<PAGE> 1
FORM 10-Q
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 June 30, 1999
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.)
One Sarasota Tower, Suite 608
2 North Tamiami Trail
Sarasota, Florida 34236
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(941) 366-5015
------------------------------
(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 [X] No [ ].
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at July 31, 1999
----- -----------------------------
Class A Common Stock, $.01 par value 14,258,671
Class B Common Stock, $.01 par value 24,334,443
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INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3 - 4
Consolidated Statements of Operations -
For the three months ended June 30, 1999 and 1998 5
Consolidated Statements of Operations -
For the six months ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 1999 and 1998 7
Consolidated Statements of Comprehensive Loss
For the six months ended June 30, 1999 and 1998 8
Notes to Consolidated Condensed Financial Statements 9 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20 - 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21 - 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
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Part I Financial Information
Item 1. Financial Statements
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
----------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value
(amortized cost $58,301 in 1999 and $6,666 in 1998) $ 58,262 $ 6,716
Fixed maturities available for sale, at fair value
(amortized cost $8,639 in 1999 and $9,047 in 1998)-restricted 8,723 9,264
-------- --------
Total investments 66,985 15,980
Cash and cash equivalents 8,831 6,864
Cash and cash equivalents-restricted 14,995 14,842
Prepaid expenses 4,810 5,171
Deferred income taxes 3,358 3,141
Accounts receivable--other 2,300 7,674
Income taxes recoverable -- 17,277
Property and equipment, net 261 337
Receivable from Zenith 81 49,933
Other assets 582 2,174
-------- --------
Total assets $102,203 $123,393
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Liabilities - accrued expenses and other liabilities $ 10,989 $ 27,827
--------- ---------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000
shares authorized; 14,371,253 shares issued 143 143
Class B Common Stock, $.01 par value, 100,000,000
shares authorized; 24,334,443 shares issued and outstanding 243 243
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding -- --
Additional paid-in capital 140,688 140,688
Retained deficit (49,889) (45,680)
Treasury Class A Common Stock - at cost, 112,582 shares (1) (1)
Accumulated Other Comprehensive Income:
Net unrealized gains on investments 30 173
--------- ---------
Total shareholders' equity 91,214 95,566
--------- ---------
Total liabilities and shareholders' equity $ 102,203 $ 123,393
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
THREE MONTHS
ENDED JUNE 30
--------------------------------------------
1999 1998
------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Net investment income $ 1,235 $ 2,252
Net realized gains 150 2,805
Other income 124 93
------------ ------------
Total revenue 1,509 5,150
------------ ------------
Expenses:
Commissions, underwriting, and administrative expenses 3,197 11,352
Interest expense (income) (219) 8
Depreciation and amortization 36 31
------------ ------------
Total expenses 3,014 11,391
------------ ------------
Loss from operations (1,505) (6,241)
Loss on sale of net assets to Zenith (4,760) --
------------ ------------
Loss before income taxes (6,265) (6,241)
Income tax benefit (2,896) --
------------ ------------
Net loss $ (3,369) $ (6,241)
============ ============
Per share data:
Net loss per common share - basic $ (0.09) $ (0.17)
============ ============
Net loss per common share - diluted $ (0.09) $ (0.17)
============ ============
Weighted average common shares outstanding 37,491,031 36,916,725
============ ============
Weighted average common and common share
equivalents outstanding 37,491,031 36,916,725
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
--------------------------------------------
1999 1998
------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Net investment income $ 3,034 $ 5,558
Net realized gains 150 4,266
Other income 124 93
Premiums earned -- 25,819
Fee income -- 5,723
------------ ------------
Total revenue 3,308 41,459
------------ ------------
Expenses:
Commissions, underwriting, and administrative expenses 4,354 26,868
Interest expense 1,222 477
Depreciation and amortization 76 3,100
Losses and loss adjustment expenses -- 24,016
Unallocated loss adjustment expenses -- 2,561
------------ ------------
Total expenses 5,652 57,022
------------ ------------
Loss from operations (2,344) (15,563)
Loss on sale of net assets to Zenith (4,760) --
------------ ------------
Loss before income taxes (7,104) (15,563)
Income tax benefit (2,896) --
------------ ------------
Net loss $ (4,208) $ (15,563)
============ ============
Per share data:
Net loss per common share - basic (0.11) (0.42)
============ ============
Net loss per common share - diluted (0.11) (0.42)
============ ============
Weighted average common shares outstanding 37,419,156 36,892,420
============ ============
Weighted average common and common share
equivalents outstanding 37,419,156 36,892,420
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
-----------------------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash provided by (used in) operating activities $ 2,231 $(15,838)
--------- --------
Cash flows from investing activities:
Purchase of fixed maturities available for sale (327,752) (24,210)
Purchase of fixed maturities held to maturity -- (5,569)
Proceeds from sale of fixed maturities available for sale 276,489 28,049
Proceeds from maturities of fixed maturities available for sale -- 6,029
Proceeds from maturities of fixed maturities held to maturity -- 5,700
Cash received from Zenith for sale of net assets 51,153 35,000
Purchase of property and equipment -- (777)
Cash assets transferred to Zenith -- (29,308)
Investments to be transferred to Zenith -- (13,200)
--------- --------
Net cash (used in) provided by investing activities (110) 1,714
--------- --------
Cash flows from financing activities:
Principal repayments of notes payable -- (245)
Decrease in deposit balances payable -- (1,599)
Transfer of cash and cash equivalents to restricted (154) (413)
--------- --------
Net cash used in financing activities (154) (2,257)
--------- --------
Net increase (decrease) in cash and cash equivalents 1,967 (16,381)
Cash and cash equivalents, beginning of period 6,864 16,858
--------- --------
Cash and cash equivalents, end of period $ 8,831 $ 477
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,124 $ 479
========= ========
Income taxes $ 82 $ 3,435
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------------
1999 1998
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net loss $(4,208) $(15,563)
------- --------
Other comprehensive loss, before income taxes:
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period (220) (4,063)
Income tax benefit related to items of other
comprehensive loss (77) (1,422)
------- --------
Other comprehensive loss, net of income taxes (143) (2,641)
------- --------
Total comprehensive loss $(4,351) $(18,204)
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated unaudited interim financial statements of
RISCORP, Inc. ("RISCORP") and subsidiaries (collectively, the "Company")
have been prepared on the basis of generally accepted accounting
principles ("GAAP") and, in the opinion of management, include 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 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 consolidated financial statements include the accounts and operations
of RISCORP and its subsidiaries. All significant intercompany balances
have been eliminated.
(2) SALE TO ZENITH INSURANCE COMPANY
As previously disclosed, on April 1, 1998, RISCORP and certain of its
subsidiaries sold substantially all of their assets and transferred
certain liabilities to Zenith Insurance Company ("Zenith") pursuant to
the terms of the Asset Purchase Agreement among the parties dated June
17, 1997, as amended (the "Asset Purchase Agreement"). In connection with
the sale to Zenith, the Company ceased substantially all of its former
business operations, including its insurance operations, effective April
1, 1998. Accordingly, after such date, the Company's operations consisted
principally of the administration of the day-to-day activities of the
surviving corporate entities, compliance with the provisions of the Asset
Purchase Agreement, and the investment, protection, and maximization of
the remaining assets of the Company. At the present time, RISCORP has no
plans to resume any operating activities.
On July 7, 1999, the Company and Zenith settled, with certain limited
exceptions, the claims arising out of the sale. The Asset Purchase
Agreement contemplated a post-closing purchase price adjustment based on
the difference between the book value of the assets purchased and the
book value of the liabilities assumed as of the closing date. In
connection with the determination of the final purchase price, a dispute
arose between the parties regarding, among other things, the book value
of the assets and liabilities of the business, Zenith's assumption of
certain operating liabilities of the business, and each party's
indemnification obligations under the Asset Purchase Agreement. The terms
of the settlement included, among other things, (i) the disbursement of
the $12.8 million in cash that has been held in escrow pursuant to the
terms of the Asset Purchase Agreement, with $6 million to be disbursed to
Zenith and the balance to be disbursed to RISCORP; (ii) RISCORP's right
to seek correction of alleged errors made by the neutral auditor in
connection with its determination of certain reinsurance recoverable
adjustments contained in the Final Business Balance Sheet; (iii)
RISCORP's right to retain any proceeds received from the Florida
Department of Labor (the "Florida DOL") in connection with RISCORP's
request for a refund of $5.3 million related to deductions for
commissions with respect to gross premiums; (iv) RISCORP's right to
retain a portion of any additional refunds received from the Florida
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DOL related to deductions for premiums ceded to others; and (v) the
mutual release of all other claims and causes of action that each party
may have against the other through the date of the Settlement
Agreement, except as expressly set forth therein. The parties have also
agreed that, with certain limited exceptions, any future claim or
controversy between the parties is to be submitted to binding
arbitration pursuant to the procedures set forth in the Settlement
Agreement. As part of the settlement, the lawsuit filed by Zenith
against the Company in the United States District of New York, and the
lawsuit filed by the Company against Zenith in the United States
District Court for the Middle District of Florida, Tampa Division, have
been dismissed with prejudice.
At June 30, 1999, the Company recorded an additional net loss of $4.8
million on the sale to Zenith due to the final terms of the Settlement
Agreement.
In connection with the sale of RISCORP's insurance operations to Zenith
on April 1, 1998, RISCORP voluntarily consented to the Florida Insurance
Department's request that RISCORP discontinue writing any new or renewal
insurance business for an indefinite period of time.
(3) ISSUANCE OF ADDITIONAL SHARES OF STOCK
In September 1996, RISCORP purchased all of the outstanding stock of
Independent Association Administrators, Inc. ("IAA") and Risk Inspection
Services and Consulting, Inc. ("RISC") in exchange for $11.5 million,
consisting principally of 790,336 shares of RISCORP's Class A Common
Stock valued at $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. The remaining unamortized goodwill relating to
those acquisitions was $7.8 million at March 31, 1998 (just prior to the
transfer of the goodwill to Zenith on April 1, 1998).
Due to a decrease in the market value of RISCORP's Class A Common Stock,
790,336 additional shares of RISCORP's Class A Common Stock valued at
$0.6 million were issued in January 1998 to the former shareholders of
IAA.
(4) COMMITMENTS AND CONTINGENCIES
On or about January 11, 1999, Zenith filed a lawsuit against RISCORP and
certain of its subsidiaries in federal court in New York setting forth 14
separate causes of action arising out of the Asset Purchase Agreement and
certain ancillary agreements. The complaint sought an unspecified total
amount of damages, but the amount of compensatory damages sought was in
excess of $30 million, together with an unspecified amount of punitive
damages and attorneys' fees. As more fully disclosed in Note 2, on July
7, 1999, the Company and Zenith settled those claims and, in connection
therewith, this lawsuit has been dismissed with prejudice by Zenith.
