i) If the Sellers elect not to defend the Indemnified Purchaser
Party against such claim or demand, whether by not giving the
Indemnified Purchaser Party timely notice as provided above or
otherwise, then the amount of any such claim or demand, or if the same
be defended by the Sellers or by the Indemnified Purchaser Party (but
no Indemnified Purchaser Party shall have any obligation to defend any
such claim or demand), then that portion thereof as to which such
defense is unsuccessful, in each case shall be conclusively deemed to
be a liability of the Sellers hereunder.
(ii) In the event an Indemnified Purchaser Party should have a
claim against any of the Sellers hereunder that does not involve
a claim or demand being asserted against or sought to be collected from
it by a third party, the Indemnified Purchaser Party shall promptly
send a Claim Notice with respect to such claim to the Sellers
Representative. If the Sellers do not notify the Indemnified Purchaser
Party within the Notice Period that it disputes such claim, the amount
of such claim shall be conclusively deemed a liability of the Sellers,
respectively, hereunder.
(c) All claims for indemnification by an Indemnified Seller Party under
this Agreement shall be asserted and resolved under the procedures set forth
above substituting in the appropriate place "Indemnified Seller Party" for
"Indemnified Purchaser Party" and variations thereof and the "Purchaser" for
"Sellers" or "Sellers Representative".
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Section 9.04. Payment. Upon the determination of the liability under
Section 9.03 hereof, the appropriate party shall pay to the other, as the case
may be, within ten days after such determination, the amount of any claim for
indemnification made hereunder. In the event that the indemnified party is not
paid in full for any such claim pursuant to the foregoing provisions promptly
after the other party's obligation to indemnify has been determined in
accordance herewith, it shall have the right, notwithstanding any other rights
that it may have against any other person, firm or corporation, to setoff the
unpaid amount of any such claim against any amounts owed by it under any
agreements entered into pursuant to this Agreement or any of the documents
executed in connection herewith. Upon the payment in full of any claim, either
by setoff or otherwise, the entity making payment shall be subrogated to the
rights of the indemnified party against any person, firm or corporation with
respect to the subject matter of such claim.
Section 9.05. Other Rights and Remedies Not Affected. The
indemnification rights of the parties under this Article IX shall be the
exclusive remedy at law with respect to any claims for money damages arising
from any misrepresentation, breach of warranty or failure to fulfill any
agreement or covenant hereunder on the part of any party hereto (other than by
reason of fraud).
Section 9.06. Limitations on Amount. (a) The Sellers will have no
liability (for indemnification or otherwise) with respect to the matters
described in Section 9.06 until the total of all damages actually paid or
incurred by an Indemnified Purchaser Party with respect to such matters exceeds
$350,000.
(b) Notwithstanding anything to the contrary contained in this
Agreement, neither the Purchaser, on the one hand, nor the Sellers on other
hand, will be liable under any circumstances for indemnification under Section
9.01 or Section 9.02, respectively, in an amount in excess of the Purchase
Price; provided, however, that the foregoing limitation shall not apply to (i)
willful breaches of any covenant or agreement set forth herein, (ii) any
liability attributable to a breach by any Seller of any representation or
warranty in Section 3.08, or (iii) any claims for indemnification pursuant to
Section 9.01(a)(i) or Section 9.02(a)(i).
ARTICLE X
TERMINATION PRIOR TO CLOSING
Section 10.01. Termination. (a) Notwithstanding any other provision
contained herein, this Agreement may be terminated at any time prior to the
Closing Date:
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(i) by mutual written consent of the Sellers, the Purchaser and the
Florida Insurance Department;
(ii) by the Sellers or the Purchaser, upon written notice to the
other party, if the Closing shall not have occurred on or prior to December 31,
1997, unless such failure of consummation shall be due to the failure of the
party seeking such termination to perform or observe in all material respects
the covenants and agreements hereof to be performed or observed by such party;
provided, however, that if despite its diligent efforts RISCORP shall not have
cleared its proxy with the Securities and Exchange Commission on or prior to
such date, such date may be extended by either party up to March 31, 1998;
(iii) by the Sellers or the Purchaser, upon written notice to the
other parties, if a governmental authority of competent jurisdiction shall have
issued an injunction, order or decree enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement, and such
injunction, order or decree shall have become final and non-appealable or if a
governmental authority has otherwise made a final determination that any
required regulatory consent would not be forthcoming; provided, however, that
the party seeking to terminate this Agreement pursuant to this clause has used
all commercially reasonable efforts to remove such injunction, order or decree;
(iv) by RISCORP or the Purchaser, if, upon a vote at a duly held
RISCORP shareholders meeting or any adjournment thereof, the RISCORP Shareholder
Approval shall not have been obtained;
(v) by the Purchaser if the any of the Sellers (i) breaches or fails
in any material respect to perform or comply with any of its material covenants
and agreements contained herein or (ii) breaches any of the representations and
warranties in any material respect referred to in Section 6.01 and such breach
would reasonably be likely to have a Sellers Material Adverse Effect and such
breach has not been remedied within 20 days after receipt of notice thereof from
the Purchaser;
(vi) by the Sellers if the Purchaser (i) breaches or fails in any
material respect to perform or comply with any of its material covenants and
agreements contained herein or (ii) breaches its representations and warranties
in any material respect referred to in Section 6.01 and such breach would
reasonably be likely to have a Purchaser Material Adverse Effect and such breach
has not been remedied within 20 days after receipt of notice thereof from the
Sellers' Representative;
(vii) by the Sellers or the Purchaser, if the Board of Directors
RISCORP shall have exercised any of its rights set forth in Section 5.04 hereof;
or
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(viii) by the Seller or the Purchaser, if the Board of Directors of
RISCORP have failed to receive an opinion of Alex. Brown & Sons, Incorporated to
the effect that the consideration to be received by the Sellers pursuant to this
Agreement is fair to the Sellers from a financial point of view by 5:00 P.M.,
New York City time, on the 30th day after the date of this Agreement.
(b) Any termination pursuant to this Section 10.01 may occur before or
after the RISCORP Shareholder Approval, except that RISCORP shall have no right
to terminate this Agreement pursuant to Sections 5.04 and 10.01(a)(iv) following
the RISCORP Shareholder Approval.
Section 10.02. Effect of Termination. In the event of termination of
this Agreement by either the Purchaser or the Sellers as provided in Section
10.01, this Agreement shall forthwith become void and have no effect, without
any liability or obligation on the part of the Purchaser or the Sellers, other
than Sections 3.12, 4.04, 5.05 and 10.02 and Article XI. Nothing contained in
this Section 10.02 shall relieve any party from any liability resulting from any
wilful and material breach of its representations, warranties, covenants or
agreements set forth in this Agreement.
ARTICLE XI
GENERAL PROVISIONS
Section 11.01. Publicity. Except as may otherwise be required by law or
the rules of applicable stock exchanges, no press release or public announcement
concerning this Agreement or the transactions contemplated hereby shall be made
by either the Purchaser or any Seller without advance approval thereof by the
other party, which shall not be unreasonably withheld. The parties hereto shall
cooperate with each other in making any press release or public announcement.
Section 11.02. Dollar References. All dollar references in this
Agreement are to the currency of the United States.
Section 11.03. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed given if delivered
personally or sent by overnight courier (providing proof of delivery), to the
parties at the following address:
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(i) If to the Purchaser:
Zenith Insurance Company
21255 Califa Street
Woodland Hills, CA 91367-5021
Attention: Stanley R. Zax
With a concurrent copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attention: Alexander M. Dye, Esq.
(ii) If to the Sellers:
RISCORP, Inc.
1390 Main Street
Sarasota, FL 34236
Attention: Walter Riehemann
With a concurrent copy to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309
Attention: J. Vaughan Curtis, Esq.
Any party may, by notice given in accordance with this Section 11.03 to
the other parties, designate another address or person for receipt of notices
hereunder provided that notice of such a change shall be effective upon receipt.
Section 11.04. Entire Agreement. This Agreement (including the
Ancillary Agreements, the other agreements contemplated hereby and thereby, the
Exhibits and the Schedules hereto) contains the entire agreement among the
parties with respect to the subject matter hereof and supersedes all prior
agreements and understandings, written or oral, with respect thereto.
Section 11.05. Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies. This Agreement may be amended, superseded, cancelled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by each of the parties or, in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any right, power or privilege, nor any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege. The rights and remedies herein provided are
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cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
Section 11.06. Governing Law; Choice of Forum. (a) THIS AGREEMENT SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. (b)
EACH PARTY HERETO CONSENTS TO THE NON EXCLUSIVE JURISDICTION OF THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK (THE "CHOSEN COURT")
IN RESPECT OF ANY CLAIM ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE
TRANSACTIONS CONTAINED IN OR CONTEMPLATED BY THIS AGREEMENT AND THE ANCILLARY
AGREEMENTS, WHETHER IN TORT OR CONTRACT OR AT LAW OR IN EQUITY AND SOLELY IN
CONNECTION WITH SUCH CLAIMS, (I) WAIVES ANY OBJECTION TO LAYING VENUE IN ANY
SUCH ACTION OR PROCEEDING IN THE CHOSEN COURT, (II) WAIVES ANY OBJECTION THAT
THE CHOSEN COURT IS AN INCONVENIENT FORUM OR DOES NOT HAVE JURISDICTION OVER ANY
PARTY HERETO AND (III) AGREES THAT SERVICE OF PROCESS UPON SUCH PARTY IN ANY
SUCH ACTION OR PROCEEDING SHALL BE EFFECTIVE IF NOTICE IS GIVEN IN ACCORDANCE
WITH SECTION 11.03 OF THIS AGREEMENT.
Section 11.07. Binding Effect; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors, permitted assigns and legal representatives. Neither this Agreement,
nor any of the rights, interests or obligations hereunder, may be assigned, in
whole or in part, by operation of law or otherwise by any party without the
prior written consent of the other parties hereto and any such assignment that
is not consented to shall be null and void; provided, however, that the
Purchaser may assign any rights, interests or obligations hereunder to any of
its Affiliates without the prior written consent of the Sellers; provided,
further, that in the event of any such assignment that Purchaser shall remain
liable with respect to its obligations hereunder.
Section 11.08. Interpretation. (a) Notwithstanding anything in this
Agreement to the contrary, no term or condition of this Agreement shall be
construed to supersede, restrict or otherwise limit any term or condition set
forth in the Reinsurance Agreement.
(b) The parties acknowledge and agree that they may pursue judicial
remedies at law or equity in the event of a dispute with respect to the
interpretation or construction of this Agreement. In the event that an
alternative dispute resolution procedure is provided for in any of the Ancillary
Agreements or any other agreement contemplated hereby or thereby, and there is a
dispute with respect to the construction or interpretation of such Ancillary
Agreement, the dispute resolution procedure provided for in such Ancillary
Agreement shall be the procedure that shall apply with respect to the resolution
of such dispute.
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(c) For purposes of this Agreement, the words "hereof", "herein",
"hereby" and other words of similar import refer to this Agreement as a whole
unless otherwise indicated. Whenever the words "include", "includes", or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation".
Section 11.09. No Third Party Beneficiaries. Nothing in this Agreement
is intended or shall be construed to give any person (including, but not limited
to, the employees of the Sellers), other than the parties hereto, their
successors and permitted assigns, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
Section 11.10. 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.
Section 11.11. Exhibits and Schedules. The Exhibits and the Schedules
to this Agreement that are specifically referred to herein are a part of this
Agreement as if fully set forth herein. All references herein to Articles,
Sections, subsections, paragraphs, subparagraphs, clauses, Exhibits and
Schedules shall be deemed references to such parts of this Agreement, unless the
context shall otherwise require. Any fact or item disclosed on any Schedule to
this Agreement shall be deemed disclosed on all other Schedules to this
Agreement to which such fact or item may apply.
Section 11.12. Headings. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.
Section 11.13. Compliance with Bulk Sales Laws. The Purchaser and the
Sellers hereby waive compliance by the Purchaser and the Sellers with the bulk
sales law and any other similar laws in any applicable jurisdiction in respect
of the transactions contemplated by this Agreement. The Sellers shall indemnify
the Purchaser from, and hold it harmless against, any liabilities, damages,
costs and expenses resulting from or arising out of (i) the parties' failure to
comply with any of such laws in respect of the transactions contemplated by this
Agreement, or (ii) any action brought or levy made as a result thereof, other
than those liabilities which have been expressly assumed, on such terms as
expressly assumed, by the Purchaser pursuant to this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ZENITH INSURANCE COMPANY
By: /s/ Stanley R. Zax
------------------
Name: Stanley R. Zax
Title: Chairman
RISCORP, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP MANAGEMENT SERVICES,
INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP OF ILLINOIS, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
INDEPENDENT ASSOCIATION
ADMINISTRATORS INCORPORATED
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
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RISCORP INSURANCE SERVICES, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP MANAGED CARE SERVICES,
INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
COMPSOURCE, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP REAL ESTATE HOLDINGS, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP ACQUISITION, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP WEST, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
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RISCORP OF FLORIDA, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP INSURANCE COMPANY
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP PROPERTY & CASUALTY
INSURANCE COMPANY
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP NATIONAL INSURANCE
COMPANY
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP SERVICES, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP STAFFING SOLUTIONS HOLDING, INC.
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
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RISCORP STAFFING SOLUTIONS HOLDING,
INC. I
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
RISCORP STAFFING SOLUTIONS HOLDING,
INC. II
By: /s/ Frederick M. Dawson
-----------------------
Name: Frederick M. Dawson
Title:
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FIRST AMENDMENT TO
ASSET PURCHASE AGREEMENT
THIS FIRST AMENDMENT (this "Amendment") is entered into this
26th day of June, 1997 by and among Zenith Insurance Company, a California
corporation (the "Purchaser") and RISCORP, Inc., a Florida corporation
("RISCORP"), RISCORP Management Services, Inc., a Florida corporation ("RMS"),
RISCORP of Illinois, Inc., an Illinois corporation ("RI"), Independent
Association Administrators Incorporated, an Alabama corporation ("IAA"),
RISCORP Insurance Services, Inc., a Florida corporation ("RIS"), RISCORP
Managed Care Services, Inc., a Florida corporation ("RMCS"), CompSource, Inc.,
a North Carolina corporation ("CompSource"), RISCORP Real Estate Holdings,
Inc., a Florida corporation ("RRE"), RISCORP Acquisition, Inc., a Florida
corporation ("RA"), RISCORP West, Inc., an Oklahoma corporation ("RW"), RISCORP
of Florida, Inc., a Florida corporation ("RF"), RISCORP Insurance Company, a
Florida corporation ("RIC"), RISCORP Property & Casualty Insurance Company, a
Florida corporation ("RP&C"), RISCORP National Insurance Company, a Missouri
corporation ("RNIC"), RISCORP Services, Inc., a Florida corporation ("RS"),
RISCORP Staffing Solutions Holding, Inc., a Florida corporation ("RSS
Holding"), RISCORP Staffing Solutions, Inc. I, a Florida corporation ("RSSI")
and RISCORP Staffing Solutions, Inc. II, a Florida corporation ("RSSII").
RISCORP, RMS, RI, IAA, RIS, RMCS, CompSource, RRE, RA, RW, RF, RIC, RP&C, RNIC,
RS, RSS Holding, RSSI and RSSII are referred to herein collectively as the
"Sellers."
W I T N E S S E T H:
WHEREAS, on June 17, 1997, the Purchaser and the Sellers entered into
an Asset Purchase Agreement (the "Agreement") which contemplates the
acquisition of certain assets and the assumption of certain liabilities of the
Sellers by the Purchaser;
WHEREAS, the Purchaser and Sellers desire to amend the Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Section 5.18(a). Section 5.18(a) of the Agreement is
hereby deleted in its entirety and, in lieu thereof, the following new Section
5.18(a) is hereby inserted:
"(a) Within twenty four days following the date of
execution of this Agreement, the Sellers' Representative on behalf of
the Sellers shall deliver to Purchaser schedules prepared in
consultation with the Purchaser and reasonably satisfactory to the
parties ("Disclosure Schedules"), which shall be accompanied by a
certificate signed by the chief executive officer of RISCORP stating
that the Disclosure Schedules are being delivered pursuant to this
Section 5.18. The Disclosure Schedules, when so delivered, shall be
deemed to constitute an integral part of this Agreement and to modify
the respective representations, warranties, covenants or agreements of
the parties hereto contained herein to the extent that such
representations, warranties, covenants or agreements expressly refer
to schedules. Anything to the contrary contained herein or in
<PAGE> 140
the Disclosure Schedules notwithstanding, any and all statements,
representations, warranties or disclosures set forth in the Disclosure
Schedules shall be deemed to have been made on and as of the date
hereof.
2. Other Terms and Conditions Ratified and Confirmed. All other
terms and conditions of the Agreement are hereby ratified and confirmed by the
parties and shall remain in full force and effect.
3. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned parties have executed this
Amendment as of the day and year set forth above.
ZENITH INSURANCE COMPANY
By:/s/ Stanley R. Zax
---------------------------------
Name: Stanley R. Zax
Title: Chairman and President
RISCORP, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP MANAGEMENT SERVICES, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP OF ILLINOIS, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
- 2 -
<PAGE> 141
INDEPENDENT ASSOCIATION ADMINISTRATORS
INCORPORATED
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP INSURANCE SERVICES, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP MANAGED CARE SERVICES, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
COMPSOURCE, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP REAL ESTATE HOLDINGS, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP ACQUISITION, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
- 3 -
<PAGE> 142
RISCORP, WEST, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP OF FLORIDA, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP INSURANCE COMPANY
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP PROPERTY & CASUALTY INSURANCE
COMPANY
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP NATIONAL INSURANCE COMPANY
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP SERVICES, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
- 4 -
<PAGE> 143
RISCORP STAFFING SOLUTIONS HOLDING, INC.
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP STAFFING SOLUTIONS HOLDING,
INC. I
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
RISCORP STAFFING SOLUTIONS HOLDING,
INC. II
By:/s/ Frederick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief
Executive Officer
- 5 -
<PAGE> 144
SECOND AMENDMENT TO
ASSET PURCHASE AGREEMENT
THIS SECOND AMENDMENT (this "Amendment") is entered into this 11th
day of July, 1997 by and among Zenith Insurance Company, a California
corporation (the "Purchaser") and RISCORP, Inc., a Florida corporation
("RISCORP"), RISCORP Management Services, Inc., a Florida corporation ("RMS"),
RISCORP of Illinois, Inc., an Illinois corporation ("RI"), Independent
Association Administrators Incorporated, an Alabama corporation ("IAA"),
RISCORP Insurance Services, Inc., a Florida corporation ("RIS"), RISCORP
Managed Care Services, Inc., a Florida corporation ("RMCS"), CompSource, Inc.,
a North Carolina corporation ("CompSource"), RISCORP Real Estate Holdings,
Inc., a Florida corporation ("RRE"), RISCORP Acquisition, Inc., a Florida
corporation ("RA"), RISCORP West, Inc., an Oklahoma corporation ("RW"), RISCORP
of Florida, Inc., a Florida corporation ("RF"), RISCORP Insurance Company, a
Florida corporation ("RIC"), RISCORP Property & Casualty Insurance Company, a
Florida corporation ("RP&C"), RISCORP National Insurance Company, a Missouri
corporation ("RNIC"), RISCORP Services, Inc., a Florida corporation ("RS"),
RISCORP Staffing Solutions Holding, Inc., a Florida corporation ("RSS
Holding"), RISCORP Staffing Solutions, Inc. I, a Florida corporation ("RSSI")
and RISCORP Staffing Solutions, Inc. II, a Florida corporation ("RSSII").
RISCORP, RMS, RI, IAA, RIS, RMCS, CompSource, RRE, RA, RW, RF, RIC, RP&C, RNIC,
RS, RSS Holding, RSSI and RSSII are referred to herein collectively as the
"Sellers."
W I T N E S S E T H:
WHEREAS, on June 17, 1997, the Purchaser and the Sellers entered
into an Asset Purchase Agreement (the "Agreement") which contemplates the
acquisition of certain assets and the assumption of certain liabilities of the
Sellers by the Purchaser;
WHEREAS, the Purchaser and Sellers desire to amend the Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Section 5.18. Section 5.18 of the Agreement is hereby
deleted in its entirety and, in lieu thereof, the following new Section 5.18 is
hereby inserted:
"(a) Within thirty one days following the date of execution
of this Agreement, the Sellers' Representative on behalf of the
Sellers shall deliver to Purchaser schedules prepared in
consultation with the Purchaser and reasonably satisfactory to the
parties ("Disclosure Schedules"), which shall be accompanied by a
certificate signed by the chief executive officer of RISCORP
stating that the Disclosure Schedules are being delivered pursuant
to this Section 5.18. The Disclosure Schedules, when so delivered,
shall be deemed to constitute an integral part of this Agreement
and to modify the respective representations, warranties, covenants
or agreements of the parties hereto contained herein to the extent
that such representations, warranties, covenants or agreements
expressly refer to schedules. Anything to the contrary contained
herein or in the Disclosure Schedules
<PAGE> 145
notwithstanding, any and all statements, representations,
warranties or disclosures set forth in the Disclosure Schedules
shall be deemed to have been made on and as of the date hereof.
(b) The parties hereby agree to cooperate in good faith to
complete within forty one days from the date hereof the schedules
to the Purchase Agreement pertaining to Assigned and Assumed
Contracts, Included Affiliate Agreements, Included Employment
Contracts, Insurance Contracts and other Transferred Assets and
Other Assumed Liabilities."
2. Other Terms and Conditions Ratified and Confirmed. All other
terms and conditions of the Agreement are hereby ratified and confirmed by the
parties and shall remain in full force and effect.
3. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned parties have executed this
Amendment as of the day and year set forth above.
ZENITH INSURANCE COMPANY
By: /s/ Stanley R. Zax
---------------------------------
Name: Stanley R. Zax
Title: Chairman and President
RISCORP, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP MANAGEMENT SERVICES, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
- 2 -
<PAGE> 146
RISCORP OF ILLINOIS, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
INDEPENDENT ASSOCIATION ADMINISTRATORS
INCORPORATED
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP INSURANCE SERVICES, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP MANAGED CARE SERVICES, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
COMPSOURCE, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
---------------------------------
RISCORP REAL ESTATE HOLDINGS, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
- 3 -
<PAGE> 147
RISCORP ACQUISITION, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP, WEST, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP OF FLORIDA, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP INSURANCE COMPANY
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP PROPERTY & CASUALTY INSURANCE
COMPANY
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP NATIONAL INSURANCE COMPANY
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
- 4 -
<PAGE> 148
RISCORP SERVICES, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP STAFFING SOLUTIONS HOLDING, INC.
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP STAFFING SOLUTIONS HOLDING,
INC. I
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
RISCORP STAFFING SOLUTIONS HOLDING,
INC. II
By: /s/ Fredrick M. Dawson
---------------------------------
Name: Frederick M. Dawson
Title: President and Chief Executive
Officer
- 5 -
<PAGE> 149
APPENDIX B
OPINION OF SMITH BARNEY, INC.
<PAGE> 150
[Smith Barney LETTERHEAD]
June 16, 1997
The Board of Directors
RISCORP, Inc.
1390 Main Street
Sarasota, PL 34236
Gentlemen:
You have requested our opinion with respect to the fairness to RISCORP, Inc.
(the "Company"), from a financial point of view, of the consideration to be
received by the Company pursuant to the terms of the Asset Purchase Agreement,
dated as of June 16, 1997 (the "Acquisition Agreement"), among the Company,
certain of its subsidiaries, and Zenith Insurance Company (the "Acquiror"). As
more fully set forth and defined in the Acquisition Agreement the Acquiror will
purchase for cash substantially all the assets and will assume substantially all
the liabilities of the Company and its subsidiaries for an amount equal to the
excess of the value of the Transferred Assets over the value of Insurance
Liabilities and other Assumed Liabilities (the "Transaction"), subject to a
minimum purchase price.
In arriving at our opinion, we have reviewed the Acquisition Agreement and
certain publicly available business and financial information relating to the
Company. We have also reviewed certain other information (including actuarial
reports) provided to us by the Company, and have met with the Company's
management to discuss the business and prospects of the Company. As you
requested, we contacted and solicited bids from a number of potential acquirors
of the Company.
We note that the Company has not filed with the Securities and Exchange
Commission its Form 10-K and accompanying financial statements for the year
ended December 31, 1996, and we have been informed that the Company has not
completed its financial statements for 1996 or any subsequent period.
Accordingly, we have relied entirely upon the unaudited financial information
supplied to us by the Company's management with respect to all periods beginning
after December 31, 1995. Our analysis is also based on certain stock market data
of the Company and similar data and financial information for other publicly
held companies in businesses similar to those of the Company. We have considered
the financial terms of certain other business combinations which have recently
<PAGE> 151
The Board of Directors
RISCORP, Inc.
June 16, 1997
Page 2
been consummated and such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
We understand that on May 12, 1997 A.M. Best Co., an insurance company rating
agency, issued the Company a "C" rating ("Weak") on its ability to pay claims
and that the Florida Insurance Commissioner has placed the Company under close
regulatory scrutiny. As a result of these and other factors, including existing
litigation involving the Company and certain of its executive officers, the
Company's ability to continue as a going concern is uncertain.
We express no opinion with respect to the adequacy of the reserves of the
Company, as to whether the Company is impaired or is not solvent under
applicable law, or as to whether the Company is in such condition that the
further transaction of business by the Company would be limited under applicable
law.
In connection with our review, we have not independently verified any of the
foregoing information and have relied on its being complete and accurate. In
addition, we have not made an independent evaluation or appraisal of the assets
of the Company, nor have we been furnished with any such appraisal. Further, our
opinion is based on economic, monetary and market conditions existing on the
date of this opinion.
We have acted as financial advisors to the Company in connection with the
Acquisition Agreement and will receive a fee for rendering this opinion. In
addition, Smith Barney Inc. acted as an underwriter of the Class A common stock
in February 1996 and received usual and customary compensation for such
services, and is a defendant, along with the Company and certain of its
executive officers and others in litigation relating to such offering. In the
ordinary course of our business, we may actively trade the equity securities of
the Company for our own account and for the accounts of customers and,
accordingly, may at any time hold or acquire a long or short position in such
securities. In addition, we and our affiliates (including Travelers Group Inc.
and its affiliates) may maintain other business relationships with the Company
and the Acquiror.
Our advisory services and this opinion are for the information of the Strategic
Alternatives Committee of the Board of Directors of the Company in its
evaluation of the proposed transaction. Our opinion is not intended to be and
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction. Our opinion is not to be
quoted or referred to, in whole or in part, in any registration statement,
prospectus or proxy statement, or in any other written document used in
connection with the Acquisition Agreement, nor shall this letter be used for any
other purposes, without our prior written consent.
<PAGE> 152
The Board of Directors
RISCORP, Inc.
June 16, 1997
Page 3
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that, as of the date hereof, the
consideration to be received by the Company pursuant to the Acquisition
Agreement is fair to the Company from a financial point of view.
Very truly yours,
/s/ Smith Barney Inc.
SMITH BARNEY INC.
<PAGE> 153
APPENDIX C
OPINION OF BT ALEX. BROWN INCORPORATED
<PAGE> 154
[ALEX. BROWN LETTERHEAD]
July 16, 1997
Strategic Alternatives Committee
of the Board of Directors and
The Board of Directors
RISCORP, Inc.
1390 Main Street
Sarasota, FL 34236
Dear Sirs:
You have requested our opinion as to the fairness, from a financial point
of view, of the consideration to be received by the Sellers (as defined in the
Asset Purchase Agreement dated June 17, 1997 between Zenith Insurance Company
("Buyer") and RISCORP, Inc. and its subsidiaries (together the "Company" or
"RISCORP") (the "Agreement")). Pursuant to the Agreement, on the Closing Date,
each of the Sellers shall sell, assign and transfer to the Buyer the Transferred
Assets and the Buyer shall assume the Transferred Liabilities (the
"Transaction"). Capitalized terms used herein but not defined shall have the
meanings ascribed to such terms in the Agreement.
Pursuant to the Agreement, at the Closing Date, the Buyer shall pay to the
Sellers an amount in cash equal to $35 million minus the Base Escrow Amount
minus the principal amount of, and any accrued and unpaid interest on, any
Systems Loans. After the Closing Date, the Buyer shall pay to the Sellers an
amount equal to the excess of the value of the Transferred Assets over the value
of the Transferred Liabilities, as such amounts are determined pursuant to the
Final Business Balance Sheet, minus $35 million minus the Additional Escrow
Amount.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have been hired by the Strategic Alternatives Committee of the
Board of Directors of RISCORP ("SAC") to render an opinion as to the fairness,
from a financial point of view, of the consideration to be received by the
Sellers in the Transaction. We have received a retainer fee and will receive a
fee for rendering this opinion. Alex. Brown regularly publishes research reports
regarding the insurance industry and other publicly owned companies in this
industry. Alex. Brown was a member of the underwriting syndicate in the offering
of the Class A common stock in February 1996 and received usual and customary
compensation for such services. In the ordinary course of business, Alex. Brown
may actively trade the
<PAGE> 155
The Board of Directors
RISCORP, Inc.
July 16, 1997
Page 2
securities of both RISCORP and the Buyer for our own account and the account of
our customers and, accordingly may at any time hold a long or short position in
securities of RISCORP and the Buyer.
In connection with our opinion, we have, among other things:
- Reviewed the Agreement, the Voting Agreement dated June 17, 1997, the
Interim Reinsurance Agreement dated June 18, 1997, the Trust Agreement
dated June 18, 1997 and related agreements, and discussed such documents
with the Company's management and the independent counsel to the SAC ("SAC
counsel").
- Reviewed the letter from the Treasurer of the State of Florida Department
of Insurance ("DOI") to RISCORP dated May 19, 1997 and certain attached
correspondence from the DOI, including a letter dated April 30, 1997
documenting a particular response to a request for information and
discussed such documents with Company management, SAC counsel and Company
regulatory counsel.
- Reviewed the letter from the State of Missouri Department of Insurance
dated March 14, 1997 which was a notice that RISCORP had failed to file the
1996 SVO Compliance Certification, Annual Statement, Actuarial
Certification and EDP Equipment Listing documents by the statutory date and
that the state would begin imposing a fine within 15 days and discussed
such document with Company management, SAC counsel and Company regulatory
counsel.
- Reviewed certain publicly available financial information concerning
RISCORP as well as the unaudited 1996 financial statements prepared as of
May 29, 1997 and discussed such financial statements with Company
management, as well as the Company's inability to prepare audited 1996
financial statements.
- Reviewed the Company's five year projections as presented to the Board of
Directors on January 10, 1997 and the Company's updated 1997-1998 cash flow
projections prepared in May 1997 and discussed such projections with
Company management and Smith Barney, Inc., the Company's financial advisor.
- Reviewed the Minutes of the Board of Directors meetings dated November 9,
1996, November 13, 1996, December 20, 1996, January 10, 1997, January 14,
1997 and February 18, 1997, draft Minutes of the Board of Directors
meetings dated March 26, 1997 and April 30, 1997 and the Written Action of
the Board of Directors dated May 19, 1997 and held discussions on the
matters contained therein with Company management, the SAC and SAC counsel.
<PAGE> 156
[ALEX. BROWN LOGO]
The Board of Directors
RISCORP, Inc.
July 16, 1997
Page 3
- Reviewed the Minutes of the SAC meetings dated November 14, 1996, November
20, 1996, November 21, 1996, December 4, 1996, January 10, 1997, January
14, 1997, February 4, 1997, February 18, 1997, February 19, 1997 and March
31, 1997 and held discussions on the matters contained therein with Company
management, the SAC and SAC counsel.
- Reviewed the minutes of the Audit Committee meetings dated November 13,
1996, December 4, 1996, February 19, 1997, March 26, 1997 and March 31,
1997, including attached correspondence between the Company and KPMG Peat
Marwick LLP, the Company's outside auditors, ("KPMG") dated October 23,
1996, November 13, 1996 and December 13, 1996 and between the Company and
Holland & Knight dated October 16, 1996. We held discussions on the matters
contained in these documents with Company management, the Audit Committee
of the Board of Directors, KPMG, and the SAC.
- Discussed the operating situation in the finance, treasury, sales and
marketing, management information systems and development areas of RISCORP
with senior members of management in each of these areas as well as
representatives of KPMG, Buttner Hammock Ranes & Co., P.A., Smith Barney,
Inc., and the SAC.
- Discussed the outstanding litigation against the Company and management and
the Company's regulatory compliance posture with Company management, the
Company's regulatory counsel, SAC counsel and the SAC.
- Reviewed presentation materials prepared and presented by Smith Barney,
Inc. to the Board of Directors and the SAC, including status reports
prepared by Smith Barney, Inc., dated between February 26, 1997 and March
31, 1997 and discussed such materials and reports with representatives of
Smith Barney, Inc., Company management, the SAC and SAC counsel.
- Discussed with Company management, the Audit Committee of the Board of
Directors, the SAC and KPMG, the deficiencies in the Company's financial
systems and reviewed and discussed with them unaudited drafts of financial
statements.
- Discussed with Company management, Smith Barney, Inc., SAC counsel and the
SAC the negotiations that occurred between (i) RISCORP and Zenith and (ii)
RISCORP and a third party in June 1997, as well as the sale process in its
entirety.
- Discussed the conversations between the Company and the DOI that occurred
following the receipt by the Company of the May 19, 1997 letter from the
DOI, the attached letters from the DOI to RISCORP and the deadlines imposed
by the DOI on
<PAGE> 157
[ALEX. BROWN LOGO]
The Board of Directors
RISCORP, Inc.
July 16, 1997
Page 4
the Company with Company management, Company regulatory counsel and the
SAC.
- Reviewed information concerning the claims paying rating history of RISCORP
Insurance Company ("RIC"), RISCORP Property & Casualty Insurance Company
("RPC") and RISCORP National Insurance Company ("RNIC") and discussed with
Company management the changes since January 1996 in the ratings for RIC
and RPC by A.M. Best Company Inc., the latest of which is a "C" rating
(Weak) on their ability to write new business and pay claims, the effects
thereof and possible effects of any such additional changes.
- Reviewed the Loss Reserve Analysis as of December 31, 1996 of RNIC and the
Loss Reserve Analysis as of December 31, 1996 of RIC and RPC, each dated
April 21, 1997, prepared by Tillinghast-Towers Perrin, the Company's
outside actuarial advisor, and discussed such documents with Company
management, the Company's internal actuaries and representatives of
Tillinghast-Towers Perrin.
- Reviewed other historical Company events, including, among other things,
(i) the departure of most of the crucial employees in the finance, treasury
and control departments, including the departure of three CFOs since the
Company's IPO on February 28, 1996, (ii) the preparation of the Company's
financial statements, (iii) the 8-K filed April 1, 1997 and (iv) the data
made available to potential buyers of the Company and discussed such
matters and the status of financial controls at the Company with Company
management, the SAC, Company regulatory counsel, representatives of Buttner
Hammock Ranes & Co., P.A., representatives of KPMG and representatives of
Smith Barney, Inc.
- Reviewed information concerning the Company's financial position and
results of operations in relation to the financial position, results of
operations and stock market performance of certain other publicly traded
insurance companies whose businesses we believe to be generally comparable
to the Company, including certain companies in regulatory and financial
distress.
- Reviewed the financial and other terms of certain business combinations of
other companies that we believe to be relevant.
- Performed other such studies and analyses and considered other such factors
as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness of
the information provided to us by the Company and its representatives and
advisors. We are
<PAGE> 158
[ALEX. BROWN LOGO]
The Board of Directors
RISCORP, Inc.
July 16, 1997
Page 5
not actuaries and, except as otherwise stated herein, we have relied upon the
Company and the reports of and discussions with the Company's internal actuary
and Tillinghast-Towers Perrin for all actuarial related information. With
respect to the information relating to the Company and its prospects, we have
assumed that such information reflects the best currently available judgments
and estimates of the management of RISCORP as to the likely future performance
of the Company and in rendering our opinion we express no opinion as to the
reasonableness of such projections, as supplemented, or the assumptions on which
they are based. In addition, we have not made nor been provided with an
independent evaluation or appraisal of the assets of the Company, nor have we
been furnished with any such evaluations or appraisals. As to legal matters,
Alex. Brown relied upon RISCORP's internal counsel, Company regulatory counsel
and the SAC counsel. We have also relied to the extent deemed appropriate on the
assessments and conclusions of the firms and individuals referred to in this
letter. As to accounting matters, Alex. Brown relied upon the Audit Committee
minutes since November 1996, KPMG, Buttner Hammock and Ranes & Co., P.A. and
Company management.
For purposes of rendering our opinion, we have assumed that, in all
respects material to our analysis, the representations and warranties of the
Company contained in the Agreement are true and correct, that the Company will
perform all of the covenants and agreements to be performed by it under the
Agreement and all conditions to the obligations of it to consummate the
Transaction will be satisfied without any waiver thereof.
Our opinion is based on market, economic and other conditions as they exist
and can be evaluated as of the date of this letter. Our opinion takes into
account, among other things, the following factors, as they existed at the
signing of the Agreement: (a) RISCORP's non-compliance with significant
insurance regulatory requirements, the administrative actions available to the
relevant insurance regulatory authorities and communications to the effect that
administrative actions would be taken imminently had the signing of the
Agreement not occurred; (b) the implications of such regulatory actions for
RISCORP's business; (c) the impact on the structure of the Transaction and the
sales process of the inability of the Company to prepare financial statements in
accordance with generally accepted or statutory accounting principles and the
status of financial controls at RISCORP; (d) the impact of RIC's and RPC's lower
claims paying ratings on RISCORP's ability to market its insurance products; (e)
the high turnover in senior management of RISCORP since February 1996; and (f)
the uncertainty of the Company's ability to continue as a going concern. This
opinion assumes that the Transaction is approved in its entirety by the
Company's shareholders, the Commissioner of Insurance of the State of Florida
and the Director of the Department of Insurance of the State of Missouri without
any material changes and that the Transaction is completed on or prior to
December 31, 1997 on the bases set forth in the Agreement.
<PAGE> 159
[ALEX. BROWN LOGO]
The Board of Directors
RISCORP, Inc.
July 16, 1997
Page 6
You have not requested and we do not express any opinion as to the fairness
of the ultimate disposition of the consideration to be paid the Sellers or the
fairness of the allocation among the Sellers of the consideration received by
the Sellers. We express no opinion with respect to the adequacy of the reserves
of the Company, as to whether the Company is impaired or is not solvent under
applicable law, or as to whether the Company is in such condition that further
transaction of business by the Company could be limited by applicable law.
In arriving at our opinion, we were not authorized to solicit, and we did
not solicit, interest from any party with respect to the acquisition of the
Company or any of its assets, nor did we have discussions or negotiate with any
parties in connection with the Transaction.
We have been retained by the SAC as financial advisor solely for the
purpose of rendering this opinion and accordingly, we have not been requested to
and have not provided any other services in connection with the Transaction.
Our opinion expressed herein was prepared for the use of the SAC and does
not constitute a recommendation to RISCORP's shareholders as to how they should
vote at the stockholders' meeting in connection with the Transaction. We hereby
consent, however, to the inclusion of this opinion, in whole, but not in part,
as an exhibit to any proxy or registration statement distributed in connection
with the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the consideration to be received by the Sellers in the
Transaction is fair, from a financial point of view, to the Sellers.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ THOMAS W. JOHNSON
------------------------
Thomas W. Johnson
Managing Director
<PAGE> 160
APPENDIX D
FLORIDA STATUTES DESCRIBING
SHAREHOLDER DISSENTERS' RIGHTS
<PAGE> 161
FLA. STAT. ANN SECTION 1301
The following definitions apply to Section 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a
dissenting shareholder before the corporate action or the
surviving or acquiring corporation by merger or share exchange
of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day
prior to the shareholders' authorization date, excluding any
appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken,
the date on which the corporation received written consents
without a meeting from the requisite number of shareholders in
order to authorize the action, or, in the case of a merger
pursuant to Section 607.1104, the day prior to the date on
which a copy of the plan of merger was mailed to each
shareholder of record of the subsidiary corporation.
FLA. STAT. ANN SECTION 1302
(1) Any shareholder of a corporation has the right to dissent from, and
obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If the shareholder is entitled to vote on the merger,
or
2. If the corporation is a subsidiary that is merged
with its parent under Section 607.1104, and the
shareholders would have been entitled to vote on
action taken, except for the applicability of Section
607.1104;
(b) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation, other than in the
usual and regular course of business, if the shareholder is
entitled to vote on the sale or exchange pursuant to Section
607.1202, including a sale in dissolution but not including a
sale pursuant to court order or a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of
the sale will be distributed to the shareholders within 1 year
after the date of sale;
(c) As provided in Section 607.0902(11), the approval of a
control-share acquisition;
(d) Consummation of a plan of share exchange to which the
corporation is a party as the corporation the shares of which
will be acquired, if the shareholder is entitled to vote on
the plan.
(e) Any amendment of the articles of incorporation if the
shareholder is entitled to vote on the amendment and if such
amendment would adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights attached
to any of his shares;
2. Altering or abolishing the voting rights pertaining
to any of his shares, except as such rights may be
affected by the voting rights of new shares then
being authorized of any existing or new class or
series of shares;
<PAGE> 162
3. Effecting an exchange, cancellation, or
reclassification of any of his shares, when such
exchange, cancellation, or reclassification would
alter or abolish his voting rights or alter his
percentage of equity in the corporation, or effecting
a reduction or cancellation of accrued dividends or
other arrearages in respect to such shares;
4. Reducing the stated redemption price of any of his
redeemable shares, altering or abolishing any
provision relating to any sinking fund for the
redemption or purchase or any of his shares, or
making any of his shares subject to redemption when
they are not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends
of any of his preferred shares which had theretofore
been cumulative;
6. Reducing the stated dividend preference of any of his
preferred shares, or
7. Reducing any stated preferential amount payable on
any of his preferred shares upon voluntary or
involuntary liquidation; or
(f) Any corporate action taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder
is entitled to dissent and obtain payment for his shares.
(2) A shareholder dissenting from any amendment specified in paragraph
(1)(e) has the right to dissent only as to those of his shares which
are adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares registered in
his name. In that event, his rights shall be determined as if the
shares as to which he has dissented and his other shares were
registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section
does not apply with respect to a plan of merger or1 share exchange or a
proposed sale or exchange of property, to the holders of shares of any
class or series which, on the record date fixed to determine the
shareholders entitled to vote at the meeting of shareholders at which
such action is to be acted upon or to consent to any such action
without a meeting, were either registered on a national securities
exchange or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his shares
under this section may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to
the shareholder or the corporation.
