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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
RISCORP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials:
----------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
[LETTERHEAD OF RISCORP, INC.]
March , 2000
TO THE SHAREHOLDERS OF RISCORP, INC.:
You are cordially invited to attend a special meeting of the shareholders
of RISCORP, Inc. to be held on April , 2000 at 10:00 a.m., Eastern Standard
Time, at the Sheraton Colony Square, 188 14th Street, N.E., Atlanta, Georgia
30361.
At the special meeting, we will ask you to consider and vote upon the
approval and adoption of a Plan and Agreement of Merger, dated as of November 3,
1999, by and among Griffin Acquisition Corp., a Florida corporation, William D.
Griffin and RISCORP pursuant to which Acquisition Corp. will be merged with and
into RISCORP. Mr. Griffin is the founder of RISCORP and beneficially owns a
majority of the outstanding capital stock of RISCORP. Because Mr. Griffin
indirectly controls over 90% of the Class B Common Stock and, therefore, over
86% of all votes entitled to be cast by RISCORP's shareholders, RISCORP cannot
liquidate, merge or otherwise be acquired without his consent.
If the merger agreement is approved and adopted and the merger becomes
effective, each share of RISCORP Class A Common Stock, par value $.01 per share,
outstanding immediately prior to the merger (except for shares as to which
appraisal rights have been perfected) will be converted into the right to
receive $2.85 in cash, without interest thereon and less any required
withholding taxes, subject to adjustment as provided in the merger agreement,
plus a contingent right to receive a pro rata cash amount if RISCORP recovers
any amounts from Zenith Insurance Company or other specified parties. On January
5, 2000, RISCORP filed suit against Zenith and Arthur Andersen LLP seeking to
monetize this contingent right; however, given the uncertainties inherent in the
litigation process, RISCORP is unable to predict the ultimate outcome of this
litigation and, accordingly, it is possible that holders of Class A Common Stock
will only receive the $2.85 cash portion of the merger consideration in
connection with the merger.
The $2.85 per share purchase price in the merger represents a premium of
approximately $1.35 over the amount that would be immediately distributable to
holders of Class A Common Stock if RISCORP were presently liquidated given the
substantial amount of cash that would need to be placed in a liquidating trust
for an indefinite period of time, $1.04 over the highest "bid" price of a share
of Class A Common Stock on the day before the announcement of the merger, and
$0.52 over the net book value per share as of September 30, 1999, on a
fully-diluted basis.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Your Board of Directors has voted unanimously to approve the merger
agreement and the merger. Each member of your Board of Directors is an
independent outside director. To ensure the Board's independence from Mr.
Griffin, each current member of the Board entered into an agreement with Mr.
Griffin in 1997 that requires Mr. Griffin to vote his shares in favor of the
election of the current directors and Frederick M. Dawson (now deceased) to the
Board, and prohibits Mr. Griffin from taking any action to remove any of them
from the Board. Accordingly, in voting to approve the merger agreement, the
Board carefully reviewed and considered the terms and conditions of the proposed
merger as described in the enclosed Proxy Statement and unanimously concluded
that the merger is in the best interests of the holders of Class A Common Stock.
If shareholder approval is obtained and the merger is consummated, each current
member of the Board will
<PAGE> 3
resign. For a discussion of events that may occur as a consequence of the
failure of the shareholders to approve the merger see "Special
Factors -- Consequences to Shareholders if the Merger is Not Approved."
Your Board of Directors recommends that you vote FOR approval and adoption
of the merger agreement and approval of the transactions contemplated therein,
including the merger. A failure to vote your shares will have the same effect as
voting your shares against the merger.
Only holders of record of RISCORP's Class A Common Stock and Class B Common
Stock, par value $.01 per share, at the close of business on February 28, 2000,
the record date for the special meeting, will be entitled to notice of, and to
vote at, the special meeting.
The attached Notice of Special Meeting and Proxy Statement explain the
proposed merger and provide specific information concerning the special meeting.
Please read these materials (including the appendices thereto) carefully. In
addition, you may obtain information about RISCORP from documents that RISCORP,
The RISCORP Group Holding Company, Limited Partnership, William D. Griffin
Family Limited Partnership, Gryphus Company I, Gryphus Company II, Acquisition
Corp. and Mr. Griffin have filed with the Securities and Exchange Commission,
including the Schedule 13E-3 Transaction Statement.
This Letter, the Notice of Special Meeting, the Proxy Statement and
accompanying Form of Proxy are first being mailed to RISCORP's shareholders on
or about April , 2000.
If you have any questions about the Proxy Statement, please let us hear
from you. We look forward to seeing you at the meeting.
Sincerely,
Walter E. Riehemann
President
2
<PAGE> 4
RISCORP, INC.
2 NORTH TAMIAMI TRAIL, SUITE 608
SARASOTA, FLORIDA 34236-5642
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL , 2000
---------------------
To the Shareholders of RISCORP, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
RISCORP, Inc. will be held at the Sheraton Colony Square, 188 14th Street, N.E.,
Atlanta, Georgia 30361, on April , 2000 at 10:00 a.m., Eastern Standard Time
for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Plan
and Agreement of Merger, dated November 3, 1999, by and among Griffin
Acquisition Corp., a Florida corporation, William D. Griffin and RISCORP,
and to approve the consummation of the transactions contemplated therein,
pursuant to which, among other things: (a) Acquisition Corp. will be merged
with and into RISCORP; (b) each outstanding share of Class A Common Stock,
par value $.01 per share, of RISCORP, except shares as to which appraisal
rights have been perfected, will be converted into the right to receive
$2.85 in cash, without interest thereon and less any required withholding
taxes, subject to adjustment as provided in the merger agreement, plus a
contingent right to receive an additional pro rata cash amount if RISCORP
recovers any amounts from Zenith Insurance Company or other specified
parties; and (c) each outstanding share of RISCORP's Class B Common Stock,
par value $.01 per share, will remain outstanding. A copy of the merger
agreement is attached as Appendix A to the accompanying Proxy Statement.
2. To consider and vote upon a proposal to approve an adjournment or
postponement of the special meeting for a period of not more than 60 days
for the purpose of soliciting additional proxies in the event RISCORP fails
to receive a sufficient number of votes to approve the merger agreement and
the merger described in Item 1 above.
3. To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
Only those persons who were holders of record of the Class A Common Stock
and Class B Common Stock of RISCORP at the close of business on February 28,
2000 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement thereof.
It is a condition precedent to the merger that the merger agreement be
adopted and approved by at least (a) 80% of the votes entitled to be cast by the
holders of all issued and outstanding shares of Class A Common Stock and Class B
Common Stock, voting together as a single class, and (b) two-thirds of the votes
entitled to be cast by the holders of all issued and outstanding shares of Class
A Common Stock.
ANY SHAREHOLDER OF RISCORP HAS THE RIGHT TO DISSENT FROM THE MERGER AND TO
OBTAIN THE "FAIR VALUE" OF SUCH SHAREHOLDER'S SHARES OF CLASS A COMMON STOCK,
PROVIDED THAT SUCH SHAREHOLDER PERFECTS HIS, HER OR ITS APPRAISAL RIGHTS IN
ACCORDANCE WITH SECTION 607.1320 OF THE FLORIDA BUSINESS CORPORATION ACT. PLEASE
SEE THE DISCUSSION OF APPRAISAL RIGHTS IN THE ACCOMPANYING PROXY STATEMENT AND
SECTIONS 607.1301, 607.1302 AND 607.1320 OF THE FLORIDA BUSINESS CORPORATION
ACT, COPIES OF WHICH ARE ATTACHED AS APPENDIX B TO THE PROXY STATEMENT.
<PAGE> 5
Your attention is directed to the accompanying Proxy Statement and its
appendices for more complete information regarding the matters to be acted upon
at the special meeting.
THE BOARD OF DIRECTORS OF RISCORP UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING THE MERGER.
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
By Order of the Board of Directors,
WALTER E. RIEHEMANN
President
IMPORTANT
WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING OR NOT, PLEASE BE SURE THAT
THE ENCLOSED PROXY IS PROPERLY COMPLETED, DATED, SIGNED, AND RETURNED WITHOUT
DELAY IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
Sarasota, Florida
March , 2000
2
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
INTRODUCTION................................................ 1
General................................................... 1
Matters to be Considered at the Special Meeting........... 1
AVAILABLE INFORMATION....................................... 2
QUESTIONS AND ANSWERS ABOUT THE PROPOSED TRANSACTION........ 3
A WARNING ABOUT FORWARD-LOOKING STATEMENTS.................. 8
SUMMARY..................................................... 9
SELECTED FINANCIAL DATA..................................... 15
THE MEETING................................................. 17
Date, Time and Place...................................... 17
Matters to be Considered.................................. 17
Record Date; Shares Outstanding and Entitled to Vote...... 17
Required Vote; Voting Agreement........................... 17
Revocability of Proxies................................... 18
Proxy Solicitation........................................ 19
Independent Auditors...................................... 19
THE PARTIES................................................. 20
RISCORP................................................... 20
William D. Griffin and Acquisition Corp................... 21
Certain Transactions...................................... 22
History of RISCORP and Reasons for the Merger............. 22
SPECIAL FACTORS............................................. 27
Background of the Merger.................................. 27
Recommendation of the Board of Directors.................. 35
Consequences to Shareholders if the Merger is Not
Approved............................................... 37
Recommendation of Mr. Griffin, Acquisition Corp., Gryphus
Company I, Gryphus Company II, The RISCORP Group
Holding Company, Limited Partnership and William D.
Griffin Family Limited Partnership..................... 38
Certain Effects of the Merger............................. 39
Operations of RISCORP Following the Merger................ 40
Interests of Certain Persons in the Merger................ 40
Financing and Expenses of the Merger...................... 41
Federal Income Tax Consequences........................... 42
Regulatory Approval....................................... 43
Accounting Treatment...................................... 44
Amendment to Shareholder Protection Rights Agreement...... 44
Litigation Regarding the Merger........................... 44
PROPOSAL 1 -- THE MERGER.................................... 45
Terms of the Merger....................................... 45
Merger Consideration...................................... 46
Exchange and Payment Procedures........................... 47
Transfers of Class A Common Stock......................... 48
Representations and Warranties............................ 48
Conduct and Transactions Prior to the Effective Time...... 49
Non-Solicitation.......................................... 51
Indemnification of Officers and Directors; Escrow
Agreement; Fee Advancement Agreement................... 52
Conditions to the Merger.................................. 53
Termination of the Merger Agreement....................... 54
</TABLE>
i
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PAGE
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Waiver and Amendment...................................... 55
Guaranty.................................................. 55
General Release........................................... 55
Dissenters' Rights of Appraisal........................... 56
PROPOSAL 2 -- POSSIBLE ADJOURNMENT OR POSTPONEMENT OF
SPECIAL MEETING........................................... 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 59
MARKET FOR RISCORP'S CLASS A COMMON STOCK AND RELATED
SHAREHOLDER MATTERS....................................... 61
PROPOSALS OF SHAREHOLDERS FOR THE NEXT ANNUAL MEETING....... 62
INCORPORATION BY REFERENCE.................................. 63
</TABLE>
APPENDICES
Appendix A -- Plan and Agreement of Merger, dated November 3, 1999, by and
among Griffin Acquisition Corp., William D. Griffin and RISCORP,
Inc.
Appendix B -- Florida Statutes Describing Shareholder Appraisal Rights.
Appendix C -- RISCORP, Inc. Annual Report on Form 10-K/A for the year ended
December 31, 1998, as filed with the Securities and Exchange
Commission on June 7, 1999.
Appendix D -- RISCORP, Inc.'s Audited Consolidated Financial Statements for the
year ended December 31, 1999.
ii
<PAGE> 8
RISCORP, INC.
2 NORTH TAMIAMI TRAIL, SUITE 608
SARASOTA, FLORIDA 34236-5642
---------------------
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL , 2000
---------------------
INTRODUCTION
GENERAL
This Proxy Statement is being sent to the holders of shares of Class A
Common Stock and Class B Common Stock, par value $.01 per share, of RISCORP,
Inc. in connection with the solicitation of proxies by the Board of Directors of
RISCORP. Those proxies will be used at a special meeting of shareholders to be
held on April , 2000, at 10:00 a.m., Eastern Standard Time, at the Sheraton
Colony Square, 188 14th Street, N.E., Atlanta, Georgia 30361, and at any
adjournments or postponements thereof. The principal executive offices of
RISCORP are located at 2 North Tamiami Trail, Suite 608, Sarasota, Florida
34236-5642. RISCORP's telephone number is (941)366-5015. This Proxy Statement
and attached Proxy are first being sent to shareholders on or about March ,
2000.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, the shareholders will be asked to consider and vote
upon a proposal to approve and adopt the Plan and Agreement of Merger, dated
November 3, 1999, by and among Griffin Acquisition Corp., a Florida corporation,
William D. Griffin and RISCORP. Pursuant to the merger agreement, Acquisition
Corp. will merge with and into RISCORP. Upon consummation of the merger, each
share of RISCORP's Class A Common Stock outstanding immediately prior to the
effective time of the merger, except shares as to which appraisal rights have
been perfected, will be converted into the right to receive $2.85 in cash,
without interest thereon and less any required withholding taxes, subject to
adjustment as provided in the merger agreement, plus a contingent right to
receive an additional pro rata cash amount if RISCORP recovers any amounts from
Zenith Insurance Company or other specified parties in connection with its sale
of assets to Zenith in 1998. On January 5, 2000, RISCORP filed suit against
Zenith and Arthur Andersen LLP seeking to monetize this contingent right;
however, given the uncertainties inherent in the litigation process, RISCORP is
unable to predict the ultimate outcome of this litigation and, accordingly, it
is possible that holders of Class A Common Stock will only receive the $2.85
cash portion of the merger consideration in connection with the merger. See "The
Merger -- Merger Consideration." A copy of the merger agreement is attached
hereto as Appendix A, and the description of the merger contained in this Proxy
Statement is qualified in its entirety by reference to Appendix A. See "The
Merger."
The shareholders will also be asked to consider and vote upon a proposal to
approve an adjournment or postponement of the special meeting for a period of
not more than 60 days for the purpose of soliciting additional proxies in the
event RISCORP fails to receive a sufficient number of votes to approve the
merger agreement and the merger.
The Board of Directors knows of no business that will be presented for
consideration at the special meeting other than the matters described in this
Proxy Statement. If any other matters properly come before the special meeting,
the persons named in the enclosed form of proxy or their substitutes will vote
in accordance with their best judgment on such matters.
THE BOARD OF DIRECTORS OF RISCORP UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING THE MERGER.
1
<PAGE> 9
AVAILABLE INFORMATION
RISCORP is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission, including the Rule 13e-3 Transaction Statement on Schedule 13E-3
filed by RISCORP, The RISCORP Group Holding Company, Limited Partnership,
Gryphus Company I, Gryphus Company II, William D. Griffin Family Limited
Partnership, Acquisition Corp. and Mr. Griffin in connection with the merger.
Such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Securities and Exchange
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Securities and Exchange Commission's regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 75 Park Place, New York, New York 10007. Copies of such
material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Securities and Exchange Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. Such information may also be
accessed electronically by means of the Securities and Exchange Commission's
home page on the Internet (http://www.sec.gov).
The Annual Report on Form 10-K/A for the year ended December 31, 1998, as
filed with the Securities and Exchange Commission on June 7, 1999, has been
included at Appendix C to this Proxy Statement. Such appendix (excluding any
documents incorporated by reference therein or exhibits thereto) constitutes a
part of this Proxy Statement and should be carefully reviewed for the
information contained therein.
2
<PAGE> 10
QUESTIONS AND ANSWERS ABOUT THE PROPOSED TRANSACTION
Q: WHAT IS THE PROPOSED TRANSACTION?
A: William D. Griffin and certain irrevocable trusts created by Mr. Griffin for
the benefit of his children collectively own, directly and indirectly, all of
the outstanding shares of Class B Common Stock of RISCORP. In the proposed
transaction, a company controlled by Mr. Griffin will merge with and into
RISCORP, with RISCORP being the surviving corporation. As a result of the
merger, Mr. Griffin and such irrevocable trusts will be the owners of 100% of
the outstanding capital stock of RISCORP, and the holders of Class A Common
Stock, none of which is owned by Mr. Griffin or his affiliates, will receive
cash for their shares. In consideration of the amount payable to the holders
of Class A Common Stock, Mr. Griffin and each of the holders of Class B
Common Stock will also be released from any potential claims or causes of
action that may be asserted against them by or on behalf of RISCORP. Because
Mr. Griffin indirectly controls over 90% of the Class B Common Stock and,
therefore, over 86% of all votes entitled to be cast by RISCORP's
shareholders, RISCORP cannot liquidate, merge or otherwise be acquired
without his consent.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Each holder of Class A Common Stock (other than holders of Class A Common
Stock who properly perfect their appraisal rights under Florida law) will
receive $2.85 in cash, without interest thereon and less any required
withholding taxes, for each share owned at the effective time of the merger
(subject to a downward adjustment as provided in the merger agreement if the
legal and accounting expenses incurred by RISCORP in connection with the
merger after November 3, 1999 exceed $1.5 million), plus the contingent right
to receive an additional pro rata cash amount if RISCORP recovers any amounts
from Zenith Insurance Company or other specified parties. On January 5, 2000,
RISCORP filed suit against Zenith and Arthur Andersen LLP seeking to monetize
this contingent right; however, given the uncertainties inherent in the
litigation process, RISCORP is unable to predict the ultimate outcome of this
litigation and, accordingly, it is possible that holders of Class A Common
Stock will only receive the $2.85 cash portion of the merger consideration in
connection with the merger. See "The Merger -- Merger Consideration." Each
share of Class B Common Stock issued and outstanding immediately prior to the
effective time of the merger will continue to remain issued and outstanding.
Q: ARE THE MEMBERS OF THE BOARD OF DIRECTORS INDEPENDENT OF MR. GRIFFIN?
A: Yes. Each member of the Board of Directors is an independent outside
director. To ensure the Board's independence from Mr. Griffin, each current
member of the Board entered into an agreement with Mr. Griffin in 1997 that
requires Mr. Griffin to vote his shares in favor of the election of the
current directors and Frederick M. Dawson (now deceased) to the Board, and
prohibits Mr. Griffin from taking any action to remove any of them from the
Board. In evaluating and negotiating the terms of the merger, the Board
sought to maximize the value of the merger consideration to be received by
the holders of Class A Common Stock in connection with this transaction and
to structure a transaction that is in the best interests of such holders.
Q: WHY DIDN'T THE BOARD OF DIRECTORS HIRE AN INVESTMENT BANKING FIRM TO RENDER A
FAIRNESS OPINION WITH RESPECT TO THE MERGER CONSIDERATION?
A: The Board of Directors considered, and rejected, the idea of engaging an
investment banking firm to render an opinion to RISCORP as to the fairness of
the merger consideration to the holders of Class A Common Stock from a
financial point of view. In making its decision not to seek such an opinion,
the Board considered the fact that substantially all of the assets of RISCORP
consist of cash, investment grade securities, and contingent claims that may
be asserted by RISCORP, and the liabilities of RISCORP consist primarily of
contingent liabilities related to pending litigation or contingent
liabilities that may arise in the future as a result of RISCORP's prior
operations. Given the fact that the valuation of these contingencies is
principally a function of the probability of recovery or loss based on the
legal theories
3
<PAGE> 11
supporting the claims, and a quantification of the likely damages
attributable to such contingencies, the Board concluded that legal counsel,
not investment bankers, would be in the best position to assist the members
of the Board in their determination of the relative merits and the reasonable
range in values attributable to each of these contingencies. This conclusion,
combined with the fact that the tangible assets of RISCORP are substantially
all cash and investment grade securities with values that are readily
ascertainable, led the Board to ultimately conclude that a fairness opinion
from a financial advisor would not be meaningful to the holders of Class A
Common Stock in their evaluation of the terms of the merger. For a
description of the material claims and contingencies considered by the Board,
see "Special Factors -- Background of the Merger."
Q: WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE MERGER TO ME?
A: The Board believes that the principal advantages of the merger to you are:
- receiving a fixed price of $2.85 per share for each share of Class A
Common Stock you own, which amount exceeds the liquidation value and net
book value of such shares and will not be reduced by operating expenses
or liabilities incurred by RISCORP prior to closing;
- receiving a contingent right to your pro rata share of any future
recovery from Zenith Insurance Company with respect to alleged errors in
the determination of the final purchase price paid by Zenith in the asset
sale; and
- receiving the cash portion of the merger consideration promptly following
the consummation of the merger.
The Board believes that the principal disadvantage of the merger to you is:
- in the event the value of the contingent assets of RISCORP, including any
potential claims against Mr. Griffin, exceeds the value of the contingent
liabilities by an amount greater than the premium reflected in the $2.85
cash portion of the merger consideration, you would not be entitled to
participate in the value of any such recovery.
Q: WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE MERGER TO MR. GRIFFIN?
A: The Board believes the principal advantages of the merger to Mr. Griffin are:
- his ability to assume control over the remaining assets of RISCORP and
the dispositive power with respect to such assets;
- the possibility that he may be able to derive value from RISCORP's net
operating loss carry-forwards following the consummation of the merger if
he is successful in acquiring or transferring to RISCORP business
activities that generate taxable income that can be offset against the
net operating losses;
- the possibility that he may be able to delay, possibly indefinitely, a
liquidation of or a distribution from RISCORP allowing him to potentially
avoid taxes that may be imposed on any such liquidation or distribution;
and
- his ability to bring finality to the possible claims that may be asserted
against him by RISCORP and its shareholders.
The Board believes that the principal disadvantages of the merger to Mr.
Griffin are:
- the fact that he is paying a substantial premium to the holders of Class
A Common Stock over the amount that would ultimately be distributed to
such holders in a liquidation of RISCORP; and
- the assumption by Mr. Griffin of all of the contingent liabilities of
RISCORP, whether known or unknown, and the inherent risks associated
therewith.
4
<PAGE> 12
Q: HOW DID THE BOARD OF DIRECTORS ASSESS RISCORP'S POTENTIAL LITIGATION CLAIMS
AGAINST MR. GRIFFIN?
A: In late 1997, the Board of Directors appointed a Claims Committee to evaluate
potential claims against various third parties. The Claims Committee was
represented by independent legal counsel in its evaluation of the nature of,
and probabilities associated with, litigation claims that might be asserted
by RISCORP, including potential litigation claims against Mr. Griffin. With
the assistance of independent counsel to the Claims Committee, the Board
analyzed the potential claims against Mr. Griffin and used the information
developed in its negotiation of the terms of the merger agreement, including
the premium reflected in the cash portion of the merger consideration. For a
discussion of the claims against Mr. Griffin and to review the background and
reasons for the merger in greater detail, see "Special Factors -- Background
of the Merger."
In consideration of the premium reflected in the cash portion of the merger
consideration, Mr. Griffin and each of the holders of Class B Common Stock
will be released from any potential claims or causes of action that may be
asserted against them by or on behalf of RISCORP. See "The Merger -- General
Release."
Q: WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE FOR THE MERGER?
A: After considering each of the alternatives available to RISCORP and
evaluating the structure and terms of this transaction, the Board determined
that the merger is fair to, and in the best interests of, RISCORP and the
holders of Class A Common Stock. The $2.85 per share cash portion of the
merger consideration represents a premium of (a) approximately $1.35 over the
amount that would be immediately distributable to holders of Class A Common
Stock if RISCORP were presently liquidated given the substantial amount of
cash that would need to be placed in a liquidating trust for an indefinite
period of time; (b) $1.04 over the highest "bid" price of a share of Class A
Common Stock on the day before the announcement of the merger; (c) and $0.52
over the net book value per share as of September 30, 1999, on a
fully-diluted basis. In addition, because RISCORP has no operating
activities, the Board of Directors believes that Mr. Griffin is the only
person who could be reasonably expected to pay any premium for shares of the
Class A Common Stock. Moreover, after considering all of the factors set
forth under the section entitled "Recommendation of the Board of Directors,"
the Board concluded that the inherent risks associated with litigation, as
well as the time, expense and speculative nature of a significant recovery
against Mr. Griffin, could result in the holders of Class A Common Stock
receiving significantly less per share if litigation were initiated against
Mr. Griffin. The Board also concluded that the terms of the merger were more
favorable to the holders of Class A Common Stock than the prospect of
continuing to resolve the contingencies pending against RISCORP given the
likelihood that the net assets of RISCORP would be reduced during this
process and the fact that Mr. Griffin's consent would be required to effect a
final liquidation of RISCORP. See "Special Factors -- Recommendation of the
Board of Directors."
Q: WHAT SHAREHOLDER APPROVALS DOES THE MERGER REQUIRE?
A: Under RISCORP's Amended and Restated Articles of Incorporation, approval of
the merger agreement and the consummation of the transactions contemplated
therein requires (a) the affirmative vote of at least eighty percent (80%) of
the votes entitled to be cast by the holders of all issued and outstanding
shares of Class A Common Stock and Class B Common Stock, voting as a single
class; and (b) the affirmative vote of a majority of the votes entitled to be
cast by the holders of all issued and outstanding shares of Class A Common
Stock and Class B Common Stock, voting as a single class, who are not
affiliates of Mr. Griffin. In addition, pursuant to Section 607.0901 of the
Florida Business Corporation Act, approval of the merger agreement and the
merger requires the affirmative vote of the holders of two-thirds of the
votes entitled to be cast by the holders of the issued and outstanding shares
of Class A Common Stock and Class B Common Stock, voting as a single class,
who are not affiliates of Mr. Griffin. As a condition to the consummation of
the merger, the merger agreement requires the affirmative vote of the holders
of two-thirds of the outstanding shares of Class A Common Stock.
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<PAGE> 13
William D. Griffin, The RISCORP Group Holding Company, Limited Partnership,
William D. Griffin Family Limited Partnership, Charlotte K. Griffin Trust
Number 3, Anna F. Griffin Trust Number 3 and John Ford Griffin Trust Number 3
collectively own, beneficially and of record, all of the outstanding shares
of Class B Common stock. Mr. Griffin disclaims beneficial ownership of the
shares of Class B Common Stock held by the trusts created for the benefit of
his children. These shareholders, representing in the aggregate over 94% of
the votes entitled to be cast by holders of Class A Common Stock and Class B
Common Stock, voting as a single class, have entered into a voting agreement
insuring that all of their shares will be voted in favor of the merger
agreement and the transactions contemplated therein. Because these
shareholders are not record holders or beneficial owners of any shares of
Class A Common Stock, the voting agreement will have no impact on the vote
required of the holders of Class A Common Stock pursuant to the terms of the
merger agreement.
Pursuant to the terms of a management agreement between The Phoenix
Management Company, Ltd. and RISCORP and its subsidiaries, Phoenix was
granted a restricted stock award for 1,725,000 shares of Class A Common
Stock, subject to vesting provisions contained in a restricted stock award
agreement. Walter E. Riehemann, who controls the operations of Phoenix as the
president and sole shareholder of its general partner, has indicated that he
intends to vote all of Phoenix's shares in favor of the merger agreement and
the transactions contemplated therein and that he agrees with the
recommendations and reasons of the Board of Directors as set forth under the
heading "Special Factors -- Recommendation of the Board of Directors."
Under RISCORP's Amended and Restated Bylaws, approval of the proposal to
adjourn or postpone the special meeting for a period of not more than 60 days
for the purpose of soliciting additional proxies requires a majority of the
votes entitled to be cast by holders of all outstanding shares of Class A
Common Stock and Class B Common Stock, voting as a single class. Mr. Griffin
controls the votes necessary to unilaterally approve this proposal.
Q: WHAT HAPPENS IF RISCORP FAILS TO RECEIVE SHAREHOLDER APPROVAL OF THE MERGER?
A: The Board of Directors has negotiated a transaction it believes is in the
best interests of the holders of the Class A Common Stock. The merger
consideration includes an immediate cash distribution to such shareholders
and represents a substantial premium over the anticipated liquidation value
per share. In the event the holders of Class A Common Stock fail to approve
the merger, the members of the Board will consider all of the facts and
circumstances that exist at that time and evaluate the alternatives available
to RISCORP for maximizing shareholder value. Given RISCORP's inability to
liquidate without Mr. Griffin's consent, the members of the Board believe
they will have only two viable alternatives: (a) resign from the Board and
allow the shareholders to elect new directors of RISCORP, or (b) continue the
monetization of all of the contingent assets of RISCORP and the resolution of
all contingent liabilities of RISCORP. Pending the resolution of all such
contingent claims, RISCORP will continue to invest a substantial portion of
its existing assets in cash and government securities. A failure to do so
could subject it to the registration requirements under the Investment
Company Act of 1940. If the members of the Board elect to resign, Mr.
Griffin, as the majority shareholder of RISCORP, would control the votes
necessary to elect new directors.
In addition, because of the fact that more than 60% of RISCORP's income comes
from passive sources and more than 50% of its outstanding capital stock is
held by five or fewer persons, if RISCORP earns taxable income and fails to
distribute such income, RISCORP will be subject to a tax of 39.6% on its
undistributed personal holding company income, in addition to its regular
income tax. These factors, coupled with the costs to be incurred in
connection with maintaining RISCORP's status as a public company and the
continued pursuit and defense of contingent claims, may reduce the amount
ultimately distributable to the shareholders in a liquidation. Also, because
Mr. Griffin has indicated he has no intention to approve a plan of
liquidation, the shareholders are not likely to receive any funds for their
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shares for an indefinite period of time. Finally, if the merger is not
approved, there can be no assurance that the market price of the shares of
Class A Common Stock will remain at its current level.
Q: WHAT DO I NEED TO DO NOW?
A: Please sign and mail your proxy card in the enclosed return envelope as soon
as possible so that your shares can be represented at the special meeting,
even if you plan to attend the special meeting in person.
Q: WHAT RIGHTS DO I HAVE TO DISSENT FROM THE MERGER AND SEEK AN APPRAISAL OF THE
FAIR VALUE OF MY SHARES?
A: If you wish, you may dissent from the merger and seek an appraisal of the
fair value of your shares, but only if you comply with all requirements of
Florida law summarized under the heading "The Merger -- Dissenters' Rights of
Appraisal." The appraised fair value of your shares may be more or less than
the consideration to be paid in the merger.
Q: WHO CAN VOTE ON THE MERGER?
A: All holders of record of Class A Common Stock and Class B Common Stock as of
the close of business on February 28, 2000 will be entitled to notice of and
to vote, either in person or by proxy, at the special meeting called to
consider the merger agreement and the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, we will promptly send you written
instructions for exchanging your stock certificates for cash. Please do not
include your stock certificates with your proxy card.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide written instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. If you do not
provide instructions to your broker, your shares will not be voted. This will
have the same effect as voting your shares against the proposal to approve
and adopt the merger agreement.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send in a later-dated, signed proxy card or a written notice of
revocation before the special meeting, or attend the special meeting and give
oral notice of your intention to vote in person. However, attendance at the
special meeting by a shareholder who has executed and delivered a proxy to
RISCORP will not in and of itself constitute a revocation of such proxy.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. If the
merger agreement is approved and other conditions to the merger are
satisfied, we expect to complete the merger promptly following the special
meeting.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The merger will be a taxable transaction to you for federal income tax
purposes. A brief review of the possible tax consequences to shareholders is
set forth under the heading "Special Factors -- Federal Income Tax
Consequences." You should also consult your tax advisor as to the tax effect
in your particular circumstances.
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
A: In addition to voting on the merger agreement and the merger, you will be
asked to vote upon a proposal to approve an adjournment or postponement of
the special meeting if RISCORP fails to receive enough
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<PAGE> 15
votes to approve the merger agreement and the merger. Approval of this
proposal requires a majority of the votes entitled to be cast by holders of
all outstanding shares of Class A Common Stock and Class B Common Stock,
voting as a single class. Accordingly, Mr. Griffin controls the votes
necessary to approve this proposal and he has indicated his intent to vote
his shares in favor of this proposal, if such vote becomes necessary.
Otherwise, we are not aware of any other matters that will be voted upon at
the special meeting.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: The information provided above in "question and answer" format is for your
convenience only and is merely a summary of the information contained in this
Proxy Statement. YOU SHOULD CAREFULLY READ THIS PROXY STATEMENT (INCLUDING
THE APPENDICES ATTACHED HERETO) IN ITS ENTIRETY. If you have any questions
concerning the merger or would like additional copies of this Proxy
Statement, you should contact Walter E. Riehemann, President, RISCORP, Inc.,
2 North Tamiami Trail, Suite 608, Sarasota, Florida 34236-5642; telephone
number (941) 366-5015.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
The statements contained or incorporated by reference in this Proxy
Statement which are not historical facts are forward-looking statements that
involve risks and uncertainties. We wish to caution you that these
forward-looking statements, particularly in the text under "Summary" and "The
Merger" and the information in Appendix C attached hereto, are based on the
beliefs and assumptions of the management of RISCORP and on information
currently available to such management. Such forward-looking statements involve
both known and unknown risks, uncertainties and other factors which may cause
the actual results, performance, or achievements of RISCORP to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements.
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SUMMARY
This summary highlights selected information from this Proxy Statement. It
may not contain all of the information that you may consider to be important. In
order to understand the merger more fully and for a more complete description of
the terms and conditions of the merger, you should read carefully this entire
Proxy Statement (including the Appendices attached hereto) and the other
documents referred to herein. The actual terms and conditions of the merger are
contained in the merger agreement, which is included in this Proxy Statement as
Appendix A.
PARTIES
RISCORP
RISCORP, Inc. is a Florida corporation that currently has no operating
activities. On April 1, 1998, RISCORP and its subsidiaries sold substantially
all of their assets and transferred certain liabilities to Zenith Insurance
Company pursuant to the terms of an Asset Purchase Agreement among the parties
dated June 17, 1997, as amended. In connection with the sale to Zenith, RISCORP
ceased substantially all of its former business operations. Since April 1, 1998,
the operations of RISCORP have consisted primarily of the administration of the
day-to-day activities of its surviving corporate entities, compliance with the
provisions of the asset purchase agreement with Zenith, the resolution of
various contingencies pending against RISCORP or its subsidiaries, and the
investment, protection, and maximization of the remaining assets of RISCORP. See
"The Parties -- RISCORP."
William D. Griffin
William D. Griffin is a resident of the State of Florida and is the founder
and majority shareholder of RISCORP. Mr. Griffin and certain irrevocable trusts
created for the benefit of his children own, directly or indirectly, all of the
issued and outstanding shares of Class B Common Stock of RISCORP and after the
merger will directly and indirectly own 100% of the outstanding capital stock of
RISCORP. Because Mr. Griffin indirectly owns and controls over 90% of the Class
B Common Stock and, therefore, over 86% of all votes entitled to be cast by
RISCORP's shareholders, RISCORP cannot liquidate, merge or otherwise be acquired
without his consent. See "The Parties -- William D. Griffin and Acquisition
Corp."
Acquisition Corp.
Griffin Acquisition Corp. is a Florida corporation owned and controlled by
Mr. Griffin. Acquisition Corp. was organized by Mr. Griffin solely for purposes
of effecting the merger. See "The Parties -- William D. Griffin and Acquisition
Corp."
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting will be held on April , 2000 at 10:00 a.m., Eastern
Standard Time, at the Sheraton Colony Square, 188 14th Street, N.E., Atlanta,
Georgia 30361.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, the shareholders will be asked:
- to consider and vote upon a proposal to approve and adopt the merger
agreement and the transactions contemplated therein;
- if necessary, to consider and vote upon a proposal to approve an
adjournment or postponement of the special meeting in order to solicit
additional proxies; and
- to transact such other business as may properly come before the special
meeting.
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VOTING
The Board of Directors has set the close of business on February 28, 2000
as the record date for determining shareholders entitled to vote at the special
meeting. At the special meeting, in accordance with RISCORP's Amended and
Restated Articles of Incorporation, each share of Class A Common Stock will be
entitled to one vote and each share of Class B Common Stock will be entitled to
ten votes. As of the record date, there were 14,258,671 shares of Class A Common
Stock outstanding and entitled to vote and 24,334,443 shares of Class B Common
Stock outstanding and entitled to vote. As of such date, there were
approximately holders of record. See "The Meeting -- Record Date;
Shares Outstanding and Entitled to Vote" and "-- Required Vote; Voting
Agreement."
You may revoke your proxy at any time before it is voted by delivering a
written notice of revocation to the President of RISCORP, by executing and
delivering a late-dated proxy or by attending the special meeting and giving
oral notice of your intention to vote in person. Your attendance at the special
meeting will not in and of itself constitute a revocation of an executed and
delivered proxy. See "The Meeting -- Revocability of Proxies."
REQUIRED VOTE; VOTING AGREEMENT
Under RISCORP's Amended and Restated Articles of Incorporation, approval of
the merger agreement and the consummation of the transactions contemplated
therein requires (a) the affirmative vote of at least eighty percent (80%) of
the votes entitled to be cast by the holders of all issued and outstanding
shares of Class A Common Stock and Class B Common Stock, voting as a single
class; and (b) the affirmative vote of a majority of the votes entitled to be
cast by the holders of all issued and outstanding shares of Class A Common Stock
and Class B Common Stock, voting as a single class, who are not affiliates of
Mr. Griffin. In addition, pursuant to Section 607.0901 of the Florida Business
Corporation Act, approval of the merger agreement and the merger requires the
affirmative vote of two-thirds of the votes entitled to be cast by the holders
of the issued and outstanding shares of Class A Common Stock and Class B Common
Stock, voting as a single class, who are not affiliates of Mr. Griffin. As a
condition to the consummation of the merger, the merger agreement requires the
affirmative vote of the holders of two-thirds of the outstanding shares of Class
A Common Stock.
William D. Griffin, The RISCORP Group Holding Company, Limited Partnership,
William D. Griffin Family Limited Partnership, Charlotte K. Griffin Trust Number
3, Anna F. Griffin Trust Number 3 and John Ford Griffin Trust Number 3
collectively own, beneficially and of record, all of the outstanding shares of
Class B Common Stock. Mr. Griffin disclaims beneficial ownership of the shares
of Class B Common Stock held by the trusts created for the benefit of his
children. These shareholders, representing in the aggregate over 94% of the
votes entitled to be cast by holders of Class A Common Stock and Class B Common
Stock, voting as a single class, have entered into a voting agreement insuring
that all of their shares will be voted in favor of the merger agreement and the
transactions contemplated therein. Because these shareholders are not record
holders or beneficial owners of any shares of Class A Common Stock, the voting
agreement will have no impact on the vote required by the holders of Class A
Common Stock pursuant to the terms of the merger agreement.
Pursuant to the terms of a management agreement between The Phoenix
Management Company, Ltd. and RISCORP and its subsidiaries, Phoenix was granted a
restricted stock award for 1,725,000 shares of Class A Common Stock, subject to
vesting provisions contained in a restricted stock award agreement. Walter E.
Riehemann, who controls the operations of Phoenix as the president and sole
shareholder of its general partner, has indicated that he intends to vote all of
Phoenix's shares in favor of the merger agreement and the transactions
contemplated therein and that he agrees with the recommendations and reasons of
the Board of Directors as set forth under the heading "Special
Factors -- Recommendation of the Board of Directors."
Under RISCORP's Amended and Restated Bylaws, approval of the proposal to
adjourn or postpone the special meeting for a period of not more than 60 days
for the purpose of soliciting additional proxies requires a majority of the
votes entitled to be cast by holders of all outstanding shares of Class A Common
Stock and
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Class B Common Stock, voting as a single class. Mr. Griffin controls the vote
necessary to unilaterally approve this proposal.
MERGER CONSIDERATION
Each holder of Class A Common Stock (other than holders of Class A Common
Stock who properly perfect their appraisal rights under Florida law) will
receive $2.85 in cash, without interest thereon and less any required
withholding taxes, for each share of Class A Common Stock that he, she or it
owns as of the effective time of the merger (subject to a downward adjustment as
provided in the merger agreement if the legal and accounting expenses incurred
by RISCORP in connection with the merger after November 3, 1999 exceed $1.5
million), plus the contingent right to receive an additional pro rata cash
amount if RISCORP recovers any amounts from Zenith, Arthur Andersen LLP, the
neutral auditors and neutral actuaries engaged to resolve the purchase price
dispute between Zenith and RISCORP, or their respective insurers, in settlement
and final discharge of all alleged errors made in the determination of the Final
Business Balance Sheet (as defined in the Asset Purchase Agreement by and among
RISCORP, its subsidiaries and Zenith dated June 17, 1997, as amended). On
January 5, 2000, RISCORP filed suit against Zenith and Arthur Andersen LLP
seeking to monetize this contingent right; however, given the uncertainties
inherent in the litigation process, RISCORP is unable to predict the ultimate
outcome of this litigation and, accordingly, it is possible that holders of
Class A Common Stock will only receive the $2.85 cash portion of the merger
consideration in connection with the merger. See "The Merger -- Merger
Consideration." Each share of Class B Common Stock issued and outstanding
immediately prior to the effective time of the merger will continue to remain
issued and outstanding.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has determined that the merger is fair to, and in
the best interests of, RISCORP and the shareholders and unanimously recommends
that you vote FOR approval and adoption of the merger agreement and the
transactions contemplated thereby. Each member of the Board of Directors is an
independent outside director. To ensure the Board's independence from Mr.
Griffin, each current member of the Board entered into an agreement with Mr.
Griffin in 1997 that requires Mr. Griffin to vote his shares in favor of the
election of the current directors and Frederick M. Dawson (now deceased) to the
Board, and prohibits Mr. Griffin from taking any action to remove them from the
Board. Accordingly, in voting to approve the merger agreement, the Board
carefully reviewed and considered the terms and conditions of the proposed
merger and unanimously concluded that the merger is in the best interests of the
holders of Class A Common Stock. The $2.85 per share purchase price in the
merger represents a premium of approximately $1.35 over the amount that would be
immediately distributable to holders of Class A Common Stock if RISCORP were
presently liquidated given the substantial amount of cash that would need to be
placed in a liquidating trust for an indefinite period of time, $1.04 over the
highest "bid" price of a share of Class A Common Stock on the day before the
announcement of the merger, and $0.52 over the net book value per share as of
September 30, 1999, on a fully-diluted basis. In addition, because RISCORP has
no operating activities, the Board of Directors believes that Mr. Griffin is the
only person who could be reasonably expected to pay any premium for shares of
the Class A Common Stock. See "Special Factors -- Recommendation of the Board of
Directors."
CONFLICTS OF INTEREST
In considering the recommendation of the Board of Directors with respect to
the merger, you should be aware of certain inherent conflicts of interest.
William D. Griffin, the sole shareholder of Acquisition Corp., is the beneficial
owner of 22,176,052 shares of Class B Common Stock. The other 2,158,391
outstanding shares of Class B Common Stock are held by various irrevocable
trusts that Mr. Griffin created for the benefit of his children. If the merger
is consummated, the only outstanding capital stock of RISCORP will be Class B
Common Stock, all of which will be held by Mr. Griffin and such irrevocable
trusts. Pursuant to the terms of a voting agreement, Mr. Griffin and each of the
irrevocable trusts owning shares of Class B Common Stock have agreed to vote
their shares in favor of the merger.
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Prior to the asset sale with Zenith, the Board of Directors decided that it
would be in the best interests of RISCORP to outsource its day-to-day management
functions following the consummation of the sale. The Board of Directors also
decided that in order to retain qualified management and to more closely align
the interests of management with the shareholders of RISCORP, it would be in the
best interests of RISCORP to grant management an equity interest in RISCORP.
Accordingly, RISCORP entered into a management agreement with The Phoenix
Management Company, Ltd. on February 18, 1998, pursuant to which Phoenix was
granted a restricted stock award for 1,725,000 shares of Class A Common Stock.
Walter E. Riehemann, the President of RISCORP, beneficially owns a majority
interest in Phoenix, a Florida limited partnership, and controls its operations
as president and the sole shareholder of its general partner, Dawson Managers,
Inc. As of the date of this Proxy Statement, shares had vested
under the terms of the restricted stock award to Phoenix. Immediately prior to
the consummation of the merger, the Board of Directors shall cause all remaining
unvested shares of restricted stock to vest. In addition, effective December 1,
1999, the Phoenix management agreement was amended and assigned to Dawson
Managers. The amendment to the management agreement reduces the monthly
management fee and the termination fee originally provided for in the management
agreement.
The merger agreement and additional agreements also contain provisions to
release and indemnify the current and former officers and directors of RISCORP
and to pay or reimburse the reasonable fees and expenses incurred by the current
officers and directors of RISCORP and Stephen C. Rece, a former chief financial
officer of RISCORP, in connection with any litigation initiated by Mr. Griffin
or a related party after the merger. See "Special Factors -- Interests of
Certain Persons in the Merger."
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the merger, holders of Class A Common Stock will have
no ownership interest in RISCORP. As a consequence, after the merger the holders
of Class A Common Stock will not share in the future earnings and growth of
RISCORP or the risks associated with such earnings and growth. The holders of
Class A Common Stock will, however, receive an immediate cash payment of $2.85
per share which reflects a premium over (a) the amount immediately distributable
to shareholders assuming a present liquidation of RISCORP; (b) the highest "bid"
price of a share of Class A Common Stock on the day before the announcement of
the merger; and (c) the net book value per share of Class A Common Stock as of
September 30, 1999. Such cash amount may not be otherwise available to holders
of Class A Common Stock in the future given the costs that may be incurred by
RISCORP in maintaining its status as a public company and in resolving the
contingencies currently pending against the company, and other costs that may
arise prior to any such liquidation. Additionally, RISCORP believes it has
potential claims it may assert against Mr. Griffin for the damages it incurred
as a result of Mr. Griffin's actions while he was an officer and director of the
company. However, Mr. Griffin has indicated that he has meritorious defenses
against such claims and intends to assert such defenses vigorously should
RISCORP initiate any action against him. See "Special Factors -- Background of
the Merger." If the merger is completed, Mr. Griffin would be released from any
such potential claims. See "The Merger -- General Release."
After the merger, William D. Griffin and certain trusts established for the
benefit of his children will be the sole direct or indirect beneficial owners of
RISCORP and will be the beneficiaries of all of the earnings, growth and
corporate opportunities of RISCORP in the future (if any). Mr. Griffin has
informed RISCORP that he has no present intention to reorganize, liquidate,
change the dividend rate of, or change the corporate structure of RISCORP. After
the merger, RISCORP will deregister its Class A Common Stock under the
Securities Exchange Act of 1934 and accordingly RISCORP and its officers,
directors and 10% shareholders will no longer be required to make the filings
required by the Securities Exchange Act of 1934. See "Special Factors -- Certain
Effects of the Merger."
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<PAGE> 20
CONDITIONS TO THE MERGER
Consummation of the merger is subject to various conditions, including:
- the approval and adoption of the merger agreement and the merger by the
affirmative vote or consent of at least (a) 80% of the votes entitled to
be cast by the holders of all issued and outstanding shares of Class A
Common Stock and Class B Common Stock, voting together as a single class,
and (b) two-thirds of the votes entitled to be cast by the holders of all
issued and outstanding shares of Class A Common Stock voting separately
as a class;
- the divestiture or surrender of RISCORP's insurance licenses; and
- satisfaction of other conditions customary to transactions of this type.
See "The Merger -- Conditions to the Merger."
TERMINATION OF THE MERGER AGREEMENT
Acquisition Corp. and RISCORP may agree at any time (including any time
after the special meeting) to terminate the merger agreement. In addition,
either Acquisition Corp. or RISCORP may terminate the merger agreement without
the agreement of the other party under specified circumstances. See "The
Merger -- Termination of the Merger Agreement."
DISSENTERS' RIGHTS OF APPRAISAL
Any holders of Class A Common Stock who do not wish to accept the
consideration set forth in the merger agreement have the right under Section
607.1302 of the Florida Business Corporation Act to dissent from the merger and
obtain the "fair value" of their shares. This "right of appraisal" is subject to
a number of restrictions and technical requirements. Generally, in order to
exercise appraisal rights:
- before the shareholder vote is taken on the proposed merger, the
shareholder must deliver written notice of the shareholder's intent to
demand payment for his, her or its shares if the proposed merger is
consummated; and
- the shareholder must not vote his, her or its shares in favor of the
proposed merger.
A PROXY OR A VOTE AGAINST THE MERGER AGREEMENT AND THE MERGER DOES NOT
CONSTITUTE A NOTICE OF INTENT TO DEMAND PAYMENT AND, THEREFORE, WILL NOT PROTECT
YOUR RIGHT OF APPRAISAL UNDER FLORIDA LAW. Appendix B to this Proxy Statement
contains the Florida statutes relating to your right of appraisal. Failure to
follow all of the steps required by these statutes will result in the loss of
your right of appraisal. See "The Merger -- Dissenters' Rights of Appraisal" and
Appendix B.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of consideration in the merger will be a taxable transaction to
the holders of Class A Common Stock for U.S. federal income tax purposes under
the Internal Revenue Code and may be a taxable transaction for foreign, state
and local income tax purposes as well. Holders of Class A Common Stock will
recognize a gain or loss measured by the difference between the amount of
consideration they receive and their tax basis in the shares of Class A Common
Stock exchanged therefor. Holders of Class A Common Stock should consult their
own tax advisors regarding the U.S. federal income tax consequences of the
merger, as well as any tax consequences under state, local or foreign laws. See
"Special Factors -- Federal Income Tax Consequences."
FINANCING OF THE MERGER
The aggregate merger consideration will be provided out of the assets of
RISCORP. At the closing of the merger, assuming no holders of Class A Common
Stock exercise and perfect their appraisal rights in connection with the merger,
holders of Class A Common Stock will receive aggregate merger consideration of
approximately $40.6 million for their shares minus the amount by which the legal
and accounting expenses of RISCORP incurred in connection with the merger after
the date of the merger agreement exceed $1.5 million. We do not currently
anticipate that such legal and accounting expenses will exceed this amount. In
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<PAGE> 21
addition to the foregoing cash consideration, pursuant to the terms of the
merger agreement, the holders of Class A Common Stock shall also have a
contingent right to receive an additional pro rata cash amount if RISCORP
recovers any amounts from Zenith or other specified parties. See "Special
Factors -- Financing and Expenses of the Merger."
ACCOUNTING TREATMENT
The assets and liabilities of Acquisition Corp. will be recorded at their
historical cost by RISCORP as of the date of the merger. See "Special
Factors -- Accounting Treatment."
LITIGATION REGARDING THE MERGER
On or about February 15, 2000, a putative shareholder class action lawsuit
was filed in the Circuit Court of the 12th Judicial Circuit, in and for Sarasota
County, Florida by Harris Blackman, an alleged holder of Class A Common Stock of
RISCORP purporting to act individually and on behalf of all holders of Class A
Common Stock who are similarly situated. The defendants named in the case are
RISCORP, William D. Griffin, Seddon Goode, Jr., George E. Greene III and Walter
L. Revell. The plaintiff alleges that the defendants breached their fiduciary
duties in connection with the proposed merger and that the cash merger
consideration of $2.85 per share is unfair and inadequate. The plaintiff seeks
to have the court certify the complaint as a class action and either to enjoin
the consummation of the merger until such time as the defendants adopt and
implement procedures designed to obtain the highest possible price for RISCORP,
or, if the merger is consummated as currently planned, to award an unspecified
amount of damages.