On August 20, 1997, the Occupational Safety Association of Alabama
Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers'
compensation fund, filed a breach of contract and fraud action against
the Company and others. The Fund entered into a Loss Portfolio Transfer
and Assumption Reinsurance Agreement dated August 26, 1996 and effective
September 1, 1996 with RISCORP National Insurance Company ("RNIC"). 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. Co-defendant Peter D. Norman ("Norman") was a
principal and officer of IAA prior to its
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acquisition by RISCORP in September 1996. The complaint alleges that
Norman and IAA breached certain fiduciary duties owed to the Fund in
connection with the subject agreement and transfer. The complaint
alleges that RISCORP has breached certain provisions of the agreement
and owes the Fund monies under the terms of the agreement. The Fund
claims, per a Loss Portfolio Evaluation dated February 26, 1998, that
the Fund overpaid RNIC by $6 million in the subject transaction. The
court has granted RNIC's Motion to Compel Arbitration per the terms and
provisions of the agreement. On December 1, 1998, the trial court issued
an order prohibiting the American Arbitration Association from
administering the arbitration between RNIC and the Fund, and RNIC has
appealed the trial court's ruling. The Alabama Supreme Court has stayed
the current arbitration. Despite the Alabama Supreme Court's stay, the
dispute between the Fund and RNIC is expected to be resolved through
arbitration. The other defendants, including IAA, have appealed to the
Supreme Court of Alabama the trial court's denial of their motions to
compel arbitration. RNIC intends to vigorously defend the Fund's claim.
On March 13, 1998, RISCORP Insurance Company ("RIC") and RISCORP Property
& Casualty Insurance Company ("RPC") were added as defendants in a
purported class action lawsuit filed in the United States District Court
for the Southern District of Florida, styled Bristol Hotel Management
Corporation, et. al., v. Aetna Casualty & Surety Company, a/k/a Aetna
Group, et. al. Case No. 97-2240-CIV-MORENO. The plaintiffs purport to
bring this action on behalf of themselves and a class consisting of all
employers in the State of Florida who purchased or renewed
retrospectively rated or adjusted workers' compensation policies in the
voluntary market since 1985. The suit was originally filed on July 17,
1997 against approximately 174 workers' compensation insurers as
defendants. The complaint was subsequently amended to add the RISCORP
defendants. The amended complaint named a total of approximately 161
insurer defendants. The suit claims that the defendant insurance
companies violated the Sherman Antitrust Act, the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), and the Florida Antitrust Act,
committed breach of contract and civil conspiracy, and were unjustly
enriched by unlawfully adding improper and illegal charges and fees onto
retrospectively rated premiums and otherwise charging more for those
policies than allowed by law. The suit seeks compensatory and punitive
damages, treble damages under the Antitrust and RICO claims, and
equitable relief. RIC and RPC moved to dismiss the amended complaint and
have also filed certain motions to dismiss the amended complaint filed by
various other defendants.
On August 26, 1998, the district court issued an order dismissing the
entire suit against all defendants on one of the grounds identified in
the various motions to dismiss filed by the defendants. The district
court indicated that all other grounds and motions to dismiss that were
pending at that time were mooted by the dismissal. On September 13, 1998,
the plaintiffs filed a Notice of Appeal. On February 9, 1999, the
district court issued, sua sponte, an Order of Reconsideration in which
the court indicated its desire to vacate the dismissal of the RICO claims
and pendant state claims based on a recent decision of the United States
Supreme Court. On March 17, 1999, plaintiffs-appellants filed an
unopposed motion to remand the action to the district court, citing the
Order of Reconsideration. On June 9, 1999, the Eleventh Circuit remanded
the case to the district court. Management will resume its vigorous
defense of the case once district court proceedings recommence.
On July 9, 1999, a shareholder class action lawsuit was filed against the
Company, two of its executive officers, and two former executive officers
in the United States District Court for the Middle District of Florida.
The plaintiff in this action purports to represent the class of
shareholders who purchased shares of RISCORP's Class A Common Stock
between November 19, 1997 and July 20, 1998. The complaint alleges, among
other things, that the financial statements included in the periodic
reports filed by RISCORP with the Securities and Exchange Commission
during the class period contain false and misleading statements of
material fact and omissions, in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. These
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allegations principally relate to the difference between the net book
value of the Company as reflected on its published financial statements
during the class period and the net book value of the assets transferred
to Zenith as determined by the neutral auditors and neutral actuaries
pursuant to the terms of the Asset Purchase Agreement between the
parties. The complaint seeks unspecified compensatory damages. RISCORP
believes that these claims are without merit and intends to vigorously
defend this suit.
The Company, in the ordinary course of business, is party to various
lawsuits. Based on information presently available, and in the light of
legal and other defenses available to the Company, contingent liabilities
arising from such threatened and pending litigation in the ordinary
course of business are not presently considered by management to be
material.
Other than as noted herein, no provision had been made in the
accompanying consolidated financial statements for the foregoing matters.
Certain of the related legal expenses may be covered under directors and
officers' insurance coverage maintained by the Company.
(5) RECLASSIFICATIONS
For comparative purposes, certain amounts in the accompanying financial
statements have been reclassified from amounts previously reported. These
reclassifications had no effect on previously reported shareholders'
equity or net loss.
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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 Risk Factors, 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.
("RISCORP") and its subsidiaries (collectively, 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, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Such statements may include, without
limitation, projections of revenues, income, losses, cash flows, plans
for future operations, financing needs, 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 actual outcome of
pending litigation, the Company's ability to gain approval and receive
payment from the Florida Department of Labor for certain refund
applications, the Company's ability to receive payment for the alleged
errors and understatement of the Final Business Balance Sheet by the
Independent Expert, the Company's need for additional capital to meet
operating requirements, and other factors mentioned elsewhere in this
report.
RECENT DEVELOPMENTS
ASSET PURCHASE AGREEMENT WITH ZENITH
See Part 1, Item 1, Notes to Consolidated Financial Statements, Note 2
for further discussion of the Zenith transaction.
LEGAL DEVELOPMENTS
See "Part II, Item 1, Legal Proceedings."
OVERVIEW
GENERAL
As discussed more fully in Note 2 to the consolidated financial
statements, RISCORP and certain of its subsidiaries sold substantially
all of their assets and transferred certain liabilities to Zenith on
April 1, 1998. In connection with the sale to Zenith, RISCORP ceased
substantially all of its former business operations, including its
insurance operations, effective April 1, 1998. Accordingly, after such
date, the Company's operations consisted primarily of the administration
of the day-to-day activities of the surviving corporate entities,
compliance with the provisions of the Asset Purchase Agreement, and the
investment, protection, and maximization of the remaining assets of the
Company. At the present time, RISCORP has no plans to resume any
operating activities.
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Since April 1, 1998, the Company has had no employees or insurance
operations, and has provided no services to self-insurance funds or other
insurance related entities. Because of these significant changes in the
operating activities of the Company after April 1, 1998, a comparison of
the results of operations for the six months ended June 30, 1999 to the
comparable period in 1998 is meaningless. Therefore, the results of
operations for the six months ended June 30, 1999 are explained
separately without comparison to the comparable prior period. The results
of operations for the three months ended June 30, 1999 are explained
separately with comparison to the comparable prior period. The results of
operations of the Company prior to the April 1, 1998 sale to Zenith are
included to comply with the requirements of the Securities Exchange Act
of 1934, as amended, and the rules and regulations of the Securities and
Exchange Commission; however, those results of operations are not
indicative of the operations of the Company since April 1, 1998 and are
not indicative of the anticipated future operations of the Company.
RESULTS OF OPERATIONS
During the six months ended June 30, 1999, the Company's primary
operating activities were the defense of the Proposed Business Balance
Sheet, the investment of the $25 million initial payment received from
Zenith on April 2, 1998, the investment of other invested assets retained
by the Company, compliance with the provisions of the Asset Purchase
Agreement, converting the taxes recoverable to cash, collecting the sale
proceeds from Zenith, the investment of the $50.8 million of sale
proceeds and interest collected from Zenith on March 26, 1999, efforts to
maximize asset recoveries, and the administration of the day-to-day
activities of the surviving corporate entities. Compliance with the
provisions of the Asset Purchase Agreement included the transfer of all
of the assets and liabilities, not retained by the Company, to Zenith,
and assisting with the orderly transition of the Company's insurance
operations to Zenith.
SIX MONTHS ENDED JUNE 30, 1999
An analysis of certain balances contained on the June 30, 1999
consolidated balance sheet is as follows:
- At June 30, 1999, the $15 million of restricted cash and cash
equivalents consisted of $12.8 million held in escrow in
connection with the sale to Zenith, $1.9 million on deposit with
various governmental agencies, and $0.3 million pledged to secure
a letter of credit.
- The $51 million increase in investments in the first six months of
1999 resulted from the collection and subsequent investment of the
proceeds from the sale to Zenith and of certain tax refunds.
- The decrease in the amount of the receivable from Zenith from
December 31, 1998 to June 30, 1999 resulted from the collection of
the remaining receivable from the sale to Zenith in March 1999.
- The decrease in other assets from December 31, 1998 to June 30,
1999 resulted from the collection of interest due from the sale to
Zenith in March 1999.
- The $4.8 million of prepaid expenses at June 30, 1999 consisted of
$3.7 million of prepaid insurance coverages and $1.1 million of
retainers paid to certain professionals and consultants.
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- A summary of the accrued expenses and other liabilities at June
30, 1999 is as follows (in millions):
<TABLE>
<S> <C>
Payable to Zenith $ 6.2 (1)
Income taxes payable 1.7
Other accruals and payables 1.2
Accrued legal, accounting, auditing,
and actuarial services 1.1
Trade accounts payable 0.5
Other 0.3
-------
Total $ 11.0
=======
</TABLE>
(1) Based on the Settlement Agreement, as more fully
discussed in Note 2 to the consolidated financial
statements.
The Company's operating results for the six months ended June 30, 1999
resulted in a net loss of $4.2 million.
The $3 million of net investment income for the six months ended June 30,
1999 consisted of $1.3 million of interest income on the receivable from
Zenith, $0.2 million of interest income on the $12.8 million balance in
escrow, and $1.5 million of investment portfolio income.
Operating expenses for the six months ended June 30, 1999 totaled $5.7
million and consisted of the following:
- The $4.4 million of commissions, underwriting, and administrative
expenses consisted of $0.6 million of management expenses, $0.7
million of accounting and auditing expenses, $1.6 million of legal
expenses, $0.6 million of recurring operating expenses such as
rent, telephone, insurance, and similar costs, and $0.9 million of
other expenses.
- The $1.2 million of interest expense consisted principally of the
interest paid in March 1999 on the settlement of a class action
lawsuit.
- Depreciation and amortization expense was $76,000. The Company
transferred all assets subject to amortization to Zenith in
connection with the sale and retained $0.4 million of fixed assets
(consisting principally of computer equipment) that are being
depreciated over three years.
As of June 30, 1999, the Company recorded an additional net loss of $4.8
million on the sale to Zenith due to the final terms of the Settlement
Agreement, as discussed more fully in Note 2 to the consolidated
financial statements.
The weighted average common and common share equivalents outstanding for
the six months ended June 30, 1999 was 37,419,156 as compared to
36,892,420 for the six months ended June 30, 1998. This includes, for
each period presented, the vested portion only, as of the end of such
period, of shares issued in April 1998 under a Restricted Stock Award
Agreement between RISCORP and Phoenix Management Company, Ltd.
15
<PAGE> 16
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
The Company's operating results for the three months ended June 30, 1999
and 1998 resulted in a net loss of $3.4 million and $6.2 million,
respectively.
The components of net investment income for the three months ended June
30, 1999 and 1998 are summarized as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
----- ------
<S> <C> <C>
Interest income on the Zenith sale
proceeds $ 0.1 $ 1.6
Interest income on the balance in escrow 0.1 0.1
Other investment income 1.0 0.6
----- -----
Total $ 1.2 $ 2.3
===== =====
</TABLE>
The components of commissions, underwriting, and administrative expenses
for the three months ended June 30, 1999 and 1998 are summarized as
follows (in millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Management expenses $ 0.3 $ 0.4
Accounting and auditing expenses 0.4 0.3
Transition expenses incurred as a result
of the sale to Zenith 0.1 0.3
Legal expenses 1.3 0.3
Recurring operating expenses
(rent, telephone, insurance, and
similar costs) 0.4 1.0
Other expenses 0.7 0.8
Significant non-recurring expenses
discussed below -- 8.3
----- ------
Total $ 3.2 $ 11.4
===== ======
</TABLE>
Interest expense (income) for the three months ended June 30, 1999 and
1998 was $(0.2) million and $8,255, respectively. The 1999 interest item
is net of $0.3 million reimbursed to the Company by RISCORP's majority
shareholder for interest previously paid by the Company on the
shareholder's behalf.