FLA. STAT. ANN SECTION 1320
(1) (a) If a proposed corporate action creating dissenters' rights
under Section 607.1302 is submitted to a vote at a
shareholders' meeting, the meeting notice shall state that
shareholders are or may be entitled to assert dissenters'
rights and be accompanied by a copy of Sections 607.1301,
607.1302, and 607.1320. A shareholder who wishes to assert
dissenters' rights shall:
- -----------------------
(1)The word "or" was substituted by the division of statutory revision for the
word "of" to correct an apparent typographical error.
-2-
<PAGE> 163
1. Deliver to the corporation before the vote is taken
written notice of his intent to demand payment for
his shares if the proposed action is effectuated, and
2. Not vote his shares in favor of the proposed action.
A proxy or vote against the proposed action does not
constitute such a notice of intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under
Section 607.1302 is effectuated by written consent without a
meeting, the corporation shall deliver a copy of Sections
607.1301. 607.1302, and 607.1320 to each shareholder
simultaneously with any request for his written consent or, if
such a request is not made, within 10 days after the date the
corporation received written consents without a meeting from
the requisite number of shareholders necessary to authorize
the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent
or adoption of the plan of merger, as the case may be, to each
shareholder who filed a notice of intent to demand payment for his
shares pursuant to paragraph (1)(a) or, in the case of action
authorized by written consent, to each shareholder, excepting any who
voted for, or consented in writing to, the proposed action.
(3) Within 20 days after the giving of notice to him, any shareholder who
elects to dissent shall file with the corporation a notice of such
election, stating his name and address, the number, classes, and series
of shares as to which he dissents, and a demand for payment of the fair
value of his shares. Any shareholder failing to file such election to
dissent within the period set forth shall be bound by the terms of the
proposed corporate action. Any shareholder filing an election to
dissent shall deposit his certificates for certificated shares with the
corporation simultaneously with the filing of the election to dissent.
The corporation may restrict the transfer of uncertificated shares from
the date the shareholder's election to dissent is filed with the
corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and
shall not be entitled to vote or to exercise any other rights of a
shareholder. A notice of election may be withdrawn in writing by the
shareholder at any time before an offer is made by the corporation, as
provided in subsection (5), to pay for his shares. After such offer, no
such notice of election may be withdrawn unless the corporation
consents thereto. However, the right of such shareholder to be paid the
fair value of his shares shall cease, and he shall be reinstated to
have all his rights as a shareholder as of the filing of his notice of
election, including any intervening preemptive rights and the right to
payment of any intervening dividend or other distribution or, if any
such rights have expired or any such dividend or distribution other
than in cash has been completed, in lieu thereof, at the election of
the corporation, the fair value thereof in cash as determined by the
board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been
taken in the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a
court has been made or filed within the time provided in this
section; or
(d) A court of competent jurisdiction determines that such
shareholder is not entitled to the relief provided by this
section.
-3-
<PAGE> 164
(5) Within 10 days after the expiration of the period in which shareholders
may file their notices of election to dissent, or within 10 days after
such corporate action is effected, whichever is later (but in no case
later than 90 days from the shareholders' authorization date), the
corporation shall make a written offer to each dissenting shareholder
who has made demand as provided in this section to pay an amount the
corporation estimates to be the fair value for such shares. If the
corporate action has not been consummated before the expiration of the
90-day period after the shareholders' authorization date, the offer may
be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available date
and not more than 12 months prior to the making of such offer;
and
(b) A profit and loss statement of such corporation for the
12-month period ended on the date of such balance sheet or, if
the corporation was not in existence throughout such 12-month
period, for the portion thereof during which it was in
existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his shares shall be made within 90 days
after the making of such offer or the consummation of the proposed
action, whichever is later. Upon payment of the agreed value, the
dissenting shareholder shall cease to have any interest in such shares.
(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period
of 30 days thereafter, then the corporation, within 30 days after
receipt of written demand from any dissenting shareholder given within
60 days after the date on which such corporate action was effected,
shall, or at its election at any time within such period of 60 days
may, file an action in any court of competent jurisdiction in the
county in this state where the registered office of the corporation is
located requesting that the fair value of such shares be determined.
The court shall also determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination,
is entitled to receive payment for his shares. If the corporation fails
to institute the proceeding as herein provided, any dissenting
shareholder may do so in the name of the corporation. All dissenting
shareholders (whether or not residents of this state), other than
shareholders who have agreed with the corporation as to the value of
their shares, shall be made parties to the proceedings as an action
against their shares. The corporation shall serve a copy of the initial
pleading in such proceeding upon each dissenting shareholder who is a
resident of this state in the manner provided by law for the service of
a summons and complaint and upon each nonresident dissenting
shareholder either by registered or certified mail and publication or
in such other manner as is permitted by law. The jurisdiction of the
court is plenary and exclusive. All shareholders who are proper parties
to the proceeding are entitled to judgment against the corporation for
the amount of the fair value of their shares. The court may, if it so
elects, appoint one or more persons as appraisers to receive evidence
and recommend a decision on the question of fair value. The appraisers
shall have such power and authority as is specified in the order of
their appointment or an amendment thereof. The corporation shall pay
each dissenting shareholder the amount found to be due him within 10
days after final determination of the proceedings. Upon payment of the
judgment, the dissenting shareholder shall cease to have any interest
in such shares.
(8) The judgment may, at the discretion of the court, include a fair rate
of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the corporation, but all or any
part of such costs and expenses may be apportioned and assessed as the
court deems equitable against any or all of the dissenting
-4-
<PAGE> 165
shareholders who are parties to the proceeding, to whom the corporation
has made an offer to pay for the shares, if the court finds that the
action of such shareholders in failing to accept such offer was
arbitrary, vexatious, or not in good faith. Such expenses shall include
reasonable compensation for, and reasonable expenses of, the
appraisers, but shall exclude the fees and expenses of counsel for, and
experts employed by, any party. If the fair value of the shares, as
determined, materially exceeds the amount which the corporation offered
to pay therefor or if no offer was made, the court in its discretion
may award to any shareholder who is a party to the proceeding such sum
as the court determines to be reasonable compensation to any attorney
or expert employed by the shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed
value thereof or pursuant to payment of the judgment entered therefor,
as provided in this section, may be held and disposed of by such
corporation as in the case of other treasury shares, except that, in
the case of a merger, they may be held and disposed of as the plan of
merger otherwise provides. The shares of the surviving corporation into
which the shares of such dissenting shareholders would have been
converted had they assented to the merger shall have the status of
authorized but unissued shares of the surviving corporation.
-5-
<PAGE> 166
APPENDIX E
ANNUAL REPORT ON FORM 10-K/A FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1996
<PAGE> 167
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File Number 0-27462
-------
RISCORP, INC.
-------------
(Exact name of registrant as specified in its charter)
Florida 65-0335150
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1390 Main Street, Sarasota, Florida 34236 -5642
----------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 906-2000
Securities registered pursuant to Section 12(b) of
the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- -------------------
None None
----------------------- ----------------
Securities registered pursuant
to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. ( )
The aggregate market value of shares of the registrant's Common Stock held by
non-affiliates of the registrant as of September 30, 1997 was $12,322,123.
The number of shares of the registrant's Common Stock issued and outstanding as
of September 30, 1997 was 36,077,778 consisting of 11,743,335 shares of Class A
Common Stock and 24,334,443 shares of Class B Common Stock.
Documents Incorporated by Reference: None
<PAGE> 168
RISCORP, INC.
ANNUAL REPORT ON FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
----------- ----
PART I
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote
of Security Holders 20
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 23
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 31
PART III
Item 10. Directors and Executive Officers
of the Registrant 32
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 47
Signatures 58
</TABLE>
<PAGE> 169
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K/A contains forward-looking statements,
particularly with respect to Legal Proceedings and the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations. Additional written or oral forward-looking statements
may be made by RISCORP, Inc. and its subsidiaries (collectively, the "Company")
from time to time, in the filings with the Securities and Exchange Commission or
otherwise. Such forward-looking statements are within the meaning of that term
in Sections 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Such statements
may include, but not be limited to, projections of revenues, income, losses,
cash flows, capital expenditures, plans for future operations, financing needs
or plans relating to products or services of the Company, estimates concerning
the effects of litigation or other disputes, as well as assumptions regarding
any of the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. Future events and actual
results could differ materially from those set forth in or underlying the
forward-looking statements. Many factors could contribute to such differences
and include, among others, the ability of the Company to maintain licensing with
regulatory agencies; the consummation of the Company's pending asset sale to
Zenith Insurance Company ("Zenith"); the actual outcome of pending litigation or
potential investigations; the impact on the Company of current and future
federal and state regulation of workers' compensation or health care reform
legislation, including changes in the availability of recoveries from the
Florida Special Disability Trust Fund (the "SDTF"); changes in the mandated
accounting treatment of SDTF recoverables; the failure of the SDTF to pay the
Company's reimbursement requests; discontinuation of the SDTF; the Company's
limited operating history and direct loss and claims experience; an unfavorable
rating from A.M. Best Company, Inc. ("A.M. Best") and the impact of such a
rating; the Company's need for additional capital to meet state regulatory
requirements and for other purposes, and the ability of the Company to generate
sufficient capital in a timely fashion; the possible negative impact on the
Company of the termination of quota share or excess of loss reinsurance
agreements, or the failure of such reinsurers to meet their obligations under
such agreements; the highly competitive nature of the managed care workers'
compensation insurance market; the limited nature of the Company's line of
insurance products; the negative impact on the Company if Florida were to permit
competition based on price in workers' compensation insurance; general economic
conditions in Florida, North Carolina and Alabama in particular, or the United
States in general; the Company's ability to continue and expand its
relationships with independent insurance agencies which market its products; and
other factors mentioned elsewhere in this report.
1
<PAGE> 170
OVERVIEW
The Company offers managed care workers' compensation insurance and
services designed to lower the overall costs of work-related claims, while
providing quality, cost-effective care to injured employees. As of December 31,
1996, the Company provided workers' compensation insurance and services to
approximately 39,000 policyholders, principally in Florida and the southeastern
United States. As of July 1, 1997, there were approximately 33,000 policyholders
and the Company expects the number of policyholders to decline during the
remainder of the year.
The Company was unable to file its 1996 financial statements in a
timely manner. See "Recent Developments - Delisting by NASDAQ."
RECENT DEVELOPMENTS
Restructuring
On May 20, 1997, the Company named Frederick M. Dawson as Chief
Executive Officer of the Company. Mr. Dawson replaced William D. Griffin who
took an unpaid leave of absence and remained as a non-salaried, non-executive
Chairman of the Board of Directors. Concurrently, Mr. Dawson was also named to
the Board of Directors of the Company, and all employee directors other than Mr.
Griffin resigned from the Board of Directors. On September 18, 1997, Mr. Griffin
resigned from the Board of Directors of the Company and from all other positions
with the Company.
In June 1997, the Company announced a workforce reduction and a
restructuring of the Company's management team, field offices and products. The
reduction in force resulted in the termination of 128 employees of the Company.
The Company also announced in June 1997 its intention to focus solely on its
core workers' compensation insurance business and to close all field offices,
except Charlotte and Birmingham, by the end of 1997.
Asset Purchase Agreement With Zenith
In June 1997, the Company entered into an asset purchase agreement (the
"Purchase Agreement") with Zenith, a subsidiary of Zenith National Insurance
Corp. Under the terms of the Purchase Agreement, Zenith will purchase all of the
assets of the Company relating to its workers' compensation business, including
the Company's existing inforce business, as well as the right to all new and
renewal policies. After the transaction closes, the Company will no longer
engage in the workers' compensation or managed care businesses. In connection
with the transaction, Zenith will assume certain liabilities related to the
Company's insurance business, including $15 million in indebtedness of the
Company owed to American Re-Insurance Company ("AmRe"). The purchase price,
which will be paid in cash, will be the difference between the book value of the
assets purchased and the book value of the liabilities assumed by Zenith on the
closing date, subject to a minimum purchase price of $35 million.
2
<PAGE> 171
The closing of the purchase is contingent upon review and approval by
appropriate state and federal regulatory agencies, and approval by the majority
of each of the Class A Common and Class B Common shareholders of the Company.
Effective June 18, 1997, Zenith entered into an interim reinsurance
agreement and cut-through endorsement with the Company. Under the terms of the
reinsurance agreement, Zenith reinsured all of the Company's liabilities on or
after June 18, 1997, as to new, renewal, and in force Florida workers'
compensation policies in the event the Company is declared insolvent under
applicable insurance law pursuant to court order. The Company has assigned to
Zenith its right to receive certain payments from other reinsurers with respect
to the business Zenith has reinsured. In addition, the Company has established
trust accounts of approximately $50 million as security to reimburse Zenith for
any amounts paid under the reinsurance agreement.
Delisting by NASDAQ
In July 1997, the Company's common stock was delisted from the NASDAQ
National Market due to the Company's failure to comply with the filing
requirements of the Exchange Act.
AmRe Loan Agreement
The Company and AmRe are parties to a senior subordinated note agreement
in the principal amount of $15.0 million due 2002 (the "AmRe loan agreement").
The AmRe loan agreement requires that the Company shall prepay the outstanding
principal balance of the notes, together with interest accrued thereon, on or
before the tenth business day following the occurrence of a Change of Control or
a Material Adverse Event. The resignation of William D. Griffin, effective on
September 18, 1997, as Chairman of RISCORP, Inc. is a Material Adverse Event as
defined in the AmRe loan agreement. On October 10, 1997, the Company received a
waiver from AmRe of the requirement to prepay these notes, as well as certain
events of default subject to the receipt of the Company's financial reports. On
October 17, 1997, the Company received a waiver from AmRe of the default based
upon the failure of the Company to deliver quarterly financial reports and to
file Form 10-Q with the Securities and Exchange Commission for the first and
second quarters of 1997. This waiver from AmRe regarding the Company's failure
to provide its financial reports and Form 10-Q's in a timely manner for the
first and second quarter of 1997 expires on December 31, 1997. In the event the
Company is unable to provide its financial reports and Form 10-Q's, including
its third quarter financial reports and Form 10-Q, to AmRe when required under
the note agreement or the waiver, additional debt covenant violations would
occur. If such debt covenant violations did occur and the Company was unable to
obtain an additional waiver of such violations from AmRe, such violations could
result in AmRe accelerating the note which, in turn, could create a liquidity
shortage for the Company.
3
<PAGE> 172
Legal Developments
See "Legal Proceedings."
A.M. Best Initial Rating
See "Business - A.M. Best Ratings of Insurance Subsidiaries."
THE COMPANY'S OPERATING PHILOSOPHY
The Company stresses an integrated approach to managed care workers'
compensation which involves the employer, employee, and care providers. This
approach combines loss prevention to promote safety in the workplace and manage
risk; early medical intervention to control costs and manage the
appropriateness, timeliness, and quality of care for injured workers; and
comprehensive medical care management, including case and utilization
management, through a provider network to establish treatment protocols,
clinical paths, and outcome measurements.
The Company's managed care approach begins with the implementation of
its First CallSM service, an early intervention system which provides employers
with a toll-free, 24-hour hotline to report claims and to seek medical attention
for injured employees. This service encourages early reporting of claims and
allows the Company to direct injured workers to appropriate medical providers
within the Company's contracted network, creating a cost-effective methodology
of dealing with claims promptly after they occur. The Company's case managers
monitor each case and use the Company's information systems to apply utilization
review and quality assurance techniques to achieve appropriate, quality medical
treatment at an affordable price.
INDUSTRY
Workers' compensation benefits are mandated and regulated by individual
states, and most states require employers to provide medical benefits and wage
replacement to individuals injured at work, regardless of fault. Virtually all
employers in the United States are required either to purchase workers'
compensation insurance from a private insurance carrier, a state-sponsored
assigned risk pool, a self-insurance fund (an entity that allows employers to
pool their liabilities for obtaining workers' compensation coverage), or, if
permitted by their state, to be self-insured. Workers' compensation laws
generally require two kinds of benefits for injured employees: (i) medical
benefits that include expenses related to diagnosis and treatment of the injury,
as well as rehabilitation, if necessary, and (ii) payments that consist of
temporary wage replacement or permanent disability payments.
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PROGRAMS AND PRODUCTS
The Company operates in a single industry segment.
Workers' Compensation Products
The Company's products and rating plans encompass a variety of options
designed to fit the needs of a wide selection of employers. The most basic
product is a guaranteed cost contract, where the premium is set in advance and
changes are made only when changes occur in policyholder operations or payrolls.
The premium for these policies is based on state approved rates, which vary
depending upon the type of work performed by each employee and the general
business of the insured. The Company also offers several loss sensitive plans
(retrospective rating, dividend and large deductible plans) which determine the
final premium paid for the current policy period based largely on the insured's
losses during that same period. Employers large enough to qualify will have
their premiums based on their loss experience as determined over a three-year
period. This loss experience is adjusted by the type of business and associated
risks. In Florida, policyholders can also qualify for one or more premium
credits (5% and 2%) by agreeing to comply with drug-free workplace, and/or safe
workplace policies, respectively. Policyholders who wish to assume a certain
amount of financial risk may elect a deductible that makes them responsible for
the first portion of any claim. In exchange for the deductible election the
employer receives a premium reduction.
Workers' Compensation Management Services
The Company provides fee-based workers' compensation insurance
management services to self-insurance funds and governmental risk-sharing pools,
performing all the services of an insurance carrier except assumption of the
underwriting risk. The Company generally requires that it be given complete
managerial control over the fund's or pool's operations, and that it be entitled
to share in cost savings it generates in addition to its base fees. During 1996,
the Company converted five self-insurance funds to at-risk business and
terminated certain contracts with third parties. As of December 31, 1996, the
Company provided these services to five entities (representing approximately
2,900 employers) with standard premiums in force under management of
approximately $85 million. The largest contracts were with North Carolina
Commerce Fund ("NCCF"), Governmental Risk Insurance Trust ("GRIT"), and the
Oklahoma Restaurant Group Self Insurance Association. The Company terminated its
agreement with the Oklahoma Restaurant Group Self Insurance Association
(representing approximately $7 million standard premium) in 1997.
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Third Party Administrative Services
The Company provides integrated administrative and managed care services
for self-insured employers. At December 31, 1996, approximately 30 employers
were under managed care contracts with the Company. In June 1997, the Company
made a strategic decision to exit this line of business which will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Workers' Compensation Managed Care Arrangements ("WCMCAs")
Effective January 1, 1997, Florida law mandated workers' compensation
insurers to provide all medical care through WCMCAs. Under these arrangements,
the Company is allowed to direct injured employees to a provider network in
which employees must participate or face possible denial of medical cost
coverage.
The Company has developed a provider network which covered the entire
state of Florida and included approximately 3,600 and 5,000 physicians and 550
and 700 hospital and ancillary facilities as of December 31, 1996 and June 30,
1997, respectively. The Company believes that its ability to obtain discounted
medical fees, manage utilization, and track medical outcomes for providers
participating in its network enhances its ability to manage claims.
The Company also maintained an arrangement with Humana Health Plans,
Inc. ("Humana"), whereby certain of the Company's medical claim costs are fixed
for the first three years of each claim. The agreement provided the Company with
access to Humana's health care provider networks in Florida. The agreement
commenced July 30, 1995, was renewed for one year upon its anniversary, and
expired in 1997. The Company had a similar arrangement with RISCORP Health
Plans, Inc. ("RHP"), an affiliated company, until the arrangement was terminated
effective May 1, 1996 whereby injured individuals were covered for three years
following any accident occurring within the policy period of any policy entered
into during the term of the agreement. To the extent that Humana or RHP is
unable to meet its contractual obligations under these arrangements, the Company
will be liable for any losses and loss adjustment expenses under these
arrangements which could have a material adverse effect on the Company's
business, financial condition, or results of operations.
Virginia Surety Underwriting Management Agreement
In September 1995, the Company entered into an Underwriting Management
Agreement ("UMA") for workers' compensation insurance with Virginia Surety
Company, Inc. ("Virginia Surety"). The Company acts as an agent for Virginia
Surety and is authorized to accept or bind business subject to the amounts and
territorial limits stipulated in the agreement. Effective September 1, 1996, the
Company renewed the UMA and extended it until December 31, 1997. For the year
ended December 31, 1996, the Company reported written premiums of approximately
$20 million under this agreement.
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ACQUISITIONS AND JOINT VENTURE
Acquisition of RISCORP West, Inc.
In November 1994, the Company acquired Self Insurors Service Bureau,
Inc. ("SISB"), a company that provided workers' compensation services to group
self insurance funds and self insured employers in nine states, primarily
Oklahoma and Louisiana. In January 1996, SISB changed its name to RISCORP West,
Inc. ("RWI").
Acquisition of RISCORP Insurance Company
In January 1995, the Company acquired RISCORP Insurance Company ("RIC"),
the successor to Commerce Mutual Insurance Company ("CMIC"), an Assessable
Mutual, in a transaction that was accounted for as a purchase. Concurrent with
the purchase, RIC converted from an assessable mutual insurance company to a
stock insurance company. Prior to the acquisition, the Company managed all
operations of RIC for a management fee primarily based on a percentage of
premiums and provided the insurer with reinsurance coverage. See "Legal
Proceedings."
Acquisition of CompSource
In March 1996, the Company purchased all of the stock of CompSource,
Inc. and Insura, Inc. (collectively, "CompSource") in exchange for approximately
$12.1 million in cash and 112,582 shares of the Company's Class A Common Stock.
CompSource is a workers' compensation management services company offering its
services in North Carolina managing a self-insurance fund with approximately $37
million of standard premiums in force at the acquisition date. Pursuant to a
redemption agreement entered into as part of this transaction, the former
shareholders of CompSource elected to have the Company repurchase the 112,582
shares at a purchase price of $18.653 per share on March 8, 1997, and the
Company repurchased all 112,582 shares from the former shareholders for $2.1
million in accordance with the terms of the redemption agreement.
Acquisition of Atlas
In March 1996, the Company completed its acquisition of Atlas Insurance
Company ("Atlas") for approximately $5.0 million in cash. Atlas is domiciled in
Missouri and has insurance licenses in 19 states. In addition, the acquisition
provided the Company with excess and surplus lines licenses in five additional
states. Following the acquisition, Atlas was renamed RISCORP National Insurance
Company ("RNIC").
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Acquisition of NARM
In June 1996, RNIC acquired the assets and assumed all of the
liabilities of the National Alliance for Risk Management Fund ("NARM"), a North
Carolina workers' compensation self-insurance fund with approximately $53
million of standard premiums in force at the acquisition date. The acquisition
was accomplished by means of a loss portfolio transfer and assumption
reinsurance agreement.
Acquisition of OSAA
In September 1996, RNIC acquired certain assets and assumed all of the
claim liabilities of the Occupational Safety Association of Alabama Workers'
Compensation Fund ("OSAA"), an Alabama workers' compensation self-insurance fund
with approximately $42 million of direct premiums in force at the acquisition
date. The acquisition was accomplished by means of a loss portfolio transfer and
assumption reinsurance agreement. See "Legal Proceedings."
Acquisition of IAA and Risk Inspection
In September 1996, the Company acquired all of the stock of Independent
Association Administrators, Inc., ("IAA") and Risk Inspection Services and
Consulting, Inc., ("Risk Inspection") in Alabama. IAA, a workers' compensation
management services company offering its services in Alabama, was acquired with
790,336 shares of Class A Common Stock of the Company (then valued at $10.9
million). Risk Inspection was purchased for approximately $600,000 in cash.
Pursuant to the acquisition agreement for IAA, if the former IAA shareholders or
their successors own all of such Class A Common Stock on September 17, 1998, the
Company is obligated to issue additional shares of the Company's Class A Common
Stock in an amount sufficient to make the value of all shares of the Company's
Class A Common Stock held by the former IAA shareholders equal to an aggregate
fair market value of $10.9 million as of that date. However, in no event will
the number of additional shares issued to the former IAA shareholders exceed
790,336 shares. See "Legal Proceedings."
Acquisitions of Virginia Funds
In October 1996, RNIC acquired all of the assets and assumed all of the
liabilities of three Virginia self-insurance funds ("the Virginia Funds")
consisting of NARM Manufacturers Group Self Insurance Association of Virginia,
NARM Services Group Self Insurance Association of Virginia and NARM Mercantile
Group Self Insurance Association of Virginia. At the date of acquisition, the
Virginia Funds had approximately $5.9 million of standard premiums in force. The
acquisition were accomplished by means of loss portfolio transfers and
assumption reinsurance agreements.
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Joint Venture Arrangement with Blue Cross and Blue Shield of Illinois
In January 1996, the Company entered into a joint venture arrangement
with Health Care Service Corporation ("HCSC"), a subsidiary of Blue Cross and
Blue Shield of Illinois, to establish Third Coast Holding Company ("TCHC"). TCHC
then formed an Illinois domestic stock insurance company, Third Coast Insurance
Company ("Third Coast"), to underwrite and sell managed care workers'
compensation insurance in Illinois, and a third-party administrative corporation
(the "Administrator") to provide administrative services to Third Coast and
third parties.
Under the terms of the arrangement, HCSC and the Company each own 50% of
the outstanding common stock of TCHC. HCSC contributed approximately $10 million
to initially capitalize Third Coast. The Company contributed no financial
capital to the venture, but contributed a non-exclusive license for the use of
its expertise, systems, and intellectual property (which was assigned a value of
$10 million) to enable Third Coast to underwrite and sell workers' compensation
insurance in Illinois. To maintain sufficient capitalization levels, HCSC agreed
to provide additional surplus loans to Third Coast in a maximum aggregate amount
of $20 million, if certain other conditions are met. On August 15, 1997 HCSC
contributed $10 million to Third Coast in the form of a surplus note.
SALES AND MARKETING
The Company's workers' compensation products and services are sold by
independent insurance agencies. As of December 31, 1996 and June 30, 1997, the
Company had appointed approximately 1,400 agencies in 16 states to sell its
products, of which approximately 400 were in Florida. These independent agencies
are viewed by the Company as important to its success.
The Company's top ten agencies accounted for approximately 22% and 15%
of the Company's direct premiums earned for the year ended December 31, 1996 and
the six months ended June 30, 1997, respectively, with the top independent
insurance agency accounting for approximately 6% and 2%, respectively, as of
such dates.
Failure of these independent insurance agencies to market the Company's
products and services successfully could have a material adverse effect on the
Company's business, financial condition, or results of operations.
CUSTOMERS
The Company insured over 39,000 policyholders as of December 31, 1996.
As of June 30, 1997, there were approximately 33,000 policyholders.
Approximately 83% and 88% of the premiums scheduled to expire in 1996 and 1995,
respectively, were renewed by the Company's customers. Through July 1997,
approximately 40% of premiums scheduled to expire in the first seven months of
1997 were renewed by the Company's customers and the Company expects this
renewal rate to continue for the remainder of 1997.
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The Company generally requests that its agencies target customers who
comply with a return-to-work program, maintain a drug-free workplace, are
proactive in seeking to minimize injuries in the workplace, and are financially
sound or, for certain types of policies, are willing to provide adequate
security. The Company does not target any particular industry and believes that
its policies are issued to a diversified mix of employers. However, the Company
generally does not insure certain employers which it considers to be high risk,
including nuclear facilities operators, asbestos removers, and certain other
high-risk employers.
EMPLOYEES
The Company had approximately 870 full-time employees at December 31,
1996. Of the Company's employees, approximately 690 provided services to the
Company's customers and 180 worked in the Company's administrative and financial
functions. None of the Company's employees is subject to collective bargaining
agreements. The Company believes that its employee relations and staffing are
satisfactory to meet current operating levels. See "Business - Recent
Developments - Restructuring."
REINSURANCE
Through various reinsurance agreements, the Company shares the risks and
benefits of the workers' compensation insurance that it writes. The Company has
in effect specific excess of loss policies under which it pays its reinsurer a
percentage of gross premiums earned and the reinsurer agrees to assume all risks
relating to claims over $500,000 on a per occurrence basis (for occurrences
prior to January 1, 1996, the retention was $350,000 per occurrence).
Continental Casualty Co. currently participates in this excess of loss program.
Continental Casualty Co. is rated A (Excellent) by A.M. Best.
The Company maintains a Quota Share Reinsurance agreement for the
workers' compensation insurance it underwrites in Florida with AmRe (the "AmRe
Quota Share agreement"), under which the Company cedes to AmRe 50% of the direct
workers' compensation premium written and losses incurred in Florida on and
after January 1, 1995. AmRe pays a ceding commission to the Company based on the
Company's Florida workers' compensation loss ratio, subject to certain
adjustments and limits. AmRe is rated A+ (Superior) by A.M. Best.
In June 1997, the Company entered into an interim reinsurance agreement
and cut-through endorsement with Zenith (rated A+ (Superior) by A.M. Best) which
provides first-dollar reinsurance coverage for Florida policyholders in the
event the Company becomes insolvent and unable to pay claims for all new,
renewal and in force policies in effect on or after June 18, 1997. See "Business
- - Recent Developments - Asset Purchase Agreement With Zenith."
Effective October 1, 1996, the Company entered into a Quota Share
Reinsurance agreement (the "Chartwell Quota Share Reinsurance agreement") for
the workers' compensation insurance it underwrites in RNIC in states other than
Florida with three reinsurers: Chartwell Reinsurance Company (rated A by A.M.
Best), Trenwick America Reinsurance Corporation (rated A+ by A.M. Best) and
Swiss Reinsurance America Corporation (rated A by A.M. Best). The Chartwell
Quota
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Share Reinsurance agreement provides for the Company to cede to the reinsurers
65% of its direct workers' compensation premiums written and losses incurred on
and after October 1, 1996. The reinsurers pay the Company a ceding commission
based on RNIC's loss ratio, subject to certain adjustments and limits. The
Chartwell Quota Share Reinsurance Agreement was amended effective January 1,
1997 to reduce the ceded percentage to 60%.
These Quota Share Reinsurance agreements allow the company to write,
within regulatory guidelines, a larger number of policies than it could
otherwise. In the event the Quota Share Reinsurance agreements are terminated
for any reason, the Company could be required to increase its capital
substantially or reduce its level of workers' compensation premiums, unless it
is able to establish another Quota Share Reinsurance arrangement. This could
result in material adverse consequences to the Company's business and growth
prospects. There is no assurance that Quota Share Reinsurance will continue to
be available to the Company for its workers' compensation business.
The Company regularly performs internal reviews of the financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance agreements, the Company would
be responsible for the payment of all losses and loss adjustment expenses which
the Company has ceded to such reinsurer. Any such failure on the part of the
Company's reinsurers could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company's group health and property and casualty insurance business
is reinsured with reinsurers rated by A.M. Best as B++ or better. The Company
retains a maximum amount of $150,000 per person per year for the group health
and $250,000 per occurrence and per risk for the commercial casualty and
commercial property. In June 1997, the Company made a strategic decision to exit
these lines of business. The Company does not expect this decision will have a
material adverse effect on the Company's business, financial condition or
results of operation.
A.M. BEST RATINGS OF INSURANCE SUBSIDIARIES
The limited operating history, pending litigation and other factors have
affected the ability of the Company's insurance subsidiaries to obtain favorable
A.M. Best and comparable ratings. A.M. Best ratings are based on a comparative
analysis of the financial condition and operating performance of insurance
companies as determined by their publicly available reports and meetings with
the entity's officers. A.M. Best ratings are based upon factors of concern to
policyholders and are not directed toward the protection of investors. In
assigning ratings, companies may fall within one of three A.M. Best rating
groupings: Best's Ratings, Best's Financial Performance Ratings or Not Rated.
A.M. Best ratings include: Secure, which consists of A++ and A+
(Superior), A and A- (Excellent) and B++ and B+ (Very Good); Vulnerable, which
consists of B and B- (Fair), C++ and C+ (Marginal), C and C- (Weak) and D
(Poor); E (Under Regulatory Supervision); F (In Liquidation) and S (Rating
Suspended).
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In May 1997, RIC and RISCORP Property & Casualty Insurance Company
("RPC") were assigned a Best's Rating of C (Weak). This rating is under review
with negative implications pending resolution of certain substantial
uncertainties, including various legal issues, any material Form 10-K
disclosures, and potential regulatory actions emanating from the ongoing state
examinations. The Company believes this rating may have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Legal Proceedings" and "Business - Regulation."
Companies not assigned either Best's Ratings or Best's Financial
Performance Ratings opinions are assigned to one of several Not Rated (NR)
Categories. The NR category identifies the primary reason a rating opinion was
not assigned.
RNIC (formerly Atlas Insurance Company) had its B+ rating removed and
was given an A.M. Best's "Not Rated" classification of NR-2 (Less than Minimum
Size and/or Operating Experience) following the Company's purchase of Atlas in
March 1996 and the discontinuance of its prior business, which effectively
treated RNIC as a start-up operation for rating purposes.
COMPETITION
The market to provide workers' compensation insurance and services is
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools, and other significant providers of health care and insurance
services. A number of the Company's current and potential competitors are
significantly larger, have greater financial and operating resources than the
Company, and can offer their services nationwide. After a period of absence from
the market, traditional national insurance companies have re-entered the Florida
workers' compensation insurance market, thereby increasing competition in the
Company's principal market segment. In addition, the Company faces significant
competition in its newer markets, particularly North Carolina and Alabama. The
Company does not offer the full line of insurance products which is offered by
some of its competitors, and there can be no assurance that the Company will be
able to compete effectively in the future.
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REGULATION
General
The Company's business is subject to state-by-state regulation of
workers' compensation insurance (which in some instances includes rate
regulation and mandatory fee schedules) and workers' compensation insurance
management services. These regulations are primarily intended to protect covered
employees and policyholders, not the insurance companies nor their shareholders.
Under the workers' compensation system, employer insurance or self-funded
coverage is governed by individual laws in each of the fifty states and by
certain federal laws. In addition, many states limit the maximum amount of
dividends, distributions and loans that may be made in any year by insurance
companies. This restricts the amount of distributions that may be made by the
Company's insurance subsidiaries.
There is no assurance that the Company will seek approvals from state
regulatory authorities to pay dividends or make distributions or that, if
sought, such approvals will be obtained. This may limit the amount of
distributions by the Company's insurance subsidiaries and may decrease amounts
of capital available to the Company. In addition, the Company is required to
contribute to state-established guaranty funds or associations that pay claims
of insolvent insurers. As a result, the Company's financial performance could be
materially adversely affected by mandatory assessments from such funds over
which the Company has no control.
Except for certain statutorily prescribed credits, Florida currently
does not permit competition on the basis of price in workers' compensation
insurance. This approach is followed in relatively few other states. If Florida
were to permit premium rates to be established with less regulatory
intervention, the Company's business, financial condition, or results of
operations could be materially and adversely affected.
The Company may from time to time need additional capital surplus to
meet certain state regulatory requirements. There can be no assurance that
capital will continue to be available when needed or, if available, will be on
terms acceptable to the Company.
Premium Rate Restrictions
State regulations governing the workers' compensation system and
insurance business in general impose restrictions and limitations on the
Company's business operations that are not imposed on unregulated businesses.
Among other matters, state laws regulate not only the kind of workers'
compensation benefits that must be paid to injured workers, but also the premium
rates that may be charged by the Company to insure employers for those
liabilities. As a consequence, the Company's ability to pay insured workers'
compensation claims out of the premium revenue generated from the sale of such
insurance is dependent on the level of premium rates permitted by state laws. In
this regard, it is significant that the state regulatory agency regulating
workers' compensation benefits may not be the same agency that regulates
workers' compensation insurance premium rates.
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In October 1996, the Florida Insurance Commissioner ordered workers'
compensation providers to reduce rates by an average of 11.2% effective January
1, 1997. Concurrently, the 10% managed care credit, which had been in place on a
voluntary basis since 1994, was phased out. As of December 31, 1996, the Company
estimates that approximately 60% of the Company's premiums received the 10%
managed care credit.
The State of North Carolina approved a 13.7% decrease in loss costs
effective April 1, 1997. The Company adopted the loss costs in October 1997
which resulted in an overall 8.4% effective rate reduction.
The Alabama and South Carolina Departments of Insurance (the "ADOI" and
"SDOI", respectively) have imposed constraints on the Company's writings in
their respective states. The ADOI has placed a $30 million limit on in force
premium and the SDOI has imposed a moratorium on new business writings. The
Company does not believe these constraints will have a material adverse effect
on the Company's business, financial condition or results of operations.
Financial and Investment Restrictions
Insurance company operations are subject to financial restrictions that
are not imposed on other businesses. State laws require insurance companies to
maintain minimum capital and surplus levels and place limits on the amount of
insurance a company may write based on the amount of the company's surplus.
These limitations restrict the rate at which the Company's insurance company
operations can grow. The Company's 1996 statutory filings indicate that, as of
December 31, 1996, its insurance subsidiaries met applicable state minimum
capital and surplus requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
State laws also require insurance companies to establish reserves for
payment of policyholder liabilities and impose restrictions on the type of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its insurance subsidiaries' assets more conservatively
than if not subject to the state law restrictions which may prevent the Company
from obtaining as high a return on these assets than it might otherwise be able
to realize.
Participation in State Guaranty Funds
Every state in which the company operates has established one or more
insurance guaranty funds or associations that are charged by state law to pay
claims of policyholders insured by a company that becomes insolvent. All
insurance companies must participate in the guaranty associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying policyholder claims of an insolvent insurer. The
Company's financial performance could be adversely affected by guaranty
association assessments as a consequence of the insolvency of other insurers
over which the Company has no control. This type of guaranty fund is separate
from the SDTF which is designed to pay insurers for certain benefits paid to
previously injured workers.
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Statutory Accounting and Solvency Regulation
State regulation of insurance company financial transactions and
financial condition are based on statutory accounting principles ("SAP"). SAP
differ in a number of ways from generally accepted accounting principles
("GAAP") which govern the financial reporting of most other businesses. In
general, SAP financial statements are more conservative than GAAP financial
statements, reflecting lower asset values and higher liability values.
State insurance regulators closely monitor the financial condition of
insurance companies reflected in SAP financial statements and can impose
financial and operating restrictions on an insurance company including: 1)
transfer or disposition of assets; 2) withdrawal of funds from bank accounts; 3)
extension of credit or making loans; 4) investment of funds.
The Florida Department of Insurance (the "FDOI") conducted a financial
examination of RIC, one of the Company's insurance subsidiaries, for 1995. The
final examination report reduced statutory surplus as of December 31, 1995 from
$31,117,099 to $4,961,478. The reduction in statutory surplus was due primarily
to adjustments related to the intercompany sale of real estate, certain related
party receivables that were considered non-admitted for statutory accounting
purposes, and an increase in the non-admitted portion of certain premium
receivables. These adjustments had no impact on the accompanying financial
statements prepared in accordance with generally accepted accounting principles.
As a result, RIC failed to meet the minimum capital and surplus requirements by
approximately $12.5 million. The Company made a capital infusion of
approximately $31.2 million into RIC in 1996, and as a result, as of December
31, 1996, the surplus of RIC exceeded the minimum capital and surplus
requirements.
The FDOI and the Missouri Department of Insurance (the "MDOI") are
currently conducting financial examinations of two of the Company's insurance
subsidiaries. While these examinations may result in adjustments to the
statutory financial statements of the insurance subsidiaries for 1996,
management does not believe that any such adjustments would be material. The
Company has not received the reports from these examinations, however, based
upon communications with the MDOI, the most significant adjustment proposed by
the MDOI is the non-admission of an accounts receivable balance of $900,000
relating to a loss portfolio transfer. This balance was received on April 14,
1997. The adjustment relates to statutory financial statements and has no impact
on GAAP financial statements, however, any adjustments could impact the dividend
paying ability of the Company's insurance subsidiaries.
Healthcare and Managed Care Laws and Reform Proposals
The Company's medical provider networks are subject to various federal
and state laws and regulations, including the Agency for Health Care
Administration ("AHCA") qualification requirements for the Company's WCMCA in
Florida. There are a number of managed care reform proposals before federal and
state legislative and regulatory bodies, and the Company expects that its
business operations and products will be impacted by these proposals, if
adopted.
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LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company establishes reserves to cover its estimated liability for
losses and loss adjustment expenses. Such reserves are based on facts then
known, estimates of future claims trends, experience with similar cases and
historical Company and industry trends. These trends include reserving, loss
payment and reporting patterns, claim closures and product mix.
Like many states, the Florida legislature has restructured its workers'
compensation laws several times over the years, with two significant law changes
since the Company began operations. Each time the workers' compensation laws
change, claims adjusters must segregate and manage claims according to
applicable laws, a process which is time-consuming and requires special skills.
In 1994, Florida enacted a law allowing both the medical and indemnity portions
of a claim to be settled. The Company took advantage of this opportunity to
reduce its outstanding claims by undertaking a claims settlement initiative in
1994. The initiative allows the Company's claims management personnel to operate
primarily under the 1994 law, because most claims governed by previous laws have
been closed.
The table below shows the development of losses and loss adjustment
expenses for 1988 through 1996. The top line indicates the estimated reserves
for unpaid losses and loss adjustment expenses as reported at the end of the
stated year. Each calendar year-end reserve includes estimated unpaid
liabilities for the current accident year and all prior accident years. The
cumulative amount paid portion of the table presents the amounts paid as of
subsequent years on those claims for which reserves were carried as of each
specific year. The section captioned "Liability Re-estimated as of" shows the
original recorded reserve as adjusted at the end of each subsequent year to
reflect cumulative amounts paid and all other facts and information discovered
during each year. For example, an adjustment made in 1996 for 1992 loss reserves
will be reflected in the re-estimated ultimate liability for each of the years
1992 through 1995. The cumulative (deficiency) redundancy line represents the
cumulative change in estimates since the initial reserve was established. It is
equal to the difference between the initial reserve and the latest liability
re-estimated amount.
The table represents combined development for RIC, RPC and their
predecessors through 1995. Calendar year 1996 estimates of ultimate liabilities
include reserves assumed with the purchase of RNIC and the subsequent loss
portfolio transfers of five self-insurance funds. Effective in 1996, the Company
has separately reported unallocated loss adjustment expenses previously included
in general and administrative expenses. The cumulative paid and re-estimated
liability data in the following table have been restated for all years to
reflect this change. The table presents development data by calendar year and
does not relate the data to the year in which the accident occurred. Conditions
that have affected historical development of reserves will not necessarily
continue in the future.