The Board of Directors of RISCORP has evaluated the allegations of the
complaint and notwithstanding such allegations, the Board has determined that
the terms of the merger agreement are fair to, and in the best interests of,
RISCORP and the holders of Class A Common Stock. RISCORP denies the plaintiffs'
allegations and intends to vigorously defend the action.
14
<PAGE> 22
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999 has been derived from
audited consolidated financial statements of RISCORP. No separate financial
information is provided for Acquisition Corp. since it is a special purpose
entity formed in connection with the proposed merger and has no operations and
no assets or liabilities. No pro forma data giving effect to the proposed merger
is provided because we do not believe that such information is material to the
shareholders in evaluating the proposed merger and merger agreement. We reached
this conclusion because (a) the proposed merger consideration is cash and a
contingent right to receive a pro rata cash amount in the event of a future
recovery against Zenith or other specified parties and (b) any pro forma
financial information about the combined results of operations of RISCORP and of
Acquisition Corp. would not provide meaningful or relevant information in
evaluating the cash merger consideration. The selected consolidated financial
data set forth below should be read in conjunction with the financial statements
of RISCORP contained in Appendices C and D.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premiums earned..................................... $ -- $ 25,819 $179,729 $173,557 $135,887
Fees and other income............................... 778 5,906 20,369 31,733 23,413
Net realized gains.................................. 150 4,280 1,546 105 1,016
Net investment income............................... 5,473 7,103 16,447 12,194 5,692
-------- -------- -------- -------- --------
Total revenues............................... 6,401 43,108 218,091 217,589 166,008
-------- -------- -------- -------- --------
Expenses:
Losses and loss adjustment expenses................. -- 24,016 104,052 114,093 82,532
Unallocated loss adjustment expenses................ -- 2,561 19,311 12,916 10,133
Commissions, general and administrative expenses 11,083 34,191 70,800 65,685 48,244
Interest expense.................................... 1,349 676 1,919 2,795 4,634
Depreciation and amortization....................... 142 2,736 7,423 11,500 1,683
-------- -------- -------- -------- --------
Total expenses............................... 12,574 64,180 203,505 206,989 147,226
-------- -------- -------- -------- --------
Income (loss) from operations......................... (6,173) (21,072) 14,586 10,600 18,782
Loss on sale of net assets to Zenith.................. (3,292) (47,747) -- -- --
-------- -------- -------- -------- --------
Income (loss) before taxes............................ (9,465) (68,819) 14,586 10,600 18,782
Income tax (benefit) expense(1)....................... (2,417) 2,056 7,300 8,202 5,099
-------- -------- -------- -------- --------
Net income (loss)............................ $ (7,048) $(70,875) $ 7,826 $ 2,398 $ 13,683
======== ======== ======== ======== ========
Net income (loss) per share(2)........................ $ (0.19) $ (1.91) $ 0.20 $ 0.07 $ 0.49
======== ======== ======== ======== ========
Net income (loss) per share assuming dilution(2)...... $ (0.19) $ (1.91) $ 0.20 $ 0.07 $ 0.45
======== ======== ======== ======== ========
Weighted average common shares outstanding............ 37,563 37,012 36,892 34,648 28,100
======== ======== ======== ======== ========
Weighted average common shares and common share
equivalents outstanding(3)(4)....................... 37,563 37,012 37,116 36,406 30,093
======== ======== ======== ======== ========
Ratio of earnings to fixed charges.................... (5.19) (96.99) 3.15 0.77 2.84
Dividends per share................................... 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments......................... $ 85,574 $ 37,868 $253,634 $281,963 $92,713
Total assets....................... 95,076 123,393 749,650 828,442 443,242
Long-term debt............................... -- -- 15,609 16,303 46,417
Shareholders' equity......................... 90,298 95,566 163,533 157,308 16,157
Book value per share......................... 2.40 2.58 4.41 4.32 0.54
</TABLE>
- ---------------
(1) Certain subsidiaries of RISCORP were S Corporations prior to the
Reorganization (as referred to in note 1(a) to RISCORP's consolidated
financial statements contained in Appendix D) and were not subject to
corporate income taxes.
15
<PAGE> 23
(2) RISCORP has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." As required by that pronouncement, these amounts have,
for all years presented, been recalculated in accordance with its
provisions.
(3) The 1995 shares exclude 2,556,557 shares of Class A Common Stock reserved
for issuance pursuant to the exercise of stock options outstanding as of
December 31, 1995, having a weighted average exercise price of $3.96 per
share.
(4) The 1997 and 1996 shares include 790,336 and 225,503 shares, respectively,
of Class A Common Stock pursuant to the contingency clause in the
acquisition agreement with IAA. See Note 4 to RISCORP's consolidated
financial statements contained in Appendix D).
16
<PAGE> 24
THE MEETING
DATE, TIME AND PLACE
The special meeting will be held on April , 2000, at 10:00 a.m., Eastern
Standard Time, at the Sheraton Colony Square, 188 14th Street, N.E., Atlanta,
Georgia 30361.
MATTERS TO BE CONSIDERED
At the special meeting, the shareholders will be asked to consider and vote
upon a proposal to approve and adopt the Plan and Agreement of Merger, dated
November 3, 1999, by and among Griffin Acquisition Corp., a Florida corporation,
William D. Griffin and RISCORP, and to approve the consummation of the
transactions contemplated therein, including the merger of Acquisition Corp.
with and into RISCORP. A copy of the merger agreement is attached hereto as
Appendix A, and the description of the merger contained in this Proxy Statement
is qualified in its entirety by reference to Appendix A. See "The Merger."
The shareholders will also be asked to consider and vote upon a proposal to
approve an adjournment or postponement of the special meeting for a period of
not more than 60 days for the purpose of soliciting additional proxies in the
event RISCORP fails to receive a sufficient number of votes to approve the
merger agreement and the merger.
The Board of Directors knows of no business that will be presented for
consideration at the special meeting other than the matters described in this
Proxy Statement. If any other matters properly come before the special meeting,
the persons named in the enclosed form of proxy or their substitutes will vote
in accordance with their best judgment on such matters.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The Board of Directors of RISCORP has fixed the close of business on
February 28, 2000 as the record date for the determination of holders of shares
of Class A Common Stock and Class B Common Stock entitled to notice of and to
vote on each matter submitted to a vote at the special meeting and any
adjournment(s) or postponement(s) thereof. On the record date, RISCORP had
outstanding 14,258,671 shares of $.01 par value Class A Common Stock, entitled
to one vote per share, held by holders of record, and 24,334,443 shares
of $.01 par value Class B Common Stock, entitled to ten votes per share.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Class A Common Stock and Class B Common Stock of RISCORP
entitled to vote is necessary to constitute a quorum at the special meeting.
Shares represented by proxies will be counted as shares present for purposes of
establishing a quorum. Shares represented by proxies that are marked "abstain"
also will be counted as shares present for purposes of establishing a quorum. If
RISCORP determines that additional time is needed for the solicitation of
proxies to approve the merger, RISCORP may adjourn or postpone the special
meeting with a vote of shareholders present at the special meeting.
REQUIRED VOTE; VOTING AGREEMENT
If shareholders specify in the accompanying proxy a choice with respect to
any matter to be acted upon, the shares represented by such proxies will be
voted as specified.
Under RISCORP's Amended and Restated Articles of Incorporation, approval of
the merger agreement and the consummation of the transactions contemplated
therein requires (a) the affirmative vote of at least eighty percent (80%) of
the votes entitled to be cast by the holders of all issued and outstanding
shares of Class A Common Stock and Class B Common Stock, voting as a single
class; and (b) the affirmative vote of a majority of the votes entitled to be
cast by the holders of all issued and outstanding shares of Class A Common Stock
and Class B Common Stock, voting as a single class, who are not affiliates of
Mr. Griffin. In addition, pursuant to Section 607.0901 of the Florida Business
Corporation Act, approval of the merger agreement and the merger requires the
affirmative vote of the holders of two-thirds of the votes entitled to be cast
by the holders of the issued and outstanding shares of Class A Common Stock and
Class B Common
17
<PAGE> 25
Stock, voting as a single class, who are not affiliates of Mr. Griffin. As a
condition to the consummation of the merger, the merger agreement requires the
affirmative vote of the holders of two-thirds of the outstanding shares of Class
A Common Stock.
William D. Griffin, The RISCORP Group Holding Company, Limited Partnership,
William D. Griffin Family Limited Partnership, Charlotte K. Griffin Trust Number
3, Anna F. Griffin Trust Number 3 and John Ford Griffin Trust Number 3
collectively own, beneficially and of record, all of the outstanding shares of
Class B Common stock. Mr. Griffin disclaims beneficial ownership of the shares
of Class B Common Stock held by the trusts created for the benefit of his
children. These shareholders, representing in the aggregate over 94% of the
votes entitled to be cast by holders of Class A Common Stock and Class B Common
Stock, voting as a single class, have entered into a voting agreement insuring
that all of their shares will be voted in favor of the merger agreement and the
transactions contemplated therein. Because these shareholders are not record
holders or beneficial owners of any shares of Class A Common Stock, the voting
agreement will have no impact on the vote required by the holders of Class A
Common Stock pursuant to the terms of the merger agreement.
Pursuant to the terms of a management agreement between The Phoenix
Management Company, Ltd. and RISCORP, Phoenix was granted a restricted stock
award for 1,725,000 shares of Class A Common Stock, subject to vesting
provisions contained in a restricted stock award agreement. Walter E. Riehemann,
who controls the operations of Phoenix as the president and sole shareholder of
its general partner, has indicated that he intends to vote all of Phoenix's
shares in favor of the merger agreement and the transactions contemplated
therein and that he agrees with the recommendations and reasons of the Board of
Directors as set forth under the heading "Special Factors -- Recommendation of
the Board of Directors."
Under RISCORP's Amended and Restated Bylaws, approval of the proposal to
adjourn or postpone the special meeting for a period of not more than 60 days
for the purpose of soliciting additional proxies requires a majority of the
votes entitled to be cast by holders of all outstanding shares of Class A Common
Stock and Class B Common Stock, voting as a single class. Mr. Griffin controls
the votes necessary to unilaterally approve this proposal.
Proxies which indicate abstentions will have the same effect as votes
against the merger agreement and the transactions contemplated therein and
against the proposal to adjourn or postpone the special meeting. IF NO
INSTRUCTIONS ARE INDICATED IN THE PROXIES RETURNED TO RISCORP, SUCH PROXIES WILL
BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND CONSUMMATION OF
THE TRANSACTIONS CONTEMPLATED THEREIN AND FOR THE PROPOSED ADJOURNMENT OR
POSTPONEMENT OF THE SPECIAL MEETING TO SOLICIT ADDITIONAL PROXIES.
With respect to all matters to be voted on by the shareholders, holders of
shares of Class A Common Stock are entitled to one vote per share and holders of
shares of Class B Common Stock are entitled to ten votes per share.
At the special meeting, broker "non-votes" may occur. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner votes on one
proposal, but does not vote on another proposal because the nominee does not
have discretionary voting power and has not received instructions from the
beneficial owner. Broker "non-votes" will be treated as votes against the
relevant proposals. Broker "non-votes" will be counted as present for purposes
of determining the existence of a quorum.
SHAREHOLDERS HAVE THE RIGHT TO DISSENT FROM APPROVAL OF THE MERGER AND
OBTAIN PAYMENT OF THE FAIR VALUE OF THEIR SHARES OF CLASS A COMMON STOCK BY
FOLLOWING THE PROCEDURES DESCRIBED IN SECTION 607.1320 OF THE FLORIDA BUSINESS
CORPORATION ACT. SEE APPENDIX B HERETO AND "THE MERGER -- DISSENTERS' RIGHTS OF
APPRAISAL."
18
<PAGE> 26
REVOCABILITY OF PROXIES
A shareholder who signs and returns a proxy may revoke it at any time
before it is voted by taking one of the following three actions: (1) giving
written notice of revocation to Walter E. Riehemann, President of RISCORP; (2)
executing and delivering a proxy with a later date; or (3) voting in person at
the special meeting.
Votes cast by proxy or in person at the special meeting will be tabulated
by one or more inspectors of election appointed at the special meeting, who also
will determine whether a quorum is present for the transaction of business. The
expense of preparing, printing, and mailing proxy materials to the shareholders
will be borne by RISCORP.
PROXY SOLICITATION
RISCORP will bear the costs of solicitation of proxies for the special
meeting. In addition to solicitation by mail, directors and officers of RISCORP
may solicit proxies from shareholders by telephone, telegram, personal interview
or otherwise. Such directors and officers will not receive additional
compensation but may be reimbursed for out-of-pocket expenses in connection with
such solicitation. In addition to solicitation by directors and officers of
RISCORP, RISCORP has engaged Georgeson Shareholder Communications Inc. to act as
solicitation agent in connection with the solicitation of proxies for the
special meeting. RISCORP will pay the fees and expenses of such solicitation
agent, which fees consist of a base fee of $9,000 and a fee of $5.00 per direct
telephone solicitation, exclusive of any expenses. Such fees and expenses will
not reduce the merger consideration payable to holders of Class A Common Stock
in connection with this merger. Brokers, nominees, fiduciaries and other
custodians have been requested to forward soliciting material to the beneficial
owners of Class A Common Stock held of record by them, and such custodians will
be reimbursed for their reasonable expenses. To date, RISCORP has spent
approximately $7,000 in connection with retaining its proxy solicitation agent.
INDEPENDENT AUDITORS
RISCORP has been advised that representatives of KPMG, LLP, RISCORP's
independent auditors for 1999, will attend the special meeting, make a statement
if they desire to do so and will be available to respond to appropriate
questions.
19
<PAGE> 27
THE PARTIES
RISCORP
Prior to April 1, 1998, RISCORP, Inc. offered managed care workers'
compensation insurance and services designed to lower the overall costs of
work-related claims, while providing quality cost-effective care to injured
employees. As of March 31, 1998, RISCORP provided workers' compensation
insurance and services to approximately 18,000 policyholders, principally in
Florida and the southeastern United States.
On April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith
Insurance Company. In connection with the sale, RISCORP ceased substantially all
of its former business operations, including its insurance operations, effective
April 1, 1998. Thereafter, the operations of RISCORP consisted primarily of the
administration of the day-to-day activities of the surviving corporate entities,
compliance with the provisions of its agreement with Zenith, and the investment,
protection, and maximization of the remaining assets of RISCORP. At the present
time, RISCORP has no plans to resume any operating activities.
RISCORP is a Florida corporation with its principal executive offices
located at 2 North Tamiami Trail, Suite 608, Sarasota, Florida 34236-5642. The
telephone number of RISCORP is (941) 366-5015.
Officers and Directors. The following summaries set forth the name of each
director and executive officer of RISCORP and a description of his positions and
offices with RISCORP; a brief description of his principal occupations and
business experience during the last five years; and certain directorships held
by him in companies other than RISCORP. Unless otherwise indicated, the business
address of each director and executive officer of RISCORP is 2 North Tamiami
Trail, Suite 608, Sarasota, Florida 34236-5642. Each officer and director is a
citizen of the United States. The information provided in this Proxy Statement
concerning directors and executive officers of RISCORP is based upon statements
made or confirmed to RISCORP by or on behalf of such individuals, except to the
extent such information is contained in the records of RISCORP.
Walter E. Riehemann has served as RISCORP's President since November 3,
1999, and as its Senior Vice President, General Counsel and Secretary since
October 1997. Mr. Riehemann joined RISCORP as Associate General Counsel in
August 1995 and was promoted to Vice President, General Counsel and Secretary in
June 1997. Prior to joining RISCORP, Mr. Riehemann had been associated with the
law firm of Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia since 1993.
Edward W. Buttner, IV has served as RISCORP's Chief Accounting Officer
since April 1, 1998. Since 1976, Mr. Buttner has practiced as a certified public
accountant in Jacksonville, Florida, where he is currently a principal of
Buttner Hammock & Company, a public accounting firm. Prior to founding Buttner
Hammock, Mr. Buttner was employed in various capacities with Ernst & Young LLP
from June 1, 1976, including as a partner from October 1, 1988 to April 3, 1992.
Seddon Goode, Jr. has served as a director of RISCORP since November 9,
1996. Mr. Goode has served as President and as a director of University Research
Park, Inc. since 1981. Mr. Goode is also a director and chairman of Canal
Industries, Inc.
George E. Greene III has served as a director of RISCORP since 1995. Mr.
Greene has been a private consultant since 1994. Mr. Greene served in various
management positions with Florida Power Corporation and other subsidiaries of
Florida Progress Corporation from 1962 to 1993. Mr. Greene retired from Florida
Power Corporation as a Senior Vice President on January 1, 1994.
Walter L. Revell has served as a director of RISCORP since 1995. Mr. Revell
has been Chairman and Chief Executive Officer of H.J. Ross Associates, Inc., a
consulting engineering, architectural and planning firm, since 1991 and Chairman
and Chief Executive Officer of Revell Investments International, Inc. since
1984. Mr. Revell is also a director of The St. Joe Company, Dycom Industries,
Inc. and NCL Cruises, Ltd.
Criminal Proceedings. On September 18, 1997, the United States Attorney's
office in Pensacola, Florida announced that a United States grand jury had
indicted RISCORP Management Services, Inc., a
20
<PAGE> 28
wholly owned subsidiary of RISCORP, and five former officers, including Mr.
Griffin, for various charges stemming from alleged illegal political campaign
contributions. On September 18, 1997, the Board of Directors of RISCORP approved
a guilty plea by RISCORP Management Services to a single count of conspiracy to
commit mail fraud. The guilty plea was entered by RISCORP Management Services
and accepted by the court on October 9, 1997. As a result of an agreement
negotiated with the United States Attorney, the court dismissed an indictment
against RISCORP on the same day.
On August 10, 1998, the U.S. District Court for the Northern District of
Florida, Tallahassee Division, sentenced RISCORP Management Services to pay:
- a fine of $300,000;
- a special assessment fee of $400;
- the Florida Department of Law Enforcement $75,000 for the costs of the
investigation; and
- the State of Florida $50,000 in restitution.
All of these amounts have been paid in full. The defendants other than Mr.
Griffin received sentences varying from fines of $10,000 to $25,000, probation
from one to three years, and, in some cases, community service.
RISCORP has never made any formal request to Mr. Griffin or the other
former officers seeking reimbursement of any of these amounts. Prior to the
Board of Directors making any such formal request of Mr. Griffin, Mr. Griffin
approached the Board with his proposal to purchase all of the outstanding Class
A Common Stock. As a consequence of this proposal, the Board of Directors took
into consideration these expenditures in its negotiation with Mr. Griffin with
respect to the merger and in its deliberations with respect to fairness of the
proposed transaction to the holders of Class A Common Stock.
WILLIAM D. GRIFFIN AND ACQUISITION CORP.
The RISCORP Group Holding Company, Limited Partnership is the holder of
record of 17,268,841 shares of Class B Common Stock and William D. Griffin
Family Limited Partnership is the holder of record of 4,907,211 shares of Class
B Common Stock. The general partner of The RISCORP Group Holding Company,
Limited Partnership and William D. Griffin Family Limited Partnership is Gryphus
Company I and Gryphus Company II, respectively. The president, director and
controlling shareholder of each of Gryphus Company I and Gryphus Company II is
William D. Griffin. Mr. Griffin is a citizen of the United States.
Griffin Acquisition Corp. is a Florida corporation that is owned and
controlled by Mr. Griffin. Acquisition Corp. was formed solely for the purpose
of effecting the merger. The principal business purpose of Gryphus Company I and
Gryphus Company II is to act as the general partner of each of The RISCORP Group
Holding Company, Limited Partnership and William D. Griffin Family Limited
Partnership, respectively. The principal business office address and telephone
number for each of The RISCORP Group Holding Company, Limited Partnership,
William D. Griffin Family Limited Partnership, Gryphus Company I and Gryphus
Company II are Bank of America Center, Suite 850, 101 Convention Center Drive,
Las Vegas, Nevada 89109, and (702) 598-3738. The address and telephone number
for each of Mr. Griffin and Acquisition Corp. are P.O. Box 728, Sarasota,
Florida 34236, and (941) 316-6800.
Mr. Griffin served as Chairman and Chief Executive Officer of RISCORP from
1988 until 1997. Mr. Griffin also served on the Board of Directors of the
Florida Workers' Compensation Joint Underwriting Association, Inc. from 1993 to
1994. Since 1997, Mr. Griffin's principal business occupation has been serving
as Chairman of Griffin Company I, Inc. (d/b/a Griffin Holdings) and its
affiliates. The address and telephone number for Griffin Company I, Inc. are
P.O. Box 728, Sarasota, Florida 34236, and (941) 316-6800.
Criminal Proceedings. Mr. Griffin was convicted (following his entry of a
plea of guilty) to one count of an indictment charging him with the violation of
Title 18 U.S.C. Section 371 (conspiracy to defraud the United States) in the
U.S. District Court for the Northern District of Florida, Tallahassee Division,
on
21
<PAGE> 29
August 10, 1998. He paid a civil penalty of $1,500,000, was fined $75,000, which
was satisfied by payment of the civil penalty, and was committed to the U.S.
Bureau of Prisons to be imprisoned for a total of five months and upon release
therefrom to be on supervised release for a term of three years (with the
initial five months thereof on home detention).
CERTAIN TRANSACTIONS
Promissory Note. In 1997 and 1998, RISCORP advanced pre-indictment legal
expenses to five former officers in connection with criminal charges instituted
against them by the federal government. The advancement of these expenses was
subject to an undertaking that each such officer would reimburse RISCORP in the
event it was subsequently determined that he was not entitled to be indemnified
by RISCORP for such expenses. Following the conviction of each former officer,
RISCORP sought repayment of the advanced legal fees. Mr. Griffin promptly
reimbursed RISCORP for the expenses advanced on his behalf. When three of these
former officers refused to reimburse RISCORP, RISCORP filed suit against each.
In December 1998, RISCORP reached an agreement with Mr. Griffin whereby each of
these suits was dismissed without prejudice in exchange for Mr. Griffin's
agreement to reimburse RISCORP for the pre-indictment legal expenses advanced to
them. This obligation is evidenced by a promissory note in the amount of
$245,000. The promissory note is payable to RISCORP on the earlier of January 1,
2001 or the date on which RISCORP makes a substantial distribution to the
holders of Class A Common Stock. In the event that the promissory note is not
paid in accordance with its terms, RISCORP is entitled to re-file and prosecute
any or all of the three actions that it dismissed against these former officers.
Directors Agreement. Mr. Griffin is currently a party to a directors
agreement with the current members of the Board of Directors of RISCORP.
Pursuant to this agreement, Mr. Griffin has agreed to refrain from taking any
action to remove any director of RISCORP so long as any shares of Class A Common
Stock remain outstanding. See "Special Factors -- Consequences to Shareholders
if the Merger is Not Approved."
HISTORY OF RISCORP AND REASONS FOR THE MERGER
On April 1, 1998, RISCORP sold substantially all of its assets to Zenith
Insurance Company for approximately $92 million in cash and the assumption by
Zenith of $15 million in debt. In connection with the sale to Zenith, RISCORP
ceased substantially all of its former business operations, including its
insurance operations, effective April 1, 1998. Since that time, RISCORP's
operations have 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 with Zenith, the resolution of remaining
liabilities, and the investment, protection, and maximization of the remaining
assets of RISCORP.
The sale to Zenith followed a number of material adverse developments that
impaired RISCORP's ability to continue as a going concern. To understand the
basis for the proposed merger with Acquisition Corp. and the other alternatives
considered by RISCORP in evaluating the terms of this transaction, an
understanding of the numerous adverse developments experienced by RISCORP since
its initial public offering is necessary. These adverse developments included:
Delay in Preparation of 1996 Audited Financial
Statements. Following the initial public offering of Class A
Common Stock in February 1996, RISCORP experienced significant
personnel turnover in its finance and treasury areas. The rapid
growth of RISCORP, its multiple acquisitions, and the loss of key
personnel impaired the ability of its internal accounting staff to
prepare auditable financial statements. On March 25, 1997, RISCORP
announced that it would delay the release of its previously
scheduled 1996 fourth quarter and year-end earnings reports.
On May 27, 1997, RISCORP informed the Florida Department of
Insurance that it would be unable to timely file the audited
statutory financial statements required by state insurance laws.
RISCORP's audited financial statements for the year ended December
31, 1996 were not made available until October 23, 1997. The
amended audited statutory financial statements of
22
<PAGE> 30
RISCORP's insurance subsidiaries were filed with the Missouri Department
of Insurance on August 30, 1997 and with the Florida Department of
Insurance on September 16, 1997.
Loss of Future Specialty Disability Trust Fund Claims with
Accident Dates after December 31, 1997. In March 1997, the Florida
legislature passed a bill substantially changing the Florida
Special Disability Trust Fund. While this legislative action did
not preclude RISCORP from being able to collect prior claims
against the Special Disability Trust Fund, it resulted in the loss
of recovery from the Special Disability Trust Fund of funds
relating to future claims occurring on or after January 1, 1998 and
required certain other claims to be refiled to be considered for
reimbursement. This legislation change created substantial
uncertainty in the marketplace regarding the ultimate financial
impact it would have on the workers' compensation insurance
carriers operating in Florida, with RISCORP being one of the
largest.
Legal Proceedings. At the time RISCORP negotiated the sale to
Zenith, RISCORP and certain of its former executive officers and
directors were parties to or implicated in a number of suits and
investigations that significantly impaired its ability to find a
buyer. These legal proceedings included:
- a purported class action lawsuit arising out of RISCORP's
acquisition of Commerce Mutual Insurance Company;
- nine shareholder class action lawsuits that were consolidated
into a single complaint seeking the recovery of damages
related to alleged violations of federal securities laws; and
- a federal grand jury investigation that ultimately led to the
issuance of indictments which charged RISCORP, one of its
subsidiaries, and five former officers of RISCORP, including
Mr. Griffin, with violating federal laws arising from alleged
illegal political campaign contributions.
Regulatory Deadlines and Possible Administrative Action. On May
19, 1997, the Florida Department of Insurance issued a letter
informing RISCORP of the Florida Department of Insurance's
inability to complete 1995 and 1996 financial examinations of
RISCORP's Florida-domiciled insurance subsidiaries. The Florida
Department of Insurance imposed a deadline of June 9, 1997, after
which it would take what it deemed "appropriate administrative
action" unless RISCORP provided information requested by the
Florida Department of Insurance for completion of its financial
examinations of RISCORP. Following considerable negotiation between
the Florida Department of Insurance and RISCORP representatives, on
June 13, 1997, the Florida Department of Insurance agreed to a
third extension of the deadline for taking administrative action
until June 17, 1997. In granting this extension, representatives of
the Florida Department of Insurance stated that if RISCORP failed
to deliver a definitive purchase agreement, along with a
cut-through endorsement, by noon on June 17, RISCORP's Florida-
domiciled insurance subsidiaries would be placed under
administrative supervision. The Board of Directors believed that
any such action by the Florida Department of Insurance would likely
result in a complete loss of shareholder value.
A New Board and New Management. At the time of RISCORP's initial public
offering of shares of Class A Common Stock, the Board of Directors consisted of
five members, two of whom were outside directors and three of whom were
executive officers of RISCORP. In October 1996, RISCORP initiated a search for a
third outside director. On November 9, 1996, the size of the Board was increased
to seven members and Seddon Goode, Jr. was elected as a director, together with
L. Scott Merritt, the Senior Vice President, Chief Investment Officer and
Treasurer of RISCORP.
In April 1997, Mr. Griffin recommended to the Board of Directors that
RISCORP consider new leadership at the chief executive officer level to help
restore RISCORP's credibility and integrity with the investing public, the
regulatory authorities, and the rating agencies. Mr. Griffin recommended
Frederick M. Dawson, an executive with substantial insurance industry expertise,
to the Board. The Board approved the
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recommendation and, on May 20, 1997, Mr. Griffin agreed to take a leave of
absence as Chief Executive Officer and to be relieved of all of his duties as
such until May 31, 1999. Also, Mr. Griffin agreed that during such period he
would forego receiving the salary and incentives set forth in his Employment and
Severance Agreement, dated January 1, 1995, that totaled approximately $1.5
million annually.
Mr. Dawson was elected as Chief Executive Officer of RISCORP and elected as
a director on May 20, 1997. As part of this management restructuring, James A.
Malone, Richard Halloy, and L. Scott Merritt, each an executive officer and
director of RISCORP, were requested by the Board to resign as directors. Each
did so on May 20, 1997. Mr. Halloy also resigned as an officer on May 20, 1997.
Additionally, Mr. Griffin entered into a directors agreement with Mr.
Dawson and the three outside directors, Messrs. Goode, Greene and Revell,
providing, in part, that: (a) so long as Mr. Griffin was a director, that he
would be Chairman of the Board of RISCORP; (b) Mr. Griffin would vote all of his
shares for each member of that Board at the 1997 Annual Shareholders Meeting;
and (c) until the Annual Shareholders Meeting in 1998, no directors would be
elected without the unanimous vote of all of the directors; and (d) Mr. Griffin
agreed not to take any action in his capacity as the controlling shareholder of
RISCORP to remove any of the directors.
Collectively, these actions resulted in RISCORP having a new Chief
Executive Officer, a Board of Directors consisting of five members, three of
whom were outside directors, and an agreement by the controlling shareholder,
Mr. Griffin, to keep that Board in place. On June 5, 1997, RISCORP's Chief
Financial Officer, Treasurer, and President and Chief Operating Officer each
resigned. The Board elected a new Chief Financial Officer, a new General
Counsel, and a new Treasurer on June 10, 1997 and also elected Mr. Dawson to
serve as President of RISCORP. Following Mr. Griffin's indictment and the
issuance of an order by the Florida Insurance Commission prohibiting him from
having any affiliation with an insurance company, the directors agreement was
amended and, on September 18, 1997, Mr. Griffin resigned as a director of
RISCORP and all other positions with RISCORP and its subsidiaries. Under the
amended directors agreement, Mr. Griffin agreed to vote his shares as required
to re-elect Messrs. Dawson, Revell, Greene and Goode as directors of RISCORP
until such time as no shares of Class A Common Stock remained outstanding.
On June 17, 1997, RISCORP entered into the definitive agreement with Zenith
for the sale of substantially all of the assets of RISCORP. A copy of the
purchase agreement was sent via facsimile to the Florida Department of Insurance
immediately prior to the noon deadline it had imposed. Following shareholder
approval, the transaction with Zenith closed on April 1, 1998. The purchase
agreement contemplated a post-closing determination of the net book value of
RISCORP and, therefore, the purchase price payable by Zenith for the assets. On
March 15, 1999, almost a year after the transaction had closed, the independent
auditor engaged to resolve the purchase price dispute between the parties
rendered its decision as to the net book value of the assets transferred to
Zenith as of April 1, 1998.
The purchase agreement with Zenith had been negotiated by the Strategic
Alternatives Committee of the Board of Directors and representatives of Alston &
Bird LLP, the independent law firm engaged by the committee to assist it in
evaluating the strategic alternatives available to RISCORP. Following the
successful negotiation of the definitive agreement with Zenith within the time
period imposed by the Florida Department of Insurance, RISCORP terminated the
engagement (as to corporate legal matters) of the law firm that had represented
it in the initial public offering and retained Alston & Bird to serve as its
principal outside law firm with respect to corporate and securities issues.
Sale to Zenith Insurance Company and the Contingent Right to any Future
Recovery from Zenith. On April 1, 1998, RISCORP sold substantially all of its
assets to Zenith and received, on the closing date, $35 million in cash, of
which $10 million was placed in escrow to secure its indemnification obligations
to Zenith. Pursuant to the terms of the asset purchase agreement, the final
purchase price to be paid by Zenith was the amount by which the book value of
the transferred assets exceeded the book value of the transferred liabilities
assumed by Zenith on the closing date. On June 9, 1998, RISCORP delivered to
Zenith a closing date balance sheet (the "Proposed Business Balance Sheet")
representing the audited statement of transferred assets and transferred
liabilities as of April 1, 1998. The Proposed Business Balance Sheet indicated
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RISCORP's proposal as to the final purchase price of approximately $141 million,
less the $35 million previously paid by Zenith.
Subsequent to June 9, 1998, Zenith suggested adjustments to the Proposed
Business Balance Sheet that totaled approximately $211 million. These suggested
adjustments principally related to differences in the estimation of loss and
loss adjustment expense reserves and the estimate of the allowance for
uncollectible receivables. The adjustments proposed by Zenith reflected Zenith's
position that the aggregate value of the liabilities assumed by Zenith exceeded
the value of the assets transferred by approximately $70 million. Zenith's
proposal would have resulted in Zenith making no additional payments in
connection with its purchase of the assets.
On July 10, 1998, RISCORP and Zenith engaged a nationally recognized
independent accounting firm to serve as neutral auditors and neutral actuaries
to resolve the items in dispute between the parties and to determine the Final
Business Balance Sheet for this transaction. On March 19, 1999, the neutral
auditors delivered its determination of the Final Business Balance Sheet and, as
such, its conclusion that the book value of the transferred assets exceeded the
book value of the transferred liabilities assumed by Zenith at closing by $92.3
million. Therefore, pursuant to the terms of the asset purchase agreement and
given the $35 million previously paid by Zenith at closing, Zenith was required
to pay an additional $57.3 million in immediately available funds on or before
March 26, 1999, plus interest thereon at 6.13% per annum from April 1, 1998
through the final payment date. On March 26, 1999, Zenith paid RISCORP $50.8
million (including $3.1 million in interest), deposited $2.8 million into escrow
to secure RISCORP's indemnification obligations to Zenith, and RISCORP retained,
with Zenith's approval, $6.8 million of cash, certificates of deposit and
securities that were identified as transferred assets, but had not been
physically transferred to Zenith by such date.
While the asset purchase agreement provides that the decision of the
neutral auditors is final, binding and conclusive, RISCORP believes that the
neutral auditors made certain errors in calculating the amount by which the book
value of the transferred assets exceeded the book value of the transferred
liabilities in connection with its determination of the Final Business Balance
Sheet. In addition to this discrepancy as to the purchase price, following the
closing of this transaction other disputes arose between the parties regarding,
among other things, Zenith's assumption of certain operating liabilities of the
business and each party's indemnification obligations under the asset purchase
agreement. On July 7, 1999, RISCORP and Zenith settled, with certain limited
exceptions, the claims arising out of the sale. The terms of the settlement
preserved RISCORP's right to seek correction of alleged errors made by the
neutral auditors in connection with its determination of certain reinsurance
recoverable adjustments contained in the Final Business Balance Sheet.
On October 7, 1999, the neutral auditors denied RISCORP's request for
correction of these errors. As a result, on January 5, 2000, RISCORP filed an
action against Zenith and the neutral auditors seeking a declaration from the
court, and an award of specific performance, correcting the neutral auditors'
alleged errors. In this suit, RISCORP is seeking an increase in the net book
value of RISCORP as reflected on the Final Business Balance Sheet of either
$18,057,000 or $5,872,000, plus interest, depending upon the findings of the
court as to the nature of the neutral auditors' alleged errors. RISCORP is
seeking to recover this sum from Zenith as additional purchase price in
connection with the asset sale. On February 14, 2000, RISCORP received notice
from Zenith of its intent to submit to arbitration an issue included in this
complaint. RISCORP intends to dispute Zenith's right to submit any matters to
arbitration arising out of the neutral auditors' alleged errors.
Pursuant to the terms of the merger agreement, the merger consideration
payable to the holders of Class A Common Stock includes the contingent right to
receive the pro rata net cash amount, if any, of the value of any recovery
obtained by RISCORP from Zenith in settlement and final discharge of alleged
errors made in the determination of the Final Business Balance Sheet. Given the
uncertainties inherent in the litigation process, RISCORP is unable to predict
the ultimate outcome of this litigation and, accordingly, it is possible that
the only consideration to be received by holders of Class A Common Stock in
connection with the merger will be $2.85 in cash.
The Claims Committee. As a result of the many adverse developments
experienced by RISCORP following its initial public offering, the Board of
Directors appointed a Claims Committee in late 1997 to evaluate and, where
appropriate, make recommendations to the Board of Directors with respect to
claims and
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contingencies pending against RISCORP or instituting claims on behalf of RISCORP
against third parties. The Claims Committee was originally comprised of four
members. Following the sale to Zenith, the Claims Committee accelerated its
efforts to identify and evaluate potential claims to be asserted by RISCORP. As
part of this process, upon the advice of Alston & Bird, the Claims Committee
interviewed a number of independent law firms to assist the committee in
evaluating various claims that might be asserted by RISCORP and to provide
independent legal representation to the committee. The Claims Committee retained
Kilpatrick Stockton LLP, a 440-lawyer law firm based in Atlanta, Georgia, for
this purpose. In January 1998, the Claims Committee was reconstituted with two
members. The Claims Committee met 11 times in 1998 and 16 times in 1999.
The Claims Committee, with the assistance of its independent counsel,
evaluated the basis and merits for asserting various claims against entities or
individuals that might have been responsible for or contributed to the adverse
developments experienced by RISCORP. Mr. Griffin's actions while an officer and
director of RISCORP were a principal focus of the Claims Committee process. In
evaluating potential claims against Mr. Griffin, the Committee and its
independent counsel investigated the factual basis for any potential cause of
action against him, the legal theories upon which to assert a right of recovery,
the potential recoverable damages attributable to his actions, and the time and
cost of pursuing an action against him. The information developed by the
committee in this process was used by the Board of Directors and its
representatives in the subsequent negotiation of the terms of the merger
agreement, including the premium reflected in the $2.85 cash portion of the
merger consideration.
Evaluation of Strategic Alternatives Following the Sale to Zenith. As
previously mentioned, following the sale to Zenith, RISCORP's operations
consisted principally of the administration of the day-to-day activities of the
surviving corporate entities, investing the proceeds from the sale to Zenith,
complying with the provisions of the asset purchase agreement, identifying,
evaluating, and pursuing the recovery of contingent assets and claims available
to RISCORP, and resolving contingent liabilities pending against RISCORP. As
part of this process, the Board of Directors considered the alternatives
available to it in order to maximize the cash distributable to the Class A
shareholders as quickly as possible. The Board concluded that the following were
the only two viable alternatives:
Effect an Orderly Winding-Up of the Operations of RISCORP. The
winding-up of RISCORP's operations would principally require the
continued monetization of all of the contingent assets of RISCORP
and the resolution of all contingent liabilities to effect, at an
indefinite time in the future, an orderly liquidation of RISCORP.
Because the contingent assets and liabilities known to exist were
principally claims or potential claims involving litigation, the
winding-up process could reasonably be expected to continue for a
period of years and require RISCORP to institute and defend itself
in litigation against various parties during this process. In
evaluating this alternative, the Board considered the time value of
money to the shareholders of RISCORP, as well as the drain on
corporate assets that could reasonably be expected in connection
with any such litigation. Proceeding on this basis would eventually
require the adoption of a plan of liquidation which, under Florida
law, would require shareholder approval (i.e., Mr. Griffin's
consent) and would ultimately result in a distribution of the
remaining assets of RISCORP to the shareholders on a pro rata basis
with Mr. Griffin receiving approximately $0.63 of every $1.00
distributed. Mr. Griffin has indicated that he has no present
intention to approve a plan of liquidation.
Negotiate a Sale of RISCORP to Mr. Griffin. Given the unique
circumstances facing RISCORP, Mr. Griffin is the only person who
would have an interest in acquiring all of the outstanding shares
of Class A Common Stock at a premium over its anticipated
liquidation value. Accordingly, assuming the per share purchase
price to be paid by Mr. Griffin includes an acceptable premium over
the liquidation value otherwise payable to the holders of Class A
Common Stock in a future liquidation, such a transaction could
achieve the Board's desire to maximize the amount to be paid for
each outstanding share of Class A Common Stock and permit such
payment to be made much sooner than would otherwise be possible in
connection with a liquidation of RISCORP. The premium to be paid by
Mr. Griffin would, in essence, reflect the negotiated amount by
which the anticipated net recovery for all contingent assets,
including contingent claims against Mr. Griffin, exceeds the
anticipated costs in resolving all contingent liabilities.
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SPECIAL FACTORS
BACKGROUND OF THE MERGER
Preliminary Negotiations with Representatives of Mr. Griffin. In April
1999, following the sale of RISCORP's assets to Zenith, counsel to Mr. Griffin
with respect to his corporate interests contacted counsel to RISCORP to discuss
the possibility of Mr. Griffin acquiring the outstanding shares of Class A
Common Stock. On April 19, 1999, the parties entered into a confidentiality
agreement permitting Mr. Griffin's representatives access to RISCORP's books and
records for due diligence purposes.
On May 25, 1999, counsel to RISCORP and counsel to Mr. Griffin met to
discuss a proposed acquisition. At this meeting, counsel to Mr. Griffin was
advised that the Claims Committee was completing its investigation of the
actions of Mr. Griffin while serving as an officer and director of RISCORP and
that any purchase price to be proposed by Mr. Griffin would have to reflect a
substantial premium over the anticipated liquidation value of RISCORP as
compensation for the damages RISCORP believed it sustained as a result of Mr.
Griffin's conduct. Accordingly, it was suggested that counsel to Mr. Griffin
meet with independent counsel to the Claims Committee to discuss the claims
RISCORP believed it had a basis to assert against Mr. Griffin and the damages
attributable to such claims.
On June 9, 1999, counsel to Mr. Griffin met with independent counsel to the
Claims Committee to discuss these issues. At this meeting, independent counsel
to the Claims Committee delivered a draft of a civil complaint against Mr.
Griffin, along with a demand letter dated June 9, 1999. Counsel to Mr. Griffin
subsequently requested the opportunity to make a presentation to the Board of
Directors of RISCORP regarding Mr. Griffin's acquisition offer.
On July 13, 1999, counsel to RISCORP and counsel to Mr. Griffin met to
discuss the terms of the proposed transaction. At this meeting, counsel to Mr.
Griffin delivered a draft term sheet, a draft merger agreement (without
specifying a purchase price), and its analysis of the size of the judgment that
would have to be recovered by RISCORP against Mr. Griffin for a distribution to
the holders of Class A Common Stock to equal or exceed the purchase price per
share to be proposed to the Board by Mr. Griffin. The parties at the meeting
discussed the structure being proposed by Mr. Griffin, contingencies with
respect to the payment of the merger consideration to the holders of Class A
Common Stock, and the assumptions used in developing the comparative analysis of
the financial terms of Mr. Griffin's offer. The draft term sheet contemplated a
merger in which each share of Class A Common Stock would be converted into a
cash amount equal to the net book value per share of RISCORP as computed as of
the close of business on the last day of the month immediately preceding the
month of closing, plus an unspecified premium per share over such net book
value. In determining net book value, Mr. Griffin's proposal contemplated the
establishment of agreed upon reserves for several of the contingent liabilities
then pending against RISCORP. These reserves would have the effect of reducing
net book value and, therefore, reducing the amount ultimately payable to the
holders of Class A Common Stock upon closing the merger. Mr. Griffin's proposal
also provided for the exclusion of up to $500,000 in transaction expenses from
the determination of net book value to, in effect, have these expenses paid by
Mr. Griffin.
On July 14, 1999, the Board met with representatives of management and
counsel to RISCORP to discuss the structure of the transaction being proposed
and the terms contained in the draft merger agreement.
On July 15, 1999, counsel to Mr. Griffin made a presentation to the Board
of Directors regarding the proposed transaction. Also present at this meeting
were the General Counsel and Principal Accounting Officer of RISCORP and counsel
to RISCORP. During the presentation, counsel to Mr. Griffin outlined the
proposed structure of the transaction, the benefits Mr. Griffin perceived to the
holders of Class A Common Stock in proceeding expeditiously, and an analysis of
the time and expense that would be incurred by RISCORP in pursuing any
litigation against Mr. Griffin for events that occurred while he was an officer
and director and the defenses which Mr. Griffin possessed with respect to such
potential claims. Counsel to Mr. Griffin also presented an analysis of the value
expected to be received by the holders of Class A Common Stock under various
alternatives available to RISCORP, and compared each alternative to Mr.
Griffin's privatization offer. This analysis focused on the size of the judgment
that RISCORP would have to recover
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against Mr. Griffin for the amount ultimately distributable to the holders of
Class A Common Stock to equal or exceed the merger consideration being offered.
Mr. Griffin's proposal contemplated that each share of Class A Common Stock
would receive a cash amount equal to the net book value per share of RISCORP as
of the last day of the month immediately proceeding the closing, plus a premium
of $0.10 per share. The net book value calculation proposed by Mr. Griffin would
include reserve adjustments for several known contingent liabilities, as well as
the exclusion of up to $500,000 in transaction expenses. The proposal did not
contemplate any post-closing adjustment that would give the holders of Class A
Common Stock the benefit of any contingent assets recovered by RISCORP following
the determination of net book value per share. Following the presentation and
questions, Mr. Griffin's representatives were excused from the meeting.
The Board, members of management, and counsel to RISCORP discussed the
proposal and recommendations for proceeding. As part of this discussion, the
Board acknowledged the inadequacy of the premium and the fact that the proposed
adjustments to net book value could substantially reduce the merger
consideration to be received by the holders of Class A Common Stock. The Board
agreed that the premium proposed by Mr. Griffin did not reflect (a) any value
for the contingent assets of RISCORP that may be realized after the closing of
this transaction; (b) the tax benefit associated with the historical operating
losses of RISCORP; or (c) adequate compensation to RISCORP for the damages the
Board believed could be attributed to Mr. Griffin's conduct while an officer and
director of RISCORP. Given the probability that other contingent liabilities
would arise between the execution of the merger agreement and the closing of
this transaction, the Board concluded that if an acceptable premium could be
negotiated, establishing a fixed purchase price per share would be beneficial to
the holders of Class A Common Stock and could potentially be structured to shift
the risk of unknown liabilities to Mr. Griffin.
Following further discussion, the Board authorized management to negotiate
an agreement in principle with Mr. Griffin, subject to the approval of the Board
of Directors. The Board instructed management that any agreement in principle
would have to include a substantial improvement in the price per share Mr.
Griffin was willing to pay. Management was also instructed to continue to pursue
a resolution of the contingencies pending against RISCORP in the event terms
acceptable to the Board could not be reached.
On July 27, 1999, counsel to RISCORP and counsel to Mr. Griffin met with
independent counsel to the Claims Committee to discuss RISCORP's potential
claims against Mr. Griffin and other former officers and directors of RISCORP.
The claims being considered by RISCORP included (a) breach of fiduciary duty,
fraud and civil theft claims arising out of the payment of illegal political
campaign contributions; (b) contribution and indemnification claims with respect
to RISCORP's settlement of the consolidated shareholder securities class action
lawsuit; and (c) claims under federal and state Racketeer Influenced and Corrupt
Organization Acts related to the payment of illegal political campaign
contributions. Independent counsel to the Claims Committee was still
investigating the merits of, and factual basis for, these claims, possible
remedies to be asserted by RISCORP, and a quantification of the damages
attributable to such claims. In addition, counsel to Mr. Griffin advised RISCORP
and counsel to the Claims Committee that it believes Mr. Griffin has meritorious
defenses to such potential claims, including, but not limited to defenses based
upon: (a) Mr. Griffin's conduct as an officer and director of RISCORP; (b) the
applicable standards for such conduct under Florida law; (c) the applicable
provisions of RISCORP's bylaws; (d) Mr. Griffin's resignation as an officer and
director and execution of the directors agreement; (e) the settlement of the
securities class action relating to RISCORP's initial public offering and the
releases executed by the parties in connection therewith; and (f) the numerous
and varied factors that contributed to or were associated with RISCORP's adverse
developments following its initial public offering and the difficulties
associated with assessing the damages that are attributable to each such factor
and the speculative nature of any such undertaking. Counsel to Mr. Griffin has
indicated that Mr. Griffin would vigorously assert such defenses and others in
any action initiated by RISCORP against Mr. Griffin. In addition, counsel to Mr.
Griffin noted that any proceeds from any claim against Mr. Griffin would be
payable to RISCORP and would inure to the benefit of all shareholders of
RISCORP, including Mr. Griffin and the various trusts created for the benefit of
his children. Finally, Mr. Griffin's counsel advised RISCORP that it would take
RISCORP in excess of 6 years to finally resolve potential claims against Mr.
Griffin. Counsel to RISCORP and independent counsel
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to the Claims Committee later briefed management and members of the Board on the
issues discussed at this meeting.
On August 3, 1999, the Claims Committee met with its independent counsel
and counsel to RISCORP to discuss the valuation issues related to the claims
against Mr. Griffin and the issues raised by counsel to Mr. Griffin in its
presentation to the Board and subsequent meetings with counsel.
On August 4, 1999, the Board met to, among other things, receive a
presentation from management and counsel regarding the status of the
negotiations with Mr. Griffin. As part of this presentation, management
described the status of the material contingencies that were pending and the
valuation issues related to the ongoing negotiations. These material
contingencies included (a) possible claims to be asserted against Zenith and the
neutral auditors in connection with the determination of the Final Business
Balance Sheet in connection with the asset sale to Zenith; (b) possible claims
to be asserted against the Florida Department of Labor seeking refunds related
to prior assessments paid by RISCORP; (c) contingent liabilities related to
ongoing litigation being defended by RISCORP; and (d) the potential for
additional claims which could be asserted against RISCORP but which were unknown
at that date. The Board also received a presentation from independent counsel to
the Claims Committee regarding the potential claims against Mr. Griffin.
Following a discussion of these issues, the Board authorized management to
communicate a counter offer to Mr. Griffin's initial proposal in the amount of
$3.65 per share. On August 6, 1999, counsel to RISCORP communicated RISCORP's
counter offer to Mr. Griffin's representatives.
For several weeks following the communication of the counter offer, counsel
to RISCORP and Mr. Griffin periodically conferred regarding the status of
various contingent assets or liabilities and the terms of the proposed
transaction. During this period, each party prepared a valuation analysis of the
known claims and contingencies to support its respective position. On September
9, 1999, counsel to Mr. Griffin presented a counter proposal to RISCORP
increasing the proposed premium per share to be paid over the adjusted net book
value of RISCORP from $0.10 per share to approximately $0.40 per share. This
counter proposal was still unacceptable to the Board of Directors.
On September 14, 1999, RISCORP countered Mr. Griffin's most recent
proposal. RISCORP proposed that each share of Class A Common Stock receive cash
in an amount equal to the greater of (a) $3.10 per share, or (b) net book value
per share plus $0.50.
On September 20, 1999, a board meeting was convened to discuss, among other
things, the status of the negotiations. Management and counsel to RISCORP
briefed the Board on the issues and the respective positions of the parties. No
formal action was taken by the Board during this meeting.
On September 22, 1999, independent counsel to the Claims Committee advised
management and counsel to RISCORP that on September 30, 1999, the statute of
limitations might expire as to certain claims against Mr. Griffin if litigation
was not initiated. Counsel to RISCORP contacted Mr. Griffin's counsel to discuss
this issue and RISCORP's decision to file suit absent an agreement that would
toll the running of the statute of limitations. On September 30, 1999, the
parties entered into a tolling agreement.
On September 30, 1999, counsel to RISCORP and counsel to Mr. Griffin met to
discuss the status of various contingencies material to price. Following
considerable discussion of the issues, an agreement in principle was reached as
to the price per share to be paid to the holders of Class A Common Stock,
subject to the approval of the Board of Directors of RISCORP and Mr. Griffin.