Operating expenses for the three months ended June 30, 1998 included
three significant non-recurring expenses that arose due to the sale to
Zenith, namely, $3.2 million of severance payments to certain of the
Company's former executives and employees, $4.1 million for the issuance
of RISCORP stock to Phoenix Management Company, Ltd. in accordance with a
Restricted Stock Award Agreement, and $1 million of adjustments to the
Proposed Business Balance Sheet.
As of June 30, 1999, the Company recorded an additional net loss of $4.8
million on the sale to Zenith due to the terms of the Settlement
Agreement, as discussed more fully in Note 2 to the consolidated
financial statements.
Depreciation and amortization expense was $36,000 and $31,000 for the
three months ended June 30, 1999 and 1998, respectively. The Company
transferred all assets subject to amortization to Zenith in
16
<PAGE> 17
connection with the sale and retained $0.4 million of fixed assets
(consisting principally of computer equipment) that is being depreciated
over three years.
The weighted average common and common share equivalents outstanding for
the three months ended June 30, 1999 was 37,491,031 as compared to
36,916,725 for the three months ended June 30, 1998. This includes, for
each period presented, the vested portion only, as of the end of such
period, of shares issued in April 1998 under a Restricted Stock Award
Agreement between RISCORP and Phoenix Management Company, Ltd.
THREE MONTHS ENDED MARCH 31, 1998
The discussion that follows relates to the operations and operating
philosophy of the Company's activities that existed prior to April 1,
1998 and addresses the operating results for the three months ended March
31, 1998.
Prior to 1996, the Company's at-risk operations were focused in Florida.
During 1996, the Company acquired RNIC and its 19 state licenses and
assumed business from several self insurance funds outside of Florida
which allowed the Company to diversify its at-risk operations.
The majority of the Company's premiums were written in Florida, a
regulated pricing state where premiums for guaranteed cost products were
based on state-approved rates. However, prior to the sale to Zenith, the
Company also offered policies that were subject to premium reductions on
high deductible plans, participating dividend plans, or other loss
sensitive plans. Pricing for those plans tended to be more competitively
based, and the Company experienced increased competition during 1997 and
1998 in pricing those plans.
In June 1997, the Company implemented a strategic plan to consolidate
several of its field offices and announced its intention to close all
field offices, except Charlotte, North Carolina, and Birmingham, Alabama,
by the end of 1997, and to cease writing new business in certain states,
including Oklahoma, Virginia, Missouri, Mississippi, Louisiana, and
Kansas. The estimated impact of the decision to discontinue writing
business in those states was a reduction of $16 million in direct
premiums written.
The Company attempted 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 was to seek recoveries
for claims that were reinsured or that could be subrogated or submitted
for reimbursement under various states' recovery programs. As a result,
the Company's losses and loss adjustment expenses were 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").
17
<PAGE> 18
The direct, assumed, ceded, and net earned premiums for the first quarter
of 1998 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Direct premiums earned $ 48,416
Assumed premiums earned 79
Premiums ceded to reinsurers (22,676)
---------
Net premiums earned $ 25,819
========
</TABLE>
There were no direct, assumed, ceded, or net earned premiums after the
April 1, 1998 sale to Zenith. At March 31, 1998, there were 18,145
policies in force.
Fee income for the first three months of 1998 was $5.7 million. After
April 1, 1998, the Company ceased generating fee income when those
activities were transferred to Zenith.
Net realized gains during the first quarter of 1998 were $1.5 million,
consisting principally of the $1.3 million gain on the sale of an
interest in a joint venture.
Net investment income for the three months ended March 31, 1998 was $3.3
million, consisting entirely of earnings from the investment portfolio,
excluding realized gains and losses.
For the three months ended March 31, 1998, the loss ratio was 93 percent,
losses and loss adjustment expenses were $24 million, unallocated loss
adjustment expenses were $2.6 million, commissions, underwriting, and
administrative expenses were $15.5 million, interest expense was $0.5
million, and depreciation and amortization expense was $3.1 million.
The weighted average common and common share equivalents outstanding for
the three months ended March 31, 1998 was 36,868,114.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically met its cash requirements and financed its
growth through cash flows generated from operations and borrowings. The
Company's primary sources of cash flow from operations were premiums and
investment income, and its cash requirements consisted principally 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 the insurance
subsidiaries, and other general and administrative expenses. RISCORP and
certain of its subsidiaries sold substantially all of their assets and
transferred certain liabilities to Zenith on April 1, 1998. In connection
with that sale to Zenith, the Company ceased substantially all of its
former business operations and, accordingly, after April 1, 1998, the
Company's primary source of cash flows has been generated from investment
income. The Company's future cash requirements are expected to be
satisfied through investment income and the liquidation of investments.
Cash flows from operations for the six months ended June 30, 1999 and
1998 was $2.2 million and ($15.8) million, respectively. The change from
1998 to 1999 was due primarily to the sale to Zenith and the cessation of
substantially all the Company's former business operations.
18
<PAGE> 19
The Company has projected cash flows through December 1999 and believes
it has sufficient liquidity and capital resources to support its
operations.
As of June 30, 1999 and 1998, RISCORP's insurance subsidiaries had
combined statutory capital and surplus of $129.8 million and $151.9
million, respectively. The individual capital and surplus of each of
RISCORP's insurance subsidiaries exceeded the minimum statutory capital
and surplus required by their respective state of domicile.
The National Association of Insurance Commissioners has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based on 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 that 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. Those 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, 1998,
RISCORP's insurance subsidiaries' statutory surplus was in excess of any
risk-based capital action level requirements.
YEAR 2000
The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing of date and
date-sensitive calculations by computers and other machinery as the Year
2000 is approached and reached. These problems may arise from hardware
and software unable to distinguish dates in the "2000's" from dates in
the "1900's" and from other sources, such as the use of special codes and
conventions that make use of a date field.
Effective April 1, 1998, RISCORP ceased substantially all of its former
business operations, including its core insurance and managerial services
operations. RISCORP's computer systems and proprietary computer software,
including the policy issue and management system and the claims systems,
were included in the assets sold to Zenith pursuant to the Asset Purchase
Agreement.
Effective April 1, 1998, the Company entered into a computer outsourcing
agreement. Under the terms of that agreement, the vendor is to provide
the Company with computer configuration, software installation, network
configuration and maintenance, telecommunication coordination, computer
maintenance, and other computer-related services. The agreement is for a
period of 36 months.
Due to the cessation of its operations, RISCORP does not believe it has
any material third-party relationships that present significant Year 2000
risks. The Company has requested confirmation from the financial
institutions with which it maintains accounts that such institutions are
Year 2000 compliant.
Based on its limited operations, the Company believes its most reasonable
likely worst case scenario Year 2000 problem would be a temporary
inability to access its accounts with financial institutions if such
institutions' systems are not Year 2000 compliant. Because the Company
does not expect that the Year 2000 will have a material adverse effect on
the Company, it has determined that it is unnecessary to develop a
contingency plan.
19
<PAGE> 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about January 11, 1999, Zenith filed a lawsuit against RISCORP
and certain of its subsidiaries in federal court in New York setting
forth 14 separate causes of action arising out of the Asset Purchase
Agreement and certain ancillary agreements. The complaint sought an
unspecified total amount of damages, but the amount of compensatory
damages sought was in excess of $30 million, together with an
unspecified amount of punitive damages and attorneys' fees. As more
fully disclosed in Note 2 of the consolidated financial statements,
on July 7, 1999, the Company and Zenith settled those claims and, in
connection therewith, this lawsuit has been dismissed with prejudice
by Zenith.
On August 20, 1997, the Occupational Safety Association of Alabama
Workers' Compensation Fund (the "Fund"), an Alabama self-insured
workers' compensation fund, filed a breach of contract and fraud
action against the Company and others. The Fund entered into a Loss
Portfolio Transfer and Assumption Reinsurance Agreement dated August
26, 1996 and effective September 1, 1996 with RNIC. 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. Co-defendant Peter D. Norman ("Norman") was a
principal and officer of IAA prior to its acquisition by RISCORP in
September 1996. The complaint alleges that Norman and IAA breached
certain fiduciary duties owed to the Fund in connection with the
subject agreement and transfer. The complaint alleges that RISCORP
has breached certain provisions of the agreement and owes the Fund
monies under the terms of the agreement. The Fund claims, per a Loss
Portfolio Evaluation dated February 26, 1998, that the Fund overpaid
RNIC by $6 million in the subject transaction. The court has granted
RNIC's Motion to Compel Arbitration per the terms and provisions of
the agreement. On December 1, 1998, the trial court issued an order
prohibiting the American Arbitration Association from administering
the arbitration between RNIC and the fund, and RNIC has appealed the
trial court's ruling. The Alabama Supreme Court has stayed the
current arbitration. Despite the Alabama Supreme Court's stay, the
dispute between the Fund and RNIC is expected to be resolved through
arbitration. The other defendants, including IAA, have appealed to
the Supreme Court of Alabama the trial court's denial of their
motions to compel arbitration. RNIC intends to vigorously defend the
Fund's claim.
On March 13, 1998, RIC and RPC were added as defendants in a
purported class action lawsuit filed in the United States District
Court for the Southern District of Florida, styled Bristol Hotel
Management Corporation, et. al., v. Aetna Casualty & Surety Company,
a/k/a Aetna Group, et. al. Case No. 97-2240-CIV-MORENO. The
plaintiffs purport to bring this action on behalf of themselves and a
class consisting of all employers in the State of Florida who
purchased or renewed retrospectively rated or adjusted workers'
compensation policies in the voluntary market since 1985. The suit
was originally filed on July 17, 1997 against approximately 174
workers' compensation insurers as defendants. The complaint was
subsequently amended to add the RISCORP defendants. The amended
complaint named a total of approximately 161 insurer defendants. The
suit claims that the defendant insurance companies violated the
Sherman Antitrust Act, the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), and the Florida Antitrust Act, committed
breach of contract and civil conspiracy, and were unjustly enriched
by unlawfully adding improper and illegal charges and fees onto
retrospectively rated premiums and otherwise charging more for those
policies than allowed by law. The suit seeks compensatory and
punitive damages, treble damages under the Antitrust and RICO claims,
and equitable relief. RIC and RPC moved to dismiss the amended
complaint and have also filed certain motions to dismiss the amended
complaint filed by various other defendants.
20
<PAGE> 21
On August 26, 1998, the district court issued an order dismissing the
entire suit against all defendants on one of the grounds identified
in the various motions to dismiss filed by the defendants. The
district court indicated that all other grounds and motions to
dismiss that were pending at that time were mooted by the dismissal.
On September 13, 1998, the plaintiffs filed a Notice of Appeal. On
February 9, 1999, the district court issued, sua sponte, an Order of
Reconsideration in which the court indicated its desire to vacate the
dismissal of the RICO claims and pendant state claims based on a
recent decision of the United States Supreme Court. On March 17,
1999, plaintiffs-appellants filed an unopposed motion to remand the
action to the district court, citing the Order of Reconsideration. On
June 9, 1999, the Eleventh Circuit remanded the case to the district
court. Management will resume its vigorous defense of the case once
district court proceedings recommence.