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<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
(In thousands)
1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and loss adjustment
expenses, net $ 954 $ 11,273 $ 36,323 $ 68,674 $ 96,755 $152,407 $ 4,599 $92,820 $196,078
Cumulative Amount Paid:
One Year Later 355 8,927 19,335 32,241 47,572 122,603 95,229 55,875
Two Years Later 902 14,922 34,010 55,794 116,193 164,840 127,395
Three Years Later 1,185 19,675 44,551 91,441 134,193 172,699
Four Years Later 1,595 22,587 59,651 100,307 137,782
Five Years Later 1,665 26,943 62,775 102,468
Six Years Later 1,801 27,870 63,620
Seven Years Later 1,821 28,141
Eight Years Later 1,662
Liability Re-estimated as of:
One Year Later 1,016 18,508 44,192 71,145 115,116 156,867 133,651 95,843
Two Years Later 1,219 20,541 49,429 83,918 123,472 156,304 139,992
Three Years Later 1,462 24,514 55,485 91,477 123,298 162,812
Four Years Later 1,890 27,108 58,588 91,821 125,751
Five Years Later 1,977 26,670 57,867 92,878
Six Years Later 1,785 26,023 57,981
Seven Years Later 1,734 26,067
Eight Years Later 1,567
Cumulative (Deficiency) (613) (14,794) (21,658) (24,204) (28,996) (10,405) (11,539) (3,023)
</TABLE>
As the above table indicates, the Company's reserving methods in its
early years were adversely impacted by its short operating history and the
relative age of the accounts it insures. Additionally, the inclusion of
unallocated loss adjustment expenses in the table has increased the cumulative
deficiency for all years. Since 1992, the Company believes its reserving
methodologies have become more reliable. Key factors for this improvement are:
1) the ability to identify trends and reduce volatility based on a larger claims
database; 2) the maturation of the Company's managed care approach to claims;
and 3) industry reforms.
17
<PAGE> 186
The following table presents an analysis of losses and loss adjustment
expenses and provides a reconciliation of beginning and ending reserves for the
periods indicated. Adverse development for prior periods' loss and loss
adjustment expenses in calendar year 1996 represented deterioration in 1993 and
prior accident years offset in part by improved experience in the 1995 accident
year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross reserves for losses and loss adjustment
expenses, beginning of period $261,700 $ 12,668 $ 6,157
Less reinsurance recoverables 100,675 7,398 -
Less SDTF recoverable 51,836 671 831
Less prepaid managed care fees 16,369 - -
-------- -------- --------
Net balance at January 1 92,820 4,599 5,326
-------- -------- --------
Assumed during year from loss portfolio
transfers and acquisitions 88,212 123,854 -
-------- -------- --------
Incurred losses and loss adjustment
expenses related to:
Current year 123,986 87,467 6,026
Prior years 3,023 5,198 2,062
-------- -------- --------
Total incurred losses and loss
adjustment expenses 127,009 92,665 8,088
-------- -------- --------
Paid related to:
Current year 56,088 33,069 4,821
Prior years 55,875 95,229 3,994
-------- -------- --------
Total paid 111,963 128,298 8,815
-------- -------- --------
Net balance at December 31 196,078 92,820 4,599
Plus reinsurance recoverables 180,698 100,675 7,398
Plus SDTF recoverables 49,505 51,836 671
Plus prepaid managed care fees 31,958 16,369 -
-------- -------- --------
Gross reserves for losses and
loss adjustment
expenses at December 31 $458,239 $261,700 $ 12,668
======== ======== ========
</TABLE>
18
<PAGE> 187
ITEM 2. PROPERTIES
The Company owns its headquarters building in Sarasota, Florida, which
contains approximately 112,000 square feet of space, as well as an adjacent
parking facility. The Company leases an aggregate of approximately 70,337 square
feet of office space at 11 other locations in nine states, including Florida,
under terms expiring through June 2001. The Company incurred rent expense of
$1.3 million for the year ended December 31, 1996. Additionally, the Company has
continuing commitments through July 1998 of approximately $70,000 in the
aggregate related to two locations in which offices were closed during 1996. See
"Business - Recent Developments - Restructuring."
ITEM 3. LEGAL PROCEEDINGS
On April 2, 1996, RISCORP, Inc., RIC, several officers, directors and
employees were named as defendants in a purported class action lawsuit filed in
the United States District Court for the Southern District of Florida. The suit
claims the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), breached fiduciary duties, and were negligent in
RISCORP, Inc.'s acquisition of CMIC in 1995. The suit seeks compensatory and
punitive damages and equitable relief and treble damages for the RICO counts.
The named plaintiffs, Vero Cricket Shop, Inc., Vero Cricket Shop Too, Inc., and
Falls Company of Longboat Key, Inc., claim to be former policyholders of CMIC
and claim to represent others similarly situated. The defendants moved to
dismiss the RICO counts and to strike the punitive damages claims. These
motions, as well as plaintiffs' motion for class certification, were pending
when the plaintiffs filed an amended complaint. The amended complaint added the
Florida Insurance Commissioner and Zenith as defendants in one new count seeking
declaratory relief. The remaining claims in the amended complaint are the same
as those in the original complaint. The defendants have filed a motion to
dismiss the amended complaint and to strike the punitive damages claims. The
parties have been ordered to non-binding mediation in this matter. The Company
intends to defend this action vigorously; however, there can be no assurance
that it will prevail in the litigation.
Between November 20, 1996, and January 31, 1997, nine shareholder class
action lawsuits were filed against RISCORP, Inc. and other defendants in the
United States District Court for the Middle District of Florida. In March 1997,
the Court consolidated these lawsuits and appointed co-lead plaintiffs and
co-lead counsel. The plaintiffs subsequently filed a consolidated complaint. The
consolidated complaint named as defendants RISCORP, Inc., three of its executive
officers, one non-officer director and three of the underwriters for RISCORP,
Inc.'s initial public offering. The plaintiffs in the consolidated complaint
purport to represent the class of shareholders who purchased RISCORP, Inc. Class
A Common Stock between February 28, 1996, and November 14, 1996. The
consolidated complaint alleges that RISCORP, Inc.'s Registration Statement and
Prospectus of February 28, 1996, as well as subsequent statements, contained
false and misleading statements of material fact and omissions, in violation of
sections 11 and 15 of the Securities Act and sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated thereunder. The consolidated complaint
seeks unspecified compensatory damages.
19
<PAGE> 188
The defendants have filed a motion to dismiss the consolidated complaint which
has been fully briefed and is pending. Discovery will be stayed until the motion
to dismiss has been decided. The plaintiffs have filed a motion to certify the
class, but the parties have agreed that the defendants need not respond to that
motion until thirty days after the motion to dismiss has been decided. The
parties have been ordered to non-binding mediation in this matter. RISCORP, Inc.
intends to defend this action vigorously; however, there can be no assurance
that it will prevail in the litigation.
On July 17, 1997, RISCORP, Inc. and several former officers were named
as defendants in a suit filed in state court in Montgomery, Alabama. The suit
alleges violations of federal and state securities laws and breach of contract
resulting from the purchase of IAA in 1996. The suit seeks compensatory and
punitive damages and equitable relief. The named plaintiffs are Thomas Albrecht
and Peter Norman, the former shareholders of IAA. RISCORP, Inc. intends to
vigorously defend this action; however, there can be no assurance that it will
prevail in the litigation.
On August 20, 1997, RISCORP, Inc., RNIC, IAA and Peter Norman were
named as defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges common law fraud, breach of contract and breach of fiduciary duty
resulting from the acquisition of OSAA in 1996. The suit seeks compensatory and
punitive damages and equitable relief. The named plaintiff is OSAA. The Company
intends to vigorously defend this action; however, there can be no assurance
that it will prevail in the litigation.
On September 18, 1997, the U.S. Attorney's Office in Pensacola, Florida
announced that a United States grand jury had indicted RISCORP, Inc., RISCORP
Management Services, Inc. (a wholly owned, non-regulated subsidiary of RISCORP,
Inc.) and five former officers, including William D. Griffin, Founder and
Chairman of the Board, for various charges stemming from alleged illegal
political campaign contributions. On September 18, 1997, the Board of Directors
approved a guilty plea by RISCORP Management Services, Inc. to a single count of
conspiracy to commit mail fraud. The guilty plea was entered by RISCORP
Management Services, Inc. and accepted by the court on October 9, 1997. As a
result of an agreement negotiated with the U. S. Attorney, the court dismissed
the indictment against RISCORP, Inc. on the same day. Mr. Griffin has resigned
from the Board of Directors of the Company and all other positions with the
Company. The Company has recorded a provision of $1 million for the payment of
fines and other costs related to this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In addition,
certain expenses of the law suits and related legal expenses may be covered
under directors and officers' insurance coverage maintained by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE> 189
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Following the Company's initial public offering on February 29, 1996,
the Company's Class A Common Stock ($.01 par value) was traded on the NASDAQ
Stock Market's National Market under the symbol "RISC." As of December 31, 1996,
there were 153 record holders of Class A Common Stock. Due to the fact that
required financial statements had not been filed with the Securities and
Exchange Commission, the Company's Class A Common Stock was delisted on July 2,
1997. See - "Business - Recent Developments - Delisting by NASDAQ." The
following table sets forth the high and low closing sales prices for the
Company's Class A Common Stock for each full quarterly period.
<TABLE>
<CAPTION>
Per Share Price of Common Stock
===================================================================================================
1996 1997
--------------------------------------------------- --------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
===================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
High 21 1/2 23 7/8 19 1/4 18 3/4 4 3/8 3 3/4 1 1/8
Low 19 15 10 3/4 3 15/64 1 7/8 15/16 3/8
</TABLE>
No dividends have been declared or paid since the Company's initial public
offering and it is not anticipated that dividends will be paid in the
foreseeable future.
21
<PAGE> 190
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premiums earned $173,557 $135,887 $ 1,513 $ 1,964 $ 4,257
Fee and other income 31,838 23,413 56,712 40,948 19,301
Net investment income 12,194 6,708 1,677 873 982
-------- -------- ------- ------- -------
Total revenues 217,589 166,008 59,902 43,785 24,540
-------- -------- ------- ------- -------
Expenses:
Losses and loss
adjustment expenses 114,093 82,532 (716) 3,571 1,584
Unallocated loss
adjustment expenses 12,916 10,133 8,804 7,637 4,839
Commissions, general and
administrative expenses 65,560 48,244 35,869 20,775 10,401
Interest 2,795 4,634 1,750 1,218 202
Depreciation and amortization 11,625 1,683 1,330 1,116 545
-------- -------- ------- ------- -------
Total expenses 206,989 147,226 47,037 34,317 17,571
-------- -------- ------- ------- -------
Income before income taxes 10,600 18,782 12,865 9,468 6,969
Income taxes (1) 8,202 5,099 5,992 3,714 1,183
-------- -------- ------- ------- -------
Net income $ 2,398 $ 13,683 $ 6,873 $ 5,754 $ 5,786
======== ======== ======= ======= =======
Net income per share $ 0.07 $ 0.45 $ 0.23 $ 0.20 $ 0.20
======== ======== ======= ======= =======
Weighted average common
shares and common share
equivalents outstanding (2) (3) 36,785 30,093 30,093 28,554 28,554
======== ======== ======= ======= =======
DECEMBER 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and investments $ 281,963 $ 92,713 $47,037 $30,157 $19,622
Total assets 828,442 443,242 93,908 54,551 34,402
Long-term debt 16,303 46,417 27,840 17,015 19,599
Shareholders' equity (deficit) 157,308 16,157 3,895 1,996 (5,289)
</TABLE>
(1) Certain subsidiaries of the Company were S Corporations prior to the
Reorganization (as defined in note 1 to the Company's consolidated
financial statements) and were not subject to corporate income taxes.
(2) 1995 amount excludes 2,556,557 shares of Class A Common Stock reserved
for issuance pursuant to the exercise of stock options outstanding as
of December 31, 1995, having a weighted average exercise price of $3.96
per share.
(3) 1996 amount includes 607,603 shares of Class A Common Stock pursuant to
the contingency clauses in the acquisition agreements with CompSource
and IAA. See notes 3 and 19 to the Company's consolidated financial
statements.
22
<PAGE> 191
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Prior to 1996, the Company's at-risk operations were focused in Florida.
During 1996, the Company initiated a number of acquisitions of licenses and
existing insurance funds which allowed the Company to diversify its at-risk
operations outside the state of Florida. A comparison of the Company's direct
premiums written by state (prior to reinsurance cessions or assumptions) is
presented below:
<TABLE>
<CAPTION>
DIRECT PREMIUMS WRITTEN (A)
--------------------------
(Dollars in millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Florida $270.8 $284.8 $2.4
North Carolina 41.4 - -
Alabama 21.7 - -
Other 22.8 -
------ ------ ----
Total $356.7 $284.8 $2.4
====== ====== ====
</TABLE>
(a) Includes RIC, RPC and RNIC for 1996, RIC and RPC for 1995, and RPC
for 1994.
Direct premiums written were reduced by specific reinsurance cessions
(1996, 1995 and 1994), the 50% AmRe Quota Share Reinsurance agreement for the
Company's Florida workers' compensation business (1996 and 1995), and the 65%
Chartwell Quota Share Reinsurance agreement (effective October 1, 1996), which
decreased to 60% effective January 1, 1997.
The majority of the Company's premiums have been written in Florida, a
regulated pricing state where premiums for guaranteed cost products are based on
state-approved rates. However, the Company also offers policies which are
subject to premium reductions as high deductible plans, participating dividend
plans, or loss sensitive plans. Pricing for these plans tends to be more
competitively based, and the Company experienced increasing competition during
1996 in pricing these plans. In addition, in October 1996, the Florida Insurance
Commissioner ordered workers' compensation providers to reduce rates by an
average of 11.2% for new or renewal policies written on or after January 1,
1997. Concurrently, 10% managed care credit was phased out. This credit had been
offered since 1994 to employers who met certain criteria for participating in a
qualified WCMCA. As of December 31, 1996, the Company estimated that
approximately 60% of the Company's premiums received the 10% managed care
credit.
23
<PAGE> 192
The Company experienced increased pricing pressures during 1996 and
expects that such pressures will continue into the foreseeable future. The
Company intends to continue applying managed care techniques to differentiate
itself from its competitors and to continue to reduce claims costs. In June
1997, the Company implemented cost cutting measures which resulted in the
Company ceasing to write new business in certain states including Oklahoma,
Virginia, Missouri, Mississippi, Louisiana and Kansas, which approximates $16
million in direct premiums written.
During 1995 and 1996, the Company began to diversify by writing other
property and casualty lines of business, which accounted for less than 1% and
4%, respectively, of its premiums earned. The Company's 1996 non-workers'
compensation products included other accident and health, reinsurance, inland
marine, fire, allied lines, commercial multiple peril, other liability -
occurrence, products liability - occurrence, surety, and earthquake. Such
property and casualty lines expose the Company to the risk of significant loss
in the event of major adverse natural phenomena, known in the insurance industry
as catastrophes. These catastrophes may cause significant financial statement
losses since catastrophe losses may not be accrued in advance of the event.
During 1997, the Company made a strategic decision to exit the non-workers'
compensation lines of business.
The Company attempts to lower claims costs by applying managed care
techniques and programs to workers compensation claims, particularly by
providing prompt medical intervention, integrating claims management and
customer service, directing care of injured employees through a managed care
provider network, and availing itself of potential recoveries under subrogation
and other programs. See "Business."
Part of the Company's claims management philosophy is to seek recoveries
for claims which are reinsured or which can be subrogated or submitted for
reimbursement under various states' recovery programs. As a result, the
Company's losses and loss adjustment expenses are offset by estimated recoveries
from reinsurers under specific excess of loss and Quota Share Reinsurance
agreements, subrogation from third parties and state "second disability" funds,
including the SDTF.
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds and self-insured employers for excess workers' compensation
benefits paid to employees when an employee is injured on the job and the injury
to the physically disabled worker merges with, aggravates, or accelerates a
preexisting impairment. The SDTF is managed by the State of Florida and is
funded through assessments against insurers and self-insurers providing workers'
compensation coverage in Florida. The SDTF's assessment formula has historically
yielded sufficient revenues for annual reimbursement payments and for costs
associated with administering the SDTF; however, the SDTF has not prefunded its
claims liability and no reserves currently exist. As of September 30, 1996, the
SDTF had an actuarially projected undiscounted liability of approximately $4
billion based on a study performed for the SDTF by independent actuarial
consultants. In addition, the SDTF actuarial study indicated that, at the
current assessment rates, the payment of the existing liability would take
numerous years.
24
<PAGE> 193
Under Florida sunset laws applicable to some state sponsored funds, the
SDTF would have expired on November 4, 1996, unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. The SDTF will accept no claims with
accident dates after December 31, 1997. Certain SDTF claims may have to be
refiled for reimbursement and such filing will require a refiling fee.
Additionally, companies accruing SDTF recoveries may be statutorily limited in
the level of recoverable they may be allowed to carry. The bill provides for a
funding mechanism through which companies writing workers' compensation
insurance in Florida will be assessed an annual charge to cover payments made by
the SDTF. The Company believes that even in the event of default by the SDTF,
the existing reimbursements of the SDTF would become general obligations of the
State of Florida. Management further believes that the recoveries recorded at
December 31, 1996 will not be materially adversely affected by the new
legislation.
Estimated recoveries from the SDTF were $49.5 million and $51.8 million
at December 31, 1996 and 1995, respectively. The decrease in 1996 resulted from
actual collections and a reduction in estimated recoveries due to additional
information regarding the impact of legislative reform. Actual net claim
recoveries from the SDTF totaled $2.5 million, $.9 million, and $0 respectively
for the years ended December 31, 1996, 1995 and 1994. SDTF assessments, which
are based on net premiums written, were $11.7 million, $12.9 million and $.1
million for the years ended December 31, 1996, 1995, and 1994, respectively.
While it is not possible to predict the result of any other legislative
or regulatory proposals affecting the SDTF, changes in the SDTF's operations or
funding which decrease the availability of recoveries or increase assessments
payable by the Company, could have a material adverse effect on the Company's
business, financial condition, or results of operations.
RESULTS OF OPERATIONS
The comments below should be read in conjunction with the Financial
Statements in Part IV, Item 14.
Direct premiums earned increased to $326.9 million for the year ended
December 31, 1996 from $274.3 million in 1995 and $0.6 million in 1994. The net
increase from 1995 to 1996 was primarily due to loss portfolio transfers and
premium growth in states licensed through RNIC. The increase from 1994 to 1995
was almost entirely due to the Company's January 1, 1995 acquisition of RIC,
along with additional revenue attributable to improved loss experience on
reinsurance contracts. In addition, the number of in force policies increased
from approximately 19,000 as of January 1, 1995 to approximately 22,000 as of
December 31, 1995 and to approximately 39,000 as of December 31, 1996. Premiums
assumed increased to $11.7 million in 1996 from $0.7 million in
25
<PAGE> 194
1995, caused primarily by the initiation of the Virginia Surety UMA. Premiums
assumed decreased from 1994 to 1995 primarily because $4.8 million of the 1994
premium balance was assumed from RIC, which the Company acquired on January 1,
1995. Premiums ceded to reinsurers increased to $165.0 million in 1996 from
$139.1 million in 1995 and $4.5 million in 1994, primarily as a result of the
Chartwell Quota Share Reinsurance agreement and the January 1, 1995 initiation
of the AmRe Quota Share Reinsurance agreement.
Net premiums earned include premiums related to retrospectively rated
policies ("Retros"), whose premiums are adjusted based on actual loss
experience. The Company has continually reassessed its estimates of net earned
premiums to reflect additional data becoming available through premium audits
and actuarial review. During 1995, the Company reduced its net earned premiums
by approximately $8 million to reflect a reduction in the expected ultimate
earned premium applicable to pre-1995 policies that had reached final premium
audit based on actuarial review. On January 1, 1996, the Company began recording
ongoing premiums for Retros at a percentage of the guaranteed cost equivalent
based on actuarial projections. During 1996, the Company reviewed pre-1996 Retro
policies which had been audited for final premium adjustments and reduced its
net earned premiums by $6.4 million to reflect projected ultimate premiums
earned on Retros.
The following table shows direct, assumed, ceded, and net earned
premiums for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Direct premiums earned $326.9 $274.3 $ 0.6
Assumed premiums earned 11.7 0.7 5.4
Premiums ceded to reinsurers (165.0) (139.1) (4.5)
------ ------ -----
Net premiums earned $173.6 $135.9 $ 1.5
====== ====== =====
</TABLE>
Fee and other income for the years ended December 31, 1996, 1995 and
1994 was $31.8 million, $23.4 million and $56.7 million, respectively. The net
increase of $8.4 million from 1995 to 1996 was primarily due to new fees
generated from CompSource, the Virginia Surety UMA, managing the Administrator
of the new Third Coast, and growth in other existing fee products, offset by
decreases in commissions on reinsurance premiums, loss of service fees when NARM
and the Virginia Funds (which were previously managed by the Company) were
converted to at-risk business through loss portfolio transfers, and decreases in
RWI service fees from terminations of RWI's Mississippi and Louisiana service
contracts. The decrease of $33.3 million from 1994 to 1995 resulted from the
acquisition of RIC, from which the Company previously derived fee income. This
decrease was partially offset by the inclusion of the results of RWI, growth in
fees generated from another fund managed by the Company, and an increase in
realized investment gains resulting from the Company's acquisition of RIC.
26
<PAGE> 195
Net investment income for the years ended December 31, 1996, 1995 and
1994 was $12.2 million, $6.7 million and $1.7 million, respectively. The $5.5
million increase from 1995 to 1996 is primarily due to the increase in the
Company's investment portfolio created from the Company's February 29, 1996
initial public offering, as well as the portfolios acquired from the NARM and
OSAA transactions. The increase of $5.0 million from 1994 to 1995 was primarily
attributable to the increase in the investment portfolio resulting from the
acquisition of RIC and its related investment portfolios and the investment of
proceeds from Company borrowings.
Losses and loss adjustment expenses for the years ended December 31,
1996, 1995 and 1994 were $114.1 million, $82.5 million and ($0.7) million,
respectively. The net increase of $31.6 million from 1995 to 1996 was
attributable to increased activity due to acquisitions and writings in new
states licensed through RNIC and growth in the Company's core Florida
operations. The net increase of $83.2 million from 1994 to 1995 was primarily
attributable to the acquisition of RIC and is net of a $6.8 million increase in
anticipated recoveries from the SDTF and $4.7 million in loss reserve decreases
due to improved loss experience.
During 1996, the Company reclassified unallocated loss adjustment
expenses out of commissions, general and administrative expenses, and reflected
this reclassification in its 1995 and 1994 financial statements as well.
Unallocated loss adjustment expenses for the years ended December 31, 1996, 1995
and 1994 were $12.9 million, $10.1 million and $8.8 million, respectively. The
net increase of $2.8 million from 1995 to 1996 and $1.3 million from 1994 to
1995 is attributable to increases in personnel and related costs attributed to
growth in premium volume.
Commissions, general and administrative expenses for the years ended
December 31, 1996, 1995 and 1994 were $65.6 million, $48.2 million and $35.9
million, respectively. The increase of $17.3 million from 1995 to 1996 is
attributable primarily to significant increases in the Company's allowance for
bad debts and legal expenses combined with increased overall commissions,
general and administrative expenses associated with higher premiums and
personnel resulting from acquisitions and internal growth. The increases were
offset by higher ceding commissions under the Quota Share Reinsurance
agreements, including $6.3 million of additional ceding commissions recognized
under the AmRe Quota Share Reinsurance agreement which resulted from improved
loss ratio experience during the contract periods. The increase of $12.3 million
from 1994 to 1995 was due primarily to increases in employees and related costs.
Total employees at December 31, 1996, 1995 and 1994 were 871; 696; and 558,
respectively.
Interest expense for the years ended December 31, 1996, 1995 and 1994
was $2.8 million, $4.6 million and $1.8 million, respectively. The decrease of
$1.8 million from 1995 to 1996 was attributable primarily to repayment of bank
borrowings in March 1996 with proceeds from the initial public offering. The
increase of $2.8 million from 1994 to 1995 was attributable primarily to
increased borrowings associated with the bank term loan and subordinated notes.
27
<PAGE> 196
Depreciation and amortization expenses for the years ended December 31,
1996, 1995 and 1994 were $11.6 million, $1.7 million and $1.3 million,
respectively. The increase of $9.9 million from 1995 to 1996 was primarily due
to the $3.2 million and $2.8 million write-off of goodwill associated with RWI
and IAA, respectively. During 1996, the Company assessed the recoverability of
the value of the assets, and wrote these assets down to $0.5 million. The
Company's assessment was based upon the termination of RWI's service contracts
with the Mississippi and Louisiana funds, the closing of former SISB offices in
several states, and the deteriorating loss ratio and declining premium retention
of OSAA. The increase of $0.4 million from 1994 to 1995 was primarily due to the
amortization of loan fees related to the bank term loan and subordinated notes,
amortization of goodwill related to the RWI acquisition, and depreciation of
fixed asset additions.
The effective tax rates for the years ended December 31, 1996, 1995 and
1994 were 77.4%, 27.1% and 46.6%, respectively. The increase from 1995 to 1996
was primarily due to the non-deductible write-off of the goodwill detailed above
which was partially offset by a higher level of tax-exempt income. The decrease
from 1994 to 1995 resulted from an increase in tax-exempt income related to the
acquisition of RIC and an increase in non-taxable earnings of RISCORP of North
Carolina, Inc. ("RONC").
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The Company's
primary sources of cash flow from operations are premiums and investment income,
and its cash requirements consist primarily of payment of losses and loss
adjustment expenses, support of its operating activities including various
reinsurance agreements and managed care programs and services, capital surplus
needs for its insurance subsidiaries, and other general and administrative
expenses.
On February 29, 1996, the Company completed its initial public offering
of Common Stock which generated net proceeds of $127.9 million which were used
to repay approximately $31 million of various borrowings, increase the capital
surplus of the Company's insurance subsidiaries, fund acquisitions and for
general corporate purposes. Borrowings increased by $19.6 million between 1994
and 1995 due to borrowings under a variable rate term loan and the subordinated
notes, the proceeds of which were used to repay existing debt and fund the
acquisition of RIC.
On October 15, 1996, the Company entered into a credit agreement with
NationsBank, N.A. and SouthTrust Bank of Alabama which provided a $50 million
credit facility to the Company for unsecured borrowings for a two-year revolving
period convertible into a term loan with a final maturity on September 30, 2001.
There were no borrowings under the agreement, and the Company terminated the
agreement on June 16, 1997.
28
<PAGE> 197
In November 1996, the Board of Directors of the Company created a
Strategic Alternatives Committee whose primary function was to evaluate
alternatives to maximize shareholder value including, without limitation,
potential acquisitions, joint ventures, mergers, strategic alliances and the
sale of all or part of the Company. In turn, the committee hired an investment
bank to identify and evaluate entities with an interest in acquiring the Company
or its assets. On June 17, 1997, the Company entered into an agreement with
Zenith to purchase substantially all of the operating assets of the Company and
its affiliates at a purchase price equal to the greater of: (i) the book value
of the acquired assets less the book value of the assumed liabilities, or (ii)
$35 million cash and assumption of $15 million of debt. The transaction is
subject to shareholder and regulatory approval. See "Business - Recent
Developments - Asset Purchase Agreement with Zenith Insurance Company."
Cash flow from operations for the years ended December 31, 1996, 1995
and 1994 was $28.1 million, ($47.3) million and $17.8 million, respectively. The
increase from 1995 to 1996 was due primarily to the improved cash flows
resulting from ceding of premiums under the AmRe Quota Share Reinsurance
agreement and increases in reserves for losses and loss adjustment expenses. The
decrease from 1994 to 1995 was due primarily to the initiation of the AmRe Quota
Share Reinsurance agreement and other reinsurance agreements which created a net
cash outflow resulting from the cessation of $139.1 million in written premium.
The Company has projected cash flows through March 1998 and believes it
has sufficient liquidity and capital resources to support its operations without
considering dividends from the insurance company subsidiaries and transactions
resulting from the pending sale of the Company.
The Company has recorded $49.5 million in accrued net recoverables from
the SDTF, which it anticipates will be reimbursed over a number of years. For
the years ended December 31, 1996, 1995 and 1994, the Company received net
payments from the SDTF totaling $2.5 million, $0.9 million and $0, respectively.
Barring any adverse legislative change, the Company believes that it
will ultimately collect the entire balance of SDTF recoverables and that
periodic reimbursement will be received following submission of proof of claim
and reimbursement requests. During its approximate 40-year history, the SDTF has
historically paid reimbursement requests for claims it determined were eligible
for reimbursement. The Company does not believe that SDTF will fail to meet its
obligations to pay eligible reimbursement requests, although there can be no
assurance in this regard. The failure of the SDTF to meet its obligations could
adversely affect the liquidity of the Company.
In addition, the liquidity of the Company could be adversely affected
by certain legal issues and its initial A.M. Best rating. See "Legal
Proceedings" and "Business - A.M. Best Ratings of Insurance Subsidiaries."
29
<PAGE> 198
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based upon the risks inherent in its operations. The
standards, which have not yet been adopted in Florida, require the computation
of a risk-based capital amount which is then compared to a carrier's actual
total adjusted capital. The computation involves applying factors to various
financial data to address four primary risks: asset risk, insurance underwriting
risk, credit risk, and off-balance sheet risk. These standards provide for
regulatory intervention when the percentage of total adjusted capital to
authorized control level risk-based capital is below certain levels. At December
31, 1996, the Company's insurance subsidiaries' statutory surplus was in excess
of any risk-based capital action level requirements.
INVESTMENT PORTFOLIO
The Company has established an investment policy that focuses upon
safety of principal, compliance with regulations, liquidity and diversification.
As of December 31, 1996, approximately 70% of the Company's investment portfolio
was rated Aa or above by Moody's, and the portfolio contained no debt securities
with a rating of less than Baa. The Company also holds a small amount of common
stocks (less than 2% of the portfolio). The average duration of the portfolio,
including operational cash, was approximately 3.1 years at December 31, 1996.
The amortized cost and the fair value of the Company's investment portfolio, at
December 31, 1996, were $252.9 million and $255.7 million, respectively.
The following table summarizes the Company's investment portfolio at
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
TAX
FAIR EQUIVALENT
TYPE OF INVESTMENT VALUE YIELD*
------------------ ----- ------
<S> <C> <C>
Certificates of deposit $ 2,250 6.26%
U.S. Government bonds 57,608 6.17%
U.S. Government agency bonds 8,909 6.71%
Corporate bonds 87,366 6.57%
Mortgage-backed securities 2,612 7.22%
Asset-backed securities 5,556 6.22%
Municipal bonds (non-taxable) 79,531 6.70%
Municipal bonds (taxable) 1,022 7.14%
Preferred stock 7,922 8.69%
Common Stock 2,963 4.10%
-------- ----
$255,739 6.56%
======== ====
</TABLE>
* The tax equivalent yield was computed using a tax rate of 35%, which
represents the effective statutory tax rate for the Company.
30
<PAGE> 199
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, footnotes and
supplementary schedules are set forth on pages F-1 to F-45 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
or financial disclosure for the two years ended December 31, 1996.
31
<PAGE> 200
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information as of September 30, 1997,
concerning the Company's executive officers, continuing directors, and nominees
for director.
<TABLE>
<CAPTION>
Name Position(s) Age Year First
- ---- ----------- --- Became a Director
-----------------
<S> <C> <C> <C>
Frederick M. Dawson President and Chief Executive Officer 57 1997
Steven J. Berling Senior Vice President 48
Gregory P. Kuzma Senior Vice President and Treasurer 46
Richard K. Larson Executive Vice President - Marketing 57
Richard T. Magsam Vice President, Controller and Chief Accounting 41
Officer
Stephen C. Rece Senior Vice President and Chief Financial 53
Officer
Walter E. Riehemann Senior Vice President, General Counsel & 31
Secretary
Seddon Goode, Jr. Director 65 1996
George E. Greene III Director 62 1995
Walter L. Revell Director and Vice Chairman 62 1995
</TABLE>
The following individuals include existing executive officers and directors and
former officers and directors included among the Company's four highest paid
executive officers for the year ended December 31, 1996.
FREDERICK M. DAWSON joined the Company in May 1997 as Chief Executive Officer,
and was elected President in June 1997. Prior to joining RISCORP, Mr. Dawson was
Chairman, President and Chief Executive Officer of Integon Life Insurance
Corporation from December 1994 to July 1995 and Harcourt General Insurance
Companies from August 1992 to December 1994. Mr. Dawson's previous experience
includes executive positions with Beneficial Corporation from October 1980 to
March 1987 and Citibank, N.A. from October 1987 to August 1992.
32
<PAGE> 201
STEVEN J. BERLING has served as a Senior Vice President of the Company and
President of the Company's Managed Care Services Group since December 1995. Mr.
Berling was President of the Management Services Division from September 1994 to
December 1995. Prior to joining RISCORP, Mr. Berling was Vice President at VHA
of Florida from June 1993 to September 1994. Mr. Berling was Vice President of
Administrative Services at Sharp Health Care from 1987 to 1993 where he served
in various capacities as a hospital administrator.
GREGORY P. KUZMA has served as Senior Vice President and Treasurer of the
Company since June 1997. Prior to joining RISCORP as a Senior Vice President in
1991, Mr. Kuzma was Vice President and Treasurer of Catalyst Energy Corporation
from May 1989 to June 1991. Previously, Mr. Kuzma was Assistant Treasurer of
Duracell Inc., The Pittston Company and Chesebrough-Pond's Inc., where he served
in various treasury positions from 1979 to 1989.
RICHARD K. LARSON joined the Company as Executive Vice President - Marketing in
August 1997. Prior to joining RISCORP, Mr. Larson was President and Chief
Operating Officer of Harvest Life Insurance Company and Federal Home Life
Insurance Company, two insurance subsidiaries of GE Capital Corporation. From
August 1992 to August 1994, Mr. Larson's experience included executive positions
with Harvest Life Insurance Company, PHF Life Insurance Company and Federal Home
Life Insurance Company.
RICHARD T. MAGSAM has served as Vice President, Controller and Chief Accounting
Officer of the Company since September 1997. Mr. Magsam was Assistant Vice
President of Integon Corporation from September 1996 to September 1997 and was
previously Corporate Controller of the Company from April 1995 to September
1996. Prior to joining RISCORP, Mr. Magsam was Senior Vice President and Chief
Financial Officer of Investors Insurance Group, Inc. from 1992 to 1995 and Vice
President and Controller of Financial Benefit Group, Inc. from 1989 to 1991.
Previously, Mr. Magsam was with the public accounting firm of KPMG Peat Marwick
from 1979 to 1988.
STEPHEN C. RECE has served as Senior Vice President and Chief Financial Officer
of the Company since June 1997. Mr. Rece joined the company in March 1989 as
Chief Operating Officer and was named Senior Vice President of Reinsurance in
February 1995. Prior to joining RISCORP, Mr. Rece was Executive Vice President
and Chief Financial Officer of Associated Reinsurance Management Corporation
from June 1985 to March 1989. Previously, Mr. Rece was Vice President and
Secretary-Treasurer of Southern Trust Corporation from 1970 to 1985.
WALTER E. RIEHEMANN has served as Senior Vice President, General Counsel and
Secretary since October 1997. Mr. Riehemann joined RISCORP as Associate General
Counsel in August 1995 and was promoted to Vice President, General Counsel and
Secretary in June 1997. Prior to joining RISCORP, Mr. Riehemann was associated
with the law firms of Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia (1993
to 1995), Long, Aldridge & Norman, Atlanta, Georgia (1993), and Jones, Day,
Reaves & Pogue, Dallas, Texas (1990 to 1993).
33
<PAGE> 202
SEDDON GOODE, JR. was elected a director of the Company in November 1996. Mr.
Goode has served as President and Director of University Research Park, Inc.
since 1981. From 1977 to 1984, Mr. Goode served as Chairman of First Charlotte
Corporation. From 1968 to 1977, Mr. Goode served as Senior Vice President, Chief
Financial Officer and Director of Interstate Securities Corporation. Mr. Goode
is also a director of Trion, Inc. and is a director and chairman of Canal
Industries, Inc.
GEORGE E. GREENE III was elected a director of the Company in November 1995. Mr.
Greene served as Executive Director of No Casinos, Inc., a non-profit
organization to keep casino gambling illegal in Florida, in 1994. Mr. Greene is
also a private consultant. Mr. Greene served in various management positions
with Florida Power Corporation, and other subsidiaries of Florida Progress
Corporation from 1962 to 1993, most recently as Senior Vice President of Florida
Power Corporation from 1983 to 1993. Mr. Greene retired from Florida Power Corp.
on January 1, 1994.
WALTER L. REVELL was elected a director of the Company in November 1995 and Vice
Chairman of the Board in November 1996. Mr. Revell has been Chairman and Chief
Executive Officer of H. J. Ross Associates, Inc., a consulting engineering,
architectural and planning firm, since 1991; Chairman and Chief Executive
Officer of Revell Investments International, Inc. since 1984 and was President
and Chief Executive Officer of Post, Buckley, Schuh & Jernigan, Inc., a
consulting engineering, architectural and planning firm, from 1975 to 1983. Mr.
Revell is also a director of St. Joe Corporation and Dycom Industries, Inc.
WILLIAM D. GRIFFIN is the Founder of the Company, and was its Chairman and Chief
Executive Officer from its inception in 1988 until his resignation in September
1997. Mr. Griffin was a member of the Florida Governor's Task Force on Workers'
Compensation in 1988, and served as chairman of the Marketplace, Conduct
Standards, and Statistics Committee of the Governor's Oversight Board in 1990.
Mr. Griffin also served on the Board of Directors of the Florida Workers'
Compensation Joint Underwriting Association, Inc. from 1993 to 1994.
THOMAS S. HALL served as Senior Vice President-Corporate Development of the
Company from October 1995 until his resignation in June 1997. Mr. Hall was a
Senior Vice President of the Company and President of RISCORP U.S. Group from
1992 to 1995. Mr. Hall served as President and Chief Executive Officer of
Chautauqua Airlines (d/b/a U. S. Air Express) from 1990 to 1992.
FRED A. HUNT served as a Senior Vice President of the Company and President of
the Company's Risk & Insurance Solutions Group from October 1995 until his
resignation in June 1997. Mr. Hunt was the Company's Senior Vice President and
President of P&C Services Division from 1994 to 1995. Mr. Hunt served in various
capacities with Liberty Mutual Insurance Company from 1973 to 1993, most
recently as Vice President and Manager of Underwriting Operations.
34
<PAGE> 203
JAMES A. MALONE served as President of the Company from 1993 until his
resignation in June 1997. Mr. Malone joined the Company in 1990 as Vice
President of Operations, and was named Senior Vice President and Chief Operating
Officer in 1991. Prior to joining the Company, Mr. Malone was Director of Risk
Management for Kentucky Fried Chicken, Inc., a subsidiary of PepsiCo, Inc., from
April 1990 to November 1990. Mr. Malone served as Manager of Risk Financing for
Batus, Inc. from 1988 to 1990.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than ten
percent of the Common Stock of the Company, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors, and ten percent shareholders are required by the SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received by it,
and written representations from certain reporting persons that no SEC Forms 3,
4, or 5 were required to be filed by those persons, the Company believes that
during 1996, its officers, directors and ten percent beneficial owners timely
complied with all applicable filing requirements, except for the following:
Thomas E. Danson, Jr., Paul F. DiFrancesco, Richard A.
Halloy and William D. Griffin each filed a Form 4 late.
35
<PAGE> 204
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the Company's
Chief Executive Officer and the four highest paid executive officers for
services rendered to the Company in 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE*
<TABLE>
<CAPTION>
Securities All Other
Annual Compensation Under- All Other
Name and --------------------------------------------------- lying Compen-
Principal Position Year Salary Bonus Other Options sation (1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William D. Griffin 1996 $751,416 $ 907,241 $18,907(2) - $17,547(5)
Chairman and Chief 1995 720,000 5,609,583 46,571(3) - 13,685(5)
Executive Officer 1994 720,000 4,173,304 53,838(4) - 16,567(5)
James A. Malone 1996 327,500 - - - 35,098(6)
President and 1995 300,000 255,904 - 150,770 33,876(6)
Chief Operating 1994 245,000 317,149 - 929,550 33,906(6)
Officer
Thomas S. Hall 1996 223,750 44,750 - 20,000 33,291(7)
Senior Vice President- 1995 205,000 20,695 - 73,303 34,652(7)
Corporate Development 1994 153,500 278,966 - 155,063 34,000(7)
Fred A. Hunt 1996 200,000 20,000 - 20,000 12,573(8)
Senior Vice President-Risk & 1995 163,165 93,615 - 73,153 4,543(9)
Insurance Solutions 1994 101,935 54,290 - 132,991 35,000(10)
Steven J. Berling 1996 208,333 52,083 - 20,000 3,831(11)
Senior Vice President- 1995 190,306 34,594 - 72,632 734(12)
Managed Care Services 1994 54,808 7,811 - 55,381 -
</TABLE>
*There were no restricted stock awards or LTIP payouts during the periods
covered.
(1) Includes amounts deferred by the executive pursuant to the Company's
401(k) plan and the Company's cafeteria plan.
(2) Includes (i) a $4,591 automobile usage allowance and (ii) a $14,316
aircraft usage allowance. For a further description of the terms of Mr.
Griffin's employment agreement, see "Compensation Arrangements upon
Resignation, Retirement or Other Termination; Employment Agreements."
(3) Includes (i) a $13,936 automobile usage allowance and (ii) a $32,635
aircraft usage allowance.
(4) Includes (i) a $13,000 automobile usage allowance and (ii) a $40,838
aircraft usage allowance.
(5) Includes (i) $9,103, $7,709 and $8,394 cash surrender value of life
insurance policies in effect in 1996, 1995 and 1994, respectively and
(ii) $7,574, $5,976 and $8,173 in annual fees for a country club
membership in 1996, 1995 and 1994, respectively. Also includes $870
group term life insurance premiums in 1996.
(6) Includes (i) $30,117, $30,000 and $30,000 in allocations to the
participant's account in the Company's defined contribution plan in
1996, 1995 and 1994, respectively and (ii) $4,651, $3,876 and $3,906 in
annual fees for country club membership in 1996, 1995 and 1994,
respectively. Also includes $330 group term life insurance premiums in
1996.
(7) Includes (i) $30,117, $30,000 and $30,000 in allocations to the
participant's account in the Company's defined contribution plan in
1996, 1995 and 1994, respectively and (ii) $2,943, $4,652 and $4,000 in
annual fees for country club membership in 1996, 1995 and 1994,
respectively. Also includes $231 group term life insurance premiums in
1996.