The agreement in principle contemplated that a fixed price would be payable to
the holders of Class A Common Stock in the amount of $2.95 per share. Based on a
liquidation value per share of RISCORP common stock of approximately $2.23 at
June 30, 1999, the $2.95 purchase price reflected a premium of $0.72 per share.
On October 2, 1999, a special board meeting was convened and counsel to RISCORP
briefed management and the Board on the terms of the agreement in principle and
the proposed resolution of various issues regarding the structure of the
transaction. Following discussion, the Board approved the agreement in principle
and authorized management to negotiate the definitive terms of the merger
agreement, subject to final approval by the Board. During the following week,
counsel to RISCORP and counsel to Mr. Griffin had several telephone
conversations regarding the terms of the transaction.
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On October 7, 1999, the Alabama Department of Insurance unexpectedly
asserted that RISCORP owed it an additional $1.7 million in premium taxes for
the 1996 tax year. This potential liability was unknown to the parties at the
time the agreement in principle was reached.
On or about October 11, 1999, RISCORP received from Arthur Andersen, the
neutral auditors, the decision that it had denied RISCORP's request for
correction of certain errors contained in the determination of the final
purchase price to be paid by Zenith. Based on the nature of the error and the
submissions to the neutral auditors from both RISCORP and Zenith on this issue,
RISCORP had believed that there was a significant likelihood that the neutral
auditors would render a decision in its favor as to at least $5.8 million, plus
accrued interest since April 1, 1998. This expectation formed a material
component of the agreement in principle reached as to price.
On October 14, 1999, counsel to RISCORP and counsel to Mr. Griffin met to
discuss these and other adverse developments recently experienced by RISCORP.
Several days following this meeting, RISCORP was advised by Mr. Griffin's
representatives that it would be necessary to conduct further due diligence to
determine whether and on what basis Mr. Griffin would be prepared to proceed
given these recent developments. During the following two weeks, representatives
of Mr. Griffin continued their due diligence into these issues in an effort to
assess the effect on the purchase price previously negotiated. Also during this
period, counsel for RISCORP and counsel for Mr. Griffin continued to negotiate
the terms of the merger agreement and exchanged comments on several revised
drafts of the documents. On October 24, 1999, Mr. Dawson died of complications
from colon cancer.
On October 29, 1999, counsel to RISCORP was advised that Mr. Griffin was no
longer willing to proceed with this transaction at the price previously
negotiated given the recent adverse developments experienced by RISCORP.
Final Negotiations. Later, on October 29, 1999, counsel to RISCORP briefed
management and discussed various alternatives available to RISCORP. These
alternatives included initiating suit against Mr. Griffin, renegotiating the
price payable by Mr. Griffin in connection with this transaction given the
recent adverse developments experienced by RISCORP, or continuing to resolve the
contingencies pending against RISCORP in contemplation of a future liquidation.
A meeting of the Board of Directors was convened that afternoon. Counsel to
RISCORP described the status of the negotiations to the Board and the issues
raised at the meeting with counsel to Mr. Griffin. A discussion of the issues
ensued, including the valuation issues created by the recent adverse
developments. Given the fact that the denial by the neutral auditors appeared to
be the principal basis upon which Mr. Griffin was attempting to renegotiate
price and given RISCORP's view as to the merits of its claim against Zenith, the
Board discussed the advisability of making a concession as to price, but
retaining for the benefit of the holders of Class A Common Stock the contingent
right to receive the pro rata amount of any recovery from Zenith. If RISCORP
were successful in its efforts to recover at least $5.8 million, plus interest,
from Zenith, such recovery would result in an additional payment of
approximately $0.16 per share of Class A Common Stock, less a pro rata share of
the expenses incurred in prosecuting the claim. Counsel suggested that such
proposal be combined with revisions to the merger agreement that would
effectively shift the risk of loss to Acquisition Corp. for any additional
adverse developments experienced by RISCORP between the signing of the merger
agreement and closing the merger or, at a minimum, limiting the circumstances
upon which Mr. Griffin could refuse to close the transaction. Given the Board's
view that it was likely that additional liabilities could arise prior to
closing, the Board agreed with this proposal and authorized management and
counsel to RISCORP to continue to negotiate these points with representatives of
Mr. Griffin.
Over the course of the next two days, the parties negotiated these issues
and, on October 31, 1999, the parties agreed, subject to Board approval, to a
resolution of the final terms of the merger agreement. On November 1, 1999, a
board meeting was convened. Counsel to RISCORP described the proposed resolution
of the issues to the Board. After considering all of the factors set forth under
the section entitled "Recommendation of the Board of Directors" below, the Board
concluded that the inherent risks associated with litigation, as well as the
time, expense and speculative nature of significant damages against Mr. Griffin,
could result in the holders of Class A Common Stock receiving significantly less
per share if litigation were
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initiated against Mr. Griffin. The Board also concluded that the terms of the
merger were more favorable to the holders of Class A Common Stock than the
prospect of continuing to resolve the contingencies pending against RISCORP
given the likelihood that the net assets of RISCORP would be reduced during this
process and the fact that Mr. Griffin's consent would be required to effect a
final liquidation of RISCORP. As a result, the Board concluded that the merger
was in the best interests of the holders of Class A Common Stock and counsel
advised the Board that the final documents would be distributed to them on
November 2, 1999 for review and, if in acceptable form, approval.
Decision of the Board of Directors. On November 3, 1999, a board meeting
was convened to consider the terms of the merger agreement and the merger. Also
participating in the meeting were members of management, counsel to RISCORP, and
independent counsel to the Claims Committee. In connection with its
consideration of the terms of the merger agreement, the Board received the
verbal report from independent counsel to the Claims Committee summarizing the
value of potential claims that may be asserted by RISCORP against Mr. Griffin,
and a financial analysis from the Principal Accounting Officer of RISCORP
addressing the size of the gross judgment that would have to be awarded to
RISCORP in litigation against Mr. Griffin to equal the premium included in the
$2.85 cash portion of the merger consideration. Following discussion and
consideration of their fiduciary duties to RISCORP and its shareholders, on
November 3, 1999, the members of the Board unanimously approved the merger
agreement and the merger. See "The Merger -- Recommendation of the Board of
Directors."
Decision Not to Engage a Financial Advisor. The Board of Directors
considered, and rejected, the idea of engaging an investment banking firm or
other financial advisor to render an opinion to RISCORP as to the fairness of
the merger consideration to the holders of Class A Common Stock from a financial
point of view. In making its decision not to seek such an opinion, the Board
considered the fact that substantially all of the assets of RISCORP consist of
cash, investment grade securities and contingent claims that may be asserted by
RISCORP. Similarly, a substantial portion of the liabilities of RISCORP consist
of contingent liabilities related to pending litigation or contingent
liabilities that may arise in the future as a result of RISCORP's prior
operations. With the assistance of both counsel to RISCORP and, where
appropriate, independent counsel to the Claims Committee, the Board quantified
the range of values it reasonably expected to be recovered by RISCORP with
respect to the contingent assets and the costs reasonably expected to be
incurred by RISCORP with respect to the contingent liabilities. Given the fact
that the valuation of these contingencies is principally a function of the
probability of recovery or loss based on the legal theories supporting the
claims, and a quantification of the likely damages attributable to such
contingencies, the Board concluded that counsel to RISCORP and independent
counsel to the Claims Committee were in the best position to assist the members
of the Board in their determination of the relative merits and the reasonable
range in values attributable to each of these contingencies. This conclusion,
combined with the fact that the tangible assets of RISCORP are substantially all
cash and investment grade securities with values that are readily ascertainable,
led the Board to ultimately conclude that a fairness opinion from a financial
advisor would not be meaningful to the holders of Class A Common Stock in their
evaluation of the terms of the merger.
Absence of an Unaffiliated Representative. The Board of Directors did not
retain an unaffiliated representative to act solely on behalf of the holders of
RISCORP's common stock who are not affiliates of Mr. Griffin in negotiating the
terms of the merger. Given the fact that all the members of the Board are
independent outside directors and the fact that the Claims Committee had the
assistance of independent outside counsel in assessing the potential claims
against Mr. Griffin, the Board does not believe that the absence of an
unaffiliated representative adversely impacted (1) the procedures the Board
employed to evaluate and approve the merger; or (2) the fairness of the
transaction to the holders of Class A Common Stock.
Potential Claims Against Mr. Griffin. In assessing the potential claims
against Mr. Griffin, the Board, with the assistance of independent counsel to
the Claims Committee, attempted to analyze the size of the gross judgment that
would have to be recovered from Mr. Griffin to equal the premium reflected in
the cash portion of the merger consideration. In making this assessment,
independent counsel to the Claims Committee advised the Board that it could
anticipate that the liquidation of these potential claims could take
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2 to 4 years, at best, with RISCORP incurring legal fees of approximately $2
million per year during the pendency of such a suit. For purposes of analyzing
the size of the gross judgment necessary to equal the premium reflected in the
$2.85 cash portion of the merger consideration, the Board estimated that the
total expenses to be incurred by RISCORP in pursuing the claims against Mr.
Griffin would be $5 million. In addition, the Board was advised of and also
considered the fact that Mr. Griffin's counsel had advised RISCORP that it
believed that Mr. Griffin had meritorious defenses to such potential claims and
that Mr. Griffin intended to assert such defenses vigorously in any action
instituted by RISCORP against him. Such defenses include, but are not limited
to, defenses based on: (a) Mr. Griffin's conduct as an officer and director of
RISCORP; (b) the applicable standards for such conduct under Florida law; (c)
the applicable provisions of RISCORP's bylaws; (d) Mr. Griffin's resignation as
an officer and director and execution of the directors agreement; (e) the
settlement of the securities class action lawsuit relating to RISCORP's initial
public offering and the releases executed by the parties in connection
therewith; and (f) the numerous and varied factors that contributed to or were
associated with RISCORP's adverse developments following its initial public
offering and the difficulties associated with assessing the damages that are
attributable to each such factor and the speculative nature of any such
undertaking.
In analyzing these claims and performing a comparative analysis of the
premium reflected in the cash portion of the merger consideration, it is
important to note that any judgment against Mr. Griffin would be payable to
RISCORP and, therefore, the economic benefit of such judgment would be allocated
on a per share basis between the holders of Class A Common Stock and Class B
Common Stock. There are currently 38,593,114 shares of RISCORP common stock
issued and outstanding, of which 14,258,671 are shares of Class A Common Stock
held by the public shareholders and 24,334,443 are shares of Class B Common
Stock held by various family partnerships controlled by Mr. Griffin and trusts
created for the benefit of his children. Mr. Griffin disclaims beneficial
ownership of the Class B Common Stock held by such trusts. Accordingly, the
holders of Class A Common Stock could expect to receive their pro rata share
equal to 37% of the amount actually received by RISCORP, net of expenses, in
connection with any judgment in favor of RISCORP against Mr. Griffin or in
connection with the recovery of any other contingent assets that RISCORP might
pursue.
In evaluating the terms of the merger, the Board considered the $2.85 cash
portion of the merger consideration in relation to: (a) $1.50, which represents
the amount the Board believes would be the approximate amount immediately
distributable to holders of Class A Common Stock assuming a liquidation of
RISCORP; (b) $1.81, which represents the highest "bid" price per share of Class
A Common Stock immediately prior to the announcement of the merger; and (c)
$2.33, which represents the net book value per share as of September 30, 1999,
on a fully-diluted basis. In doing so, the Board concluded that while net book
value per share and the highest bid price per share may be relevant, for
purposes of evaluating the premium reflected in the $2.85 cash portion of the
merger consideration, it is more appropriate to compare the $2.85 to the amount
distributable to the holders of Class A Common Stock if RISCORP were liquidated.
In connection with this analysis, the Board considered RISCORP's liquidation
value of approximately $2.25 per share at September 30, 1999, and concluded that
any immediate liquidating distribution to RISCORP shareholders would have to be
reduced by as much as one-third to fund a liquidating trust pending the
resolution of all claims and contingencies that presently exist or may be
asserted against RISCORP in the future. The balance, if any, of the amount
placed in the liquidating trust would ultimately be distributable to the
shareholders upon the final resolution of all such claims and contingencies.
Based on this analysis, the Board concluded that RISCORP would need to recover a
gross judgment from Mr. Griffin in excess of $28 million to approximate the
premium reflected in the cash portion of the merger consideration.
As a result, after considering the size of the gross judgment necessary to
approximate the premium, as well as the inherent risks and uncertainties
associated with the litigation process, including the risks that (a) RISCORP may
not prevail in such litigation or that a jury could consider that the damages
attributable to Mr. Griffin's conduct were substantially less than the amount
sought to be recovered by RISCORP; (b) the litigation of claims against Mr.
Griffin could take substantially longer than 4 years; and (c) the expenses to be
incurred by RISCORP in pursuing such claims could substantially exceed the $5
million in estimated fees and expenses, the Board concluded that proceeding with
the merger was in the best interest of the holders of
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Class A Common Stock and maximizes the value of the Class A Common Stock. In
reaching such conclusion, the Board also considered the likelihood that, if
RISCORP was not successful in a suit against Mr. Griffin, the holders of Class A
Common Stock would receive significantly less per share than the $2.85 cash
portion of the merger consideration in any future liquidation, assuming Mr.
Griffin would consent to any such liquidation.
Analysis of the Other Material Contingent Assets and Liabilities. In
addition to analyzing potential claims against Mr. Griffin and Zenith, the
Board, with the assistance of counsel, also analyzed the other material
contingent assets and liabilities related to RISCORP's former business
activities and attempted to quantify the value of each in evaluating whether the
merger is in the best interests of the holders of Class A Common Stock. The
contingent assets considered by the Board to be both material and potentially
available to RISCORP were:
- Claims Against the Florida Department of Labor. On September 10, 1999
RISCORP Insurance Company and RISCORP Property & Casualty Insurance
Company filed suit against the Florida Department of Labor and Employment
Security. In this suit, RISCORP is seeking to recover certain assessments
paid to the Florida DOL from 1995 to 1997 that were allegedly paid in
error. The Florida DOL has denied liability for the requested refunds.
While the complaint does not specify the amount of refunds sought, the
Board assessed RISCORP's likelihood of prevailing on the merits, as well
as its anticipated range of recovery in evaluating the terms of the
merger and recommending its approval to the holders of Class A Common
Stock.
- Net Operating Loss Carry-Forward. In valuing this contingent asset, the
Board considered the potential value of these NOLs to the holders of
Class A Common Stock and to Mr. Griffin. The Board considered the fact
that, upon liquidation of RISCORP, the holders of Class A Common Stock
would not receive any value for the NOLs. Furthermore, given the
limitations on RISCORP's or any other party's ability to utilize these
NOLs, the Board concluded that the monetization of this contingent asset
was unlikely. Notwithstanding these limitations, in the negotiation of
the merger consideration the Board recognized and considered the fact
that Mr. Griffin may be able to derive value from the NOLs following the
consummation of the merger if he were successful in acquiring,
developing, or transferring to RISCORP business activities that generate
taxable income against which these NOLs may be offset. This point was
specifically raised in the negotiation of the merger consideration and
considered by the Board in determining that the terms of this transaction
are fair to, and in the best interest of, the holders of Class A Common
Stock.
The material contingent liabilities considered by the Board were:
- OSAA Litigation. In August 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 Riscorp National Insurance Company ("RNIC"), a wholly owned
subsidiary of RISCORP, and others. The Fund entered into a Loss Portfolio
Transfer and Assumption Reinsurance Agreement 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 was a
principal and officer of Independent Association Administrators, Inc.
("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
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defendants, including IAA, have appealed to the Supreme Court of Alabama
the trial court's denial of their motions to compel arbitration. This
case is still pending.
- Alabama Department of Revenue. On October 7, 1999, the Alabama
Department of Revenue asserted that RISCORP owed it an additional $1.7
million in premium taxes allegedly owed for the 1996 tax year. While
RISCORP has disputed its liability for this additional premium tax and
intends to vigorously defend any cause of action instituted by the
department seeking payment, the Board considered the existence of this
contingent liability in negotiating the terms of the merger. On February
24, 2000, RISCORP was advised by counsel purporting to represent the
Alabama Department of Revenue that it intended to file suit seeking
recovery of this amount.
- Bristol Hotel Litigation. On March 31, 1998, RISCORP Insurance Company
("RIC") and
RISCORP Property & Casualty Insurance Company ("RPC"), each a wholly owned
subsidiary of RISCORP, were added as defendants in a purported class
action lawsuit filed in the United States District Court for the Southern
District Florida, styled Bristol Hotel Management Corporation, et. al.,
v. Aetna Casualty & Surety Company, a/k/a Aetna Group, et. al. 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 June 9, 1999, the Eleventh Circuit remanded the case to
the district court, and the district court has assigned the case to a
magistrate for handling pre-trial matters. At a status conference held in
October 1999, the magistrate established deadlines for the filing of a
motion for leave to amend the complaint, for supplemental briefing on
pending motions, and set a hearing for March 7, 2000. Subsequent to
entering into the merger agreement, plaintiffs' counsel agreed to dismiss
all claims against the RISCORP defendants without prejudice, and has
filed a proposed Second Amended Class Action Complaint and Amended RICO
Statement that does not state claims against the RISCORP defendants. The
consent motion seeking court approval of the formal dismissal of the
RISCORP defendants is pending at this time.
- Chap-Cap Litigation. On July 9, 1999, Chap-Cap Partners, L.P., a
shareholder of RISCORP, filed a putative class action against RISCORP and
four of its present or former officers: William D. Griffin, Frederick M.
Dawson, Walter E. Riehemann, and Stephen C. Rece. Chap-Cap seeks to
represent a class of all RISCORP shareholders during the period November
19, 1997 through July 20, 1998. Chap-Cap contends that during the class
period RISCORP published materially false financial statements, resulting
in harm to the class. Chap-Cap asserts claims against the defendants
under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, as well as under Section 20(a) of the Exchange Act. Chap-Cap
requests that the Court certify a class and award the
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class compensatory damages and expenses in unspecified amounts.
Defendants Dawson (now deceased), Riehemann and Rece sought
indemnification from RISCORP. Pursuant to a series of consent orders, the
defendants have through March 27, 2000 in which to respond to Chap-Cap's
amended complaint, or to any amended complaint that may be filed. RISCORP
and the indemnified defendants deny liability to the plaintiff or to the
putative class, and intend to defend this action vigorously. Upon service
of the complaint, RISCORP promptly notified its D&O insurance carrier.
Recently, the insurance carrier sent a letter to RISCORP denying coverage
of this claim. RISCORP has disputed the insurance company's position, and
has insisted on coverage. Since this case is in the early stages and no
discovery has been conducted, RISCORP is unable to predict the ultimate
outcome of this litigation.
- Salomon Smith Barney, Inc. In April 1999, RISCORP received an invoice
from Salomon Smith Barney for approximately $2,000,000 for financial
advisory services rendered in connection with the sale to Zenith. While
RISCORP disputes any liability for the payment of such fees and intends
to vigorously defend any cause of action instituted by Salomon Smith
Barney seeking payment, this demand was also considered by the Board in
evaluating the terms of the merger.
In evaluating whether the merger is in the best interests of the holders of
Class A Common Stock, the Board considered each of the foregoing contingencies,
as well as the potential costs and expenses to be incurred by RISCORP in
pursuing or defending these claims. In doing so, the Board considered the merits
of each, the anticipated range of recovery and the uncertainties inherent in the
litigation process. The Board concluded that structuring the merger to provide
that the holders of Class A Common Stock would receive a fixed price per share
in connection with the merger would effectively shift the risk of loss related
to the resolution of these contingencies, as well as any other unknown
liabilities that exist or that may arise prior to closing, to Mr. Griffin.
Accordingly, the merger will have no effect on these contingencies other than
shifting control of the resolution of these claims to Mr. Griffin and making him
solely responsible for the costs associated therewith.
RECOMMENDATION OF THE BOARD OF DIRECTORS
At the meeting of the Board of Directors held on November 3, 1999, after
consultation with RISCORP's legal counsel, independent counsel to the Claims
Committee, and RISCORP's Principal Accounting Officer, and after analyzing the
consideration to be received by the holders of Class A Common Stock from a
financial point of view, the Board of Directors approved the merger agreement
and the merger, authorized the execution, delivery, and performance of the
merger agreement and adopted a resolution recommending to the shareholders the
approval of the merger agreement and the consummation of the merger. The Board
of Directors believes the merger agreement and the consideration to be received
by the holders of Class A Common Stock are fair to, and in the best interests
of, such shareholders. Each member of the Board of Directors is an independent
outside director. To ensure the Board's independence from Mr. Griffin, each
current member of the Board entered into an agreement with Mr. Griffin in 1997
that requires Mr. Griffin to vote his shares in favor of the election of the
current directors and Mr. Dawson (now deceased) to the Board, and prohibits him
from taking any action to remove any of them from the Board. Accordingly, in
voting to approve the merger agreement, the Board carefully reviewed and
considered the terms of the proposed merger and unanimously concluded that the
merger is in the best interests of the holders of Class A Common Stock.
In reaching its conclusion that the terms of the merger agreement are fair
to, and in the best interests of, RISCORP and its shareholders, the following
are all material positive factors considered by the Board of Directors:
- the cash portion of the purchase price in the merger includes a premium
of (1) approximately $1.35 over the amount that would be immediately
distributable to the holders of Class A Common Stock if RISCORP were
presently liquidated, given the substantial amount of cash that would
need to be placed in a liquidating trust for an indefinite period of time
to resolve contingent claims and liabilities; (2) $1.04 over the highest
"bid" price per share of the Class A Common Stock in the over-the-counter
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market on the day immediately prior to the announcement of the merger;
and (3) $0.52 over the net book value per share as of September 30, 1999,
on a fully-diluted basis.
- the merger consideration payable to the holders of Class A Common Stock
includes a contingent right to a pro rata amount of any recovery from
Zenith or other specified parties with respect to any alleged errors in
the determination of the final purchase price paid by Zenith in
connection with the asset sale;
- the terms of the merger agreement provide for, among other things, the
assumption by the surviving corporation of all liabilities of RISCORP,
whether known or unknown, without recourse to the shareholders;
- the terms of the merger agreement provide for, among other things, that
liabilities which may arise between November 3, 1999 and the closing will
not affect the purchase price payable to holders of Class A Common Stock;
- the presentation made to the Board of Directors by independent legal
counsel to the Claims Committee as to the value of potential claims that
may be asserted by RISCORP against Mr. Griffin and an estimate of the
time and legal fees and expenses to be incurred by RISCORP in pursuing
such claims;
- the presentation made to the Board of Directors by the Principal
Accounting Officer of RISCORP regarding the size of the gross judgment
that would have to be awarded to RISCORP in any litigation against Mr.
Griffin to equal the premium reflected in the $2.85 cash portion of the
merger consideration;
- the fact that RISCORP has no business operations and no other person or
entity has expressed any interest in acquiring all of the outstanding
shares of Class A Common Stock of RISCORP at any price, much less at a
premium over the current liquidation value per share;
- the fact that, under Florida law, the liquidation of RISCORP would
require the adoption of a plan of liquidation by the shareholders of
RISCORP and, accordingly, any such plan of liquidation would require the
approval of holders of the Class B Common Stock;
- the likelihood that the resolution of all known claims and contingencies
would take years and, accordingly, even assuming that shareholder
approval of a plan of liquidation could be obtained, the final
distribution to shareholders would be delayed indefinitely;
- the possibility that the costs to be incurred by RISCORP in resolving the
contingent liabilities and maintaining its status as a public company
could exceed the value of the contingent assets thereby further reducing
the amount ultimately distributable to the holders of Class A Common
Stock;
- the terms of the merger agreement provide for, among other things, an
escrow of $2,500,000 as security for RISCORP's indemnification
obligations to its officers and directors to be funded without any
reduction in the consideration payable to the holders of Class A Common
Stock through a liquidating trust or otherwise;
- the terms of the merger agreement provide for, among other things,
general cross-releases which should minimize the risk that the parties
will be engaged in potentially protracted litigation following the
consummation of the merger;
- the fact that, under Florida law, the sale of RISCORP to a third party
would require the approval of holders of the Class B Common Stock;
- the fact that operating expenses currently exceed investment income, as
well as the likelihood that the costs to be incurred in resolving the
claims and contingencies available to and pending against RISCORP may
further reduce the assets ultimately distributable to shareholders;
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- the fact that the closing of the merger is conditioned upon obtaining the
approval of the merger agreement by the vote of two-thirds of the
outstanding shares of Class A Common Stock entitled to vote at the
special meeting.
The Board also considered the following factors which it viewed as all of
the material negative factors bearing on its decision:
- the possibility that the value of the contingent assets could exceed the
value of the contingent liabilities, thereby reducing or eliminating the
premium reflected in the $2.85 cash portion of the merger consideration;
and
- the possibility that RISCORP could receive a judgment against Mr. Griffin
that would exceed the value of the premium reflected in the $2.85 cash
portion of the merger consideration.
In reaching its conclusion, the Board considered each of the foregoing
factors assigning the greatest weight to the premium which the proposed merger
consideration reflects over the anticipated liquidation value of RISCORP and,
accordingly, the size of the judgment that RISCORP would have to be awarded
against Mr. Griffin to obtain a higher price per share to holders of Class A
Common Stock. In light of the number of other factors it considered in approving
the merger agreement and the merger, the Board did not assign a relative weight
to any of the other factors considered in reaching its decision. Rather, the
Board viewed its recommendations as being based on its judgment, in light of the
totality of the information presented and considered, of the benefits of the
merger to the holders of Class A Common Stock compared to the alternatives
available to RISCORP absent a negotiated transaction with Mr. Griffin.
The Board believes that the proposed merger is procedurally fair because:
- the evaluation of the potential claims against Mr. Griffin was performed
by the Claims Committee;
- the Claims Committee was represented by independent legal counsel in
connection with its evaluation of these claims;
- the terms and conditions of the merger agreement, including the merger
consideration, resulted from arms length negotiations between the Board
and Mr. Griffin through their respective counsel and advisors;
- the merger agreement has been approved by the Board, which is comprised
solely of independent outside directors; and
- the merger agreement must be approved by the affirmative vote of the
holders of two-thirds of the votes entitled to be cast by the holders of
the issued and outstanding shares of Class A Common Stock.
The Board took special note of the treatment of certain affiliates of
RISCORP as described under "-- Interests of Certain Persons in the Merger." The
Board also considered the other alternatives available to RISCORP in light of
all the other information available to it and concluded, based on the reasons
cited above, that the merger agreement and the merger provide the greatest
opportunity to maximize value to the shareholders. ACCORDINGLY, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS APPROVE AND ADOPT THE
MERGER AGREEMENT AND APPROVE THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREIN.
CONSEQUENCES TO SHAREHOLDERS IF THE MERGER IS NOT APPROVED
In the event RISCORP fails to receive shareholder approval for the merger
at the special meeting or any adjournment of the special meeting, or if for any
other reason the merger fails to close, the Board of Directors will once again
evaluate the alternatives available to RISCORP to maximize shareholder value.
The members of the Board believe they will have only two viable
alternatives:
- resign from the Board of Directors and allow the shareholders and,
therefore, Mr. Griffin, to elect new directors of RISCORP; or
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- continue the monetization of all of the contingent assets of RISCORP and
the resolution of all contingent liabilities.
The current members of the Board are parties to a directors agreement with
Mr. Griffin dated May 19, 1997, as amended. Under the terms of the directors
agreement, until such time as RISCORP has no shares of Class A Common Stock
outstanding (at which time the agreement will terminate), Mr. Griffin agreed to
cause all of his shares of capital stock of RISCORP to be voted in favor of the
election of Messrs. Dawson (now deceased), Goode, Greene and Revell as directors
and to refrain from taking any action to remove any director of RISCORP. Upon
the resignation of the current directors, the directors agreement would be
voided and Mr. Griffin would control the votes necessary to elect a new Board of
Directors. Mr. Griffin has informed the Board that, if the merger is not
approved, he has no present intention to vote in favor of or cause the
liquidation of RISCORP or the distribution of RISCORP's assets to its
shareholders.
If the merger is not consummated, RISCORP will continue to be subject to
the personal holding company provisions of the Internal Revenue Code of 1986, as
amended, that govern corporations that have 60% or more of their income from
various passive sources and that have 50% or more of their outstanding stock
held by five or fewer individuals. Such corporations are subject to a tax of
39.6% of their undistributed personal holding company income, as defined in the
tax code, in addition to their regular income tax. If RISCORP fails to
distribute its taxable income in accordance with the tax code, such failure
would reduce the amount, if any, that would otherwise be distributable to
RISCORP's shareholders upon liquidation. To date, RISCORP has not needed to
distribute any taxable income given the manner in which this additional tax is
calculated. The Board intends to make any necessary distribution of taxable
income to avoid this additional tax.
In addition, the continued monetization of the assets of RISCORP will
either require it to continue to invest its assets in a manner that allows it to
avoid registration as an investment company under the Investment Company Act of
1940, as amended, or to register as an investment company. Registration by
RISCORP under the Investment Company Act would require RISCORP to comply with
various reporting and other requirements under the Investment Company Act, would
subject RISCORP to additional expense and could limit RISCORP's options for
future operations. In the alternative, to avoid the registration requirements
under the Investment Company Act, RISCORP will have to continue to invest 60% or
more of its assets in government securities, or cash equivalents. Such
investments could yield a significantly lower rate of return than other
investments which RISCORP could make if it chose to register as an investment
company.
RECOMMENDATION OF MR. GRIFFIN, ACQUISITION CORP., GRYPHUS COMPANY I, GRYPHUS
COMPANY II, THE RISCORP GROUP HOLDING COMPANY, LIMITED PARTNERSHIP AND WILLIAM
D. GRIFFIN FAMILY LIMITED PARTNERSHIP
Each of Mr. Griffin, Acquisition Corp., Gryphus Company I, Gryphus Company
II, The RISCORP Group Holding Company, Limited Partnership and William D.
Griffin Family Limited Partnership (the "Acquisition Group") has considered the
analyses and findings of the Board of Directors (described in detail in sections
"Special Factors -- Background of Reasons for the Merger" and "-- Recommendation
of the Board of Directors") with respect to the fairness of the merger to the
holders of the Class A Common Stock. As of the date of this Proxy Statement,
based on (1) the reasons set forth under the section "Special
Factors -- Recommendation of the Board of Directors," which were made known to
the Acquisition Group subsequent to the Board of Directors' determination that
the merger and the merger agreement are fair to and in the best interest of the
holders of the Class A Common Stock, (2) the Acquisition Group's review of
publicly available information regarding RISCORP, and (3) the Acquisition
Group's due diligence investigation of RISCORP, the Acquisition Group has
adopted the reasons set forth under the section "Special Factors
- -- Recommendation of the Board of Directors," and believes that the merger, the
merger agreement, and the transactions contemplated thereby are fair to the
holders of the Class A Common Stock.
In reaching this conclusion, the Acquisition Group primarily considered the
fact that the cash purchase price of the merger constituted a premium over the
amount of cash that would be immediately distributable to the holders of the
Class A Common Stock if RISCORP were immediately liquidated, over the highest
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<PAGE> 46
"bid" price per share of the Class A Common Stock on the trading date
immediately preceding the day the merger was announced and over the book value
per share. In addition, the Acquisition Group notes that the merger will require
approval of the holders of two-thirds of the Class A Common Stock and that all
of RISCORP's directors are independent outside directors. The Acquisition Group
did not participate in any of the Board's discussions concerning the merger and
did not consider whether or not the Board should engage an unaffiliated
representative to represent the holders of the Class A Common Stock. However,
the Acquisition Group does not believe that the absence of an unaffiliated
representative adversely impacted (1) the procedures the Board employed to
evaluate and approve the merger, or (2) the fairness of the transaction to the
holders of the Class A Common Stock.
None of the Acquisition Group makes any recommendation as to how RISCORP's
shareholders should vote on the merger agreement. The Acquisition Group has a
financial interest in the merger.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the merger, holders of Class A Common Stock will have
no ownership interest in RISCORP. Accordingly, after the merger the holders of
Class A Common Stock will not share in the future earnings and growth of RISCORP
or the risks associated with such earnings and growth. Instead, each holder will
be entitled to receive for each share of Class A Common Stock $2.85 in cash,
without interest thereon and less any required withholding taxes, for each share
owned at the effective time of the merger (subject to downward adjustment as
provided in the merger agreement if the legal and accounting expenses incurred
by RISCORP in connection with the merger after November 3, 1999 exceed $1.5
million), plus the contingent right to receive an additional pro rata cash
amount if RISCORP recovers any amounts from Zenith or other specified parties.
On January 5, 2000, RISCORP filed suit against Zenith and Arthur Andersen LLP
seeking to monetize this contingent right; however, given the uncertainties
inherent in the litigation process, RISCORP is unable to predict the ultimate
outcome of this litigation and, accordingly, it is possible that holders of
Class A Common Stock will only receive the $2.85 cash portion of the merger
consideration in connection with the merger. See "The Merger -- Merger
Consideration." The $2.85 cash amount that the holders of Class A Common Stock
would be entitled to receive reflects a premium over (a) the amount immediately
distributable to shareholders assuming a present liquidation of RISCORP; (b) the
highest "bid" price of a share of Class A Common Stock on the day before the
announcement of the merger; and (c) the net book value per share of Class A
Common Stock as of September 30, 1999. Such cash amount may not be otherwise
available to the holders of Class A Common Stock in the future given the costs
that may be incurred by RISCORP in resolving the contingencies currently pending
against the company or that may arise prior to any such liquidation.
Additionally, RISCORP believes it has potential claims against Mr. Griffin
for the damages it incurred as a result of Mr. Griffin's actions while he was a
director and officer of the company. In addition, counsel to Mr. Griffin has
indicated that it believes Mr. Griffin has meritorious defenses to such
potential claims and that Mr. Griffin would assert such defenses vigorously in
any action instituted by RISCORP against him. See "Special Factors -- Background
of the Merger." If the merger is completed, Mr. Griffin would be released from
any such claims. See "The Merger -- General Release."
Upon completion of the merger, trading in Class A Common Stock will cease
and, as a result, RISCORP is expected to deregister the Class A Common Stock
under the Securities Exchange Act of 1934. Upon such deregistration:
- RISCORP will be relieved of its obligation to comply with the proxy rules
of the Securities and Exchange Commission;
- RISCORP's officers, directors and 10% shareholders will be relieved of
the reporting requirements under Section 16 of the Securities Exchange
Act of 1934; and
- RISCORP will no longer be subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, and will, therefore, no longer
file quarterly reports on Form 10-Q or annual reports on Form 10-K.
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<PAGE> 47
The holders of the Class A Common Stock have invested approximately $208
million in RISCORP primarily as part of RISCORP's initial public offering. Prior
to RISCORP's initial public offering, holders of Class B Common Stock invested
approximately $36 million in RISCORP but retained approximately 63% of RISCORP's
capital following the initial public offering. In the merger, holders of Class A
Common Stock will receive cash consideration of $2.85 per share. Following the
merger, Mr. Griffin, Acquisition Corp. and certain trusts established for the
benefit of Mr. Griffin's children, as owners of all of the issued and
outstanding Class B Common Stock and as the sole remaining direct or indirect
beneficial owners of RISCORP after the merger, will be the beneficiaries of all
of the future earnings, growth and corporate opportunities of RISCORP, if any.
Had the merger been consummated as of December 31, 1999, after payment of the
consideration and expenses of the merger (as currently estimated by RISCORP),
the book value per share of Class B Common Stock would have been approximately
$1.94. Concurrent with the consummation of the merger, the current members of
RISCORP's Board of Directors will resign and, following the merger, new
directors will be elected by the holders of Class B Common Stock.
OPERATIONS OF RISCORP FOLLOWING THE MERGER
Mr. Griffin has informed RISCORP that after the merger, he intends to cause
RISCORP and its subsidiaries to comply with the terms of the merger agreement
and the asset purchase agreement with Zenith, and to invest, protect, and
maximize the remaining assets of RISCORP. Mr. Griffin has informed RISCORP that
he has no present intention to reorganize, liquidate, change the dividend rate
of, or change the corporate structure of RISCORP after the merger. Following the
merger, Mr. Griffin intends to operate RISCORP as a privately held company
through which Mr. Griffin and the family trusts and partnerships will pursue
business opportunities in a variety of different industries. Mr. Griffin intends
to utilize RISCORP's net operating loss carry-forwards to offset taxes due with
respect to the income realized from such future business operations; however,
utilization of such NOLs is subject to various limitations.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of RISCORP with
respect to the merger, you should be aware of certain inherent conflicts of
interest. Mr. Griffin, the sole shareholder of Acquisition Corp., is the
beneficial owner of 22,176,052 shares of Class B Common Stock. The other
2,158,391 outstanding shares of Class B Common Stock are held by various
irrevocable trusts created by Mr. Griffin for the benefit of his children. See
"Security Ownership of Certain Beneficial Owners and Management." If the merger
is consummated, the only capital stock of RISCORP that will remain outstanding
will be Class B Common Stock, all of which will be held, directly or indirectly,
by Mr. Griffin and these various irrevocable trusts. As a consequence of the
merger, Mr. Griffin will indirectly own and control approximately 91% of the
then outstanding stock of RISCORP and the various trusts will own the remaining
9%. Had the merger been consummated as of December 31, 1999, after payment of
the consideration and expenses of the merger (as currently estimated by
RISCORP), the book value per share of Class B Common Stock would have been
approximately $1.94.
Prior to the asset sale with Zenith, the Board of Directors decided that it
would be in the best interests of RISCORP to outsource RISCORP's management
functions. RISCORP entered into a management agreement as of February 18, 1998
with The Phoenix Management Company, Ltd. for the provision of various
management services to RISCORP following the consummation of the asset sale with
Zenith. Mr. Dawson, the former President of RISCORP, owned a majority interest
in Phoenix, a Florida limited partnership, and controlled its operations as
president and beneficial owner of its general partner, Dawson Managers, Inc.
Following Mr. Dawson's death, Walter E. Riehemann, the current President of
RISCORP, exercised an option to purchase all of the capital stock of Dawson
Managers, Inc. and all of its interest in Phoenix. Accordingly, Mr. Riehemann
owns a majority interest in Phoenix and controls its operations as president and
sole shareholder of Dawson Managers. The Board of Directors also decided that in
order to retain qualified management and to more closely align the interests of
management with the shareholders of RISCORP, it would be in the best interests
of RISCORP to offer management an equity interest in RISCORP. Accordingly,
pursuant to the terms of the management agreement, Phoenix was granted a
restricted stock
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<PAGE> 48
award for 1,725,000 shares of Class A Common Stock, subject to vesting
provisions contained in a restricted stock award agreement. As of the date of
this Proxy Statement, shares had vested under the terms of the
restricted stock award to Phoenix. Under the terms of the restricted stock award
agreement, the remaining unvested shares will vest at the rate of 47,917 shares
per month. Immediately prior to the consummation of the merger, the Board of
Directors shall cause all unvested shares of restricted stock to vest.
In addition, under the terms of the management agreement, Phoenix was
entitled to a monthly fee for services it performed of $100,000, plus expenses,
and a termination fee payable upon the occurrence of specified events, such as
the merger, equal to the management fees that would have been payable until the
end of the initial term of the management agreement. Effective December 1, 1999,
the management agreement was assigned to Dawson Managers and amended to reduce
the monthly fee to $70,000, which will result in a reduced termination payment
of approximately $800,000 to Dawson Managers as of the closing of the merger.
Acquisition Corp. has agreed to maintain the current policies of directors'
and officers' liability insurance maintained by RISCORP with respect to claims
arising from facts or events which occurred prior to the effective time of the
merger until such policies either expire by their own terms or are canceled by
the insurer. Additionally, RISCORP has agreed to indemnify each present or
former director or officer of RISCORP and its subsidiaries to the same extent
such person was indemnified immediately prior to the merger. In order to secure
this latter indemnification obligation, RISCORP will enter into an escrow
agreement at the closing of the merger with First Union National Bank, as escrow
agent, pursuant to which RISCORP will transfer $2,500,000 to First Union. Also,
RISCORP has agreed to maintain a minimum net book value (as defined in the
merger agreement) for four and one-half years following the closing to secure
these indemnification obligations. See "The Merger -- Indemnification of
Officers and Directors; Escrow Agreement; Fee Advancement Agreement."
Pursuant to a fee advancement agreement, Acquisition Corp. has agreed that
if, following the consummation of the merger, RISCORP or any of the holders of
Class B Common Stock initiates or causes to be initiated any suit or proceeding
which directly or indirectly results in the participation of the estate of
Frederick M. Dawson, Seddon Goode, Jr., George E. Greene III, Walter L. Revell,
Walter E. Riehemann, Edward W. Buttner, IV or Stephen C. Rece as a witness,
RISCORP will advance funds or reimburse such witness for all reasonable fees and
expenses incurred in connection with the participation in such suit or
proceeding. See "The Merger -- Indemnification of Officers and Directors; Escrow
Agreement; Fee Advancement Agreement."
The Board of Directors was aware of the foregoing interests and considered
them, along with other matters, in approving and adopting the merger agreement
and the merger.
FINANCING AND EXPENSES OF THE MERGER
The total amount of funds required to consummate the merger and other
transactions contemplated by the merger agreement is estimated to be
approximately $44.3 million, consisting of:
- approximately $40.6 million to pay for outstanding shares of Class A
Common Stock, and
- approximately $3.7 million in legal, accounting and other fees and
expenses payable by RISCORP, Acquisition Corp. and Mr. Griffin (which are
described in more detail below).
The funds necessary to pay for the outstanding shares of Class A Common
Stock will be provided from the assets of RISCORP as provided in the merger
agreement. Pursuant to the terms of the merger agreement, the holders of Class A
Common Stock will have the right to receive merger consideration of an amount in
cash equal to $2.85. This $2.85 cash amount remains fixed so long as the legal
and accounting fees incurred by RISCORP after November 3, 1999 in connection
with the merger do not exceed $1,500,000. To the extent that RISCORP's legal and
accounting fees incurred after November 3, 1999 do not exceed this amount, these
fees will essentially be borne by Acquisition Corp. because RISCORP's net worth
will have decreased by the amount owed by RISCORP for such services. However, if
RISCORP's legal and accounting fees incurred after November 3, 1999 in
connection with the merger exceed $1,500,000, the excess shall be
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<PAGE> 49
deducted pro rata from the amounts to be paid the holders of Class A Common
Stock. See "The Merger -- The Merger Consideration." Otherwise, each party to
the merger agreement is responsible for its own costs and expenses. The Board of
Directors does not anticipate that the legal and accounting expenses incurred by
RISCORP in connection with the merger following November 3, 1999 will exceed
$1,500,000.
Estimated fees and expenses to be incurred by RISCORP, Acquisition Corp.
and Mr. Griffin in connection with the merger are as follows:
<TABLE>
<S> <C>
Legal, accounting and professional fees of RISCORP incurred
after November 3, 1999.................................... $1,500,000
Legal, accounting and professional fees of RISCORP incurred
prior to, and including, November 3, 1999................. 500,000
Legal, accounting and professional fees of Griffin and
Acquisition Corp. ........................................ 750,000
Filing fees (paid by RISCORP)............................... 8,128
Printing and mailing costs (paid by RISCORP)................ 60,000
Fee associated with the termination of the management
agreement with Phoenix.................................... 800,000
Miscellaneous (paid by RISCORP)............................. 100,000
----------
Total............................................. $3,718,128
==========
</TABLE>
Pursuant to the terms of the merger agreement, the holders of Class A
Common Stock shall also have a contingent right to receive an additional pro
rata cash amount if RISCORP recovers any amounts from Zenith or other specified
parties. It is not expected that any such amounts will be recovered prior to the
consummation of the merger. The funds necessary to pay such amounts will be
provided from the assets of RISCORP. See "The Merger -- The Merger
Consideration."
FEDERAL INCOME TAX CONSEQUENCES
Receipt of the merger consideration by the holders of Class A Common Stock
is a taxable event. The merger consideration consists of cash and the contingent
right to receive an additional pro rata cash amount if RISCORP recovers any
amounts based on alleged errors in the determination of the purchase price paid
by Zenith for RISCORP's assets. While there are inherent uncertainties
associated with the litigation process which make it difficult to value such
contingent right, a fair market value of the aggregate consideration to be
received in the exchange may be established based on the public trading price of
the Class A Common Stock. Accordingly, if the trading price for the Class A
Common Stock at or about the time of the merger exceeds the cash to be received
for each share in the merger, holders of the shares of Class A Common Stock may
determine the fair market value of the contingent right based upon the trading
price for the stock less the amount of cash received on a per share basis. On
the other hand, if the trading price of the Class A Common Stock at or about the
time of the merger is less than the amount of cash per share payable in the
merger ($2.85), a shareholder may determine that the contingent right has no
fair market value.
A shareholder's gain or loss will be measured by the difference between the
fair market value of the consideration received for the Class A Common Stock
exchanged, including the amount of cash received and the fair market value of
the contingent right, and the shareholder's tax basis in those shares. If a
shareholder holds shares of Class A Common Stock as capital assets, the gain or
loss will be capital gain or loss (which will be long term if the shares are
held for more than 12 months at the time of the merger). Since the Class A
Common Stock is traded on an established securities market within applicable
Internal Revenue Code definitions, no holder of Class A Common Stock is eligible
to use the installment method to report any gain from the merger. Nonetheless,
if the market for the Class A Common Stock at or about the time of the merger
does not reasonably permit a determination of the fair market value of the
contingent right (for example, if the trading price does not exceed $2.85 per
share, which is the amount of cash per share payable in the merger), a
shareholder might take the position that the transaction remains "open" for
income tax purposes. Under the "open transaction" reporting method, a
shareholder would treat the contingent right as
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<PAGE> 50
having no value and would determine gain or loss in the merger based upon the
difference between the cash received at the time of the merger and the tax basis
in the shareholder's shares, and then would report any subsequent payment with
respect to the contingent right as described in the following paragraph.
The federal income tax treatment of the receipt of payments with respect to
the contingent right is uncertain and may vary depending upon whether the
transaction is treated as "closed" with a specific value attributed to the
contingent right or whether it is considered "open" with no value attributed to
the contingent right at the time of the merger. Due to this lack of certainty,
it is not possible to give a definitive description of the tax results of
receipt of payments under the contingent right. Holders of the Class A Common
Stock receiving the merger consideration, however, should realize that some or
all of any cash proceeds received with respect to the contingent right may be
treated as ordinary interest income rather than as generating additional capital
gain or loss. In addition, it is possible that if the transaction is treated as
"closed" and a value is placed on the contingent right at the time of the
merger, holders of the Class A Common Stock may be required to report interest
income under the original issue discount rules before all of the contingencies
concerning the contingent right have been resolved.
Shareholders should consult with their own tax advisors concerning the
proper reporting of the merger for federal income tax purposes, including the
valuation of the contingent right, possible use of the open transaction
reporting method and implications for reporting of interest income arising from
the contingent right.
Any dissenting shareholder who objects to the merger and perfects such
shareholder's rights of appraisal under Florida law generally will recognize
capital gain or loss in an amount equal to the difference between the
shareholder's adjusted tax basis in such shareholder's Class A Common Stock and
the amount of cash received in exchange therefor.
In general, the maximum rate of federal income tax on net capital gain
recognized by individuals, trusts and estates from the sale or exchange of
capital assets held for more than 12 months is 20% (as compared with a maximum
rate of 39.6% on ordinary income). For 15% bracket taxpayers, the maximum
federal income tax rate on net capital gains is 10%. Corporate shareholders
generally are subject to tax at a maximum federal income tax rate of 35% on both
capital gains and ordinary income. The distinction between capital gain and
ordinary income may be relevant for certain other purposes, including a
taxpayer's ability to utilize capital loss carryovers to offset any gain
recognized.
The foregoing summary is based on current law and only applies to
shareholders who hold their Class A Common Stock as a capital asset within the
meaning of federal income tax laws. This summary does not discuss all of the tax
consequences that may be relevant to certain types of holders of Class A Common
Stock subject to special treatment under the federal income tax laws (such as
individual retirement accounts and other tax-deferred annuities, life insurance
companies, tax-exempt organizations, dealers in securities and foreign persons),
and does not consider the effect of any applicable foreign, state, local or
other tax laws. ACCORDINGLY, HOLDERS OF CLASS A COMMON STOCK SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR CONSEQUENCES TO THEM OF
THE RECEIPT OF THE MERGER CONSIDERATION, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY STATE, LOCAL OR FOREIGN TAX LAWS TO WHICH THEY MAY BE SUBJECT AND OF ANY
LEGISLATIVE OR ADMINISTRATIVE CHANGE IN LAW.
REGULATORY APPROVAL
Under the terms of the merger agreement, the obligations of RISCORP,
Acquisition Corp., and Mr. Griffin to consummate the transactions contemplated
therein are subject to, among other things, RISCORP either:
- divesting itself of its insurance licenses, which would require the
consent or approval of the departments of insurance of the states of
Florida and Missouri; or
- effecting the surrender of certificates of authority or insurance
licenses in each of the following states: Alabama, Arkansas, Florida,
Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Minne-
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<PAGE> 51
sota, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina,
Tennessee, Virginia, and Wisconsin.
RISCORP is also considering the divestiture of its insurance licenses
through the sale of its three insurance subsidiaries with any such sale to close
immediately prior to the consummation of the merger.
RISCORP's insurance subsidiaries have filed applications with each of the
foregoing states seeking the surrender of its licenses; however, such
applications have been suspended pending a determination by RISCORP with respect
to the sale of its insurance subsidiaries.
ACCOUNTING TREATMENT
The assets and liabilities of Acquisition Corp. will be recorded at their
historical cost by RISCORP as of the date of the merger.
AMENDMENT TO SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On November 3, 1999, RISCORP entered into a First Amendment to Shareholder
Protection Rights Agreement between RISCORP and First Union National Bank, as
rights agent. This amendment amended the Shareholder Protection Rights
Agreement, dated as of May 13, 1999, to ensure that neither the execution of the
merger agreement nor the consummation of the merger triggers the operative
provisions of the rights agreement.
LITIGATION REGARDING THE MERGER
On or about February 15, 2000, a putative shareholder class action lawsuit
was filed in the Circuit Court of the 12th Judicial Circuit, in and for Sarasota
County, Florida by Harris Blackman, an alleged holder of Class A Common Stock of
RISCORP purporting to act individually and on behalf of all holders of Class A
Common Stock who are similarly situated. The defendants named in the case are
RISCORP, William D. Griffin, Seddon Goode, Jr., George E. Greene III and Walter
L. Revell. The plaintiff alleges that the defendants breached their fiduciary
duties in connection with the proposed merger and that the cash merger
consideration of $2.85 per share is unfair and inadequate. The plaintiff seeks
to have the court certify the complaint as a class action and either to enjoin
the consummation of the merger until such time as the defendants adopt and
implement procedures designed to obtain the highest possible price for the
company, or, if the merger is consummated as currently planned, to award an
unspecified amount of damages.
The Board of Directors of RISCORP has evaluated the allegations of the
complaint and notwithstanding such allegations, the Board has determined that
the terms of the merger agreement are fair to, and in the best interests of,
RISCORP and the holders of Class A Common Stock. RISCORP denies the plaintiffs'
allegations and intends to vigorously defend the action.