On July 9, 1999, a shareholder class action lawsuit was filed against
the Company, two of its executive officers, and two former executive
officers in the United States District Court for the Middle District
of Florida. The plaintiff in this action purports to represent the
class of shareholders who purchased shares of RISCORP's Class A
Common Stock between November 19, 1997 and July 20, 1998. The
complaint alleges, among other things, that the financial statements
included in the periodic reports filed by RISCORP with the Securities
and Exchange Commission during the class period contain false and
misleading statements of material fact and omissions, in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder. These allegations
principally relate to the difference between the net book value of
the Company as reflected on its published financial statements during
the class period and the net book value of the assets transferred to
Zenith as determined by the neutral auditors and neutral actuaries
pursuant to the terms of the Asset Purchase Agreement between the
parties. The complaint seeks unspecified compensatory damages.
RISCORP believes that these claims are without merit and intends to
vigorously defend this suit.
The Company, in the ordinary course of business, is party to various
lawsuits. Based on information presently available, and in the light
of legal and other defenses available to the Company, contingent
liabilities arising from such threatened and pending litigation in
the ordinary course of business are not presently considered by
management to be material.
Other than as noted herein, no provision had been made in the
accompanying consolidated financial statements for the foregoing
matters. Certain of the related legal expenses may be covered under
directors and officers' insurance coverage maintained by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 1999, the Company held its 1999 Annual Meeting of
Shareholders. The shareholders voted upon one proposal, to elect
Frederick M. Dawson, Seddon Goode, Jr., George E. Greene III and
Walter L. Revell to serve as directors of the Company until the next
annual meeting of
21
<PAGE> 22
shareholders and until their successors are elected and qualified.
Pursuant to the Company's Amended and Restated Articles of Incorporation,
holders of Class B Common Stock are entitled to 10 votes per share and
the holders of Class A Common Stock are entitled to one vote per share on
all matters to be voted on by the shareholders of the Company. There were
24,334,443 Class B votes cast "for" each of the nominees for director,
consisting of 100 percent of the outstanding shares of Class B Common
Stock. Holders of Class A Common Stock voted their shares as set forth
below for each of the nominees:
<TABLE>
<CAPTION>
FOR WITHHELD
SHARES VOTES SHARES VOTES
<S> <C> <C> <C> <C> <C>
Frederick M. Dawson Class A 7,964,703 7,964,703 79,398 79,398
Seldon Goode, Jr. Class A 7,960,788 7,960,788 83,313 83,313
George E. Greene III Class A 7,960,788 7,960,788 83,313 83,313
Walter L. Revell Class A 7,960,788 7,960,788 83,313 83,313
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Form of Director Indemnity Agreement
10.2 Settlement Agreement with Zenith Insurance Company
11 Statement Re Computation of Per Share Net Loss
27 Financial Data Schedules
b) Reports on Form 8-K
RISCORP filed a report on Form 8-K on May 14, 1999 with
respect to the Shareholder Protection Rights Agreement adopted
by RISCORP.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities 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/ Walter E. Riehemann
-----------------------------------
Walter E. Riehemann
Senior Vice President and Secretary
Date:
By: /s/ Edward W. Buttner
-----------------------------------
Edward W. Buttner IV, CPA
Principal Accounting Officer
Date: August 16, 1999
23
<PAGE> 1
EXHIBIT 10.1
FORM OF
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this "Agreement") is entered into as of the
___ day of ________, 1998, between RISCORP, Inc., a Florida corporation (the
"Corporation"), and _____________ ("Indemnitee").
WHEREAS, it is essential to the Corporation to retain and attract as
directors and officers the most capable persons available; and
WHEREAS, Indemnitee is a director [and officer] of the Corporation and
from time to time may also serve at the Corporation's request as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, limited liability company, joint venture, trust,
employee benefit plan, or other entity; and
WHEREAS, both the Corporation and Indemnitee recognize the risk of
litigation and other claims being asserted against directors and officers of
business corporations in today's environment; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability and in order to enhance Indemnitee's continued
service to the Corporation and such other entities in an effective manner, the
Corporation desires to extend to Indemnitee the contractual rights to
indemnification and advancement of expenses as provided herein;
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions for Purposes of this Agreement. The
following terms as used in this Agreement shall have the meanings set forth
below.
(a) "Change in Control" shall have occurred if, during any period
of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the
Corporation cease for any reason to constitute at least a
majority thereof, unless the election of each new Director was
approved in advance by a vote of at least a majority of the
Directors then still in office who were Directors at the
beginning of the period.
(b) "Corporation" includes any domestic or foreign predecessor
entity of the Corporation in a merger or other transaction in
which the predecessor's existence ceased upon consummation of
the transaction.
<PAGE> 2
(c) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the
Corporation, is or was serving at the Corporation's request as
a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, limited
liability company, joint venture, trust, employee benefit
plan, or other entity. A Director is considered to be serving
an employee benefit plan at the Corporation's request if his
duties to the Corporation also impose duties on, or otherwise
involve services by, him to the plan or to participants in or
beneficiaries of the plan. "Director" includes, unless the
context requires otherwise, the estate or personal
representative of a Director.
(d) "Disinterested Director" or "Disinterested Officer" means a
Director or Officer, respectively, who at the time of a vote
or selection referred to in Section 3(c) or 4(b) is not a
Party to the Proceeding.
(e) "Expenses" includes all reasonable counsel fees, retainers,
court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding
costs, telephone charges, postage, delivery service fees, and
all other disbursements or expenses of the types customarily
incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, being or preparing to
be a witness in, or otherwise participating in, a Proceeding,
including any appeals.
(f) "Independent Legal Counsel" shall mean a law firm, or a member
of a law firm, that is experienced in matters of corporation
law and neither at the time of retention is, nor in the five
years preceding the date of such retention has been, retained
to represent (i) the Corporation or Indemnitee in any matter
material to either such party or (ii) any other Party to the
Proceeding giving rise to a claim for indemnification under
this Agreement. Notwithstanding the foregoing, the term
"Independent Legal Counsel" shall not include any person who,
under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing
either the Corporation or Indemnitee in an action to determine
Indemnitee's rights under this Agreement.
(g) "Liability" includes the obligation to pay a judgment,
settlement, penalty, fine (including an excise tax assessed
with respect to an employee benefit plan), or reasonable
Expenses actually incurred with respect to a Proceeding.
(h) "Officer" means an individual who is or was an officer of the
Corporation or an individual who, while an officer of the
Corporation, is or was serving at the Corporation's request as
a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation,
-2-
<PAGE> 3
partnership, limited liability company, joint venture, trust,
employee benefit plan, or other entity. An Officer is
considered to be serving an employee benefit plan at the
Corporation's request if his duties to the Corporation also
impose duties on, or otherwise involve services by, him to the
plan or to participants in or beneficiaries of the plan.
"Officer" includes, unless the context requires otherwise, the
estate or personal representative of an Officer.
(i) "Party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in a Proceeding.
(j) "Proceeding" includes any threatened, pending, or completed
action, suit, or other type of proceeding, whether civil,
criminal, administrative, arbitrative or investigative and
whether formal or informal.
(k) "Reviewing Party" shall mean the person or persons making the
entitlement determination pursuant to Section 4 of this
Agreement, and shall not include a court making any
determination under this Agreement or otherwise.
2. Basic Indemnification Arrangement.
(a) Obligation to Indemnify; Standard of Conduct. Except as
provided in Sections 2(e), 2(f), 2(g) or 6 below, the
Corporation shall indemnify Indemnitee in the event Indemnitee
is made a Party to a Proceeding because he is or was a
Director or Officer against Liability incurred in the
Proceeding if:
(1) Indemnitee conducted himself in good faith
and in a manner he reasonably believed to be
in, or not opposed to, the best interests of
the Corporation; and
(2) In the case of any criminal Proceeding,
Indemnitee had no reasonable cause to
believe such conduct was unlawful.
(b) Service with Respect to Employee Benefit Plan. Indemnitee's
conduct with respect to an employee benefit plan for a purpose
he believed in good faith to be in the interests of the
participants in and beneficiaries of the plan is conduct that
satisfies the requirement of Section 2(a)(1).
(c) Reliance as Safe Harbor. For purposes of any determination of
good faith, Indemnitee shall be deemed to have acted in good
faith if Indemnitee's conduct was based primarily on the
records or books of account of the Corporation or relevant
entity, including financial statements, or on information
supplied to Indemnitee by the officers of the Corporation or
-3-
<PAGE> 4
relevant entity in the course of their duties, or on the
advice of legal counsel for the Corporation or relevant
entity, or on information or records given or reports made to
the Corporation or relevant entity by an independent certified
public accountant, or by an appraiser or other expert selected
with reasonable care by the Corporation or relevant entity.
The provisions of this Section 2(c) shall not be deemed to be
exclusive or to limit in any way the other circumstances in
which Indemnitee may be deemed to have met the relevant
standard of conduct set forth in this Agreement.
(d) Termination of Proceeding Not Determinative. The termination
of a Proceeding by judgment, order, settlement, or conviction,
or upon a plea of nolo contendere or its equivalent shall not,
of itself, create a presumption or be determinative that
Indemnitee did not meet the relevant standard of conduct set
forth in Section 2(a).
(e) Limits on Indemnification. Unless, and then only to the extent
that, a court of competent jurisdiction acting pursuant to
Section 5 of this Agreement or Section 607.0850(9) of the
Florida Business Corporation Act, determines that, in view of
the circumstances of the case, Indemnitee is fairly and
reasonably entitled to indemnification, the Corporation shall
not indemnify Indemnitee under this Agreement:
(1) In connection with a Proceeding by or in the right of
the Corporation, except for reasonable Expenses
(including an excise tax assessed with respect to an
employee benefit plan) and amounts paid in settlement
not exceeding, in the judgment of the Board, the
estimated expense of litigating the Proceeding to
conclusion, actually and reasonably incurred in
connection with the defense or settlement of the
Proceeding, including any appeal thereof; or
(2) In connection with a Proceeding by or in the right of
the Corporation with respect to any claim, issue or
matter as to which Indemnitee shall have been
adjudged liable to the Corporation.
(f) Proceeding Brought by Indemnitee. Notwithstanding any other
provision of this Agreement, Indemnitee shall not be entitled
to indemnification or advancement of Expenses hereunder with
respect to any Proceeding or claim brought or made by him
against the Corporation, other than a Proceeding or claim
seeking or defending Indemnitee's right to indemnification or
advancement of Expenses pursuant to Section 5 hereof or
otherwise.
(g) Settlements. Notwithstanding any other provision of this
Agreement, the Corporation shall not be liable for any amount
paid by Indemnitee in
-4-
<PAGE> 5
settlement of any Proceeding that is not defended by the
Corporation, unless the Corporation has consented to such
settlement, which consent shall not be unreasonably withheld.
The Corporation shall not be required to obtain the consent of
Indemnitee to the settlement of any Proceeding which the
Corporation has undertaken to defend if the Corporation
assumes full and sole responsibility for such settlement and
the settlement grants Indemnitee a complete and unqualified
release in respect of the potential Liability.
(h) Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement or otherwise to indemnification by
the Corporation for some portion of Liability incurred by him,
but not the total amount thereof, the Corporation shall
indemnify Indemnitee for the portion of such Liability to
which he is entitled.