36
<PAGE> 205
(8) Includes (i) $5,988 in allocations to the participant's account in the
Company's defined contribution plan, (ii) $6,063 in annual fees for
country club membership, and (iii) $522 for group term life insurance
premiums.
(9) Represents $4,543 in annual fees for country club membership.
(10) Relocation Reimbursement.
(11) Represents a $3,274 allocation to the participant's account in the
Company's defined contribution account and $557 for group term life
insurance.
(12) Represents annual fees for country club membership.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are paid $40,000 annually
plus $1,000 for each Board meeting attended, and $1,000 for each day of
committee meetings attended if such meeting day occurs on a day other than that
of a scheduled meeting of the Board of Directors. In addition, the Company
reserved 10,000 shares of Common Stock for future issuance upon the exercise of
stock options that may be granted to such non-employee directors. During 1996,
Messrs. Greene and Revell were granted options to purchase 1,000 shares each of
the Company's Class A Common Stock at an exercise price of $19.00 per share.
During 1996, Mr. Goode was granted options to purchase 1,000 shares of the
Company's Class A Common Stock at an exercise price of $4.44 per share. These
options vest 25% per year beginning two years from the option grant date. All
directors receive reimbursement of reasonable out-of-pocket expenses incurred in
connection with meetings of the Board of Directors. No director who is an
employee of the Company receives separate compensation for services rendered as
a director.
STOCK OPTION GRANTS
The following table shows information concerning options granted in 1996
to the officers shown in the Compensation Table at the end of 1996. The options
vest at the rate of 25% per year beginning on the second anniversary of the date
of grant.
OPTION/SAR GRANTS IN LAST FISCAL YEAR*
- -------------------------------------------------------------------------------
Individual Grants
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Percent Of
Total Potential Realizable Value
Number Of Options At Assumed Annual Rates Of
Securities Granted To Stock Price Appreciation
Underlying Employees Exercise Or For Option Term
Options In Fiscal Base Expiration ---------------------------
Name Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William D. Griffin 0 0 $ 0 N/A $ 0 $ 0
James A. Malone 0 0 0 N/A 0 0
Thomas S. Hall 20,000 3% 4.50 11/18/08 73,800 207,000
Fred A. Hunt 20,000 3% 4.50 11/18/08 73,800 207,000
Steven J. Berling 20,000 3% 4.50 11/18/08 73,800 207,000
</TABLE>
*No SARs have been granted.
37
<PAGE> 206
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table shows information concerning options exercised
during 1996 and options held by the officers shown in the Summary Compensation
Table at the end of 1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year-End at Fiscal Year-End (1) (2)
Acquired on Value -------------------------- --------------------------
Name Exercise Realized Exerciseable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William D. Griffin - - - - - -
James A. Malone - - 524,175 556,145 $1,129,795 $ 8,134
Thomas S. Hall - - 38,766 209,600 775 2,326
Fred A. Hunt - - 33,228 192,836 665 1,994
Steven J. Berling - - 13,845 134,168 277 831
</TABLE>
(1) Based on the closing market price on December 31, 1996 of $3.63 per share.
(2) Based on the closing market price on October 10, 1997 of $0.625 per share,
there were no in-the-money options.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") provides for the
grant of stock options to eligible employees and consultants of the Company. The
Option Plan is intended to provide participants with an opportunity to increase
their stock ownership in the Company and to give them an additional incentive to
promote the financial success of the Company. Pursuant to the Option Plan, the
Company may grant nonqualified stock options to employees (including officers
and directors who are employees) and consultants. William D. Griffin, an officer
and director of the Company, is not eligible to participate in the Option Plan.
A total of 3,118,832 shares of Class A Common Stock has been reserved for
issuance under the Option Plan. As of December 31, 1996, the Company had granted
stock options covering 3,078,779 shares of Class A Common Stock to various
employees (including options to purchase 1,927,542 shares issued to executive
officers) at exercise prices ranging from $0.72 to $19.00 per share. Each
exercise price was determined to be not less than the fair market value of the
Class A Common Stock on the date of grant, except for grants to James A. Malone
to purchase 387,314 shares on October 10, 1994 and 2,604 shares on March 24,
1995. In November 1996, the Stock Option Committee amended the exercise price on
all options with an exercise price greater than $4.50 per share to $4.50 per
share, the fair market value of the Class A Common Stock on the date of the
amendment. As of December 31, 1996, the exercise prices range from $0.72 to
$4.50 per share.
38
<PAGE> 207
The Stock Option Plan Committee is authorized to administer the Option
Plan, including selection of employees and consultants of the Company to whom
options may be granted. The Stock Option Committee also determines the number of
shares, the exercise price, the terms, any conditions on exercise and other
terms of each option. There is no limit on the term of the options. Options
granted under the Option Plan generally vest over a period of five years. The
option price is payable in full upon exercise, and payment may be made in cash,
by delivery of shares of Class A Common Stock (valued at fair market value at
the time of exercise), or by such other consideration as the Stock Option
Committee may approve at the time of grant. The options are non-transferable
other than by will or by the laws of descent and distribution and must be
exercised by the optionee during the period of his employment with the Company
or within a specified period following termination of employment. The Option
Plan may be amended or terminated at any time by the Board of Directors,
although certain amendments require shareholder approval. The Option Plan
terminates in November 2005.
The Company's board of directors adopted an additional stock option plan
in March 1997 (the "1997 Plan"). A total of 750,000 shares of Class A Common
Stock has been reserved for issuance under the 1997 Plan. The terms of the 1997
Plan are substantially similar to those of the Option Plan. The 1997 Plan will
be submitted to the Company's shareholders for approval.
COMPENSATION ARRANGEMENTS UPON RESIGNATION, RETIREMENT OR OTHER TERMINATION;
EMPLOYMENT AGREEMENTS
The Company had entered into employment agreements with Messrs. Malone,
Hall, Hunt, and Berling, providing for base salaries of $330,000, $225,000,
$200,000 and $210,000, respectively. These employment agreements have a term of
one year (which automatically renew for successive one year periods unless
terminated) and allow the employee to participate in the Company's employee
benefit plans. Under the employment agreements, the Company may terminate the
employee at any time. If the employee's employment is terminated by the Company
for other than "Cause" (as defined in the employment agreements), or the
employee voluntarily terminates his employment for "Good Reason" due to a
material modification, without the employee's written consent, of his duties,
compensation or scope of responsibilities, then the Company must pay the
employee an amount equal to one year of the employee's base salary in effect on
the effective date of termination, payable without interest in twelve equal
monthly installments. During the twelve months, following the date the employee
is terminated for other than Cause, the employee may not compete with the
Company. If the Company terminates the Employee for other than "Cause" or the
Employee voluntarily terminates his employment for Good Reason (a) within 2
years of a "Change of Control" (as defined in the employment agreements) or (b)
within 120 days of a "Potential Change of Control" (as defined in the employment
agreements),
39
<PAGE> 208
then the Company must pay the Employee an amount equal to three times the
employee's base salary in effect on the effective date of termination, payable
in a lump sum. In the event the employee is terminated after a change of
control, the non-compete period is two years. If the employee voluntarily
terminates his employment for other than Good Reason, or his employment
terminates due to disability, or if the Company terminates the employee's
employment for Cause, then the Company will pay the employee a lump sum payment
equal to the portion of his base salary accrued through the date his employment
terminates.
In accordance with his employment agreement, in effect prior to the
Company's initial public offering, Mr. Griffin's compensation includes an annual
base salary of $750,000, quarterly incentives of up to $750,000 per year based
on premiums written and revenues earned, and an annual bonus to be determined in
the discretion of the Board of Directors. This employment agreement will extend
until the earlier of the fifth anniversary of a change of control of the Company
or Mr. Griffin's 65th birthday. The employment agreement contains a covenant
prohibiting competition in the workers' compensation insurance or services
fields in the United States which continues for a period of two years after the
termination of his employment with the Company. The employment agreement
provides that if Mr. Griffin is terminated by the Company after a change of
control of the Company, he will be entitled to receive within 14 days of his
termination date, a lump sum termination payment equal to his total taxable
compensation during the three most recent calendar years, plus an amount equal
to his annual salary for the year in which termination occurs, subject to the
parachute limitations set forth in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended. In addition, the employment agreement provides for a
separate registration rights agreement, which grants to Mr. Griffin certain
rights related to shares of the Company's Class B Common Stock beneficially
owned by him. Under the employment agreement, the Company has also granted Mr.
Griffin the right to use certain intellectual property owned by the Company
bearing the name Griffin or any derivation thereof and the griffin design owned
by the Company. The Company and Mr. Griffin have reserved their rights as to
whether any severance is due to Mr. Griffin due to his recent resignation. See
"Business - Recent Developments - Restructuring."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1996 information as
to the Company's Common Stock beneficially owned by: (i) each director of the
Company, (ii) each executive officer named in the Summary Compensation Table,
(iii) all directors and executive officers of the Company as a group, and (iv)
any person who is known by the Company to be the beneficial owner of more than
5% of the outstanding shares of Common Stock.
40
<PAGE> 209
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (2)
<TABLE>
<CAPTION>
Class A Common Class B Common
Name and Address of -------------- --------------
Beneficial Owner (1) Number Percent Number Percent
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William D. Griffin (3) -- * 22,176,052 91%
James A. Malone (4) 526,389 4% -- *
Steven J. Berling (5) 13,938 * -- *
Thomas S. Hall (6) 39,027 * -- *
Richard A. Halloy (7) 4,488 * -- *
Fred A. Hunt (8) 33,451 * -- *
L. Scott Merritt (9) (10) 13,938 * 2,158,391 9%
George E. Greene III (11) 200 * -- *
Walter L. Revell (12) -- * -- *
Seddon Goode, Jr. (13) -- * -- *
------- -- ---------- ----
All directors and officers as a group 631,431 5% 24,334,443 100%
======= == ========== ====
</TABLE>
(10 persons) (14)
*Less than 1%
(1) The business address for Messrs. Griffin, Malone, Berling, Hall,
Halloy, Hunt, Merritt, Greene, Revell and Goode is 1390 Main Street,
Sarasota, Florida 34236.
(2) Beneficial ownership of shares, as determined in accordance with
applicable Securities and Exchange Commission Rules, includes shares as
to which a person has or shares voting power and/or investment power.
The Company has been informed that all shares shown are held of record
with sole voting and investment power, except as otherwise indicated.
(3) Mr. Griffin's shares are Class B Common Stock and are beneficially
owned by Mr. Griffin through one corporation and two limited
partnerships.
(4) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Malone also has options to acquire 553,931
additional shares of Class A Common Stock that are not exercisable
within 60 days.
(5) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Berling also has options to acquire 134,075
shares of Class A Common Stock that are not exercisable within 60 days.
(6) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Hall also has options to acquire 209,339
shares of Class A Common Stock that are not exercisable within 60 days.
(7) Represents 1,700 shares of Class A Common Stock owned directly and
2,788 shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Halloy also has options to acquire 133,363
shares of Class A Common Stock that are not exercisable within 60 days.
(8) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Hunt also has options to acquire 192,613
shares of Class A Common Stock that are not exercisable within 60 days.
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<PAGE> 210
(9) Includes 13,938 shares of Class A Common Stock subject to options held
by Mr. Merritt that are currently exercisable. Mr. Merritt also has
options to acquire 89,536 shares of Class A Common Stock that are not
exercisable within 60 days.
(10) Mr. Merritt holds 2,158,391 shares of Class B Common Stock as trustee
of certain irrevocable trusts created by Mr. Griffin for the benefit of
his children. Mr. Griffin disclaims beneficial ownership of those
shares.
(11) Mr. Greene owns 200 shares of Class A Common Stock directly and has
options to acquire 8,500 shares of Class A Common Stock that are not
exercisable within 60 days.
(12) Mr. Revell has options to acquire 8,500 shares of Class A Common Stock
that are not exercisable within 60 days.
(13) Mr. Goode has options to acquire 8,500 shares of Class A Common Stock
that are not exercisable within 60 days.
(14) Includes shares subject to options held by all directors and executive
officers that are exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the initial public offering of the Company in February, 1996,
the Company and its predecessor and subsidiary entities were wholly-owned by
William D. Griffin and trusts for the benefit of his children and certain loans
and other business transactions between the Company, Mr. Griffin and entities
owned or controlled by him were structured for reasons related to family
business and estate planning. Prior to September 18, 1997, Mr. Griffin was an
officer and a director of all entities. Business transactions with Mr. Griffin
or other officers or directors must now be approved by a majority of outside
directors and are made on terms no less favorable to the Company than could be
obtained from unrelated third parties.
Prior to the consummation of the initial public offering, the Company
completed a reorganization of its existing corporate structure with the result
that RISCORP, Inc. became a holding company with several direct and indirect
subsidiaries (the "Reorganization"). Prior to the Reorganization, William D.
Griffin was the sole beneficial shareholder of the Common Stock of the Company.
Through a series of transactions that met the requirements of Section 351 of the
Internal Revenue Code of 1986, as amended, several entities previously owned by
Mr. Griffin became subsidiaries of the Company. In addition, RONC, which was
owned by three trusts for the benefit of Mr. Griffin's children, became a
wholly-owned subsidiary of the Company through a share exchange merger.
RONC was an S Corporation prior to the Reorganization and declared
in-kind dividends in an amount equal to substantially all of its estimated
undistributed S Corporation earnings through the date of the Reorganization,
with a value in the amount of $1.4 million.
TRANSACTIONS TERMINATED DURING 1996
Loans Made by the Company
The Company was the lender pursuant to five revolving credit agreements,
either with William D. Griffin or with certain entities controlled by Mr.
Griffin: (i) a $100,000 line of credit in
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favor of Custodial Engineers, Inc. ("CEI"), bearing interest at the prime rate
of First Union National Bank of North Carolina ("First Union") plus one percent;
(ii) a $1.0 million line of credit in favor of CMI Aviation Services, Inc.
("CMI"), bearing interest at the prime rate of First Union plus one percent;
(iii) a $200,000 line of credit in favor of Five Points Properties, Inc.
("FPP"), bearing interest at the prime rate of First Union plus one percent;
(iv) a $100,000 line of credit in favor of Millennium Health Services Limited
("MHSL"), bearing interest at the prime rate of NationsBank of Florida, N.A.
("NationsBank"); and (v) a $2.0 million line of credit in favor of Mr. Griffin
individually, bearing interest at the prime rate of First Union plus one
percent. As of December 31, 1995, approximately $0, $833,000, $350,000, $31,000,
and $1.3 million, respectively, were outstanding under these lines of credit
including accrued interest.
On June 30, 1993, the Company loaned FPP $2.5 million with Mr. Griffin
acting individually as guarantor. On April 29, 1994, Mr. Griffin assumed the
repayment of this debt and FPP was released from any liability thereunder. The
loan had a maturity date of February 28, 1997. The aggregate amount outstanding
under this loan including accrued interest, as of December 31, 1995, was
approximately $2.9 million with interest accruing at the prime rate of First
Union plus one percent.
On January 24, 1994, NationsBank loaned Mr. Griffin $9.0 million with
the Company acting as guarantor. On January 3, 1995, the Company was released as
guarantor.
On July 1, 1994, the Company loaned RHP $2.0 million. Mr. Griffin owns
approximately 95% of the stock of RHP. The loan had a maturity date of July 1,
2001 with interest accruing at prime rate plus 1%. The aggregate principal
amount outstanding under this loan as of December 31, 1995, was approximately
$2.2 million.
On July 3, 1995, RONC loaned $3.1 million to JoFoKe Investments, Inc., a
Florida corporation controlled by Mr. Griffin. The loan had a maturity date of
June 30, 1996. The aggregate principal amount outstanding under this loan, as of
December 31, 1995, was approximately $1.7 million. This loan accrued interest at
the SouthTrust Bank of Alabama prime rate plus 1.5% per annum.
Mr. Griffin repaid all of the above listed indebtedness in March 1996,
with the exception of the loan to RHP, which was repaid in September 1996. The
Company does not intend to make loans to Mr. Griffin or other directors or their
family members, or entities under their control.
Loan Made to the Company
On December 15, 1995, the RISCORP Group Holding Company, Limited
Partnership ("RGHLP") loaned $1.0 million to the Company in connection with the
acquisition of CompSource, Inc. RGHLP is a limited partnership controlled by Mr.
Griffin. The loan accrued interest at LIBOR plus 3% per annum and had a maturity
date of April 1, 1996. This loan was repaid in March 1996.
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<PAGE> 212
Services Provided to the Company
The Company entered into certain lease agreements in 1993 and 1994 with
CMI Aviation Services, Inc. ("CMI"), whereby the Company leased two aircraft. In
September 1995, the parties terminated one of the lease agreements. The
remaining lease required a minimum monthly rental amount of $34,000, on a bare
plane basis. This lease was amended in May 1996 due to the acquisition of a new
plane by CMI. The amended lease provided for a minimum monthly rental amount of
$50,000. Effective July 1, 1996, the lease agreement with CMI was amended again
to provide that the Company would pay no minimum monthly rental, but would pay
$900 per hour for the actual use of the plane. The aggregate amounts paid by the
Company to CMI in the fiscal year ending December 31, 1996 was $223,350. Gryphus
Development Group ("GDG"), a corporation owned by Mr. Griffin, provides all
other services related to the aircraft (e.g., salaries of the pilots and the
rest of the flight crews, hangar fees, and other operating costs related to the
aircraft). Prior to May 1996, the Company paid GDG $60,000 a month for its
services, which the Company believed would be GDG's approximate cost. Due to the
acquisition of the new plane by CMI in May 1996, the agreement with GDG was
amended to provide for payments of $96,000 per month for the services related to
the aircraft. Effective July 1, 1996, the agreement with GDG was amended again
to provide that the Company would pay no minimum monthly amount, but would pay
$2,500 per hour for the actual services performed by GDG. The arrangements
between the Company and CMI and GDG related to the plane lease and the aircraft
related services were terminated completely effective March 31, 1996.
Prior to September 1996, Mr. Griffin controlled CEI, a building
custodial and maintenance service company. The Company has contracted with CEI
to provide custodial and maintenance services to the Company's headquarters in
Sarasota, Florida. The aggregate amount paid by the Company to CEI in the fiscal
year ending December 31, 1996 was $455,851. In September 1996, Mr. Griffin
disposed of his entire interest in CEI.
The Company previously contracted with GDG to provide facilities
services to the Company's Sarasota office, and this contract was terminated in
1996. In 1996, the Company paid approximately $20,000 for such services.
In November 1995, the Company entered into six computer equipment and
software leases with Gryphus Financial Services, Inc. ("GFS"), a company
controlled by Mr. Griffin. Five of the equipment leases are for a term of 36
months and one equipment lease is for a term of 24 months. The aggregate annual
payments under the equipment leases during 1996 was approximately $100,000.
These leases were sold by GFS to an unrelated financial institution during 1996.
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<PAGE> 213
Services Provided by the Company
The Company previously provided management, staff, systems, and other
support services to MHSL, in which Mr. Griffin held a 95% ownership interest.
Under a management agreement and other contractual arrangements, the Company
charged approximately $7,500 per month for rendering these services. The
contractual arrangements commenced in November 1994. The aggregate amount
charged for 1996 was $77,974. In November 1996, Mr. Griffin sold his interest in
MHSL and the Company ceased providing any services and support to MHSL.
Workers' Compensation Managed Care Arrangement
During 1996, the Company and RHP were parties to a workers' compensation
managed care contract under which RHP provided medical services and assumed risk
for medical claims under the WCMCA offered by the Company. During 1996, the
Company paid RHP approximately $17.0 million under this arrangement. This
arrangement was terminated effective as of May 1, 1996 but continues to apply to
policies with an inception date before May 1, 1996.
TRANSACTIONS CONTINUING THROUGH 1996
Services Provided to the Company
In 1994, Mr. Griffin began leasing parking facilities to the Company at
its Sarasota office. Lease payments under this arrangement were approximately
$24,000 per month. During 1996, the Company paid $317,458 under this lease. In
February 1997, the lease agreement was amended to reduce the monthly rental to
$16,960 per month.
Mango Excess Insurance Agency, Inc., a Florida corporation ("Mango"), a
company owned and controlled by Mr. Griffin, acts as a reinsurance broker to the
Company in obtaining reinsurance for the Company's insurance subsidiaries, and
some of its self-insured clients. The commission payable to Mango and the other
terms and conditions of this relationship do not exceed industry standards for
such arrangements. In 1996, the Company paid Mango commissions of $0.9 million.
Services Provided by the Company
In 1996, the Company entered into a Bilateral Administrative Services
Cost Sharing Agreement with RHP, a company owned and controlled by Mr. Griffin.
This agreement is intended to ensure that costs shared by the two companies will
be fairly allocated between them. The Company and its affiliates provide
facilities, financial, legal, human resource, communications, information
systems, marketing, claims, technical and other administrative and management
support to RHP. RHP provides certain client services, medical provider
management, credentialing
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and utilization management to the Company for its health indemnity products. The
Company has agreed not to compete with RHP in the development or marketing of an
HMO or other managed care health plan product and RHP has agreed not to compete
with the Company in offering workers' compensation insurance services. The two
companies will reimburse one another for the actual costs of providing the
personnel services and other support, and sharing the other resources required
by the agreement. The agreement is for a term of five years and can be renewed
for an additional five-year term, but is also terminable at will by 180-days'
notice by either party. During 1996, the Company received a net amount of
$410,158 from RHP under this agreement.
Effective as of January 1, 1996, the Company entered into an
Administrative Services Cost Sharing Agreement with GDG. This agreement is
intended to ensure that costs incurred by the Company on behalf of GDG are
reimbursed to the Company. The Company and its affiliates provide facilities,
financial, legal, human resource, communications, information systems,
marketing, claims, technical and other administrative and management support to
GDG. GDG will reimburse the Company for the actual costs of providing the
personnel services and other support. The agreement is for a term of five years
and can be renewed for an additional five year term, but is also terminable at
will by 180-days' notice by either party. During 1996, the Company received
$86,363 from GDG under this agreement.
INVESTMENT SERVICES
The Company provided administrative services to Merritt & Company.
During 1996, the Company received approximately $86,276 for those services. The
sole shareholder of Merritt & Company is L. Scott Merritt, former officer and
Director and the trustee for certain trusts which will own more than 5% of the
Class B Common Stock. Mr. Merritt became employed by the Company on January 1,
1995. During 1996, Merritt & Company provided investment services to two
customers of the Company. During 1997, Merritt & Company's services were
discontinued.
LICENSE ARRANGEMENT
RHP pays a fee of 0.5% of all RHP revenues to the Company for the right
to use the RISCORP name and related trade designs and logos. During 1996, the
Company received $50,826 as a license fee from RHP. The Company and RHP share
contractual rights to a medical provider network utilized by both the Company
and RHP in delivering provider services. In addition, Comprehensive Care
Systems, Inc., 100% of the stock of which is owned by Mr. Griffin, also has the
right to access provider services under the network upon payment of a
commercially reasonable access charge to RHP and the Company, as determined by
the outside directors. The contract for the provider network provides that the
Company shall continue to have unrestricted access to the network on terms and
conditions at least equal to any other use of the network. The cost of
developing and maintaining the provider network is prorated between RHP and the
Company on a member usage basis. During 1996, RHP paid the Company $139,016
under this arrangement for costs incurred by the Company attributable to RHP.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8 - K
(a) List the following documents filed as part of this report:
1. Financial Statements.
<TABLE>
<S> <C> <C>
- Independent Auditors' Report.................................F-1
- Consolidated Balance Sheets at December
31, 1996 and 1995............................................F-3
- Consolidated Statements of Income for the
Years Ended December 31, 1996,
1995 and 1994................................................F-5
- Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.............................F-6
- Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996,
1995 and 1994................................................F-7
- Notes to Consolidated Financial Statements...................F-9
2. Financial Statement Schedules
- I - Summary of investments - other than
investments in related parties.........................F-42
- II - Condensed financial information of registrant..........F-43
- IV - Reinsurance............................................F-46
- VI - Supplemental information concerning property-casualty
insurance operations...................................F-47
</TABLE>
All other schedules are omitted because of the absence of conditions
under which they are required or because the necessary information is provided
in the consolidated financial statements or notes thereto.
3. Exhibits
Set forth in paragraph (c) below.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of 1996.
(c) Exhibits
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<PAGE> 216
The following are filed as exhibits to this report:
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
3.1 -Amended and Restated Articles of Incorporation.*
(Incorporated herein by reference to Exhibit 3.1
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
3.2 -Bylaws.* (Incorporated herein by reference to
Exhibit 3.2 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
4.1 -Form of Common Stock Certificate.* (Incorporated
herein by reference to Exhibit 4.1 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.1 -$28,000,000 Credit Agreement, dated as of
December 16, 1994, by and between First Union
National Bank of North Carolina and the Company
(f/k/a RISCORP Group Holdings, Inc.), as amended
by a First Amendment to Credit Agreement, dated as
of December 30, 1994, and as amended by a Second
Amendment to Credit Agreement, dated as of June 1,
1995.* (Incorporated herein by reference to
Exhibit 10.1 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.2 -Amended and Restated Note Purchase Agreement,
dated as of January 1, 1995, by and between
American Re-Insurance Company and the Company.*
(Incorporated herein by reference to Exhibit 10.2
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.3 -$2,400,000 Term Note, dated November 9, 1994,
delivered by RISCORP Acquisition, Inc. to
Governmental Risk Insurance Trust.* (Incorporated
herein by reference to Exhibit 10.3 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.4 -$2,000,000 Surplus Note, dated July 1, 1994,
executed and delivered by RISCORP Health Plans,
Inc. to RISCORP Property and Casualty Insurance
Company, Inc. (f/k/a Florida Interstate Insurance
Company).* (Incorporated herein by reference to
Exhibit 10.4 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.5 -Amended and Restated Loan Agreement, dated as of
November 1, 1995, by and between JoFoKe
Investments, Inc. and RISCORP of North Carolina,
Inc.* (Incorporated herein by reference to Exhibit
10.5 to RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File Number
33-99760)
10.6 -$100,000 Revolving Credit Agreement, dated as of
January 1, 1993, by and among Custodial Engineers,
Inc., as borrower, William D. Griffin, as
guarantor, and RISCORP Management Services, Inc.,
as lender, as amended by a Modification Agreement,
dated as of June 30, 1994.* (Incorporated herein
by reference to Exhibit 10.6 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.7 -$1,000,000 Revolving Credit Agreement, dated as
of January 1, 1993, by and among CMI Aviation
Services, Inc. (f/k/a Cocky McGriffin, Inc.) as
borrower, William D. Griffin, as guarantor, and
RISCORP Management Services, Inc., as lender, as
amended by a Modification Agreement, dated as of
June 30, 1994.* (Incorporated herein by reference
to Exhibit 10.7 to RISCORP's Amendment No. 4 to
Form S-1, as of February 28, 1996, Commissions
File Number 33-99760)
10.8 -$100,000 Revolving Credit Agreement, dated as of
July 1, 1993, by and between Five Points
Properties, Inc., as borrower, William D. Griffin,
as guarantor, and RISCORP Management Services,
Inc., as lender, as amended by a Modification
Agreement, dated as of June 30, 1994.*
(Incorporated herein by reference to Exhibit 10.8
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
</TABLE>
48
<PAGE> 217
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.9 -$100,000 Revolving Credit Agreement, dated as of
November 30, 1994, by and between Millennium
Health Services, Limited, as borrower, and RISCORP
Management Services, Inc., as lender.*
(Incorporated herein by reference to Exhibit 10.9
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.10 -$2,000,000 Revolving Credit Agreement, dated as
of January 1, 1993, by and among the Company
(f/k/a Petty Cash Properties, Inc.), as borrower,
William D. Griffin, as guarantor, and RISCORP
Management Services, Inc., as lender. as amended
by a Modification Agreement, dated as of June 30,
1994.* (Incorporated herein by reference to
Exhibit 10.10 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.11 -$2,000,000 Revolving Credit Agreement, dated as
of January 1, 1993, by and between William D.
Griffin, as borrower, and RISCORP Management
Services, Inc., as lender, as amended by a
Modification Agreement, dated as of June 30,
1994.* (Incorporated herein by reference to
Exhibit 10.11 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.12 -Loan Agreement, dated as of January 25, 1994, by
and among NationsBank of Florida, N.A., William D.
Griffin, RISCORP Management Services, Inc.,
RISCORP of Florida, Inc., Specialized Risk
Administrators, Inc., Petty Cash Properties, Inc.,
Five Points Properties, Inc., and Sarasota
International Risk and Insurance Services, Inc.,
as amended by a Loan Agreement, dated January 3,
1995, by and among NationsBank of Florida, N.A.,
William D. Griffin and Five Points Properties,
Inc.* (Incorporated herein by reference to Exhibit
10.12 to RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File Number
33-99760)
10.13 -$2,500,000 Loan Assumption Agreement, dated April
29, 1994, by and among Five Point Properties,
Inc., as borrower, William D. Griffin, as
guarantor, and RISCORP Management Services, Inc.,
as lender.* (Incorporated herein by reference to
Exhibit 10.13 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.14 -$2,400,000 Promissory Note, dated November 9,
1994, executed and delivered by RISCORP
Acquisitions, Inc. and Self Insurors Service
Bureau, Inc. to W. Gerald Fiser, as modified by
the Settlement Agreement, dated May 1, 1995, by
and among W. Gerald Fiser, Self Insurors Service
Bureau, Inc., RISCORP Acquisitions, Inc., and
RISCORP Group Holdings, L.P.; Stock Purchase
Agreement, dated as of November 4, 1994, by and
between RISCORP Acquisitions, Inc., Self Insurors
Service Bureau, Inc. and W. Gerald Fiser, Stock
Pledge Agreement, dated as of November 9, 1994, by
and between RISCORP Acquisitions, Inc., and W.
Gerald Fiser, Security Agreement, dated as of
November 9, 1994, by and between Self Insurors,
Service Bureau, Inc. and W. Gerald Fiser,
Guarantee Agreement, dated as of November 9, 1994,
by and between RISCORP Group Holdings, L.P., and
W. Gerald Fiser, Security Coordinating Agreement,
dated November 9, 1994 by and among, W. Gerald
Fiser, RISCORP Acquisitions, Inc., RISCORP Group
Holdings, L.P., and Self Insurors Service Bureau,
Inc.* (Incorporated herein by reference to Exhibit
10.14 to RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File Number
33-99760)
10.15 -Form of Agency Agreement by and between the
independent insurance agents and the Company's
workers' compensation insurance subsidiaries.*
(Incorporated herein by reference to Exhibit 10.15
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
</TABLE>
49
<PAGE> 218
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.16 -Florida Workers' Compensation Managed Care
Agreement, dated July 30, 1995, by and among
RISCORP Insurance Company, Inc., RISCORP
Management Services, Inc., Sarasota International
Risk and Insurance Services, Inc., and Humana
Medical Plan, Inc.* (Incorporated herein by
reference to Exhibit 10.16 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.17 -Florida Workers' Compensation Managed Care
Agreement, dated July 30, 1995, by and among
RISCORP Property and Casualty Insurance Company,
Inc., RISCORP Management Services, Inc., Sarasota
International Risk and Insurance Services, Inc.,
and Humana Medical Plan, Inc.* (Incorporated
herein by reference to Exhibit 10.17 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.18 -Florida Workers' Compensation Managed Care
Agreement, dated January 1, 1995, by and among
RISCORP Insurance Company, Inc., RISCORP Property
and Casualty Insurance Company, Inc. and RISCORP
Health Plans, Inc.* (Incorporated herein by
reference to Exhibit 10.18 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.19 -Aircraft Lease, dated February 12, 1993, by and
between RISCORP Management Services, Inc. and CMI
Aviation Services.* (Incorporated herein by
reference to Exhibit 10.19 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.20 -Aircraft Lease, dated December 24, 1994, by and
between RISCORP Management Services, Inc. and CMI
Aviation Services.* (Incorporated herein by
reference to Exhibit 10.20 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.21 -Split Dollar Agreement, dated as of June 1, 1995,
by and among RISCORP Management Services, Inc.,
William D. Griffin, and L. Scott Merritt, as
trustee, for payment of premiums for split-dollar
life insurance.* (Incorporated herein by reference
to Exhibit 10.21 to RISCORP's Amendment No. 4 to
Form S-1, as of February 28, 1996, Commissions
File Number 33-99760)
10.22 -Split Dollar Agreement, dated as of July 1, 1994,
by and among RISCORP Management Services, Inc.,
William D. Griffin, and L. Scott Merritt, as
trustee for payment of premiums for split-dollar
life insurance.* (Incorporated herein by reference
to Exhibit 10.22 to RISCORP's Amendment No. 4 to
Form S-1, as of February 28, 1996, Commissions
File Number 33-99760)
10.23 -Pooling Agreement, dated as of January 1, 1995,
by and between RISCORP Insurance Company, Inc. and
RISCORP Property and Casualty Insurance Company,
Inc.* (Incorporated herein by reference to Exhibit
10.23 to RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File Number
33-99760)
10.24 -Workers' Compensation Quota Share Re-Insurance
Agreement, dated as of December 27, 1994, by and
among American Re-Insurance Company, RISCORP
Insurance Company, Inc., and RISCORP Property and
Casualty Insurance Company, Inc.+ (Incorporated
herein by reference to Exhibit 10.24 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.25 -Workers' Compensation Excess of Loss Reinsurance
Agreement, dated January 1, 1995, by and among
RISCORP Insurance Company, Inc., RISCORP Property
and Casualty Insurance Company, Inc., Signet Star
Reinsurance Company, Republic Western Insurance
Company, and TIG Reinsurance Company, as
reinsurers.+* (Incorporated herein by reference to
Exhibit 10.25 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
</TABLE>
50
<PAGE> 219
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.26 -Workers' Compensation Excess of Loss Reinsurance
Agreement, dated September 29, 1995, by and among
RISCORP Insurance Company, Inc., RISCORP Property
and Casualty Insurance Company, Inc., and
Continental Casualty Company, as reinsurers*
(Incorporated herein by reference to Exhibit 10.26
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.27 -Aggregate Net Excess of Loss Reinsurance
Agreement, dated December 6, 1993, by and between
Governmental Risk Insurance Trust and RISCORP
Property and Casualty Insurance Company, Inc., as
reinsurers* (Incorporated herein by reference to
Exhibit 10.27 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.28 -Aggregate Excess of Loss Reinsurance Agreement,
effective as of October 1, 1993, by and between
RISCORP Property and Casualty Insurance Company,
Inc. and Centre Reinsurance Company of New York,
as reinsurers* (Incorporated herein by reference
to Exhibit 10.28 to RISCORP's Amendment No. 4 to
Form S-1, as of February 28, 1996, Commissions
File Number 33-99760)
10.29 -RISCORP, Inc. Stock Option Plan.* (Incorporated
herein by reference to Exhibit 10.29 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.30 -Form of RISCORP, Inc. Stock Option Agreement.*
(Incorporated herein by reference to Exhibit 10.30
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.31 -Employment and Severance Agreement, dated as of
January 1, 1995, by and between RISCORP Management
Services, Inc. and William D. Griffin.*
(Incorporated herein by reference to Exhibit 10.31
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.32 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management Services,
Inc. and James A- Malone.* (Incorporated herein by
reference to Exhibit 10.32 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.33 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management Services,
Inc. and Edward Hammel.* (Incorporated herein by
reference to Exhibit 10.33 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.34 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management Services,
Inc. and Thomas Hall.* (Incorporated herein by
reference to Exhibit 10.34 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.35 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management Services,
Inc. and Fred Hunt.* (Incorporated herein by
reference to Exhibit 10.35 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.36 -Agreement, dated September 16, 1993, by and
between RISCORP Insurance Company, Inc. and the
Florida Chamber of Commerce, Inc.* (Incorporated
herein by reference to Exhibit 10.36 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.37 -$5,000,000 Letter of Credit issued by
NationsBank, N.A. in favor of Florida Chamber of
Commerce, Inc., currently outstanding in the
amount of $3,000,000.* (Incorporated herein by
reference to Exhibit 10.37 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
</TABLE>
51
<PAGE> 220
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.38 -Service Company Agreement, dated July 1, 1995, by
and between Governmental Risk Insurance Trust and
RISCORP Insurance Services. Inc.* (Incorporated
herein by reference to Exhibit 10.38 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.39 -Service Agent Contract of National Alliance for
Risk Management Group Self Insurers' Fund, dated
as of September 15, 1993, by and between the
Trustees of National Alliance for Risk Management
Group Self Insurers' Fund and RISCORP of North
Carolina, Inc.* (Incorporated herein by reference
to Exhibit 10.39 to RISCORP's Amendment No. 4 to
Form S-1, as of February 28, 1996, Commissions
File Number 33-99760)
10.40 -Maintenance Service Agreement, dated May 1, 1995,
by and between Custodial Engineers, Inc. and
RISCORP Property and Casualty Insurance Company,
Inc.* (Incorporated herein by reference to Exhibit
10.40 to RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File Number
33-99760)
10.41 -Custodial Service Agreement, dated May 1, 1995,
by and between Custodial Engineers, Inc. and
RISCORP Property and Casualty Insurance Company,
Inc. *(Incorporated herein by reference to Exhibit
10.41 to RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File Number
33-99760)
10.42 -Parking Lease Agreement, dated February 15, 1994,
by and between RISCORP Management Services, Inc.
and William D. Griffin.* (Incorporated herein by
reference to Exhibit 10.42 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.43 -Lease Nos. GFS 1 186, GFS 1 187, GFS 1 188, Form
of GFS 1 189, GFS 1 190, and GFS 1 191, each dated
November 1, 1995, by and between Gryphus Financial
Services, Inc. and the Company.* (Incorporated
herein by reference to Exhibit 10.43 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.44 -Management Agreement of Millennium Health
Services, Limited, dated as of November 1, 1994,
by and between RISCORP Management Services, Inc.
and Millennium Health Services, Limited.*
(Incorporated herein by reference to Exhibit 10.44
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.45 -Management Subcontract for Millennium Health
Services, Limited, dated as of November 1, 1994,
by and between Millennium Health Services, Limited
and RISCORP Management Services, Inc.*
(Incorporated herein by reference to Exhibit 10.45
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.46 -Management Agreement of Millennium Health
Services of Sarasota, Limited, dated as of
November 1, 1994, by and between Millennium Health
Services, Limited and Millennium Health Services
of Sarasota, Limited.* (Incorporated herein by
reference to Exhibit 10.46 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.47 -Financial Advisor/Manager Contract, dated
September 13, 1993, between Florida Interstate
Insurance Co. and Merritt & Company.*
(Incorporated herein by reference to Exhibit 10.47
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.48 -Form of Stock Redemption Agreement relating to
the acquisition of the stock of CompSource, Inc.
and Insura, Inc.* (Incorporated herein by
reference to Exhibit 10.48 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.49 -Form of Aircraft and Related Services Agreement
between RISCORP Management Services, Inc. and
GRYPHUS Development Group dated January 1, 1996.*
(Incorporated herein by reference to Exhibit 10.49
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
</TABLE>
52
<PAGE> 221
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.50 -Form of Restated and Amended Administrative
Services Agreement between RISCORP Management
Services, Inc., and RISCORP Health Plans, Inc.
dated January 1, 1996.* (Incorporated herein by
reference to Exhibit 10.50 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.51 -Form of Memorandum of Understanding (concerning
RHP's health insurance administrative services)
between RISCORP Health Plans, Inc. and RISCORP
Management Services, Inc.' dated January 1, 1996.*
(Incorporated herein by reference to Exhibit 10.51
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.52 -Form of RISCORP Controlled Affiliate License
Agreement between RISCORP, Inc. and RISCORP
Management Services, Inc. (as licenser) and
RISCORP Health Plans, Inc. (as licensee).
(Incorporated herein by reference to Exhibit 10.52
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.53 -Form of Amendment to Florida's Worker's
Compensation Managed Care Agreement among RISCORP
Property & Casualty Company, RISCORP Insurance
Company and RISCORP Health Plans, Inc. dated
January 1, 1996.* (Incorporated herein by
reference to Exhibit 10.53 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.54 -Form of Acknowledgment of Provider Rights
Ownership and Cost Allocation Agreement among
RISCORP Management Services, Inc., RISCORP Managed
Care Solutions, Inc. and RISCORP Health Plans,
Inc. dated January 1, 1996.1* (Incorporated herein
by reference to Exhibit 10.54 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.55 -Form of Provider Network Access Agreement among
RISCORP Management Services, Inc., RISCORP Health
Plans, Inc. and Comprehensive Care Systems, Inc.*
(Incorporated herein by reference to Exhibit 10.55
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.56 -Form of Memorandum of Understanding between
RISCORP Health Plans, Inc. and RISCORP Insurance
Company.* (Incorporated herein by reference to
Exhibit 10.56 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.57 -Form of Registration Rights Agreement dated as of
February 1, 1996, by and among RISCORP, Inc.,
RISCORP Management Services, Inc. and William D.
Griffin.* (Incorporated herein by reference to
Exhibit 10.57 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.58 -Third Amendment to Credit Agreement, dated as of
November 30, 1995, by and between RISCORP Group
Holdings, Inc. and First Union National Bank of
North Carolina.* (Incorporated herein by reference
to Exhibit 10.58 to RISCORP's Amendment No. 4 to
Form S-1, as of February 28, 1996, Commissions
File Number 33-99760)
10.59 -Consent Agreement and Fourth Amendment to Credit
Agreement, dated as of January 2, 1996, by and
between RISCORP Group Holdings, Inc. and First
Union of North Carolina.* (Incorporated herein by
reference to Exhibit 10.59 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.60 -Form of Bilateral Administrative Services Costs
Sharing Agreement by and between RISCORP
Management Services, Inc. and RISCORP Health
Plans, Inc.* (Incorporated herein by reference to
Exhibit 10.60 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
</TABLE>
53
<PAGE> 222
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.61 -Agreement of Purchase and Sale of Stock, dated as
of December 15, 1995, by and among CompSource
Acquisition, Inc., James K. Secunda, Bruce A.