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PROPOSAL 1
THE MERGER
This section of the Proxy Statement describes certain aspects of the
proposed merger. To the extent that the description relates to the merger
agreement, the following description does not purport to be complete and is
qualified in its entirety by reference to the merger agreement, which is
attached as Appendix A to this Proxy Statement and is incorporated herein by
reference. All shareholders are urged to read the merger agreement, as well as
other appendices in their entirety.
TERMS OF THE MERGER
At the effective time of the merger, Acquisition Corp. will be merged with
and into RISCORP, Acquisition Corp. will cease to exist and RISCORP will
continue as the surviving corporation. The articles of incorporation and bylaws
of RISCORP in effect immediately prior to the effective time of the merger will
remain the articles of incorporation and bylaws of the surviving corporation
following the merger. The officers and directors of Acquisition Corp.
immediately prior to the effective time of the merger will be the officers and
directors of the surviving corporation following the merger.
As of the effective time of the merger, by virtue of the merger and without
any action on the part of the shareholders, Acquisition Corp. or RISCORP:
- each share of common stock, par value $.01 per share, of Acquisition
Corp. that is outstanding immediately prior to the effective time of the
merger shall be converted into and become one fully paid and
nonassessable share of Class B Common Stock;
- each share of Class A Common Stock that is outstanding immediately prior
to the effective time of the merger (other than shares of Class A Common
Stock held by shareholders who properly perfect their appraisal rights
under Florida law) shall be canceled and automatically converted into a
right to receive $2.85 in cash, without interest thereon and less any
required withholding taxes, subject to adjustment as provided in the
merger agreement if the legal and accounting expenses incurred by RISCORP
after November 3, 1999 in connection with the merger exceed $1.5 million,
plus a contingent right to receive an additional pro rata cash amount, if
RISCORP recovers any amounts from Zenith or other specified parties as
provided in the merger agreement; and
- each share of Class B Common Stock that is outstanding immediately prior
to the effective time of the merger shall remain outstanding.
Shares of Class A Common Stock outstanding immediately prior to the
effective time of the merger held by a shareholder who has demanded and
perfected his, her or its right of appraisal will not be converted as provided
above. Any such holder of Class A Common Stock will instead be entitled to such
rights as are afforded under the Florida Business Corporation Act. See
"-- Dissenters' Rights of Appraisal."
The merger agreement provides that the merger will become effective upon
the filing of articles of merger with the Secretary of State of the State of
Florida or at such other time as the parties may agree and specify in the
articles of merger. If the merger receives the approval of (a) 80% of the votes
entitled to be cast by the holders of all issued and outstanding shares of Class
A Common Stock and Class B Common Stock, voting together as a single class, and
(b) two-thirds of the votes entitled to be cast by the holders of all issued and
outstanding shares of Class A Common Stock, and the other conditions to the
merger are either satisfied or waived, it is currently anticipated that the
merger will become effective as soon as practicable after the special meeting.
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<PAGE> 53
MERGER CONSIDERATION
Not less than two days prior to the date of the special meeting of
shareholders, RISCORP must deliver to Acquisition Corp. a certificate executed
by a duly authorized officer of RISCORP that sets forth the sum of the following
professional fees, costs and expenses:
- the estimated fees, costs and expenses for legal services rendered to
RISCORP after November 3, 1999, in connection with the consummation of
the transactions contemplated by the merger agreement, exclusive of any
fees, costs or expenses incurred in connection with obtaining any
consents or approvals from any state department of insurance; and
- the estimated fees, costs and expenses of RISCORP with respect to
services provided to RISCORP by KPMG (or any successor thereto) in
connection with the consummation of the transactions contemplated by the
merger agreement after November 3, 1999.
As of the effective time of the merger, the holders of Class A Common Stock
(other than holders of Class A Common Stock who properly perfect their appraisal
rights under Florida law) will have the right to receive merger consideration of
an amount in cash equal to $2.85, without interest thereon and less any required
withholding taxes, less (a) the excess of the professional fees, costs and
expenses set forth in such certificate over $1.5 million divided by (b) the
number of issued and outstanding shares of Class A Common Stock.
In addition to the $2.85 per share, as part of the merger consideration,
the holders of Class A Common Stock will also have the right to receive a
continent right to an additional pro rata cash amount if RISCORP obtains any
recovery from Zenith, Arthur Andersen LLP, the neutral auditors and neutral
actuaries engaged to resolve the purchase price dispute between Zenith and
RISCORP, or their respective insurers in settlement and final discharge of all
alleged errors made in the determination of the Final Business Balance Sheet (as
defined in the asset purchase agreement with Zenith). The additional pro rata
cash amount, if any, distributable to each holder of Class A Common Stock (other
than holders of Class A Common Stock who properly perfect their appraisal rights
under Florida law) shall be determined by taking (a) the total value of any such
recovery less the aggregate of all fees, costs and expenses incurred by RISCORP
in obtaining recovery for the alleged errors, hiring and engaging an independent
expert to determine the value of any recovery not paid in cash or cash
equivalents, and distributing any such recovery to shareholders of RISCORP,
divided by (b) the aggregate number of shares of Class A Common Stock and Class
B Common Stock issued and outstanding on the record date for the special
meeting. To the extent that RISCORP obtains any recovery and fails to distribute
any such recovery to the shareholders, the shareholders would have a cause of
action against RISCORP.
Following the closing of the merger, RISCORP will have all right and
authority to manage, pursue and prosecute this contingent claim against Zenith,
Arthur Andersen or their respective insurers in such manner as RISCORP deems
necessary or appropriate within the exercise of RISCORP's sole, absolute and
unfettered discretion, including the right to elect not to pursue such
contingent claim, the right to settle, compromise or dismiss such contingent
claim for such consideration as RISCORP shall determine, and to select and
appoint counsel and to determine the means used to prosecute or pursue or
settle, resolve or dismiss such contingent claim. However, any recovery obtained
after the consummation of the merger will be shared pro rata by the former
holders of Class A Common Stock and the holders of Class B Common Stock. Given
the fact that this would entitle the holders of Class B Common Stock to
approximately 63% of any recovery, the interests of each are aligned with
respect to the desire to maximize the value of any recovery from Zenith in
prosecuting this contingent claim. NEVERTHELESS, THE HOLDERS OF CLASS A COMMON
STOCK SHOULD BE AWARE THAT RISCORP MAY ELECT NOT TO PURSUE SUCH CONTINGENT
CLAIM, AND EVEN IF IT DOES, RISCORP MAY NEVER OBTAIN ANY RECOVERY AGAINST ANY OF
THESE PARTIES. ACCORDINGLY, IT IS POSSIBLE THAT THE ONLY CONSIDERATION HOLDERS
OF CLASS A COMMON STOCK WILL BE ENTITLED TO RECEIVE
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IN CONNECTION WITH THIS TRANSACTION IS THE $2.85 CASH PORTION OF THE MERGER
CONSIDERATION.
EXCHANGE AND PAYMENT PROCEDURES
Prior to the effective time of the merger, RISCORP will designate a bank or
trust company reasonably satisfactory to Acquisition Corp. to serve as a
disbursing agent. At the effective time of the merger, RISCORP will deposit or
cause to be deposited with the disbursing agent cash in the amount equal to the
aggregate merger consideration for the benefit of the holders of Class A Common
Stock (other than those holders of Class A Common Stock who have perfected their
rights of appraisal under Florida law).
Immediately following the effective time, the surviving corporation shall
cause a letter of transmittal and other documents and materials for use in
surrendering certificates representing shares of Class A Common Stock to be
distributed to each holder of record of shares of Class A Common Stock that have
been converted pursuant to the merger agreement into the right to receive the
merger consideration. No holder of Class A Common Stock should surrender any
certificate for such shares until such shareholder receives the letter of
transmittal and other materials for such surrender. Upon surrender of a
certificate for cancellation to the disbursing agent, together with a letter of
transmittal, duly executed, and such other customary documents as may be
required, the holder of such certificate will be entitled to receive the merger
consideration into which the number of shares of Class A Common Stock previously
represented by such certificate shall have been converted pursuant to the merger
agreement, without any interest thereon, and the certificate so surrendered will
be canceled.
If payment of the merger consideration is to be made to a person other than
the person in whose name the surrendered certificate is registered, it will be a
condition of payment that the certificate so surrendered will be properly
endorsed or otherwise be in proper form for transfer, and that the person
requesting such payment shall have paid any transfer or other taxes required by
reason of the payment of the merger consideration in a name other than that of
the registered holder thereof or establish to the satisfaction of the surviving
corporation or the disbursing agent that such tax either has been paid or is not
applicable.
HOLDERS OF CLASS A COMMON STOCK SHOULD NOT SEND THEIR CERTIFICATES NOW AND
SHOULD SEND THEM ONLY PURSUANT TO INSTRUCTIONS SET FORTH IN THE LETTERS OF
TRANSMITTAL TO BE MAILED TO HOLDERS OF CLASS A COMMON STOCK PROMPTLY AFTER THE
EFFECTIVE TIME. IN ALL CASES, THE MERGER CONSIDERATION WILL BE PROVIDED ONLY IN
ACCORDANCE WITH THE PROCEDURES SET FORTH IN THIS PROXY STATEMENT AND SUCH
LETTERS OF TRANSMITTAL.
Six months after the effective time of the merger, the disbursing agent
will deliver to the surviving corporation any portion of the merger
consideration that remains undistributed to or unclaimed by the holders of
certificates representing shares of Class A Common Stock (including the proceeds
of any investments thereof), and any holders of certificates who have not
theretofore complied with the above-described procedures to receive payment of
the merger consideration may look only to the surviving corporation for payment
of the merger consideration to which they are entitled. The surviving
corporation or the disbursing agent shall be authorized to pay the cash
attributable to any certificate theretofore issued that has been lost or
destroyed only upon the receipt of evidence reasonably satisfactory to the
surviving corporation of ownership of the shares of Class A Common Stock
represented by the certificate and of appropriate indemnification. If any
certificate shall not have been surrendered prior to three years after the
effective time, any such cash, dividends or distributions in respect of such
certificate shall, to the extent permitted by applicable law, become the
property of the surviving corporation, free and clear of all claims or interest
of any person previously entitled thereto.
On the closing date of the merger, RISCORP will deliver to Acquisition
Corp. a listing of each holder of Class A Common Stock indicating such holder's
name and address. If RISCORP recovers any items of value from Zenith, Arthur
Andersen or their respective insurers in settlement and final discharge of all
alleged errors made in the determination of the Final Business Balance Sheet, no
later than 45 days following the final settlement of such contingent claim,
RISCORP shall distribute to each holder of Class A Common Stock
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such holder's pro rata portion of the recovery amount to the address shown on
the Class A Common Stock listing or such other address as any shareholder may
from time to time provide in writing to RISCORP. To the extent that any recovery
obtained by RISCORP on such contingent claim is other than cash or a cash
equivalent, RISCORP, within the exercise of its reasonable discretion, may pay
the pro rata portion of the recovery amount to the holders of Class A Common
Stock in cash or by distribution of any securities or other instruments received
by RISCORP in settlement of such contingent claim.
TRANSFERS OF CLASS A COMMON STOCK
No transfer of shares of Class A Common Stock will be made on the stock
transfer books of RISCORP after the effective time of the merger. If, after the
effective time, certificates representing shares of Class A Common Stock are
presented to the disbursing agent or the surviving corporation, they will be
canceled and exchanged for the merger consideration as provided above and
subject to the terms of the merger agreement.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of
RISCORP to Acquisition Corp., including with respect to the following matters:
- the due incorporation and valid existence of RISCORP and similar
corporate matters;
- capitalization;
- subsidiaries of RISCORP;
- the due authorization, execution and delivery of the merger agreement and
the binding effect on RISCORP;
- required consents and approvals of governmental entities and absence of
conflict with RISCORP's governing documents and agreements;
- the making and accuracy of Securities and Exchange Commission filings
(including RISCORP's financial statements);
- the absence of specified changes or events;
- taxes and tax returns;
- the absence of material litigation;
- contracts and commitments;
- the accuracy of this Proxy Statement and any other document to be filed
with the Securities and Exchange Commission in connection with the
merger;
- employee benefit plans;
- labor matters;
- that there are no brokers or finders employed by RISCORP or any of its
subsidiaries with the respect to the merger;
- compliance with all applicable laws and regulations in connection with
the conduct of the business operations of RISCORP and its subsidiaries;
- voting requirements for approval of the merger agreement and the merger;
- properties;
- that RISCORP's shareholder rights agreement has been amended such that
the transactions contemplated by the merger agreement do not trigger the
provisions of such agreement; and
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- the accuracy of the representations, warranties and covenants of RISCORP
contained in the merger agreement.
Such representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
The merger agreement also contains representations and warranties of
Acquisition Corp. and William D. Griffin to RISCORP, including with respect to
the following matters:
- the due incorporation and valid existence of Acquisition Corp. and
similar corporate matters;
- the due authorization, execution and delivery of the merger agreement and
the binding effect on each of Acquisition Corp. and Mr. Griffin;
- required consents and approvals of governmental entities and absence of
conflict with Acquisition Corp.'s governing documents and agreements
entered into by each of Acquisition Corp. and Mr. Griffin;
- the accuracy of information provided by Acquisition Corp. and Mr. Griffin
for inclusion in this Proxy Statement and any other document to be filed
with the Securities and Exchange Commission in connection with the
merger;
- that there are no brokers or finders employed by either Acquisition Corp.
or Mr. Griffin with the respect to the merger;
- capitalization of Acquisition Corp.;
- the accuracy of the representations, warranties and covenants of
Acquisition Corp. contained in the merger agreement; and
- the independent review and analysis of RISCORP and its subsidiaries by
Acquisition Corp. and Mr. Griffin.
Such representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
The representations and warranties in the merger agreement are complicated
and not easily summarized. The merger agreement is attached to this Proxy
Statement as Appendix A and we urge you to read it carefully, including the
sections of the merger agreement entitled, "REPRESENTATIONS AND WARRANTIES OF
RISCORP" and "REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND GUARANTOR."
CONDUCT AND TRANSACTIONS PRIOR TO THE EFFECTIVE TIME
In the merger agreement, RISCORP has agreed prior to the effective time of
the merger:
- to afford Acquisition Corp. and Mr. Griffin reasonable access to
information concerning the business and properties of RISCORP and its
subsidiaries;
- to operate its business and the businesses of its subsidiaries only in
the ordinary course and consistent with their past business practices
since April 1, 1998;
- that neither it nor any of its subsidiaries will (a) change any
provisions of its articles of incorporation or bylaws or similar
governing documents, (b) make, declare or pay any dividend, or (c) issue
or redeem any securities;
- that neither it nor any of its subsidiaries will take specified actions
relating to:
- borrowing additional funds;
- selling or encumbering any of its properties or assets;
- employee benefit plans and employee compensation;
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- collective bargaining agreements;
- changes in accounting methods;
- transactions with any of its officers or directors or any "affiliate" or
"associate" of any of its officers or directors (as such terms are
defined under Rule 405 of the Securities Act of 1933, as amended);
- tax elections or settlement of tax liabilities;
- splitting, combining, or reclassifying any capital stock;
- business acquisitions or joint ventures;
- restructuring, recapitalization, reorganization, dissolution or
liquidation;
- the investment of assets;
- amending, terminating, modifying or accelerating any material contract
or agreement;
- modifying, amending or terminating RISCORP's written investment policy,
- modifying or accelerating the provisions of, or terminating or amending,
any contract with The Phoenix Management Company, Ltd. or Buttner
Hammock & Company, P.A., provided that RISCORP may take any action
necessary to (a) accelerate the vesting of the Class A Common Stock
issued to Phoenix pursuant to a restricted stock award agreement by and
between Phoenix and RISCORP, (b) amend the provisions of the management
agreement by and between Phoenix and RISCORP to reduce the fees paid to
Phoenix, or (c) terminate such management agreement; or
- entering into any agreement to take any action prohibited by the merger
agreement;
- to consult with and keep Acquisition Corp. and Mr. Griffin informed with
respect to the status of any litigation to which RISCORP, any of its
subsidiaries, or any officer, director or employee of RISCORP or any of
its subsidiaries is a party and shall not take any action to settle or
compromise such litigation without the consent of Acquisition Corp.;
provided that RISCORP may enter into any settlement agreement for any
litigation to which it or any of its subsidiaries is a defendant and in
which it or any of its subsidiaries has no claims for recovery if the
amount paid for such settlement does not exceed $100,000 for any such
litigation claim and does not exceed $250,000 in the aggregate for all
such litigation claims;
- to use all commercially reasonable efforts to solicit proxies in favor of
the merger from the holders of Class A Common Stock and to take all other
action necessary or advisable to secure any vote or consent of the
holders of Class A Common Stock required by the Florida Business
Corporation Act; and
- to notify Acquisition Corp. and keep Acquisition Corp. informed of (a)
any material change in the normal course of RISCORP's or its
subsidiaries' businesses or in the operation of its or their properties,
(b) the receipt by RISCORP or any of its subsidiaries of notice of any
governmental complaints, investigations or hearings, or (c) the receipt
by RISCORP or any of its subsidiaries of a notice of the institution or
the threat of litigation involving RISCORP or any of its subsidiaries.
In the merger agreement, RISCORP and Acquisition Corp. have each agreed
prior to the effective time of the merger:
- to grant such approvals and take such commercially reasonable actions to
eliminate or minimize the effect of state anti-takeover statutes or
regulations applicable to the merger or any of the other transactions
contemplated by the merger agreement;
- to use commercially reasonable efforts to obtain the written consent or
approval of the necessary governmental authorities, and to promptly file
and prosecute diligently the applications and related documents required
to be filed with the applicable authorities, in connection with the
consummation of the transactions contemplated by the merger agreement;
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- to defend vigorously against any actions, suits or proceedings in which
such party is named as a defendant which seeks to enjoin, restrain or
prohibit the transactions contemplated by the merger agreement;
- to use all commercially reasonable efforts to (a) surrender or cause to
be surrendered or sell or cause to be sold at or prior to the closing of
the merger all certificates of authority or insurance licenses held by
RISCORP or by any of its subsidiaries, and (b) receive or have released
by any state insurance commissioner or any other appropriate state
authority any and all restricted funds, minimum capital requirements or
deposits or any other funds;
- to promptly give notice to the other parties to the merger agreement upon
becoming aware of any event that would cause or constitute a breach of
any of the representations, warranties or covenants of such party
contained in the merger agreement and to use all commercially reasonable
efforts to prevent or remedy such breach; and
- not to issue any press release or make any public announcement with
regard to the merger agreement or the merger without the consent of the
other parties to the merger agreement except as required by law.
The provisions in the merger agreement regarding the conduct of the parties
prior to the effective time of the merger are complicated and not easily
summarized. The merger agreement is attached to this Proxy Statement as Appendix
A and we urge you to read it carefully, including the section of the merger
agreement entitled "Conduct and Transactions Prior to the Effective Time;
Certain Covenants."
NON-SOLICITATION
Under the merger agreement, RISCORP agreed not to:
- solicit, initiate or encourage the submission of any bona fide proposal
with respect to a merger, consolidation, share exchange or similar
transaction involving RISCORP or any of its subsidiaries, or any purchase
of all or any significant portion of its assets other than the
transactions contemplated by the merger agreement;
- furnish to any person any information with respect to, or take any other
action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably expected to lead to, any such bona fide
proposal;
- withdraw, qualify or modify, or propose publicly to withdraw, qualify or
modify, in a manner adverse to Acquisition Corp., the approval or
recommendation of its Board of Directors with respect to the merger and
the merger agreement;
- approve or recommend, or propose publicly to approve or recommend, any
transaction involving a bona fide proposal from a third party; or
- cause RISCORP to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any
alternative transaction.
Notwithstanding the foregoing, RISCORP's Board of Directors may furnish
non-public information to or enter into discussions or negotiations with any
person or entity in connection with an unsolicited bona fide alternative
transaction, or recommend such an unsolicited bona fide alternative transaction
to the shareholders of RISCORP, if and only to the extent that the Board of
Directors determines in good faith (after receiving advice from outside counsel
as to its fiduciary duties under applicable law) that it has received a
"superior proposal" (as defined in the merger agreement). If the Board of
Directors believes it has received a superior proposal, it may inform the
shareholders that it no longer believes that the merger is advisable and no
longer recommends approval of the merger and may enter into an acquisition
agreement with respect to such superior proposal, but only at a time that is
after the third business day following Acquisition Corp.'s receipt of written
notice from RISCORP advising Acquisition Corp. that the Board of Directors has
received such superior proposal. During such three-day period, RISCORP shall
provide an opportunity for Acquisition
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Corp. to propose such adjustments to the terms and conditions of the merger
agreement as would enable the Board of Directors to proceed with its
recommendation to the shareholders. The acceptance of any such proposed
adjustment shall be at the sole discretion of the Board of Directors, exercised
in good faith; provided, however, that any such proposed adjustment, the sole
effect of which is to increase the amount of the merger consideration, waive one
or more conditions to the obligations of Acquisition Corp. to effect the merger,
or modify the terms and conditions of the merger agreement to reflect identical
terms and conditions contained in such superior proposal, shall be automatically
accepted by RISCORP, and the merger agreement shall be amended to reflect any
such automatically accepted adjustments.
INDEMNIFICATION OF OFFICERS AND DIRECTORS; ESCROW AGREEMENT; FEE ADVANCEMENT
AGREEMENT
Under the terms of the merger agreement, Acquisition Corp. agreed to
maintain the current policies of directors' and officers' liability insurance
maintained by RISCORP or any of its subsidiaries with respect to claims arising
from facts or events which occur prior to the effective time of the merger until
such policies either expire by their own terms or are canceled by the insurer.
Additionally, until the expiration of the applicable statute of limitations
period, the surviving corporation has agreed to indemnify each present or former
director or officer of RISCORP and its subsidiaries to the same extent such
person was indemnified immediately prior to the merger, whether under the
Florida Business Corporation Act, the indemnity agreement to which each present
director of RISCORP is a party or the articles of incorporation or the bylaws of
RISCORP or such subsidiary. In order to secure this indemnification obligation,
RISCORP will enter into an escrow agreement at the closing of the merger with
First Union National Bank, as escrow agent, pursuant to which RISCORP will
transfer $2,500,000 to First Union to be held in accordance with the terms of
such escrow agreement.
If, on the fifth business day following the second anniversary of the date
of the escrow agreement, no indemnity claim has been submitted to the escrow
agent pursuant to the terms of the escrow agreement and no claims are pending or
threatened against any director or officer, then the escrow agent has to
disburse to RISCORP an amount equal to one-half of the total escrow amount then
held by the escrow agent. The escrow provided by the escrow agreement terminates
upon the earlier of: (a) the disbursement of the total escrow amount to
indemnified officers and directors or (b) if no investigation or proceeding
which has formed the basis of an indemnity claim is then pending, the date that
is four and one-half years following the effective date of the merger. Following
the termination of the escrow agreement, any portion of the escrow amount not
paid to officers and directors will be paid to RISCORP. The foregoing
description of the escrow agreement does not purport to be complete and is
qualified in its entirety by reference to the form of escrow agreement that is
attached as an exhibit to the merger agreement in Appendix A to this Proxy
Statement and is incorporated herein by reference. All shareholders are urged to
read the escrow agreement in its entirety.
RISCORP has also agreed to maintain a minimum net book value (as defined in
the merger agreement) for a period of four and one-half years following the
closing date of the merger in order to secure its indemnification obligations.
In connection with the merger agreement, Acquisition Corp. executed and
delivered a fee advancement agreement by and among Acquisition Corp., RISCORP,
the estate of Frederick M. Dawson, Seddon Goode, Jr., George E. Greene III,
Walter L. Revell, Walter E. Riehemann, Edward W. Buttner, IV and Stephen C.
Rece. The fee advancement agreement provides that if, following the consummation
of the merger, RISCORP, William D. Griffin, The RISCORP Group Holding Company,
Limited Partnership, William D. Griffin Family Limited Partnership, Charlotte K.
Griffin Trust Number 3, Anna F. Griffin Trust Number 3, John Ford Griffin Trust
Number 3, any person or entity controlled by RISCORP or Mr. Griffin, or any of
their respective officers, directors, trustees, beneficiaries, employees,
agents, representatives, heirs, successors or assigns initiates or causes to be
initiated any suit or proceeding which directly or indirectly results in the
participation of any of the estate of Mr. Dawson, Mr. Goode, Mr. Greene, Mr.
Revell, Mr. Riehemann, Mr. Buttner or Mr. Rece as a witness, RISCORP agrees to
advance funds or reimburse such witness for all reasonable fees and expenses
including, without limitation, all reasonable attorneys' fees, costs, travel
expenses, and such other fees and expenses incurred in connection with the
participation in any suit or
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proceeding. The foregoing description of the fee advancement agreement does not
purport to be complete and is qualified in its entirety by reference to the fee
advancement agreement that is attached as an exhibit to the merger agreement in
Appendix A to this Proxy Statement and is incorporated herein by reference. All
shareholders are urged to read the fee advancement agreement in its entirety.
CONDITIONS TO THE MERGER
The respective obligations of RISCORP and Acquisition Corp. to consummate
the merger are subject to the following conditions:
- the approval and adoption of the merger agreement and the merger by (a)
80% of the votes entitled to be cast by the holders of all issued and
outstanding shares of Class A Common Stock and Class B Common Stock,
voting together as a single class, and (b) two-thirds of the votes
entitled to be cast by the holders of all issued and outstanding shares
of Class A Common Stock, voting separately as a class;
- obtaining all consents, authorizations, orders and approvals required in
connection with the merger agreement, of which the failure to obtain (or
conditions required to obtain) would prevent the consummation of the
merger or have a material adverse effect on either RISCORP or Acquisition
Corp.;
- the absence of any law, rule, regulation, executive order, decree,
injunction or other order from a governmental authority which prevents or
prohibits the merger or the transactions contemplated by the merger
agreement; and
- this Proxy Statement, at the date of its mailing and the date of the
special meeting, shall not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements herein not misleading.
The obligations of RISCORP to effect the merger are subject to the
following additional conditions:
- the following representations and warranties of Acquisition Corp. and Mr.
Griffin being true and correct in all material respects as of the date of
the merger agreement and as of the closing date of the merger (except to
the extent such representations and warranties expressly relate to an
earlier date) as though made as of the closing date of the merger:
- the due incorporation and valid existence of Acquisition Corp. and
similar corporate matters;
- the due authorization, execution and delivery of the merger agreement
and the binding effect on each of Acquisition Corp. and Mr. Griffin; and
- required consents and approvals of governmental entities and absence of
conflict with Acquisition Corp.'s governing documents and agreements
entered into by each of Acquisition Corp. and Mr. Griffin;
- Acquisition Corp. and Mr. Griffin having performed in all material
respects all covenants and agreements required to be performed by them
under the merger agreement at or prior to the closing date of the merger;
and
- RISCORP having paid to the escrow agent the escrow funds, and RISCORP and
the escrow agent having executed and delivered the escrow agreement.
The obligations of Acquisition Corp. to effect the merger are subject to
the following additional conditions:
- the following representations and warranties of RISCORP being true and
correct in all material respects (except to the extent they are qualified
as to materiality, in which case they must be true and correct in all
respects) as of the date of the merger agreement and as of the closing
date of the merger
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(except to the extent such representations and warranties expressly
relate to an earlier date) as though made as of the closing date of the
merger:
- the due incorporation and valid existence of RISCORP and similar
corporate matters;
- capitalization;
- the due authorization, execution and delivery of the merger agreement
and the binding effect on RISCORP; and
- required consents and approvals of governmental entities and absence of
conflict with RISCORP's governing documents and agreements;
- RISCORP having performed in all material respects all covenants and
agreements required to be performed by it under the merger agreement at
or prior to the closing date of the merger;
- RISCORP having paid to the escrow agent the escrow funds, and RISCORP and
the escrow agent having executed and delivered the escrow agreement; and
- Acquisition Corp. having received letters of resignation effective as of
the effective time of the merger from each of the officers and directors
of RISCORP.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the effective
time of the merger, whether before or after the approval by the shareholders of
RISCORP:
- by the mutual written consent of Acquisition Corp. and RISCORP;
- by RISCORP, if the merger is not consummated on or before April 30, 2000
(or such later date as approved by Acquisition Corp. and RISCORP), unless
the failure of such occurrence is due to the failure of RISCORP to
perform or observe the covenants, agreements and conditions of the merger
agreement to be performed or observed by it at or before the effective
time;
- by RISCORP, if events occur which render impossible the satisfaction of
one or more its conditions to effect the merger and such conditions are
not waived by RISCORP, unless the failure of such occurrence is due to
the failure of RISCORP to perform or observe the covenants, agreements
and conditions of the merger agreement to be performed or observed by it
at or before the effective time;
- by RISCORP, if it is enjoined or restrained by any governmental authority
or other regulatory body (including any court), such injunction or
restraining order prevents the performance by RISCORP of its obligations
under the merger agreement and such injunction shall not have been
withdrawn within 60 days after the date of which such injunction was
first issued;
- by RISCORP, if its shareholders shall have voted on the merger agreement
and the merger, and the approval required by the merger agreement is not
obtained;
- by RISCORP, if it enters into an acquisition agreement effecting the sale
of RISCORP or substantially all its assets provided RISCORP and its Board
of Directors comply with the notice and other provisions of the merger
agreement summarized above under the heading "-- Non-Solicitation."
- by Acquisition Corp., if the merger is not consummated on or before April
30, 2000 (or such later date as approved by RISCORP and Acquisition
Corp.), unless the failure of such occurrence is due to the failure of
Acquisition Corp. or Mr. Griffin to perform or observe the covenants,
agreements and conditions of the merger agreement to be performed or
observed by it at or before the effective time;
- by Acquisition Corp., if events occur which render impossible the
satisfaction of one or more of its conditions to effect the merger and
such conditions are not waived by Acquisition Corp., unless the failure
of such occurrence is due to the failure of Acquisition Corp. or Mr.
Griffin to perform or observe
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the covenants, agreements and conditions of the merger agreement to be
performed or observed by them at or before the effective time;
- by Acquisition Corp., if it is enjoined or restrained by any governmental
authority or other regulatory body (including any court), such injunction
or restraining order prevents the performance by Acquisition Corp. of its
obligations under the merger agreement and such injunction shall not have
been withdrawn within 60 days after the date of which such injunction was
first issued;
- by Acquisition Corp., if the shareholders of RISCORP shall have voted on
the merger agreement and the merger, and the approval required by the
merger agreement is not obtained; or
- by Acquisition Corp., if it receives written notice from RISCORP's Board
of Directors that RISCORP's Board of Directors has received a "superior
proposal" (as defined in the merger agreement) or intends to inform the
RISCORP shareholders it no longer believes the merger is advisable and no
longer recommends approval of the merger as discussed above under the
heading "-- Non-Solicitation."
In the event of the termination of the merger agreement, the merger
agreement will become void and have no effect and there will be no liability or
obligation on the part of any party to the merger agreement or their respective
officers, directors or shareholders except to the extent that such termination
results from the willful breach by any party of any material representation,
warranty, covenant or agreement under the merger agreement.
WAIVER AND AMENDMENT
Any term or provision of the merger agreement may be waived in writing at
any time by the party which is, or whose shareholders are, entitled to the
benefits of such term or provision. Any term or provision of the merger
agreement may be amended or supplemented at any time by action of the respective
Boards of Directors (or its authorized representative) of Acquisition Corp. or
RISCORP, without action of the shareholders, whether before or after the special
meeting; provided, however, that after the approval of the merger agreement by
the shareholders of RISCORP, no such amendment shall:
- reduce the amount or change the form of the consideration to be delivered
to the shareholders as contemplated by the merger agreement;
- otherwise materially adversely affect the interests of such shareholders
unless such amendment is approved by the shareholders; or
- except as allowed by Section 607.1002 of the Florida Business Corporation
Act, amend the articles of incorporation of either RISCORP or Acquisition
Corp.
GUARANTY
Mr. Griffin is the sole shareholder of Acquisition Corp. and has executed
the merger agreement to guarantee the performance of Acquisition Corp.'s
obligations under the merger agreement through the effective time. If
Acquisition Corp. fails to perform fully and punctually any obligation or
undertaking under the merger agreement, Mr. Griffin will, upon written demand
from RISCORP, perform or cause to be performed such obligation or undertaking.
The obligations of Mr. Griffin to guarantee the performance of Acquisition
Corp.'s obligations are not contingent upon any attempt by RISCORP to enforce
performance by Acquisition Corp. Mr. Griffin's guaranty terminates upon the
closing of the merger.
GENERAL RELEASE
In connection with the merger agreement, William D. Griffin, each of the
holders of shares of Class B Common Stock, RISCORP, the estate of Frederick M.
Dawson, the current officers and directors of RISCORP, The Phoenix Management
Company, Ltd. and Buttner Hammock & Company executed and delivered a general
release. Pursuant to the terms of the general release, with some specific
exceptions, each of RISCORP, the estate of Mr. Dawson, the current officers and
directors of RISCORP, Phoenix and Buttner
55
<PAGE> 63
Hammock agreed to release, acquit and forever discharge Mr. Griffin and each of
the holders of shares of Class B Common Stock of and from any and all claims,
demands, claims for relief, actions causes of action, suits, debts, obligations,
liabilities, losses, costs, attorneys' fees and expenses of any kind arising out
of, or in connection with any claim or fact occurring or arising on or prior to
the date of the consummation of the merger. With some specific exceptions, Mr.
Griffin and each of the holders of shares of Class B Common Stock similarly
agreed to release, acquit and forever discharge RISCORP, the estate of Mr.
Dawson, the current officers and directors of RISCORP, Phoenix and Buttner
Hammock. Additionally, the parties to the general release agreed not to bring,
commence, prosecute, maintain or cause or permit to be brought, commenced,
prosecuted or maintained any suit or action regarding any matter or event being
released in the general release. The foregoing description of the general
release does not purport to be complete and is qualified in its entirety by
reference to the general release that is attached as an exhibit to the merger
agreement in Appendix A to this Proxy Statement and is incorporated herein by
reference. All shareholders are urged to read the general release in its
entirety.
DISSENTERS' RIGHTS OF APPRAISAL
Under Florida law, holders of Class A Common Stock are entitled to
appraisal rights in connection with the merger. Any holder of record of Class A
Common Stock who objects to the merger may elect to have his, her or its shares
of Class A Common Stock appraised under the procedures of the Florida Business
Corporation Act and to be paid the appraised value of such shares. The appraised
value of the shares will not include any value arising from the merger but may
include a fair rate of interest. It is possible that the fair value determined
may be more or less than the merger consideration. Holders of Class A Common
Stock that exercise and perfect dissenters' rights will not be entitled to
receive any merger consideration, including the contingent right to receive a
pro rata cash amount if RISCORP recovers any amounts from Zenith or other
specified parties.
Any holder of Class A Common Stock who is considering exercising his, her
or its appraisal rights is urged to review carefully the provisions of Sections
607.1301, 607.1302 and 607.1320 of the Florida Business Corporation Act (copies
of which are attached as Appendix B), particularly with respect to the
procedural steps required to perfect the right of appraisal. The right of
appraisal may be lost if the procedural requirements of Section 607.1320 are not
followed exactly. The following is a summary of the procedures relating to
exercise of the right of appraisal, which should be read in conjunction with the
full text of the applicable sections of Section 607.1320.
RISCORP is required to notify each RISCORP shareholder entitled to
appraisal rights, at least 20 days prior to the special meeting, that such
appraisal rights are available. The notice should include a copy of the
applicable sections of the Florida Business Corporation Act. THIS PROXY
STATEMENT CONSTITUTES SUCH NOTICE TO THE RISCORP SHAREHOLDERS.
Before the vote is taken at the special meeting, a holder of Class A Common
Stock who wishes to assert dissenters' rights under Section 607.1320 must
deliver to RISCORP a written notice of his, her or its intent to demand
appraisal if the merger is consummated. A VOTE AGAINST THE ADOPTION OF THE
MERGER AGREEMENT OR AN ABSTENTION BY ITSELF WILL NOT CONSTITUTE A DEMAND FOR
APPRAISAL. In addition to not voting for the approval and adoption of the merger
agreement and the merger, a holder of Class A Common Stock electing to dissent
from the merger and demand appraisal must do so by a separate written demand to
RISCORP. Demands should be mailed or delivered to RISCORP, Inc., 2 North Tamiami
Trail, Suite 608, Sarasota, Florida 34236-5642, Attention: Walter E. Riehemann,
President.
Within ten calendar days after the effective time of the merger, RISCORP
will notify each holder of Class A Common Stock who has made a proper written
demand for appraisal and who has not voted for the adoption of the merger
agreement that the merger has been completed. A vote "FOR" the adoption of the
Merger Agreement will have the effect of waiving all appraisal rights. Within 20
days after the giving of such notice by RISCORP, any holder of Class A Common
Stock who elects to dissent must file with RISCORP a notice of such election,
stating the shareholder's name and address, the number of shares of Class A
56
<PAGE> 64
Common Stock as to which he, she or it dissents, and a demand for payment of the
fair market value thereof. Any holder of Class A Common Stock filing an election
to dissent must deposit his, her or its certificates representing shares of
Class A Common Stock with surviving corporation simultaneously with the filing
of the election.
Within ten days after the period in which holders of Class A Common Stock
may file their notices of election to dissent (or ten days after the effective
date, whichever is later, but in no event later than 90 days after the merger
agreement is approved), the surviving corporation shall make a written offer to
pay each dissenting shareholder an amount the surviving corporation estimates to
be the fair market value for such shares.
If, within 30 days after the making of the surviving corporation's offer,
any dissenting shareholder accepts such offer, payment shall be made by the
surviving corporation within 90 days of its offer, and thereafter, the
dissenting shareholders shall cease to have any interest in such shares.
If the surviving corporation fails to make such offer within the period
specified, or if it makes an offer and any dissenting shareholder fails to
accept the same within the prescribed period, then the surviving corporation
shall file an action in any court of competent jurisdiction requesting that the
fair value of such shares of Class A Common Stock be determined.
After the court determines which holders of Class A Common Stock are
entitled to an appraisal under Section 607.1320, the court will appraise the
shares of Class A Common Stock. Following determination by the court of the fair
value of the shares, the surviving corporation will pay, within 10 days of the
final determination of such court, all dissenting shareholders the appraised
value of their shares, together with interest (if so ordered by such court) upon
surrender to the surviving corporation of their certificates representing Class
A Common Stock. The costs of the appraisal proceeding may be determined by the
court and charged to the parties as the court deems equitable under the
circumstances.
If a holder of Class A Common Stock either withdraws his, her or its demand
for appraisal or has his, her or its appraisal rights terminated as described
above, the holder of Class A Common Stock will only be entitled to receive the
merger consideration for his, her or its shares of Class A Common Stock as
provided under the terms of the merger agreement.
57
<PAGE> 65
PROPOSAL 2
POSSIBLE ADJOURNMENT OR POSTPONEMENT OF SPECIAL MEETING
In the event RISCORP fails to receive a sufficient number of votes to
approve the merger agreement and the transactions contemplated therein, RISCORP
proposes to adjourn or postpone the special meeting for a period of not more
than 60 days for the purpose of soliciting additional proxies. Proxies initially
cast in favor of the merger agreement and the transactions contemplated therein
will be voted in favor of the approval of such items at any special meeting
subsequently convened within 60 days of the initial date of the special meeting
unless such proxies are revoked as described under "The Meeting -- Revocability
of Proxies."
Under RISCORP's Amended and Restated Bylaws, if a quorum is present at the
special meeting, approval of a proposal to adjourn or postpone the special
meeting for the purpose of soliciting additional proxies requires the
affirmative vote of the holders of a majority of all outstanding shares of Class
A Common Stock and Class B Common Stock, voting as a single class, entitled to
vote thereon. Accordingly, Mr. Griffin controls the votes necessary to
unilaterally approve this proposal.
IF NECESSARY, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING TO SOLICIT ADDITIONAL
PROXIES.
58
<PAGE> 66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 2000, the record date
for the special meeting, information as to RISCORP's Class A and Class B Common
Stock beneficially owned by: (a) each director of RISCORP, (b) each executive
officer of RISCORP, (c) all directors and executive officers of RISCORP as a
group, and (d) any person who is known by RISCORP to be the beneficial owner of
more than 5% of the outstanding shares of Class A Common Stock or Class B Common
Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
----------------------------------------------
CLASS A COMMON CLASS B COMMON
--------------------- ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------ ---------- -------- ----------- --------
<S> <C> <C> <C> <C>
William D. Griffin(2).............................. -- -- 22,176,052 91.1%
L. Scott Merritt(3)................................ -- -- 2,158,391 8.9
Blavin & Company, Inc. (4)......................... 1,982,000 13.9% -- --
Chap-Cap Partners, L.P.(5)......................... 1,026,500 7.2 -- --
Seth W. Hamot(6)................................... 821,300 5.7 -- --
Thomas K. Albrecht(7).............................. 790,336 5.5 -- --
Peter D. Norman(8)................................. 790,336 5.5 -- --
Walter E. Riehemann(9)............................. 1,725,000 12.1 -- --
Seddon Goode, Jr. ................................. -- -- -- --
George E. Greene III............................... 200 * -- --
Walter L. Revell................................... -- -- -- --
Edward Buttner, IV................................. -- -- -- --
All directors and executive officers as a
group (4 persons)................................ 1,725,200 12.1 -- --
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership of shares, as determined in accordance with applicable
rules promulgated by the Securities and Exchange Commission, includes shares
as to which a person has or shares voting power and/or investment power.
RISCORP has been informed that all shares shown are held of record with sole
voting and investment power, except as otherwise indicated.
(2) Mr. Griffin's business address is P.O. Box 728, Sarasota, Florida 34230. Mr.
Griffin's shares of Class B Common Stock are owned of record by The RISCORP
Group Holding Company, Limited Partnership (17,268,841 shares) and William
D. Griffin Family Limited Partnership (4,907,211 shares). The general
partners of such limited partnerships are Gryphus Company I and Gryphus
Company II, respectively. Mr. Griffin is the president, a director and the
controlling shareholder of Gryphus Company I and Gryphus Company II. The
business address of Gryphus Company I and Gryphus Company II is Bank of
America Center, Suite 850, 101 Convention Center Drive, Las Vegas, Nevada
89109. All of the shares of Class B Common Stock noted may be converted into
shares of Class A Common Stock, on a one for one basis. If all of the Class
B Common Stock shares noted were so converted into Class A Common Stock, Mr.
Griffin would beneficially own 60.9% of the shares of Class A Common Stock.
On September 18, 1997, Mr. Griffin resigned as a director of RISCORP and all
other positions with RISCORP and its subsidiaries. The information herein
regarding the stock ownership of Mr. Griffin, Gryphus Company I and Gryphus
Company II was obtained from a Schedule 13G filed by such persons with the
Securities and Exchange Commission on February 14, 2000. RISCORP makes no
representation as to the accuracy or completeness of the information
reported regarding Mr. Griffin, Gryphus Company I and Gryphus Company II.
(3) Mr. Merritt's business address is 4711 Meadowview Circle, Sarasota, Florida
34233. Mr. Merritt has sole voting and investment power with respect to
2,158,391 shares of Class B Common Stock as trustee of certain irrevocable
trusts created by Mr. Griffin for the benefit of his children. Mr. Griffin
disclaims beneficial ownership of those shares. All of the shares of Class B
Common Stock noted may be converted into shares of Class A Common Stock, on
a one for one basis. If all of the Class B Common Stock shares noted were so
converted into Class A Common Stock, Mr. Merritt would beneficially own
15.5%
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<PAGE> 67
of the shares of Class A Common Stock. The information herein regarding the
stock ownership of Mr. Merritt was obtained from a Schedule 13G filed by Mr.
Merritt with the Securities and Exchange Commission on February 14, 2000.
RISCORP makes no representation as to the accuracy or completeness of the
information reported regarding Mr. Merritt.
(4) The business address of Blavin & Company, Inc. is 29621 Northwestern
Highway, Southfield, Michigan 48034. The information herein regarding the
stock ownership of Blavin & Company, Inc. was obtained from a Schedule 13D
filed by Blavin & Company, Inc. on March 27, 1998, and as amended on April
9, 1998, July 29, 1998, April 1, 1999 and May 7, 1999. RISCORP makes no
representation as to the accuracy or completeness of the information
reported regarding Blavin & Company, Inc.
(5) Chap-Cap Partners, L.P. shares voting, dispositive power and beneficial
ownership with respect to 985,000 shares of Class A Common Stock with
Chapman Capital L.L.C. and Robert L. Chapman, Jr. The business address of
Chap-Cap Partners, L.P., Chapman Capital, L.L.C. and Mr. Chapman is 725
South Figuerosa Street, 23rd Floor, Suite 2369, Los Angeles, California
90017. The information herein regarding the stock ownership of Chap-Cap
Partners, L.P. was obtained from a Schedule 13D filed by Chap-Cap Partners,
L.P. on March 23, 1999 and as amended on May 11, 1999, July 14, 1999 and
October 29, 1999. RISCORP makes no representation as to the accuracy or
completeness of the information reported regarding Chap-Cap Partners, L.P.,
Chapman Capital, L.L.C. and Mr. Chapman.
(6) Mr. Hamot has sole voting and investment power with respect to 811,300
shares of Class A Common Stock and shared voting and investment power with
respect to 10,000 shares of Class A Common Stock. Of the 811,300 shares
beneficially owned by Mr. Hamot, 766,300 shares are owned of record by Costa
Brava Partnership II Limited Partnership and 5,000 shares are owned by Seth
W. Hamot as custodian for Gideon B. Hamot under the Massachusetts Uniform
Transfers to Minors Act. The general partner of Costa Brava Partnership II
is Roark, Reardon & Hamot, Inc.. Mr. Hamot is a principal of Roark, Reardon
& Hamot. The business address of Mr. Hamot, Costa Brava Partnership II and
Roark, Reardon & Hamot is 121-B Tremont Street, Brighton, Massachusetts
02155. The information herein regarding the stock ownership of Mr. Hamot,
Gideon B. Hamot, Costa Brava Partnership II and Roark, Reardon & Hamot was
obtained from a Schedule 13D filed by such persons with the Securities and
Exchange Commission on September 29, 1998, and as amended on April 21, 1999
and June 8, 1999. Such Schedule 13D also disclosed ownership by certain
other individuals and entities who jointly filed such Schedule 13D with Mr.
Hamot, Gideon B. Hamot, Costa Brava Partnership II and Roark, Reardon &
Hamot of an aggregate of 213,000 shares of Class A Common Stock (or
approximately 1.5% of the Class A Shares outstanding), which shares are in
addition to those disclosed as beneficially owned by Mr. Hamot. RISCORP
makes no representation as to the accuracy or completeness of the
information reported regarding Mr. Hamot, Gideon B. Hamot, Costa Brava
Partnership II, Roark, Reardon & Hamot or the other individuals and entities
identified as joint filers in such Schedule 13D.
(7) Mr. Albrecht's business address is 4137 Carmichael Road, Suite 330,
Montgomery, Alabama 36106. Represents shares issued to Mr. Albrecht by
RISCORP in connection with the settlement of claims made by Mr. Albrecht
against RISCORP.
(8) Mr. Norman's business address is 4137 Carmichael Road, Suite 330,
Montgomery, Alabama 36106. Represents shares issued to Mr. Norman by RISCORP
in connection with the settlement of claims made by Mr. Norman against
RISCORP.
(9) Represents a restricted stock award for 1,725,000 shares of Class A Common
Stock (subject to certain vesting provisions) granted pursuant to the
management agreement dated February 18, 1998 between The Phoenix Management
Company, Ltd. and RISCORP and its subsidiaries. Mr. Riehemann controls the
operations of Phoenix as the president and sole shareholder of its general
partner.
60
<PAGE> 68
MARKET FOR RISCORP'S CLASS A COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Following RISCORP's initial public offering on February 29, 1996, RISCORP's
Class A Common Stock ($.01 par value) was traded on the Nasdaq Stock Market's
National Market under the symbol "RISC." There is no public market for RISCORP's
Class B Common Stock. Due to RISCORP's inability to timely file its Annual
Report on Form 10-K for the year ended December 31, 1996 or its Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997, RISCORP's Class A Common
Stock was delisted on July 2, 1997. RISCORP's Class A Common Stock is currently
traded in the over-the-counter market. RISCORP has no intention to seek
readmission for listing on the Nasdaq National Market or any other national
securities exchange.
As of February 28, 2000, the record date for the special meeting, there
were record holders of Class A Common Stock. The following table
sets forth the high and low per share bid prices for RISCORP's Class A Common
Stock for each quarterly period, as reported by a national brokerage firm. Such
over-the-counter quotations reflect inter-dealer prices, without retail mark-up,
or commission, and may not necessarily represent actual transactions.
PER SHARE BID INFORMATION FOR CLASS A COMMON STOCK
<TABLE>
<CAPTION>
1998 1999
----------------------------------------------------- -----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High................. $2.50 $2.38 $2.13 $1.03 $1.50 $1.66 $1.73 $2.62
Low.................. $2.17 $1.97 $0.88 $0.72 $0.78 $1.31 $1.56 $1.72
</TABLE>
The high and low per share bid prices for RISCORP's Class A Common Stock on
November 3, 1999, the date preceding public announcement of the merger
agreement, were both $1.81.
No dividends have been declared or paid since RISCORP's initial public
offering and it is not anticipated that dividends will be paid in the
foreseeable future.
In March 1996, RISCORP purchased all of the outstanding stock of
CompSource, Inc. and Insura, Inc. in exchange for $12.1 million in cash and
112,582 shares of Class A Common Stock valued at $2.1 million on the date of the
acquisition. Pursuant to a stock redemption agreement entered into as a part of
the acquisition of CompSource and Insura, the former shareholders of CompSource
and Insura elected to have RISCORP repurchase the 112,582 shares at a purchase
price of $18.653 per share on March 8, 1997, and RISCORP repurchased all 112,582
shares from the former shareholders for $2.1 million in accordance with the
terms of the stock redemption agreement.
61
<PAGE> 69
PROPOSALS OF SHAREHOLDERS FOR THE NEXT ANNUAL MEETING
If the merger is consummated, there will be no public shareholders of
RISCORP and no public participation in any future meetings of shareholders of
RISCORP. However, if the merger is not consummated, RISCORP's public
shareholders will continue to be entitled to attend and participate in RISCORP's
meetings of shareholders.
RISCORP's Amended and Restated Articles of Incorporation require advance
notice to RISCORP of any shareholder proposal and of any nominations by
shareholders of persons to stand for election as directors at a meeting of
shareholders. Notice of shareholder proposals and of director nominations must
be timely given in writing to the Secretary of RISCORP prior to the meeting at
which the directors are to be elected. To be timely, notice must be received at
the principal executive office of RISCORP not less than 60 days prior to the
meeting of shareholders; provided, however, that in the event that less than 70
days notice prior to public disclosure of the date of the meeting is given or
made to the shareholders, notice by the shareholder, in order to be timely, must
be so delivered or received not later than the close of business on the tenth
day following the day on which such notice of the date of the annual meeting was
mailed or public disclosure of the date of the annual meeting was made,
whichever first occurs.