(i) Mandatory Indemnification. The Corporation shall indemnify
Indemnitee to the extent that he has been successful, on the
merits or otherwise, in the defense of any Proceeding to which
he was a Party, or in defense of any claim, issue or matter
therein, because he is or was a Director or Officer, against
reasonable Expenses incurred by him in connection with the
Proceeding.
3. Advances for Expenses.
(a) Obligations and Requirements. The Corporation shall, before
final disposition of a Proceeding, advance funds to pay for or
reimburse the reasonable Expenses incurred by Indemnitee as a
Party to such Proceeding if Indemnitee delivers to the
Corporation Indemnitee's written undertaking (meeting the
qualifications set forth below in Section 3(b)) to repay any
funds advanced if it is ultimately determined that Indemnitee
is not entitled to indemnification under this Agreement, the
Florida Business Corporation Act or otherwise.
(b) Undertaking. The undertaking required by Section 3(a) above
must be an unlimited general obligation of Indemnitee but need
not be secured and shall be accepted without reference to
Indemnitee's financial ability to make repayment. If
Indemnitee seeks to enforce his rights to indemnification in a
court pursuant to Section 5, such undertaking to repay shall
not be applicable or enforceable unless and until there is a
final court determination that he is not entitled to
indemnification, as to which all rights of appeal have been
exhausted or have expired.
(c) Evaluation of Reasonableness of Expenses. Evaluation as to
reasonableness of Expenses of Indemnitee in the specific case
shall be made in the same manner as the determination that
indemnification is permissible, as described in Section 4(b)
below, except that if the determination is made
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<PAGE> 6
by Independent Legal Counsel, evaluation as to reasonableness
of Expenses shall be made by those entitled under Section
4(b)(3) to select Independent Legal Counsel. Notwithstanding
the foregoing sentence, any Expenses claimed by Indemnitee
shall be deemed reasonable if the Reviewing Party fails to
make the reasonableness evaluation within fifteen (15) days
following the later of (i) the Corporation's receipt of the
undertaking required by Section 3(a), or (ii) the
Corporation's receipt of invoices for specific Expenses to be
reimbursed or advanced.
(d) Timing of Payments. Subject to Section 3(c) above,
reimbursement or advances for Expenses under this Section 3
shall be made not later than thirty (30) days after the later
of (i) the Corporation's receipt of the undertaking required
by Section 3(a), or (ii) the Corporation's receipt of invoices
for specific Expenses to be reimbursed or advanced.
4. Authorization of and Determination of Entitlement to
Indemnification.
(a) Entitlement Determination. The Corporation and Indemnitee
hereby acknowledge that indemnification of Indemnitee under
Section 2 of this Agreement has been pre-authorized by the
Corporation as permitted by the Florida Business Corporation
Act. Nevertheless, the Corporation shall not indemnify
Indemnitee under Section 2 unless a separate determination has
been made in the specific case that indemnification of
Indemnitee is permissible in the circumstances because he has
met the relevant standard of conduct set forth in Section
2(a); provided, however, that (i) no such entitlement decision
need be made prior to the advancement of Expenses, and (ii)
regardless of the result or absence of any such determination,
the Corporation shall make any indemnification mandated by
Section 2(i) above.
(b) Reviewing Party. The determination referred to in Section 4(a)
shall be made, at the election of the Board of Directors, by
any of the following Reviewing Parties (unless a Change in
Control shall have occurred after Indemnitee first began
serving as a Director or Officer, in which case Indemnitee
shall be entitled to designate that the determination shall be
made by Independent Legal Counsel selected in the manner set
forth in Section 4(c) below):
(1) By the Board of Directors by a majority vote of a
quorum consisting of Disinterested Directors; or
(2) By a majority vote of a committee duly designated by
the Board of Directors (in which designation
directors who do not qualify as Disinterested
Directors may participate) consisting solely of two
or more Disinterested Directors; or
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<PAGE> 7
(3) By Independent Legal Counsel:
(A) Selected in the manner prescribed in
paragraph (1) or (2) of this Section 4(b);
or
(B) If a quorum of Directors cannot be obtained
for purposes of paragraph (1) and the
committee cannot be designated under
paragraph (2), selected by a majority vote
of the full Board of Directors (in which
selection directors who do not qualify as
Disinterested Directors may participate); or
(4) By the shareholders of the Corporation, by a majority
vote of a quorum consisting of shareholders who were
not Parties to such Proceeding or, if no such quorum
is obtainable, by a majority vote of shareholders who
were not Parties to such Proceeding.
(c) Selection of Counsel after Change in Control. If a Change in
Control shall have occurred, Independent Legal Counsel shall
be selected by Indemnitee (unless Indemnitee requests that
such selection be made in the manner described in Section
4(b)(3)), and Indemnitee shall give written notice to the
Corporation advising it of the identity of the Independent
Legal Counsel so selected. In either event, Indemnitee or the
Corporation, as the case may be, may, within ten (10) days
after such written notice of selection has been given, deliver
to the Corporation or to Indemnitee, as the case may be, a
written objection to such selection; provided, however, that
such objection may be asserted only on the ground that such
counsel so selected does not meet the requirements of
"Independent Legal Counsel" as defined in Section 1 of this
Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. If such
written objection is so made and substantiated, the counsel so
selected may not serve as Independent Legal Counsel unless and
until such objection is withdrawn or a court has determined
that such objection is without merit. If, within twenty (20)
days after submission by Indemnitee of a written request for
indemnification, no Independent Legal Counsel shall have been
selected and not objected to, either the Corporation or
Indemnitee may petition the court conducting the Proceeding,
or another court of competent jurisdiction, for resolution of
any objection which shall have been made by the Corporation or
Indemnitee to the other's selection of Independent Legal
Counsel and/or for the appointment as Independent Legal
Counsel of a person selected by the court or by such other
person as the court shall designate, and the person with
respect to whom all objections are so resolved or the person
so appointed shall act as Independent Legal Counsel under
Section 4(b).
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<PAGE> 8
(d) Cooperation by Indemnitee. Indemnitee shall cooperate with the
Reviewing Party with respect to its determination of
Indemnitee's entitlement to indemnification, including
providing to the Reviewing Party upon reasonable advance
request any documentation or information which is not
privileged or otherwise protected from disclosure and which is
reasonably available to Indemnitee and reasonably necessary to
such determination. Any Expenses incurred by Indemnitee in so
cooperating with the Reviewing Party shall be borne by the
Corporation (irrespective of the determination as to
Indemnitee's entitlement to indemnification).
(e) Other.
(i) The Reviewing Party, however chosen, shall
make the requested determination as promptly as reasonably
practicable after a request for indemnification is presented.
(ii) Any determination by Independent Legal
Counsel under this Section 4 shall be delivered in the form of
a written option to the Board of Directors with a copy to
Indemnitee.
(iii) The Corporation shall pay any and all
reasonable fees and expenses of Independent Legal Counsel
incurred by such counsel in connection with acting pursuant to
Section 4(b), and the Corporation shall pay all reasonable
fees and expenses incident to the procedures of Section 4(d),
regardless of the manner in which such Independent Legal
Counsel was selected or appointed.
(iv) Upon the due commencement of any action to
seek court-ordered indemnification pursuant to Section 5 of
this Agreement, Independent Legal Counsel shall be discharged
and relieved of any further responsibility in such capacity
(subject to the applicable standards of professional conduct
then prevailing).
5. Court-Ordered Indemnification and Advances for Expenses.
(a) Procedure. If Indemnitee is a Party to a Proceeding, he may
apply for indemnification or for advances for Expenses to the
court conducting the Proceeding or to another court of
competent jurisdiction. For purposes of this Agreement, the
Corporation hereby consents to personal jurisdiction and venue
in any court in which is pending a Proceeding to which
Indemnitee is a Party. Regardless of any determination by the
Reviewing Party that Indemnitee is not entitled to
indemnification or to advancement of Expenses or as to the
reasonableness of Expenses, and regardless of any failure by
the Reviewing Party to make a determination as to such
entitlement or the reasonableness of Expenses, such court's
review shall be
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<PAGE> 9
a de novo review. After receipt of an application and after
giving any notice it considers necessary, the court may:
(1) Order indemnification or the advance for Expenses if
it determines that Indemnitee is entitled to
indemnification or to advance for Expenses under this
Agreement, the Florida Business Corporation Act or
otherwise; or
(2) Order indemnification or the advance for Expenses if
it determines that, in view of all the relevant
circumstances, it is fair and reasonable to indemnify
Indemnitee, or to advance Expenses to Indemnitee,
regardless of whether Indemnitee has the relevant
standard of conduct, complied with the requirements
for advancement of Expenses, or been adjudged liable
in a Proceeding referred to in Section 2(e) above (in
which case any court-ordered indemnification need not
be limited to Expenses incurred by Indemnitee, but
may include penalties, fines, amounts paid in
settlement, judgments and any other amounts ordered
by the court to be indemnified or advanced).
(b) Payment of Expenses to Seek Court-Ordered Indemnification. If
the court determines that Indemnitee is entitled to
indemnification or to advance for Expenses, the Corporation
shall pay Indemnitee's reasonable Expenses to obtain such
court-ordered indemnification or advance for Expenses.
6. Limitations on Indemnification. Regardless of whether
Indemnitee has met the relevant standard of conduct set forth in Section 2(a),
nothing in this Agreement shall require or permit indemnification of Indemnitee
for any Liability or Expenses incurred in a Proceeding in which a judgment or
other final adjudication establishes that Indemnitee's actions, or omissions to
act, were material to the cause of action so adjudicated and constitute:
(a) a violation of criminal law, unless Indemnitee had reasonable
cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful;
(b) a transaction from which Indemnitee derived an improper
personal benefit;
(c) in the case of a Director, a circumstance under which the
liability provisions of Section 607.0834 of the Florida
Business Corporation Act are applicable; or
(d) willful misconduct or a conscious disregard for the best
interests of the Corporation in a Proceeding by or in the
right of the Corporation to
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<PAGE> 10
procure a judgment in its favor or in a Proceeding by or in
the right of a shareholder of the Corporation.
7. Vested Rights; Specific Performance. No amendment to the
Articles of Incorporation or Bylaws of the Corporation or any other corporate
action shall in any way limit Indemnitee's rights under this Agreement. In any
Proceeding brought by or on behalf of Indemnitee to specifically enforce the
provisions of this Agreement, the Corporation hereby waives the claim or defense
therein that the plaintiff or claimant has an adequate remedy at law, and the
Corporation shall not urge in any such Proceeding the claim or defense that such
remedy at law exists. The provisions of this Section 7, however, shall not
prevent Indemnitee from seeking a remedy at law in connection with any breach of
this Agreement.
8. Liability Insurance. To the extent the Corporation maintains
an insurance policy or policies providing directors' or officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage provided under
such policy or policies in effect for any other Director or Officer of the
Corporation, as the case may be.
9. Witness Fees. Nothing in this Agreement shall limit the
Corporation's power to pay or reimburse Expenses incurred by Indemnitee in
connection with his appearance as a witness in a Proceeding at a time when he
has not been made a named defendant or respondent in the Proceeding.
10. Security for Indemnification Obligations. The Corporation may
at any time and in any manner, at the discretion of the Board of Directors,
secure the Corporation's obligations to indemnify or advance Expenses to
Indemnitee pursuant to this Agreement.