Flachs, the James K. and Debra W. Secunda
Charitable Remainder Unitrust Number One, the
James K. and Debra W. Secunda Charitable Remainder
Unitrust Number Two and the Bruce Flachs
Charitable Remainder Unitrust (more commonly
referred to as the CompSource stock purchase
agreement).* (Incorporated herein by reference to
Exhibit 10.61 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.62 -Agreement of Purchase and Sale of Stock, dated as
of January 10, 1996, by and among Atlas Insurance
Company, RISCORP of Florida, Inc., Atlas Financial
Corporation and Haas Wilkerson-Wohlberg, Inc.*
(Incorporated herein by reference to Exhibit 10.62
to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.63 -Form of First Amendment to Bilateral
Administrative Services Costs Sharing Agreement by
and between RISCORP Management Services, Inc. and
RISCORP Health Plans, Inc.* (Incorporated herein
by reference to Exhibit 10.63 to RISCORP's
Amendment No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.64 -Amendment to Agreement of Purchase and Sale of
Stock, dated as of December 15, 1995, by and among
CompSource Acquisition, Inc., James K. Secunda,
Bruce A. Flachs, the James K. and Debra W. Secunda
Charitable Remainder Unitrust Number One, the
James K. and Debra W. Secunda Charitable Remainder
Unitrust Number Two and the Bruce Flachs
Charitable Remainder Unitrust* (more commonly
referred to as the CompSource stock purchase
agreement). (Incorporated herein by reference to
Exhibit 10.64 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commissions File
Number 33-99760)
10.65 -Employment Agreement with James A. Malone dated
March 25, 1997.* (Incorporated herein by reference
to Exhibit 10.65 to RISCORP's Form 10-K/A filed
with the Commission on May 19, 1997)
10.66 -Employment Agreement with Thomas S. Hall dated
January 6, 1997.* (Incorporated herein by
reference to Exhibit 10.66 to RISCORP's Form
10-K/A filed with the Commission on May 19, 1997)
10.67 -Employment Agreement with Steven J. Berling dated
January 6, 1997.* (Incorporated herein by
reference to Exhibit 10.67 to RISCORP's Form
10-K/A filed with the Commission on May 19, 1997)
10.68 -Employment Agreement with Fred A. Hunt, dated
January 6, 1997.* (Incorporated herein by
reference to Exhibit 10.68 to RISCORP's Form
10-K/A filed with the Commission on May 19, 1997)
10.69 -Credit Agreement among the Company and
NationsBank N.A. (South) dated October 15, 1996.*
(Incorporated herein by reference to Exhibit 10.69
to RISCORP's Form 10-K/A filed with the Commission
on May 19, 1997)
10.70 -Reinsurance Agreement between RISCORP National
Insurance Company and G.J. Sullivan Co.
Reinsurance dated February 4, 1997.* (Incorporated
herein by reference to Exhibit 10.65 to RISCORP's
Form 10-K/A filed with the Commission on May 19,
1997)
10.71 -Underwriting Management Agreement dated September
1, 1996 between RISCORP Management Services and
Virginia Surety Company, Inc.* (Incorporated
herein by reference to Exhibit 10.71 to RISCORP's
Form 10-K/A filed with the Commission on May 19,
1997)
</TABLE>
54
<PAGE> 223
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.72 -Loss Portfolio Transfer Agreement between RISCORP
National Insurance Company and Occupational Safety
Association of Alabama Workmen's Compensation
Fund.* (Incorporated herein by reference to
Exhibit 10.72 to RISCORP's Form 10-K/A filed with
the Commission on May 19, 1997)
10.73 -Agreement and Plan of Merger by and among
RISCORP, Inc., RISCORP-IAA, Inc., Independent
Association Administrators Incorporated, and The
Stockholders of Independent Association
Administrators Incorporated* (Incorporated herein
by reference to Exhibit 10.73 to RISCORP's Form
10-K/A filed with the Commission on May 19, 1997)
10.74 -Policy and Loss Portfolio Transfer Assumption
Reinsurance Agreement between RISCORP National
Insurance Company and National Alliance for Risk
Management Group Self-Insurance Fund *
(Incorporated herein by reference to Exhibit 10.74
to RISCORP's Form 10-K/A filed with the Commission
on May 19, 1997)
10.75 -Stock Purchase Agreement by and Between RISCORP,
Inc. and Thomas Albrecht, Peter Norman and Hugh D.
Langdale, Jr. * (Incorporated herein by reference
to Exhibit 10.75 to RISCORP's Form 10-K/A filed
with the Commission on May 19, 1997)
10.76 -Workers Compensation Quota Share Retrocessional
Treaty Agreement with Chartwell Reinsurance
Company.* (Incorporated herein by reference to
Exhibit 10.76 to RISCORP's Form 10-K/A filed with
the Commission on May 19, 1997)
10.77 -Loss Portfolio Transfer Assumption Reinsurance
Agreement between NARM Mercantile Group Self
Insurance Association of Virginia and RISCORP
National Insurance Company.* (Incorporated herein
by reference to Exhibit 10.77 to RISCORP's Form
10-K/A filed with the Commission on May 19, 1997)
10.78 -Loss Portfolio Transfer Assumption Reinsurance
Agreement between NARM Services' Group Self
Insurance Association of Virginia and RISCORP
National Insurance Company.* (Incorporated herein
by reference to Exhibit 10.78 to RISCORP's Form
10-K/A filed with the Commission on May 19, 1997)
10.79 -Loss Portfolio Transfer Assumption Reinsurance
Agreement between NARM Manufacturers Group Self
Insurance Association of Virginia and RISCORP
National Insurance Company.* (Incorporated herein
by reference to Exhibit 10.79 to RISCORP's Form
10-K/A filed with the Commission on May 19, 1997)
11 -Statement Re Computation of Per Share Earnings.
21.1 -List of Subsidiaries of the Registrant.
27 -Financial Data Schedule (for SEC use only).
28.1 -Information from Reports Furnished to State
Insurance Regulatory Authorities.* (Incorporated
herein by reference to Exhibit 28.1 1.1 to
RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commission File Number
33-99760)
</TABLE>
* Previously filed.
+ Confidential treatment granted pursuant to Rule 406 of the Securities Act of
1933.
55
<PAGE> 224
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
RISCORP, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Income $ 2,398,000 $13,683,000 $6,873,000
=========== =========== ===========
Number of shares used in calculating
primary earnings per share:
Weighted average outstanding
shares during the period 34,422,483 28,100,234 28,100,234
Redemption contingency for CompSource acquisition 279,865 - -
Redemption contingency for IAA acquisition 225,503 - -
Additional common shares issuable under
employee stock options using the treasury stock
method (Note 1) 1,757,602 1,992,266 1,992,266
----------- ----------- -----------
Average outstanding shares. 36,785,453 30,092,500 30,092,500
=========== =========== ===========
Earnings per share $ 0.07 $ 0.45 $ 0.23
=========== =========== ===========
</TABLE>
(1) Based on the average quarterly market price of each period.
56
<PAGE> 225
EXHIBIT 21
RISCORP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT* STATE OF INCORPORATION
- ------------------------------- ----------------------
<S> <C>
RISCORP, Inc. (Registrant) Florida
RISCORP Acquisition, Inc. Florida
RISCORP West, Inc. Oklahoma
RISCORP of Florida, Inc. Florida
RISCORP Insurance Company Florida
RISCORP Property & Casualty Insurance Company Florida
RISCORP National Insurance Company Missouri
RISCORP Services, Inc. Florida
RISCORP Management Services, Inc. Florida
RISCORP Insurance Services, Inc. Florida
RISCORP Managed Care Services, Inc. Florida
RISCORP of Illinois, Inc. Florida
CompSource, Inc. North Carolina
Independent Association of Administrators Incorporated Alabama
RISCORP Real Estate Holdings, Inc. Florida
</TABLE>
*All subsidiaries below are owned, directly or indirectly, 100% by the
Registrant
57
<PAGE> 226
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, the
Registrant has duly caused this form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sarasota, State of
Florida, on the 27th day of February, 1998.
RISCORP, INC.
By: /s/ Frederick M. Dawson
-------------------------------------
Frederick M. Dawson
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS FORM
10-K/A REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Frederick M. Dawson
- ---------------------------
Frederick M. Dawson President, Chief Executive February 27, 1998
Officer and Director
(principal executive officer)
/s/ Stephen C. Rece
- ---------------------------
Stephen C. Rece Senior Vice President, and February 27, 1998
Chief Financial Officer
(principal financial and
accounting officer)
/s/ Seddon Goode, Jr.
- ---------------------------
Seddon Goode, Jr. Director February 27, 1998
/s/ George E. Greene III
- ---------------------------
George E. Greene III Director February 27, 1998
/s/ Walter L. Revell
- ---------------------------
Walter L. Revell Director February 27, 1998
</TABLE>
58
<PAGE> 227
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
RISCORP, Inc.:
We have audited the consolidated financial statements of RISCORP, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedules listed in the accompanying index. These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1(a) to the accompanying consolidated financial
statements, during November 1996, the Company undertook a strategic initiative
to evaluate alternatives to maximize shareholder value. The initiative has
resulted in the pending sale and transfer of certain assets and non-contingent
liabilities of the Company and its subsidiaries. Additionally, the Company and
its Florida and Missouri domiciled insurance operating subsidiaries experienced
difficulties in completing their respective 1996 financial statements in an
accurate and timely manner, and, consequently, were delinquent in filing such
1996 financial statements with the Departments of Insurance of Florida and
Missouri, and in the case of the Company, the Securities and Exchange
Commission ("SEC"). The Company and its affiliates also experienced increased
scrutiny by the respective regulatory authorities, adverse publicity, an
unfavorable rating by A.M. Best Company, Inc. and, in the case of the Company,
the delisting of its stock from the stock exchange on which it was listed. In
addition, the Company is in the process of filing amended Form 10-Q's for the
first, second and third quarters to allocate adjustments made in the fourth
quarter of 1996 to the appropriate quarter. The Company has not yet filed a
Form 10-Q for the first or second quarter of 1997. Although regulatory
sanctions were not imposed by the Florida Department of Insurance against the
Company's Florida domiciled subsidiaries in connection with the late filing of
their 1996 financial statements, the Florida Department of Insurance did
request cut-through endorsements and an interim reinsurance agreement to be
executed in connection with the pending sale. The sale is subject to the
approval of the shareholders of the Company, regulatory approval, and the
filing of a proxy statement with the SEC, among other conditions. The Company's
ability to operate at its present level of activity may be affected if the
pending sale transaction is not completed. Moreover, as discussed in Note 20,
the Company's failure to file financial reports and a Form 10-Q for the first
and second quarters of 1997 resulted in violations of certain debt covenants
related to a $15 million note payable. Although the violations have been waived
until December 31, 1997, there can be no assurance that the Company will be
able to file its first and second quarter financial reports and Form 10-Q's
prior to December 31, 1997 or that it will be able to file its third quarter
financial reports and Form 10-Q when required, thus raising the possibility of
additional debt covenant violations. Additional covenant violations could
result in the
F-1
<PAGE> 228
note being called. Further, as discussed in Note 19, the Company and its
subsidiaries, certain former key executives, and others have been named as
defendants in various lawsuits.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RISCORP,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements, taken as a
whole, present fairly, in all material respects the information set forth
therein.
Ft. Lauderdale, Florida
October 15, 1997
F-2
<PAGE> 229
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
ASSETS ------------ ------------
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value (amortized cost $226,240
$226,240 in 1996 and $52,608 in 1995) $ 228,802 $ 53,390
Fixed maturities held to maturity, at amortized cost (fair value $22,892
in 1996 and $15,892 in 1995) 22,809 15,583
Equity securities, at fair value (cost $3,880 in 1996 and $389 in 1995) 4,045 392
----------- ------------
Total investments 255,656 69,365
Cash and cash equivalents 26,307 23,348
Premiums receivable, net 122,078 93,748
Accounts and notes receivable--related party - 10,754
Accounts receivable--other 11,676 -
Recoverable from Florida Special Disability Trust Fund, net 49,505 51,836
Reinsurance recoverables 180,698 100,675
Prepaid reinsurance premiums 49,788 21,880
Prepaid managed care fees 31,958 16,369
Accrued reinsurance commissions 20,419 7,549
Deferred income taxes 22,551 11,193
Property and equipment, net 27,505 18,044
Goodwill 22,648 3,688
Other assets 7,653 14,793
----------- ------------
Total assets $ 828,442 $ 443,242
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 230
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY ------------ -----------
<S> <C> <C>
Liabilities:
Losses and loss adjustment expenses $ 458,239 $ 261,700
Unearned premiums 102,562 64,395
Notes payable of parent company 15,000 42,000
Notes payable of subsidiaries 1,303 4,417
Accounts and notes payable--related party 1,171 1,000
Deposit balances payable 4,787 3,731
Accrued expenses and other liabilities 74,706 42,451
Net assets in excess of cost of business acquired 11,266 7,391
------------ -----------
669,034 427,085
------------ -----------
Class A Common Stock subject to put options 2,100 -
------------ -----------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding: 1996-- 11,855,917 and 1995-- 0 120 -
Class B Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding; 1996 -- 24,334,443
and 1995-- 28,069,443 243 281
Preferred stock, $.01 par value, 10,000,000 shares authorized; 0 shares
issued and outstanding - -
Additional paid-in capital 137,813 349
Net unrealized gains on investments 1,769 510
Unearnedd compensation--stock options (546) (215)
Retained earnings 17,909 15,232
------------ -----------
Total shareholders' equity 157,308 16,157
------------ -----------
Total liabilities and shareholders' equity $ 828,442 $ 443,242
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 231
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994 (in thousands, except share and per
share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<C> <C> <C>
Revenues:
Premiums earned $ 173,557 $ 135,887 $ 1,513
Fee and other income 31,838 23,413 56,712
Net investment income 12,194 6,708 1,677
------------- ------------- -------------
Total revenues 217,589 166,008 59,902
------------- ------------- -------------
Expenses:
Losses and loss adjustment expenses 114,093 82,532 (716)
Unallocated loss adjustment expenses 12,916 10,133 8,804
Commissions, general and administrative expenses 65,560 48,244 35,869
Interest 2,795 4,634 1,750
Depreciation and amortization 11,625 1,683 1,330
------------- ------------- -------------
Total expenses 206,989 147,226 47,037
------------- ------------- -------------
Income before income taxes 10,600 18,782 12,865
Income taxes 8,202 5,099 5,992
------------- ------------- -------------
Net income $ 2,398 $ 13,683 $ 6,873
============= ============= =============
Per share data: $ 0.07 $ 0.45 $ 0.23
============= ============= =============
Weighted average common shares and common share
equivalents outstanding 36,785,453 30,092,500 30,092,500
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 232
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(in thousands)
<TABLE>
<CAPTION>
NET
UNREALIZED
CLASS A CLASS B ADDITIONAL GAINS TOTAL
COMMON COMMON PAID-IN (LOSSES) ON UNEARNED RETAINED SHAREHOLDERS'
STOCK STOCK CAPITAL INVESTMENTS COMPENSATION EARNINGS EQUITY
------ ------- ---------- ------------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ - $ 281 $ 419 $ 271 $ (9,740) $ 10,765 $ 1,996
Net income - - - - - 6,873 6,873
Distributions - - - - - (336) (336)
Return on capital - - (69) - - - (69)
Liquidation of ESOP - - (1,120) - 9,740 (12,547) (3,927)
Unearned compensation--stock
options - - 1,119 - (930) - 189
Change in net unrealized losses
on investments - - - (831) - - (831)
----- ----- --------- --------- --------- -------- -----------
Balance, December 31, 1994 - 281 349 (560) (930) 4,755 3,895
Net income - - - - - 13,683 13,683
Distributions - - - - - (3,206) (3,206)
Change in unearned compensation - - - - 715 - 715
Change in net unrealized gains
on investments - - - 1,070 - - 1,070
----- ----- --------- --------- --------- -------- -----------
Balance, December 31, 1995 - 281 349 510 (215) 15,232 16,157
Net income - - - - - 2,398 2,398
Distributions - - - - - 279 279
Issuance of common stock 72 - 125,789 - - - 125,861
Conversion of common stock 38 (38) - - - - -
Issuance of common stock put options - - (2,100) - - - (2,100)
Stock options exercised 2 - 63 - - - 65
Issuance of common stock for
acquisitions 8 - 12,991 - - - 12,999
Change in unearned compensation - - 721 - (331) - 390
Change in net unrealized gains
on investments - - - 1,259 - - 1,259
----- ----- --------- --------- --------- -------- -----------
Balance, December 31, 1996 $ 120 $ 243 $ 137,813 $ 1,769 $ (546) $ 17,909 $ 157,308
===== ===== ========= ========= ========= ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 233
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
-------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,398 $ 13,683 $ 6,873
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,500 1,683 1,330
Net realized (gain) loss on sale of investments (140) (1,282) 9
Net amortization (accretion) of discounts on investments 174 (82) (219)
Loss on disposal of property and equipment 294 22 21
(Increase) decrease in premiums receivable, net (24,275) (23,744) 2,247
Decrease (increase) in accounts and notes receivable--related party 10,754 642 (6,252)
Increase in accounts receivable--other (11,676) - -
Decrease (increase) in recoverable from Florida State Disability
Trust Fund, net 2,331 (5,920) 160
Increase in reinsurance recoverables (76,971) (58,534) (7,398)
Increase in prepaid reinsurance premiums (27,908) (21,880) -
Increase in prepaid managed care fees (15,589) (15,068) -
Increase in accrued reinsurance commissions (12,870) (7,549) -
(Increase) decrease in deferred income taxes (8,448) 106 (453)
Increase in losses and loss adjustment expenses 106,484 51,827 6,510
Increase in unearned premiums 30,891 7,315 2,694
Increase in accrued expenses and other liabilities 19,909 7,420 6,224
Increase in accounts payable related party 171 1,000 -
Decrease in other assets 21,026 3,110 6,087
----------- ---------- ---------
Net cash provided by (used in) operating activities 28,055 (47,251) 17,833
----------- ---------- ---------
Cash flows from investing activities:
Purchase of property and equipment (13,215) (6,393) (5,477)
Proceeds from the sale of equipment 532 564 45
Purchase of fixed maturities--available for sale (191,153) (23,543) (8,362)
Purchase of fixed maturities--held to maturity (2,452) - -
Proceeds from sale of fixed maturities--available for sale 88,900 60,303 992
Proceeds from maturities of fixed maturities--available for sale 6,295 10,209 1,580
Proceeds from maturities of fixed maturities--held to maturity 4,400 - -
Purchase of equity securities (3,952) (341) (80)
Proceeds from sale of equity securities 732 1,162 17
Purchase of RISCORP West, Inc., net of cash acquired - - (3,959)
Purchase of RISCORP Insurance Company, net of cash acquired - 5,885 -
Purchase of surplus note - - (2,047)
Purchase of IAA, net of cash acquired 282 - -
Purchase of RISC, net of cash acquired (538) - -
Purchase of CompSource and Insura, net of cash acquired (10,733) - -
</TABLE>
F-7
<PAGE> 234
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from investing activities (continued):
Purchase of Atlas Insurance Company, net of cash acquired (5,573) - -
Purchase of NARM, net of cash acquired 2,717 - -
Purchase of Virginia Funds, net of cash acquired 1,300 - -
----------- ---------- ----------
Net cash (used in) provided by investing activities (122,458) 47,846 (17,291)
----------- ---------- ----------
Cash flows from financing activities:
Principal repayments of notes payable (30,202) (25,215) (16,986)
Proceeds from notes payable - 43,692 23,329
Increase (decrease) in deposit balances payable 968 (6,980) 9,175
Shareholder distributions 279 (3,206) (335)
Liquidation of ESOP - - (3,927)
(Increase) decrease in unearned compensation (331) 715 189
Proceeds of initial offering of common stock 127,908 - -
Other, net (1,325) - -
Stock options exercised 65 - -
----------- ---------- ----------
Net cash provided by financing activities 97,362 9,006 11,445
----------- ---------- ----------
Net increase in cash and cash equivalents 2,959 9,601 11,987
Cash and cash equivalents, beginning of period 23,348 13,747 1,760
----------- ---------- ----------
Cash and cash equivalents, end of period $ 26,307 $ 23,348 $ 13,747
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,689 $ 3,966 $ 1,266
=========== ========== ==========
Income taxes $ 15,127 $ 4,969 $ 4,004
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 235
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND
(A) REORGANIZATION
RISCORP, Inc. ("RISCORP" or the "Company") was formed on February 28,
1996 through the reorganization and consolidation of several affiliated
companies which were under the common control of a majority shareholder, who,
at that time, was the Chairman of the Board and Chief Executive Officer of
RISCORP (see Note 20). The reorganization and consolidation qualified as a
tax-free reorganization of commonly controlled entities and was accounted for
in a manner similar to a "pooling of interests." Accordingly, the consolidated
financial statements have been restated to include the results of each of the
individual companies for all the periods presented. All significant
intercompany accounts and transactions have been eliminated in consolidation
and the accompanying consolidated financial statements reflect the above
changes to the Company's capital structure for all periods presented.
The Company acquired RISCORP Insurance Company ("RIC"), the successor
to Commerce Mutual Insurance Company, an Assessable Mutual ("CMIC"), on January
1, 1995. RIC, subject to a Plan of Conversion and Recapitalization, and with
the approval of CMIC's policyholders and the Florida Department of Insurance
("FDOI"), converted from an assessable mutual insurance company to a stock
insurance company as of January 1, 1995. The acquisition has been accounted for
as a purchase and RIC's results have been included in the accompanying
consolidated financial statements for 1996 and 1995 (see Note 3).
On November 9, 1996, at a Special Board of Directors' meeting of RISCORP,
the Board voted to establish a Strategic Alternatives Committee to evaluate
alternatives to maximize shareholder value including, without limitation,
potential acquisitions, joint ventures, mergers, strategic alliances and the
sale of all or part of RISCORP and its subsidiaries. The actions of the
Strategic Alternatives Committee during the period of November 1996 through
June 1997 culminated in the June 17, 1997 agreement (as more fully described in
Note 20) for the sale and transfer of certain of RISCORP's and its
subsidiaries' assets and non-contingent liabilities to another insurer for
cash. The pending sale, which is anticipated to take place in early 1998,
requires the filing of a proxy statement with the Securities and Exchange
Commission ("SEC"), the approval of the transaction by RISCORP shareholders and
approval by the Florida and Missouri Departments of Insurance, amongst other
conditions.
RIC, RISCORP Property & Casualty Insurance Company ("RPC") (both
Florida domiciled insurance companies) and RISCORP National Insurance Company
("RNIC") (a Missouri domiciled insurance company), are all wholly-owned
subsidiaries of RISCORP and each of these companies experienced difficulty in
completing their year end December 31, 1996 statutory financial statements in
an accurate and timely manner. In addition, RIC and RPC were unable to respond
in an accurate and timely manner to requests for financial information made by
examiners from the FDOI in connection with the FDOI's financial examination of
RIC for 1996 and RPC for 1995.
While RIC, RPC and RNIC filed their 1996 statutory financial
statements by February 28, 1997, the deadline for filing such statements, each
of the companies discovered later that certain amounts contained in the
previously filed 1996 statutory financial statements were incorrect and the
1996
F-9
<PAGE> 236
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statutory financial statements of each of the companies are expected to be
amended by substitution in October 1997 as discussed in Note 20. RIC, RPC and
RNIC were also unable to file their 1996 audited statutory financial statements
by June 1, 1997, as required by Florida and Missouri statutes.
RISCORP also experienced difficulty in completing its 1996 financial
statements in a timely manner. This resulted in RISCORP being delisted by the
stock exchange on which its stock was traded and in adverse publicity in the
insurance marketplace. The Company has not yet filed a Form 10-Q for the first
or second quarter of 1997. The Company anticipates filing the first and second
quarter 1997 Form 10-Q's in the near future.
The inability of RIC and RPC to file accurate and timely financial
statements and to respond timely to requests made by the examiners from the
FDOI inhibited the FDOI's ability to assess the financial condition of RIC and
RPC and prompted increased regulatory scrutiny of the companies. As a result of
the FDOI's increased regulatory scrutiny of RIC and RPC, and in connection with
the pending sale discussed above and in Note 20, the FDOI requested the
purchaser to provide an interim reinsurance agreement and cut-through
endorsement ("Agreement") on all inforce business as of June 18, 1997 and all
new and renewed business written on or after June 18, 1997. This Agreement only
provides coverage for Florida workers' compensation policyholders and was
approved by the FDOI.
The ability of RIC and RPC to operate at their present level of
insurance activity could be affected if the transaction discussed in Note 20 is
not completed and RIC and RPC are unable to replace the reinsurance agreement.
Management believes it could replace this reinsurance agreement under similar
terms.
(B) INITIAL PUBLIC OFFERING ("IPO") OF COMMON STOCK
On February 29, 1996, the Company completed an IPO of common stock
with the issuance of 10.935 million shares of Class A Common Stock. Of the
shares offered, 7.2 million were sold by the Company and 3.735 million were
sold by the majority shareholder of the Company. The following table reflects
certain summary information regarding the IPO:
<TABLE>
<CAPTION>
UNDERWRITING
NUMBER PRICE DISCOUNTS AND NET
SHARES SOLD BY OF SHARES TO PUBLIC COMMISSIONS PROCEEDS
-------------------- ------------ ---------- --------------- --------------
<S> <C> <C> <C> <C>
RISCORP 7,200,000 $ 19.00 $ 8,892,000 $ 127,908,000
Shareholder 3,735,000 $ 19.00 4,612,725 66,352,275
----------- -------------- -------------
10,935,000 $ 13,504,725 $ 194,260,275
=========== ============== =============
</TABLE>
The net proceeds reflected above are before deducting other expenses
of approximately $2.0 million incurred in conjunction with the IPO.
The Company used the proceeds from the IPO to repay outstanding debt,
fund acquisitions, increase the capital and surplus of the Company's insurance
subsidiaries and for general corporate purposes.
F-10
<PAGE> 237
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company did not receive any proceeds from the sale of Class A
Common Stock by the majority shareholder; however, a portion of the majority
shareholders' proceeds was used to repay approximately $9.8 million in
outstanding indebtedness to the Company.
(C) BUSINESS
RISCORP, through its wholly-owned insurance subsidiaries, is
primarily engaged in providing workers' compensation insurance under a managed
care philosophy. RISCORP provides these managed care workers' compensation
products and services to clients throughout the Southeast and other select
markets. In addition, RISCORP, through its wholly-owned non-insurance
subsidiaries, provides reinsurance, risk management advisory services and
insurance managerial services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
presented in accordance with generally accepted accounting principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires the
use of assumptions and estimates in reporting certain assets and liabilities
and related disclosures. Actual results could differ from those estimates.
(B) RECOGNITION OF REVENUES
Workers' compensation and employer liability insurance premiums
consist of deposit premiums and installment premiums billed under the terms of
the policy, and estimates of retrospectively-rated premiums based on experience
incurred under these contracts to date. Unbilled installment premiums and audit
premiums are recognized as revenue on the accrual basis. Premiums are primarily
recognized as revenue over the period to which the premiums relate using the
daily pro rata basis with a liability for unearned premium recorded for the
excess of premiums billed over the earned premiums.
Service fee revenue is recorded as a percentage of standard earned
premiums of the underlying insurance policies of the facilities managed, in
accordance with the specific contractual provisions.
Reinsurance premiums are recognized as revenue on a pro rata basis
over the contract term with a liability for unearned premiums established for
the unexpired portion of the contract.
F-11
<PAGE> 238
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(C) PARTICIPATING INSURANCE POLICIES
The Company offers participating insurance policies in connection
with custom plans, flexible retention plans and preferred account dividend
plans. Dividends are approved quarterly by the Board of Directors and are based
upon the actual loss experience of each of the policies. Participating policies
represented approximately 16.5%, 10.1% and 1% of written premiums at December
31, 1996, 1995 and 1994, respectively. The Company paid dividends to
participating policyholders of $9.2 million, $1.6 million an $0 for the years
ended December 31, 1996, 1995 and 1994, respectively.
(D) STATE OF FLORIDA SPECIAL DISABILITY TRUST FUND
The State of Florida maintains a Special Disability Trust
Fund ("SDTF") for the purpose of providing benefits to workers who have a
pre-existing condition and incur a second or subsequent injury.
The SDTF is financed through annual assessments imposed on workers'
compensation insurers, which is based on a percentage of net workers'
compensation premiums written. The Company submits claims to the SDTF for
recovery of applicable claims paid on behalf of the Company's insureds. The
Company estimates such recoveries based on industry statistics applied to
ultimate projected claims. The amounts reflected as SDTF recoveries in the
accompanying Consolidated Balance Sheets are net of a valuation allowance of
$8.9 million and $8.2 million as of December 31, 1996 and 1995, respectively.
The allowance is determined based upon the actuarially estimated recoverable
amount compared to the estimated recovery actually expected from the SDTF by
RISCORP (see Note 6).
(E) INVESTMENTS
Fixed maturity investments are securities that mature at a specified
future date more than one year after being issued. Fixed maturity securities
that the Company intends to hold until maturity are classified as "fixed
maturities held to maturity" and are carried at amortized cost. Amortized cost
is based on the purchase price and is adjusted periodically so the carrying
value of the security will equal the face or par value at maturity. Fixed
maturity securities which may be sold prior to maturity due to changes in
interest rates, prepayment risks, liquidity needs, tax planning purposes or
other similar factors, are classified as "available for sale" and are carried
at fair value as determined using values from independent pricing services.
Equity securities (common and nonredeemable preferred stock) are
carried at fair value. If the current market value of equity securities is
higher than the original cost, the excess is an unrealized gain, and if lower
than the original cost, the difference is an unrealized loss. The net
unrealized gains or losses on equity securities, net of the related deferred
income taxes, are reported as a separate component of shareholders' equity,
along with the net unrealized gains or losses on fixed maturity securities
available for sale.
Realized gains and losses on sales of investments are recognized in
net income on the specific identification basis, as of the trade date. A
provision for impairment, if any, resulting from other than temporary declines
in fair value is included in net investment income.
F-12
<PAGE> 239
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(F) LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses is based on an
actuarial determination and represents management's best estimate of the
ultimate cost of losses and loss adjustment expenses that are unpaid at year
end including incurred but not reported claims. Although the liabilities are
supported by actuarial projections and other data, such liabilities are
ultimately based on management's reasoned expectations of future events. It is
possible that the expectations associated with these accounts could change in
the near future (i.e., within one year) and that the effect of these changes
could be material to the financial statements. The reserve for losses and loss
adjustment expenses is continually reviewed and as adjustments become
necessary, such adjustments are included in current operations.
Management believes that the liability for losses and loss adjustment
expenses at December 31, 1996 is adequate to cover the ultimate liability.
However, the ultimate settlement of losses and the related loss adjustment
expenses may vary from the amounts in the accompanying financial statements.
The Company recognizes reinsurance recoveries, estimated recoveries
from the SDTF and subrogation from third parties as reductions to losses
incurred.
(G) REINSURANCE
Premiums and losses ceded under reinsurance contracts in which an
assuming enterprise provides indemnification against loss or liability relating
to an insurance risk are reported as a reduction to premium earned and losses
and loss adjustment expenses, respectively. Amounts recoverable for ceded
losses and loss adjustment expenses and ceded unearned premiums under
reinsurance agreements are recorded as assets on the balance sheet. Reinsurance
contracts that do not transfer risk are accounted for as deposits in the
Consolidated Balance Sheets.
(H) INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", ("SFAS 109"). Under SFAS 109, deferred tax
assets and liabilities are established for temporary differences between the
financial reporting basis and tax basis of the Company's assets and liabilities
at enacted tax rates expected to be in effect when such amounts are recovered
or settled. Such temporary differences are principally related to the deferral
of policy acquisition costs, tax basis discount on reserves for unpaid losses
and loss adjustment expenses, the deductibility of unearned premiums, the
allowance for uncollectible premiums receivable and the amortization of
goodwill. A valuation allowance is established to reduce deferred tax assets to
an amount that, in the opinion of management, is more likely than not to be
realized.
F-13
<PAGE> 240
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(I) POLICY ACQUISITION COSTS
The cost of acquiring and renewing business; principally commissions,
premium taxes and other underwriting expenses are deferred to the extent
recoverable and amortized over the term of the related policies. Anticipated
investment income is considered in the determination of recoverability.
Unearned ceding commissions are reported as a reduction to deferred policy
acquisition costs. For the years ended December 31, 1996, 1995 and 1994, policy
acquisition costs deferred totaled $31.8 million, $48.9 million and $0.5
million, respectively. For the years ended December 31, 1996, 1995 and 1994,
amortization of deferred policy acquisition costs totaled $33.7 million, $46.9
million and $126,000, respectively.
(J) GOODWILL
Costs in excess of net assets acquired, or goodwill, represents the
unamortized excess of cost over underlying net assets of companies acquired.
Goodwill is being amortized on a straight-line basis over periods ranging from
5 to 15 years. Amortization expense, including impairment losses of $5.6
million in 1996, for the years ended December 31, 1996, 1995 and 1994 totaled
$7.9 million, $0.3 million and $0, respectively.
The Company periodically reviews its assets subject to Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", ("SFAS 121") and when events or changes in
circumstances indicate that the carrying amount of an asset may no longer be
fully recoverable, the Company tests the recoverability of the asset primarily
by estimating the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
value of the asset, the Company recognizes an impairment loss. Measurement of
an impairment loss is based on the carrying amount and estimated fair value of
the asset.
During 1996, using the criteria contained in SFAS 121, the Company
recognized an impairment loss of $3.2 million and reduced goodwill that was
recorded in 1995 in conjunction with the purchase of RISCORP West, formerly
known as the Self Insurors Service Bureau, Inc. ("SISB"). The Company's
impairment assessment was primarily based upon the closing of former SISB
offices in certain states and the Company's current focus on at-risk business.
The impairment loss was recorded as a component of depreciation and
amortization in the Company's Consolidated Statement of Income for the year
ended December 31, 1996. Remaining unamortized goodwill related to the SISB
purchase was $468,000 at December 31, 1996.
As more fully described in Note 3, the Company also recorded an
impairment loss of $2.8 million in connection with the acquisition of
Independent Association Administrators, Inc. The remaining unamortized goodwill
relating to this acquisition is $8.5 million at December 31, 1996.
Net assets acquired in excess of cost, or "negative" goodwill, is
being amortized on a straight-line basis over 10 years. Income from
amortization of negative goodwill totaled $0.9 million, $0.8 million and $0 for
the years ended December 31, 1996, 1995 and 1994, respectively (see Note 3).
F-14
<PAGE> 241
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(K) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
useful lives of the related assets. Property and equipment recorded under
capital lease arrangements are amortized over the shorter of the asset's useful
life or the lease term.
The Company capitalizes incremental internal and external costs
directly related to internally developed software to meet the Company's needs.
These software development projects represent major system enhancements or
replacements of existing operating management information systems.
Capitalization commences when management has committed to funding the software
project and it is probable that upon completion the software will perform its
intended function. Capitalized costs are recorded in property and equipment and
amortized using the straight-line method over three years. For the years ended
December 31, 1996, 1995 and 1994, the Company capitalized $1.7 million, $0.3
million and $0, respectively. Amortization expense of $.04 million, $0 and $0
has been recorded for the years ended December 31, 1996, 1995 and 1994,
respectively, for internally developed software costs.
(L) INVESTMENT IN JOINT VENTURE
The Company accounts for its 50 percent investment in a joint venture
arrangement on the equity basis of accounting whereby the Company's recorded
investment is adjusted for its proportionate share of earnings or losses of the
joint venture. For the year ended December 31, 1996, the Company's equity in
undistributed losses of the joint venture was $0.2 million.
(M) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(N) BAD DEBT ALLOWANCE
The bad debt allowance is based on the Company's experience with
uncollectible premiums receivable and represents the Company's best estimate of
the ultimate uncollectible amounts incurred through the balance sheet date.
Premiums receivable contained in the accompanying Consolidated Balance Sheets
are shown net of this valuation allowance.
(O) EARNINGS PER SHARE
Net income per common share is determined by dividing net income by
the weighted average number of common shares and common share equivalents
outstanding during the period. Included in the weighted average number of
shares are contingent shares of 607,603 for the year ended December 31, 1996
and 0 for the years ended December 31, 1995 and 1994, related to acquisitions
completed by the Company. The weighted average number of shares used in the
calculation was 36,785,453 for the year ended December 31, 1996 and 30,092,500
for both of the years ended December 31, 1995 and 1994.
F-15
<PAGE> 242
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(P) STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"),
which is effective for fiscal years beginning after December 15, 1995. SFAS 123
establishes a method of accounting for stock-based compensation that is based on
the fair value of stock options and similar instruments and encourages, but does
not require, adoption of that method. The Company has elected to continue
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", for measuring compensation cost. However, as required by
SFAS 123, the Company has disclosed pro forma net income and earnings per share
for the years ended December 31, 1996 and 1995 as if the provisions of SFAS 123
had been adopted (see Note 12).
(Q) CONCENTRATIONS OF RISK
Following is a description of significant risks facing the Company
and its property and casualty insurance subsidiaries and how those risks are
minimized:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates can create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those currently recorded in the financial statements.
The Company attempts to minimize this risk by reviewing legislative
and other regulatory changes and adjusting rates whenever possible.
All of the Company's premiums were derived from products offered to
customers located in the United States. Accordingly, the Company
could be adversely affected by economic downturns, significant
unemployment and other conditions that may occur from time. (See
Notes 1(a), 6, 19 and 20)
Credit Risk is the risk that issuers of securities owned by the
Company will default, or other parties, including reinsurers, the
SDTF agents and insureds who may owe the Company money, will not pay.
The Company minimizes this risk by adhering to a conservative
investment strategy, by placing reinsurance with highly rated
reinsurers and by actively monitoring collections of the SDTF
recoverable and premiums receivable.
Interest Rate Risk is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments. The
Company mitigates this risk by attempting to match the maturity
schedule of its assets with the expected payout of its liabilities.
To the extent that liabilities come due more quickly than assets
mature, an insurer would have to sell assets prior to maturity and
recognize potential gains or losses.
(R) RECLASSIFICATIONS
Certain amounts in the financial statements presented have been
reclassified from amounts previously reported in order to be comparable between
years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
F-16
<PAGE> 243
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACQUISITIONS AND JOINT VENTURE
ACQUISITIONS
As more fully described below, the Company acquired RIC in 1995, RNIC in
1996, and two workers' compensation management services companies in 1996. Each
of these transactions were accounted for under the purchase method of
accounting under which the aggregate purchase price paid for the entity was
allocated to the assets acquired and liabilities assumed based upon the
estimated fair value of such assets and liabilities at the dates of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired is reflected as costs in excess of net assets acquired and is
being accreted over periods ranging from 5 to 15 years. For acquisitions in
which net assets acquired exceeded the purchase price, a liability for net
assets acquired in excess of costs has been recorded and is being amortized
over 10 years.
Operating results of the acquired entities have been included in the
consolidated financial statements from their date of acquisition. The following
schedule summarizes certain pro forma results of operations for the years ended
December 31, 1996, 1995 and 1994, as if the acquisition took place at the
beginning of the Company's fiscal year preceding the year of acquisition (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Total revenues $ 275,410 $ 266,412 $ 243,500
Income before income taxes $ 18,503 $ 23,070 $ 22,500
Net income $ 6,860 $ 16,407 $ 13,000
Earnings per share $ 0.19 $ 0.55 $ 0.45
</TABLE>
ACQUISITION OF RISCORP INSURANCE COMPANY
Effective January 1, 1995, RIC was acquired by RISCORP of Florida, Inc.,
a wholly-owned subsidiary of the Company. As a result of the acquisition, RIC's
name was changed from CMIC. Upon conversion, 1.5 million shares of $100 par
value stock were authorized and 15,000 shares were issued and outstanding. RIC
received $25.0 million as a capital contribution from the Company in the form
of $12.0 million cash and the issuance of $13.0 million of surplus notes to the
Company. In conjunction with the acquisition, RIC, subject to a Plan of
Conversion and Recapitalization and with the approval of CMIC's policyholders
and the FDOI, converted from an assessable mutual insurance company to a stock
insurance company. RIC provides workers' compensation insurance in the State of
Florida.
In exchange for their ownership interest in RIC, former CMIC
policyholders were relieved of all contingent liabilities for future policy
assessments and the risk that recorded liabilities were insufficient
F-17
<PAGE> 244
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to cover incurred losses. On the acquisition date, the estimated fair value of
RIC's net assets in excess of the purchase price was $8.2 million, which was
recorded as negative goodwill and is being amortized on a straight-line basis
over 10 years.
ACQUISITION OF COMPSOURCE
In March 1996, the Company purchased all of the outstanding stock of
CompSource, Inc. and Insura, Inc. (collectively, "CompSource") in exchange for
approximately $12.1 million in cash and 112,582 shares of the Company's Class A
Common Stock valued at $2.1 million on the date of acquisition. CompSource is a
workers' compensation management services company offering its services in
North Carolina. Pursuant to a stock redemption agreement entered into as part
of this transaction, the former shareholders of CompSource elected to have the
Company repurchase the 112,582 shares at a purchase price of $18.653 per share
on March 8, 1997, and the Company repurchased all 112,582 shares from the
former shareholders for $2.1 million in accordance with the terms of the
redemption agreement. This $2.1 million stock redemption has been included in
the accompanying Consolidated Balance Sheets.
On the acquisition date, the excess of the purchase price over the fair value
of the net assets acquired was $12.6 million and was recorded as goodwill in
the accompanying Consolidated Balance Sheets.
ACQUISITION OF INDEPENDENT ASSOCIATION ADMINISTRATORS, INC. ("IAA") AND RISK
INSPECTION SERVICES AND CONSULTING, INC. ("RISC")
In September 1996, the Company purchased all of the outstanding stock of
IAA and RISC in exchange for approximately $11.5 million, consisting primarily
of 790,336 shares of the Company's Class A Common Stock valued at approximately
$10.9 million on the date of acquisition. IAA and RISC are workers'
compensation management services companies offering services in Alabama. On the
acquisition date, the excess of the purchase price over the fair value of the
net assets acquired was $11.4 million and was recorded as goodwill in the
accompanying Consolidated Balance Sheets.
During the first quarter of 1997, it became evident that the goodwill
recorded at the date of the RISC and IAA acquisition could not be fully
recovered from the profitability of the workers' compensation business that was
currently under contract. Therefore, as of December 31, 1996, $2.8 million of
goodwill was written off and is included as an expense in the accompanying
Consolidated Statements of Income.
ACQUISITION OF ATLAS
In March 1996, RISCORP of Florida, Inc., a wholly-owned subsidiary of the
Company, acquired 100 percent of the outstanding capital stock of Atlas
Insurance Company ("Atlas") for approximately $5.0 million in cash. As a result
of the acquisition, the name was changed from Atlas to RNIC. RNIC, which
primarily provides workers' compensation insurance, is licensed to do business
in 19 states and is authorized to operate on an excess and surplus lines basis
in 5 additional states. On the acquisition date,
F-18
<PAGE> 245
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the excess of the purchase price over the fair value of the net assets acquired
was $2.6 million and was recorded as goodwill in the accompanying Consolidated
Balance Sheets.