In addition to the matters required to be set forth by the rules of the
Securities and Exchange Commission, a shareholder's notice with respect to a
proposal to be brought before the annual meeting must set forth:
- a brief description of the proposal and the reasons for conducting such
business at the annual meeting;
- the name and address, as they appear on RISCORP's books, of the
shareholder proposing such business and any other shareholders known by
such shareholder to be supporting such proposal; and
- the class and number of shares of RISCORP that are beneficially owned by
such shareholder on the date of such shareholder notice and by other
shareholders known to such shareholder to be supporting such proposal on
the date of such shareholder notice, and (d) any financial interest of
the shareholder in such proposal.
As to each director nominee, a shareholder's notice with respect to a
director nomination must set forth:
- the name, age, business address, and residence address of the person;
- the principal occupation or employment of the person;
- the class and number of shares of RISCORP that are beneficially owned by
such person; and
- all information that would be required to be included in the proxy
statement soliciting proxies for the election of the nominee director
(including such person's written consent to serve as a director if so
elected).
As to each shareholder providing such notice, a shareholder's notice must
set forth:
- the name and address, as they appear on RISCORP's books, of the
shareholder; and
- the class and number of shares of RISCORP that are beneficially owned by
such shareholder on the date of such shareholder notice.
The complete Amended and Restated Articles of Incorporation provisions
governing these requirements are available to any shareholder without charge
upon request from the Secretary of RISCORP.
62
<PAGE> 70
INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows RISCORP to "incorporate by
reference" information into this Proxy Statement, which means that RISCORP can
disclose important information by referring you to another document filed
separately with the Securities and Exchange Commission. The following documents
previously filed with the Securities and Exchange Commission by RISCORP (File
No. 0-27462) pursuant to the Securities Exchange Act of 1934 are incorporated by
reference in this Proxy Statement and deemed to be a part hereof:
- RISCORP's Annual Report on Form 10-K for the fiscal year ended December
31, 1998;
- RISCORP's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, June 30, and September 30, 1999; and
- RISCORP's Current Reports on Form 8-K as filed with the Securities and
Exchange Commission on May 14, July 14, October 28, and November 4, 1999.
All documents and reports subsequently filed by RISCORP pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934 after
the date of this Proxy Statement and prior to the date of the special meeting
shall be deemed to be incorporated by reference into this Proxy Statement and to
be part hereof from the date of filing of such documents or reports. Any
statement contained in a document incorporated or deemed incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement.
RISCORP's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended, is enclosed with this Proxy Statement and can be found at
Appendix C.
RISCORP undertakes to provide by first class mail, without charge and
within one business day of receipt of any written or oral request, to any person
to whom a copy of this Proxy Statement has been delivered, a copy of any or all
of the documents referred to above which have been incorporated by reference in
this Proxy Statement, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference therein). Requests for such
copies should be directed to Walter E. Riehemann, RISCORP, Inc., 2 North Tamiami
Trail, Suite 608, Sarasota, Florida 34236-5642; telephone number: (941)
366-5015.
63
<PAGE> 71
APPENDIX A
PLAN AND AGREEMENT OF MERGER
<PAGE> 72
PLAN AND AGREEMENT OF MERGER
AMONG
GRIFFIN ACQUISITION CORP.,
WILLIAM D. GRIFFIN,
AND
RISCORP, INC.
NOVEMBER 3, 1999
<PAGE> 73
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
1. MERGER...................................................................................................2
1.1. The Merger......................................................................................2
1.2. Conversion of Shares............................................................................2
1.3. Dissenting Shares...............................................................................4
1.4. Payment of Cash for Class A Common Stock........................................................5
1.5. Stock Transfers.................................................................................7
2. CLOSING..................................................................................................7
3. REPRESENTATIONS AND WARRANTIES OF RISCORP................................................................7
3.1. Organization, Good Standing and Power...........................................................7
3.2. Capitalization..................................................................................7
3.3. RISCORP Subsidiaries............................................................................8
3.4. Authority; Enforceability.......................................................................8
3.5. No Violation; Consents..........................................................................8
3.6. RISCORP Financial Statement; SEC Reports........................................................9
3.7. Absence of Certain Changes or Events...........................................................10
3.8. Taxes and Tax Returns..........................................................................11
3.9. Litigation.....................................................................................13
3.10. Contracts and Commitments......................................................................13
3.11. Proxy Statement, Etc...........................................................................13
3.12. Employee Benefit Plans.........................................................................14
3.13. Collective Bargaining; Labor Disputes; Compliance..............................................15
3.14. Brokers and Finders............................................................................15
3.15. No Violation of Law............................................................................15
3.16. Voting Requirements............................................................................16
3.17. Properties.....................................................................................16
3.18. Amendment to Rights Agreement..................................................................17
3.19. Disclosure.....................................................................................17
4. REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND GUARANTOR................................................17
4.1. Organization, Good Standing and Power..........................................................17
4.2. Authority; Enforceability......................................................................17
4.3. No Violation; Consents.........................................................................18
4.4. Proxy..........................................................................................18
4.5. Brokers and Finders............................................................................19
4.6. Capitalization.................................................................................19
4.7. Disclosure.....................................................................................19
4.8. Investigation by Acquiror and Guarantor........................................................19
5. CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; CERTAIN COVENANTS.....................................20
5.1. Access and Information.........................................................................20
5.2. Conduct of Business Pending Merger.............................................................20
5.3. Stockholders' Approval.........................................................................24
5.4. Takeover Statutes..............................................................................24
</TABLE>
i
<PAGE> 74
<TABLE>
<S> <C> <C>
5.5. Consents.......................................................................................25
5.6. Further Assurances.............................................................................25
5.7. Notice; Efforts to Remedy......................................................................25
5.8. Proxy Materials and Schedule 13E-3.............................................................26
5.9. Press Releases; Filings........................................................................26
5.10. Indemnification of Officers and Directors......................................................26
5.11. Surrender/Sale of Insurance Licenses...........................................................27
5.12. Management of Contingent Claim.................................................................28
6. CONDITIONS PRECEDENT TO MERGER..........................................................................28
6.1. Conditions to Each Party's Obligations.........................................................28
6.2. Conditions to Obligations of RISCORP...........................................................28
6.3. Conditions to Obligations of Acquiror..........................................................29
7. TERMINATION OF THE MERGER...............................................................................30
7.1. Termination....................................................................................30
7.2. Effect of Termination..........................................................................31
8. MISCELLANEOUS...........................................................................................31
8.1. Waiver and Amendment...........................................................................31
8.2. Non-Survival of Representations and Warranties.................................................31
8.3. Notices........................................................................................32
8.4. Descriptive Headings; Interpretation...........................................................33
8.5. Counterparts...................................................................................33
8.6. Entire Agreement...............................................................................33
8.7. Governing Law..................................................................................33
8.8. Severability...................................................................................33
8.9. Enforcement of Agreement.......................................................................33
8.10. Assignment.....................................................................................34
8.11. Limited Liability..............................................................................34
8.12. Definition of Knowledge........................................................................34
8.13. Guarantor......................................................................................34
</TABLE>
LIST OF EXHIBITS
Exhibit A Voting Agreement
Exhibit B General Release
Exhibit C Fee Advancement Agreement
Exhibit D Escrow Agreement
Exhibit E Form of Section 5.10(d) Compliance Certificate
Exhibit F Contact Information for Compliance with Section 5.11(d)
Exhibit G RISCORP's Knowledge
-ii-
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PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER (this "Agreement"), dated as of November
3, 1999, by and among, GRIFFIN ACQUISITION CORP., a Florida corporation
("Acquiror"), WILLIAM D. GRIFFIN, an individual and resident of the state of
Florida ("Guarantor") and RISCORP, INC., a Florida corporation ("RISCORP").
WHEREAS, Guarantor has incorporated Acquiror under the Florida Business
Corporation Act (the "FBCA") for the purpose of Acquiror merging with and into
RISCORP pursuant to the applicable provisions of the FBCA (the "Merger") so that
RISCORP will continue as the surviving corporation of the Merger;
WHEREAS, Guarantor is the sole stockholder of Acquiror and is executing
this Agreement to guarantee the performance of Acquiror's obligations hereunder
through the Effective Time (as hereinafter defined);
WHEREAS, the respective Boards of Directors of RISCORP and Acquiror
have approved and declared advisable the Merger, the terms and provisions of
this Agreement and the transactions contemplated hereby;
WHEREAS, the respective Boards of Directors of RISCORP and Acquiror
have determined that the Merger is in furtherance of and consistent with their
respective long-term business strategies and is fair to and in the best
interests of their respective stockholders;
WHEREAS, the Merger described herein is subject to the approval of the
stockholders of RISCORP and the satisfaction of certain other conditions
described in this Agreement;
WHEREAS, in order to induce the parties to enter into this Agreement
and to perform their obligations hereunder Guarantor and each holder of Class B
Common Stock (as hereinafter defined) have executed and delivered a voting
agreement in the form of Exhibit A attached hereto;
WHEREAS, in order to induce the parties to enter into this Agreement
and to perform their obligations hereunder, each of the holders of shares of
Class B Common Stock, the officers and directors of RISCORP, Guarantor, and
certain other parties have executed and delivered a release substantially in the
form of Exhibit B attached hereto to be effective as of the Effective Time (as
hereinafter defined) (the "Release"); and
WHEREAS, in connection with the execution and delivery of this
Agreement, Acquiror has executed and delivered a fee advancement agreement in
substantially the form of Exhibit C attached hereto to be effective as of the
Effective Time (the "Fee Advancement Agreement").
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements herein contained, the
parties agree as follows:
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1. MERGER
1.1. The Merger
(a) Upon the terms and subject to the conditions of
this Agreement, at the Effective Time and in accordance with the
provisions of this Agreement and the FBCA, Acquiror shall be merged
with and into RISCORP, which shall be the surviving corporation
(sometimes referred to hereinafter as the "Surviving Corporation") in
the Merger, and the separate corporate existence of Acquiror shall
cease. Subject to the provisions of this Agreement, articles of merger
(the "Articles of Merger") shall be duly prepared, executed and
acknowledged by RISCORP, on behalf of the Surviving Corporation, and
thereafter delivered to the Secretary of State of the State of Florida
for filing on the Closing Date, as required by Section 607.1105 of the
FBCA. The Merger shall become effective upon the filing of the Articles
of Merger with the Secretary of State of the State of Florida or at
such time thereafter as is provided in the Articles of Merger (the
"Effective Time").
(b) From and after the Effective Time, the Merger
shall have all the effects as provided in the applicable provisions of
the FBCA. Without limiting the generality of the foregoing, and subject
thereto, by virtue of the Merger and in accordance with the FBCA, all
of the properties, rights, privileges, powers and franchises of RISCORP
and Acquiror shall vest in the Surviving Corporation and all of the
debts, liabilities and duties of RISCORP and Acquiror shall become the
debts, liabilities and duties of the Surviving Corporation.
(c) The Articles of Incorporation of RISCORP in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with the provisions thereof and the FBCA.
(d) The Bylaws of RISCORP in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation
until altered, amended or repealed as provided in such Bylaws, in the
Articles of Incorporation of the Surviving Corporation and in the FBCA.
(e) The officers and directors of Acquiror
immediately prior to the Effective Time shall be the initial officers
and directors of the Surviving Corporation, in each case until their
respective successors are duly elected and qualified.
1.2. Conversion of Shares. As of the Effective Time, by
virtue of the Merger and without any action on the part of Acquiror, RISCORP or
any holder of the following securities:
(a) Each share of common stock, par value $.01 of
Acquiror ("Acquiror Common Stock") that is issued and outstanding
immediately prior to the Effective Time shall be converted into and
become one fully paid and nonassessable share of Class B Common Stock
(as hereinafter defined).
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(b) Subject to Section 1.3, each share of Class A
Common Stock, par value $.01 per share of RISCORP (the "Class A Common
Stock") that is issued and outstanding immediately prior to the
Effective Time shall be canceled and extinguished and shall be
converted automatically into a right to receive an amount in cash equal
to the Merger Consideration (as hereinafter defined), without interest,
less any required withholding taxes, payable to the holder thereof, as
provided in Section 1.4, upon surrender of the certificate formerly
representing the Class A Common Stock.
(i) As used herein:
(1) the term "Merger Consideration"
shall equal (A)(I) $2.85 less (II) the excess of the
Transactional Expenses over $1,500,000 divided by the
Outstanding Class A Shares (as defined in Section
3.2), plus (B) the Contingent Claim Amount divided by
the aggregate of the Outstanding Class A Shares and
the Outstanding Class B Shares (as defined in Section
3.2); and
(2) the term "Contingent Claim
Amount" shall equal the value of any recovery
obtained by RISCORP from Zenith Insurance Company,
Arthur Andersen LLP or their respective insurers in
settlement and final discharge of all alleged errors
made in the determination of the Final Business
Balance Sheet (as defined in that certain Asset
Purchase Agreement by and among RISCORP, its
subsidiaries and Zenith Insurance Company dated June
17, 1997) (the "Contingent Claim"); provided that (A)
the value of any recovery (to the extent not paid in
cash or cash equivalents) shall be determined as of
the date of settlement of such Contingent Claim by an
independent expert well recognized for having the
knowledge and experience necessary to value such
consideration (the "Independent Expert") who shall be
selected by RISCORP within its reasonable discretion
and who shall use such valuation methodologies as are
reasonably customary under the circumstances and
deemed relevant by the Independent Expert (B) the
determination of such Independent Expert shall be
final, valid and binding on all parties in interest;
(C) to the extent that all or any portion of the
recovery received in respect of the Contingent Claim
is not reasonably subject to valuation (as determined
by the Independent Expert) then all or such portion
(as the case may be) of such recovery shall be deemed
to equal zero; and (D) the Contingent Claim Amount
shall be reduced by the aggregate of all fees, costs
and expenses incurred by, paid by, or charged to
RISCORP in (I) pursuing, prosecuting, settling, and
obtaining recovery for any such Contingent Claim,
(II) hiring and engaging the Independent Expert and
valuing any recovery of the Contingent Claim; and
(III) distributing any Contingent Claim Amount to
stockholders of RISCORP.
(ii) On the Closing Date, RISCORP shall
deliver to Acquiror a listing of each holder of Class A Common
Stock indicating such holder's name and address (the "Class A
Stockholder List"). Not later than forty-five (45) days
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following the final settlement of the Contingent Claim,
RISCORP shall distribute to each holder of Class A Common
Stock such holder's pro rata portion of the Contingent Claim
Amount to the address shown on the Class A Stockholder List or
such other address as any such stockholder may from time to
time provide in writing to RISCORP; provided that to the
extent that any recovery obtained by RISCORP on any Contingent
Claim is other than cash or a cash equivalent, RISCORP, within
the exercise of its reasonable discretion, may pay the pro
rata portion of the Contingent Claim Amount to the holders of
Class A Common Stock in cash or by distribution of any
securities or other instruments received by RISCORP in
settlement of such Contingent Claim.
(iii) Not less than two (2) days prior to
the Stockholders' Meeting (as hereinafter defined), RISCORP
shall cause the Officer's Certificate (as hereinafter defined)
to be delivered to Acquiror. For purposes of this Agreement:
(1) "Transactional Expenses" shall
mean the amount of Estimated Transactional Expenses
(as hereinafter defined) as set forth on the
Officer's Certificate;
(2) "Estimated Transactional
Expenses" shall mean the sum of the (A) estimated
costs, expenses and fees for legal services rendered
to RISCORP after the date hereof in connection with
the consummation of the transactions contemplated
hereby and (B) the estimated fees, costs, and
expenses of RISCORP with respect to services provided
to RISCORP by KPMG, LLP (or any successor thereto)
after the date hereof in connection with the
consummation of the transactions contemplated hereby,
(excluding any fees, costs and expenses related to
the audit of RISCORP's financial statements for the
calendar year ending December 31, 1999); and
(3) "Officer's Certificate" shall
mean a certificate executed by a duly authorized
officer of RISCORP which sets forth the Estimated
Transactional Expenses and which shall include
reasonable and appropriate supporting invoices and/or
other documentation.
(c) Each share of Class B Common Stock, par value
$.01 per share of RISCORP ("Class B Common Stock") that is issued and
outstanding immediately prior to the Effective Time shall remain
outstanding.
1.3. Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, shares of Class A Common Stock issued and outstanding
immediately prior to the Effective Time held by a holder who shall have not
voted in favor of the Merger or consented thereto in writing and who shall have
demanded in writing appraisal for such shares in accordance with Sections
607.1301 et seq. of the FBCA shall not be converted into a right to receive the
Merger Consideration but shall have the rights set forth in Sections 607.1301 et
seq. of the FBCA (or any successor provisions), if applicable unless such holder
fails to perfect or otherwise loses such holder's right to such payment or
appraisal, if any, pursuant to Sections 607.1301 et seq. of the
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FBCA. If, after the Effective Time, any holder of Class A Common Stock fails to
perfect or loses any such right to appraisal, each such share of such holder
shall be treated as a share that had been converted as of the Effective Time
into the right to receive the Merger Consideration in accordance with Section
1.2. RISCORP shall give prompt notice to Acquiror of any notices of dissent,
demands for payment of fair value or other communications or actions received by
RISCORP with respect to shares of Class A Common Stock, and Acquiror shall have
the right to participate in and approve all negotiations and proceedings with
respect thereto. RISCORP shall not, except with the prior written consent of
Acquiror, make any payment with respect to, or settle or offer to settle, any
such demands.
1.4. Payment of Cash for Class A Common Stock.
(a) At the Effective Time, RISCORP shall
irrevocably deposit or cause to be deposited with a bank or trust
company to be designated by RISCORP and reasonably satisfactory to
Acquiror which is organized and doing business under the laws of the
Untied States or any state thereof and has a combined capital and
surplus of at least $100,000,000 (the "Disbursing Agent"), as agent for
the holders of the shares of the Class A Common Stock, cash in the
estimated aggregate amount required to effect conversion of shares of
Class A Common Stock into the Merger Consideration at the Effective
Time pursuant to Section 1.2 hereof. Pending distribution hereof
pursuant to Section 1.4(b) hereof of the cash deposited with the
Disbursing Agent, such cash shall be held in trust for the benefit of
the holders of the Class A Common Stock and the fund shall not be used
for any other purpose and Acquiror and Surviving Corporation may direct
the Disbursing Agent to invest such cash, provided that such
investments:
(i) shall be obligations of or
guaranteed by the United States of America, commercial paper
obligations receiving the highest rating from either Moody's
Investors Services, Inc. or Standard & Poors Corporation, or
certificates of deposit, bank repurchase agreements or bankers
acceptance, of domestic commercial banks with capital
exceeding $250,000,000 (collectively, "Permitted Investments")
or money market funds which are invested solely in Permitted
Investments; and
(ii) shall have maturities that will not
prevent or delay payments to be made pursuant to Section
1.4(b) hereof.
Each holder of a certificate or certificates representing shares of
Class A Common Stock canceled on the Effective Time pursuant to Section
1.2 hereof may thereafter surrender such certificate to the Disbursing
Agent, as agent for such holder of shares of Class A Common Stock,
which shall effect the exchange of such certificate or certificates on
such holder's behalf for a period ending six months after the Effective
Time. Any interest and other income resulting from such investments
shall be paid to the Surviving Corporation.
(b) After surrender to the Disbursing Agent of any
certificate which prior to the Effective Time shall have represented
any shares of Class A Common Stock (such shares being the "Surrendered
Shares"), the Disbursing Agent shall promptly distribute to the person
in whose name such certificate shall have been registered a check in an
amount equal
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to the Merger Consideration multiplied by the number of Surrendered
Shares. Until so surrendered and exchanged, each such certificate
shall, after the Effective Time, be deemed to represent only the right
to receive such cash, and until such surrender and exchange, no cash
shall be paid to the holder of such outstanding certificate in respect
thereof. No interest or dividends shall be paid or accrued on the
Merger Consideration. Not less than ten (10) business days prior to the
Closing Date, Acquiror shall submit to RISCORP, letters of transmittal
and other documents and materials to be mailed to the holders of Class
A Common Stock to facilitate the surrender of such Class A Common
Stock. The Surviving Corporation shall immediately following the
Effective Time cause to be distributed to such holders such letters of
transmittal and other documents and materials approved by RISCORP to
facilitate such surrender.
(c) If any cash deposited with the Disbursing Agent
for purposes of payment in exchange for shares of Class A Common Stock
remains unclaimed following the expiration of six (6) months after the
Effective Time, such cash shall be delivered to the Surviving
Corporation by the Disbursing Agent, and thereafter the Disbursing
Agent shall not be liable to any persons claiming any amount of such
cash, and the surrender and exchange shall be effected directly with
the Surviving Corporation (subject to applicable abandoned property,
escheat and similar laws). No interest shall accrue or be payable with
respect to any amounts which any such holder shall be so entitled to
receive. The Surviving Corporation or the Disbursing Agent shall be
authorized to pay the cash attributable to any certificate theretofore
issued which has been lost or destroyed, upon receipt of evidence
reasonably satisfactory to the Surviving Corporation of ownership of
the shares of Class A Common Stock represented thereby and of
appropriate indemnification.
(d) None of Acquiror, the Surviving Corporation or
the Disbursing Agent shall be liable to any person in respect of any
shares of retained Class A Common Stock (or dividends or distributions
with respect thereto) or cash delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. If any
certificates representing shares of Class A Common Stock shall not have
been surrendered prior to three years after the Effective Time, any
such cash, dividends or distributions in respect of such certificate
shall, to the extent permitted by applicable law, become the property
of the Surviving Corporation, free and clear of all claims or interest
of any person previously entitled thereto.
(e) If payment is to be made to a person other than
the person in whose name a surrendered certificate, which prior to the
Effective Time shall have represented any shares of Class A Common
Stock, is registered, it shall be a condition to such payment that the
certificate so surrendered shall be endorsed or shall otherwise be in
proper form for transfer, and that the person requesting such payment
shall have paid any transfer and other taxes required by reason of such
payment in a name other than that of the registered holder of the
certificate surrendered or shall have established to the satisfaction
of the Surviving Corporation or the Disbursing Agent that such tax
either has been paid or is not payable.
(f) From and after the Effective Time, the holders of
shares of Class A Common Stock outstanding immediately prior to the
Effective Time shall cease to have any
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rights with respect to such shares of Class A Common Stock except as
otherwise provided herein or by law.
1.5. Stock Transfers. After the Effective Time, there shall be
no transfers on the stock transfer books of the Surviving Corporation of any
shares of Class A Common Stock which were outstanding immediately prior to the
Effective Time.
2. CLOSING. Unless otherwise mutually agreed upon in writing by
Acquiror and RISCORP, the closing of the Merger (the "Closing") will be held at
10:00 a.m., local time, on the second business day following the date that all
of the conditions precedent specified in this Agreement have been (or can be at
the Closing) satisfied or waived by the party or parties permitted to do so
(such date being referred to hereinafter as the "Closing Date"). The place of
Closing shall be at the offices of King & Spalding, 191 Peachtree Street, N.E.,
Atlanta, Georgia 30303, or at such other place as may be agreed between Acquiror
and RISCORP.
3. REPRESENTATIONS AND WARRANTIES OF RISCORP. With such exceptions as
are set forth in the appropriate sections of a letter (the "RISCORP Disclosure
Letter") delivered by RISCORP to Acquiror on or prior to the date of this
Agreement, RISCORP hereby represents and warrants to Acquiror as set forth in
this Section 3.
3.1. Organization, Good Standing and Power. RISCORP is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Florida and has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. RISCORP is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties make such qualification or licensing
necessary, except where the failure to be so qualified or licensed or to be in
good standing would not, individually or in the aggregate, have a material
adverse effect (net of any insurance proceeds recovered) on (a) the financial
condition or net worth of RISCORP and RISCORP Subsidiaries (as hereinafter
defined) on a consolidated basis or (b) the ability of RISCORP to consummate the
transactions contemplated by this Agreement (collectively, a "Material Adverse
Effect on RISCORP"). RISCORP has made available to Acquiror complete and correct
copies of its Articles of Incorporation and all amendments thereto and its
Bylaws as amended and all similar organizational documents for all RISCORP
Subsidiaries.
3.2. Capitalization. The authorized capital stock of
RISCORP as of the date hereof consists of (a) 100,000,000 shares of Class A
Common Stock of which 14,258,671 shares are issued and outstanding (such shares
being the "Outstanding Class A Shares"), (b) 100,000,000 shares of Class B
Common Stock of which 24,334,443 shares are issued and outstanding (such shares
being the "Outstanding Class B Shares"), and (c) 10,000,000 shares of Preferred
Stock, par value $.01 per share of RISCORP ("Preferred Stock"), of which no
shares are issued and outstanding. All outstanding shares of capital stock
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of RISCORP have been duly authorized and validly issued and are fully paid and
nonassessable and not subject to any preemptive rights. Except as set forth in
this Section 3.2, (a) there are no shares of capital stock or other equity
securities of RISCORP outstanding, (b) there are no option plans, outstanding
options, warrants or rights to purchase or acquire from RISCORP any capital
stock of RISCORP, (c) there are no existing registration covenants with RISCORP
with respect to outstanding shares of any of the capital stock of RISCORP, and
(d) there are no convertible securities or other contracts, commitments,
agreements, understandings, arrangements or restrictions by which RISCORP is
bound to issue any additional shares of its capital stock or other securities.
Other than as contemplated in this Agreement and in the First Amendment to
Directors Agreement, there are no voting trusts or other agreements or
understandings with respect to the voting of capital stock of RISCORP or any
RISCORP Subsidiary to which RISCORP or any RISCORP Subsidiary is a party.
3.3. RISCORP Subsidiaries. Section 3.3 of RISCORP
Disclosure Letter sets forth a correct and complete list of each corporation
owned directly or indirectly by RISCORP (each a "RISCORP Subsidiary" and
collectively the "RISCORP Subsidiaries"). Section 3.3 of the Disclosure Letter
also identifies those RISCORP subsidiaries holding insurance licenses or owning
any assets (the "Insurance Subsidiaries"). RISCORP owns or controls, directly or
indirectly, 100% of the outstanding equity securities of each RISCORP Subsidiary
free and clear of all liens, charges, pledges, security interests or other
encumbrances. Other than the RISCORP Subsidiaries, RISCORP does not own or
control any equity interest in any corporation, partnership, limited liability
company, association or other entity. All of the capital stock of each Insurance
Subsidiary has been duly authorized and validly issued and is fully paid and
nonassessable. There are no outstanding options or rights to subscribe to, or
any contracts or commitments to issue or sell, any shares of the common stock,
equity interests or other securities (collectively the "Capital Stock") or
obligations convertible into or exchangeable for, or giving any person any right
to acquire, any shares of the Capital Stock of any Insurance Subsidiary to which
RISCORP or any Insurance Subsidiary is a party. Each Insurance Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted.
3.4. Authority; Enforceability. RISCORP has the corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby, subject to the approval of this Agreement and
the Merger by the stockholders of RISCORP in accordance with the FBCA and the
Bylaws and Articles of Incorporation of RISCORP. Subject to such approval and
compliance, the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of RISCORP, and this Agreement has been duly
executed and delivered by RISCORP and constitutes the valid and binding
obligation of RISCORP, enforceable against it in accordance with its terms, (i)
except as may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting or relating to enforcement of creditors' rights generally and
(ii) subject to general principles of equity.
3.5. No Violation; Consents.
(a) Except for compliance with the Securities
Exchange Act of 1934 (the "Exchange Act"), neither the execution,
delivery and performance by RISCORP of this Agreement, the filing of
the Articles of Merger with the Secretary of State for the State of
Florida, the consummation by RISCORP of the transactions contemplated
hereby, nor compliance by RISCORP with any of the provisions hereof,
will:
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(i) violate, conflict with, result in a
breach of any provision of, constitute a default (or an event
that, with notice or lapse of time or both, would constitute a
default) under, result in the termination of, accelerate the
performance required by, or result in a right of termination
or acceleration, or the creation of any lien, security
interest, charge or encumbrance upon any of the properties or
assets of RISCORP, under any of the terms, conditions or
provisions of, (x) RISCORP's Articles of Incorporation or
Bylaws, (y) the articles of incorporation, certificate of
incorporation, bylaws or any similar organizational document
of any Insurance Subsidiary, or (z) any note, bond, mortgage,
indenture or Material Contract (as hereinafter defined) to
which RISCORP or any RISCORP Subsidiary is a party, or by
which RISCORP or any RISCORP Subsidiary may be bound, or to
which RISCORP or any RISCORP Subsidiary or the properties or
assets of any of them may be subject; or
(ii) subject to compliance with the statutes
and regulations referred to in Section 3.4(b), violate any
valid and enforceable judgment, ruling, order, award, writ,
injunction, decree, or any statute, rule or regulation
applicable to RISCORP or any RISCORP Subsidiary or any of
their respective properties or assets.
(b) Except for (i) compliance with the Exchange Act,
(ii) notices, filings, authorizations, exemptions, consents or
approvals, the failure of which to give or obtain would not,
individually or in the aggregate, have a Material Adverse Effect on
RISCORP, (iii) the filing of the Articles of Merger with the Secretary
of State of Florida, and (iv) the filing of the notices with or the
consents obtained from the state insurance commissioners of Florida and
Missouri or other regulatory authorities set forth in the RISCORP
Disclosure Letter and the surrender of certificates of authority or
insurance licenses in those states in which such surrender has not been
accomplished prior to or at Closing, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any
governmental authority or other regulatory body is necessary for the
consummation by RISCORP of the transactions contemplated by this
Agreement.
3.6. RISCORP Financial Statement; SEC Reports.
(a) Since February 27, 1998 (such date being the date
RISCORP filed the amended Annual Report on Form 10-K/A for the calendar
year ending December 31, 1996) (the "Filing Date") RISCORP has filed
all reports or amended reports (the "RISCORP Reports") required to be
filed by it with the Securities and Exchange Commission (the "SEC") and
all RISCORP Reports complied as to form in all material respects with
the applicable requirements of law. Each report required to be filed by
RISCORP with the SEC since the Filing Date did not on the date of
filing of such reports and, except to the extent revised or superseded
by a subsequent filing with the SEC prior to the date hereof does not,
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were
made not misleading. RISCORP has heretofore made available to Acquiror
true and correct copies of all RISCORP Reports, together with all
exhibits thereto.
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RISCORP also has made available to Acquiror true and correct copies of
the unaudited consolidated balance sheets of RISCORP and the RISCORP
Subsidiaries at August 31, 1999 and the related unaudited consolidated
statements of income, stockholders' equity and cash flows for the
period then ended. The audited consolidated balance sheet of RISCORP
and the RISCORP Subsidiaries as of December 31, 1998 as set forth in
RISCORP's Annual Report on Form 10-K for the period then ended (the
"Form 10-K") is sometimes referred to herein as the "1998 Balance
Sheet."
(b) All of the financial statements included in the
RISCORP Reports (which are collectively referred to herein as the
"RISCORP Consolidated Financial Statements") fairly presented in all
material respects the consolidated financial position of RISCORP and
the RISCORP Subsidiaries as at the dates mentioned and the consolidated
results of operations, changes in stockholders' equity and cash flows
for the periods then ended in conformity with generally accepted
accounting principles ("GAAP") (subject to any exceptions as to
consistency specified therein or as may be indicated in the notes
thereto or in the case of the unaudited statements, as may be permitted
by Form 10-Q of the SEC and subject, in the case of unaudited
statements, to normal, recurring year end audit adjustments).
3.7. Absence of Certain Changes or Events. Since December
31, 1998:
(a) there has not been any condition, event or
occurrence which, individually or in the aggregate, has had or could
reasonably be expected to have a Material Adverse Effect on RISCORP or
give rise to a Material Adverse Effect on RISCORP;
(b) RISCORP has not changed its accounting principles
or methods in any material respect except insofar as may be required by
a change in GAAP;
(c) there has been no condition, event or occurrence
which could reasonably be expected to prevent, materially hinder or
materially delay the ability of RISCORP to consummate the Merger or the
transactions contemplated by this Agreement;
(d) there has not been any declaration, setting aside
or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to the capital stock of RISCORP or any
RISCORP Subsidiary other than dividends paid to RISCORP or a member of
the consolidated group of RISCORP;
(e) RISCORP has not terminated or accelerated the
provisions of any contract or agreement for the provision of
professional services; and
(f) RISCORP and RISCORP Subsidiaries have not:
(i) increased the compensation or fringe
benefits of any present or former director, officer or
employee of RISCORP or any RISCORP Subsidiary (except for
increases in salary or wages of employees in the ordinary
course of business consistent with past practice);
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(ii) granted any severance or termination
pay to any present or former director, officer or employee of
RISCORP or any RISCORP Subsidiary;
(iii) loaned or advanced money or other
property by RISCORP or any RISCORP Subsidiary to any of their
present or former directors, officers or employees; or
(iv) except as contemplated in Section
5.2(c)(xiv), established, adopted, entered into, amended or
terminated any RISCORP Employee Plan (as hereinafter defined);
or
(g) except as contemplated in Section 5.2(c)(xiv),
RISCORP has not amended, terminated, modified or accelerated any
contract with The Phoenix Management Company, Ltd.
3.8. Taxes and Tax Returns.
(a) Since September 17, 1997 and, prior to September
17, 1997, to the actual knowledge of RISCORP, without independent
investigation or inquiry, RISCORP and the RISCORP Subsidiaries have (i)
duly and timely filed (or there has been filed on their behalf) with
appropriate governmental authorities all tax returns required to be
filed by them, on or prior to the date hereof, except to the extent
that any failure to timely file would not, individually or in the
aggregate, have a Material Adverse Effect on RISCORP, and (ii) duly
paid in full or made provisions in RISCORP Consolidated Financial
Statements in accordance with GAAP (or there has been paid or provision
has been made on their behalf) for the payment of all Taxes (as
hereinafter defined) for all periods ending on or prior to the date
hereof.
(b) All such returns are correct and complete in all
material respects and there are no deficiencies for Taxes (as
hereinafter defined) that have been proposed, asserted or assessed
against RISCORP or its Tax Affiliates that remain unpaid.
(c) No federal, state, local or foreign audits or
other administrative proceedings or court proceedings are presently
pending with regard to any Taxes or tax returns of RISCORP or the
RISCORP Subsidiaries wherein an adverse determination or ruling in any
one such proceeding or in all such proceedings in the aggregate would
have a Material Adverse Effect on RISCORP.
(d) The RISCORP Disclosure Letter lists all tax
returns that have been audited and indicates all tax returns that are
currently the subject of audit. Since September 17, 1997 and, prior to
September 17, 1997, to the actual knowledge of RISCORP, without
independent investigation or inquiry, neither RISCORP nor any Tax
Affiliate has granted any extension or waiver of the statute of
limitations period on the assessment of any material Taxes which period
(after giving effect to such extension or waiver) has not expired.
Since September 17, 1997 and, prior to September 17, 1997, to the
Knowledge of RISCORP, neither RISCORP nor any Tax Affiliate has granted
power of
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attorney with respect to any matter relating to any material Tax. Since
September 17, 1997 and, prior to September 17, 1997, to the actual
knowledge of RISCORP, without independent investigation or inquiry, no
claim has been made by an authority in a jurisdiction where RISCORP or
any Tax Affiliate does not file tax returns that it is or may be
subject to Tax in that jurisdiction.
(e) Since September 17, 1997 and, prior to September
17, 1997, to the actual knowledge of RISCORP, without independent
investigation or inquiry, RISCORP and each Tax Affiliate has withheld
and paid all Taxes required to have been paid in connection with
amounts paid or owing to any employee, independent contractor,
stockholder, partner or third party.
(f) Since September 17, 1997 and, prior to September
17, 1997, to the actual knowledge of RISCORP, without independent
investigation or inquiry, neither RISCORP nor any Tax Affiliate is a
party to any Tax allocation, sharing or similar agreement.
(g) Since September 17, 1997 and, prior to September
17, 1997, to the actual knowledge of RISCORP, without independent
investigation or inquiry, neither RISCORP nor any Tax Affiliate has
been a member of an affiliated group filing or consolidated federal
income tax return (other than a group the common parent of which was
RISCORP).
(h) Since September 17, 1997 and, prior to September
17, 1997, to the actual knowledge of RISCORP, without independent
investigation or inquiry, neither RISCORP nor any Tax Affiliate has
made any payments, is obligated to make any payments, or is a party to
any agreement that under certain circumstances could obligate it to
make any payments that will not be deductible under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") or would
constitute compensation in excess of the limitation set forth in
Section 162(m) of the Code.
(i) Since September 17, 1997 and, prior to September
17, 1997, to the actual knowledge of RISCORP, without independent
investigation or inquiry, no consent under Section 341(f) of the Code
has been filed with respect to RISCORP or any Tax Affiliate.
(j) Neither RISCORP nor any Tax Affiliate has been a
United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
(k) Since September 17, 1997 and, prior to September
17, 1997, to the actual knowledge of RISCORP, without independent
investigation or inquiry, no claim for unpaid Taxes has become a lien
or encumbrance of any kind against the property of RISCORP or any Tax
Affiliate.
As used herein (i) the term "Taxes" shall include all Federal, state, local and
foreign income, property, premium, sales, excise, employment, payroll,
withholding and other taxes and (ii) the term "Tax Affiliate" shall mean any
RISCORP Subsidiary and any individual or entity for whose Taxes RISCORP or any
RISCORP Subsidiary is or could be held liable whether by reason of
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being a member of an affiliated, consolidated, combined, unitary or other
similar group for tax purposes, by reason of being a successor, member or
general partner, by agreement, or otherwise.
3.9. Litigation. Except as disclosed in the RISCORP Reports:
(a) neither RISCORP nor any RISCORP Subsidiary is a party to
any pending or, to the Knowledge of RISCORP (as hereinafter defined),
threatened claim, action, suit, investigation or proceeding which, if
finally determined adversely, would have, either individually or in the
aggregate, a Material Adverse Effect on RISCORP;
(b) there is no outstanding order, writ, judgment,
stipulation, injunction, decree, determination, award or other decision
against RISCORP or any RISCORP Subsidiary which, either individually or
in the aggregate, has had or would have a Material Adverse Effect on
RISCORP;
(c) no officer or director of RISCORP is a party to any
pending or, to the knowledge of such officer of director, threatened
claim, action, suit, investigation or proceeding or subject to
outstanding order, writ, judgment, stipulation, injunction, decree,
determination, award or other decision arising out of or related to
such officer's or director's actions, inactions, duties, or status as
an officer or director of RISCORP.
3.10. Contracts and Commitments. Each contract, agreement or
other document or instrument ("Material Contract") to which RISCORP or any of
its Subsidiaries is a party that was required to be filed as an exhibit to
RISCORP's annual report on Form 10-K or 10-K/A for the year ended December 31,
1998 or any quarterly report on form 10-Q filed since December 31, 1998 was so
filed. Except for the Shareholder Protection Rights Agreement dated May 13, 1999
by and between RISCORP and First Union National Bank (the "Rights Agreement"),
RISCORP is not a party to or subject to any "poison pill", shareholders rights
plan, rights agreement or similar agreement, instrument or plan.
3.11. Proxy Statement, Etc. The proxy statement (the "Proxy
Statement") to be mailed to RISCORP's stockholders in connection with the
meeting (the "Stockholders' Meeting") to be called to consider the Merger and
any other document filed with the SEC in connection with the Merger, at the date
such document is first published, sent or delivered to RISCORP's stockholders
and at the Stockholders' Meeting will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein in light of the
circumstances under which they were made not misleading, provided that no
representation is made by RISCORP with respect to statements made in such Proxy
Statement or other document filed with the SEC in connection with the Merger
based on written information supplied by Acquiror or Guarantor specifically for
inclusion or incorporation by reference in the Proxy Statement or such other
document. All documents that RISCORP is responsible for filing with the SEC and
any other regulatory agency in connection with the Merger will comply as to form
in all material respects with the provisions of applicable law and any
applicable rules or regulations thereunder.
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3.12. Employee Benefit Plans. Notwithstanding the following
representations regarding employee benefit plans, with respect to any
representations or warranties concerning any matter relating to or arising out
of any transactions occurring before September 17, 1997, between any party in
interest (as defined in Section 3(14) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")), and the RISCORP Management Services, Inc.
Employee Stock Ownership Plan (as amended and restated as part of the RISCORP
Management Services, Inc. Retirement Plan) in this Section 3.12 or elsewhere in
this Agreement, such representation or warranty shall be based on RISCORP's
actual knowledge without independent investigation or inquiry.
(a) The RISCORP Disclosure Letter contains a list of
each employee benefit plan (as defined in Section 3(3) of ERISA) which
is maintained by or contributed to by RISCORP or any RISCORP
Subsidiary, each stock option, stock purchase or other equity-based
compensation plan maintained by or contributed to by RISCORP or any
RISCORP Subsidiary, each other plan, program or other arrangement which
provides compensation or taxable benefits to officers of RISCORP or any
RISCORP Subsidiary, each employment agreement in effect with any
officer or employee of RISCORP or any RISCORP Subsidiary and each
agreement which provides any benefits upon a change in control of
RISCORP or any RISCORP Subsidiary (individually a "RISCORP Employee
Plan" and collectively the "RISCORP Employee Plans"). RISCORP has made
available to Acquiror the plan documents or other writing constituting
each RISCORP Employee Plan and, if applicable, the trust, insurance
contract or other arrangement which holds, or which constitutes, an
asset of such plan, the ERISA summary plan description for such plan
and the most recent Form 5500 for such plan. RISCORP has identified
those RISCORP Employee Plans which RISCORP intends to satisfy the
requirements of Section 401 of the Code and has made available to
Acquiror accurate copies of the most recent favorable determination
letters for such plans.
(b) No RISCORP Employee Plan is subject to Title IV
or Section 302 of ERISA or Section 412 or 4971 of the Code. To the
Knowledge of RISCORP, there does not now exist, nor do any
circumstances currently exist, that could result in any liability under
the continuation coverage requirements of Section 601 et seq. of ERISA
and Section 4980B of the Code other than liabilities under such laws
that arise solely out of, or relate solely to, the RISCORP Employee
Plans ("RISCORP Controlled Acquiror Liability") that would be a
liability of RISCORP or any RISCORP Subsidiary following the Effective
Time.
(c) Neither RISCORP nor any RISCORP Subsidiary is, or
has been, a participant in a multi employer plan (within the meaning of
ERISA Section 3(37)). Neither RISCORP nor any RISCORP Subsidiary
maintains or has at any time maintained a RISCORP Employee Plan which
is subject to Title IV of ERISA. Neither RISCORP nor any RISCORP
Subsidiary is obligated to provide medical benefits or any other
welfare benefits under any RISCORP Employee Plan which is a welfare
plan as defined in Section 3(1) of ERISA to or on behalf of any person
who is no longer an employee of RISCORP or any RISCORP Subsidiary,
except for health continuation coverage as required by Section 4980B of
the Code or Part 6 of Title I of ERISA.
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(d) Each RISCORP Employee Plan (i) has at all times
been maintained, by its terms and in operation, in accordance with all
applicable laws, and (ii) which is intended to be qualified under
Section 401 of the Code has at all times been maintained, by its terms
and in operation, in accordance with Section 401 of the Code, in each
case except where a failure to be so maintained would not have a
Material Adverse Effect on RISCORP. As of December 31, 1998, neither
RISCORP nor any of RISCORP Subsidiaries had any liability under any
RISCORP Employee Plan that was not reflected in 1998 Balance Sheet or
disclosed in the notes thereto, other than liabilities which
individually or in the aggregate would not have a Material Adverse
Effect on RISCORP.
(e) To the actual knowledge of RISCORP, without
independent investigation or inquiry, no prohibited transaction has
occurred with respect to any RISCORP Employee Plan maintained by
RISCORP or any of the RISCORP Subsidiaries that would result in the
imposition of an excise tax or other liability under the Code or ERISA
on RISCORP or any RISCORP Subsidiary or in any obligation to reimburse
any person for any such tax or other liability.
(f) All contributions or premium payments with
respect to the RISCORP Employee Plans due for any period ending on or
before the Effective Time have been or will be timely paid by RISCORP.
The execution of or performance of the transactions contemplated by
this Agreement will not create, accelerate or increase any obligations
under the RISCORP Employee Plans.
3.13. Collective Bargaining; Labor Disputes; Compliance.
Neither RISCORP nor any RISCORP Subsidiary (a) is a party to any collective
bargaining agreement or (b) has any employees. To the knowledge of RISCORP,
since September 17, 1997, RISCORP and each RISCORP Subsidiary have complied with
all laws relating to the employment and safety of labor, including provisions
relating to wages, hours, benefits, collective bargaining and all applicable
occupational safety and health acts, laws and regulations except, in each case,
where the failure to be in compliance would not, individually or in the
aggregate, have a Material Adverse Effect on RISCORP.
3.14. Brokers and Finders. Neither RISCORP nor any RISCORP
Subsidiary, nor any of their respective officers, directors or employees, has
employed or will employ any broker or finder or incurred or will incur any
liability for any financial advisory fees, brokerage fees, commissions, or
finder's fees, and no broker or finder has acted or will act directly or
indirectly for RISCORP or any RISCORP Subsidiary, in connection with this
Agreement or any of the transactions contemplated hereby.
3.15. No Violation of Law. To the Knowledge of RISCORP, since
September 17, 1997, the business and operations of RISCORP and the RISCORP
Subsidiaries have been conducted in compliance with all applicable laws,
ordinances, regulations and orders of all governmental entities and other
regulatory bodies (including, without limitation, laws, ordinances, regulations
and orders relating to zoning, environmental matters and the safety and health
of employees and to applicable state and federal insurance laws) except where
such noncompliance, individually or in the aggregate, would not have a Material
Adverse Effect on RISCORP. Since
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September 17, 1997, except as disclosed in the RISCORP Reports or the RISCORP
Disclosure Letter:
(a) neither RISCORP, any RISCORP Subsidiary, nor any
officer or director of RISCORP has been charged with or, to the
Knowledge of RISCORP, is now under investigation with respect to, a
violation of any regulation, ordinance, order or other requirement of a
governmental entity or other regulatory body;
(b) neither RISCORP, any RISCORP Subsidiary nor any
officer or director of RISCORP is a party to or bound by any order,
judgment, decree or award of a governmental entity or other regulatory
body which has or will have, individually or in the aggregate, a
Material Adverse Effect on RISCORP; and
(c) RISCORP and the RISCORP Subsidiaries have timely
filed all reports required to be filed with any governmental entity or
other regulatory body on or before the date hereof as to which the
failure to timely file such reports would result, individually or in
the aggregate, in a Material Adverse Effect on RISCORP.
RISCORP and the RISCORP Subsidiaries have all permits, certificates, licenses,
approvals and other authorizations required in connection with the operation of
the business of RISCORP and the RISCORP Subsidiaries, except for permits,
certificates, licenses, approvals and other authorizations the failure of which
to have would not, individually or in the aggregate, have a Material Adverse
Effect on RISCORP. The RISCORP Disclosure Letter sets forth a list of all
permits, certificates, licenses, approvals and other authorizations required to
be obtained in connection with the consummation of the transactions contemplated
hereby the failure of which to obtain would have a Material Adverse Effects on
RISCORP.
3.16. Voting Requirements. The affirmative vote of (i) the
holders of 80% of the issued and outstanding Voting Stock (as defined in
RISCORP's Articles of Organization) and (ii) the holders of two-thirds of the
shares of Class A Common Stock with respect to this Agreement and the Merger is
the only vote of the holders of any class or series of RISCORP's capital stock
necessary to approve this Agreement and the transactions contemplated by this
Agreement.
3.17. Properties.
(a) RISCORP does not own any real property and there
are no outstanding contracts for the purchase of any real property.
(b) RISCORP and RISCORP Subsidiaries hold good and
valid leasehold title to leased real property they occupy, free of all
liens except for liens that, individually or in the aggregate, would
not have a Material Adverse Effect on RISCORP or liens securing
indebtedness evidenced by agreements listed on the RISCORP Disclosure
Letter or reflected on the RISCORP Consolidated Financial Statement.
All Real Property leases are in full force and effect and grant in all
respects the leasehold estates or rights of occupancy or use they
purpose to grant. There are no existing defaults (either on the part of
RISCORP or any RISCORP Subsidiary, or, to the Knowledge of RISCORP, any
other party thereto) under any
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real property lease and no event has occurred which, with notice or the
lapse of time, or both, would constitute a default (either on the part
of RISCORP or any RISCORP Subsidiary or, to the Knowledge of RISCORP,
any other party thereto) under any of the real property leases. The
consummation of the merger will not result in the occurrence of a
default under any of the real property leases (whether pursuant to a
"change of control" provision in the real property lease or otherwise).
3.18. Amendment to Rights Agreement. On or prior to the date
hereof, the Board of Directors of RISCORP has taken all necessary action with
respect to the Rights Agreement so that (i) neither Acquiror nor Guarantor will
become an "Acquiring Person" as a result of the consummation of the transactions
contemplated by this Agreement, (ii) no "Separation Time" (as such term is
defined in the Rights Agreement) will occur as a result of the consummation of
the transactions contemplated by this Agreement, and (iii) all Class A Rights
and Class B Rights (as such terms are defined in Rights Agreement) issued and
outstanding under the Rights Agreement or any other similar rights or options
issued pursuant to any contract or agreement will not be exercisable as a result
of the execution and delivery of this Agreement or the consummation of the
transactions contemplated herein.
3.19. Disclosure. No representation, warranty or covenant made
by RISCORP in this Agreement or the RISCORP Disclosure Letter contains an untrue
statement of a material fact or omits to state a material fact required to be
stated herein or therein or necessary to make the statements contained herein or
therein not misleading. The disclosure of any item in the RISCORP Disclosure
Letter or in any attachment thereto is disclosure for all purposes for which
disclosure is required under this Agreement, to the extent that such information
is reasonably apparent on its face as being applicable for all such purposes.
The inclusion of any item in the RISCORP Disclosure Letter (i) does not
represent a determination by RISCORP that such item is "material" or could have
a Material Adverse Effect on RISCORP; (ii) does not represent a determination by
RISCORP that such item did not arise in the ordinary course of business; and
(iii) shall not constitute an admission by RISCORP that such disclosure is
required to be made pursuant to any of the representations and warranties
contained herein.
4. REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND GUARANTOR. With such
exceptions as are set forth in a letter (the "Acquiror Disclosure Letter")
delivered by Acquiror to RISCORP prior to the date of this Agreement, each of
Acquiror and Guarantor hereby represents and warrants to RISCORP as follows:
4.1. Organization, Good Standing and Power. Acquiror is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of Florida and has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted.
4.2. Authority; Enforceability. Each of Acquiror and Guarantor
has the power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby, the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of each of Acquiror,
and this Agreement has been duly executed and delivered by Acquiror and
Guarantor and
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constitutes the valid and binding obligation of each such party, enforceable
against it in accordance with its terms, (i) except as may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to enforcement of creditors rights generally and (ii) subject to general
principles of equity.