11. Non-exclusivity, No Duplication of Payments. The rights of
Indemnitee hereunder shall be in addition to any other rights with respect to
indemnification, advancement of Expenses or otherwise that Indemnitee may have
under the Corporation's Articles of Incorporation or Bylaws, the Florida
Business Corporation Act or otherwise; provided, however, that the Corporation
shall not be liable under this Agreement to make any payment to Indemnitee
hereunder to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Articles of Incorporation or
Bylaws, or otherwise) of the amounts otherwise payable hereunder. The
Corporation's obligation to indemnify or advance expenses hereunder to
Indemnitee who is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of any other entity shall
be reduced by any amount Indemnitee has actually received as indemnification or
advancement of expenses from such other entity.
12. Amendments. To the extent that the provisions of this
Agreement are held to be inconsistent with the provisions of the Florida
Business Corporation Act (including Section 607.0850(7) thereof), such
provisions of such statute shall govern. To the extent that the Florida Business
Corporation Act is hereafter amended to permit a Florida
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<PAGE> 11
business corporation, without the need for shareholder approval, to provide to
its directors greater rights to indemnification or advancement of Expenses than
those specifically set forth hereinabove, this Agreement shall be deemed amended
to require such greater indemnification or more liberal advancement of Expenses
to Indemnitee, in each case consistent with the Florida Business Corporation Act
as so amended from time to time. Otherwise, no supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by the
Corporation and Indemnitee.
13. Subrogation. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Corporation effectively to
bring suit to enforce such rights.
14. Waiver. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
15. Binding Effect, Etc. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors or assigns (including any direct or indirect successor or
assign by purchase, merger, consolidation or otherwise to all or substantially
all of the business and/or assets of the Corporation), spouses, heirs, and
personal and legal representatives.
16. Applicability of Agreement. This Agreement shall apply
retroactively with respect to acts or omissions of Indemnitee occurring since
the date that Indemnitee first became a Director or Officer, and this Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a Director or Officer, but only in respect of acts or omissions occurring prior
to the termination of Indemnitee's service as a Director or Officer.
17. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal, or unenforceable for any reason
whatsoever: (a) the validity, legality, and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal, or unenforceable, that is not itself invalid, illegal, or
unenforceable) shall not in any way be affected or impaired thereby; (b) such
provision or provisions shall be deemed reformed to the extent necessary to
conform to applicable law and to give the maximum effect to the intent of the
parties hereto; and (c) to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of any Section of this
Agreement containing any such provision held to be invalid, illegal, or
unenforceable, that is not itself invalid, illegal, or unenforceable) shall be
construed so as to give effect to the intent manifested thereby.
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<PAGE> 12
18. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Florida
applicable to contracts made and to be performed in such state without giving
effect to the principles of conflicts of laws.
19. Headings. The headings of the Sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
20. Inducement. The Corporation expressly confirms and agrees that
it has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce Indemnitee to serve or continue to serve as a Director
and/or Officer, and the Corporation acknowledges that Indemnitee is relying upon
this Agreement in serving as a director, officer, employee or agent of the
Corporation or, at the request of the Corporation, as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, limited liability company, joint venture, trust, employee benefit
plan, or other entity.
21. Notice by the Indemnitee. Indemnitee agrees promptly to notify
the Corporation in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information, or other document relating to any
Proceeding or matter which may be subject to indemnification or advancement of
Expenses covered hereunder. The failure of Indemnitee so to notify the
Corporation shall not relieve the Corporation of any obligation which it may
have to Indemnitee under this Agreement or otherwise.
22. Notices. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed if to the Corporation, to the principal
office address of the Corporation, or if to Indemnitee, to the address of
Indemnitee last on file with the Corporation, or to such other address as may
have been furnished to Indemnitee by the Corporation or to the Corporation by
Indemnitee, as the case may be.
(signatures on following page)
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<PAGE> 13
Executed as of the date first above written.
RISCORP, INC.:
By:
--------------------------------
------------------------
INDEMNITEE:
-----------------------------------
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<PAGE> 1
EXHIBIT 10.2
SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT, dated as of July 7, 1999, is entered into by
and among Zenith Insurance Company, a California Corporation ("Zenith"),
RISCORP, Inc., a Florida corporation ("RISCORP, Inc."), RISCORP Management
Services, Inc., a Florida corporation ("RMS"), 1390 Main Street Services, Inc.,
a Florida corporation ("1390 Main Street"), 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"), a
Florida corporation, 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
Company, 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, Inc., RMS, 1390 Main Street, 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
"RISCORP" or the "RISCORP Companies."
<PAGE> 2
WITNESSETH:
WHEREAS:
A. Zenith and RISCORP are parties to (a) an Asset Purchase
Agreement, dated as of June 17, 1997, as subsequently amended on June 26, 1997,
July 11, 1997, and March 30, 1998 (the "Asset Purchase Agreement"); (b) an
Escrow Agreement with First Union National Bank as Escrow Agent dated April 1,
1998 (the "Escrow Agreement"); (c) a letter agreement dated April 1, 1998 (the
"Letter Agreement"); and (d) those documents and instruments listed on Exhibit A
hereto (together with the Escrow Agreement and the Letter Agreement, the
"Transaction Documents"). Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Asset Purchase
Agreement;
B. Pursuant to the Asset Purchase Agreement, on April 1, 1998,
Zenith acquired substantially all of RISCORP's assets and assumed certain of
RISCORP's liabilities (the "Asset Sale") for a purchase price equal to the
amount by which the book value of the Transferred Assets exceeded the book value
of the Transferred Liabilities as set forth on a Final Business Balance Sheet to
be determined in accordance with the procedures set forth in the Asset Purchase
Agreement;
C. On April 1, 1998, in connection with the closing of the Asset
Sale, Zenith paid RISCORP $35 million to be applied toward the final Purchase
Price payable pursuant to the Asset Purchase Agreement, $10 million of which was
deposited with the Escrow Agent to be distributed pursuant to the terms of the
Asset Purchase Agreement and the Escrow Agreement;
<PAGE> 3
D. The Letter Agreement contained certain provisions pursuant to
which certain of RISCORP's Assets would be deemed not to be Transferred Assets
for purposes of determining the Final Business Balance Sheet and the Purchase
Price payable pursuant to the Asset Purchase Agreement.
E. On October 16, 1998, RISCORP commenced an action against
Zenith in the United States District Court for the Middle District of Florida,
Tampa Division, captioned RISCORP, Inc., et al. v. Zenith Insurance Co., Case
No. 98-2122-CIV-T-25E (the "Florida Action"), in which RISCORP alleged various
claims against Zenith, including claims relating to Zenith's alleged breaches of
the Asset Purchase Agreement and the Letter Agreement;
F. On January 8, 1999, Zenith commenced an action in the United
States District Court for the Southern District of New York, captioned Zenith
Insurance Co. v. RISCORP, Inc., et al., Case No. 99 Civ. 0171 (WHP) (the "New
York Action"), in which Zenith asserted various claims against RISCORP,
including claims relating to RISCORP's alleged breaches of the Asset Purchase
Agreement;
G. On March 19, 1999, Arthur Andersen LLP ("Arthur Andersen"),
acting as Neutral Auditor and Neutral Actuary pursuant to the Asset Purchase
Agreement, issued (i) a report containing its determinations of certain issues
that Arthur Andersen found to be in dispute between the parties regarding the
manner in which certain items should be treated in the preparation of the Final
Business Balance Sheet; and (ii) its determination of the Final Business Balance
Sheet;
H. As a result of the issuance of the Final Business Balance
Sheet, (i) on or about March 26, 1999, Zenith wire transferred to RISCORP, Inc.
the sum of $50,853,182, and wire
<PAGE> 4
transferred to the Escrow Agent the sum of $2,835,723; and (ii) on April 14,
1999, Zenith wire transferred to RISCORP, Inc. the sum of $619,173.32;
I. The parties agree that in determining the final Purchase Price
to be paid by Zenith in connection with the Asset Sale certain adjustments to
the Final Business Balance Sheet are required based on (i) certain provisions of
the Letter Agreement; (ii) the value of certain assets identified on Exhibit F-1
included among the Transferred Assets on the Final Business Balance Sheet that
in fact were not transferred to Zenith, and (iii) the value of a treasury note
acquired by Zenith that was not included among the Transferred Assets on the
Final Business Balance Sheet. In addition, certain adjustments to the Final
Balance Sheet may be required based on certain errors that were allegedly made
by Arthur Anderson in determining the Final Business Balance Sheet; and
J. Zenith and RISCORP desire to compromise and settle the claims
and all pending and potential litigation between them (except as otherwise
expressly provided herein), and they have therefore agreed to enter into this
Settlement Agreement to settle and resolve, on the terms specified herein, all
such claims and disputes.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, it is hereby agreed as follows:
1. The Final Business Balance Sheet. Zenith and RISCORP agree not
to commence or prosecute any action or proceeding, or to take any other action,
that seeks to confirm, modify, vacate, challenge or otherwise review the Final
Business Balance Sheet or the Revised Final Business Balance Sheet (as defined
herein) except as provided below in this paragraph 1.
<PAGE> 5
(a) The parties agree that RISCORP may request that
Arthur Andersen review and/or correct any alleged errors made in its
determination of the Final Business Balance Sheet with respect to its failure to
make appropriate adjustment for certain reinsurance treaties in effect during
accident years 1991 through 1993, inclusive, including, without limitation,
whether issues relating to Arthur Andersen's adjustment to reinsurance
recoverable were in dispute between the parties (the "RISCORP Reinsurance
Claims").
(b) Within five business days after the date of this
Settlement Agreement, Zenith may make a submission to Arthur Andersen regarding
the RISCORP Reinsurance Claims in respect of (i) correspondence from Buttner
Hammock & Company to Arthur Andersen dated May 17, 1999; (ii) correspondence
from Alston & Bird LLP to Arthur Andersen dated May 24, 1999; and (iii)
correspondence from Alston & Bird LLP to Arthur Andersen dated June 4, 1999.
Zenith's submission to Arthur Andersen shall be to the effect that the RISCORP
Reinsurance Claims were not "in dispute" under Section 2.02(b) of the Asset
Purchase Agreement and that Arthur Andersen did not make an error with respect
to this issue in the Final Business Balance Sheet. On or before July 27, 1999,
RISCORP may make an additional submission to Arthur Andersen addressing the
RISCORP Reinsurance Claims or any issues raised in Zenith's submission to Arthur
Andersen pursuant to this paragraph 1(b).
(c) Zenith and RISCORP agree that, in reviewing the
RISCORP Reinsurance Claims, Arthur Andersen may: (i) determine whether such
claims were "in dispute" under Section 2.02(b) of the Asset Purchase Agreement;
(ii) resolve such claims on the merits by applying the standards for review by
the Neutral Auditors and Neutral Actuary under Section 2.02(b) of the Asset
<PAGE> 6
Purchase Agreement; and (iii) if appropriate, issue a revised or corrected Final
Business Balance Sheet reflecting any resolution of such claims (the "Revised
Final Business Balance Sheet").
(d) If Arthur Andersen issues the Revised Final Business
Balance Sheet, then (i) RISCORP shall pay to Zenith the amount of the net
reduction, if any, in the Net Assets Transferred reflected on the Revised Final
Business Balance Sheet; or (ii) Zenith shall pay to RISCORP on behalf of the
Sellers the amount of the net increase, if any, in the Net Assets Transferred
reflected on the Revised Final Business Balance Sheet. RISCORP or Zenith, as the
case may be, shall pay interest on any amounts due under this paragraph 1 at the
rate of 6.25% per annum from (and including) April 1, 1998 to (but excluding)
the date of payment. Any such payment shall be made within five business days
after receipt of the Revised Final Business Balance Sheet by wire transfer of
immediately available funds to an account designated by the party entitled to
receive such payment.