ASSUMPTION REINSURANCE TRANSACTION
During 1996, RNIC also entered into several assumption reinsurance
transactions that resulted in the acquisition of five self insurance funds that
are discussed in Note 7 (b).
JOINT VENTURE ARRANGEMENT
In January 1996, the Company, through its wholly-owned subsidiary,
RISCORP of Illinois, entered into a joint venture arrangement with Health Care
Service Corporation ("HCSC"), a subsidiary of Blue Cross and Blue Shield of
Illinois, to underwrite and sell managed care workers' compensation insurance
in Illinois. The Company and HCSC each hold 50 percent ownership in the joint
venture known as Third Coast Holding Company ("Third Coast"). The Company
contributed the use of its expertise, insurance systems and intellectual
property. The Company's initial investment in Third Coast was valued at $10.0
million; however, the Company's cost basis in the contributed property was $0.
As of December 31, 1996, the Company is carrying its initial investment in
Third Coast at $0.
(4) INVESTMENTS
Investments included in the accompanying Consolidated Balance Sheets as
of December 31, 1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
COST GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1996:
Available for sale:
Fixed maturity securities:
Municipal government obligations $ 75,844 $ 559 $ 55 $ 76,348
U.S. government obligations 49,144 983 47 50,080
Corporate obligations 86,726 734 94 87,366
Mortgage backed securities 2,588 25 1 2,612
Asset backed securities 5,501 57 2 5,556
Redeemable preferred stocks 6,437 408 5 6,840
---------- -------- ------ ----------
226,240 2,766 204 228,802
---------- -------- ------ ----------
Equity securities:
Nonredeemable preferred stocks 1,063 28 9 1,082
Common stocks 2,817 205 59 2,963
---------- -------- ------ ----------
3,880 233 68 4,045
---------- -------- ------ ----------
Total available for sale 230,120 2,999 272 232,847
---------- -------- ------ ----------
Held to maturity:
Fixed maturity securities:
U.S. government obligations 16,355 144 62 16,437
Municipal government obligations 4,204 5 4 4,205
Certificates of deposit 2,250 - - 2,250
---------- -------- ------ ----------
Total held to maturity 22,809 149 66 22,892
---------- -------- ------ ----------
Total investments $ 252,929 $ 3,148 $ 338 $ 255,739
========== ======== ====== ==========
</TABLE>
F-19
<PAGE> 246
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COST GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1995:
Available for sale:
Fixed maturity securities:
Municipal government obligations $ 29,112 $ 342 $ 75 $ 29,379
U.S. government obligations 13,754 58 9 13,803
Corporate obligations 4,024 69 1 4,092
Redeemable preferred stocks 5,718 402 4 6,116
---------- --------- ------- ----------
52,608 871 89 53,390
---------- --------- ------- ----------
Equity securities:
Nonredeemable preferred stocks 175 1 1 175
Common stocks 214 14 11 217
---------- --------- ------- ----------
389 15 12 392
---------- --------- ------- ----------
Total available for sale 52,997 886 101 53,782
---------- --------- ------- ----------
Held to maturity:
Fixed maturity securities:
U.S. government obligations 12,133 309 - 12,442
Certificates of deposit 3,450 - - 3,450
---------- --------- ------- ----------
Total held to maturity 15,583 309 - 15,892
---------- --------- ------- ----------
Total investments $ 68,580 $ 1,195 $ 101 $ 69,674
========== ========= ======= ==========
</TABLE>
The fair value of investments at December 31, 1996 and 1995 was
determined using independent pricing services.
The amortized cost and estimated fair value of fixed maturities by
contractual maturity, as of December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------- -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 17,524 $ 17,614 $ 3,052 $ 3,050
Due after one year through five years 152,133 153,315 15,510 15,601
Due after five years through ten years 36,933 37,892 3,927 3,926
Due after ten years 17,062 17,369 320 315
Mortgage backed securities 2,588 2,612 - -
---------- ---------- --------- ----------
$ 226,240 $ 228,802 $ 22,809 $ 22,892
========== ========== ========= ==========
</TABLE>
Actual maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
During the years ended December 31, 1996, 1995 and 1994, proceeds from
sales of fixed maturities available for sale totaled $88.9 million, $60.3
million and $1.0 million, respectively. Gross realized gains and gross realized
losses for the years ended December 31, 1996, 1995 and 1994 are summarized in
the following table (in thousands) and are recorded in net investment income in
the accompanying Consolidated Statements of Income:
F-20
<PAGE> 247
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Gross realized gains $ 178 $ 1,395 $ -
Gross realized losses (73) (379) (9)
------ ------- ------
Net realized gains (losses) $ 105 $ 1,016 $ (9)
====== ======= ======
</TABLE>
The following information summarizes the components of net investment
income for the years ended December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- -------
<S> <C> <C> <C>
Fixed maturities $ 10,444 $ 5,856 $ 1,376
Equity securities 547 410 113
Cash and cash equivalents 1,700 606 398
-------- -------- -------
12,691 6,872 1,887
Investment expenses (497) (164) (210)
-------- -------- -------
$ 12,194 $ 6,708 $ 1,677
======== ======== =======
</TABLE>
While the Company has credit risk in the investment portfolio, no fixed
maturity security had a Standard & Poor's rating of less than BBB at December
31, 1996. The carrying value of securities on deposit with various governmental
agencies was $18.6 million and $15.6 million at December 31, 1996 and 1995,
respectively, and is included in fixed maturities held to maturity in the
accompanying Consolidated Balance Sheets.
The Company's investments in excess of 10 percent of shareholders' equity
at December 31, 1996 and 1995, aggregated by issuer and excluding investments
issued or guaranteed by the United States, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
CARRYING VALUE
---------------------------
1996 1995
---------- -----------
<S> <C> <C>
Fixed maturities:
State of California $ - $ 2,171
State of Florida 23,472 3,450
State of Illinois - 3,331
State of Minnesota - 2,479
State of New Jersey - 2,823
---------- -----------
$ 23,472 $ 14,254
========== ===========
</TABLE>
(5) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company establishes reserves to cover its estimated liability for
losses and loss adjustment expenses with respect to reported claims and claims
incurred but not yet reported as of the end of each accounting period. The
Company establishes its reserves based on facts then known, estimates of future
claims trends and other factors, including the Company's experience with
similar cases and historical
F-21
<PAGE> 248
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company and industry trends, such as reserving patterns, loss payment patterns,
claim closure and reporting patterns, and product mix.
Activity in the reserve for losses and loss adjustment expenses for the
years ended December 31, 1996, 1995 and 1994 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Gross reserves for losses and loss adjustment expenses, beginning of period $ 261,700 $ 12,668 $ 6,157
Less reinsurance recoverables 100,675 7,398 -
Less SDTF recoverables 51,836 671 831
Less prepaid managed care fees 16,369 - -
--------- -------- -------
Net balance at January 1 92,820 4,599 5,326
--------- -------- -------
Assumed during year from loss portfolio transfers and acquisitions 88,212 123,854 -
--------- -------- -------
Incurred losses and loss adjustment expenses related to:
Current year 123,986 87,467 6,026
Prior years 3,023 5,198 2,062
---------- -------- -------
Total incurred losses and loss adjustment expenses 127,009 92,665 8,088
---------- -------- -------
Paid related to:
Current year 56,088 33,069 4,821
Prior years 55,875 95,229 3,994
---------- -------- -------
Total paid 111,963 128,298 8,815
---------- --------- -------
Net balance at December 31 196,078 92,820 4,599
Plus reinsurance recoverables 180,698 100,675 7,398
Plus SDTF recoverables 49,505 51,836 671
Plus prepaid managed care fees 31,958 16,369 -
---------- --------- -------
Gross reserves for losses and loss adjustment expenses, at December 31 $ 458,239 $ 261,700 $12,668
========== ========= =======
</TABLE>
The Company recognizes recoveries from the SDTF and subrogation from
third parties as a reduction to incurred losses. In determining the best
estimate of the effect of these recoveries on the ultimate cost of all unpaid
losses and loss adjustment expenses, the Company utilizes historical and
industry statistics. The estimated amount of recoveries from the SDTF included
as a reduction to the reserve for losses and loss adjustment expenses was $49.5
million and $51.8 million at December 31, 1996 and 1995, respectively.
The 1995 activity in the reserve for losses and loss adjustment expenses
reflects the acquisition of RIC on January 1, 1995. Adverse development in 1996
occurred due to deterioration in 1993 and prior accident years offset in part
by improved experience for the 1995 accident year.
Prior to the acquisition of RIC, the Company's insurance operations
consisted primarily of providing excess reinsurance coverage to other entities.
Because of the nature and volatility of these excess coverages and the short
history of operations, few losses were reported and paid under these excess
policies. As a result of changes in estimates of insured events in prior years,
the net provision for unpaid losses and loss adjustment expenses for such prior
years decreased by $1.9 million in 1994.
F-22
<PAGE> 249
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STATE OF FLORIDA SPECIAL DISABILITY TRUST FUND
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds and self-insured employers in Florida for certain workers'
compensation benefits paid to injured employees. SDTF reimburses claim payments
made to a claimant whose injury merges with, aggravates or accelerates a
pre-existing permanent physical impairment. The SDTF is managed by the State of
Florida and is funded through assessments against insurers and self-insurers
providing workers' compensation coverage in Florida. RISCORP's pro-rata amount
of the SDTF assessment is based upon its written premiums compared to the total
workers' compensation premiums written by all Florida insurers and
self-insurance funds. Should a carrier stop writing business, it has no
obligation for future assessments. The SDTF's assessment formula has
historically yielded sufficient revenues for annual reimbursement payments and
for costs associated with administering the SDTF. The SDTF has not prefunded
its claims liability and no reserves currently exist. As of September 30, 1996,
the SDTF had an actuarial projected undiscounted liability of approximately
$4.0 billion based on a study performed for the SDTF by independent actuarial
consultants. In addition, the SDTF actuarial study indicated that, at the
current assessment rates, the payment of the existing liability would take
numerous years.
Under Florida sunset laws applicable to some state-sponsored funds, the
SDTF would have expired on November 4, 1996 unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. The SDTF will accept no claims with
accident dates after December 31, 1997. Certain SDTF claims may have to be
refiled for reimbursement and such filing may require a refiling fee.
Additionally, companies accruing SDTF recoveries may be statutorily limited in
the level of recoverables they may be allowed to carry. The bill provides for a
funding mechanism through which companies writing workers' compensation
insurance in Florida will be assessed an annual charge to cover payments made
by the SDTF. The Company believes that even in the event of default by the
SDTF, the existing reimbursements of the SDTF would become general obligations
of the State of Florida. Management further believes that the recoveries
recorded at December 31, 1996 will not be materially adversely affected by the
new legislation.
For the years ended December 31, 1996 and 1995, the change in the
estimated SDTF recoveries was a decrease in losses and loss adjustment expenses
incurred of approximately $200,000 and $5.8 million, respectively. For the
years ended December 31, 1996 and 1995, SDTF cash recoveries were $2.5 million
and $0.9 million, respectively. SDTF assessments were $11.7 million, $12.9
million and $0.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
(7) REINSURANCE
(A) GENERAL
The Company is involved in the cession of insurance to certain
unaffiliated insurance and reinsurance companies under specific excess of loss
and quota share reinsurance contracts. Amounts by which certain financial
statement balances have been reduced as a result of these reinsurance contracts
as of and for the years ended December 31, 1996 and 1995 are as follows (in
thousands):
F-23
<PAGE> 250
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Premiums written $ 192,528 $ 161,696 $ 4,523
Premiums earned $ 165,022 $ 139,144 $ 4,523
Reserve for losses and loss adjustment expenses $ 180,698 $ 100,675 $ 7,398
Unearned premiums $ 49,788 $ 21,880 $ -
</TABLE>
Ceded losses and loss adjustment expenses were $152.3 million, $78.7
and $6.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and are reflected as reductions in the related financial
statement balances.
Effective January 1, 1995, RIC entered into a quota share reinsurance
agreement with American Re-Insurance Company ("AmRe"), whereby RIC ceded 50
percent of new and renewal premiums written and losses incurred. The
reinsurance agreement provides for the payment of a ceding commission at rates
which vary from 27.5 percent to 60 percent based on the loss ratio of the
business ceded, excluding unallocated loss adjustment expenses. The provisional
ceding commission provided for in the reinsurance agreement was 33 percent.
This reinsurance agreement will remain in force for an unlimited period of
time, but may be terminated by either party at any December 31 after December
31, 1995. The Company and AmRe are parties to a senior subordinated note
agreement in the principal amount of $15.0 million due 2002. Under the terms of
the note agreement, the Company must maintain the quota share treaty or other
comparable reinsurance agreement with AmRe for a minimum period of five years
beginning January 1, 1995 (see Note 20). Ceding commissions earned under the
AmRe reinsurance agreement were $58.2 million and $48.6 million for the years
ended December 31, 1996 and 1995, respectively.
The combined reinsurance recoverables and ceded unearned premiums (by
reinsurer) in excess of three percent of shareholders' equity as of December
31, 1996 are detailed below (in thousands):
<TABLE>
<CAPTION>
REINSURANCE CEDED UNEARNED
REINSURER RECOVERABLES PREMIUMS
--------------------------------------------------------- ------------ --------------
<S> <C> <C>
American Re-Insurance Company $ 96,345 $ 40,962
Continental Casualty Company $ 38,688 $ -
Signet Star Reinsurance Company $ 15,977 $ 123
TIG Reinsurance Company $ 10,492 $ -
Chartwell Reinsurance Company $ 5,800 $ 4,272
National Union Fire Insurance Company $ 5,572 $ -
Swiss Reinsurance America Company $ 2,875 $ 2,090
Trenwick American Reinsurance Company $ 2,875 $ 2,090
</TABLE>
Effective September 1, 1995, RPC entered into a medical excess of
loss reinsurance agreement with Cologne Life Reinsurance Company, whereby the
Company ceded 100 percent of all losses incurred per insured, per agreement
year, in excess of $150,000 up to $1.0 million. The Company pays $5.99 per
certificate of insurance per month for this coverage. The agreement is
continuous, but can be canceled by either party at September 1, 1996 or any
September 1 thereafter.
F-24
<PAGE> 251
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1996, RPC entered into a commercial casualty
excess of loss reinsurance agreement with Allstate Insurance Company, Chartwell
Reinsurance Company, Signet Star Reinsurance Company and San Francisco
Reinsurance Company, whereby the Company ceded 100 percent of all losses
incurred on business inforce, written or renewed during the term of this
agreement, per occurrence, in excess of $250,000 to $1.0 million. RPC is
required to pay 11.5 percent of earned premiums subject to a minimum premium of
$483,000 under the agreement. This reinsurance agreement will remain in force
for an unlimited period of time, but may be terminated by either party at
December 31, 1996 or any December 31 thereafter.
RPC ceded reinsurance to an unaffiliated insurer which was funded
through a deposit premium based on a percentage of estimated written premiums.
RPC determined that the agreement did not transfer risk. Accordingly, the
contract was accounted for using deposit accounting. Non-refundable premiums of
$229,962 were paid to the reinsurer for the year ended December 31, 1995 and
were expensed pro rata over the policy period in the accompanying financial
statements with the remaining unexpired portion recorded as a deposit. There
were no losses ceded to this contract for the year December 31, 1995. This
reinsurance agreement was canceled in 1996.
Effective October 1, 1996, RNIC entered into a quota share
reinsurance agreement with Chartwell Reinsurance Company, Swiss Reinsurance
America Corporation and Trenwick American Reinsurance Corporation (collectively
the "Reinsurers"), whereby RNIC ceded 65 percent of its net unearned premiums
as of October 1, 1996, and 65 percent of net written workers' compensation and
employers liability premiums, new or renewal, for the period October 1 to
December 31, 1996. Effective January 1, 1997, RNIC reduced the ceded quota
share amount to 60 percent. The reinsurance agreement provides for the payment
of a ceding commission at rates which vary from 27 percent to 49 percent based
on the loss ratio of the business ceded. The provisional ceding commission
contained in the reinsurance agreement was 33 percent. This reinsurance
agreement will remain in force for an unlimited period of time, but may be
terminated by either party at December 31, 1997 or any December 31 thereafter.
RNIC has ceded losses in excess of $500,000 to Continental Casualty
Company ("CNA") under three separate excess of loss reinsurance treaties. These
treaties have effective dates of January 1, June 14, and September 1, 1996 and
provide for the payment of premiums to CNA based on earned premiums. While the
contracts contain provisions for minimum premiums, the premiums for 1996 based
on earned premiums will exceed the minimum premium provisions specified under
these contracts. Each of these treaties with CNA expired on January 1, 1997.
RNIC also maintains specific excess of loss coverage on the run off
of the Atlas book of business with Allstate Insurance Company.
The unaffiliated reinsurers of each of the Company's insurance
subsidiaries are reinsurance companies with A.M. Best ratings of A- or higher.
The Company actively monitors and evaluates the financial condition of its
reinsurers. As a result, the Company does not believe it has any significant
credit risk associated with unaffiliated reinsurance recoverables. To the
extent that the reinsurers are
F-25
<PAGE> 252
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unable to meet their contractual obligations, the Company is contingently
liable for any losses and loss adjustment expenses ceded.
At December 31, 1996 and 1995, reinsurance recoverables consisted of
$180.7 million and $100.7 million of recoverables on reserves for losses and
loss adjustment expenses, respectively.
At December 31, 1996, approximately $91.5 million of the reinsurance
recoverable balance related to RIC's quota share agreement with one reinsurer.
The remaining recoverable balance of $89.5 million reflected estimated
recoveries from 15 unaffiliated reinsurers that provided specific and aggregate
excess of loss coverage. The previous table includes all reinsurance
recoverables in excess of three percent of shareholders' equity at December 31,
1996.
(B) ASSUMPTION REINSURANCE TRANSACTIONS
Effective June 14, 1996, RNIC entered into a loss portfolio transfer
and assumption reinsurance agreement with National Alliance for Risk Management
("NARM"), a North Carolina self-insured workers' compensation fund. Under the
terms of the agreement, RNIC assumed 100 percent of the outstanding loss
reserves (including incurred but not reported losses) and the outstanding
unearned premiums as of June 14, 1996. RNIC issued assumption certificates to
all of the NARM policyholders.
Effective September 1, 1996, RNIC entered into a loss portfolio
transfer and assumption reinsurance agreement with the Occupational Safety
Association of Alabama ("OSAA"), an Alabama self-insured workers' compensation
fund. Under the terms of the agreement, RNIC assumed 100 percent of the
outstanding loss reserves (including incurred but not reported losses) as of
September 1, 1996. RNIC issued assumption certificates to all OSAA
policyholders.
Effective October 1, 1996, RNIC entered into a loss portfolio
transfer and assumption reinsurance agreement with three NARM self insurance
funds in Virginia ("NARM - Virginia"). Under the terms of the agreement, RNIC
assumed 100 percent of the outstanding loss reserves (including incurred but
not reported losses) and the outstanding unearned premiums as of October 1,
1996. RNIC issued assumption certificates to all NARM Virginia policyholders.
The following loss portfolio transfers and assumption reinsurance
agreements were entered into by RNIC during 1996 (in thousands):
<TABLE>
<CAPTION>
LOSSES ASSUMED AT UNEARNED PREMIUMS AT
ENTITY EFFECTIVE DATE DATE OF TRANSFER DATE OF TRANSFER
---------------- ------------------ ----------------- --------------------
<S> <C> <C> <C>
NARM June 14, 1996 $ 34,544 $ 5,209
OSAA September 1, 1996 49,716 -
NARM - Virginia October 1, 1996 3,057 996
--------- -------
Total $ 87,317 $ 6,205
========= =======
</TABLE>
F-26
<PAGE> 253
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RISCORP received primarily cash and marketable securities from the
ceding companies of approximately $93.5 million to fund the loss and unearned
premium reserves assumed in connection with these transactions. In addition,
OSAA transferred to RNIC approximately $11.0 million in OSAA member deposits
and cash of approximately $11.0 million. RNIC will refund the deposits to the
policyholders during 1997 when the final premium audits are completed for the
1996 policy year. As of December 31, 1996, OSAA owed RNIC approximately $3.3
million in connection with the transaction. These funds were received on April
14, 1997.
(8) MANAGED CARE AGREEMENTS
The Company is party to arrangements with both Humana Medical Plans, Inc.
("Humana"), an unaffiliated health maintenance organization ("HMO"), and
RISCORP Health Plans, Inc. ("RHP"), an affiliated HMO, whereby upon
policyholder election to participate, the Company's medical claim costs are
fixed for the first three years of each claim. On May 1, 1996, the Company
terminated its arrangement with RHP; however, injured individuals are covered
for three years following any accident occurring during policy periods in
effect prior to termination. The Humana arrangement, which commenced July 1,
1995, was renewed for one additional year at the anniversary date. Under the
Humana arrangement, injured individuals are covered for three years following
any accident occurring within the policy periods. The fees paid to Humana and
RHP are recognized as prepaid assets and losses and loss adjustment expenses in
the Consolidated Balance Sheets. Included in losses and loss adjustment
expenses were $30.6 million, $19.0 million and $0 of such fees for the years
ended December 31, 1996, 1995 and 1994, respectively.
To the extent that Humana or RHP is unable to meet its contractual
obligations under the agreements, the Company is liable for any unpaid losses
and loss adjustment expenses. At December 31, 1996 and 1995, unpaid losses and
loss adjustment expenses covered by Humana and RHP were $32.0 million and $16.4
million, respectively.
(9) INCOME TAXES
The components of income taxes for the years ended December 31, 1996,
1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 17,919 $ 4,042 $ 5,366
State 2,280 1,037 924
-------- ------- -------
Total current 20,199 5,079 6,290
-------- ------- -------
</TABLE>
F-27
<PAGE> 254
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Deferred:
Federal (12,126) 219 (274)
State 129 (199) (24)
---------- --------- ---------
Total deferred (11,997) 20 (298)
---------- --------- ---------
Total income taxes $ 8,202 $ 5,099 $ 5,992
========== ========= =========
</TABLE>
The differences between taxes computed at the federal statutory rate and
recorded income tax expense for the years ended December 31, 1996, 1995 and
1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense $ 3,710 $ 6,574 $ 4,503
State taxes in excess of federal benefit 1,336 545 582
Non-taxable income (982) (637) (260)
Goodwill and other amortization 2,437 (287) -
ESOP termination benefit expense - - 1,245
Excise tax - - 595
S corporation earnings - (984) (444)
Fines and penalties 543 - -
Amounts related to prior years 980 - -
Other 178 (112) (229)
------- ------- -------
Income tax expense $ 8,202 $ 5,099 $ 5,992
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Deferred tax assets:
Unearned premium $ 3,688 $ 2,920
Discount on reserve for losses and loss adjustment expenses 13,149 5,950
Deferred income - 2,074
Accrued employee benefits 709 327
Bad debts 5,950 -
Other 1,507 1,448
--------- ---------
Gross deferred tax assets 25,003 12,719
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs 156 849
Unrealized gains on investments 952 275
Depreciation 446 287
Other 898 115
--------- ---------
Gross deferred tax liabilities 2,452 1,526
--------- ---------
Net deferred tax asset $ 22,551 $ 11,193
========= =========
</TABLE>
F-28
<PAGE> 255
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes it could realize its net deferred tax asset through
the carryback of future tax losses to prior years or the generation of future
taxable income, and it is more likely than not that the tax benefits of the
deferred tax assets will be realized. Accordingly, no valuation allowance
relating to deferred taxes has been established.
(10) NOTES PAYABLE
Notes payable consist of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Subordinated notes from quota share reinsurer, bearing interest at 12%;
matures December 31, 2002. $ 15,000 $ 15,000
Notepayable from acquisition of subsidiary, with implicit interest rate
of 9.76% computed on the payment stream; matures November 9, 1998. 756 1,147
Term loan, implicit interest rate of 12% computed on the payment stream;
matures January 1, 1999. 470 690
Notes payable on five automobiles, bearing interest at 7%; various
maturities throughout 2000. 77 -
Termloan, bearing interest at a rate above prime or LIBOR (8.75% at
December 31,1995), secured by all of the Company's assets and
guaranteed by Company's majority shareholder and affiliates;
(repaid March, 1996). - 25,000
$2.0 million line of credit, bearing interest at a rate above LIBOR
or prime; (repaid March, 1996). - 2,000
Note payable to an insurance pool, bearing interest at prime plus 1%,
unsecured; (repaid March 1996). - 2,580
-------- --------
$ 16,303 $ 46,417
======== ========
</TABLE>
F-29
<PAGE> 256
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notes payable are due as follows at December 31, 1996 (in thousands):
<TABLE>
<S> <C>
1997 $ 645
1998 614
1999 43
2000 1
2001 and thereafter 15,000
----------
$ 16,303
==========
</TABLE>
The Company is currently in default of several debt covenants contained
in the AmRe loan agreement including the filing of the audited GAAP financial
statements by March 31, 1997. On October 10, 1997, the Company received a
waiver from AmRe concerning these defaults, subject to their actual receipt of
the delinquent financial statements. On October 17, 1997, the Company received
a waiver from AmRe of the default based upon the failure of the Company to
deliver quarterly financial statements and for failure to file Form 10-Q with
the Securities and Exchange Commission for the first and second quarters of
1997. Additional covenant violations could result in the note being called.
(11) SHAREHOLDERS' EQUITY
The Company has 100 million shares of $.01 par value Class A Common Stock
authorized and 11,855,917 issued and outstanding shares at December 31, 1996.
Class B Common Stock, par value $.01, consists of 100 million shares
authorized, 24.3 million and 28.1 million shares issued and outstanding at
December 31, 1996 and 1995, respectively. Ten million shares of preferred stock
are authorized, but no shares are issued or outstanding. The characteristics of
the Class B Common Stock are identical to those of the Class A Common Stock,
except that each holder of the Class B Common Stock is entitled to 10 votes for
each share held. The Class B Common Stock may be converted into Class A Common
Stock at any time at the election of the holders on a one-for-one basis.
The Company's insurance subsidiaries are limited by statute in their
ability to distribute unassigned surplus without approval of the Commissioner
of Insurance for the state of domicile. Dividends or distributions to
shareholders that are made under these statutes and that do not require the
prior approval of the FDOI or the Missouri Department of Insurance ("MDOI") are
determined based on a combination of an insurer's net income realized and
unrealized capital gains, percentages of dividends and distribution of surplus,
and the relationship of surplus after the dividend or distribution is made to
the minimum required statutory surplus. The Company did not declare any
shareholder dividends during 1996 and 1995. The Company paid dividends to
participating policyholders of $9.2 million, $1.6 million and $0 for the years
ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996,
the Company's insurance subsidiaries have the ability to dividend approximately
$16.0 million to RISCORP without the prior approval of the FDOI or the MDOI,
consisting of $14.9 million from RIC and $1.1 million from RPC.
F-30
<PAGE> 257
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined statutory policyholders' surplus as of December 31, 1996 and
1995, and combined statutory net income for the years ended December 31, 1996
and 1995 (as filed and adjusted for the FDOI examination adjustments as
discussed in initial Note) for the Company's insurance subsidiaries, were as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Policyholders' surplus $ 90,639 $ 13,945
Net income $ 13,980 $ 15,354
</TABLE>
The amount of policyholders' surplus for 1995 does not reflect FDOI
examination adjustments as discussed in Note 19.
In order to facilitate their responsibility to monitor insurer solvency,
the National Association of Insurance Commissioners in January 1995 issued a
model law to implement risk-based capital ("RBC") reporting requirements for
property and casualty insurance companies. The model law is designed to assess
capital adequacy and the level of protection that statutory surplus provides
for policyholder obligations. The RBC formula for property and casualty
insurance companies measures four major areas of risk facing property and
casualty insurers: (i) underwriting, which encompasses the risk of adverse loss
development and inadequate pricing; (ii) credit risk, which evaluates the
declines in asset values; (iii) investment risk, which evaluates declines in
asset values; and (iv) off balance sheet risk. Pursuant to the model law,
insurers having less statutory surplus than required by the RBC calculation
will be subject to varying degrees of regulatory action, depending on the level
of capital inadequacy. RPC and RIC are domiciled in the State of Florida which
has yet to adopt the provisions of the RBC model law; however, these insurance
subsidiaries monitor their RBC results in anticipation of future filings. The
Company's third insurance subsidiary, RNIC, is domiciled in the State of
Missouri and RBC information is filed with state regulators. RBC is calculated
on an annual basis. At December 31, 1996, the Company's insurance subsidiaries
had statutory surplus in excess of any action level requirements.
(12) STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123").
SFAS 123 establishes a method of accounting for stock-based compensation that
is based on the fair value of stock options and similar instruments and is
effective for fiscal years beginning after December 15, 1995. The adoption of
SFAS 123 is not required and the Company has elected to continue following
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", for measuring compensation cost. Had the Company adopted SFAS 123,
pro forma net income and earnings per share for the years ended December 31,
1996 and 1995 would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C> <C>
Net income - as reported $ 2,398 $ 13,683
- pro forma $ 2,479 $ 13,506
Earnings per share - as reported $ 0.07 $ 0.45
- pro forma $ 0.07 $ 0.45
</TABLE>
F-31
<PAGE> 258
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma effect on net income for 1996 and 1995 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
In conjunction with the reorganization discussed in Note 1, stock options
of the Company were substituted for options previously granted to certain
officers and employees of the Company's affiliates. Options are exercisable for
12 years after the date of the grant and the options vest over periods ranging
from two to nine years.
A summary of the status of the Company's Stock Option Plan as of and for
the years ended December 1996, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
Beginning of year 2,556,557 $3.96 1,854,392 $3.01 - -
Granted 1,572,538 6.84 702,165 $6.50 1,854,392 $3.01
Exercised (17,999) 3.61 - - - -
Canceled (1,032,317) 9.22 - - - -
---------- ----- --------- ----- --------- -----
Outstanding, end of year 3,078,779 $3.67 2,556,557 $3.96 1,854,392 $3.01
========== ===== ========= ===== ========= =====
Options
exercisable at year end 731,849 $2.08 193,657 $0.73 -
========== ===== ========== ===== =========
-
Weighted average fair value of
options granted during the year $5.44 $5.67 $7.11
===== ===== =====
</TABLE>
The fair value of each option has been estimated on the date the option
was granted using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996, 1995 and 1994,
respectively: dividend yield of 0 percent for all years; expected volatility of
60 percent for all years; risk-free interest rate of 8.1 percent (1996), 6.5
percent (1995) and 6.6 percent (1994); and expected lives of 12 years for all
years. Due to events subsequent to December 31, 1996, the amount shown above
for the weighted average fair value of options granted during 1996 may not be
indicative of the current market value of the Company's stock.
The exercise price of options granted were determined to be not less than
the fair market value of the Class A Common Stock on the date the option was
granted with the exception of options for 387,314, 2,604 and 16,725 shares made
to two employees at exercise prices of $0.72, $4.50 and $4.50, respectively,
and fair values of $22.78, $12.54 and $12.33, respectively. Compensation
expense recognized for options with exercise prices below fair market value
totaled $0.3 million, $0.7 million and $0.2 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
F-32
<PAGE> 259
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- --------------------------------
NUMBER WEIGHTED AVG NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG EXERCISABLE WEIGHTED AVG
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- ---------------- ----------------- ------------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.72 387,314 9.8 years $ 0.72 387,314 $ 0.72
$ 3.61 1,426,927 9.8 years 3.61 343,233 3.61
$ 19.00 13,158 11.2 years 19.00 - -
$ 4.50 1,251,380 11.9 years 4.50 1,302 4.50
--------- ---------- ------- --------- -------
3,078,779 10.6 years $ 3.67 731,849 $ 2.08
========= ========== ====== ======= ======
</TABLE>
On August 28, 1996, the Company repriced 126,500 options with an average
exercise price of $18 per share to $12.50 per share. On November 18, 1996, the
Company repriced 830,380 options with an average exercise price of $8 per share
to $4.50 per share. Remaining options available for grant totaled 40,053 at
December 31, 1996.
(13) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1996 1995
------------ --------- ---------
<S> <C> <C> <C>
Furniture and equipment 3-7 years $ 15,984 $ 8,853
Building 39 years 7,846 7,036
Leasehold improvements 5-10 years 4,896 2,710
Software 3 years 5,041 2,182
Land 1,200 1,200
--------- ---------
34,967 21,981
Less accumulated depreciation and amortization (7,462) (3,937)
--------- ---------
$ 27,505 $ 18,044
========= =========
</TABLE>
Depreciation and amortization expense totaled $3.6 million, $2.0 million
and $1.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Included in these amounts is amortization expense of $0.8
million, $0.2 million and $0 for the years ended December 31, 1996, 1995 and
1994, respectively, related to both purchased and capitalized internally
developed software costs.
F-33
<PAGE> 260
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) LEASES
The Company leases space for some of its office facilities under
non-cancelable operating leases expiring through January 2002, with renewal
options available for certain leases. Total rental expense for the years ended
December 31, 1996, 1995 and 1994 was $1.3 million, $0.9 million and $1.5
million, respectively. At December 31, 1996, the Company was obligated under
aggregate minimum annual rentals as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, ANNUAL RENTAL
----------------------- -------------
<S> <C>
1997 $1,387
1998 1,212
1999 637
2000 529
2001 391
Thereafter 249
</TABLE>
(15) EMPLOYEE HEALTH BENEFITS
The Company self-insures its employees' health benefits and has purchased
excess insurance that limits its exposure to $1.1 million in the aggregate and
$50,000 per occurrence. The Company estimates its liability for unpaid claims
based on aggregate limits for health insurance payments less actual payments
made. These estimates are continually reviewed and adjustments, if any, are
reflected in current operations. Included in accrued expenses at December 31,
1996 and 1995 is a liability for self-insured health benefits of approximately
$0.4 million and $0.5 million, respectively. Expenses for self-insured health
benefits were $2.6 million, $1.4 million and $1.1 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
Expenses relating to employee benefit plans were $0.4 million, $0.2
million and $3.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
(16) RELATED PARTY TRANSACTIONS
The Company has accounts receivable of $0 and $1.3 million from several
affiliates which are included in accounts and notes receivable-related party in
the accompanying Consolidated Balance Sheets at December 31, 1996 and 1995,
respectively. Additionally, the Company has accounts and notes payable of $1.2
million and $1.0 million at December 31, 1996 and 1995, respectively, to those
same affiliates.
F-34
<PAGE> 261
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996 and 1995, notes receivable consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Notes receivable from shareholder and affiliated
companies at rates from prime to prime plus 1%,
guaranteed by shareholder; repaid March 1996. $ - $ 7,273
Surplus note receivable. RHP, an affiliated company,
at prime plus 1%; repaid September 1996. - 2,150
-------- -------
$ - $ 9,423
======== =======
</TABLE>
The shareholder referred to above was the Chairman of the Board of the
Company and the affiliated companies were controlled or wholly-owned by him.
In addition, the Company contracted with affiliated entities for
transportation, facilities management, and custodial and maintenance services.
The Company also leased parking facilities from affiliated entities. Expenses
relating to these services totaled approximately $1.6 million, $2.5 million and
$1.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. These expenses are included in commissions, general and
administrative expenses in the accompanying Consolidated Statements of Income.
Beginning in 1994, the Company paid brokerage fees to an affiliated
company for the negotiation and placement of reinsurance under several specific
excess of loss coverages. These fees totaled $0.9 million, $0.8 million and
$0.01 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company provides administrative and support services to three
affiliated companies. Under these arrangements, one of which terminated in
1996, the Company received $0.8 million, $1.02 million and $0.07 million for
the years ended December 31, 1996, 1995 and 1994, respectively. In addition,
the Company performed certain unreimbursed services totaling $1.6 million
during 1995 for one of these affiliates.
As described in Note 8, the Company was party to a managed care
arrangement with RHP, an affiliated HMO, until May 1, 1996. Fees paid to RHP
for the years ended December 31, 1996, 1995 and 1994 totaled $17.1 million,
$1.5 million and $0, respectively. To the extent RHP is unable to meet its
contractual obligations remaining under the arrangements, the Company is liable
for any unpaid losses and loss adjustment expenses. At December 31, 1996 and
1995, unpaid losses and loss adjustment expenses covered by RHP were $7.1
million and $0.6 million, respectively.
F-35
<PAGE> 262
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) BAD DEBT ALLOWANCE
The following table summarizes activity in the bad debt allowance account
for premiums receivable for the years ended December 31, 1996, 1995 and 1994
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Balance at beginning of period $ 5,899 $ 5 $ -
Allowance acquired from acquisitions 782 7,542 -
Additions to allowance 31,424 3,852 5
Write-offs against allowance (21,105) (5,500) -
------- ------- -----
Balance at end of period $17,000 $ 5,899 $ 5
======= ======= =====
</TABLE>
(18) CONCENTRATION IN A SINGLE STATE
Although the Company has expanded its operations into additional states,
approximately 74 percent, 93 percent and 100 percent of its revenues for the
years ended December 31, 1996, 1995 and 1994, respectively, were derived from
products and services offered to customers located in Florida. Accordingly, the
Company could be adversely affected by economic downturns, significant
unemployment, and other conditions that may occur from time to time in Florida,
which may not significantly affect its more geographically diversified
competitors.
(19) COMMITMENTS AND CONTINGENCIES
On April 2, 1996, the Company, RIC, several officers, directors and
employees were named as defendants in a purported class action filed in the
United States District Court for the Southern District of Florida. The suit
claims the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), breached fiduciary duties, and were negligent in
the Company's acquisition of CMIC in 1995. The suit seeks compensatory and
punitive damages and equitable relief and treble damages for the RICO counts.
The named plaintiffs, Vero Cricket Shop, Inc., Vero Cricket Shop Too, Inc., and
Falls Company of Longboat Key, Inc., claim to be former policyholders of CMIC
and claim to represent others similarly situated. The defendants moved to
dismiss the RICO counts and to strike the punitive damages claims. These
motions, as well as plaintiffs' motion for class certification, were pending
when the plaintiffs filed an amended complaint. The amended complaint added the
Florida Insurance Commissioner and Zenith as defendants in one new count
seeking declaratory relief. The remaining claims in the amended complaint are
the same as those in the original complaint. The defendants have filed a motion
to dismiss the amended complaint and to strike the punitive damages claims. The
parties have been ordered to non-binding mediation in this matter. The Company
intends to defend this action vigorously; however, there can be no assurance
that it will prevail in the litigation.
F-36
<PAGE> 263
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Between November 20, 1996 and January 31, 1997, nine shareholder class
action lawsuits were filed against the Company and other defendants in the
United States District Court for the Middle District of Florida. In March 1997,
the Court consolidated these lawsuits and appointed co-lead plaintiffs and
co-lead counsel. The plaintiffs subsequently filed a consolidated complaint.
The consolidated complaint named as defendants the Company, three of its
executive officers, one non-officer director and three of the Company's
underwriters for the Company's initial public offering. The plaintiffs in the
consolidated complaint purport to represent the class of shareholders who
purchased the Company's Class A Common Stock between February 28, 1996 and
November 14, 1996. The consolidated complaint alleges that the Company's
Registration Statement and Prospectus of February 28, 1996, as well as
subsequent statements, contained false and misleading statements of material
fact and omissions, in violation of sections 11 and 15 of the Securities Act
and sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5
promulgated thereunder. The consolidated complaint seeks unspecified
compensatory damages. The Company has filed a motion to dismiss the
consolidated complaint which has been fully briefed and is pending. Discovery
will be stayed until the motion to dismiss has been decided. The plaintiffs
have filed a motion to certify the class, but the parties have agreed that the
Company need not respond to that motion until thirty days after the motion to
dismiss has been decided. The parties have been ordered to non-binding
mediation in this matter. The Company intends to defend this action vigorously;
however, there can be no assurance that it will prevail in the litigation.
On July 17, 1997, the Company and several former officers were named as
defendants in a suit filed in state court in Montgomery, Alabama. The suit
alleges violations of federal and state securities laws and breach of contract
resulting from the purchase of IAA by the Company in 1996. The suit seeks
compensatory and punitive damages and equitable relief. The named plaintiffs
are Thomas Albrecht and Peter Norman, the former shareholders of IAA. The
Company intends to vigorously defend this action; however, there can be no
assurance that it will prevail in the litigation.
On August 20, 1997, the Company, RNIC, IAA and Peter Norman were named as
defendants in a suit filed in state court in Montgomery, Alabama. The suit
alleges common law fraud, breach of contract and breach of fiduciary duty
resulting from the acquisition of OSAA in 1996. The suit seeks compensatory and
punitive damages and equitable relief. The named plaintiff is OSAA. The Company
intends to vigorously defend this action; however, there can be no assurance
that it will prevail in the litigation.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the Company,
RISCORP Management Services, Inc. (a wholly owned, non-regulated subsidiary of
the Company) and five former officers, including William D. Griffin, Founder
and Chairman of the Board, for various charges stemming from alleged illegal
political campaign contributions. On September 18, 1997, the Board of Directors
approved a guilty plea by RISCORP Management Services, Inc. to a single count
of conspiracy to commit mail fraud. The guilty plea was entered by RISCORP
Management Services, Inc. and accepted by the court on October 9, 1997. As a
result of an agreement negotiated with the U.S. Attorney, the court dismissed
the indictment against the Company on the same day. Mr. Griffin has resigned
from the Board of Directors of the Company
F-37
<PAGE> 264
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and its subsidiaries and all other positions with the Company and its
subsidiaries. The Company has recorded in the accompanying financial statements
a provision of $1.0 million for the payment of fines and other costs related to
this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In addition,
certain of the lawsuits and related legal expenses may be covered under
directors and officers' insurance coverage maintained by the Company.
Due to a recent decrease in the market value of the Company's Class A
Common Stock, additional amounts may have to be paid to the former shareholders
of IAA. Under the IAA acquisition agreement, the former IAA shareholders
received 790,336 shares of the Company's Class A Common Stock. Pursuant to the
acquisition agreement, if the former IAA shareholders own all of such Class A
Common Stock on September 17, 1998, the Company is obligated to issue
additional shares of the Company's Class A Common Stock in an amount sufficient
to make the value of all shares of the Company's Class A Common Stock held by
the former IAA shareholders equal to an aggregate fair market value of $10.9
million on September 17, 1998. However, in no event will the number of
additional shares issued to the former IAA shareholders exceed 790,336 shares.
The Company has included 225,503 contingent shares in the calculation of
weighted average number of common shares and common share equivalents for the
year ended December 31, 1996. Based upon the fair market value of the Company's
Class A Common Stock of $0.50 as of August 31, 1997, 790,336 additional shares
would be issued to the former IAA shareholders.