4.3. No Violation; Consents.
(a) Except for compliance with the Exchange Act,
neither the execution, delivery and performance by Acquiror or
Guarantor of this Agreement, the filing of the Articles of Merger with
the Secretary of State for the State of Florida, the consummation by
Acquiror or Guarantor of the transactions contemplated hereby, nor
compliance by Acquiror or Guarantor with any of the provisions hereof,
will:
(i) violate, conflict with, result in a
breach of any provision of, constitute a default (or an event
that, with notice or lapse of time or both, would constitute a
default) under, result in the termination of, accelerate the
performance required by, or result in a right of termination
or acceleration, or the creation of any lien, security
interest, charge or encumbrance upon any of the properties or
assets of Acquiror or Guarantor, under any of the terms,
conditions or provisions of, (x) Acquiror's Articles of
Incorporation or Bylaws, or (y) any note, bond, mortgage,
indenture or material contract to which Acquiror or Guarantor
is a party, or by which Acquiror or Guarantor may be bound, or
to which Acquiror or Guarantor or the properties or assets of
any of them may be subject, other than as would, with respect
to clause (y) not have, individually or in the aggregate, a
material adverse effect (net of any insurance proceeds
recovered) on (1) the financial condition or net worth of
Acquiror or Guarantor or (2) the ability of Acquiror or
Guarantor to consummate the transactions contemplated by this
Agreement (a "Material Adverse Effect on Acquiror/Guarantor");
or
(ii) subject to compliance with the statutes
and regulations referred to in Section 4.3(b), violate any
valid and enforceable judgment, ruling, order, writ,
injunction, decree, or any statute, rule or regulation
applicable to Acquiror or Guarantor or any of their respective
properties or assets where such violation would, individually
or in the aggregate, have a Material Adverse Effect on
Acquiror/Guarantor.
(b) Except for (i) compliance with the Exchange Act,
(ii) notices, filings, authorizations, exemptions, consents or
approvals, the failure of which to give or obtain would not,
individually or in the aggregate, have a Material Adverse Effect on
Acquiror/Guarantor, and (iii) the filing of the Articles of Merger with
the Secretary of State of Florida, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any
governmental authority or other regulatory body is necessary for the
consummation by Acquiror or Guarantor of the transactions contemplated
by this Agreement.
4.4. Proxy. The written information furnished to RISCORP by
Acquiror and Guarantor specifically for inclusion in the Proxy Statement, or any
amendment or supplement
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thereto, or specifically for inclusion in any other documents filed with the SEC
by RISCORP in connection with the Merger, shall, (i) with respect to the Proxy
Statement at the time the Proxy Statement is mailed and at the time of the
Stockholders' Meeting, and, (ii) with respect to the Schedule 13E-3 and such
other documents, at the time of filing with the SEC and at the time of such
Stockholders' Meeting, not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstance under which they were made,
not misleading.
4.5. Brokers and Finders. Neither Acquiror nor Guarantor nor
any of their respective officers, directors or employees, has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions, or finder's fees, and no broker or finder has acted
directly or indirectly for Acquiror or Guarantor, in connection with this
Agreement or any of the transactions contemplated hereby.
4.6. Capitalization. The authorized capital stock of Acquiror
consists of 10,000 shares of common stock, par value $.10 per share of which one
(1) share is issued and outstanding on the date hereof and is owned of record
and beneficially by Guarantor. Such issued and outstanding stock has been duly
authorized and validly issued and is fully paid and non-assessable and free of
pre-emptive rights.
4.7. Disclosure. No representation, warranty or covenant made
by Acquiror in this Agreement or the Acquiror Disclosure Letter contains an
untrue statement of a material fact or omits to state a material fact required
to be stated herein or therein or necessary to make the statements contained
herein or therein not misleading. The disclosure of any item in the Acquiror
Disclosure Letter or in any attachment thereto is disclosure for all purposes
for which disclosure is required under this Agreement, to the extent that such
information is reasonably apparent on its face as being applicable for all such
purposes. The inclusion of any item in the Acquiror Disclosure Letter (i) does
not represent a determination by Acquiror that such item is "material" or could
have a Material Adverse Effect on Acquiror/Guarantor; (ii) does not represent a
determination by Acquiror that such item did not arise in the ordinary course of
business; and (iii) shall not constitute an admission by Acquiror or Guarantor
that such disclosure is required to be made pursuant to any of the
representations and warranties contained herein.
4.8. Investigation by Acquiror and Guarantor. Acquiror and
Guarantor have conducted their own independent review and analysis of the
businesses, assets, condition, operations and prospects of RISCORP and the
RISCORP Subsidiaries and acknowledge that Acquiror and Guarantor have been
provided access to the properties, premises and records of RISCORP and the
RISCORP subsidiaries for this purpose. In entering into this Agreement, Acquiror
and Guarantor have relied or will rely solely upon their own investigation and
analysis and the representations and warranties contained herein, and Acquiror
and Guarantor:
(a) acknowledge that, except with respect to the
RISCORP Reports, none of RISCORP, the RISCORP Subsidiaries or any of
their respective directors, officers, employees, affiliates, agents or
representatives makes any representation or warranty, either express or
implied, as to the accuracy or completeness of any of the information
provided or
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made available to Acquiror and Guarantor or their agents or
representatives prior to the execution of this Agreement; and
(b) agree, to the fullest extent permitted by law,
that none of RISCORP, the RISCORP Subsidiaries or any of their
respective directors, officers, employees, affiliates, agents or
representatives shall have any liability or responsibility whatsoever
to Acquiror or Guarantor on any basis (including, without limitation,
in contract or tort or otherwise) based upon any information provided
or made available, or statements made, to Acquiror or Guarantor prior
to the execution of this Agreement,
except that the foregoing shall not apply to the extent RISCORP, the RISCORP
Subsidiaries or any of their respective directors, officers, employees,
affiliates, agents or representatives commits fraud or engages in intentional
deception with respect to the information that it provides or makes available to
RISCORP.
5. CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; CERTAIN COVENANTS
5.1. Access and Information. Upon reasonable notice, RISCORP
shall afford Acquiror and Guarantor and their respective representatives
reasonable access during normal business hours to the properties, books, records
and personnel of RISCORP and RISCORP Subsidiaries and such additional
information concerning the business and properties of RISCORP and RISCORP
Subsidiaries as Acquiror and its representatives may reasonably request.
5.2. Conduct of Business Pending Merger.
(a) RISCORP agrees that from the date hereof to the
Effective Time, except as contemplated by this Agreement or to the
extent that Acquiror shall otherwise consent in writing, RISCORP and
the RISCORP Subsidiaries will operate their businesses only in the
ordinary course, and, consistent with its business practices since
April 1, 1998.
(b) RISCORP agrees that from the date hereof to the
Effective Time, except as otherwise consented to by Acquiror in writing
or as permitted, required or contemplated by this Agreement, (i)
neither it nor any RISCORP Subsidiary will change any provision of its
Certificate of Incorporation or Bylaws or similar governing documents
(subject to compliance with Section 5.11 hereto, except such changes as
are necessary to effectuate the surrender and/or sale of RISCORP's or
RISCORP Subsidiaries' certificate of authority or licenses to transact
the business of insurance in the state where such certificates of
authority or licenses are currently held); (ii) neither it nor any
RISCORP Subsidiary will not make, declare or pay any dividend except
for any dividend declared or paid by any RISCORP Subsidiary to RISCORP
or any RISCORP Subsidiary; and (iii) neither it nor any RISCORP
Subsidiary will make any distribution or directly or indirectly sell,
issue, redeem, purchase or otherwise acquire, any shares of its
outstanding capital stock, change the number of shares of its
authorized or issued capital stock or issue or grant any option,
warrant, call, commitment, subscription, right to purchase or agreement
of any character relating to its authorized or issued capital stock or
any securities convertible into shares of such stock.
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(c) RISCORP agrees that, except to the extent (i)
consented to by Acquiror in writing or (ii) permitted, required or
contemplated by this Agreement, from the date hereof it will not, nor
will it permit any RISCORP Subsidiary to:
(i) enter into any agreement representing an
obligation for indebtedness for borrowed money or increase the
principal amount of indebtedness under any existing agreement
or assume, guarantee, endorse or otherwise become responsible
for the obligations of any other individual, firm or
corporation;
(ii) sell, mortgage, encumber or pledge any
of its properties or assets;
(iii) take any action to (A) amend or
terminate any RISCORP Employee Plan, (B) increase the
compensation of any of its directors, executive officers or
employees, (C) adopt any other plan, program, arrangement or
practice providing new or increased benefits or compensation
to its employees, or (D) modify, accelerate the benefits
under, amend or terminate any agreement with any of RISCORP's
agents, employees, officers or directors, except as set forth
in Section 5.2(c)(xiv);
(iv) enter into any negotiation with respect
to or adopt any collective bargaining agreement;
(v) make any significant change in any
accounting methods or systems of internal accounting controls,
except as may be appropriate to conform to changes in
statutory accounting rules or GAAP;
(vi) pay, loan or advance any amount to, or
sell, transfer or lease any properties or assets (real,
personal or mixed, tangible or intangible) to, or enter into
any material agreement or arrangement with, any (A) of its
officers or directors, (B) "affiliate" or "associate" of any
of its officers or directors (as such terms are defined in
Rule 405 promulgated under the Securities Act) or (C) third
party;
(vii) make any tax election or settle or
compromise tax liability that would reasonably be expected to
have a Material Adverse Effect on RISCORP;
(viii) split, combine, or reclassify any
capital stock of RISCORP or any RISCORP Subsidiary;
(ix) acquire or agree to acquire by merging
or consolidating with or by purchasing a substantial portion
of the stock or assets of, or by any other manner, any
business or any corporation, partnership, joint venture,
association or other business organization or division
thereof;
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(x) adopt a plan of complete or partial
liquidation or resolutions providing for or authorizing such a
liquidation or a dissolution, merger, consolidation,
restructuring, recapitalization or reorganization;
(xi) invest assets of RISCORP or any RISCORP
Subsidiary in any security, instrument, or other investment
other than in the ordinary course of business at then
prevailing market rates consistent with RISCORP's written
investment policy;
(xii) amend, terminate, modify, or
accelerate any material contract or agreement to which RISCORP
is a party;
(xiii) modify, amend or terminate RISCORP's
written investment policy;
(xiv) modify or accelerate the provisions of
or terminate or amend any contract with The Phoenix Management
Company, Ltd. or Buttner Hammock and Company, P.A., provided
that RISCORP shall be authorized to take any action necessary
to (A)(1) accelerate, effective as of the Closing, the vesting
of the Class A Common Stock issued to The Phoenix Management
Company, Ltd. pursuant to that certain Restricted Stock Award
Agreement by and between The Phoenix Management Company, Ltd.
and RISCORP and (2) amend the provisions of the Management
Agreement of RISCORP, Inc. dated February 18, 1998 (the
"Management Agreement") to reduce the fees paid to The Phoenix
Management Company, Ltd. to such amount RISCORP deems
appropriate after notice to Acquiror or (B) terminate the
Management Agreement.
(xv) enter into any agreement to take any of
the actions described in Section 5.2(b) or elsewhere in this
Section 5.2(c).
(d) RISCORP shall keep Acquiror and Guarantor
informed with respect to the status of any litigation to which RISCORP,
any RISCORP Subsidiary, or any officer, director or employee of RISCORP
or any RISCORP Subsidiary is a party (whether or not commenced prior to
the date of this Agreement) and shall not settle or compromise any such
litigation in which RISCORP or any RISCORP Subsidiary is a defendant
without the consent of Acquiror; provided that RISCORP may enter into
any settlement agreement for any litigation to which any RISCORP
Subsidiary is a defendant in which a determination has been made by
RISCORP that neither it nor or any RISCORP Subsidiary has any
reasonable basis to assert claims for, cross claims for, or similar
rights to recovery if the amount paid for such settlement by RISCORP
and the RISCORP Subsidiaries does not exceed $100,000 for any such
individual litigation claim and does not exceed $250,000 in the
aggregate for all such litigation claims. Further, RISCORP covenants
and agrees that it will consult with representatives of Acquiror on an
on-going basis with respect to the direction and material decisions
affecting the disposition of all litigation in which RISCORP or any
RISCORP Subsidiary is either a plaintiff or asserting a cross or other
similar form of claim and shall not take any action to settle or
compromise and/or resolve any such claim
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without first giving Acquiror's representatives adequate opportunity to
consider the merits of any such settlement, compromise or resolution
and an opportunity to advise RISCORP of Acquiror's views with respect
to the merits of any such proposed settlement, compromise and/or
resolution.
(e) Except as provided by this Section 5.2(e) RISCORP
shall not, nor shall it permit any RISCORP Subsidiary to, nor shall it
authorize or permit any officer, director or employee of, or any
investment banker, attorney or other advisor or representative or agent
of, RISCORP or any RISCORP Subsidiary to, directly or indirectly, (i)
solicit, initiate or encourage the submission of any bona fide proposal
with respect to a merger, consolidation, share exchange or similar
transaction involving RISCORP or any RISCORP Subsidiary, or any
purchase of all or substantially all of the assets of RISCORP other
than the transactions contemplated hereby (an "Acquisition Proposal");
(ii) furnish to any person any information with respect to, or take any
other action to facilitate any inquiries or the making of any proposal
that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal; (iii) withdraw, qualify or modify, or propose
publicly to withdraw, qualify or modify, in a manner adverse to
Acquiror, the approval or recommendation of RISCORP's Board of
Directors or any committee thereof of the Merger or this Agreement;
(iv) approve or recommend, or propose publicly to approve or recommend,
any transaction involving an Acquisition Proposal from a third party
(an "Alternative Transaction"); or (v) cause RISCORP to enter into any
letter of intent, agreement in principle, acquisition agreement or
other similar agreement related to any Alternative Transaction (each an
"Acquisition Agreement"). Notwithstanding the foregoing, nothing herein
shall prevent RISCORP's Board of Directors from furnishing non-public
information to or entering into discussions or negotiations with any
person or entity in connection with an unsolicited bona fide
Alternative Transaction or recommending such an unsolicited bona fide
Alternative Transaction to the stockholders of RISCORP, if and only to
the extent that, RISCORP's Board of Directors determines in good faith
(after receiving advice from outside counsel as to its fiduciary duties
to RISCORP's stockholders under applicable law) that it has received a
Superior Proposal (as hereinafter defined). If, in accordance with the
immediately preceding sentence, RISCORP's Board of Directors believes
it has received a Superior Proposal, it may inform RISCORP's
stockholders that it no longer believes that the Merger is advisable
and no longer recommends approval of the Merger (a "Subsequent
Determination") and may enter into an Acquisition Agreement with
respect to a Superior Proposal, but only at a time that is after the
third business day following Acquiror's receipt of written notice
advising Acquiror that RISCORP's Board of Directors has received a
Superior Proposal. Such written notice shall specify the material terms
and conditions of such Superior Proposal, identify the person making
such Superior Proposal and state that RISCORP's Board of Directors
intends to make a Subsequent Determination. During such three business
day period, RISCORP shall provide an opportunity for Acquiror to
propose such adjustments to the terms and conditions of this Agreement
as would enable RISCORP to proceed with its recommendation to its
stockholders without a Subsequent Determination; provided, however,
that the acceptance of any such proposed adjustment shall be at the
sole discretion of RISCORP's Board of Directors, exercised in good
faith, and this Agreement shall be amended to reflect any such accepted
adjustments; provided, further, however, that any such proposed
adjustment, the sole effect of which is to (i) increase the amount of
the
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Merger Consideration, (ii) waive one or more conditions to the
obligations of Acquiror to effect the Merger or (iii) modify the terms
and conditions of this Agreement to reflect identical terms and
conditions contained in such Superior Proposal, shall be automatically
accepted by RISCORP, and this Agreement shall be amended to reflect any
such automatically accepted adjustments. For purposes of this
Agreement, a "Superior Proposal" means any proposal (on its most
recently amended or modified terms, if amended or modified) made by a
third party to enter into an Alternative Transaction which RISCORP's
Board of Directors determines in its good faith judgment to be more
favorable to RISCORP's stockholders than the Merger, taking into
account all relevant factors (including whether, in the good faith
judgment of RISCORP's Board of Directors, the third party is reasonably
able to finance the transaction, and any proposed changes to this
Agreement that may be proposed by Acquiror in response to such
Alternative Transaction). Nothing contained in this Section 5.2(e) or
any other provision hereof shall prohibit RISCORP or RISCORP Board of
Directors from making such disclosure to RISCORP's stockholders as, in
the good faith judgment of RISCORP's Board of Directors after receiving
advice from outside counsel, is consistent with its obligations
hereunder and is required by applicable law; provided, that RISCORP may
not, except as expressly provided by this Section 5.2(e), withdraw,
qualify or modify, in a manner adverse to Acquiror, the approval or
recommendation of RISCORP's Board of Directors of the Merger or this
Agreement.
5.3. Stockholders' Approval.
(a) RISCORP shall take all actions reasonably
necessary in accordance with applicable law and its articles of
incorporation and bylaws to convene the Stockholders' Meeting as soon
as reasonably practicable. Except as set forth in Section 5.2(e) in
connection with the Stockholders' Meeting, the Board of Directors of
RISCORP shall recommend that the stockholders of RISCORP vote to
approve this Agreement.
(b) RISCORP shall use all commercially reasonable
efforts to solicit from holders of shares of Class A Common Stock,
proxies in favor of the Merger and shall take all other action
necessary or, in the reasonable opinion of the Board of Directors of
RISCORP, advisable to secure any vote or consent of the holders of
Class A Common Stock required by the FBCA and this Agreement.
5.4. Takeover Statutes. If any "fair price," "moratorium,"
"control share acquisition," "business combination," "stockholder protection" or
similar antitakeover statute or regulation enacted under state or Federal law
shall become applicable to the Merger or any of the other transactions
contemplated hereby, each of RISCORP and Acquiror and the Board of Directors of
RISCORP and partners of Acquiror shall grant such approvals and take such
commercially reasonable actions as are within its authority and consistent with
its fiduciary obligations to its stockholders as determined in good faith by
such Board so that the Merger and the other transactions contemplated hereby may
be consummated as promptly as practicable on the terms contemplated hereby and
otherwise use commercially reasonable efforts, subject to such fiduciary duties,
to eliminate or minimize the effects of such statute or regulation on the Merger
and the other transactions contemplated hereby.
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5.5. Consents.
(a) RISCORP and Acquiror, individually or
collectively, will use commercially reasonable efforts to take, or
cause to be taken all action and to do, or cause to be done all things
necessary, proper, or advisable to obtain the written consent or
approval of the governmental authorities, regulatory bodies, and other
persons or entities identified on Schedule 5.6 in connection with the
consummation of the transactions contemplated by this Agreement, except
where the failure to obtain any required written consent or approval
thereunder would not individually or in the aggregate result in a
Material Adverse Effect on RISCORP; provided, however, the costs,
expenses and fees incurred by RISCORP in connection with obtaining any
consents or approvals from any state department of insurance shall not
be included in the Estimated Transactional Expenses.
(b) Subject to the terms and conditions herein
provided, each of the parties hereto will promptly file and prosecute
diligently the applications and related documents required to be filed
by such party with the applicable regulatory authorities in order to
effect the transactions contemplated hereby. Each party hereto agrees
to use all commercially reasonable efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate
and make effective the transactions contemplated by this Agreement.
5.6. Further Assurances. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to obtain the written consent or approval of the
governmental authorities, regulatory bodies and other persons or entities
identified on Schedule 5.6, the proper officers and directors of each
corporation which is a party to this Agreement shall take all such necessary
action. Each of the parties hereto agrees to defend vigorously against any
actions, suits or proceedings in which such party is named as defendant which
seeks to enjoin, restrain or prohibit the transactions contemplated hereby or
seeks damages with respect to such transactions.
5.7. Notice; Efforts to Remedy.
(a) Each party hereto shall promptly give written
notice to the other parties hereto upon becoming aware of the impending
occurrence of any event which would cause or constitute a breach of any
of the representations, warranties or covenants of such party contained
in this Agreement and shall use all commercially reasonable efforts to
prevent or promptly remedy the same. During the period from the date of
this Agreement to the Effective Time, RISCORP and Acquiror each shall
cause one or more of its representatives to confer on a regular and
frequent basis with representatives of the other and to report on the
general status of its ongoing operations. RISCORP shall promptly notify
Acquiror of any material change in each case on a consolidated basis in
the normal course of RISCORP's or the RISCORP Subsidiaries' businesses
or in the operation of its or their properties and of the receipt by
RISCORP or the RISCORP Subsidiaries of notice of any governmental
complaints, investigations or hearings (or communications indicating
that the same may be contemplated) or the receipt by RISCORP or the
RISCORP Subsidiaries of a
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notice of the institution or the threat of litigation involving RISCORP
or any of the RISCORP Subsidiaries, and will keep Acquiror fully
informed with respect to such events.
5.8. Proxy Materials and Schedule 13E-3.
(a) In connection with the Stockholders' Meeting,
RISCORP shall prepare and file the Proxy Statement with the SEC and
shall use its commercially reasonable efforts to respond to the
comments of the SEC and to cause a Proxy Statement to be mailed to
RISCORP's shareholders all as soon as reasonably practicable; provided,
that prior to filing the Proxy Statement, RISCORP shall consult with
Acquiror with respect to such filings and shall afford Acquiror
reasonable opportunity to comment thereon. Acquiror shall provide
RISCORP with any information for inclusion in the Proxy Statement which
may be required under applicable law and which is reasonably requested
by RISCORP.
(b) RISCORP and any person that may be deemed to be
an affiliate of RISCORP shall prepare and file concurrently with the
filing of the Proxy Statement a statement on Schedule 13E-3 with the
SEC. If at any time prior to the Stockholders' Meeting any event should
occur which is required by applicable law to be set forth in an
amendment of, or supplement to, the Schedule 13E-3, RISCORP and such
person shall file such amendments or supplements.
5.9. Press Releases; Filings. Without the consent of the other
parties, none of the parties shall issue any press release or make any public
announcement with regard to this Agreement or the Merger or any of the
transactions contemplated hereby or thereby; provided, however, that nothing in
this Section 5.9 shall be deemed to prohibit any party hereto from making any
disclosure which its counsel deems necessary or advisable in order to fulfill
such party's disclosure obligations imposed by law or the rules of any national
securities exchange or automated quotation system. Each of RISCORP and Acquiror
shall promptly notify the other of each report, schedule and other document
filed by it or any of its respective Subsidiaries with the SEC and of any other
document pertaining to the transactions contemplated hereby filed with any other
governmental authorities.
5.10. Indemnification of Officers and Directors.
(a) Immediately following the Effective Time,
Acquiror shall cause to be in effect the current policies of directors'
and officers' liability insurance maintained by RISCORP or any RISCORP
Subsidiary (the "D&O Policies") with respect to claims arising from
facts or events which occurred at or before the Effective Time, and
Acquiror shall maintain such coverage until such policies expire by
their own terms or are cancelled by the insurer. On the Closing Date,
RISCORP shall transfer to First Union National Bank ("Escrow Agent") an
amount equal to $2,500,000 to be held by Escrow Agent for a period not
to exceed four and one half years and in accordance with the Escrow
Agreement attached hereto as Exhibit D (the "Escrow Agreement").
(b) Until expiration of the applicable statute of
limitations period, the Surviving Corporation shall provide with
respect to each present or former director or
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officer of RISCORP and its subsidiaries (both present and past) (the
"Indemnified Parties"), the indemnification rights (including any
rights to advancement of expenses) which such Indemnified Parties had,
whether from RISCORP or such subsidiary, immediately prior to the
Merger, whether under the FBCA, the Indemnity Agreements to which each
present RISCORP director is a party or the articles of incorporation or
the bylaws of RISCORP or such subsidiary or otherwise.
(c) This Section 5.10 shall survive the Closing and
is intended to benefit RISCORP, the Surviving Corporation and each of
the Indemnified Parties and his or her heirs and representatives (each
of whom shall be entitled to enforce this Section 5.10 against Acquiror
or the Surviving Corporation, as the case may be) and shall be binding
on all successors and assigns of Acquiror and the Surviving
Corporation.
(d) For a period of four and one half years (the
"Covenant Period") following the Closing Date, RISCORP shall, as of the
end each fiscal quarter during the Covenant Period, maintain a Net Book
Value (as hereinafter defined) of not less than the amount set forth in
the Acquiror Disclosure Letter, of which an amount set forth in the
Acquiror Disclosure Letter shall be comprised of cash and cash
equivalents (as determined on a consolidated basis and in accordance
with GAAP). As used herein the term "Net Book Value" shall equal (A)
the sum of all of RISCORP's assets as of the end of any such fiscal
quarter determined on a consolidated basis and in accordance with GAAP
less (B) the sum of all of RISCORP's liabilities as of the end of any
such fiscal quarter determined on a consolidated basis and in
accordance with GAAP. Not more than thirty (30) days following the end
of each fiscal quarter during the Covenant Period, a duly authorized
officer of RISCORP shall deliver a certificate in the form attached
hereto as Exhibit E to each of the persons set forth on Exhibit F
certifying RISCORP's compliance with the covenants set forth in this
Section 5.10(d).
5.11. Surrender/Sale of Insurance Licenses. RISCORP and
Acquiror, individually or collectively shall use commercially reasonable efforts
to (i) surrender or cause to be surrendered or sell or cause to be sold at or
prior to Closing all certificates of authority or insurance licenses held by
RISCORP or by any RISCORP Subsidiary, and (ii) receive or have released by any
state insurance commissioner or any other appropriate state authority any and
all restricted funds, minimum capital requirements or deposits or any other
funds shown as "Cash and Cash Equivalents - Restricted" on the 1998 Balance
Sheet; provided, however, the costs, expenses and fees incurred by RISCORP in
connection with the performance of its obligations under this Section 5.11 shall
not be included in the Estimated Transactional Expenses. Notwithstanding
RISCORP's efforts to date to surrender or cause to be surrendered all
certificates of authority or insurance licenses held by RISCORP or by any
RISCORP Subsidiary, RISCORP agrees that it shall cooperate with Acquiror in its
efforts to determine whether such certificates of authority or insurance
licenses could be sold to a third party immediately prior to the consummation of
the Merger without delaying the consummation of the transactions contemplated
herein. The parties agree that any such sale of the certificates of authority or
insurance licenses would be on terms mutually acceptable to RISCORP and Acquiror
and would be subject to, among other things, RISCORP's ability to withdraw its
pending requests for the surrender of such certificates of authority or
insurance licenses.
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5.12. Management of Contingent Claim. Notwithstanding any
provisions in this Agreement to the contrary, the parties hereto acknowledge and
agree that, following Closing, RISCORP shall have all right and authority to
manage, pursue and prosecute the Contingent Claim in such manner as RISCORP
deems necessary or appropriate within the exercise of RISCORP's sole, absolute
and unfettered discretion, including, without limitation, the right (i) to elect
not to pursue such Contingent Claim; (ii) to settle, compromise or dismiss such
Contingent Claim for such amount and/or for such consideration as RISCORP shall
determine in its sole, absolute and unfettered discretion; and (iii) to select
and appoint counsel and to determine the means used to prosecute or pursue or
settle, resolve or dismiss such Contingent Claim.
6. CONDITIONS PRECEDENT TO MERGER
6.1. Conditions to Each Party's Obligations. The respective
obligations of each party to effect the Merger shall be subject to the
satisfaction on or prior to the Closing Date of each of the following
conditions:
(a) This Agreement and the Merger shall have been
approved and adopted by the affirmative vote or consent of the holders
of at least (i) 80% of the Voting Stock (as defined in RISCORP's
Articles of Incorporation) and (ii) two-thirds of the outstanding
shares of Class A Common Stock.
(b) All consents, authorizations, orders and
approvals identified on Schedule 5.6 required in connection with the
execution, delivery and performance of this Agreement, the failure to
obtain which would prevent the consummation of the Merger or have a
Material Adverse Effect on RISCORP or a Material Adverse Effect on
Acquiror/Guarantor, shall have been obtained without the imposition of
any condition having a Material Adverse Effect on RISCORP or a Material
Adverse Effect on Acquiror/Guarantor.
(c) No governmental authority or other regulatory
body (including any court of competent jurisdiction) shall have
enacted, issued, promulgated, enforced or entered any law, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is then in effect and has
the effect of making illegal or in any way preventing or prohibiting
the Merger or the transactions contemplated by this Agreement.
(d) At the mailing date of the Proxy Statement and
the date of the Stockholders' Meeting, the Proxy Statement shall not
contain any untrue statement of a material fact, or omit to state any
material fact necessary in order to make the statements therein not
misleading.
6.2. Conditions to Obligations of RISCORP. The obligations of
RISCORP to effect the Merger shall be subject to the satisfaction on or prior to
the Closing Date (except as set forth herein) of each of the following
conditions unless waived by RISCORP:
(a) The representations and warranties of Acquiror
and Guarantor set forth in Sections 4.1, 4.2, and 4.3 of this Agreement
that are qualified as to materiality shall be
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true and correct in all respects at and as of the date of this
Agreement and at and as of the Closing Date (except to the extent such
representations and warranties expressly relate to an earlier date) as
though made at and as of the Closing Date. The representations and
warranties of Acquiror and Guarantor set forth in Sections 4.1, 4.2,
and 4.3 of this Agreement that are not qualified as to materiality
shall be true and correct in all material respects at and as of the
date of this Agreement and at and as of the Closing Date (except to the
extent such representations and warranties expressly relate to an
earlier date) as though made at and as of the Closing Date.
(b) Acquiror and Guarantor each shall have performed
in all material respects all covenants and agreements required to be
performed by them under this Agreement at or prior to the Closing Date.
(c) Acquiror shall furnish RISCORP with a certificate
of its appropriate officers as to compliance with the conditions set
forth in Sections 6.2(a) and 6.2(b).
(d) RISCORP shall have paid to Escrow Agent the
Escrow Amount and the Escrow Agent and RISCORP shall have executed and
delivered the Escrow Agreement.
6.3. Conditions to Obligations of Acquiror. The obligations of
Acquiror and Guarantor to effect the Merger shall be subject to the satisfaction
on or prior to the Closing Date of each of the following conditions unless
waived by Acquiror and Guarantor:
(a) The representations and warranties of RISCORP set
forth in Sections 3.1, 3.2, 3.4 and 3.5 of this Agreement that are
qualified as to materiality shall be true and correct in all respects
at and as of the date of this Agreement and at and as of the Closing
Date (except to the extent such representations and warranties
expressly relate to an earlier date) as though made at and as of the
Closing Date. The representations and warranties of RISCORP set forth
in Sections 3.1, 3.2, 3.4 and 3.5 of this Agreement that are not
qualified as to materiality shall be true and correct in all material
respects at and as of the date of this Agreement and at and as of the
Closing Date (except to the extent such representations and warranties
expressly relate to an earlier date) as though made at and as of the
Closing Date.
(b) RISCORP shall have performed in all material
respects all covenants and agreements required to be performed by it
under this Agreement at or prior to the Closing Date.
(c) RISCORP shall furnish Acquiror with a certificate
of its appropriate officers as to compliance with the conditions set
forth in Sections 6.3(a) and 6.3(b).
(d) RISCORP shall have paid to Escrow Agent the
Escrow Amount and the Escrow Agent and RISCORP shall have executed and
delivered the Escrow Agreement.
(e) Acquiror shall have received letters of
resignation effective as of the Effective Time from each of the
officers and directors of RISCORP.
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7. TERMINATION OF THE MERGER
7.1. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the approval by the
stockholders of RISCORP:
(a) by the mutual written consent of Acquiror and
RISCORP;
(b) by RISCORP :
(i) if the Merger is not consummated on or
before April 30, 2000 (or such later date as shall have been
approved by Acquiror and RISCORP), unless the failure of such
occurrence shall be due to the failure of RISCORP to perform
or observe the covenants, agreements and conditions hereof to
be performed or observed by it at or before the Effective
Time;
(ii) if events occur which render impossible
the satisfaction of one or more of the conditions set forth in
Sections 6.1 and 6.2 and such conditions are not waived by
RISCORP, unless the failure of such occurrence shall be due to
the failure of RISCORP to perform or observe the covenants,
agreements and conditions hereof to be performed or observed
by it at or before the Effective Time;
(iii) if RISCORP is enjoined or restrained
by any governmental authority or other regulatory body
(including any court), such injunction or restraining order
prevents the performance by RISCORP of its obligations
hereunder and such injunction shall not have been withdrawn
within 60 days after the date on which such injunction was
first issued;
(iv) the stockholders of RISCORP shall have
voted on this Agreement and the Merger and the votes shall not
have been sufficient to satisfy the condition set forth in
Section 6.1(a); or
(v) in connection with entering into a
definitive agreement as permitted by Section 5.2(e) related to
a Superior Proposal, provided that Company has complied with
all provisions of Section 5.2(e) including, without
limitation, the notice provisions thereof.
(c) by Acquiror if:
(i) the Merger is not consummated on or
before April 30, 2000 (or such later date as shall have been
approved by RISCORP and Acquiror), unless the failure of such
occurrence shall be due to the failure of Acquiror or
Guarantor to perform or observe the covenants, agreements and
conditions hereof to be performed or observed by them at or
before the Effective Time;
(ii) events occur which render impossible
the satisfaction of one or more of the conditions set forth in
Sections 6.1 and 6.3 and such conditions are
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not waived by Acquiror, unless the failure of such occurrence
shall be due to the failure of Acquiror or Guarantor to
perform or observe the covenants, agreements and conditions
hereof to be performed or observed by them at or before the
Effective Time;
(iii) Acquiror is enjoined or restrained by
any governmental authority or other regulatory body (including
any court), such injunction or restraining order prevents the
performance by Acquiror of its obligations hereunder and such
injunction shall not have been withdrawn within 60 days after
the date on which such injunction was first issued;
(iv) the stockholders of RISCORP shall have
voted on this Agreement and the Merger and the votes shall not
have been sufficient to satisfy the condition set forth in
Section 6.1(a); or
(v) Acquiror receives a written notice from
RISCORP's Board of Directors in accordance with Section 5.2(e)
that RISCORP's Board of Directors has received a Superior
Proposal or intends to make a Subsequent Determination.
7.2. Effect of Termination. In the event of the termination
and abandonment of this Agreement under Section 7.1, this Agreement shall become
void and have no effect, without any liability on the part of any party or its
directors, officers or stockholders except (i) as provided in Section 5.9 and
(ii) to the extent that such termination results from the willful breach by any
party hereto of any material representation, warranty, covenant, or agreement
hereunder.
8. MISCELLANEOUS
8.1. Waiver and Amendment. Any term or provision of this
Agreement may be waived in writing at any time by the party which is, or whose
stockholders are, entitled to the benefits thereof, and any term or provision of
this Agreement may be amended or supplemented at any time by action of the
respective Boards of Directors (or its authorized representative) of Acquiror or
RISCORP without action of the stockholders, whether before or after the
Stockholders' Meeting; provided, however, that after approval of the
stockholders of RISCORP no such amendment shall (i) reduce the amount or change
the form of the consideration to be delivered to RISCORP's stockholders as
contemplated by this Agreement; (ii) otherwise materially adversely affect the
interests of such stockholders unless such amendment is approved by RISCORP's
stockholders; or (ii) except as allowed by Section 607.1002 of the FBCA, amend
the articles of incorporation of either RISCORP or Acquiror. No amendment to
this Agreement shall be effective unless it has been executed by RISCORP,
Acquiror and Guarantor.
8.2. Non-Survival of Representations and Warranties. None of
the representations and warranties of RISCORP set forth in Section 3 to this
Agreement or of Acquiror or Guarantor set forth in Section 4 to this Agreement,
or in any instrument or certificate delivered pursuant to this Agreement, shall
survive the Merger nor shall their respective stockholders, directors or
officers have any liability to the other after the Effective Time on account of
any breach of warranty or failure or the incorrectness of any of the
representations or warranties contained
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herein or in any certificate or other instrument delivered pursuant to this
Agreement. All covenants and agreements set forth in this Agreement shall
survive until satisfied or waived by the appropriate party. Except as set forth
in the immediately preceding sentence, the sole right and remedy arising from a
breach of a representation or warranty, from the failure of any of the
conditions of the Merger to be met, or from the failure to perform (other than a
willful failure to perform) any promise or discharge any obligation in this
Agreement shall be termination of this Agreement by the aggrieved party and the
remedies provided in Section 7.2 or Section 8.9 hereof.
8.3. Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
personally, telecopied (if confirmed) or sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to RISCORP:
One Sarasota Tower, Suite 608
Two North Tamiami Trail
Sarasota, Florida 34236
Attention: Walter E. Riehemann
Telecopy No.: 941-366-0993
With a copy to:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: J. Vaughan Curtis
Telecopy No.: 404-881-4777
If to Acquiror or Guarantor:
1830 S. Osprey Avenue
Suite 100-A
Sarasota, Florida 34239
Attention: William D. Griffin
Telecopy No.: 941-316-6813
With a copy to:
King & Spalding
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Mr. Edward J. Hawie, Esq.
Telecopy No.: (404) 572-5100
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<PAGE> 107
8.4. Descriptive Headings; Interpretation. The descriptive
headings are for convenience of reference only and shall not control or affect
the meaning or construction of any provision of this Agreement. When a reference
is made in this Agreement to Sections, such reference shall be to a Section of
this Agreement unless otherwise indicated. The phrase "made available" in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available.
8.5. Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement. This Agreement shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other parties, it
being understood that the parties need not sign the same counterpart.
8.6. Entire Agreement. This Agreement contains the entire
agreement between Acquiror and RISCORP with respect to the Merger, and supersede
all prior arrangements or understandings with respect to the subject matter
hereof. Except as otherwise contemplated in the covenants listed in Section 7.2
(which covenants shall be enforceable by the person or persons affected thereby
following the Effective Time), this Agreement is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder; provided
that each current director and officer of RISCORP shall be deemed a third party
beneficiary of this Agreement and shall be entitled to enforce the covenants of
Acquiror contained in Section 5.10 hereof as if they were a party hereto.
8.7. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA (WITHOUT REGARD TO
ANY APPLICABLE CONFLICTS OF LAW PROVISIONS THEREOF).
8.8. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions be consummated as originally contemplated to the
fullest extent possible.
8.9. Enforcement of Agreement. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
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<PAGE> 108
8.10. Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, and any attempt to make any such
assignment without such consent shall be null and void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties hereto and their respective successors and assigns.
8.11. Limited Liability. Notwithstanding any other provision
of this Agreement, no stockholder, director, officer, affiliate or
representative of RISCORP or Acquiror shall have any personal liability in
respect of or relating a breach of the representations or warranties of such
party under this Agreement, except to the extent that such person or entity has
engaged in fraud with respect to such matters or has engaged in intentional
deception with respect to such matters. Except as set forth in the preceding
sentence, to the fullest extent legally permissible, each of RISCORP and
Acquiror, for itself and its stockholders, directors, officers and affiliates,
waives and agrees not to seek to assert or enforce any such liability for a
breach of representations and warranties contained herein that any such person
otherwise might have pursuant to applicable law.
8.12. Definition of Knowledge. The words "to the Knowledge of
RISCORP" or "to RISCORP's knowledge" and words of similar import shall mean the
knowledge of any one of the persons listed on Exhibit G. Knowledge shall include
actual knowledge as well as the knowledge a reasonable business person would
have obtained after making reasonable inquiry and after exercising reasonable
diligence with respect thereto.
8.13. Guarantor.
(a) Guarantor hereby unconditionally and irrevocably
guarantees, to RISCORP the due and punctual performance of each of the
obligations and the undertakings of Acquiror under this Agreement when
and to the extent the same are required to be performed and subject to
all of the terms and conditions hereof. If Acquiror shall fail to
perform fully and punctually any obligation or undertaking of Acquiror
under this Agreement when and to the extent the same is required to be
performed, Guarantor will upon written demand from RISCORP forthwith
perform or cause to be performed such obligation or undertaking, as the
case may be. The obligations of Guarantor under this guaranty shall
constitute an absolute and unconditional present and continuing
guarantee of performance to the extent provided herein, and shall not
be contingent upon any attempt by RISCORP to enforce performance by
Acquiror.
(b) Subject to 8.13(a), the obligations of Guarantor
under this guaranty are absolute and unconditional, are not subject to
any counterclaim, set off, deduction, abatement or defense based upon
any claim Guarantor may have against RISCORP (except for any defense
Acquiror may have against RISCORP under the terms of this Agreement),
and shall remain in full force and effect without regard to (i) any
agreement or modification to any of the terms of this Agreement or any
other agreement which may hereafter be made relating thereto; (ii) any
exercise, nonexercise, or waiver by RISCORP of any right, power,
privilege or remedy under or in respect of this Agreement; (iii) any
insolvency, bankruptcy, dissolution, liquidation, reorganization or the
like of Acquiror at or prior to the Closing; (iv)
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<PAGE> 109
absence of any notice to, or knowledge by, Guarantor of the existence
or occurrence of any of the matters or events set forth in the forgoing
causes (i) through (iii); or (v) any other circumstance, whether
similar or dissimilar to the foregoing.
(c) Guarantor unconditionally waives (i) any and all
notice of default, non-performance or non-payment by Acquiror under
this Agreement, (ii) all notices which may be required by statute, rule
of law or otherwise to preserve intact any rights of RISCORP against
Guarantor, including, without limitation, any demand, presentment or
protest, or proof of notice of non-payment under this Agreement, and
(iii) any right to the enforcement, assertion or exercise by RISCORP of
any right, power, privilege or remedy conferred in this Agreement or
otherwise.
(d) Notwithstanding anything in this Section 8.13 to
the contrary, the guaranty set forth in this Section 8.13 shall
terminate and shall be of no further force or effect upon the Closing.
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<PAGE> 110
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered by its respective duly authorized
officers, all as of the date first above written.
GRIFFIN ACQUISITION CORP.
By: /s/ William D. Griffin
-----------------------------------
Name: William D. Griffin
Title: President
/s/ William D. Griffin
---------------------------------------
William D. Griffin
RISCORP, INC.
By: /s/ Walter E. Riehemann
-------------------------------------
Name: Walter E. Riehemann
Title: President
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<PAGE> 111
EXHIBIT A
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement"), dated as of November 3,
1999, is entered into by and among RISCORP, INC., a Florida corporation
("RISCORP"), and William D. Griffin, an individual resident of the State of
Florida ("Griffin"), The RISCORP Group Holding Company Limited Partnership, a
Nevada limited partnership ("RGHC"), William D. Griffin Family Limited
Partnership, a Nevada limited partnership ("WDG Family Partnership"), Charlotte
K. Griffin Trust Number 3, a Florida trust ("CKG Trust"), Anna F. Griffin Trust
Number 3, a Florida trust ("AFG Trust"), and John Ford Griffin Trust Number 3,
a Florida trust ("JFG Trust"; and, together with RGHC, WDG Family Partnership,
CKT Trust, and AFG Trust, the "Shareholders" and each a "Shareholder") of
RISCORP.
W I T N E S S E T H:
WHEREAS, the Shareholders own (both beneficially and of record) in the
aggregate 24,334,443 shares of Series B Common Stock, par value $.01, of
RISCORP ("Class B Common Stock");
WHEREAS, RISCORP, Acquiror and Griffin are parties to that certain
Plan and Agreement of Merger, dated November 3, 1999 (the "Merger Agreement"),
pursuant to which Acquiror will be merged with and into RISCORP (the "Merger");
WHEREAS, as a condition to the willingness of RISCORP to enter into
the Merger Agreement, RISCORP has requested that each Shareholder agree, and in
order to induce RISCORP to enter into the Merger Agreement, each Shareholder
has agreed, among other things, (i) with respect to certain questions put to
shareholders of RISCORP for a vote, to vote the Shares (as hereinafter
defined), in each case, in accordance with the terms and conditions of this
Agreement, (ii) in the event a Shareholder should fail to vote its Shares in
accordance with the terms of this Agreement, to appoint RISCORP as such
Shareholder's proxy to vote all the shares of Class B Common Stock now owned or
which may hereafter be acquired by such Shareholder (such Shareholder's
"Shares"), and (iii) to the other provisions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
adequacy of which is hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Representations and Warranties of Shareholders. Each Shareholder
hereby represents and warrants to RISCORP as follows:
<PAGE> 112
1.1. Title to the Shares. Such Shareholder is the owner
(both beneficially and of record) of the number of shares of Class B Common
Stock set forth opposite its name on the signature pages of this Agreement
(which as of the date hereof constitutes each such Shareholder's Shares) and
has exclusive power to vote such shares on all matters submitted to holders of
shares of Class B Common Stock. Other than the right to convert the shares of
Class B Common Stock into shares of Class A Common Stock, such Shareholder does
not have any rights of any nature to acquire any additional shares of Common
Stock. To the knowledge of each Shareholder, the Shareholders' Shares, in the
aggregate, constitute all of the outstanding shares of Class B Common Stock.
Except pursuant to (i) the Directors Agreement dated May 19, 1997, among
RISCORP, William Griffin, Frederick M. Dawson, Walter L. Revell, Seddon Goode,
Jr. and George E. Greene III, as amended (the "Directors Agreement"), and (ii)
a Stock Pledge and Security between The RISCORP Group Holding Company Limited
Partnership and SouthTrust Bank of Alabama, N.A., dated as of March 28, 1996,
as amended (the "Pledge and Security Agreement"), such Shareholder owns all of
such Shareholder's Shares free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements, limitations on
such Shareholder's voting rights, charges and other encumbrances of any nature
whatsoever, and, except as provided or described in this Agreement, such
Shareholder has not appointed or granted any proxy, which appointment or grant
is still effective, with respect to any of such Shareholder's Shares.
1.2. Authority Relative to this Agreement. Such Shareholder
has all necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by such
Shareholder and the consummation by such Shareholder of the transactions
contemplated hereby have been duly and validly authorized by all necessary
action on the part of such Shareholder. This Agreement has been duly and
validly executed and delivered by such Shareholder and, assuming the due
authorization, execution and delivery by RISCORP, constitutes a legal, valid
and binding obligation of such Shareholder, enforceable against such
Shareholder in accordance with its terms, (i) except as may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to enforcement of creditors' rights generally, and (ii) subject to general
principles of equity.
1.3. No Conflict. The execution and delivery of this
Agreement by such Shareholder does not, and the performance of this Agreement
by such Shareholder will not, (a) require any consent, approval, authorization
or permit of, or filing with or notification to, any governmental or regulatory
authority, domestic or foreign by such Shareholder, or (b) conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to such
Shareholder.
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<PAGE> 113
2. Covenants of Shareholders. Each Shareholder hereby covenants and
agrees that, during the time this Agreement is in effect, except as otherwise
specifically contemplated by (i) this Agreement, (ii) the Directors Agreement,
or (iii) the Pledge and Security Agreement, such Shareholder shall not, and
shall not offer or agree to, sell, transfer, tender, assign, hypothecate or
otherwise dispose of, or create or permit to exist any security interest, lien,
claim, pledge, option, right of first refusal, agreement, limitation on such
Shareholder's voting rights, charge or other encumbrance of any nature
whatsoever with respect to the Shares now owned or that may hereafter be
acquired by such Shareholder.
3. Voting Agreement; Proxy of Shareholders.
3.1. Voting Agreement. Each Shareholder hereby agrees that,
during the time this Agreement is in effect, at any meeting of the shareholders
of RISCORP, however called, and in any action by written consent of the
shareholders of RISCORP, such Shareholder shall: (a) vote such Shareholder's
Shares in favor of the Merger Agreement (as amended from time to time) and any
of the transactions contemplated by the Merger Agreement; and (b) vote the
Shares against any action or agreement that would result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation of RISCORP under the Merger Agreement or which is reasonably likely
to result in any conditions to RISCORP's obligations under the Merger Agreement
not being fulfilled. Each of the Shareholders shall vote on all issues other
than those specified in this Section 3.1 that may come before a meeting of the
Shareholders of RISCORP in such Shareholder's sole discretion, provided that
such vote is not inconsistent with the purposes of this Agreement.
3.2. Irrevocable Proxy. Each Shareholder agrees that, in
the event such Shareholder shall fail to comply with the provisions of Section
3.1 hereof as determined by RISCORP in its reasonable discretion, such failure
shall result, without any further action by such Shareholder, in the
irrevocable appointment of RISCORP as the attorney-in-fact and proxy of such
Shareholder pursuant to the provisions of Florida law, with full power of
substitution, to vote, and otherwise act (by written consent or otherwise) with
respect to, the Shares that such Shareholder is entitled to vote at any meeting
of shareholders of RISCORP (whether annual or special and whether or not an
adjourned or postponed meeting) or consent in lieu of any such meeting or
otherwise, solely on the matters and in the manner specified in Section 3.1
hereof. THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN
INTEREST. Such Shareholder hereby revokes, effective upon the execution and
delivery of the Merger Agreement by the parties thereto, all other proxies and
powers of attorney with respect to such Shareholder's Shares that such
Shareholder may have heretofore appointed or granted (other than as set forth
in the Pledge and Security Agreement), and no subsequent proxy or power of
attorney (except in furtherance of such Shareholder's obligations under Section
3.1 hereof) shall be given or written consent executed (and if
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<PAGE> 114
given or executed, shall not be effective) by such Shareholder with respect
thereto so long as this Agreement remains in effect.
4. Termination. This Agreement shall terminate on the date (the
"Termination Date") that is the earlier of (a) the Closing Date and (b) the
date on which the Merger Agreement is terminated in accordance with its terms.
5. Miscellaneous.
5.1. Expenses. All costs and expenses incurred in
connection with the transactions contemplated by this Agreement shall be paid
by the party incurring such costs and expenses.
5.2. Further Assurances. Each Shareholder and RISCORP will
execute and deliver all such further documents and instruments and take all
such further action as may be necessary in order to consummate the transactions
contemplated hereby.
5.3. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement is
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
5.4. Entire Agreement. This Agreement constitutes the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings, both written and
oral, among such parties with respect to the subject matter hereof.
5.5. Assignment. This Agreement shall not be assigned by
operation of law or otherwise.
5.6. Parties in Interest. This Agreement shall be binding
upon, inure solely to the benefit of, and be enforceable by, the parties hereto
and their successors and permitted assigns. Nothing in this Agreement, express
or implied, is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
5.7. Amendment. This Agreement may not be amended except by
an instrument in writing signed by the parties hereto.
5.8. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of this Agreement is not affected in any manner materially
adverse to any party. Upon such determination that any term or
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<PAGE> 115
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the terms of this Agreement remain as
originally contemplated to the fullest extent possible.
5.9. Notices. Except as otherwise provided herein, all
notices, requests, claims, demands and other communications hereunder shall be
in writing and shall be given (and shall be deemed to have been duly given upon
receipt) by delivery in person, by cable, facsimile transmission, telegram or
telex or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the following addresses (or at such
other address for a party as shall be specified in a notice given in accordance
with this Section 5.9):
if to RISCORP:
2 North Tamiami Trail
One Sarasota Tower
Suite 608
Sarasota, Florida 34236
Attention: Walter E. Riehemann
Facsimile: (941) 366-0993
Telephone: (941) 366-5015
with a copy to:
Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: J. Vaughan Curtis, Esq.
Facsimile: (404) 881-7777
Telephone: (404) 881-7000
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<PAGE> 116
if to the Shareholders:
c/o William D. Griffin
One Sarasota Tower
Suite 410
Sarasota, Florida 34236
Facsimile: (941)316-6813
Telephone: (941)316-6800
with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attention: Edward J. Hawie, Esq.