(e) Notwithstanding anything to the contrary in this
Settlement Agreement, including, without limitation, the foregoing provisions of
this paragraph 1, neither Zenith nor RISCORP has waived any right to commence
legal action in any court of competent jurisdiction: (i) to seek correction of
alleged errors with respect to the RISCORP Reinsurance Claims that were not
corrected by Arthur Andersen in a Revised Final Business Balance Sheet pursuant
to this paragraph 1; or (ii) to correct, modify, vacate or set aside any
revision of the Final Business Balance Sheet made in the Revised Final Business
Balance Sheet.
2. Disbursements from Escrow. (a) Zenith and RlSCORP agree to
cause all funds currently on deposit with the Escrow Agent to be distributed as
soon as reasonably practicable, but in no event later than 20 business days
after execution of this Settlement Agreement, as follows:
<PAGE> 7
(i) Six million dollars ($6,000,000) to Zenith;
and
(ii) the balance of all principal and interest to
RISCORP, Inc.
(b) Following the foregoing disbursement of funds, the
Escrow Agreement shall be terminated and the parties shall execute such
documents or instruments as may be reasonably necessary to evidence such
termination.
(c) RISCORP acknowledges that Zenith intends to treat the
amounts received under this paragraph 2 as reimbursement for unexpected expenses
incurred by Zenith in connection with carrying on the Business acquired from
RISCORP.
3. Claims for Refunds. The parties agree that RISCORP's claims
for refunds made to the Florida Department of Labor and Employment Security,
Division of Workers' Compensation Administrative and Field Support Unit will be
divided between them as follows:
(a) RISCORP, Inc. shall be the sole owner of and is
entitled to any refund granted in connection with its request for a refund for
Five Million Two Hundred Ninety Two Thousand, One Hundred Eighty-Three Dollars
($5,292,183) related to deductions for commissions against gross premiums (the
"Commission Refund"); and
(b) Of the approximate balance of Twenty-Seven Million
Dollars ($27,000,000) of potential additional refunds related to deduction for
premiums ceded to others (the "Reinsurance Refunds"), RISCORP, Inc. shall
receive the first Ten Million Dollars ($10,000,000) of any Reinsurance Refunds
recovered, and should the Reinsurance Refunds recovery exceed Ten Million
Dollars ($10,000,000), RISCORP and Zenith will share equally in any excess
proceeds.
<PAGE> 8
(c) The fees and expenses incurred in connection with
RISCORP's efforts to seek recovery of the Reinsurance Refunds shall be shared by
Zenith and RISCORP in the same ratio as the amounts which each ultimately
recovers. All such fees and expenses shall initially be borne by RISCORP, which
shall be entitled to reimbursement for Zenith's share of such fees and expenses
only if Zenith shares in any Reinsurance Refunds. RISCORP shall have the right
to direct and control the prosecution of any attempts to recover the Reinsurance
Refunds. RISCORP shall not compromise or settle such claims without the prior
written approval of Zenith, which approval shall not be unreasonably withheld.
At RISCORP's request, Zenith shall jointly prosecute the claims to recovery of
the Reinsurance Refunds, but RISCORP shall retain the right to direct and
control the prosecution in such event. RISCORP may cease prosecuting such claims
at any time in its sole discretion, provided, however, that RISCORP first offers
in writing to assign such claims to Zenith without consideration, and Zenith
does not accept such assignment within ten business days of receipt of such
offer. If Zenith does accept such Assignment, RISCORP shall be dismissed as a
party, and Zenith, as assignee of RISCORP, shall be substituted. Zenith shall
thereafter bear all fees and expenses incurred in connection with its
prosecution of such claim.
4. Release by Zenith. Effective with the execution of this
Settlement Agreement, Zenith and its affiliates, subsidiaries, parents,
shareholders, agents, employees, attorneys, accountants, representatives,
directors, and officers (the "Zenith Releasors") hereby release, acquit and
forever discharge RISCORP and its affiliates, subsidiaries, parents,
shareholders, agents, employees, attorneys, accountants, representatives,
directors and officers (the "RISCORP Releasees") from any and all claims, causes
of action, debts, accounts, contracts, torts, demands, judgments, whether at law
<PAGE> 9
or in equity, accrued or contingent, known or unknown, discovered or
undiscovered, in the past or in the future, which the Zenith Releasors had,
have, or may in the future have, of any form or nature, from the beginning of
time through and including the date of this Settlement Agreement (collectively,
"Zenith Claims"), except for any Zenith Claims that arise from, relate to, or
are based on (i) any of the obligations contained within this Settlement
Agreement; (ii) the surviving provisions of the Asset Purchase Agreement; and
(iii) the surviving provisions of the Transaction Documents.
5. Release by RISCORP. Effective with the execution of this
Settlement Agreement, the RISCORP Releasees hereby release, acquit and forever
discharge the Zenith Releasors from any and all claims, causes of action, debts,
accounts, contracts, torts, demands, judgments, whether at law or in equity,
accrued or contingent, known or unknown, discovered or undiscovered, in the past
or in the future, which the RISCORP Releasees had, have, or may in the future
have, of any form or nature, from the beginning of time through and including
the date of this Settlement Agreement (collectively, "RISCORP Claims"), except
for any RISCORP Claims that arise from, relate to, or are based on (i) any of
the obligations contained within this Settlement Agreement including, without
limitation, any claims arising out of or related to any alleged errors made by
Arthur Andersen as provided in paragraph 1 hereof; (ii) the surviving provisions
of the Asset Purchase Agreement; (iii) the surviving provisions of the
Transaction Documents; and (iv) RISCORP's right to seek indemnification from
Zenith with respect to Bristol Hotel Management Corporation, et al. v. Aetna
Casualty & Surety Company, a/k/a Aetna Group, et al. (the "Bristol Hotel
Action").
6. Covenant Not to Sue or Arbitrate by Zenith. Except as
contemplated by paragraphs 1 and 14 hereof, effective with the execution of this
Settlement Agreement Zenith and its affiliates,
<PAGE> 10
subsidiaries, parents, shareholders, agents, employees, attorneys, accountants,
representatives, directors, and officers (the "Zenith Convenantors") hereby
covenant not to sue and covenant not to arbitrate against RISCORP and its
affiliates, subsidiaries, parents, shareholders, agents, employees, attorneys,
accountants, representatives, directors and officers (the "RISCORP Covenantees")
as to any and all claims, causes of action, debts, accounts, contracts, torts,
demands, and judgments, whether at law or in equity, which the Zenith
Covenantors had, have, or may have in the future, of any form or nature, based
in whole or in substantial part on facts actually known to the officers or
former officers of Zenith identified on Exhibit B attached hereto, or which
should have been known to such officers of Zenith after reasonable inquiry, from
the beginning of time up to the date of this Settlement Agreement.
7. Covenant Not to Sue or Arbitrate by RISCORP. Except as
contemplated by paragraphs 1 and 14 hereof and as to the Bristol Hotel Action,
effective with the execution of this Settlement Agreement the RISCORP
Covenantees hereby covenant not to sue and covenant not to arbitrate against the
Zenith Covenantors as to any and all claims, causes of action, debts, accounts,
contracts, torts, demands, and judgments, whether at law or in equity, which the
RISCORP Covenantees had, have, or may have in the future, of any form or nature,
based in whole or in substantial part on facts actually known to the officers of
RISCORP, or which should have been known to the officers of RISCORP after
reasonable inquiry, from the beginning of time up to the date of this Settlement
Agreement.
8. Dismissal of Florida Action. Within five business days of the
execution of this Settlement Agreement, Zenith and RISCORP agree to submit a
Stipulation in the form annexed
<PAGE> 11
hereto as Exhibit C to the United States District Court for the Middle District
of Florida, Tampa Division, for filing in the action captioned RISCORP. Inc., et
al. v. Zenith Insurance Co., Case No. 98-2122-CIV-T-25E.
9. Dismissal of New York Action. Within five business days of the
execution of this Settlement Agreement, Zenith and RISCORP agree to submit a
Stipulation in the form annexed hereto as Exhibit D to the United States
District Court for the Southern District of New York for filing in the action
captioned Zenith Insurance Co. v. RISCORP, Inc., et al., Case No. 99 Civ. 0171
(WHP).
10. Release of Securities. Zenith agrees promptly to execute upon
RISCORP's request letters in substantially the form attached as Exhibit E
evidencing Zenith's acknowledgment that it has no right, title or interest in or
to certain funds on deposit with various state regulatory agencies and its
consent to the release of such funds or securities to RISCORP. Zenith further
covenants and agrees that it shall execute any additional documents or
instruments as may be reasonably necessary to assist RISCORP in the recovery of
such funds. The funds or securities currently on deposit with various state
agencies to which Zenith acknowledges RISCORP's full entitlement are set forth
on Exhibit F.
11. Assessments. Responsibility for satisfaction of assessments,
including those assessments at issue in the Florida Action and the New York
Action and those arising in the future, from state insurance departments and
other state and federal regulatory agencies will be borne by the parties as
follows:
(a) The parties have set forth on Exhibit G those
assessments currently known to the parties and have identified whether or the
extent to which each such assessment is the
<PAGE> 12
responsibility of RISCORP or Zenith. Unless otherwise specifically provided on
Exhibit G, the parties will each satisfy their respective obligations as
reflected on Exhibit G within 15 days of the execution of this Settlement
Agreement and shall provide to the other party evidence of such satisfaction.
(b) Any other assessment or Tax attributable to the
Business for a period prior to April 1, 1998 will be the responsibility of
RISCORP.
(c) Any other assessment or Tax attributable to the
Business for a period on or after April 1, 1998 will be the responsibility of
Zenith, regardless of whether the premiums or other amounts used to calculate
such assessment or Tax relate to a period before or after April 1, 1998.
(d) Any other assessment or Tax attributable to the
Business for a period both prior to and following April 1, 1998 shall be
prorated between RISCORP and Zenith, respectively, by following the methodology
described in paragraphs (b) and (c) above based on the ratio of (i) the number
of days in the period prior to April 1, 1998, to (ii) the number of days in the
period on and after April 1, 1998 in the period being assessed.
12. Amendment to Asset Purchase Agreement. The parties hereto
agree that the Asset Purchase Agreement is hereby amended as follows:
(a) The following Sections or Articles of the Asset
Purchase Agreement shall have no further force or effect: Sections 3.03, 3.04,
3.05, 3.06, 3.07, 3.09, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 3.15 A, 3.18, 3.19,
3.20, 3.21, 3.22, 4.03, 4.04; Article V; Article VI; Article VII; and Article X.
(b) The following Sections of the Asset Purchase
Agreement are amended as set forth below:
<PAGE> 13
(i) Section 8.01. Section 8.01 of the Asset
Purchase Agreement is amended to provide as
follows:
Section 8.01: Survival of Representations and
Warranties. All representations and warranties
contained in Sections 3.01, 3.02, 3.08, 3.16, 3.17,
4.01, and 4.02 of the Asset Purchase Agreement shall
survive the Closing and shall terminate and expire at
the close of business on April 1, 2000.
(ii) Section 11.06. Section 11.06 of the Asset
Purchase Agreement is hereby amended by
deleting subpart (b) thereof in its
entirety.
(c) To the extent that any provisions of this Settlement
Agreement may conflict with any surviving provisions
of the Asset Purchase Agreement or the Transaction
Documents, the provisions of this Settlement
Agreement shall control.
13. Pending Litigation. Attached as Exhibit H is a schedule of
pending litigation, along with a designation as to which party shall be
responsible for the defense of, and satisfaction of any judgment or settlement
arising from, each suit.