The Florida Department of Insurance conducted a financial examination of
RIC, one of the Company's insurance subsidiaries, for 1995. The final
examination report reduced statutory surplus as of December 31, 1995 from
$31,117,099 to $4,961,478. The reduction in statutory surplus was due primarily
to adjustments related to the intercompany sale of real estate, certain related
party receivables that were considered non-admitted for statutory accounting
purposes, and an increase in the non-admitted portion of certain premium
receivables. These adjustments had no impact on the accompanying financial
statements prepared in accordance with generally accepted accounting
principles. As a result, RIC failed to meet the minimum capital and surplus
requirements by approximately $12.5 million. The Company made a capital
infusion of approximately $31.2 million into RIC in 1996, and as a result, as
of December 31, 1996, the surplus of RIC exceeded the minimum capital and
surplus requirements.
The FDOI and the MDOI are currently conducting financial examinations of
two of the Company's insurance subsidiaries. While these examinations may
result in adjustments to the statutory financial statements of the insurance
subsidiaries for 1996, management does not believe that any such adjustments
would be material. The Company has not received the reports from these
examinations, however, based upon communications with the MDOI, the most
significant adjustment proposed by the MDOI is the non-admission of an accounts
receivable balance of $900,000 relating to a loss portfolio transfer. This
balance was received on April 14, 1997. The adjustment relates to statutory
financial statements and has no impact on these GAAP financial statements,
however, any adjustments could impact the dividend ability of the company's
insurance subsidiaries and the disclosures within these financial statements.
F-38
<PAGE> 265
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the CompSource acquisition, the former shareholder received cash
and 112,582 shares of the Company's Class A Common Stock. Per a redemption
agreement, if the former shareholders so elect, the Company is obligated to
repurchase the 112,582 shares at a purchase price of $18.653 per share during a
redemption period beginning March 8, 1997 and ending April 7, 1998. The Company
has included 382,100 contingent shares in the calculation of weighted average
number of common shares and common share equivalents for the year ended
December 31, 1996. On March 19, 1997, the Company received the redemption
notice from the former CompSource shareholders. On March 19, 1997, the Company
paid the CompSource shareholders $2.1 million as payment for the 112,582 shares
of Class A Common Stock pursuant to the redemption provisions.
The Company historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The
Company's primary sources of cash flow from operations are premiums and
investment income, and its cash requirements consist primarily of payment of
losses and loss adjustment expenses, support of its operating activities
including various reinsurance agreements and managed care programs and
services, capital surplus needs for its insurance subsidiaries, and other
general and administrative expenses.
In November 1996, the Board of Directors of the Company created a
Strategic Alternatives Committee whose primary function was to enhance
shareholder value by addressing the Company's capital needs and seeking
alternative sources of capital for the Company. In turn, the committee hired an
investment bank to identify and evaluate entities with an interest in acquiring
the Company or its assets. On June 17, 1997, the Company announced an agreement
with Zenith Insurance Company ("Zenith") to purchase substantially all of the
operating assets of the Company and its affiliates at a purchase price equal to
the greater of either the book value of the acquired assets less the book value
of the liabilities assumed or $35.0 million. The transaction is subject to
shareholder and regulatory approval, and is expected to close during the first
quarter of 1998.
(20) ADJUSTMENTS MADE IN THE FOURTH QUARTER OF 1996
As described below, the Company made certain adjustments in the fourth quarter
of 1996 which have been included in the accompanying December 31, 1996
financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company completed a detailed review of the composition of the December 31,
1996 premium receivables balance in 1997, in connection with the determination
of the allowance for doubtful accounts as of December 31, 1996. As a result of
this analysis, an increase of approximately $7.7 million was recorded in the
allowance for doubtful accounts in the fourth quarter of 1996 to increase the
allowance for doubtful accounts to $17.0 million.
F-39
<PAGE> 266
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
As more fully discussed in Note 2(j) and Note 3, during the first quarter of
1997, it became evident that the goodwill recorded at the date of the RISC and
IAA acquisition could not be fully recovered from the profitability of the
workers' compensation business that was currently under contract. The Company
performed an analysis of the carrying value of the goodwill recorded in
connection with this acquisition and recognized an impairment loss of $2.8
million in the fourth quarter of 1996. This impairment loss was recorded as a
component of depreciation and amortization in the Company's Consolidated
Statement of Income for the year ended December 31, 1996. Remaining unamortized
goodwill related to IAA was $8.5 million at December 31, 1996.
LITIGATION EXPENSES
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States Grand Jury had indicted the Company,
RISCORP Management Services, Inc., a wholly owned, non-regulated subsidiary of
the Company ("RMS"), and five former officers, including William D. Griffin,
founder and Chairman of the Board, for various charges stemming from alleged
illegal political campaign contributions. On September 18, 1997, the Board of
Directors approved a guilty plea by RMS to a single count of conspiracy to
commit mail fraud. The guilty plea was entered by RMS and accepted by the court
on October 9, 1997. As a result of an agreement negotiated with the United
States Attorney, the court dismissed the indictment against the Company on the
same day. Mr. Griffin has resigned from the Board of Directors of the Company
and its subsidiaries and all other positions with the Company and its
subsidiaries. In the fourth quarter of 1996, the Company recorded a provision
of $1.0 million for payment of fines and other costs related to this matter.
This provision was included in the Company's Consolidated Statement of Income
for the year ended December 31, 1996.
(21) EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
On June 17, 1997, the Company entered into an agreement for the sale
and transfer of certain of its assets and non-contingent liabilities to Zenith
in exchange for cash. The purchase price for the net assets of the Company is
undetermined at this time but will be based on the GAAP statement of
transferred assets and the transferred liabilities as of the closing date,
which has also not yet been determined. It is expected that this pending
transaction will transfer primarily all of the assets, liabilities and
operations of the Company to Zenith, leaving the Company with the minimum
required capital and surplus to maintain its various state licenses and no
continuing insurance operations.
F-40
<PAGE> 267
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the Company and
five former officers, including William D. Griffin, founder and Chairman of the
Board, for various charges stemming from alleged illegal political campaign
contributions. On September 18, 1997, the Board of Directors approved a guilty
plea by RISCORP Management Services, Inc., a wholly-owned, non-regulated
subsidiary of the Company, to a single count of conspiracy to commit mail
fraud. As a result of the plea with the United States Attorney, the indictment
against the Company was dismissed. Mr. Griffin has resigned from the Board of
Directors of the Company and all other positions with the Company.
On October 1, 1997, RMS entered into a Plea and Cooperation Agreement
with the United States Attorney and pleaded guilty to a single count of
conspiracy to commit mail fraud. RMS has agreed to cease to operate as a third
party administrator effective October 31, 1997. As of December 31, 1996, RMS
recorded $1.0 million for the estimated fines relating to these matters.
In September 1997, the Company formed 1390 Main Street Services, Inc. for
the purpose of providing the identical services that were being provided by
RMS. The FDOI approved the Managing General Agency and Service Agreement
between each of the Company's Florida domiciled insurance subsidiaries and 1390
Main Street Services, Inc. on October 6, 1997, under the identical terms as the
previous contract with RMS. The Managing General Agency and Service Agreement
is pending approval in Missouri.
In May 1997, RIC and RPC were assigned a rating of C (Weak) by A.M. Best,
one of the leading insurance rating agencies. This rating will remain "under
review with negative implications" by A.M. Best pending the resolution of
certain uncertainties, including various legal issues, the protracted delay in
RISCORP filing its 1996 Form 10-K with the SEC and the ongoing state regulatory
examination for the year ended 1996.
In April 1997, RNIC was assigned a rating of NR-2 (Not Rated) by A.M.
Best. RNIC was not eligible for a Best Rating due to its limited operating
experience.
The AmRe loan agreement requires that the Company shall prepay the
outstanding principal balance of the Notes, together with interest accrued
thereon, on or before the tenth business day following the occurrence of a
Change of Control or a Material Adverse Event. The resignation of William D.
Griffin, effective on September 18, 1997, as Chairman of RISCORP is a Material
Adverse Event as defined in the AmRe loan agreement. On October 10, 1997, the
Company received a waiver from AmRe of the requirement to prepay these notes,
as well as certain events of default subject to the receipt of the Company's
financial statements. On October 17, 1997, the Company received a waiver from
AmRe of the default based upon the failure of the Company to deliver quarterly
financial statements and for failure to file Form 10-Q with the Securities and
Exchange Commission for the first and second quarters of 1997.
Additional covenant violations could result in the note being called.
(22) EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT -
UNAUDITED
The Company completed its review and analysis of each of the fourth
quarter adjustments discussed more fully in Note 20 and based upon the specific
facts and circumstances relating to each of the adjustments, the Company has
determined that no adjustment to the previously filed 1996 Form 10-Q's was
necessary.
F-41
<PAGE> 268
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
RISCORP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996
(in thousands)
<TABLE>
<CAPTION>
VALUE AT
WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST MARKET VALUE BALANCE SHEET
- ------------------ -------- ------------ ---------------
<S> <C> <C> <C>
Available for sale:
Fixed maturity securities:
Municipal government obligations $ 75,844 $ 76,348 $ 76,348
U.S. government obligations 49,144 50,080 50,080
Corporate obligations 86,726 87,366 87,366
Mortgage backed securities 2,588 2,612 2,612
Asset backed securities 5,501 5,556 5,556
Redeemable preferred stocks 6,437 6,840 6,840
Equity securities:
Nonredeemable preferred stocks 1,063 1,082 1,082
Common stocks 2,817 2,963 2,963
-------- ---------- ----------
Total available for sale 230,120 232,847 232,847
-------- ---------- ----------
Held to maturity:
Fixed maturity securities:
U.S. government obligations 16,355 16,437 16,355
Municipal government obligations 4,204 4,205 4,204
Certificates of deposit 2,250 2,250 2,250
-------- ---------- ----------
Total held to maturity 22,809 22,892 22,809
-------- ---------- ----------
Total investments $252,929 $ 255,739 $ 255,656
======== ========== ==========
</TABLE>
F-42
<PAGE> 269
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- ------------
ASSETS
<S> <C> <C>
Investments at fair value (cost $7,816 and $3,000) $ 7,816 $ 3,000
Cash and cash equivalents 274 (353)
Investment in wholly-owned subsidiaries 153,118 44,623
Surplus note receivable from subsidiary 13,000 13,000
Other assets 8,186 2,453
----------- -----------
Total assets $ 182,394 $ 62,723
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 15,000 $ 42,000
Accrued expenses and other liabilities 7,986 4,566
----------- -----------
Total liabilities 22,986 46,566
----------- -----------
Class A Common Stock subject to put options 2,100 -
----------- -----------
Shareholders' equity:
Common stock 363 281
Additional paid-in capital 137,813 349
Net unrealized gains on investments 1,769 510
Unearned compensation--stock options (546) (215)
Retained earnings 17,909 15,232
----------- -----------
Total shareholders' equity 157,308 16,157
----------- -----------
Total liabilities and shareholders' equity $ 182,394 $ 62,723
=========== ===========
</TABLE>
F-43
<PAGE> 270
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Revenues:
Net investment income $ 2,590 $ 1,469 $ -
Dividend income 18,335 2,652 -
Other income 3 - 1,617
--------- -------- --------
Total revenue 20,928 4,121 1,617
--------- -------- --------
Expenses:
General and administrative expenses 1,870 90 722
Interest expense 2,234 4,170 456
Depreciation and amortization 3,955 205 119
--------- -------- --------
Total expenses 8,059 4,465 1,297
--------- -------- --------
Income (loss) before equity in income of
subsidiaries and income taxes 12,869 (344) 320
Equity in (loss) income of subsidiaries before
income taxes (2,269) 19,126 12,545
--------- -------- --------
Income before income taxes 10,600 18,782 12,865
Income taxes 8,202 5,099 5,992
--------- -------- --------
Net income $ 2,398 $ 13,683 $ 6,873
========= ======== ========
</TABLE>
F-44
<PAGE> 271
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOW
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,398 $ 13,683 $ 6,873
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,955 - -
Net amortization of discounts on investments 80 - -
Interest on present value of future profits (125) - -
Net realized gain on sale of investments (4) - -
Decrease (increase) in other assets 2,750 4,494 (1,146)
Equity in net loss (income) of subsidiaries 5,967 (11,035) (6,758)
Increase in surplus note receivable - (13,000) -
Increase in accrued expenses and other liabilities 3,421 3,415 336
---------- ----------- ----------
Net cash provided by operating activities 18,442 (2,443) (695)
---------- ----------- ----------
Cash flows from investing activities:
Capital contributions to subsidiaries (114,375) (31,045) -
Purchase of fixed maturities--available for sale (48,438) (3,000) -
Proceeds from sale of fixed maturities--held for sale 44,124 - -
Purchase of equity securities 1,000 - -
Purchase of equity securities (1,905) - -
Proceeds from the sale of equity securities 353 - -
Purchase of IAA, net of cash acquired (10,618) - -
Purchase of RISC, net of cash acquired (538) - -
---------- ----------- ----------
Net cash used in investing activities (130,397) (34,045) -
---------- ----------- ----------
Cash flows from financing activities:
Proceeds from note payable - 43,000 867
Principal repayment of notes payable (27,000) (6,867) -
Shareholder distributions - - (135)
Exercise of stock options 65 - -
Decrease in APIC - - (70)
Proceeds of initial offering of common stock 127,908 - -
Other, net 11,609 - -
---------- ----------- ----------
Net cash provided by financing activities 112,582 36,133 662
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 627 (355) (33)
Cash and cash equivalents, beginning of period (353) 2 35
========== =========== ==========
Cash and cash equivalents, end of year $ 274 $ (353) $ 2
========== =========== ==========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 2,684 $ 3,966 $ 66
========== =========== ==========
Income taxes $ 15,127 $ 4,969 $ 4,004
========== =========== ==========
</TABLE>
F-45
<PAGE> 272
SCHEDULE IV - REINSURANCE
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
CEDED TO ASSUMED PERCENTAGE
GROSS OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- ---------- ------ --------------
<S> <C> <C> <C> <C> <C>
YEARS ENDED
DECEMBER 31,
1996
Premiums earned $ 326,875 $ 165,022 $ 11,704 $ 173,557 6.7%
========= ========= ======== ========= ======
1995
Premiums earned $ 274,351 $ 139,144 $ 680 $ 135,887 .5%
========= ========= ======== ========= ======
1994
Premiums earned $ 614 $ 4,523 $ 5,422 $ 1,513 358.4%
========= ========= ======== ========= ======
</TABLE>
F-46
<PAGE> 273
SCHEDULE VI - SUPPLEMENTAL INFORMATION
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
(COL. C) LOSSES AND LOSS
RESERVES FOR ADJUSTMENT EXPENSES
DEFERRED UNPAID LOSSES DISCOUNT, INCURRED RELATED TO:
POLICY AND LOSS IF ANY, NET NET ---------------------
ACQUISITION ADJUSTMENT DEDUCTED UNEARNED EARNED INVESTMENT CURRENT PRIOR
YEAR COSTS EXPENSES IN COL. C. PREMIUMS PREMIUMS INCOME YEAR YEARS
- ---- ----- -------- ---------- -------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 446 $458,239 $ - $102,562 $173,557 $12,194 $123,986 $ 3,023
1995 $ 2,389 $261,700 $ - $ 64,395 $135,887 $ 6,708 $ 87,467 $ 5,198
1994 $ 362 $ 12,668 $ - $ 5,438 $ 1,513 $ 1,677 $ 6,026 $ 2,062
<CAPTION>
AMORTIZATION NET
OF DEFERRED PAID LOSSES
POLICY AND LOSS NET
ACQUISITION ADJUSTMENT PREMIUMS
YEAR COSTS EXPENSES WRITTEN
- ---- ----------- ---------- ---------
<S> <C> <C> <C>
1996 $33,716 $111,963 $179,706
1995 $46,878 $128,298 $123,429
1994 $ 126 $ 8,815 $ 4,207
</TABLE>
F-47
<PAGE> 274
APPENDIX F
QUARTERLY REPORT ON
FORM 10-Q/A FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1997
<PAGE> 275
FORM 10-Q/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
___________ ______________
Commission file number 0-27462
-------
RISCORP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0335150
- ------------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1390 Main Street, Sarasota, Florida 34236
- ------------------------------------------ -----------------------
(Address of principal executive offices) (Zip Code)
(941) 906-2000
---------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X .
---- ----
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at October 31, 1997
----- -------------------------------
Class A Common Stock, $.01 par value 11,743,335
Class B Common Stock, $.01 par value 24,334,443
<PAGE> 276
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3-4
Consolidated Statements of Operations -
For the three months ended September 30, 1997 and 1996 5
Consolidated Statements of Income -
For the nine months ended September 30, 1997 and 1996 6
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 8-15
Item 2. Management's Discussion and Analysis of Financial 16-27
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes to Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29-30
Signatures 31
Exhibits 32-35
</TABLE>
2
<PAGE> 277
Part I Financial Information
Item 1. Financial Statements
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value (amortized cost $226,240
$147,882 in 1997 and $226,240 in 1996) $ 151,200 $ 228,802
Fixed maturities available for sale, restricted, at fair value
(amortized cost $34,515 in 1997) 34,633 --
Fixed maturities held to maturity, at amortized cost (fair value
$21,882 in 1997 and $22,892 in 1996) 21,765 22,809
Equity securities, at fair value (cost $1,476 in 1997 and $3,380 in 1996) 1,536 4,045
----------- ------------
Total investments 209,134 255,656
Cash and cash equivalents 29,750 26,307
Cash and cash equivalents, restricted 16,374 --
Premiums receivable, net 109,295 122,078
Accounts receivable--other 3,724 11,676
Recoverable from Florida Special Disability Trust Fund, net 45,215 49,505
Reinsurance recoverables 190,871 180,698
Prepaid reinsurance premiums 39,039 49,788
Prepaid managed care fees 22,174 31,958
Accrued reinsurance commissions 27,153 20,419
Deferred income taxes 22,248 22,551
Property and equipment, net 27,281 27,505
Goodwill 19,629 22,648
Other assets 7,389 7,653
----------- ------------
Total assets $ 769,276 $ 828,442
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 278
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Liabilities:
Losses and loss adjustment expenses $ 460,428 $ 458,239
Unearned premiums 73,252 102,562
Notes payable of parent company 15,000 15,000
Notes payable of subsidiaries 802 1,303
Accounts and notes payable--related party -- 1,171
Deposit balances payable 5,512 4,787
Accrued expenses and other liabilities 42,291 74,706
Net assets in excess of cost of business acquired 10,043 11,266
----------- ----------
607,328 669,034
----------- ----------
Class A Common Stock subject to put options -- 2,100
----------- ----------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding: 11,855,917 in 1997
and 1996 120 120
Class B Common Stock, $.01 par value, 100,000,000 shares
authorized; shares issued and outstanding; 1996 and 1997
24,334,443 243 243
Preferred stock, $.01 par value, 10,000,000 shares authorized; 0
shares issued and outstanding -- --
Additional paid-in capital 139,691 137,813
Net unrealized gains on investments 2,274 1,769
Unearned compensation--stock options -- (546)
Retained earnings 21,720 17,909
Treasury stock - at cost, 112,582 shares (2,100) -
----------- ----------
Total shareholders' equity 161,948 157,308
----------- ----------
Total liabilities and shareholders' equity $ 769,276 $ 828,442
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 279
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1997 and 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Premiums earned $ 40,417 $ 51,365
Fee income 7,008 7,111
Net investment income
4,104 3,098
----------- -----------
Total revenue 51,529 61,574
----------- -----------
Expenses:
Losses and loss adjustment expenses 31,219 38,291
Unallocated loss adjustment expenses 3,195 3,367
Commissions, underwriting and administrative expenses 15,291 13,207
Interest expense 473 523
Depreciation and amortization
2,418 4,323
----------- -----------
Total expenses 52,596 59,711
----------- -----------
Income (loss) before income taxes (1,067) 1,863
Income tax (benefit) expense
(433) 1,551
----------- -----------
Net (loss) income $ (634) 312
=========== ===========
Net (loss) income per common share $ (0.02) 0.01
=========== ===========
Weighted average common and common share
equivalents outstanding 36,868,114 37,591,605
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 280
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30, 1997 and 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996
------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Premiums earned $ 133,882 $ 131,855
Fee and other income 17,969 23,079
Net investment income 12,557 7,592
----------- -----------
Total revenue 164,408 162,526
----------- -----------
Expenses:
Losses and loss adjustment expenses 87,140 89,517
Unallocated loss adjustment expenses 11,295 9,214
Commissions, underwriting and administrative expenses 51,862 39,327
Interest expense 1,442 2,121
Depreciation and amortization 6,257 6,270
----------- -----------
Total expenses 157,996 146,449
----------- -----------
Income before income taxes 6,412 16,077
Income taxes 2,602 6,776
----------- -----------
Net income $ 3,810 $ 9,301
=========== ===========
Net income per common share $ 0.10 $ 0.26
=========== ===========
Weighted average common and common share
equivalents outstanding 37,164,143 35,828,026
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 281
.RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash (used in) provided by operating activities $ (24,228) $ 30,712
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (3,112) (9,807)
Proceeds from the sale of equipment 658 600
Purchase of fixed maturities - available for sale (86,170) (154,776)
Proceeds from sale of fixed maturities - available for sale 120,424 64,850
Proceeds from maturities of fixed maturities - available for sale 9,868 2,500
Purchase of fixed maturities--held to maturity -- (2,452)
Proceeds from maturities of fixed maturities - held to maturity 1,000 4,400
Purchase of equity securities (637) (2,955)
Proceeds from sale of equity securities 3,431 414
Purchase of National Alliance for Risk Management Group Self
Insurers' Fund of Maryland, net of cash acquired 134 --
Purchase of CompSource, Inc. and Insura, Inc., net of cash acquired -- (12,681)
Purchase of NARM, net of cash acquired -- 2,717
Purchase of Atlas Insurance Company, net of cash acquired -- (5,370)
Purchase of Independent Association Administrators, Inc., net of
cash acquired -- (10,543)
Purchase of Risk Inspection Services and Consulting, Inc., net of
cash acquired -- (538)
----------- -----------
Net cash provided by (used in) investing activities 45,596 (123,641)
----------- -----------
Cash flows from financing activities:
Principal repayments of notes payable (501) (30,832)
Increase in deposit balances payable 725 668
Unearned compensation - stock options 547 216
Issuance of common stock -- 138,375
Treasury Stock (2,100) --
Other, net (222) 324
------------ -----------
Net cash (used in) provided by financing activities (1,551) 108,103
------------ -----------
Net increase in cash and cash equivalents 19,817 15,174
Cash and cash equivalents, beginning of period 26,307 23,348
----------- -----------
Cash and cash equivalents, end of period $ 46,124 $ 38,522
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,447 $ 2,965
=========== ===========
Income taxes $ 3,445 $ 6,244
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 282
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
RISCORP, Inc.'s (the "Company" or "RISCORP") consolidated unaudited
interim financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's
financial condition, results of operations and cash flows for the
periods presented. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the reporting
period. Actual results could differ from those estimates. The results of
operations for the three and nine months ended September 30, 1997 may
not be indicative of the results that may be expected for the full year
ending December 31, 1997. These consolidated financial statements and
notes should be read in conjunction with the financial statements and
notes included in the audited consolidated financial statements of
RISCORP, Inc. and subsidiaries for the year ended December 31, 1996
contained in the Company's Statement on Form 10K/A, which was filed with
the Securities and Exchange Commission on October 23, 1997.
The consolidated financial statements include the accounts of the
Company and each of its subsidiaries. All significant intercompany
balances have been eliminated.
(2) INITIAL PUBLIC OFFERING OF COMMON STOCK
On February 29, 1996, the Company issued 7,200,000 shares of common
stock in an initial public offering ("IPO") at a price of $19.00 per
share. Net proceeds, after underwriting discounts and commissions,
totaled approximately $127.9 million. The Company used $28.6 million of
the proceeds from the IPO to repay certain debt, including debt of $26.0
million bearing interest at a variable rate (either LIBOR or the prime
rate of First Union National Bank of North Carolina, plus an applicable
margin) which was 8.75 percent as of March 1, 1996, and debt of $2.6
million bearing interest at the rate of 9.75 percent per year.
Additionally, approximately $12.1 million was used to complete the
acquisition of CompSource, Inc. and Insura, Inc. (collectively,
"CompSource"), approximately $5.0 million was used to acquire Atlas
Insurance Company ("Atlas"), approximately $11.5 million was used to
acquire Independent Association Administrators, Inc. ("IAA"),
approximately $68.9 million was used to increase the capital and surplus
of the Company's insurance subsidiaries, and the balance was used for
general corporate purposes. These acquisitions are more fully described
in Note 3.
In conjunction with the offering of shares by the Company, the majority
shareholder offered shares to the public. The Company did not receive
any proceeds from the sale of shares offered by the majority
shareholder. However, some of the majority shareholder's proceeds from
the offering were used to repay approximately $7.6 million in
outstanding indebtedness to the Company.
8
<PAGE> 283
(3) ACQUISITIONS AND JOINT VENTURES
JOINT VENTURE ARRANGEMENT
In January 1996, the Company, through its wholly-owned subsidiary,
RISCORP of Illinois, entered into a joint venture arrangement with
Health Care Service Corporation ("HCSC"), a subsidiary of Blue Cross and
Blue Shield of Illinois, to underwrite and sell managed care workers'
compensation insurance in Illinois. The Company and HCSC each hold 50
percent ownership in the joint venture known as Third Coast Holding
Company ("Third Coast"). The Company contributed the use of its
expertise, insurance systems and intellectual property, while HCSC
contributed cash of $10.0 million. The Company's contributed property in
Third Coast was valued at $10.0 million; however, the Company's cost
basis in the contributed property was $0 and as of December 31, 1996,
the Company recorded its initial investment in Third Coast at $0.
The Company accounts for its 50 percent investment in Third Coast on the
equity basis of accounting, whereby the Company's recorded investment is
adjusted for its proportionate share of earnings or losses of Third
Coast. The Company discontinued the use of the equity method of
accounting for Third Coast in the first quarter of 1997 when the
cumulative losses reduced the Company's investment in Third Coast to $0.
In addition, the Company has not made any financial guarantees relating
to Third Coast and has not made any financial commitments to provide any
future funding to Third Coast. For the three months ended September 30,
1997, the unrecorded losses relating to Third Coast were approximately
$2.7 million and the cumulative unrecorded losses as of September 30,
1997 were approximately $5.3 million.
ACQUISITION OF COMPSOURCE
In March 1996, the Company purchased all of the outstanding stock of
CompSource in exchange for approximately $12.1 million in cash and
112,582 shares of the Company's Class A Common Stock valued at $2.1
million on the date of acquisition. CompSource is a workers'
compensation management services company offering its services in North
Carolina. Pursuant to a stock redemption agreement entered into as part
of this transaction, the former shareholders of CompSource elected to
have the Company repurchase the 112,582 shares at a purchase price of
$18.653 per share on March 8, 1997, and the Company repurchased all
112,582 shares from the former shareholders for $2.1 million, in
accordance with the terms of the redemption agreement. This $2.1 million
stock redemption has been included in the accompanying Consolidated
Balance Sheets.
On the acquisition date, the excess of the purchase price over the fair
value of the net assets acquired was $12.6 million and was recorded as
goodwill in the accompanying Consolidated Balance Sheets.
ACQUISITION OF ATLAS
In March 1996, RISCORP of Florida, Inc., a wholly-owned subsidiary of
the Company, acquired 100 percent of the outstanding capital stock of
Atlas for approximately $5.0 million in cash. As a result of the
acquisition, the name was changed from Atlas to RISCORP National
Insurance Company ("RNIC"). RNIC, which primarily provides workers'
compensation insurance, is licensed to do business in 19 states and is
authorized to operate on an excess and surplus lines basis in 5
additional states. On the acquisition date, the excess of the purchase
price over the fair value of the net assets acquired was $2.6 million
and was recorded as goodwill in the accompanying Consolidated Balance
Sheets.
9
<PAGE> 284
ACQUISITION OF INDEPENDENT ASSOCIATION ADMINISTRATORS, INC. AND RISK
INSPECTION SERVICES AND CONSULTING, INC. ("RISC")
In September 1996, the Company purchased all of the outstanding stock of
IAA and RISC in exchange for approximately $11.5 million, consisting
primarily of 790,336 shares of the Company's Class A Common Stock valued
at approximately $10.9 million on the date of acquisition. IAA and RISC
are workers' compensation management services companies offering
services in Alabama. On the acquisition date, the excess of the purchase
price over the fair value of the net assets acquired was $11.4 million
and was recorded as goodwill in the accompanying Consolidated Balance
Sheets.
During the first quarter of 1997, it became evident that the goodwill
recorded at the date of the RISC and IAA acquisition could not be fully
recovered from the profitability of the workers' compensation business
that was currently under contract including the estimated 1997 renewals.
Therefore, as of December 31, 1996, $2.8 million of goodwill was written
off and is included as an expense in the accompanying Consolidated
Statements of Income.
ASSUMPTION REINSURANCE TRANSACTION
The following loss portfolio transfers and assumption reinsurance
agreements were entered into by RNIC during 1996 (in thousands):
<TABLE>
<CAPTION>
LOSSES ASSUMED AT UNEARNED PREMIUMS AT
ENTITY EFFECTIVE DATE DATE OF TRANSFER DATE OF TRANSFER
------------------ -------------------- ------------------ ---------------------
<S> <C> <C> <C>
NARM June 14, 1996 $ 34,544 $ 5,209
OSAA September 1, 1996 49,716 --
NARM - Virginia October 1, 1996 3,057 996
-------- -------
Total $ 87,317 $ 6,205
======== =======
</TABLE>
Effective June 14, 1996, RNIC entered into a loss portfolio transfer and
assumption reinsurance agreement with National Alliance for Risk
Management ("NARM"), a North Carolina self-insured workers' compensation
fund. Under the terms of the agreement, RNIC assumed 100 percent of the
outstanding loss reserves (including incurred but not reported losses)
and the outstanding unearned premiums as of June 14, 1996. RNIC issued
assumption certificates to all of the NARM policyholders.
Effective September 1, 1996, RNIC entered into a loss portfolio transfer
and assumption reinsurance agreement with the Occupational Safety
Association of Alabama ("OSAA"), an Alabama self-insured workers'
compensation fund. Under the terms of the agreement, RNIC assumed 100
percent of the outstanding loss reserves (including incurred but not
reported losses) as of September 1, 1996. RNIC issued assumption
certificates to all OSAA policyholders.
Effective October 1, 1996, RNIC entered into a loss portfolio transfer
and assumption reinsurance agreement with three NARM self insurance
funds in Virginia ("NARM - Virginia"). Under the terms of the agreement,
RNIC assumed 100 percent of the outstanding loss reserves (including
incurred but not reported losses) and the outstanding unearned premiums
as of October 1, 1996. RNIC issued assumption certificates to all NARM
Virginia policyholders.
10
<PAGE> 285
In addition, OSAA transferred to RNIC approximately $11.0 million in
OSAA member deposits and cash of approximately $11.0 million. RNIC will
refund the deposits to the policyholders during 1997 when the final
premium audits are completed for the 1996 policy year. As of December
31, 1996, OSAA owed RNIC approximately $3.3 million in connection with
the transaction. These funds were received on April 14, 1997.
(4) COMMITMENTS AND CONTINGENCIES
On April 2, 1996, the Company, RISCORP Insurance Company ("RIC"),
several officers, directors and employees were named as defendants in a
purported class action filed in the United States District Court for the
Southern District of Florida. The suit claims the defendants violated
the Racketeer Influenced and Corrupt Organizations Act ("RICO"),
breached fiduciary duties, and were negligent in the Company's
acquisition of Commerce Mutual Insurance Company ("CMIC") in 1995. The
suit seeks compensatory and punitive damages and equitable relief and
treble damages for the RICO counts. The named plaintiffs, Vero Cricket
Shop, Inc., Vero Cricket Shop Too, Inc., and Falls Company of Longboat
Key, Inc., claim to be former policyholders of CMIC and claim to
represent others similarly situated. The defendants moved to dismiss the
RICO counts and to strike the punitive damages claims. These motions, as
well as plaintiffs' motion for class certification, were pending when
the plaintiffs filed an amended complaint. The amended complaint added
the Florida Insurance Commissioner and Zenith Insurance Company
("Zenith") as defendants in one new count seeking declaratory relief.
The remaining claims in the amended complaint are the same as those in
the original complaint. The defendants have filed a motion to dismiss
the amended complaint and to strike the punitive damages claims. The
parties have been ordered to non-binding mediation in this matter. The
Company intends to defend this action vigorously; however, there can be
no assurance that it will prevail in the litigation.
Between November 20, 1996 and January 31, 1997, nine shareholder class
action lawsuits were filed against the Company and other defendants in
the United States District Court for the Middle District of Florida. In
March 1997, the Court consolidated these lawsuits and appointed co-lead
plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants
the Company, three of its executive officers, one non-officer director
and three of the Company's underwriters for the Company's initial public
offering. The plaintiffs in the consolidated complaint purport to
represent the class of shareholders who purchased the Company's Class A
Common Stock between February 28, 1996 and November 14, 1996. The
consolidated complaint alleges that the Company's Registration Statement
and Prospectus of February 28, 1996, as well as subsequent statements,
contained false and misleading statements of material fact and
omissions, in violation of sections 11 and 15 of the Securities Act and
sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5
promulgated thereunder. The consolidated complaint seeks unspecified
compensatory damages. The Company has filed a motion to dismiss the
consolidated complaint which has been fully briefed and is pending.
Discovery will be stayed until the motion to dismiss has been decided.
The plaintiffs have filed a motion to certify the class, but the parties
have agreed that the Company need not respond to that motion until
thirty days after the motion to dismiss has been decided. The parties
have been ordered to non-binding mediation in this matter. The Company
intends to defend this action vigorously; however, there can be no
assurance that it will prevail in the litigation.
11
<PAGE> 286
On July 17, 1997, the Company and several former officers were named as
defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges violations of federal and state securities laws and breach
of contract resulting from the purchase of IAA by the Company in 1996.
The suit seeks compensatory and punitive damages and equitable relief.
The named plaintiffs are Thomas Albrecht and Peter Norman, the former
shareholders of IAA. The Company intends to vigorously defend this
action; however, there can be no assurance that it will prevail in the
litigation.
On August 20, 1997, the Company, RNIC, IAA and Peter Norman were named
as defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges common law fraud, breach of contract and breach of
fiduciary duty resulting from the assumption reinsurance and loss
portfolio transfer agreement with OSAA in 1996. The suit seeks
compensatory and punitive damages and equitable relief. The named
plaintiff is OSAA. The Company intends to vigorously defend this action;
however, there can be no assurance that it will prevail in the
litigation.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the
Company, RISCORP Management Services, Inc. ("RMS") (a wholly owned,
non-regulated subsidiary of the Company) and five former officers,
including William D. Griffin, Founder and Chairman of the Board, for
various charges stemming from alleged illegal political campaign
contributions. On September 18, 1997, the Board of Directors approved a
guilty plea by RMS to a single count of conspiracy to commit mail fraud.
The guilty plea was entered by RMS and accepted by the court on October
9, 1997. As a result of an agreement negotiated with the United States
Attorney, the court dismissed the indictment against the Company on the
same day. Mr. Griffin has resigned from the Board of Directors of the
Company and its subsidiaries and all other positions with the Company
and its subsidiaries. As of December 31, 1996 the Company had recorded
in the accompanying financial statements a provision of $1.0 million for
the payment of fines and other costs related to this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In
addition, certain of the lawsuits and related legal expenses may be
covered under directors and officers' insurance coverage maintained by
the Company.
Due to a recent decrease in the market value of the Company's Class A
Common Stock, additional amounts may have to be paid to the former
shareholders of IAA. Under the IAA acquisition agreement, the former IAA
shareholders received 790,336 shares of the Company's Class A Common
Stock. Pursuant to the acquisition agreement, if the former IAA
shareholders own all of such Class A Common Stock on September 17, 1998,
the Company is obligated to issue additional shares of the Company's
Class A Common Stock in an amount sufficient to make the value of all
shares of the Company's Class A Common Stock held by the former IAA
shareholders equal to an aggregate fair market value of $10.9 million on
September 17, 1998. However, in no event will the number of additional
shares issued to the former IAA shareholders exceed 790,336 shares.
Based upon the fair market value of the Company's Class A Common Stock
of $1.00 as of November 14, 1997, 790,336 additional shares would be
issued to the former IAA shareholders.
The Florida Department of Insurance (the "FDOI") conducted a financial
examination of RIC, one of the Company's insurance subsidiaries, for
1995. The final examination report reduced statutory surplus as of
December 31, 1995 from $31,117,099 to $4,961,478. As a result, RIC
failed to meet the minimum capital and surplus requirements by
approximately $12.5 million. The Company made a capital infusion of
approximately $31.2 million into RIC in 1996, and as a result, as of
December 31, 1996, the surplus of RIC exceeded the minimum capital and
surplus requirements.
12
<PAGE> 287
The FDOI and the Missouri Department of Insurance (the "MDOI") are
currently conducting financial examinations of two of the Company's
insurance subsidiaries. While these examinations may result in
adjustments to the statutory financial statements of the insurance
subsidiaries for 1996, management does not believe that any such
adjustments will be material. The Company has not received the reports
from these examinations, however, based upon communications with the
MDOI, the most significant adjustment proposed by the MDOI is the
non-admission of an accounts receivable balance of $900,000 relating to
a loss portfolio transfer. This balance was received on April 14, 1997.
The adjustment relates to statutory financial statements and has no
impact on these GAAP financial statements, however, any adjustments
could impact the dividend ability of the company's insurance
subsidiaries and the disclosures within these financial statements.
Under the CompSource acquisition, the former shareholder received cash
and 112,582 shares of the Company's Class A Common Stock. Per a
redemption agreement, if the former shareholders so elect, the Company
is obligated to repurchase the 112,582 shares at a purchase price of
$18.653 per share during a redemption period beginning March 8, 1997 and
ending April 7, 1998. On March 19, 1997, the Company received the
redemption notice from the former CompSource shareholders. On March 19,
1997, the Company paid the CompSource shareholders $2.1 million as
payment for the 112,582 shares of Class A Common Stock pursuant to the
redemption provisions.
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The
Company's primary sources of cash flow from operations are premiums and
investment income, and its cash requirements consist primarily of
payment of losses and loss adjustment expenses, support of its operating
activities including various reinsurance agreements and managed care
programs and services, capital and surplus needs for its insurance
subsidiaries, and other general and administrative expenses.
On November 9, 1996, at a Special Board of Directors' meeting of
RISCORP, the Board voted to establish a Strategic Alternatives Committee
to evaluate alternatives to maximize shareholder value including,
without limitation, potential acquisitions, joint ventures, mergers,
strategic alliances and the sale of all or part of RISCORP and its
subsidiaries. The actions of the Strategic Alternatives Committee during
the period of November 1996 through June 1997 culminated in the June 17,
1997 agreement for the sale and transfer of certain of RISCORP's and its
subsidiaries' assets and non-contingent liabilities to another insurer
for cash. The pending sale, which is anticipated to take place in early
1998, requires the filing of a proxy statement with the Securities and
Exchange Commission ("SEC"), the approval of the transaction by RISCORP
shareholders and approval by the FDOI and MDOI, amongst other
conditions.
(5) EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
In May 1997, RIC and RISCORP Property & Casualty Company ("RPC") were
assigned a rating of C (Weak) by A.M. Best Company, Inc. ("A.M. Best"),
one of the leading insurance rating agencies. This rating will remain
"under review with negative implications" by A.M. Best pending the
resolution of certain uncertainties, including various legal issues, the
protracted delay in RISCORP filing its annual report on Form 10-K/A for
the year ended December 31, 1996 with the Securities and Exchange
Commission ("SEC"), and the ongoing state regulatory examination for
1996. The Company filed its annual report on Form 10K/A for the years
ended December 31, 1996 with the SEC on October 23, 1997. In April 1997,
RNIC was assigned a rating of NR-2 (Not Rated) by A.M. Best. RNIC was
not eligible for a Best Rating due to its limited operating experience.
13
<PAGE> 288
On June 17, 1997, the Company entered into an agreement for the sale and
transfer of certain of its assets and non-contingent liabilities to
Zenith in exchange for cash. The purchase price for the net assets of
the Company is undetermined at this time but will be based on the GAAP
statement of transferred assets and the transferred liabilities as of
the closing date, which has also not yet been determined. It is expected
that this pending transaction will transfer primarily all of the assets,
liabilities and operations of the Company to Zenith, leaving the Company
with the minimum required capital and surplus to maintain its various
state licenses and no continuing insurance operations.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the
Company and five former officers, including William D. Griffin, founder
and Chairman of the Board, for various charges stemming from alleged
illegal political campaign contributions. On September 18, 1997, the
Board of Directors approved a guilty plea by RMS, a wholly-owned,
non-regulated subsidiary of the Company, to a single count of conspiracy
to commit mail fraud. As a result of the plea with the United States
Attorney, the indictment against the Company was dismissed. Mr. Griffin
has resigned from the Board of Directors of the Company and all other
positions with the Company.
In September 1997, the Company formed 1390 Main Street Services, Inc.
for the purpose of providing the identical services that were being
provided by RMS. The FDOI approved the Managing General Agency and
Service Agreement between each of the Company's Florida domiciled
insurance subsidiaries and 1390 Main Street Services, Inc. on October 6,
1997, under the identical terms as the previous contract with RMS. The
Managing General Agency and Service Agreement is pending approval in
Missouri.
On October 1, 1997, RMS entered into a Plea and Cooperation Agreement
with the United States Attorney and pleaded guilty to a single count of
conspiracy to commit mail fraud. RMS has agreed to cease to operate as a
third party administrator effective October 31, 1997. As of December 31,
1996, RMS recorded $1.0 million provision for the payment of fines and
other costs relating to these matters.
The Company and American Re-Insurance Company ("AmRe") are parties to a
senior subordinated note agreement in the principal amount of $15.0
million due 2002 (the "AmRe loan agreement"). The AmRe loan agreement
requires that the Company shall prepay the outstanding principal balance
of the notes, together with interest accrued thereon, on or before the
tenth business day following the occurrence of a Change of Control or a
Material Adverse Event. The resignation of William D. Griffin, effective
on September 18, 1997, as Chairman of RISCORP is a Material Adverse
Event as defined in the AmRe loan agreement. On October 10, 1997, the
Company received a waiver from AmRe of the requirement to prepay these
notes, as well as certain events of default subject to the receipt of
the Company's financial statements. On October 17, 1997, the Company
received a waiver from AmRe of the default based upon the failure of the
Company to deliver quarterly financial statements and for failure to
file its quarterly report on Form 10-Q with the SEC for the quarterly
periods ended March 31, 1997 and June 30, 1997. This waiver from AmRe
regarding the Company's failure to provide its financial reports and
Form 10-Q's in a timely manner for the first and second quarter of 1997
expires on December 31, 1997. In the event the Company is unable to
provide its financial reports and Form 10-Q's, including its third
quarter financial reports and Form 10-Q, to AmRe when required under the
note agreement or the waiver, additional debt covenant violations would
occur. If such debt covenant violations did occur and the Company was
unable to obtain an additional waiver of such violations from AmRe, such
violations could result in AmRe accelerating the note which, in turn,
could create as liquidity shortage for the Company.