Facsimile: (404) 572-5100
Telephone: (404) 572-4600
5.10 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Florida applicable
to contracts executed in and to be performed in Florida without regard to any
principles of choice of law or conflicts of law of such state.
5.11. Definitions. Capitalized terms not otherwise defined
herein shall have the meanings set forth in the Merger Agreement.
5.12. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
5.13. Counterparts. This Agreement may be executed and
delivered (including by facsimile transmission) in one or more counterparts,
and by the different parties hereto in separate counterparts, each of which
when so executed and delivered shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
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<PAGE> 117
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed and delivered as of the date first written above.
RISCORP, INC.
By: /s/ Walter E. Riehemann
--------------------------------
Walter E. Riehemann
President
/s/ William D. Griffin
---------------------------------------
WILLIAM D. GRIFFIN
17,268,841 THE RISCORP GROUP HOLDING COMPANY
- ---------- LIMITED PARTNERSHIP
shares
By: Gryphus Company I, General Partner
By /s/ William D. Griffin
-------------------------------------
WILLIAM D. GRIFFIN, President
4,907 211 WILLIAM D. GRIFFIN FAMILY LIMITED
- ---------- PARTNERSHIP
shares
By: Gryphus Company I, General Partner
By: /s/ William D. Griffin
-------------------------------------
WILLIAM D. GRIFFIN, President
719,464 CHARLOTTE K. GRIFFIN TRUST NUMBER 3
- ----------
shares
By: /s/ L. Scott Merritt
-------------------------------------
L. Scott Merritt, Trustee
719,464 ANNA F. GRIFFIN TRUST NUMBER 3
- ----------
shares
By: /s/ L. Scott Merritt
-------------------------------------
L. Scott Merritt, Trustee
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<PAGE> 118
719,463 JOHN FORD GRIFFIN TRUST NUMBER 3
- ----------
shares
By: /s/ L. Scott Merritt
--------------------------------------
L. Scott Merritt, Trustee
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<PAGE> 119
EXHIBIT B
GENERAL RELEASE
THIS GENERAL RELEASE (the "Agreement") is entered into as of this 3rd
day of November, 1999 by and among (i) RISCORP Group Holding Company, L.P., a
Nevada limited partnership ("Holding"), (ii) William D. Griffin Family
Partnership, a Nevada limited partnership ("Family"), (iii) L. Scott Merritt,
as trustee of Charlotte K. Griffin Trust Number 3, Anna F. Griffin Trust Number
3, and John F. Griffin Trust Number 3 (the "Trusts"), (iv) William D. Griffin,
an individual and resident of the State of Florida, ("WDG" and together with
Holding, Family and the Trusts, the "Griffin Group"), (v) RISCORP, Inc,
("RISCORP") (vi) the estate of Frederick M. Dawson, represented herein by Karen
Dawson, its executrix, (vii) Seddon Goode, Jr., (viii) George E. Greene III,
(ix) Walter L. Revell, (x) Walter E. Riehemann; (xi) Edward W. Buttner, IV,
(xii) The Phoenix Management Company, Ltd. ("PMC"), and (xiii) Buttner Hammock
& Company ("BH&C") ((vi) through (xi) being the "RISCORP Directors and
Officers" and together with PMC and BH&C the "RISCORP Group") to be effective
as of the consummation of the transactions contemplated in the Merger Agreement
(as hereinafter defined).
WHEREAS, RISCORP, Griffin Acquisition Corp., a Florida corporation
("Acquiror") and WDG are parties to that certain Plan and Agreement of Merger
dated as of November 3, 1999 (the "Merger Agreement") pursuant to which Griffin
Acquisition Corp, a Florida corporation will be merged with and into RISCORP
(the "Merger"); and
WHEREAS, the parties hereto, as a condition to and in contemplation of
the Merger, desire to execute and deliver this Agreement to release each other
party hereto from any and all claims such party may have, with such release to
be effective upon consummation of the Merger.
NOW, THEREFORE, in consideration of (i) the performance of each of
RISCORP's, Acquiror's, WDG's and RISCORP Directors and Officers' respective
obligations under and pursuant to the Merger Agreement and (ii) the payment,
mutual promises, agreements and covenants set forth herein, and the performance
thereof, the parties hereto agree as follows:
1. RELEASE OF GRIFFIN GROUP. Except with respect to any rights or
obligations set forth on Schedule 1 attached hereto, effective upon
consummation of the Merger, each of RISCORP and the RISCORP Group on behalf of
themselves and their respective shareholders, officers, directors, employees,
agents, representatives, attorneys, accountants, parents, subsidiaries,
affiliates, predecessors, successors and assigns hereby release, acquit and
forever discharge RISCORP, each member of the Griffin Group and their
respective current and former officers, directors and employees of and from any
and all claims,
<PAGE> 120
demands, claims for relief, actions, causes of action, suits, debts,
obligations, liabilities, damages, losses, costs, attorneys' fees, and expenses
of any kind, character or nature whatsoever, whether known or unknown,
suspected or unsuspected, fixed or contingent, now existing or in the future
arising, based on, arising out of, or in connection with any claim or fact
occurring or arising on or prior to the date of the consummation of the Merger.
2. RELEASE OF RISCORP GROUP. Except with respect to any rights or
obligations set forth on Schedule 2 attached hereto, effective upon
consummation of the Merger, each of RISCORP and each member of the Griffin
Group hereby on behalf of themselves and their respective shareholders,
officers, directors, employees, agents, representatives, attorneys, parents,
subsidiaries, affiliates, predecessors, successors and assigns release, acquit
and forever discharge the RISCORP Group and their respective current and former
officers, directors and employees of and from any and all claims, demands,
claims for relief, actions, causes of actions, suits, debts, obligations,
liabilities, damages, losses, costs, attorneys' fees and expenses of any kind,
character, or nature whatsoever, whether known or unknown, suspected or
unsuspected, fixed or contingent, now existing or in the future arising, based
on, arising out of, or in connection with any claim or fact occurring or
arising on or prior to the date of the consummation of the Merger.
3. COVENANT NOT TO SUE. The parties hereto further covenant and
agree not to bring, commence, prosecute, maintain or cause or permit to be
brought, commenced, prosecuted or maintained any suit or action, either at law
or in equity, in any court or before any other administrative or judicial
authority regarding any matter or event being released herein. This covenant
not to sue may be pleaded as an affirmative defense to any action or other
proceeding which may be brought, instituted or taken by any party or its
predecessors, successors or assigns and all past and present shareholders,
directors, officers, employees, agents, affiliates, heirs, and personal
representatives, in breach of this covenant.
4. MISCELLANEOUS
4.1 Descriptive Headings; Interpretation. The descriptive
headings are for convenience of reference only and shall not control or affect
the meaning or construction of any provision of this Agreement.
4.2 Attorneys' Fees and Costs. In the event any party is
required to engage the services of legal counsel to enforce its rights under
this Agreement against any other party, the prevailing party shall be entitled
to recover reasonable attorneys' fees and costs from the non-prevailing party,
which, in the event of litigation, shall include fees and costs incurred at
trial and on appeal.
4.3 Severability. If any provision of this Agreement shall
be held to be invalid, illegal, or unenforceable for any reason (i) the
validity, legality, and enforceability of the remaining provisions of this
Agreement (including, without limitation, all parts of any section of this
Agreement containing any such provision held to be invalid, illegal, or
unenforceable, that are not themselves invalid, illegal, or unenforceable)
shall not in any
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<PAGE> 121
way be affected or impaired thereby; and (ii) to the fullest extent possible,
the provisions of this Agreement (including, without limitation, all parts of
any section of this Agreement containing any such provision held to be invalid,
illegal, or unenforceable, that are not themselves invalid, illegal, or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal, or unenforceable.
4.4 Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement. This Agreement shall become effective when one or more
counterparts have been signed by each of the parties and delivered to the other
parties, it being understood that the parties need not sign the same
counterpart.
4.5 Entire Agreement. This Agreement contains the entire
agreement among the parties with respect to the subject matter hereof, and
supersede all prior arrangements or understandings with respect to the subject
matter hereof.
4.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA (WITHOUT REGARD
TO ANY APPLICABLE CONFLICTS OF LAW PROVISIONS THEREOF).
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<PAGE> 122
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered by its respective duly authorized
officers, all as of the date first above written.
RISCORP GROUP HOLDING
COMPANY, L.P.
/s/ William D. Griffin
--------------------------------------------
By: Gryphus Company I, General Partner
By: William D. Griffin
Title: President
WILLIAM D. GRIFFIN FAMILY
PARTNERSHIP
/s/ William D. Griffin
--------------------------------------------
By: Gryphus Company II, General Partner
By: William D. Griffin
Title: President
/s/ L. Scott Merritt
--------------------------------------------
as trustee of Charlotte K. Griffin Trust
Number 3, Anna F. Griffin Trust Number
3, and John Ford Griffin Trust Number 3
/s/ William D. Griffin
--------------------------------------------
William D. Griffin
RISCORP, INC.
/s/ Walter E. Riehemann
--------------------------------------------
Name: Walter E. Riehemann
Title: President
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<PAGE> 123
THE PHOENIX MANAGEMENT
COMPANY, LTD.
/s/ Walter E. Riehemann
--------------------------------------------
By: Dawson Managers, Inc., General Partner
By: Walter E. Riehemann
Title: President
DIRECTORS AND OFFICERS
/s/ Karen A. Dawson
--------------------------------------------
Estate of Frederick M. Dawson
By: Karen Dawson
Its Executrix
/s/ Walter L. Revell
--------------------------------------------
Walter L. Revell
/s/ Seddon Goode, Jr.
--------------------------------------------
Seddon Goode, Jr.
/s/ George E. Greene III
--------------------------------------------
George E. Greene III
/s/ Walter E. Riehemann
--------------------------------------------
Walter E. Riehemann
/s/ Edward W. Buttner, IV
--------------------------------------------
Edward W. Buttner, IV
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<PAGE> 124
BUTTNER HAMMOCK & COMPANY,
P.A.
/s/ Edward W. Buttner, IV
--------------------------------------------
Name: Edward W. Buttner, IV
Title: President
- 6 -
<PAGE> 125
EXHIBIT C
FEE ADVANCEMENT AGREEMENT
THIS FEE ADVANCEMENT AGREEMENT (this "Agreement") is made and entered
into this 3rd day of November, 1999, by and among Griffin Acquisition Corp.,
("Acquiror") and RISCORP, Inc. ("RISCORP") and each of the estate of Frederick
M. Dawson, Seddon Goode, Jr., George E. Greene III, Walter L. Revell, Walter E.
Riehemann, Edward W. Buttner, IV and Stephen C. Rece (each a "Participant" and
collectively the "Participants"). Capitalized terms used herein but not
otherwise defined shall have the meanings ascribed to such terms in the Merger
Agreement (as hereinafter defined).
WHEREAS, RISCORP, Acquiror, and William D. Griffin are parties to that
certain Plan and Agreement of Merger, dated November 3, 1999 (the "Merger
Agreement"), pursuant to which Acquiror will be merged with and into RISCORP
(the "Merger");
WHEREAS, as a condition to and in contemplation of the Merger the
parties have agreed to enter into this Agreement for the advancement of certain
fees and expenses incurred by the former officers or directors of RISCORP in
connection with any suit or proceeding initiated by RISCORP, William D. Griffin
or any of their respective affiliates following the consummation of the Merger.
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and pursuant to the material covenants and agreements contained
herein, the parties agree as follows:
1. Advancement of Fees and Expenses. If, following the consummation
of the Merger, RISCORP, William D. Griffin, The RISCORP Group Holding Company
Limited Partnership, a Nevada limited partnership, William D. Griffin Family
Limited Partnership, a Nevada limited partnership, Charlotte K. Griffin Trust
Number 3, a Florida trust, Anna F. Griffin Trust Number 3, a Florida trust,
John Ford Griffin Trust Number 3, a Florida trust, any person or entity
Controlled (as hereinafter defined) by RISCORP or William D. Griffin, or any of
their respective officers, directors, trustees, beneficiaries, employees,
agents, representatives, heirs, successors or assigns (the "Initiating
Parties") initiate or cause to be initiated any suit or proceeding (a
"Proceeding") which directly or indirectly results in the participation of any
Participant as a witness, RISCORP agrees to advance or reimburse, as the case
may be, all reasonable fees and expenses including, without limitation, all
reasonable attorneys' fees, costs, travel expenses, and such other fees and
expenses incurred by such Participant in connection with his or her
participation in such Proceeding (collectively, the "Fees"). As used herein,
the term "Controlled" shall
<PAGE> 126
mean the power to direct or cause the direction of the management or policies
of such person or entity, whether through the ownership of voting securities,
by contract or otherwise.
2. Submission of Invoices to RISCORP. If a Proceeding is initiated
which entitles a Participant to the advancement or reimbursement of Fees
pursuant to the terms of this Agreement, Participant shall deliver to RISCORP
an itemized statement of the Fees incurred by Participant in connection with
such Proceeding. If RISCORP disputes the reasonableness of the Fees for which
Participant seeks payment, RISCORP and Participant shall work together in good
faith to resolve such dispute. In the event the parties are unable to reach
mutual agreement with respect to the reasonableness of such Fees, either party
may submit the matter to binding arbitration in accordance with Section 3
hereof. Absent a dispute as to the reasonableness of such Fees, RISCORP shall
remit payment to Participant within thirty days of the date of receipt of an
itemized statement of such fees.
3. Arbitration. Any claim or controversy arising under this
Agreement shall be resolved by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The arbitration shall be held in Atlanta, Georgia in front of a single
arbitrator appointed by AAA. The parties agree that the arbitration hearing
shall take place as soon as reasonably possible after demand for arbitration is
made, but no later than 60 days after a demand is made. The party who prevails
in the arbitration shall be entitled to recover reasonable attorneys' fees and
the costs of arbitration incurred as a result of prosecution of or defense of
the demand for arbitration.
4. Miscellaneous.
4.1 Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
personally, telecopied (if confirmed) or sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
<TABLE>
<CAPTION>
If to the estate of Frederick M. Dawson: If to Walter L. Revell:
<S> <C>
12900 Lakeview Point Court H.J. Ross Associates, Inc.
Windermere, Florida 34786 3770 SW 8th Street
Telecopy No.: 407-876-0374 Suite 200
Attn: Karen Dawson Coral Gables, Florida 33134
Telecopy No.: 305-567-1771
</TABLE>
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<PAGE> 127
<TABLE>
<CAPTION>
If to Seddon Goode, Jr.: If to Walter E. Riehemann:
<S> <C>
University Research Park, Inc. 6321 Manatee Avenue West
301 South Tryon Street Bradenton, Florida 34209
Two First Union Center Telecopy No.: 941-761-9186
Suite 1980
Charlotte, North Carolina 28202-1910
Telecopy No.: 704-338-9539
If to George E. Greene III: If to Edward W. Buttner, IV:
1222 Brightwaters Boulevard, NE Buttner, Hammock & Company, P.A
St. Petersburg, Florida 33704 7800 Belfort Parkway
Telecopy No.: 727-898-7202 Suite 165
Jacksonville, Florida 32256
Telecopy No.: 904-281-0518
If to Stephen C. Rece:
PIA-Alternative CompSolutions
2230 Towne Lake Parkway
Bldg. 1300, Suite 130
Woodstock, Georgia 30189
Telecopy: 678-445-7179
With a copy to:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: J. Vaughan Curtis, Esq.
Telecopy No.: (404) 881-4777
If to RISCORP:
One Sarasota Tower, Suite 410
2 North Tamiami Trail
Sarasota, Florida 34236
Attention: William D. Griffin
Telecopy No.: (941) 316-6813
</TABLE>
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<PAGE> 128
With a copy to:
King & Spalding
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Mr. Edward J. Hawie, Esq.
Telecopy No.: (404) 572-5100
4.2 Descriptive Headings; Interpretation. The descriptive
headings are for convenience of reference only and shall not control or affect
the meaning or construction of any provision of this Agreement. When a
reference is made in this Agreement to Sections, such reference shall be to a
Section of this Agreement unless otherwise indicated.
4.3 Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement. This Agreement shall become effective when one or more
counterparts have been signed by each of the parties and delivered to the other
parties, it being understood that the parties need not sign the same
counterpart.
4.4 Entire Agreement. This Agreement contains the entire
agreement among the parties and supersedes all prior arrangements or
understandings with respect to the subject matter hereof.
4.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA (WITHOUT REGARD
TO ANY APPLICABLE CONFLICTS OF LAW PROVISIONS THEREOF).
4.6 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party.
4.7 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, and any attempt to make any such
assignment without such consent shall be null and void. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective successors and
permitted assigns.
- 4 -
<PAGE> 129
4.8 Cooperation. If any Participant seeks recovery for
Fees in any Proceeding, such Participant agrees to make himself reasonably
available to the Initiating Parties in connection with such Proceeding.
4.9 Selection of Counsel. Notwithstanding any provision in
this Agreement to the contrary, none of the Participants shall be entitled to
retain separate counsel to represent such Participant in any such Proceeding;
provided, however, that a Participant shall be entitled to retain separate
counsel in any Proceeding in which (A) counsel representing the Initiating
Party is unable or unwilling to represent such Participant in connection with
such Proceeding; or (B) counsel to such Participant has advised the Initiating
Party and such Participant that (i) there are one or more defenses available to
such Participant that are different from or additional to those available to
the Initiating Party; or (ii) based on the nature of the Proceeding and
Participant's involvement therein, separate counsel for Participant is
advisable.
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<PAGE> 130
IN WITNESS WHEREOF, the parties have executed this Agreement this 3rd
day of November, 1999.
Griffin Acquisition Corp.
By: /s/ William D. Griffin
-------------------------------
Its:
-------------------------------
RISCORP, Inc.
By: /s/ Walter E. Riehemann
-------------------------------
Its: President
------------------------------
Participants:
Estate of Frederick M. Dawson
/s/ Karen A. Dawson
-----------------------------------
By: Karen Dawson
Title: Executrix
/s/ Seddon Goode, Jr.
-----------------------------------
Seddon Goode, Jr.
/s/ Walter L. Revell
-----------------------------------
Walter L. Revell
/s/ George E. Greene III
-----------------------------------
George E. Greene III
/s/ Walter E. Riehemann
-----------------------------------
Walter E. Riehemann
/s/ Edward W. Buttner, IV
-----------------------------------
Edward W. Buttner, IV
/s/ Stephen C. Rece
-----------------------------------
Stephen C. Rece
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<PAGE> 131
EXHIBIT D
ESCROW AGREEMENT
THIS AGREEMENT (the "Agreement"), dated as of the ____ day of ______,
1999, by and among Griffin Acquisition Corp, Inc. ("Acquiror"), RISCORP, Inc.,
("RISCORP"); First Union National Bank, a national banking corporation, as
escrow agent (the "Escrow Agent"); and the estate of Frederick M. Dawson,
represented herein by Karen Dawson, its executrix, Seddon Goode, Jr., George E.
Greene III, Walter L. Revell, Walter E. Riehemann, Edward W. Buttner, IV and
Stephen C. Rece (individually, the "Director or Officer");
RECITALS
WHEREAS, RISCORP, Acquiror, and William D. Griffin, an individual and
resident of the State of Florida are parties to that certain Plan and Agreement
of Merger, dated October 20, 1999 (the "Merger Agreement") pursuant to which
Acquiror will be merged with and into RISCORP (the "Merger");
WHEREAS, as a condition to and in contemplation of the Merger the
parties hereto have agreed to enter into this Agreement and create the escrow
contemplated herein in order to secure RISCORP's indemnification obligations
pursuant to Section 5.10 of the Merger Agreement.
WHEREAS, the Escrow Agent is willing to act as escrow agent under this
Agreement.
AGREEMENT
In consideration of the premises and the mutual promises and
agreements contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. DEFINITIONS.
Capitalized terms used but not otherwise defined in this
Agreement shall have the meanings ascribed to such terms in the Merger
Agreement.
2. THE ESCROW AGENT APPOINTMENT. The parties hereby appoint and
designate First Union National Bank, as the Escrow Agent to receive, hold and
distribute the Escrow Amount (as defined herein) in accordance with the terms
of this Agreement. The Escrow Agent hereby accepts its appointment as the
escrow agent and agrees to hold, administer, invest and disburse the Escrow
Amount and any income,
<PAGE> 132
interest or other amounts received thereon in accordance with the terms
thereof. The Escrow Agent shall have no obligation or responsibilities in
connection with the Merger Agreement or any other agreement between any of the
parties to the Merger Agreement, other than this Agreement.
3. ESCROW AMOUNT.
3.1 Escrow Amount. Simultaneously with the execution of
this Agreement, RISCORP has delivered to the Escrow Agent $2,500,000 (the
"Escrow Amount") in accordance with Section 5.10(a) of the Merger Agreement by
wire transfer of immediately available funds.
3.2 Investment of Escrow Amount.
(i) The Escrow Agent shall invest the Escrow
Amount as instructed by RISCORP, in writing from time to time, only in
(A) United States Treasury bills, notes, or bonds with maturities of
not more than one year; (B) United States government bonds rated AAA
with maturities of not more than one year; (C) corporate bonds rated
AAA or better with maturities of not more than one year; or (E) the
Escrow Agent's Money Market Fund (as long as such money market fund is
rated AAA or better by a nationally recognized credit rating agency).
(ii) The parties agree that income from such
invested cash shall be held by the Escrow Agent as part of the Escrow
Amount and shall be recognized as income by RISCORP for federal, state
and local tax purposes.
3.3 Disbursement of the Escrow Amount. The Escrow Amount
shall secure RISCORP's obligations with respect to Section 5.10(b) of the
Merger Agreement ("Indemnification"). The Escrow Agent shall disburse the
Escrow Amount as follows:
(i) with respect to any claim from a Director or Officer
seeking Indemnification (an "Indemnity Claim"), Escrow Agent shall
disburse to such Director or Officer an amount equal to the Indemnity
Claim promptly following receipt by Escrow Agent of (A) an affidavit
from such Director or Officer (1) specifying the amount thereof and
the basis upon which such Director or Officer is seeking
Indemnification; (2) certifying that the Director or Officer is
entitled to Indemnification pursuant to the RISCORP Articles of
Incorporation, bylaws, Indemnity Agreement to which such Director is a
party or the applicable provisions of the FBCA; and (3) that such
Director or Officer has sent notice to RISCORP in writing of the
amount and basis of such claim prior to or contemporaneously with the
affidavit being delivered to Escrow Agent and (B) (1) if such
Indemnity Claim is for fees, costs and/or expenses incurred in advance
of a final resolution of the matter that forms the basis of such
Indemnity Claim, an
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<PAGE> 133
undertaking (an "Undertaking"), by the Director or Officer, in
accordance with Section 607.0850(6) of the FBCA, to repay to the
Escrow Agent, or, if such repayment is after termination of this
Agreement, RISCORP such amount if it has been determined by
Independent Legal Counsel (as hereinafter defined) that such Director
or Officer is not entitled to Indemnification pursuant to the
requirements of Section 607.0850 of the FBCA, the indemnity agreement
to which each present director of RISCORP is a party or the articles
of incorporation or bylaws of RISCORP (an "Adverse Determination"); or
(2) if such Indemnity Claim is for fees, costs and/or expenses
incurred in connection with a matter that has been resolved and is no
longer the subject of dispute, a written opinion of Independent Legal
Counsel confirming that such Director or Officer has satisfied the
applicable standards of Section 607.0850 of the FBCA (a "Counsel's
Opinion") or a written consent from RISCORP confirming RISCORP's
concurrence that such standards have been met with respect to such
Indemnity Claim (a "RISCORP Consent"), provided that with respect to
this clause (B)(2), any such Director or Officer seeking an Indemnity
Claim shall first seek to obtain a RISCORP consent and, if such
RISCORP Consent is not provided to such Director or Officer within ten
(10) days of its request, such Director or Officer may seek to obtain
a Counsel's opinion which shall be at RISCORP's expense if such
Counsel's Opinion confirms that such Director or Officer has satisfied
the applicable standards of Section 607.0850; and
(ii) if on the second anniversary of the date of this
Agreement (A) no Indemnity Claim has been submitted to Escrow Agent
pursuant to the terms of this Agreement, and (B) Escrow Agent has not
received a certificate, in form attached hereto as Schedule I, from
any Director or Officer certifying that such Director or Officer is
subject to a pending or threatened claim for which such Officer or
Director may make an Indemnity Claim, the Escrow Agent shall disburse
to RISCORP an amount equal to one-half (1/2) of the Escrow Amount then
held by the Escrow Agent not later than the fifth business day
following such Second Anniversary.
As used herein, the term "Independent Legal Counsel" shall mean Eugene E.
Stearns, Esq., or, if he is unwilling or unable to serve, a partner with the
law firm of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., or, of
no partner at such firm is mutually acceptable to the parties or willing or
able to serve, a partner with a law firm, which partner and firm shall be
mutually acceptable to RISCORP and such Director or Officer which,
notwithstanding the provisions of Section 607.0850(4) or any agreement between
RISCORP and any Director or Officer, shall determine whether a Director or
Officer making an Indemnity Claim has met the applicable standards of Section
607.0850 of the FBCA. Any determination by such Independent Legal Counsel shall
be final and binding on RISCORP and such Director or Officer. Any Director or
Officer that has or intends to make an Indemnity Claim shall obtain, as soon as
reasonably
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<PAGE> 134
practicable, following the final determination of the claim giving rise to the
Indemnity Claim, a Counsel's Opinion or a RISCORP Consent.
Notwithstanding anything in this Section 3.3 to the contrary, Escrow Agent
shall not pay any Indemnity Claim or advance any portion of the Escrow Amount
to any Director or Officer if RISCORP provides Escrow Agent with (i) a copy of
a written Adverse Determination (if any) and (ii) reasonable evidence for such
Director's or Officer's failure to comply with or default under any Undertaking
for forty-five days following RISCORP's notice to such Director or Officer of
such failure or default.
4. TERMINATION OF AGREEMENT. The escrow provided for hereunder
shall terminate upon the earlier of (i) disbursement of the Escrow Amount
pursuant to Section 3.3, or (ii) the day that is four and one-half (4 1/2)
years following the Effective Date (the "Termination Date") provided that, no
such distribution shall be made (i) if Escrow Agent has received, prior to such
Termination Date, a certificate in the form attached hereto on Schedule I from
any Director or Officer certifying that such Director or Officer is subject to
a pending or threatened claim for which such Director or Officer may make an
Indemnity Claim which has not been paid prior to the Termination Date and (ii)
until ten (10) business days following the final determination and payment of
all Indemnity Claims outstanding on the Termination Date. Following termination
of this Agreement, any portion of the Escrow Amount not paid pursuant to
Section 3.3 shall be paid to RISCORP in accordance with this Section 4.
5. ESCROW AGENT.
5.1 Duties. In performing its duties under this Agreement
or upon the claimed failure to perform its duties hereunder, the Escrow Agent
shall have no liability except for the Escrow Agent's willful misconduct or
gross negligence. The Escrow Agent's sole responsibility shall be for the
safekeeping and disbursement of the Escrow Amount in accordance with the terms
of this Agreement. The Escrow Agent shall have no implied duties or obligations
and shall not be charged with knowledge or notice of any fact or circumstance
not specifically set forth herein. The Escrow Agent shall be entitled to rely
upon and shall be protected in acting upon any request, instructions, statement
or other instrument, not only as to its due execution, validity and
effectiveness, but also as to the truth and accuracy of any information
contained therein, which the Escrow Agent shall in good faith believe to be
genuine, to have been signed or presented by the person or parties purporting
to sign the same and to conform to the provisions of this Agreement. In no
event shall the Escrow Agent be liable for incidental, indirect, special,
consequential or punitive damages. The Escrow Agent shall not be obligated to
take any legal action or to commence any proceeding in connection with the
Escrow Amount, any account in which the Escrow Amount is deposited or this
Agreement, or to appear in, prosecute or defend any such legal action or
proceedings. The Escrow Agent may consult legal counsel selected by it in the
event of any dispute or question as to the construction of any of the
provisions hereof or of any other agreement or of its duties
- 4 -
<PAGE> 135
hereunder, and shall incur no liability and shall be fully protected from any
liability whatsoever in acting in accordance with the opinion or instruction of
such counsel. RISCORP shall promptly pay, upon demand, the reasonable fees and
expenses of any such counsel. The Escrow Agent shall have no obligations or
responsibilities in connection with the Merger Agreement or any other agreement
between any other parties to the Merger Agreement, other than this Agreement.
6. INDEMNIFICATION.
6.1 Generally. From and at all times after the date of
this Escrow Agreement, RISCORP shall, to the fullest extent permitted by law
and to the extent provided herein, indemnify and hold harmless the Escrow Agent
and each director, officer, employee, attorney, agent and affiliate of the
Escrow Agent (collectively, the "Indemnified Parties") against any and all
actions, claims (whether or not valid), losses, damages, liabilities, costs and
expenses of any kind or nature whatsoever (including, without limitation,
reasonable attorneys' fees, costs and expenses) incurred by or asserted against
any of the Indemnified Parties from and after the date hereof, whether direct,
indirect or consequential, as a result of or arising from or in any way
relating to any claim, demand, suit, action or proceeding (including any
inquiry or investigation) by any person, whether threatened or initiated,
asserting a claim for any legal or equitable remedy against any person under
any statute or regulation, including, but not limited to, any federal or state
securities laws, or under any common law or equitable cause or otherwise,
arising out of or related to this Agreement, the services of the Escrow Agent
hereunder, the monies or other property held by it hereunder or any income
earned from investment of such monies, other than any expense or loss which
arises out of or relates to the Escrow Agent's gross negligence or willful
misconduct.
6.2 Disputes. If, at any time, there shall exist any
dispute between the Directors, Officers or RISCORP with respect to the holding
or disposition of any portion of the Escrow Amount or any other obligations of
the Escrow Agent hereunder, or if at any time the Escrow Agent is unable to
determine, to the Escrow Agent's sole satisfaction, the proper disposition of
any portion of the Escrow Amount or the Escrow Agent's proper actions with
respect to its obligations hereunder, or if the Directors, Officers and RISCORP
have not, within 30 days of the furnishing by the Escrow Agent of a notice of
resignation pursuant to Section 6.3 below, appointed a successor escrow agent
to act hereunder, then the Escrow Agent may, in its sole discretion, take
either or both of the following actions:
(i) suspend the performance of any of its
obligations under this Agreement until such dispute or
uncertainty shall be resolved to the sole satisfaction of the
Escrow Agent or until a successor escrow agent shall have
been appointed (as the case may be); and
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<PAGE> 136
(ii) petition (by means of an interpleader action
or any other appropriate method) any court of competent
jurisdiction for instructions with respect to such dispute or
uncertainty, and pay into or deposit with such court all
disputed Escrow Amounts held by Escrow Agent for holding and
disposition in accordance with the instructions of such
court.
The Escrow Agent shall have no liability to the Directors,
Officers or RISCORP or any other person with respect to any such suspension of
performance or disbursement into court, specifically including any liability
that may arise, or be alleged to have arisen, out of or as a result of any
delay in the disbursement of funds held in the Escrow Amount or any delay in or
with respect to any other action required or requested of the Escrow Agent.
6.3 Resignation of Escrow Agent. The Escrow Agent may
resign from the performance of its duties hereunder at any time by giving ten
days' prior written notice to Directors and RISCORP or may be removed, with or
without cause, by Directors, Officers and RISCORP, acting jointly, at any time
by the giving of ten days' prior written notice to the Escrow Agent. Such
resignation or removal shall take effect upon the appointment of a successor
escrow agent as provided herein. Upon any such notice of resignation or
removal, Directors, Officers and RISCORP, acting jointly, shall appoint a
successor escrow agent hereunder, which shall be a commercial bank, trust
company or other financial institution with a combined capital and surplus in
excess of $100,000,000, unless otherwise agreed by Directors, Officers and
RISCORP. Upon the acceptance in writing of any appointment as Escrow Agent
hereunder by a successor escrow agent, such successor escrow agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Escrow Agent, and the retiring Escrow Agent shall be
discharged from its duties and obligations under this Escrow Agreement, but
shall not be discharged from any liability for actions taken as Escrow Agent
hereunder prior to such succession. After any retiring Escrow Agent's
resignation or removal, the provisions of this Escrow Agreement shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Escrow Agent under this Escrow Agreement.
6.4 Receipt. By its execution and delivery of this
Agreement, the Escrow Agent acknowledges receipt of the Escrow Amount.
6.5 Fees. RISCORP shall compensate the Escrow Agent for
its services hereunder in accordance with Schedule II attached hereto and, in
addition, shall reimburse the Escrow Agent for all of its reasonable
out-of-pocket expenses, including attorneys' fees, travel expenses, telephone
and facsimile transmission costs, postage (including express mail and overnight
delivery charges), copying charges and the like. All of the compensation and
reimbursement obligations set forth in this Section 6.5 shall be payable upon
demand by the Escrow Agent. The obligations of RISCORP under this
- 6 -
<PAGE> 137
Section 6.5 shall survive any termination of this Agreement and the resignation
or removal of the Escrow Agent.
7. MISCELLANEOUS
7.1 Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
personally, telecopied (if confirmed) or sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
<TABLE>
<CAPTION>
The estate of Frederick M. Dawson: Walter L. Revell:
<S> <C>
12900 Lakeview Point Court H.J. Ross Associates, Inc.
Windermere, Florida 3770 SW 8th Street
Telecopy No.: 407-876-0374 Coral Gables, Florida 33134
Telecopy No.: 305-567-1771
Seddon Goode, Jr.: Walter E. Riehemann:
University Research Park, Inc. 6321 Manatee Avenue West
301 South Tryon Street Bradenton, Florida 34209
Two First Union Center Telecopy No.: 941-761-9186
Suite 1980
Charlotte, North Carolina 28202-1910
Telecopy No.: 704-338-9539
George E. Greene: Edward W. Buttner, IV:
1222 Brightwaters Boulevard, NE Buttner, Hammock & Company, P.A
St. Petersburg, Florida 33704 7800 Belfort Parkway
Telecopy No.: 727-898-7202 Jacksonville, Florida 32256
Telecopy No.: 904-281-0518
Stephen C. Rece
PLA-Alternative CompSolutions
2230 Towne Lake Parkway
Bldg. 1300, Suite 130
Woodstock, Georgia 30189
Telecopy No.: 678-445-7179
</TABLE>
- 7 -
<PAGE> 138
With a copy to:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: J. Vaughan Curtis, Esq.
Telecopy No.: (404) 881-4777
If to RISCORP:
2 North Tamiami Trail
1 Sarasota Tower, Suite 410
Attention: William D. Griffin
Telecopy No.: 941-316-6813
With a copy to:
King & Spalding
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Mr. Edward J. Hawie, Esq.
Telecopy No.: (404) 572-5100
7.2 Descriptive Headings; Interpretation. The descriptive
headings are for convenience of reference only and shall not control or affect
the meaning or construction of any provision of this Agreement. When a
reference is made in this Agreement to Sections, such reference shall be to a
Section of this Agreement unless otherwise indicated.
7.3 Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement. This Agreement shall become effective when one or more
counterparts have been signed by each of the parties and delivered to the other
parties, it being understood that the parties need not sign the same
counterpart.
7.4 Entire Agreement. This Agreement contains the entire
agreement among the parties and supersedes all prior arrangements or
understandings with respect to the subject matter hereof.
7.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
- 8 -
<PAGE> 139
FLORIDA (WITHOUT REGARD TO ANY APPLICABLE CONFLICTS OF LAW PROVISIONS THEREOF).
7.6 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party.
7.7 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, and any attempt to make any such
assignment without such consent shall be null and void. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective successors and
assigns.
- 9 -
<PAGE> 140
IN WITNESS WHEREOF, each of the parties hereto has caused
this Agreement to be executed and delivered by its respective duly authorized
officers, all as of the date first above written.
GRIFFIN ACQUISITION CORP
By:
------------------------------------
Name:
Title:
RISCORP, INC.
By:
------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By:
------------------------------------
Name:
Title:
DIRECTORS OR OFFICERS
---------------------------------------
Estate of Frederick M. Dawson
By:
------------------------------------
Its Executor
---------------------------------------
Walter L. Revell
---------------------------------------
Seddon Goode, Jr.
- 10 -
<PAGE> 141
---------------------------------------
George E. Greene III
---------------------------------------
Walter E. Riehemann
---------------------------------------
Edward W. Buttner, IV
---------------------------------------
Stephen C. Rece
- 11 -
<PAGE> 142
APPENDIX B
FLORIDA STATUTES DESCRIBING
SHAREHOLDER APPRAISAL RIGHTS
<PAGE> 143
FLA. STAT. ANN SS. 1301
607.1301 DISSENTERS' RIGHTS; DEFINITIONS.
The following definitions apply to ss. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a
dissenting shareholder before the corporate action or the surviving or
acquiring corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on which
the corporation received written consents without a meeting from the requisite
number of shareholders in order to authorize the action, or, in the case of a
merger pursuant to s. 607.1104, the day prior to the date on which a copy of
the plan of merger was mailed to each shareholder of record of the subsidiary
corporation.
FLA. STAT. ANN SS. 1302
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT.
(1) Any shareholder of a corporation has the right to dissent from,
and obtain payment of the fair value of his or her shares in the event of, any
of the following corporate actions:
(a) Consummation of a plan of merger to which the
corporation is a party:
1. If the shareholder is entitled to vote on the
merger, or
2. If the corporation is a subsidiary that is merged
with its parent under s. 607.1104, and the shareholders would have been
entitled to vote on action taken, except for the applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation, other than in the usual
and regular course of business, if the shareholder is entitled to vote on the
sale or exchange pursuant to s. 607.1202, including a sale in dissolution but
not including a sale pursuant to court order or a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within 1 year after the date of sale;
<PAGE> 144
(c) As provided in s. 607.0902(11), the approval of a
control-share acquisition;
(d) Consummation of a plan of share exchange to which the
corporation is a party as the corporation the shares of which will be acquired,
if the shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the
shareholder is entitled to vote on the amendment and if such amendment would
adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights
attached to any of his or her shares;
2. Altering or abolishing the voting rights
pertaining to any of his or her shares, except as such rights may be affected
by the voting rights of new shares then being authorized of any existing or new
class or series of shares;
3. Effecting an exchange, cancellation, or
reclassification of any of his or her shares, when such exchange, cancellation,
or reclassification would alter or abolish the shareholder's voting rights or
alter his or her percentage of equity in the corporation, or effecting a
reduction or cancellation of accrued dividends or other arrearages in respect
to such shares;
4. Reducing the stated redemption price of any of
the shareholder's redeemable shares, altering or abolishing any provision
relating to any sinking fund for the redemption or purchase of any of his or
her shares, or making any of his or her shares subject to redemption when they
are not otherwise redeemable;
5. Making noncumulative, in whole or in part,
dividends of any of the shareholder's preferred shares which had theretofore
been cumulative;
6. Reducing the stated dividend preference of any of
the shareholder's preferred shares; or
7. Reducing any stated preferential amount payable
on any of the shareholder's preferred shares upon voluntary or involuntary
liquidation; or
(f) Any corporate action taken, to the extent the articles
of incorporation provide that a voting or nonvoting shareholder is entitled to
dissent and obtain payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in
paragraph (1)(e) has the right to dissent only as to those of his or her shares
which are adversely affected by the amendment.
<PAGE> 145
(3) A shareholder may dissent as to less than all the shares
registered in his or her name. In that event, the shareholder's rights shall be
determined as if the shares as to which he or she has dissented and his or her
other shares were registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this
section does not apply with respect to a plan of merger or share exchange or a
proposed sale or exchange of property, to the holders of shares of any class or
series which, on the record date fixed to determine the shareholders entitled
to vote at the meeting of shareholders at which such action is to be acted upon
or to consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his or
her shares under this section may not challenge the corporate action creating
his or her entitlement unless the action is unlawful or fraudulent with respect
to the shareholder or the corporation.
FLA. STAT. ANN. SS.1320
607.1320 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.
(1) (a) If a proposed corporate action creating dissenters'
rights under s. 607.1302 is submitted to a vote at a shareholders' meeting, the
meeting notice shall state that shareholders are or may be entitled to assert
dissenters' rights and be accompanied by a copy of ss. 607.1301, 607.1302, and
607.1320. A shareholder who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is
taken written notice of the shareholder's intent to demand payment for his or
her shares if the proposed action is effectuated, and
2. Not vote his or her shares in favor of the
proposed action. A proxy or vote against the proposed action does not
constitute such a notice of intent to demand payment.
(b) If proposed corporate action creating dissenters'
rights under s. 607.1302 is effectuated by written consent without a meeting,
the corporation shall deliver a copy of ss. 607.1301, 607.1302, and 607.1320 to
each shareholder simultaneously with any request for the shareholder's written
consent or, if such a request is not made, within 10 days after the date the
corporation received written consents without a meeting from the requisite
number of shareholders necessary to authorize the action.
<PAGE> 146
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his or her shares pursuant to
paragraph (1)(a) or, in the case of action authorized by written consent, to
each shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
(3) Within 20 days after the giving of notice to him or her, any
shareholder who elects to dissent shall file with the corporation a notice of
such election, stating the shareholder's name and address, the number, classes
and series of shares as to which he or she dissents, and a demand for payment
of the fair value of his or her shares. Any shareholder failing to file such
election to dissent within the period set forth shall be bound by the terms of
the proposed corporate action. Any shareholder filing an election to dissent
shall deposit his or her certificates for certificated shares with the
corporation simultaneously with the filing of the election to dissent. The
corporation may restrict the transfer of uncertificated shares from the date
the shareholder's election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder
shall thereafter be entitled only to payment as a provided in this section and
shall not be entitled to vote or to exercise any other rights of a shareholder.
A notice of election may be withdrawn in writing by the shareholder at any time
before an offer is made by the corporation, as provided in subsection (5), to
pay for his or her shares. After such offer, no such notice of election may be
withdrawn unless the corporation consents thereto. However, the right of such
shareholder to be paid the fair value of his or her shares shall cease, and the
shareholder shall be reinstated to have all his or her rights as a shareholder
as of the filing of his or her notice of election, including any intervening
preemptive rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by
the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in
the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or
rescinded or the shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair
value by a court has been made or filed within the time provided in this
section; or
(d) A court of competent jurisdiction determines that such
shareholder is not entitled to the relief provided by this section.
<PAGE> 147
(5) Within 10 days after the expiration of the period in which
shareholders may file their notices of election to dissent, or within 10 days
after such corporate action is effected, whichever is later (but in no case
later than 90 days from the shareholders' authorization date), the corporation
shall make a written offer to each dissenting shareholder who has made demand
as provided in this section to pay an amount the corporation estimates to be
the fair value for such shares. If the corporate action has not been
consummated before the expiration of the 90-day period after the shareholders'
authorization date, the offer may be made conditional upon the consummation of
such action. Such notice and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of
which the dissenting shareholder holds, as of the latest available date and not
more than 12 months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for
the 12-month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such 12-month period, for the
portion thereof during which it was in existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his or her shares shall be made within 90 days
after the making of such offer or the consummation of the proposed action,
whichever is later. Upon payment of the agreed value, the dissenting
shareholder shall cease to have any interest in such shares.
(7) If the corporation fails to make such offer within the period
specified therefore in subsection (5) or if it makes the offer and any
dissenting shareholder or shareholders fail to accept the same within the
period of 30 days thereafter, then the corporation, within 30 days after
receipt of written demand from any dissenting shareholder given within 60 days
after the date on which such corporate action was effected, shall, or at its
election at any time within such period of 60 days may, file an action in any
court of competent jurisdiction in the county in this state where the
registered office of the corporation is located requesting that the fair value
of such shares be determined. The court shall also determine whether each
dissenting shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his or her shares. If
the corporation fails to institute the proceeding as herein provided, any
dissenting shareholder may do so in the name of the corporation. All dissenting
shareholders (whether or not residents of this state), other than shareholders
who have agreed with the corporation as to the value of their shares, shall be
made parties to the proceeding as an action against their shares. The
corporation shall serve a copy of the initial pleading in such proceeding upon
each dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons and complaint and upon each
nonresident dissenting shareholder either by registered or certified mail and
publication or in such other manner as is permitted by law. The jurisdiction of
the court is plenary and exclusive. All shareholders who are proper parties to
the proceeding are entitled to judgment against the corporation for the amount
of the
<PAGE> 148
fair value of their shares. The court may, if it so elects, appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers shall have such power and authority as
is specified in the order of their appointment or an amendment thereof. The
corporation shall pay each dissenting shareholder the amount found to be due
him or her within 10 days after final determination of the proceedings. Upon
payment of the judgment, the dissenting shareholder shall cease to have any
interest in such shares.
(8) The judgment may, at the discretion of the court, include a fair
rate of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be
determined by the court and shall be assessed against the corporation, but all
or any part of such costs and expenses may be apportioned and assessed as the
court deems equitable against any or all of the dissenting shareholders who are
parties to the proceeding, to whom the corporation has made an offer to pay for
the shares, if the court finds that the action of such shareholders in failing
to accept such offer was arbitrary, vexatious, or not in good faith. Such
expenses shall include reasonable compensation for, and reasonable expenses of,
the appraisers, but shall exclude the fees and expenses of counsel for, and
experts employed by, any party. If the fair value of the shares, as determined,
materially exceeds the amount which the corporation offered to pay therefor or
if no offer was made, the court in its discretion may award to any shareholder
who is a party to the proceeding such sum as the court determines to be
reasonable compensation to any attorney or expert employed by the shareholder
in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the
agreed value thereof or pursuant to payment of the judgment entered therefor,
as provided in this section, may be held and disposed of by such corporation as
authorized but unissued shares of the corporation, except that, in the case of
a merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
<PAGE> 149
APPENDIX C
ANNUAL REPORT ON
FORM 10-K/A FOR THE YEAR ENDED
DECEMBER 31, 1998
<PAGE> 150
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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)
<TABLE>
<S> <C>
Florida 65-0335150
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2 North Tamiami Trail, Suite 608, Sarasota, Florida 34236 -5642
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (941) 366-5015
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on which Registered
----------------------- --------------------
<S> <C>
None None
----------------------- --------------------
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of shares of the registrant's Class A Common Stock
held by non-affiliates of the registrant as of May 31, 1999 was $16,981,537.
The number of shares of the registrant's Common Stock issued and outstanding as
of May 31, 1999 was 38,593,114 consisting of 14,258,671 shares of Class A
Common Stock and 24,334,443 shares of Class B Common Stock.
Documents Incorporated by Reference: None
<PAGE> 151
RISCORP, INC.
ANNUAL REPORT ON FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C> <C>
PART I
Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote
of Security Holders 19
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 21
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 29
PART III
Item 10. Directors and Executive Officers
of the Company 29
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain
Beneficial Owners and Management 32
Item 13. Certain Relationships and Related Transactions 34
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 36
Signatures 38
</TABLE>
<PAGE> 152
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K/A 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, uncertainties with respect to the final purchase
price to be paid by Zenith Insurance Company ("Zenith") pursuant to that certain
Asset Purchase Agreement by and among RISCORP, certain of its subsidiaries named
therein, and Zenith, dated June 17, 1997, as amended (the "Asset Purchase
Agreement"); the actual outcome of pending litigation, including, without
limitation, the litigations currently pending with Zenith; the Company's ability
to gain approval and receive payment from the Florida Department of Labor; the
Company's need for additional capital to meet operating requirements; and other
factors mentioned elsewhere in this report.
OVERVIEW
On April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith.
In connection with this sale, the Company ceased substantially all of its former
business operations, including its insurance operations, effective April 1,
1998. Accordingly, after such date, the operations of the Company 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, the Company has no plans to resume
any operating activities.
Prior to April 1, 1998, the Company offered managed care workers'
compensation insurance and services designed to lower the overall costs of
work-related claims, while providing quality cost-effective care to injured
employees. As of March 31, 1998, the Company provided workers' compensation
insurance and services to approximately 18,000 policyholders, principally in
Florida and the southeastern United States.
1
<PAGE> 153
ASSET PURCHASE AGREEMENT WITH ZENITH
On June 17, 1997, the Company entered into the Asset Purchase
Agreement with Zenith for the sale of substantially all of the assets of the
Company related to its workers' compensation and other insurance business,
including the Company's existing inforce business, and the right to all new and
renewal policies (the "Asset Sale"). The transaction closed on April 1, 1998.
Pursuant to a covenant not to compete set forth in the Asset Purchase Agreement,
the Company agreed that it would not compete in the workers' compensation
insurance business in the United States for a three-year period following the
closing date. Accordingly, after the transaction closed, the Company ceased to
be engaged in the workers' compensation or managed care businesses. In
connection with the transaction, Zenith assumed certain liabilities related to
the Company's insurance business, including $15 million in Company indebtedness
owed to American Re-Insurance Company.
In connection with the Asset Sale, Zenith paid the Company $35 million in
cash, of which $10 million was placed in escrow to secure its indemnification
obligations to Zenith. Pursuant to the terms of the Asset Purchase Agreement,
the final purchase price to be paid by Zenith will be the amount by which the
book value of the transferred assets exceeds the book value of the transferred
liabilities assumed by Zenith at closing. On June 9, 1998, RISCORP delivered to
Zenith a closing date balance sheet (the "Proposed Business Balance Sheet")
representing the audited statement of transferred assets and transferred
liabilities as of Apri1 1, 1998. The Proposed Business Balance Sheet indicated
RISCORP's proposal as to the final purchase price of approximately $141 million,
less the $35 million previously paid by Zenith.
Subsequent to June 9, 1998, Zenith suggested adjustments to the
Proposed Business Balance Sheet that totaled approximately $211 million. These
suggested adjustments principally related to differences in the estimation of
loss and loss adjustment expense reserves and the estimate of the allowance for
uncollectible receivables. The adjustments proposed by Zenith reflected Zenith's
position that the aggregate value of the liabilities assumed by Zenith exceeded
the value of the assets transferred by approximately $70 million.
On July 10, 1998, RISCORP and Zenith engaged a nationally recognized
independent accounting firm to serve as neutral auditors and neutral actuaries
(the "Independent Expert") to resolve the items in dispute between the parties
and to determine the Final Business Balance Sheet for this transaction. On March
19, 1999, the Independent Expert delivered its determination of the Final
Business Balance Sheet and, as such, its conclusion that the book value of the
transferred assets exceeded the book value of the transferred liabilities
assumed by Zenith at closing by $92.3 million. Therefore, pursuant to the terms
of the Asset Purchase Agreement and given the $35 million previously paid by
Zenith at closing, Zenith is required to pay an additional $57.3 million in
immediately available funds on or before March 26, 1999, plus interest thereon
of 6.13 percent from April 1, 1998 through the final payment date. Of this
amount, $53.5 million, plus the interest component, is required to be paid to
RISCORP, and $3.8 million is required to be deposited into escrow to further
secure the Company's indemnification obligations to Zenith. RISCORP has reported
the results of the Independent Expert's determinations in the accompanying 1998
consolidated financial statements; however, RISCORP
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<PAGE> 154
is in the process of analyzing the basis for the adjustments to the Proposed
Business Balance Sheet and is evaluating its alternatives related thereto.
The sale to Zenith is more fully described in Note 1(b) of the
accompanying consolidated financial statements.