14. Voided Checks/Stop Payment Orders. (a) Zenith and RISCORP
agree that Zenith shall have 60 days from the date of this Settlement Agreement
to submit to RISCORP the following: (i) a Schedule of Unpaid Checks listing
checks that were issued by any RISCORP company prior to April 1, 1998 that
either (A) were voided by Zenith, or (B) are subject to stop payment orders
issued by Zenith; and (ii) copies of canceled checks, reasonable proof of
reissuance or other documentation demonstrating Zenith's right to reimbursement
for checks listed on the Schedule of Unpaid Checks
<PAGE> 14
(collectively, the "Check Documentation"); provided, however, Zenith's right to
reimbursement shall be limited to the lesser of (A) the amount actually paid by
Zenith in connection with the reissuance of a check listed on the Schedule of
Unpaid Checks, or (B) the amount RISCORP carried on its outstanding check list
for such check as of April 1, 1998.
(b) Within ten business days after RISCORP's receipt of
the Check Documentation, RISCORP shall (i) provide Zenith a written schedule
listing its objections, if any, to reimbursing Zenith for checks listed on the
Schedule of Unpaid Checks, and (ii) reimburse Zenith, by wire transfer to an
account designated by Zenith, in an aggregate amount equal to the amount of all
checks as to which RISCORP is not objecting to reimbursement.
(c) Except for checks for which Check Documentation has
been provided to RISCORP within 60 days of the date of this Settlement
Agreement, Zenith agrees that it has no right to assert any claim against
RISCORP or any RISCORP company for reimbursement of any check that was issued by
any RISCORP company prior to April 1, 1998 whether or not such check was
included on the Schedule of Unpaid Checks.
(d) Any disputes between the parties concerning Zenith's
right to reimbursement for unpaid checks that are the subject of this paragraph
14 shall be resolved by arbitration pursuant to paragraph 15 hereof.
15. Submission of Matters to Arbitration. (a) The parties
expressly agree that, except as otherwise set forth in paragraph 1 hereof or as
to any claim or controversy that is subject to the agreement not to sue or
arbitrate as provided in paragraphs 6 or 7 hereof, any claim or controversy
arising out of or in connection with (i) the surviving provisions of the Asset
Purchase Agreement, (ii)
<PAGE> 15
the surviving provisions of the Transaction Documents, (iii) the enforcement or
interpretation of this Settlement Agreement, or (iv) any of the obligations
contained within this Settlement Agreement, shall be resolved by binding
arbitration before the Honorable Clinton A. Curtis, unless he is unavailable or
unwilling to serve. In the event the Honorable Clinton A. Curtis is unavailable
or unwilling to serve, an arbitrator shall be selected in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. Any
arbitration pursuant to this Settlement Agreement shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association except as modified by this paragraph 15. The arbitration shall take
place in Tampa, Florida. The Honorable Clinton A. Curtis or other arbitrator
selected in accordance with this paragraph shall be hereinafter referred to as
the "Arbitrator." The decision or award of the Arbitrator shall be final,
binding and conclusive. Either party may seek confirmation of any award or
decision entered pursuant to this paragraph 15 by any court of competent
jurisdiction.
(b) The parties expressly waive any right to file a civil
action and any right to a jury trial as to any claim or controversy between
them, except as to the potential claims described in paragraph 1 above.
(c) Except as expressly authorized in this Settlement
Agreement, the parties agree that it shall be a breach of this Settlement
Agreement for any party hereto to file against any other party any civil action
or arbitration proceeding relating to (i) any of the Zenith Claims or RISCORP
Claims that are released pursuant to paragraphs 4 and 5 of this Settlement
Agreement, (ii) the claims in respect of which the parties have agreed not to
sue or arbitrate pursuant to paragraphs 6 and 7 of this Settlement Agreement,
(iii) the enforcement or interpretation of this Settlement Agreement, or
<PAGE> 16
(iv) any dispute that may arise between the parties relating to the Asset
Purchase Agreement, the Transaction Documents, or the transactions contemplated
by the Asset Purchase Agreement. In the event of such a breach, the
non-breaching party or parties shall be entitled to recover any consequential
damages as well as its reasonable attorneys' fees and expenses from the
breaching party or parties.
(d) As a condition precedent to the submission of any
dispute for determination by the Arbitrator, a party shall serve upon the other
party to this Settlement Agreement, in the manner provided for notices pursuant
to Section 11.03 of the Asset Purchase Agreement, a written statement of the
matter in dispute, and thereafter the parties shaft negotiate in good faith to
attempt to resolve the matter in dispute for a time period not to exceed ten
(10) days (unless the parties mutually agree in writing to extend this time
period).
(e) Within twenty (20) days following the end of the
period of good faith negotiations set forth in the immediately preceding
paragraph, any party to this Settlement Agreement who desires to arbitrate a
claim shall submit to the other party and to the Arbitrator a demand for
arbitration setting forth with reasonable specificity the nature and amount of
the claim, and the parties shall follow the following procedures:
(i) The party receiving the demand for
arbitration shall have ten business days
from receipt of the other party's demand to
dispute the claim in writing. If the claim
is not disputed, the amount claimed in the
arbitration demand will be the award of the
Arbitrator.
<PAGE> 17
(ii) Should the party receiving the claim dispute
it, the party asserting the claim shall
submit, no later than ten business days
after receipt of its adversary's notice of
dispute, a position paper, setting forth its
position as to why it should prevail on its
claim, including any appropriate evidentiary
material.
(iii) The party disputing the demand for
arbitration will have ten business days
after its receipt of its adversary's
position paper to submit a response,
including any appropriate evidentiary
material.
(iv) The Arbitrator shall issue his award within
thirty days of his receipt of the response
of the party opposing the claim.
(v) For purposes of this paragraph 15, all
claims, responses, notices, position papers
or other papers of any kind shall be served
by facsimile and overnight delivery (next
business day) to the persons identified in
paragraph 11.03 of the Asset Purchase
Agreement and upon the Arbitrator, except
that exhibits, appendices, and other lengthy
documents need only be served by overnight
delivery service. The time for any party to
take any action pursuant to this paragraph
after receipt of notice or written material
shall commence to run from receipt of such
notice or written material by overnight
delivery service.
<PAGE> 18
16. Termination of Letter Agreement and Power of Attorney. The
parties expressly agree that the Letter Agreement and the Power of Attorney
executed by RISCORP in connection with the closing of the Asset Sale are hereby
terminated and shall be of no further force or effect.
17. Further Assurances. On and after execution of this Settlement
Agreement, Zenith and RISCORP 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
Settlement Agreement or the surviving provisions of the Asset Purchase Agreement
and the Transaction Documents.
18. Entire Agreement. This Settlement Agreement 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.
19. Amendments and Waivers. 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.
20. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors, permitted assigns
and legal representatives.
<PAGE> 19
21. Governing Law. This settlement agreement shall be governed by
and construed in accordance with the laws of the State of Florida, without
giving effect to the principles of conflicts of laws thereof.
22. No Admission of Liability. Zenith and RISCORP agree (a) that
neither this Settlement Agreement nor the fact of settlement are an admission of
any liability or wrongdoing whatsoever; (b) that neither this Settlement
Agreement nor the fact of settlement shall be used or construed as an admission
of any fault, liability or wrongdoing by any person; and (c) that neither this
Settlement Agreement, the fact of settlement, the settlement negotiations, nor
any related document shall be offered or received in evidence as an admission,
concession, presumption or inference against any party in any action or
proceeding other than an action or proceeding to enforce this Settlement
Agreement.
23. Representations of RISCORP. RISCORP, Inc., RMS, 1390 Main
Street, RI, IAA, RIS, RMCS, CompSource, RRE, RA, RW, RF, RIC, RP&C, RNIC, RS,
RSS Holding, RSSI and RSSII each represent and warrant that (a) each such entity
has the requisite corporate power and authority to execute, deliver and perform
its obligations under this Settlement Agreement; (b) the execution and delivery
of this Settlement Agreement and the performance of the obligations thereunder
have been duly authorized by all necessary corporate action; (c) this Settlement
Agreement constitutes the legal, valid and binding obligation of each such
entity, enforceable in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles (regardless of whether such
<PAGE> 20
enforceability is considered in a proceeding in equity or in law); and (d) after
giving effect to the transactions contemplated by this Settlement Agreement, the
RISCORP Companies, 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 RISCORP Companies,
individually and on a consolidated basis, at
a fair evaluation, exceed the total
liabilities (including contingent,
subordinated, unmatured and unliquidated
liabilities) of the RISCORP Companies;
(ii) current projections which are based on
underlying assumptions which provide a
reasonable basis for the projections and
which reflect the RISCORP Companies'
judgment based on present circumstances, the
most likely set of conditions and the
RISCORP Companies' most likely course of
action for the period projected, demonstrate
that the RISCORP Companies, individually and
on a consolidated basis, will have
sufficient cash flow to enable them to pay
their debts as they mature or the RISCORP
Companies are reasonably satisfied that they
will be able to refinance such debt at or
prior to maturity on commercial reasonable
terms; and
(iii) the RISCORP Companies, individually and on a
consolidated basis, do not have unreasonably
small capital base with which to engage in
their anticipated businesses.
<PAGE> 21
24. Representations of Zenith. Zenith represents and warrants that
(a) it has the requisite corporate power and authority to execute, deliver and
perform its obligations under this Settlement Agreement (b) the execution and
delivery of this Settlement Agreement and the performance of its obligations
thereunder have been duly authorized by all necessary corporate action, and (c)
this Settlement Agreement constitutes the legal, valid and binding obligation of
Zenith, enforceable in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or in law).
25. Counterparts. This Settlement Agreement 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.
<PAGE> 22
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 and President
RISCORP, INC.
RISCORP MANAGEMENT SERVICES, INC.
1390 MAIN STREET 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 COMPANY
RISCORP STAFFING SOLUTIONS, INC. I
RISCORP STAFFING SOLUTIONS, INC. II
By: /s/ Walter E. Riehemann
-------------------------------------
Name: Walter E. Riehemann
Title: Vice President
<PAGE> 1
EXHIBIT 11
RISCORP, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE NET LOSS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
---------------------------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net loss $ 3,369 $ 6,241
============ ============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,868,114 36,868,114
Restricted stock vested 622,917 48,611
------------ ------------
Weighted average common shares outstanding - (basic) 37,491,031 36,916,725
============ ============
Weighted average common and common share
equivalents outstanding - (diluted) 37,491,031 36,916,725
============ ============
Net loss per common share--basic $ (0.09) $ (0.17)
============ ============
Net loss per common share--diluted $ (0.09) $ (0.17)
============ ============
</TABLE>
24
<PAGE> 2
EXHIBIT 11
RISCORP, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE NET LOSS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net loss $ 4,208 $ 15,563
============ ============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,868,114 36,868,114
Restricted stock vested 551,042 24,306
------------ ------------
Weighted average common shares outstanding - (basic) 37,419,156 36,892,420
============ ============
Weighted average common and common share
equivalents outstanding - (diluted) 37,419,156 36,892,420
============ ============
Net loss per common share--basic $ (0.11) $ (0.42)
============ ============
Net loss per common share--diluted $ (0.11) $ (0.42)
============ ============
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,831
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,985
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 102,203
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 386
<OTHER-SE> 90,828
<TOTAL-LIABILITIES-AND-EQUITY> 102,203
<INTEREST-LOAN> 0
<INTEREST-INVEST> 3,034
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 150
<EXPENSE-OTHER> 0
<INCOME-PRETAX> (7,104)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,208)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