14
<PAGE> 289
(6) RECLASSIFICATIONS
Certain amounts in the financial statements presented have been
reclassified from amounts previously reported in order to be comparable
between periods. These reclassifications have no effect on previously
reported shareholders' equity or net income during the periods involved.
15
<PAGE> 290
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements,
particularly with respect to the Liquidity and Capital Resources section
of Management's Discussion and Analysis of Financial Condition and
Results of Operations. Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with
the Securities and Exchange Commission or otherwise. Such
forward-looking statements are within the meaning of that term in
Sections 27A of the Securities Act of 1933 (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act").
Such statements may include, but not be limited to, projections of
revenues, income, losses, cash flows, capital expenditures, plans for
future operations, financing needs or plans, plans relating to products
or services of the Company, estimates concerning the effects of
litigation or other disputes, as well as assumptions to any of the
foregoing. See "Part I, Item 1, Note 5 to the consolidated financial
statements."
RECENT DEVELOPMENTS
RESTRUCTURING
On May 20, 1997, the Company named Frederick M. Dawson as Chief
Executive Officer of the Company. Mr. Dawson replaced William D. Griffin
who took an unpaid leave of absence and remained as a non-salaried,
non-executive Chairman of the Board of Directors. Concurrently, Mr.
Dawson was also named to the Board of Directors of the Company, and all
employee directors other than Mr. Griffin resigned from the Board of
Directors. On June 10, 1997, Mr. Dawson became president of the Company
upon the resignation of James A. Malone from the position of president
and chief operating officer on the same date. On September 18, 1997, Mr.
Griffin resigned from the Board of Directors of the Company and from all
other positions with the Company.
In June 1997, the Company announced a workforce reduction and a
restructuring of the Company's management team, field offices and
products. The reduction in the work force resulted in the termination of
128 employees of the Company. The Company also announced in June 1997
its intention to focus solely on its core workers' compensation
insurance business and to close all field offices, except Charlotte and
Birmingham, by the end of 1997. The Company recorded $5.9 million in the
second quarter of 1997 in connection with the workforce reduction and
restructuring of the field offices and products. These non-recurring
expenses consisted primarily of severance expenses of approximately $5.1
million, of which $4.1 million was unpaid as of September 30, 1997, and
occupancy costs of approximately $0.7 million. These expenses were
included in commissions, underwriting and administrative expenses in the
June 30, 1997 and September 30, 1997 Consolidated Statements of Income.
16
<PAGE> 291
ASSET PURCHASE AGREEMENT WITH ZENITH
In June 1997, the Company entered into an asset purchase agreement (the
"Purchase Agreement") with Zenith, a subsidiary of Zenith National
Insurance Corp. Under the terms of the Purchase Agreement, Zenith will
purchase all of the assets of the Company relating to its workers'
compensation business, including the Company's existing in force
business, as well as the right to all new and renewal policies. After
the transaction closes, the Company will no longer engage in the
workers' compensation or managed care businesses. In connection with the
transaction, Zenith will assume certain liabilities related to the
Company's insurance business, including $15.0 million in indebtedness of
the Company owed to AmRe. The purchase price, which will be paid in
cash, will be the difference between the book value of the assets
purchased and the book value of the liabilities assumed by Zenith on the
closing date including the $15.0 million AmRe debt, subject to a minimum
purchase price of $35.0 million.
The closing of the purchase is contingent upon review and approval by
the appropriate state and federal regulatory agencies, and approval by a
majority of each of the Class A Common and Class B Common shareholders
of the Company.
Effective June 18, 1997, Zenith entered into an interim reinsurance
agreement and cut-through endorsement with the RIC and RISCORP Property
& Casualty Insurance Company ("RPC"). Under the terms of the reinsurance
agreement, Zenith reinsured all of the Company's liabilities on or after
June 18, 1997, as to new, renewal, and in force Florida workers'
compensation policies in the event RIC and RPC are declared insolvent
under applicable insurance law pursuant to court order. RIC and RPC have
assigned to Zenith its right to receive certain payments from other
reinsurers with respect to the business Zenith has reinsured. In
addition, RIC and RPC have established trust accounts of approximately
$50.0 million as security to reimburse Zenith for any amounts paid under
the reinsurance agreement.
DELISTING BY NASDAQ
After the Company's initial public offering of Class A Common Stock in
February 1996, the Company experienced personnel turnover in its finance
and treasury areas. The rapid growth of the Company and its multiple
acquisitions coupled with the loss of key personnel overloaded the
Company's internal accounting staff. As a result, the Company was not
able to provide the necessary support and back-up required to complete
the audit of its 1996 financial statements in a timely manner, and
therefore, the Company was unable to timely file with the Securities and
Exchange Commission its annual report on Form 10-K/A for the year ended
December 31, 1996. Despite management's efforts to correct these issues,
difficulties continued in 1997 resulting in the Company's inability to
timely file its quarterly reports on Form 10-Q for the quarterly periods
ended March 31, 1997 and June 30, 1997.
In July 1997, the Company's common stock was delisted from the NASDAQ
National Market due to the Company's failure to comply with the filing
requirements of the Exchange Act.
AMRE LOAN AGREEMENT
The $15.0 million AmRe loan agreement requires that the Company shall
prepay the outstanding principal balance of the notes, together with
interest accrued thereon, on or before the tenth business day following
the occurrence of a Change of Control or a Material Adverse Event. The
resignation of William D. Griffin, effective on September 18, 1997, as
Chairman of RISCORP, Inc. is a Material Adverse Event as defined in the
AmRe loan agreement. On October 10, 1997, the Company received a waiver
from AmRe of the requirement to prepay these notes, as well as certain
events of default
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<PAGE> 292
subject to the receipt of the Company's financial reports. On October
17, 1997, the Company received a waiver from AmRe of the default based
upon the failure of the Company to deliver quarterly financial reports
and to file its quarterly report on Form 10-Q with the SEC for the
quarterly periods ended March 31, 1997 and June 30, 1997. This waiver
from AmRe regarding the Company's failure to provide its financial
reports and Form 10-Q's in a timely manner for the first and second
quarter of 1997 expires on December 31, 1997. In the event the Company
is unable to provide its financial reports and Form 10-Q's, including
its third quarter financial reports and Form 10-Q, to AmRe when required
under the note agreement or the waiver, additional debt covenant
violations would occur. If such debt covenant violations did occur and
the Company was unable to obtain an additional waiver of such violations
from AmRe, such violations could result in AmRe accelerating the note
which, in turn, could create a liquidity shortage for the Company.
LEGAL DEVELOPMENTS
See "Part II, Item 1, Legal Proceedings."
A.M. BEST INITIAL RATING
During 1997 the Company's insurance subsidiaries were reviewed by A.M.
Best and assigned a rating. A.M. Best ratings are based on several
factors, including comparative analysis of the financial condition and
operating performance of insurance companies as determined by their
publicly available reports and meetings with the entity's officers. A.M.
Best ratings are based upon factors of concern to policyholders and are
not directed toward the protection of investors. In assigning ratings,
companies may fall within one of three A.M. Best rating groupings:
Best's Ratings, Best's Financial Performance Ratings or Not Rated.
A.M. Best ratings include: Secure, which consists of A++ and A+
(Superior), A and A- (Excellent) and B++ and B+ (Very Good); Vulnerable,
which consists of B and B- (Fair), C++ and C+ (Marginal), C and C-
(Weak) and D (Poor); E (Under Regulatory Supervision); F (In
Liquidation) and S (Rating Suspended). Companies not assigned either
Best's Ratings or Best's Financial Performance Ratings opinions are
assigned to one of several Not Rated (NR) Categories. The NR category
identifies the primary reason a rating opinion was not assigned.
The limited operating history of the companies, pending litigation and
the factors discussed above have affected the ability of the Company's
insurance subsidiaries to obtain favorable A.M. Best and comparable
ratings. In May 1997, RIC and RPC were assigned a Best's Rating of C
(Weak). This rating is under review with negative implications pending
resolution of certain substantial uncertainties, including various legal
issues, any material Form 10-K disclosures, and potential regulatory
actions emanating from the ongoing state examinations. The Company
believes this rating and the factors discussed above will have a
material adverse effect on the Company's business, financial condition
and results of operations.
RNIC (formerly Atlas Insurance Company) had its B+ rating removed and
was given an A.M. Best's "Not Rated" classification of NR-2 (Less than
Minimum Size and/or Operating Experience) following the Company's
purchase of Atlas in March 1996 and the discontinuance of its prior
business, which effectively treated RNIC as a start-up operation for
rating purposes.
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<PAGE> 293
1997 EVENTS THAT HAVE IMPACTED THE COMPANY
On November 9, 1996, at a special meeting of the Board of Directors of
RISCORP, the Board voted to establish a Strategic Alternatives Committee
to evaluate alternatives to maximize shareholder value including,
without limitation, potential acquisitions, joint ventures, mergers,
strategic alliances and the sale of all or part of RISCORP and its
subsidiaries. The actions of the Strategic Alternatives Committee during
the period of November 1996 through June 1997 culminated in the June 17,
1997 agreement (as more fully described in Note 5 to the consolidated
financial statements) for the sale and transfer of certain of RISCORP's
and its subsidiaries' assets and non-contingent liabilities to another
insurer for cash. The pending sale, which is anticipated to take place
in early 1998, requires, among other things, the filing of a proxy
statement with the Securities and Exchange Commission ("SEC"), the
approval of the transaction by RISCORP shareholders and regulatory
approval by the FDOI and MDOI.
RIC, RPC (both Florida domiciled insurance companies) and RNIC (a
Missouri domiciled insurance company), are all wholly-owned subsidiaries
of RISCORP and each of these companies experienced difficulty in
completing their year end December 31, 1996 statutory financial
statements in an accurate and timely manner. In addition, RIC and RPC
were unable to respond in an accurate and timely manner to requests for
financial information made by examiners from the FDOI in connection with
the FDOI's financial examination of RIC for 1996 and RPC for 1995.
While RIC, RPC and RNIC filed their 1996 statutory financial statements
by February 28, 1997, the deadline for filing such statements, each of
the companies discovered later that certain amounts contained in the
previously filed 1996 statutory financial statements were incorrect and
the 1996 statutory financial statements of each of the companies were
amended by substitution in October 1997. In addition, RIC, RPC and RNIC
were also unable to file their 1996 audited statutory financial
statements by June 1, 1997, as required by Florida and Missouri
statutes. Audited financial statements were filed for each company in
September, 1997. As previously described, RISCORP also experienced
difficulty in completing its 1996 financial statements in a timely
manner. This resulted in RISCORP being delisted by the stock exchange on
which its stock was traded and in adverse publicity in the insurance
marketplace. See "Part I, Item 2, Delisting by NASDAQ."
The inability of RIC and RPC to file accurate and timely financial
statements and to respond timely to requests made by the examiners from
the FDOI inhibited the FDOI's ability to assess the financial condition
of RIC and RPC and prompted increased regulatory scrutiny of the
companies. As a result of the FDOI's increased regulatory scrutiny of
RIC and RPC, and in connection with the pending sale discussed above and
in Note 5 to the consolidated financial statements, the FDOI requested
the purchaser to provide an interim reinsurance agreement and
cut-through endorsement ("Agreement") on all inforce business as of June
18, 1997 and all new and renewed business written on or after June 18,
1997. This Agreement only provides coverage for Florida workers'
compensation policyholders and was approved by the FDOI.
The ability of RIC and RPC to operate at their present level of
insurance activity could be affected if the transaction discussed in
Note 5 is not completed and RIC and RPC are unable to replace the
reinsurance agreement. Management believes it could replace this
reinsurance agreement under similar terms.
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<PAGE> 294
The unfavorable publicity related to the inability of the Company and
its subsidiaries to file timely financial statements, the delisting of
the Company's stock, the pending litigation and subsequent indictments,
A.M. Best's letter rating, and delays in completion of the Company's
1996 audit, have negatively impacted the Company's ability to retain its
existing customers and add new business. While the first quarter of 1997
was not adversely affected by these factors, the Company began to
experience a decline in new and renewed premiums in the second quarter
of 1997. This decline increased in the third quarter. The Company
anticipates that written premiums for the fourth quarter of 1997 will be
significantly less than 1996 written premiums for comparable quarters.
In addition, the Company has experienced increased employee turnover
which has resulted in the hiring of consultants and increased operating
costs to the Company. The overall effects of these and other factors are
discussed in more detail below in the "Results of Operations".
During 1997, the Company completed its review of each of the fourth
quarter adjustments discussed in the 1996 Form 10-K/A, the 3-31-97 Form
10-Q and the 6-30-97 Form 10-Q, and based upon the specific facts and
circumstances relating to each 1996 fourth quarter adjustment, the
Company has determined that no adjustment to previously filed 1996 Form
10-Q's was necessary.
OVERVIEW
GENERAL
Prior to 1996, the Company's at-risk operations were focused in Florida.
During 1996, the Company acquired RNIC and its 19 licenses and assumed
business from several self insurance funds outside of Florida which
allowed the Company to diversify its at-risk operations outside the
state of Florida. A comparison of the Company's direct written premiums
(prior to reinsurance cessions or assumptions) by state is presented
below:
<TABLE>
<CAPTION>
DIRECT PREMIUMS WRITTEN (A)
-----------------------------------
(Dollars in millions) 1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
Florida $ 270.8 $ 284.8 $ 2.4
North Carolina 41.4 -- --
Alabama 21.7 -- --
Other 22.8 -- --
------- ------- -----
Total $ 356.7 $ 284.8 $ 2.4
======= ======= =====
</TABLE>
(a) Includes RIC, RPC and RNIC for 1996, RIC and RPC for 1995,
and RPC for 1994.
Direct written premiums were reduced by specific reinsurance cessions
(1996, 1995 and 1994), the 50 percent AmRe quota share reinsurance
agreement for the Company's Florida workers' compensation business (1996
and 1995) and the 65 percent quota share reinsurance agreement
(effective October 1, 1996), with another reinsurer for certain
non-Florida business. This quota share reinsurance agreement was reduced
to 60 percent effective January 1, 1997.
The majority of the Company's premiums have been written in Florida, a
regulated pricing state where premiums for guaranteed cost products are
based on state-approved rates. However, the Company also offers policies
which are subject to premium reductions as high deductible plans,
participating dividend plans, or other loss sensitive plans. Pricing for
these plans tends to be more competitively based, and the Company
experienced increased competition during 1996 in pricing these plans. In
addition, in October 1996, the Florida Insurance Commissioner ordered
workers'
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<PAGE> 295
compensation providers to reduce rates by an average of 11.2 percent for
new and renewal policies written on or after January 1, 1997.
Concurrently, the 10 percent managed care credit was phased out. This
credit had been offered since 1994 to employers who met certain criteria
for participating in a qualified workers' compensation managed
care arrangement. As of December 31, 1996, the Company estimated that
approximately 60 percent of the Company's premiums received the 10
percent managed care credit.
The Company experienced increased pricing pressures during 1996 and
expects that such pressures will continue into the foreseeable future.
The Company intends to continue applying managed care techniques to
differentiate itself from its competitors and to continue to reduce
claims costs. In June 1997, the Company implemented cost cutting
measures which resulted in the Company ceasing to write new business in
certain states including Oklahoma, Virginia, Missouri, Mississippi,
Louisiana and Kansas, which approximates $16.0 million in direct
premiums written.
The Company attempts to lower claims costs by applying managed care
techniques and programs to workers' compensation claims, particularly by
providing prompt medical intervention, integrating claims management and
customer service, directing care of injured employees through a managed
care provider network, and availing itself of potential recoveries under
subrogation and other programs.
Part of the Company's claims management philosophy is to seek recoveries
for claims which are reinsured or which can be subrogated or submitted
for reimbursement under various states' recovery programs. As a result,
the Company's losses and loss adjustment expenses are offset by
estimated recoveries from reinsurers under specific excess of loss and
quota share reinsurance agreements, subrogation from third parties and
state "second disability" funds, including the Florida Special
Disability Trust Fund ("SDTF").
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1996
The following table shows direct, assumed, ceded, and net earned
premiums for the three months and nine months ended September 30, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Direct premiums earned $ 77,169 $ 84,220 $ 260,446 $ 236,448
Assumed premiums earned 1,118 33,772 6,008 37,316
Premiums ceded to reinsurers (37,870) (66,627) (132,572) (141,909)
--------- --------- ---------- -----------
Net premiums earned $ 40,417 $ 51,365 $ 133,882 $ 131,855
========= ========= ========== ===========
</TABLE>
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<PAGE> 296
The number of inforce policies were:
<TABLE>
<CAPTION>
QUARTER ENDED 1996 1997
---------------------------------- -------- --------
<S> <C> <C>
March 31 22,777 30,141
June 30 26,002 29,602
September 30 28,772 25,649
December 31 30,081 N/A
</TABLE>
Direct premiums earned decreased to $77.2 million for the three months
ended September 30, 1997 from $84.2 million for the same period in 1996,
a net decrease of $7.0 million. Direct premiums earned increased to
$260.4 million for the nine months ended September 30, 1997 from $236.4
million for the same period in 1996, a net increase of $24.0 million.
The decrease in direct earned premiums for the three months ended
September 30, 1997 of $7.0 million from the same period in 1996 was
primarily due to the decrease in new and renewal premiums that the
Company experienced in the second and third quarters of 1997 from the
adverse publicity discussed earlier in this report. In addition, the
direct premiums earned for the three months ended September 30, 1996
were favorably impacted by the rapid growth that occurred in 1996 after
the IPO and adversely impacted by the third quarter 1996 earned premium
reduction for loss sensitive products of $4.9 million (net). During the
three months ended September 30, 1996, the Company reduced its earned
premiums by approximately $4.9 million to reflect the projected ultimate
earned premiums on loss sensitive products. The increase in the direct
premiums earned for the nine months ended September 30, 1997 was
primarily the result of the following factors:
- The infusion of approximately $68.9 million of capital into
the Company's insurance subsidiaries from the IPO proceeds
allowed the insurance subsidiaries to increase their premium
writing capacity and, as a result, the Company was able to
increase premiums during the last nine months of 1996 due to
its expanded premium writing capabilities. Written premiums
are earned pro rata over the policy period (usually twelve
months) therefore, increased premiums written during the last
nine months of 1996 will have a positive impact on earned
premiums in 1996 and 1997.
- Written premiums increased in the third and fourth quarters
of 1996 and the first quarter of 1997 from the assumption
reinsurance and loss portfolio agreements entered into by the
Company and from the acquisitions made by the Company during
1996.
- Enhanced marketing initiatives implemented by the Company
after the IPO to increase the number of policies and to write
accounts with larger premiums.
- These increases were partially offset by a decrease in new
and renewal premiums in the second and third quarters of 1997
due to the adverse publicity discussed more fully in "Recent
Developments".
In September 1995, the Company entered into a fronting agreement with
another insurer which enabled the Company to begin expansion into states
where its insurance subsidiaries were not licensed. The assumed premiums
from the fronting agreement were approximately $1.1 million for the
three months ended September 30, 1997 compared to $2.4 million at
September 30, 1996. The decrease in assumed premiums from the fronting
agreement was due to a reduction in the third quarter of 1997 in the
premium writings under this agreement during the third quarter of 1997.
The majority of the decrease in assumed premiums for the three months
ended September 30, 1997 compared to
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<PAGE> 297
September 30, 1996, was due to the assumption reinsurance and loss
portfolio transfers of the NARM and OSAA business in the third quarter
of 1996. The impact of these transaction was to increase assumed and
ceded premiums for the three months ended September 30, 1996 by $32.0
million. There were no similar transactions in 1997.
The Company cedes approximately 50 percent of its Florida premiums to
AmRe under a quota share reinsurance agreement and the Company cedes 60
percent of the business written by RNIC under a separate quota share
agreement (65 percent during 1996). As direct earned premiums decrease,
the ceded premiums will also decrease.
Fee income for the three months ended September 30, 1997 was $7.0
million compared to $7.1 million for the same period in 1996, a net
decrease of $0.1 million. The decrease is primarily due to the loss of
service fees from the conversion of the NARM self insurance funds of
Virginia (which were previously managed by the Company) to at-risk
business via loss portfolio transfers and decreases in RWI service fees
from the termination of RWI's Mississippi and Louisiana service
contracts. The decrease in fee income was partially offset by new fees
generated from CompSource, the fronting agreement, the new service
agreement with Third Coast Insurance Company, and growth in other
existing fee products. Fee income for the nine months ended September
30, 1997 and 1996 was $18.0 million and $23.1 million, respectively. The
decrease in fee income of $5.1 million for the nine month period ended
September 30, 1997 compared to the same period in 1996, was primarily
due to the reasons discussed above and the loss in service fees from the
NARM Self Insurance Fund of North Carolina.
Net investment income for the three months ended September 30, 1997 was
$4.1 million compared to $3.1 million for the same period in 1996, a net
increase of $1.0 million. Net investment income for the nine months
ended September 30, 1997 and 1996 was $12.6 million and $7.6 million,
respectively. Investment income consists entirely of earnings from the
investment portfolio, including realized gains and losses. The total
investments of the Company for 1996 and 1997 were (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
March 31 $ 114,477 $ 230,274
June 30 $ 187,528 $ 227,970
September 30 $ 241,143 $ 209,134
December 31 $ 255,656 N/A
</TABLE>
The increase in the investment portfolio during 1996 was due (i) to the
investment of proceeds from the IPO by RISCORP into its insurance
subsidiaries, which, in turn, invested the proceeds in their individual
investment portfolios, (ii) the growth in premium volume during 1996
which generated positive cash flow which was used to purchase
investments, and (iii) the positive cash flow generated from the
proceeds received from the assumption reinsurance transactions which
were also used to purchase investments. The increase in invested assets
is the primary reason for the increase in the investment income for both
the third quarter of 1997 over the corresponding quarter of 1996 and the
nine months ended September 30, 1997 compared to the same period in
1996. The actual yield on invested assets was comparable between
quarters.
The decrease in accounts payable and other accrued expenses of
approximately $32.4 million from December 31, 1996 was primarily due to
the payment of approximately $8.5 million in accrued assessments,
approximately $6.2 million in amounts held as deposits for insureds and
approximately $20.4 million in net reductions in reinsurance payable.
These decreases were offset by increases to
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<PAGE> 298
accrued expenses of $0.5 million, increases in trade accounts payable of
$2.2 million from the restructuring and increases in deferred revenues
of $0.4 million. The decrease in the cash and invested assets of
approximately $26.7 million from December 31, 1996 was caused primarily
by the liquidation of investments to pay these items.
Losses and loss adjustment expenses for the three months ended September
30, 1997, were $31.2 million compared to $38.3 million for the same
period in 1996, a net decrease of $7.1 million. The loss ratio for the
three months ended September 30, 1997 and 1996 was 77.2 percent and 74.5
percent, respectively. The $7.1 million decrease in losses and loss
adjustment expenses for the three months ended September 30, 1997
compared to the same period in 1996, was primarily due the $10.9 million
decrease in earned premiums from the three months ended September 30,
1997 compared to the same period in 1996. In addition, the loss reserves
for the quarter ended September 30, 1997 were effected adversely by
approximately $1.0 million, net, by the loss development in Alabama and
North Carolina. This decrease in losses and loss adjustment expenses was
also impacted by increases in the reserves from loss portfolio transfers
and writings in new states licensed through RNIC, as well as growth in
the Company's core Florida operations.
Losses and loss adjustment expenses for the nine months ended September
30, 1997 and 1996 were approximately $87.1 million and $89.5 million,
respectively. The loss ratio for the nine months ended September 30,
1997 and 1996 was 65.1 percent and 67.9 percent, respectively. The
decrease in the loss ratio from 67.9 percent to 65.1 percent was
primarily due to a $4.9 million decrease in the second quarter in
reserves on Florida business resulting from favorable development for
the 1996 accident year resulting primarily from favorable development of
post 1993 Florida accident years due to enhanced savings from the
legislative changes that became effective in 1994. This favorable
development was partially offset by the adverse development by
approximately $3.0 million experienced in the first quarter of 1997.
Unallocated loss adjustment expenses for the three months ended
September 30, 1997, were $3.2 million compared to $3.4 million for the
same period in 1996, a net decrease of $0.2 million. The slight decrease
in unallocated loss adjustment expenses for the three months ended
September 30, 1997 is due primarily to the decrease in earned premiums,
offset by increased personnel and personnel related costs from the same
period in 1996. Unallocated loss adjustment expenses for the nine months
ended September 30, 1997 and 1996 were $11.3 million and $9.2 million,
respectively, representing an increase of $2.1 million. These increases
for the nine months ended September 30, 1997 were primarily due to the
increased premium volume and increased operating expenses during these
periods. The unallocated loss adjustment expense ratio for the three
months ended September 30, 1997 and 1996 was 7.9 percent and 6.6
percent, respectively. The unallocated loss adjustment expense ratio for
the nine months ended September 30, 1997 and 1996 was 8.4 percent and
7.0 percent, respectively. The increase in the ratio was primarily due
to increased personnel and personnel related costs.
Commissions, underwriting and administrative expenses for the three
months ended September 30, 1997 were $15.3 million compared to $13.2
million for the same period in 1996. The net increase of $2.1 million
from 1996 to 1997 was attributable to increases in commissions, premium
taxes and personnel costs caused by higher premiums generated from
acquisitions and new and renewal premium growth, increased operating
expenses from the addition of employees and increases in legal expenses
from actions initiated in 1996. The Company's total employees decreased
from 805 as of September 30, 1996 to 619 at September 30, 1997, as a
result of the June 1997 restructuring and workforce reduction. The net
increase in these expenses for the three months ended September 30,
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<PAGE> 299
1997 was also adversely impacted by a $1.6 million decrease in the
ceding commission income received under the quota share reinsurance
agreements.
Commissions, underwriting and administrative expenses for the nine
months ended September 30, 1997 and 1996 were $51.9 million and $39.3
million, respectively, representing an increase of $12.6 million. During
the second quarter of 1997 the Company recorded a charge to earnings of
$5.9 million in connection with the workforce reduction and
restructuring. This non-recurring charge consisted of $5.1 million of
personnel expenses (primarily severance costs), $0.7 million of
occupancy costs (primarily lease cancellations) and $0.1 million of
other restructuring costs. These restructuring costs were included in
the accompanying nine month financial statements with commissions,
underwriting and administrative expenses. The remaining net increase of
$6.7 million was primarily the result of increased commissions, premium
taxes and personnel costs caused by increased premium volume and offset
by an increase in ceding commission income for the nine months ended
September 30, 1997 of $5.7 million compared to the same period in 1996.
Interest expense for the three months ended September 30, 1997 was $0.5
million compared to $0.5 million for the same period in 1996.
Outstanding debt was principally unchanged during this period. Interest
expense for the nine months ended September 30, 1997 and 1996 was $1.4
million and $2.1 million, respectively. The decrease in the interest
expense of $0.7 million is due to the $28.6 million reduction in
outstanding debt during the first quarter of 1996 from the proceeds of
the IPO.
Depreciation and amortization expenses for the three months ended
September 30, 1997 were $2.4 million compared to $4.3 million for the
same period in 1996, a net decrease of $1.9 million. The amortization
expense for the three months ended September 30, 1996 contained an
impairment loss of $2.7 million related to the goodwill recorded in
connection with the purchase of SISB. Excluding this impairment loss of
$2.7 million, depreciation and amortization increased $0.8 million. The
increase of $0.8 million was primarily the result of amortization of
goodwill related to the acquisitions of CompSource and IAA in 1996, and
additions to property and equipment during 1996 necessary to support the
Company's growth. This increase in depreciation and amortization in 1997
was partially offset by the reduction in recurring amortization of
goodwill due to a $3.0 million writedown of goodwill associated with RWI
and a $2.8 million writedown of goodwill associated with the IAA
acquisition in the third and fourth quarters of 1996. These adjustments
to goodwill are more fully discussed in Note 6 to the consolidated
financial statements.
Depreciation and amortization expense for the nine months ended
September 30, 1997 and 1996 were $6.3 million and $6.3 million,
respectively. The changes in the depreciation and amortization are
described above.
The effective tax rate for the three months ended September 30, 1997 was
40.6 percent compared to 83.3 percent for the same period in 1996. The
effective tax rate for the nine months ended September 30, 1997 and 1996
was 40.6 percent and 42.1 percent, respectively. The 83.3 percent tax
rate for the three months ended September 30, 1996 was adversely
effected by the $2.7 million impairment loss relating to goodwill, which
is non-deductible for tax purposes. Excluding this impairment loss, the
effective tax rate was 34 percent for the three months ended September
30, 1997.
The weighted average common shares outstanding for the three months
ending September 30, 1997, was 36,868,114 versus 37,485,691 for the
three months ending September 30, 1996. The weighted average common
shares outstanding for the nine months ended September 30, 1997 and 1996
were 37,331,665 and 35,720,088, respectively. The increase in the
weighted average number of shares for the nine months ended September
30, 1997 was due primarily to the inclusion of the shares issued in
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<PAGE> 300
connection with the February 29, 1996 IPO for the entire first, second
and third quarters of 1997 versus inclusion of such shares for only
seven months for the first, second and third quarters of 1996, and the
inclusion of certain contingent shares reserved for issuance in
connection with the acquisitions of CompSource and IAA, as more fully
discussed in Note 3 of the consolidated financial statements included in
this document. The increase was partially offset by a decrease in common
stock equivalents for option shares assumed to be exercised.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The
Company's primary sources of cash flow from operations are premiums and
investment income, and its cash requirements consist primarily of
payment of losses and loss adjustment expenses, support of its operating
activities including various reinsurance agreements and managed care
programs and services, capital and surplus needs for its insurance
subsidiaries, and other general and administrative expenses.
On February 29, 1996, the Company completed its initial public offering
of Common Stock which generated net proceeds of $127.9 million which
were used to repay approximately $28.6 million of various borrowings,
increase the capital and surplus of the Company's insurance
subsidiaries, fund acquisitions and for general corporate purposes.
Borrowings increased by $19.6 million between 1994 and 1995 due to
borrowings under a variable rate term loan and the subordinated notes,
the proceeds of which were used to repay existing debt and fund the
acquisition of RIC.
On October 15, 1996, the Company entered into a credit agreement with
NationsBank, N.A. and SouthTrust Bank of Alabama which provided a $50.0
million credit facility to the Company for unsecured borrowings for a
two-year revolving period convertible into a term loan with a final
maturity on September 30, 2001. There were no borrowings under the
agreement, and the Company terminated the agreement on June 16, 1997.
In November 1996, the Board of Directors of the Company formed a
Strategic Alternatives Committee whose primary function was to evaluate
alternatives to maximize shareholder value including, without
limitation, potential acquisitions, joint ventures, mergers, strategic
alliances and the sale of all or part of the Company. In turn, the
committee hired an investment bank to identify and evaluate entities
with an interest in acquiring the Company or its assets. On June 17,
1997, the Company entered into an agreement with Zenith to purchase
substantially all of the operating assets of the Company and its
affiliates at a purchase price equal to the greater of: (i) the book
value of the acquired assets less the book value of the assumed
liabilities including the $15.0 million AmRe debt, or (ii) $35.0 million
in cash. The transaction is subject to shareholder and regulatory
approval.
Cash flow from operations for the years ended December 31, 1996, 1995
and 1994 was $28.1 million, ($47.3) million and $17.8 million,
respectively. The increase from 1995 to 1996 was due primarily to the
improved cash flows resulting from ceding of premiums under the AmRe
quota share reinsurance agreement and the increase in losses and loss
adjustment expenses. The decrease from 1994 to 1995 was due primarily to
the initiation of the AmRe quota share reinsurance agreement and other
reinsurance agreements which created a net cash outflow resulting from
the ceding of $139.1 million in written premium.
The Company has projected cash flows through March 1998 and believes it
has sufficient liquidity and capital resources to support its operations
without considering dividends from the insurance company subsidiaries
and transactions resulting from the pending sale of the Company.
26
<PAGE> 301
The Company has recorded $49.5 million in accrued net recoverables from
the SDTF, which it anticipates will be reimbursed over a number of
years. For the years ended December 31, 1996, 1995 and 1994, the Company
received net payments from the SDTF totaling $2.5 million, $0.9 million
and $0, respectively.
Barring any adverse legislative change, the Company believes that it
will ultimately collect the entire balance of SDTF recoverables and that
periodic reimbursement will be received following submission of proof of
claim and reimbursement requests. During its approximate 40-year
history, the SDTF has historically paid reimbursement requests for
claims it determined were eligible for reimbursement. The Company does
not believe that SDTF will fail to meet its obligations to pay eligible
reimbursement requests, although there can be no assurance in this
regard. The failure of the SDTF to meet its obligations could adversely
affect the liquidity of the Company.
In addition, the liquidity of the Company could be adversely affected by
certain legal issues and its initial A.M. Best Rating. See "Legal
Proceedings" and "Recent Developments - A.M. Best Initial Rating."
The National Association of Insurance Commissioners has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based upon the risks inherent in its operations. The
standards, which have not yet been adopted in Florida, require the
computation of a risk-based capital amount which is then compared to a
carrier's actual total adjusted capital. The computation involves
applying factors to various financial data to address four primary
risks: asset risk, insurance underwriting risk, credit risk, and
off-balance sheet risk. These standards provide for regulatory
intervention when the percentage of total adjusted capital to authorized
control level risk-based capital is below certain levels. At December
31, 1996 and March 31, 1997, the Company's insurance subsidiaries'
statutory surplus was in excess of any risk-based capital action level
requirements.
27
<PAGE> 302
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 2, 1996, the Company, RIC, several officers, directors and
employees were named as defendants in a purported class action lawsuit
filed in the United States District Court for the Southern District of
Florida. The suit claims the defendants violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), breached fiduciary
duties, and were negligent in the Company's acquisition of CMIC in 1995.
The suit seeks compensatory and punitive damages and equitable relief
and treble damages for the RICO counts. The named plaintiffs, Vero
Cricket Shop, Inc., Vero Cricket Shop Too, Inc., and Falls Company of
Longboat Key, Inc., claim to be former policyholders of CMIC and claim
to represent others similarly situated. The defendants moved to dismiss
the RICO counts and to strike the punitive damages claims. These
motions, as well as plaintiffs' motion for class certification, were
pending when the plaintiffs filed an amended complaint. The amended
complaint added the Florida Insurance Commissioner and Zenith as
defendants in one new count seeking declaratory relief. The remaining
claims in the amended complaint are the same as those in the original
complaint. The defendants have filed a motion to dismiss the amended
complaint and to strike the punitive damages claims. The parties have
been ordered to non-binding mediation in this matter. The Company
intends to defend this action vigorously; however, there can be no
assurance that it will prevail in the litigation.
Between November 20, 1996, and January 31, 1997, nine shareholder class
action lawsuits were filed against RISCORP, Inc. and other defendants in
the United States District Court for the Middle District of Florida. In
March 1997, the Court consolidated these lawsuits and appointed co-lead
plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants
RISCORP, Inc., three of its executive officers, one non-officer director
and three of the underwriters for RISCORP, Inc.'s initial public
offering. The plaintiffs in the consolidated complaint purport to
represent the class of shareholders who purchased RISCORP, Inc. Class A
Common Stock between February 28, 1996, and November 14, 1996. The
consolidated complaint alleges that RISCORP, Inc.'s Registration
Statement and Prospectus of February 28, 1996, as well as subsequent
statements, contained false and misleading statements of material fact
and omissions, in violation of sections 11 and 15 of the Securities Act
and sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder. The consolidated complaint seeks unspecified
compensatory damages. The defendants have filed a motion to dismiss the
consolidated complaint which has been fully briefed and is pending.
Discovery will be stayed until the motion to dismiss has been decided.
The plaintiffs have filed a motion to certify the class, but the parties
have agreed that the defendants need not respond to that motion until
thirty days after the motion to dismiss has been decided. The parties
have been ordered to non-binding mediation in this matter. RISCORP, Inc.
intends to defend this action vigorously; however, there can be no
assurance that it will prevail in the litigation.
On July 17, 1997, RISCORP, Inc. and several former officers were named
as defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges violations of federal and state securities laws and breach
of contract resulting from the purchase of IAA in 1996. The suit seeks
compensatory and punitive damages and equitable relief. The named
plaintiffs are Thomas Albrecht and Peter Norman, the former shareholders
of IAA. RISCORP, Inc. intends to vigorously defend this action; however,
there can be no assurance that it will prevail in the litigation.
28
<PAGE> 303
On August 20, 1997, RISCORP, Inc., RNIC, IAA and Peter Norman were named
as defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges common law fraud, breach of contract and breach of
fiduciary duty resulting from the assumption of the OSAA business in
1996. The suit seeks compensatory and punitive damages and equitable
relief. The named plaintiff is OSAA. The Company intends to vigorously
defend this action; however, there can be no assurance that it will
prevail in the litigation.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the
Company, RISCORP Management Services, Inc. ("RMS") (a wholly owned,
non-regulated subsidiary of the Company) and five former officers,
including William D. Griffin, Founder and Chairman of the Board, for
various charges stemming from alleged illegal political campaign
contributions. On September 18, 1997, the Board of Directors approved a
guilty plea by RMS to a single count of conspiracy to commit mail fraud.
The guilty plea was entered by RMS and accepted by the court on October
9, 1997. As a result of an agreement negotiated with the United States
Attorney, the court dismissed the indictment against the Company on the
same day. Mr. Griffin has resigned from the Board of Directors of the
Company and its subsidiaries and all other positions with the Company
and its subsidiaries. As of December 31, 1996 the Company had recorded
in the accompanying financial statements a provision of $1.0 million for
the payment of fines and other costs related to this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In
addition, certain expenses of the law suits and related legal expenses
may be covered under directors and officers' insurance coverage
maintained by the Company.
ITEM 2. CHANGES TO SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedules (for SEC use only)
29
<PAGE> 304
b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter
ended September 30, 1997.
<TABLE>
<CAPTION>
Filing Date Item No. Description
<S> <C> <C>
July 2, 1997 5 Other Events. Copy of press release announcing the asset purchase
agreement between RISCORP, Inc and Zenith Insurance Company.
7 Financial Statements and Exhibits. Exhibit 2.1 - Asset Purchase
Agreement, dated June 17, 1997, among Zenith Insurance Company and
RISCORP, Inc.
</TABLE>
30
<PAGE> 305
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RISCORP, INC.
(Registrant)
By: /s/Stephen C. Rece
---------------------------------
Stephen C. Rece
Senior Vice President and
Chief Financial Officer
Date: February 27, 1998
31
<PAGE> 306
EXHIBIT 11
RISCORP, INC. AND SUBSIDIARIES
STATEMENT RE. COMPUTATION OF PER SHARE EARNINGS
For the three months ended September 30, 1997 and 1996
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net (loss) income $ (634) $ 312
================ ================
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,077,778 35,639,300
Redemption contingency for CompSource acquisition -- --
Redemption contingency for IAA acquisition 790,336 114,160
Common stock equivalents--assumed exercise of stock options -- 1,838,145
--------------- ----------------
Weighted average common and
common share equivalents outstanding 36,868,114 37,591,605
=============== ================
Earnings per share $ (0.02) $ 0.01
=============== ================
</TABLE>
32
<PAGE> 307
EXHIBIT 11, CONTINUED
RISCORP, INC. AND SUBSIDIARIES
STATEMENT RE. COMPUTATION OF PER SHARE EARNINGS
For the nine months ended September 30, 1997 and 1996 (Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net income $ 3,810 $ 9,301
============== ==============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,109,885 33,884,758
Redemption contingency for CompSource acquisition -- --
Redemption contingency for IAA acquisition 790,336 114,160
Common stock equivalents - assumed exercise of stock options 263,922 1,829,108
--------------- --------------
Weighted average common and
common share equivalents outstanding 37,164,143 35,828,026
=============== ==============
Earnings per share $ 0.10 $ 0.26
=============== ==============
</TABLE>
33
<PAGE> 308
APPENDIX
RISCORP, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF RISCORP, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 26, 1998
The undersigned hereby appoints FREDERICK M. DAWSON and WALTER E. RIEHEMANN,
or either of them, with the individual power of substitution, proxies to vote
all shares of Class A and Class B Common Stock of RISCORP, Inc. that the
undersigned may be entitled to vote at the Special Meeting of Shareholders to be
held in Atlanta, Georgia on March 26, 1998, and at any reconvened meeting
following any adjournment thereof. Said proxies will vote on the proposals set
forth in the Notice of Special Meeting and Proxy Statement as specified on this
card, and are authorized to vote in their discretion as to any other matters
that may properly come before the meeting.
1. Adoption and approval of the Asset Purchase Agreement, dated June 17, 1997,
as amended, by and among Zenith Insurance Company, RISCORP, Inc., and the
certain subsidiaries of RISCORP, Inc. named therein, and the consummation of
the transactions contemplated therein, including the proposed sale of
substantially all of the assets of RISCORP, Inc. and its subsidiaries
pursuant to such Asset Purchase Agreement.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the adjournment or postponement of the Special Meeting for a
period of not more than one hundred twenty days for the purpose of soliciting
additional proxies in the event the number of shares of Class A Common Stock
and Class B Common Stock represented at the meeting in person or by proxy is
insufficient to constitute a quorum or, if a quorum is present, the Company
fails to receive a sufficient number of votes to approve the Purchase
Agreement and Asset Sale.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on the reverse side.)
IF A VOTE IS NOT SPECIFIED, THE PROXIES WILL VOTE "FOR" THE ABOVE PROPOSALS.
THE PROXIES WILL VOTE WITH DISCRETIONARY AUTHORITY ON ALL OTHER MATTERS THAT MAY
PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENTS THEREOF.
DATE: , 1998
-------------------
------------------------------
SIGNATURE(S):
------------------------------
------------------------------
IMPORTANT: Please sign this
Proxy exactly as your name or
names appear to the left. When
shares are held by joint
tenants, both should sign.
When signing as attorney,
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.
SHARES
------------------------
PLEASE VOTE, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