BASIS OF PRESENTATION
As previously disclosed, due to the sale to Zenith, the Company
ceased substantially all of its business operations as of April 1, 1998.
However, given the operations of the Company for the period January 1, 1998 to
April 1, 1998, a description of the Company's former business operations and the
workers' compensation industry are included in this report to comply with the
requirements of the Exchange Act and the rules and regulations of the Securities
and Exchange Commission. At the present time, the Company has no plans to resume
any operating activities.
INDUSTRY
Workers' compensation benefits are mandated and regulated by
individual states, and most states require employers to provide medical benefits
and wage replacement to individuals injured at work, regardless of fault.
Virtually all employers in the United States are required either to purchase
workers' compensation insurance from a private insurance carrier, a
state-sponsored assigned risk pool, a self-insurance fund (an entity that allows
employers to pool their liabilities for obtaining workers' compensation
coverage), or, if permitted by their state, to be self-insured. Workers'
compensation laws generally require two kinds of benefits for injured employees:
(i) medical benefits that include expenses related to diagnosis and treatment of
the injury, as well as rehabilitation, if necessary, and (ii) payments that
consist of temporary wage replacement or permanent disability payments.
PROGRAMS AND PRODUCTS
Workers' Compensation Products
Prior to the sale to Zenith, the Company operated in a single
industry segment. The Company's products and rating plans encompassed a variety
of options designed to fit the needs of a wide selection of employers. The most
basic product was a guaranteed cost contract, where the premium was set in
advance and changes were made only when changes occurred in policyholder
operations or payrolls. The premium for these policies was based on state
approved rates, which varied depending on the type of work performed by each
employee and the general business of the insured. The Company also offered
several loss sensitive plans (retrospective rating, dividend, and large
deductible plans) which determined the final premium paid based largely on the
insured's losses during the policy period. Employers large enough to qualify had
their premiums based on their loss experience over a three-year period. This
loss experience was adjusted by the type of business and associated risks. In
Florida, policyholders could also qualify for one or more premium credits (5
percent and 2 percent) by agreeing to comply with drug-free workplace and/or
safe workplace policies, respectively. Policyholders that elected to assume a
certain amount of financial risk could elect a deductible that made them
responsible for the first portion of any claim.
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In exchange for the deductible election, the employer received a premium
reduction. As a result of the sale to Zenith, the Company no longer offers any
programs or products.
Workers' Compensation Management Services
Prior to the sale to Zenith, the Company provided fee-based workers'
compensation insurance management services to self-insurance funds and
governmental risk-sharing pools, and performed all the services of an insurance
carrier except assumption of the underwriting risk. The Company generally
required that it be given complete managerial control over the fund's or pool's
operations, and that it be entitled to share in cost savings it generated in
addition to its base fees. As of March 31, 1998 (immediately prior to the sale
to Zenith), the Company provided these services to four entities (representing
approximately 3,000 employers) with standard premiums in force under management
of approximately $80 million. The largest contracts were with Governmental Risk
Insurance Trust, North Carolina Commerce Fund, and Third Coast Insurance
Company. Effective January 1, 1998, the Company entered into an agreement for
the sale of the Company's 50 percent interest in Third Coast Holding Company
("Third Coast"). Third Coast owned a 100 percent interest in Third Coast
Insurance Company. The Company no longer provides any workers' compensation
management services.
Workers' Compensation Managed Care Arrangements ("WCMCAs")
Effective January 1, 1997, Florida law mandated that workers'
compensation insurers provide all medical care through WCMCAs. Under these
arrangements, the Company was allowed to direct injured employees to a provider
network in which employees were required to participate or face possible denial
of medical cost coverage.
The Company developed a provider network which covered the entire
state of Florida and included approximately 5,000 physicians and 650 hospital
and ancillary facilities as of March 31, 1998. The Company believed that its
ability to obtain discounted medical fees, manage utilization, and track medical
outcomes for providers that participated in its network enhanced its ability to
manage claims. This provider network was assumed by Zenith on April 1, 1998.
SALES
Prior to the sale to Zenith, the Company's workers' compensation
products and services were sold by independent insurance agencies. As of March
31, 1998, the Company had appointed approximately 800 agencies in four states
which sold its products, of which approximately 400 were in Florida. These
independent agencies were viewed by the Company as important to its success. As
a result of the Asset Sale, the Company no longer maintains relationships with
any agencies.
CUSTOMERS
The Company insured over 18,000 policyholders as of March 31, 1998.
The Company generally requested that its agencies target customers that complied
with a return-to-work program, maintained a drug-free workplace, were proactive
in seeking to minimize injuries in the workplace,
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<PAGE> 156
and were financially sound or, for certain types of policies, were willing to
provide adequate security. The Company did not target any particular industry
and believes that its policies were issued to a diversified mix of employers.
However, the Company generally did not insure certain employers which it
considered to be high risk, including nuclear facilities operators, asbestos
removers, and certain other high-risk employers. The Company no longer has any
customers.
EMPLOYEES
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. Those services normally provided by employees are
currently being outsourced. The Company had approximately 580 full-time
employees at March 31, 1998. Of the Company's employees, approximately 435
provided services to the Company's customers and 145 worked in the Company's
administrative and financial functions. The Company's employees were not subject
to collective bargaining agreements. The Company believed that its employee
relations and staffing were satisfactory to meet its former operating levels.
REINSURANCE
In connection with the sale to Zenith, the Company entered into an
assumption and indemnity reinsurance agreement with Zenith effective April 1,
1998. Under the terms of that agreement, the Company ceded to Zenith 100 percent
of its outstanding loss reserves (including incurred but not reported losses)
and 100 percent of its unearned premiums as of April 1, 1998. Zenith issued
assumption certificates to all the Company's former policyholders.
Pursuant to the terms of the Asset Purchase Agreement, Zenith agreed
to assume all of the Company's obligations under its then current and prior
insurance and reinsurance contracts. The terms of the Asset Purchase Agreement,
including the assumption and indemnity reinsurance agreement, were approved by
the Florida and Missouri Insurance Departments on March 31, 1998 and April 1,
1998, respectively.
As more fully explained in Note 1(b) of the accompanying consolidated
financial statements, the Company transferred its reinsurance assets and
liabilities in their entirety to Zenith on April 1, 1998. Prior to the sale to
Zenith, the Company shared the risks and benefits of the workers' compensation
insurance that it wrote with other insurance and reinsurance companies through
various reinsurance agreements. For a further discussion of reinsurance, see
Note 8 to the accompanying consolidated financial statements included herein.
To the extent that the reinsurers, including Zenith, are unable to
meet their contractual obligations, the Company may be contingently liable for
any losses and loss adjustment expenses ceded. Any such failure on the part of
the Company's reinsurers could have a material adverse effect on the Company's
financial condition.
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<PAGE> 157
A.M. BEST RATINGS OF INSURANCE SUBSIDIARIES
Due to the discontinuation of the Company's insurance operations,
RISCORP's insurance subsidiaries are no longer rated by A.M. Best, an insurance
rating organization, or any other rating organization.
Prior to the sale to Zenith, the Company's limited operating history,
pending litigation, and other factors affected the ability of the insurance
companies to obtain favorable A.M. Best and comparable ratings. A.M. Best
ratings are based on, among other things, a comparative analysis of the
financial condition and operating performance of insurance companies as
determined by their publicly available reports and meetings with the entities'
officers. A.M. Best ratings are weighted towards factors of concern to
policyholders and are not weighed toward the protection of investors. In
assigning ratings, companies may fall within one of three A.M. Best rating
groupings: Best's Ratings, Best's Financial Performance Ratings, or Not Rated
("NR"). The NR category identifies the primary reason a rating opinion was not
assigned.
At December 31, 1998, RISCORP's three insurance subsidiaries, RISCORP
Insurance Company ("RIC"), RISCORP Property & Casualty Insurance Company
("RPC"), and RISCORP National Insurance Company ("RNIC"), were each assigned a
Best's classification of NR-3 (Rating Procedure Inapplicable). An NR-3
classification is assigned to companies that are not rated by A.M. Best because
the A.M. Best normal rating procedures do not apply due to a company's unique or
unusual business features.
COMPETITION
Since April 1, 1998, the Company has not provided any insurance
products or services. However, prior to ceasing its insurance operations, the
Company competed in a highly competitive market. The Company's competitors
included, among others, insurance companies, specialized provider groups,
in-house benefits administrators, state insurance pools, and other significant
providers of health care and insurance services. A number of the Company's
former competitors were significantly larger, had greater financial and
operating resources than the Company, and could offer their services nationwide.
After a period of absence from the market, traditional national insurance
companies re-entered the Florida workers' compensation insurance market, which
re-entry increased competition in the Company's principal market segment. In
addition, the Company faced significant competition in its newer markets,
particularly North Carolina and Alabama. The Company did not offer the full line
of insurance products which were offered by some of its competitors.
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<PAGE> 158
REGULATION
General
The Company's business was subject to state-by-state regulation of
workers' compensation insurance (which in some instances included rate
regulation and mandatory fee schedules) and workers' compensation insurance
management services. These regulations are primarily intended to protect covered
employees and policyholders, not the insurance companies nor their shareholders.
Under the workers' compensation system, employer insurance or self-funded
coverage is governed by individual laws in each of the 50 states and by certain
federal laws. In addition, many states limit the maximum amount of dividends,
distributions, and loans that may be made in any year by insurance companies.
The Company did not make any shareholder dividends or distributions during 1998.
The Company may from time to time need additional surplus to meet
certain state regulatory requirements. There can be no assurance that capital
will continue to be available when needed or, if available, will be on terms
acceptable to the Company.
In accordance with the terms of the Asset Purchase Agreement, RISCORP
entered into a non-compete agreement with Zenith and, pursuant thereto, its
insurance subsidiaries cannot re-enter the insurance business for a period of
three years from April 1, 1998. In addition, in connection with the approval of
the sale to Zenith, RISCORP voluntarily consented to a request from the Florida
Insurance Department to discontinue writing any new or renewal insurance
business for an indefinite period of time.
Based on the inability of the Company to write any new or renewal
insurance business for an indefinite period of time, the impact of the
non-compete on the marketability of RISCORP's insurance subsidiaries, and the
future need for operating capital, RISCORP is presently considering the
surrender of the Certificates of Authority ("COAs") of its insurance
subsidiaries. If RISCORP surrenders the COAs of its insurance subsidiaries, it
would be able to dividend funds from the insurance subsidiaries to RISCORP
without regulatory approval.
Premium Rate Restrictions
State regulations governing the workers' compensation system and
insurance business in general imposed restrictions and limitations on the
Company's business operations. Among other matters, state laws regulate not only
the kind of workers' compensation benefits that must be paid to injured workers,
but also the premium rates that may be charged to insure employers for those
liabilities. As a consequence, the Company's ability to pay insured workers'
compensation claims out of the premium revenue generated from the sale of such
insurance was dependent on the level of premium rates permitted by state laws.
In this regard, it is significant that, in certain instances applicable to the
Company, the state regulatory agency that regulated workers' compensation
benefits was not the same agency that regulated workers' compensation insurance
premium rates and, in certain circumstances, such agencies' regulations were
incompatible.
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<PAGE> 159
Financial and Investment Restrictions
Insurance company operations are subject to financial restrictions
that are not imposed on most other businesses. State laws require insurance
companies to maintain minimum capital and surplus levels and place limits on the
amount of insurance premiums a company may write based on the amount of the
company's surplus. These limitations restricted the rate at which the Company's
insurance operations could grow. The Company's 1998 statutory filings indicated
that, as of December 31, 1998, its insurance subsidiaries met applicable state
minimum capital and surplus requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
State laws also require insurance companies to establish reserves for
the payment of policyholder liabilities and impose restrictions on the type of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its insurance subsidiaries' assets more conservatively
than if those companies were not subject to the state law restrictions which may
prevent the Company from obtaining as high a return on these assets than it
might otherwise be able to realize.
Participation in State Guaranty Funds
Every state in which the Company operated has established one or more
insurance guaranty funds or associations that are charged by state law to pay
claims of policyholders insured by companies that become insolvent. All
insurance companies must participate in the guaranty associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying policyholder claims of insolvent insurers. This
type of guaranty fund is separate from the Florida Special Disability Trust Fund
("SDTF") which is designed to pay insurers for certain benefits paid to
previously injured Florida workers. Pursuant to the terms of the Asset Purchase
Agreement, Zenith assumed all liabilities and obligations with respect to
guaranty fund assessments and similar charges attributable to the Company's
former insurance operations.
Statutory Accounting and Solvency Regulation
State regulation of insurance company financial transactions and
financial condition are based on statutory accounting principles ("SAP"). SAP
differs in a number of ways from generally accepted accounting principles
("GAAP") which govern the financial reporting of most other businesses. In
general, SAP financial statements are more conservative than GAAP financial
statements, often resulting in lower asset values and higher liability values.
State insurance regulators closely monitor the SAP-basis financial
condition of insurance companies and can impose financial and operating
restrictions on an insurance company, including: 1) transfer or disposition of
assets; 2) withdrawal of funds from bank accounts; 3) extension of credit or
making loans; and 4) investment of funds.
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At December 31, 1998 and 1997, each of RISCORP's insurance subsidiaries
maintained statutory capital and surplus that met the minimum capital and
surplus requirements in each state in which the individual company was licensed.
The National Association of Insurance Commissioners has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based upon the risks inherent in its operations. The
standards, which have not yet been adopted in Florida, require the computation
of a risk-based capital amount which is then compared to a carrier's actual
total adjusted capital. The computation involves applying factors to various
financial data to address four primary risks: asset risk, insurance underwriting
risk, credit risk, and off-balance sheet risk. These standards provide for
regulatory intervention when the percentage of total adjusted capital to
authorized control level risk-based capital is below certain levels. At December
31, 1998 and 1997, RISCORP's insurance subsidiaries' statutory surplus was in
excess of any risk-based capital action level requirements.
The Florida Insurance Department completed an examination of the
statutory books and records of RIC and RPC as of December 31, 1996 and issued
final reports on the examinations in October 1998. There were no adjustments to
the capital and surplus of RPC and $3.5 million of adjustments which reduced the
capital and surplus of RIC. The most significant examination adjustment to the
capital and surplus of RIC was the non-admission by the examiners of $2.2
million of investments that were held by a bank outside of Florida. The
remaining $1.3 million of adjustments related primarily to certain related party
receivables that were either collected or charged to expense in 1997. These
statutory adjustments had no material impact on the accompanying GAAP-based
financial statements.
On October 9, 1997, the Missouri Insurance Department completed an
examination of RNIC's books and records as of December 31, 1996, and issued a
final report on the 1996 examination in January 1998. The statutory capital and
surplus as of December 31, 1996 determined by the examiners was $1.7 million
less than that reported by RNIC in its 1996 statutory financial statements. One
of the examination adjustments was the non-admission of a $0.9 million accounts
receivable balance relating to the loss portfolio transfer from the Occupational
Safety Association of Alabama ("OSAA"), an Alabama self-insured workers'
compensation fund. This balance was paid in full by OSAA. The remaining $0.8
million of adjustments pertained to items that were either collected or charged
to expense during 1997. These examination adjustments related only to the
statutory financial statements and had no impact on the accompanying GAAP-based
financial statements.
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<PAGE> 161
LOSSES AND LOSS ADJUSTMENT EXPENSES
On April 1, 1998, the Company's net liabilities for losses and loss
adjustment expense were transferred to Zenith; accordingly, at December 31,
1998, no liability for losses and loss adjustment expense was necessary.
Prior to the sale to Zenith, the Company established its estimated
liability for losses and loss adjustment expenses based on facts then known,
estimates of future claims trends, experience with similar cases, and historical
Company and industry trends. These trends included loss payment and reporting
patterns, claim closures, and product mix.
The following table presents an analysis of losses and loss
adjustment expenses and provides a reconciliation of beginning and ending
reserves for 1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
Gross reserves for losses and loss adjustment
expenses, beginning of year $437,038 $458,239 $261,700
Less reinsurance recoverables 184,251 180,698 100,675
Less SDTF recoverable 45,211 49,505 51,836
Less prepaid managed care fees 8,420 31,958 16,369
-------- -------- --------
Net balance at January 1 199,156 196,078 92,820
-------- -------- --------
Assumed during year from loss portfolio transfers and acquisitions -- -- 88,212
-------- -------- --------
Incurred losses and loss adjustment expenses related to:
Current year 14,860 125,764 123,986
Prior years 11,717 (2,401) 3,023
-------- -------- --------
Total incurred losses and loss adjustment expenses 26,577 123,363 127,009
-------- -------- --------
Losses and loss adjustment expenses paid related to:
Current year 1,717 45,646 56,088
Prior years 26,760 74,639 55,875
-------- -------- --------
Total losses and loss adjustment expenses paid 28,477 120,285 111,963
-------- -------- --------
Net balance at December 31 197,256 199,156 196,078
Plus reinsurance recoverables 214,302 184,251 180,698
Plus SDTF recoverables 44,552 45,211 49,505
Plus prepaid managed care fees 6,182 8,420 31,958
-------- -------- --------
462,292 437,038 458,239
Less reserves for losses and loss adjustment
expenses transferred to Zenith 462,292 -- --
-------- -------- --------
Gross reserves for losses and loss adjustment
expenses at December 31 $ -- $437,038 $458,239
======== ======== ========
</TABLE>
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The following table shows the development of losses and loss
adjustment expenses for 1988 through 1997. The development data for 1998 is not
available due to the transfer of the liabilities for losses and loss adjustment
expenses to Zenith on April 1, 1998. The top line of the table indicates the
estimated liabilities for unpaid losses and loss adjustment expenses as reported
at the end of the stated year. Each calendar year-end reserve includes estimated
unpaid liabilities for the current accident year and all prior accident years.
The cumulative amount paid portion of the table presents the amounts paid as of
subsequent years on those claims for which liabilities were carried as of each
specific year. The section captioned "Liability Re-estimated as of" shows the
original recorded liabilities as adjusted at the end of each subsequent year to
give effect to the cumulative amounts paid and all other facts and information
discovered during each year. For example, an adjustment made in 1996 for 1992
loss reserves will be reflected in the re-estimated ultimate liability for each
of the years 1992 through 1995. The cumulative redundancy (deficiency) line
represents the cumulative change in estimates since the initial liabilities were
established. It is equal to the difference between the initial reserve and the
latest liability re-estimated amount.
The table below represents combined development for RIC, RPC, and
their predecessors through 1995. Calendar year 1996 estimates of ultimate
liabilities include reserves assumed with the purchase of RNIC and the
subsequent loss portfolio transfers of five self-insurance funds. Effective in
1996, the Company has separately reported unallocated loss adjustment expenses
previously included in general and administrative expenses. The cumulative paid
and re-estimated liability data in the following table have been restated for
all years to reflect this change. The table presents development data by
calendar year and does not relate the data to the year in which the accident
occurred.
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------------------------------------------------------------------------
(In thousands)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and loss adjustment
expenses, net $ 954 $11,273 $36,323 $ 68,674 $ 96,755 $152,406 $128,453 $92,820 $196,078 $199,156
Cumulative Amount Paid:
One Year Later 355 8,927 19,335 32,241 47,572 122,603 95,229 55,875 74,639
Two Years Later 902 14,922 34,010 55,794 116,193 164,840 127,395 77,823
Three Years Later 1,185 19,675 44,551 91,441 134,193 172,699 141,803
Four Years Later 1,595 22,587 59,651 100,307 137,782 177,603
Five Years Later 1,665 26,943 62,775 102,468 140,671
Six Years Later 1,801 27,870 63,620 103,936
Seven Years Later 1,821 28,141 64,129
Eight Years Later 1,662 28,563
Nine Years Later 1,862
Liability Re-estimated as of:
One Year Later 1,016 18,508 44,192 71,145 115,116 156,866 133,651 95,843 193,677
Two Years Later 1,219 20,541 49,429 83,918 123,472 156,303 139,992 96,189
Three Years Later 1,462 24,514 55,485 91,477 123,298 162,811 144,138
Four Years Later 1,890 27,108 58,588 91,821 125,751 167,907
Five Years Later 1,977 26,670 57,867 92,878 131,074
Six Years Later 1,785 26,023 57,981 96,905
Seven Years Later 1,734 26,067 59,986
Eight Years Later 1,567 26,814
Nine Years Later 1,763
Cumulative Redundancy
(Deficiency) (809) (15,541) (23,663) (28,231) (34,319) (15,501) (15,685) (3,369) 2,401
</TABLE>
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<PAGE> 163
As the foregoing table indicates, the Company's reserving results in
its early years were adversely impacted by its short operating history and the
relative age of the accounts it insured. Additionally, the inclusion of
unallocated loss adjustment expenses in the table increased the cumulative
deficiency for all years. From 1992 through March 31, 1998, the Company believes
its reserving methodologies became more reliable. Key factors for this
improvement were: 1) the ability to identify trends and reduce volatility based
on a larger claims database; 2) the maturation of the Company's managed care
approach to claims; and 3) industry reforms.
RISK FACTORS
In evaluating the Company, prospective investors should carefully
consider the following risk factors, in addition to the other information
contained in this Annual Report.
Cessation of Business Operations
On April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith.
In connection with the Asset Sale, RISCORP ceased substantially all of its
former business operations, including its insurance operations, effective April
1, 1998. Accordingly, since such date, the operations of the Company have
consisted, and will continue to consist, 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, the
Company has no plans to resume any operating activities.
Control by a Single Shareholder
The Company's equity consists of RISCORP's Class A and Class B Common
Stock, which vote together as a single class on all issues, except as otherwise
required by law. Mr. William D. Griffin owns beneficially 22,176,052 shares of
RISCORP's Class B Common Stock, each share of which has ten times the voting
power of a share of Class A Common Stock. As a result, Mr. Griffin controls
approximately 86 percent of the combined voting power of the Class A and Class B
Common Stock and controls the outcome of substantially all shareholder votes.
Uncertainties Relating to the Availability of Cash Proceeds for Distribution to
Shareholders
On March 19, 1999, the Independent Expert delivered its determination
of the Final Business Balance Sheet and, as such, its conclusion that the book
value of the transferred assets exceeded the book value of the transferred
liabilities assumed by Zenith at closing by $92.3 million. Therefore, pursuant
to the terms of the Asset Purchase Agreement and given the $35 million
previously paid by Zenith at closing, Zenith is required to pay an additional
$57.3 million in immediately available funds on or before March 26, 1999, plus
interest thereon of 6.13 percent from April 1, 1998 through the final payment
date. Of this amount, $53.5 million, plus the interest component, is required to
be paid to RISCORP, and $3.8 million is required to be deposited into escrow to
secure the Company's indemnification obligations to Zenith.
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<PAGE> 164
Of the cash proceeds to be received from Zenith in connection with
the Asset Purchase Agreement, approximately 85 percent have been, or will be,
used to (i) fund the working capital requirements of the Company, (ii) resolve
all claims and contingencies pending against RISCORP and its subsidiaries and to
fund all expenses associated therewith, (iii) fund all other liabilities not
transferred to Zenith, and (iv) satisfy any statutory reserve or capital
requirements to which RISCORP's regulated subsidiaries are subject following the
closing of the transaction with Zenith. Fifteen percent of the cash proceeds
received from Zenith is to be held in escrow until the second anniversary of the
Closing Date. Such escrowed funds are to be used to indemnify Zenith against
liabilities (other than those transferred) and any misrepresentation, breach, or
nonfulfillment of any agreement contemplated in the Asset Purchase Agreement.
After the two year anniversary of the Closing Date, if no indemnification claim
is pending, the funds remaining in escrow are to be paid to the Company with
accrued interest, and such amount, if any, is to be available for the purposes
set forth in items (i), (ii), (iii), and (iv) above.
The Company anticipates that, after satisfaction of all claims and
contingencies pending against the Company and its subsidiaries and after funding
all expenses associated therewith, the remaining proceeds, if any, will be
distributed to those shareholders of record on a record date to be established
by RISCORP's Board of Directors in connection with any future dividends or
distributions. Such claims and contingencies include all litigation pending or
hereafter instituted against RISCORP, its subsidiaries, and their respective
officers, directors, and agents, including, without limitation, the litigation
with Zenith.
While the Company believes that a portion of the proceeds will
ultimately be available for distribution to shareholders, it is currently
anticipated that the resolution of various contingent liabilities, including the
Company's indemnification obligations to Zenith, will take at least two years.
In addition, the Company is unable to predict when its litigation with Zenith
will be resolved and what effect such resolution will have on funds available to
shareholders. Pursuant to the terms of RISCORP's Amended and Restated Articles
of Incorporation, the holders of Class A Common Stock and Class B Common Stock
are entitled to participate in any dividends declared or paid by RISCORP or
distributions to the holders of common stock in connection with any liquidation,
dissolution, or winding up of the Company ratably on a per share basis.
Any future distribution of closing proceeds will be at the discretion
of the Board of Directors and available only to RISCORP shareholders on a record
date to be established at a later time in connection with any such future
distribution. Shareholders that currently are record holders of Class A Common
Stock or Class B Common Stock who are not record holders at the time a record
date is established in connection with a future distribution will not be
entitled to participate in any such distribution of closing proceeds. The Board
of Directors intends to solicit additional shareholder approval prior to a final
distribution of closing proceeds. Although interim distributions or dividends to
shareholders do not require shareholder approval, a final distribution of
closing proceeds will require additional shareholder approval.
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<PAGE> 165
Personal Holding Company Income
Following the consummation of the Asset Sale, the Company ceased
substantially all of its former business operations and invested a substantial
portion of its remaining assets in interest bearing obligations pending the
resolution of various outstanding claims and other contingencies. Under the
Internal Revenue Code of 1986, as amended (the "Code"), corporations that have
60 percent or more of their income from various passive sources, including
dividends and interest, and that have 50 percent or more of their outstanding
stock held by five or fewer individuals, are subject to a tax of 39.6 percent on
their undistributed personal holding company income, as defined in the Code, in
addition to their regular income tax. Because the Company has ceased to have
active business income, but will not be able to liquidate or make other
distributions promptly, it is anticipated that in one or more post-1998 tax
years the Company will be considered to be a personal holding company and will
either be subject to the personal holding company tax in addition to the regular
income tax or will be required to distribute an amount equal to the taxable
income earned by the Company, net of certain expenses and with certain other
adjustments, as regular dividends taxable as ordinary income to shareholders to
avoid the imposition of such a tax. In an effort to avoid unfavorable tax
treatment, the Company, pending resolution of claims or contingencies, may
invest in obligations the interest of which is excluded from gross income for
federal income tax purposes. The Company's failure to make such investments or
in the alternative to make distributions of net investment income, if any, could
have a material adverse affect on the amount distributable to shareholders.
Investment Company Act Considerations
While the Company does not intend to conduct its affairs in a manner
which would require registration as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), a determination
that it is an investment company subject to registration could materially
increase its administrative costs and regulatory requirements.
The Investment Company Act places restrictions on the capital
structure, business activities, and corporate transactions of companies
registered thereunder. Generally, a company is deemed to be an investment
company subject to registration if its holdings of "investment securities"
(generally, securities other than securities issued by majority controlled,
non-investment company subsidiaries, and government securities) exceed 40
percent of the value of its total assets exclusive of government securities and
cash items on an unconsolidated basis. Pursuant to a rule of the Securities and
Exchange Commission (the "Commission") under the Investment Company Act, a
company that otherwise would be deemed to be an investment company may be
excluded from such status for a one-year period provided that such company has a
bona fide intent to be engaged primarily, as soon as reasonably possible (and in
any event within that one-year period), in a business other than that of
investing, reinvesting, owning, holding, or trading in securities. If the
Company would otherwise be deemed to be an investment company under the
Investment Company Act, the Company intends to rely on such exemption while it
attempts to resolve all contingencies pending against the Company, and will not
register as an investment company under the Investment Company Act during the
one-year period following the closing of the Asset Sale.
14
<PAGE> 166
Registration by the Company under the Investment Company Act would
require the Company to comply with various reporting and other requirements
under the Investment Company Act, would subject the Company to certain
additional expense, and could limit the Company's options for future operations.
Because the Company does not expect to have resolved all
contingencies pending against it within the one-year period referred to above,
the Company may be required either to (i) apply to the Commission for exemptive
relief from the requirements of the Investment Company Act or (ii) invest
certain of its assets in government securities and cash equivalents that are not
considered "investment securities" under the Investment Company Act. There can
be no assurance that the Company will be able to obtain exemptive relief from
the Commission. Alternatively, investments in government securities and cash
equivalents could yield a significantly lower rate of return than other
investments which the Company could make if it chose to register as an
investment company.
ITEM 2. PROPERTIES
On April 1, 1998, the Company sold its headquarters building in
Sarasota, Florida to Zenith in accordance with the terms of the Asset Purchase
Agreement. The building contained 112,000 square feet of space, as well as an
adjacent parking facility. The Company currently leases an aggregate of 17,000
square feet of office space at four other locations in three states, including
Florida, under terms expiring through January 2001. The Company incurred rent
expense of $0.2 million for 1998. The Company has aggregate continuing lease
commitments through October 2000 of $0.2 million related to two locations in
which offices were closed during 1997.
ITEM 3. LEGAL PROCEEDINGS
Zenith Litigation. 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 seeks an unspecified
total amount of damages, but the amount of compensatory damages sought is in
excess of $30 million, together with an unspecified amount of punitive damages
and attorneys' fees. Zenith's claims include, among others, that the Company (i)
breached certain representations and warranties set forth in the Asset Purchase
Agreement, (ii) failed to transfer certain assets to Zenith, (iii) failed to
operate its business in the ordinary course, (iv) failed to reimburse Zenith for
certain payments, and (v) fraudulently induced Zenith to execute the Asset
Purchase Agreement due to certain alleged verbal representations made with
respect to RISCORP's Year 2000 compliance.
On October 16, 1998, RISCORP and certain of its subsidiaries filed an
action against Zenith in federal court in Tampa, Florida alleging a breach of
the Asset Purchase Agreement. The Company amended its complaint in Florida on
January 25, 1999, and added ten additional claims arising out of Zenith's
failure to indemnify the Company for certain claims of third parties. The
Company also added two other claims, one for breach of contract and one for
15
<PAGE> 167
conversion, related to Zenith's taking of $4.1 million the Company had on
deposit with the South Carolina Insurance Department.
The Company intends to vigorously defend those claims asserted by
Zenith and to vigorously prosecute the Company's claims; however, there can be
no assurance as to the ultimate outcome of this litigation.
Securities Litigation. Between November 20, 1996 and January 31, 1997,
nine shareholder class-action lawsuits were filed against RISCORP and other
defendants in the United States District Court for the Middle District of
Florida. In March 1997, the court consolidated these lawsuits and appointed
co-lead plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants RISCORP,
three of its executive officers, one non-officer director, and three of the
underwriters for RISCORP's initial public offering. The plaintiffs in the
consolidated complaint purport to represent the class of shareholders who
purchased RISCORP's Class A Common Stock between February 28, 1996 and November
14, 1996. The consolidated complaint alleges that RISCORP's Registration
Statement and Prospectus of February 28, 1996, as well as subsequent statements,
contained false and misleading statements of material fact and omissions, in
violation of Sections 11 and 15 of the Securities Act, Sections 10(b) and 20(a)
of the Exchange Act, and Rule 10b-5 promulgated thereunder. The consolidated
complaint seeks unspecified compensatory damages.
In July 1998, the parties executed a stipulation and agreement of
settlement in which the Company agreed to pay $21 million in cash to a
settlement fund to settle this litigation. The Company has paid $0.5 million as
an advance to the settlement fund. The remainder of the settlement fund is to be
paid from the proceeds of the second payment due under the Asset Purchase
Agreement with Zenith. On July 29, 1998, the court issued a preliminary approval
order in which it certified the purported class for settlement purposes. The
court held a settlement fairness hearing on December 15, 1998. At that hearing,
the court announced its opinion that the settlement was fair and reasonable and
should be approved. The parties have executed several amendments to the
settlement agreement extending the deadline after which plaintiffs may terminate
the settlement agreement and resume litigation. Under the most recent amendment,
the Company has until March 24, 1999 in which to fully fund the settlement
agreement from the proceeds of the Zenith transaction. If the settlement fund is
not fully funded by that date, plaintiffs have the right to terminate the
settlement agreement pursuant to procedures specified in the agreement.
The Company estimates that $8 million of insurance proceeds will be
available for contribution to the settlement amount, as well as related costs
and expenses. The Company recognized the $21 million proposed settlement and the
related insurance proceeds in the 1997 consolidated statement of operations.
Because the settlement agreement is contingent on the Company's receipt of an
additional payment from Zenith in connection with the Asset Sale, there can be
no assurance that this litigation will be ultimately settled on the terms
described herein.
OSAA Litigation. On August 20, 1997, the OSAA Workers' Compensation
Fund (the "Fund") filed a breach of contract and fraud action against the
Company and others. The Fund
16
<PAGE> 168
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 Mr. Peter D. Norman ("Norman") was a principal and officer of
Independent Association Administrators, Inc. ("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. RNIC has appealed the trial court's ruling which
prevents the American Arbitration Association from administering the arbitration
between RNIC and the Fund. The Alabama Supreme Court has stayed the current
arbitration. 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.
Bristol Hotel Litigation. On March 13, 1998, RIC and RPC were added
as defendants in a purported class action 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 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. Although the Plaintiffs have
indicated that they will seek to have the appeal terminated and the case
remanded to the district court, no formal motion has been filed with the Court
of Appeals. Management will continue to monitor the progress of the appeals
process as necessary and intends to defend the case vigorously if it is returned
to the district court for further proceedings.
17
<PAGE> 169
Employee Matters. In June 1997, the Company terminated a number of
employees in connection with a workforce reduction. As a result of the workforce
reduction, a number of former employees have initiated proceedings, including
arbitration, against the Company for certain severance benefits. The Company
intends to vigorously defend these suits; however, there can be no assurance
that it will prevail in these proceedings.
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 are not presently
considered by management to be material.
Other than as noted above, no provision had been made in the
accompanying consolidated financial statements for the foregoing matters at
December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Following RISCORP's initial public offering on February 29, 1996, the
Company's Class A Common Stock ($.01 par value) was traded on the NASDAQ Stock
Market's National Market under the symbol "RISC." There is no public market for
RISCORP's Class B Common Stock. Due to RISCORP's inability to timely file its
Annual Report on Form 10-K for the year ended December 31, 1996 or its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997, RISCORP's Class A
Common Stock was delisted on July 2, 1997. Despite RISCORP's timely filing of
all periodic reports for all periods subsequent to the third quarter of 1997,
RISCORP's Class A Common Stock has remained delisted, and RISCORP has no
intention to seek readmission for listing on NASDAQ or any other national
securities exchange. Accordingly, since July 2, 1997, there has been no public
market for the RISCORP's Class A Common Stock.
As of December 31, 1998, there were 376 record holders of Class A
Common Stock. The following table sets forth the high and low per share bid
prices for RISCORP's Class A Common Stock for each quarterly period, as reported
to RISCORP by a national brokerage firm. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Per Share Bid Information for Class A Common Stock
- ---------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------- -------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 2 1/2 2 3/8 2 1/8 1 1/32 4 3/8 3 3/4 1 1/8 1 1/2
Low 25/32 1 31/32 7/8 23/32 1 7/8 15/16 3/8 5/8
</TABLE>
No dividends have been declared or paid since RISCORP's initial
public offering and it is not anticipated that dividends will be paid in the
foreseeable future.
18
<PAGE> 170
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premiums earned $25,819 $179,729 $173,557 $135,887 $ 1,513
Fees and other income 5,906 20,369 31,733 22,397 56,712
Net realized gains 4,280 1,546 105 1,016 --
Net investment income 7,103 16,447 12,194 6,708 1,677
------- -------- -------- -------- --------
Total revenues 43,108 218,091 217,589 166,008 59,902
------- -------- -------- -------- --------
Expenses:
Losses and loss
adjustment expenses 24,016 104,052 114,093 82,532 (716)
Unallocated loss
adjustment expenses 2,561 19,311 12,916 10,133 8,804
Commissions and general and
administrative expenses 34,191 70,800 65,685 48,244 35,869
Interest 676 1,919 2,795 4,634 1,750
Depreciation and amortization 2,736 7,423 11,500 1,683 1,330
------- -------- -------- -------- --------
Total expenses 64,180 203,505 206,989 147,226 47,037
------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations (21,072) 14,586 10,600 18,782 12,865
Loss on sale of net assets to Zenith (47,747) -- -- -- --
--------- -------- -------- -------- -------
Income (loss) before income taxes (68,819) 14,586 10,600 18,782 12,865
Income taxes (1) 2,056 7,300 8,202 5,099 5,992
--------- -------- -------- -------- -------
Net income (loss) $ (70,875) $ 7,286 $ 2,398 $ 13,683 $ 6,873
========= ======== ======== ======== =======
Net income (loss) per share (4) $ (1.91) $ 0.20 $ 0.07 $ 0.49 $ 0.24
========= ======== ======== ======== =======
Net income (loss) per share assuming
dilution (4) $ (1.91) $ 0.20 $ 0.07 $ 0.45 $ 0.23
========= ======== ======== ======== =======
Weighted average common
shares outstanding 37,012 36,892 34,648 28,100 28,100
========= ======== ======== ======== =======
Weighted average common
shares and common share
equivalents outstanding (2)(3) 37,012 37,116 36,406 30,093 30,093
========= ======== ======== ======== =======
BALANCE SHEET DATA (AT END OF YEAR):
Cash and investments $ 37,686 $253,634 $281,963 $ 92,713 $47,037
Total assets 123,393 749,650 828,442 443,242 93,908
Long-term debt -- 15,609 16,303 46,417 27,840
Shareholders' equity 95,566 163,533 157,308 16,157 3,895
</TABLE>
(1) Certain subsidiaries of RISCORP were S Corporations prior to the
Reorganization [as referred to in Note 1(a) to the Company's
consolidated financial statements] and were not subject to corporate
income taxes.
(2) The 1995 shares exclude 2,556,557 shares of Class A Common Stock
reserved for issuance pursuant to the exercise of stock options
outstanding as of December 31, 1995, having a weighted average exercise
price of $3.96 per share.
(3) The 1997 and 1996 shares include 790,336 and 225,503 shares,
respectively, of Class A Common Stock pursuant to the contingency
clauses in the acquisition agreement with IAA. See Notes 4 and 20 to
the Company's consolidated financial statements.
(4) The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share". As required by that pronouncement, these
amounts have, for all years presented, been recalculated in accordance
with its provisions.
19
<PAGE> 171
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
As discussed more fully in Note 1(b) of the accompanying 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 this sale, RISCORP ceased substantially all of its
former business operations, including its insurance operations, effective April
1, 1998. Accordingly, after such date, the operations of the Company 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.
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 the significant changes in the operating
activities of the Company after April 1, 1998, a comparison of the results of
operations for 1998 to 1997 and 1996 is meaningless. Therefore, the results of
operations for the nine months ended December 31, 1998 are explained separately
with no comparison to the comparable prior periods. The results of operations of
the Company prior to the April 1, 1998 sale to Zenith, compared to the
comparable period in 1997 and 1996 are included to comply with the requirements
of the Exchange Act 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 any
future operations by the Company since no future operations are anticipated.
RESULTS OF OPERATIONS
APRIL 1, 1998 TO DECEMBER 31, 1998
During the nine months ended December 31, 1998, the Company's primary
operating activities were the defense of the Proposed Business Balance Sheet,
the investment of the net $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, 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.
At December 31, 1998, the Company had investments totaling $16 million,
of which $4.6 million consisted of securities to be transferred to Zenith. Those
securities were primarily regulatory deposits and securities held in trust in
connection with certain reinsurance agreements.
The following comments pertain to the other balances on the December
31, 1998 balance sheet.
20
<PAGE> 172
- Restricted cash and cash equivalents consisted primarily of
the $10 million initial purchase price payment which is being
held in escrow under the terms of the Asset Purchase
Agreement.
- The $49.9 million receivable from Zenith represents the
remaining purchase price to be received from Zenith in
connection with the Asset Sale. A more in-depth discussion of
the receivable amount can be found in Note 1(b) of the
accompanying financial statements.
- Deferred income taxes of $3.1 million consisted of federal and
state income taxes that are anticipated to be recovered in
future years. At this time, this asset is expected to be fully
recoverable.
- Other assets of $7.3 million consisted primarily of prepaid
insurance coverages of $4.1 million, retainers paid to certain
professionals and consultants of $1.1 million, and accrued
investment income of $2.1 million, of which $1.8 million
relates to interest receivable from Zenith.
- In March 1999, the Company collected $11.9 million of the
$17.3 million of recorded income taxes recoverable. The
remaining balance is expected to be received during 1999.
- Accounts receivable-other of $7.7 million consisted primarily
of a $2.3 million receivable which is expected to be realized
upon the redemption of the Company's outstanding stock and
$4.8 million of certain insurance recoverables which is
expected to be received when the accrued legal settlements
discussed herein are actually paid.
- Accrued expenses and other liabilities totaled $27.8 million
and consisted primarily of $20.5 million of an accrued legal
settlement, $2.5 million of accrued legal, accounting,
auditing, and actuarial expenses that primarily relate to the
defense of the Proposed Business Balance Sheet, $1.3 million
of trade accounts payable, $1 million of income taxes payable,
$0.6 million of unpaid restructuring cost relating to the June
1997 corporate restructuring, and $1 million of other accruals
and payables.
The Company's operating results for the nine months ended December 31,
1998 resulted in a net loss of $61.6 million. The following comments pertain to
the Company's revenues and expenses for the nine months ended December 31, 1998:
- The $47.7 million loss on the sale to Zenith represents the
adjustment to the purchase price as determined by the
Independent Expert [see Note 1(b) of the accompanying
consolidated financial statements].
- Net realized gains were $2.8 million. The net realized gains
consisted primarily of gains on the sale of securities
transferred to Zenith in connection with the Asset Purchase
Agreement. For 1998, the net realized gains were $4.3 million,
of which $1.3
21
<PAGE> 173
million was the gain on the sale of Third Coast recognized in
the first quarter of 1998, more fully discussed in Note 4 of
the accompanying consolidated financial statements.
- Net investment income was $3.8 million. Net investment income
consisted of $1.8 million of interest income on the $49.9
million receivable from Zenith, interest income of $0.4
million on the $10 million balance in escrow, and $1.6 million
of investment portfolio income.
- Operating expenses totaled $18.6 million. This amount included
three significant non-recurring expenses that relate to the
sale to Zenith. The first non-recurring expense totaled $3.4
million and consisted of severance payments to certain of the
Company's former executives and employees. The second expense
totaled $4.1 million and consisted of the issuance of RISCORP
stock to The Phoenix Management Company, Ltd. ("Phoenix") in
accordance with a Restricted Stock Award Agreement. The third
expense totaled $2.8 million and represented a payment for a
tax gross up related to the issuance of the restricted stock
award to Phoenix. The remaining $8.3 million of operating
expenses consisted of $2.8 million of accounting and auditing
expenses, $1.7 million of recurring operating expenses such as
rent, telephone, insurance, and similar costs, $1 million of
adjustments to the Proposed Business Balance Sheet (discussed
more fully in Note 1(b) of the accompanying consolidated
financial statements), $0.9 million of management expenses,
$0.3 million of transition expenses incurred as a result of
the sale to Zenith, and $1.6 million of other expenses.
- In September 1998, the Company received a reimbursement of
$1.2 million of legal fees incurred in 1997 and 1998 in
connection with payments made on behalf of certain former
officers and directors of the Company. This reimbursement was
included as a reduction in commissions and underwriting and
administrative expenses in the accompanying 1998 consolidated
statement of operations.
- Depreciation and amortization expense was $0.3 million. The
Company transferred all assets subject to amortization to
Zenith in connection with the sale and, based on discussions
with representatives of Zenith, retained $0.3 million of fixed
assets (consisting primarily of computer equipment) which is
being depreciated over three years.
- Interest expense was $0.7 million.
Net investment income for 1998 was $7.1 million compared to $16.4
million in 1997, a net decrease of $9.3 million. The decline in investment
income was due to a decline in invested assets (including the receivable from
Zenith) of $157.6 million for 1998 compared to 1997. The decrease in invested
assets was primarily due to the sale to Zenith and the decline in written
premiums as discussed elsewhere herein.
22
<PAGE> 174
PRIOR TO APRIL 1, 1998
The discussion that follows relates to the operations and operating
philosophy of the Company's activities which existed prior to April 1, 1998 and
includes the results for the year ended December 31, 1998 compared to 1997 and
1996.
Prior to 1996, the Company's at-risk operations were focused in
Florida. During 1996, RISCORP acquired RNIC and its 19 licenses and assumed
business from several self insurance funds outside of Florida which allowed
RISCORP to diversify its at-risk operations. A comparison of the Company's
direct written premiums for 1998, 1997, and 1996 (prior to reinsurance cessions
or assumptions) by state is presented below (in millions):
<TABLE>
<CAPTION>
DIRECT PREMIUMS WRITTEN
-------------------------------
1998 (A) 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Florida $ 29.2 $180.8 $270.8
Alabama 4.1 39.1 21.7
North Carolina 4.4 32.2 41.4
Other 1.0 28.4 22.8
------ ------ ------
Total $ 38.7 $280.5 $356.7
====== ====== ======
</TABLE>
(a) 1st quarter 1998, prior to the sale to Zenith.
Direct written premiums were reduced by specific reinsurance cessions
(1996), the 50 percent quota-share reinsurance agreement for the Company's
Florida workers' compensation business (1996), and the 65 percent quota-share
reinsurance agreement (effective October 1, 1996), with another reinsurer for
certain non-Florida business. The 65 percent quota-share reinsurance agreement
was reduced to 60 percent effective January 1, 1997 and was cancelled on a
run-off basis on December 31, 1997.
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 which were subject to premium reductions as high deductible
plans, participating dividend plans, or other loss sensitive plans. Pricing for
these plans tended to be more competitively based, and the Company experienced
increased competition during 1997 and 1998 in pricing these plans. In addition,
in October 1996, the Florida Insurance Commissioner ordered workers'
compensation providers to reduce rates by an average of 11.2 percent for new and
renewal policies written on or after January 1, 1997. Concurrently, with the
premium reduction effective January 1, 1997, the 10 percent managed care credit
was phased out. This credit had been offered since 1994 to employers who met
certain criteria for participating in a qualified workers' compensation managed
care arrangement. In October 1997, Florida further reduced premium rates by 1.7
percent for new and renewal policies written on or after January 1, 1998. North
Carolina approved a 13.7 percent decrease in loss costs, effective April 1,
1997, that the Company adopted in October 1997, which resulted in an overall
effective rate reduction of 8.4 percent.
The Company experienced increased pricing pressures during 1997. During
1997, the Company made the strategic decision to discontinue writing business
owners' protection, commercial multiple peril, and auto, and to focus on its
core workers' compensation business.
23
<PAGE> 175
Net written premiums on these lines of business were less than $1 million during
1997 and were less than $0.5 million in 1996.
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 which were reinsured or which could be subrogated or
submitted for reimbursement under various state 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").
The following table shows direct, assumed, ceded, and net earned
premiums for 1998, 1997, and 1996 (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 (A) 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Direct premiums earned $ 48.4 $328.2 $326.9
Assumed premiums earned 0.1 18.8 11.7
Premiums ceded to reinsurers (22.7) (167.3) (165.0)
------ ------ ------
Net premiums earned $ 25.8 $179.7 $173.6
====== ====== ======
</TABLE>
(a) 1st quarter 1998, prior to the sale to Zenith.
The Company experienced a decrease in direct earned premiums in the
last six months of 1997 and the first quarter of 1998 primarily due to the
decrease in new and renewal premiums experienced by the Company in the second,
third, and fourth quarters of 1997. These premium declines resulted from, among
other things, the adverse publicity pertaining to the A.M. Best ratings of
RISCORP's insurance subsidiaries, RISCORP's inability to file its 1996 Form
10-K, 1997 Form 10-Qs, and 1996 audited statutory financial statements in a
timely manner, the delisting of RISCORP's stock by NASDAQ, and the failure by
Zenith to provide a cut through endorsement for the non-Florida business, as
requested by the Company.
The $1.3 million net increase in the direct premiums earned for 1997
compared to 1996 was primarily the result of the following factors:
- The infusion of $68.9 million of capital into RISCORP's
insurance subsidiaries from RISCORP's initial public offering
("IPO") proceeds allowed the insurance subsidiaries
24
<PAGE> 176
to increase their premium writing capacity and, as a result,
the Company was able to increase premiums during the last nine
months of 1996 due to its expanded premium writing
capabilities. Written premiums were earned pro rata over the
policy periods (usually 12 months); therefore, increased
premiums written during the last nine months of 1996 had a
positive impact on earned premiums in 1996 and 1997.
- Written premiums increased in the third and fourth quarters of
1996 and the first quarter of 1997 from the assumption
reinsurance and loss portfolio agreements entered into by the
Company and from the acquisitions made by the Company during
1996.
- Enhanced marketing initiatives implemented by the Company
after the IPO to increase the number of policies and to write
accounts with larger premiums.
In September 1995, the Company entered into a fronting agreement with
another insurer which enabled the Company to begin expansion into states where
the RISCORP insurance companies were not licensed. The fronting agreement was
cancelled effective December 31, 1997. The cancellation of the fronting
agreement and the sale to Zenith were the primary reasons that the assumed
premiums decreased to $0.1 million in 1998 from $18.8 million in 1997. The
increase in assumed premiums earned in 1997 from 1996 was primarily the result
of the Company recording $11.4 million of earned premiums from the National
Council on Compensation Insurance, Inc. pool participation. The assumed premiums
from the fronting agreement were $7.1 million and $11.7 million for 1997 and
1996, respectively. While the company assumed premiums from several insurers,
the fronting agreement generated the majority of the assumed premiums.
For 1997 and 1996, the Company ceded 50 percent of its Florida premiums
under a quota-share reinsurance agreement and 60 percent of the business written
by RNIC under a separate quota-share agreement (65 percent during 1996) with
Chartwell Reinsurance Company ("Chartwell"). The Company terminated the
agreement with Chartwell at December 31, 1997; however, the reinsurer continues
to receive premiums and to be responsible for its portion of all losses incurred
on policies effective before the termination date. The decrease in ceded
premiums to $22.7 million in 1998 from $167.3 million in 1997 was due primarily
to the sale to Zenith and to the decrease in direct premiums earned discussed
above.
Fee income for 1998 was $5.7 million compared to $20.4 million and
$31.7 million for 1997 and 1996, respectively. The decrease in fee income was
primarily due to sale of the insurance operations to Zenith. The decrease
between 1996 and 1997 was primarily due to the loss of service fees from the
conversion of the National Alliance for Risk Management ("NARM") self-insurance
funds of North Carolina and Virginia (which funds were previously managed by the
Company) to at-risk business via loss portfolio transfers and decreases in
RISCORP West Incorporated ("RWI") service fee income from the termination of
RWI's Mississippi and Louisiana service contracts. The decrease in fee income
was partially offset by new fees generated from the CompSource acquisition, the
fronting agreement, the new service agreement with Third Coast Insurance
Company, and growth in other existing fee products.
25
<PAGE> 177
Net investment income for 1998, 1997, and 1996 was $7.1 million, $16.4
million, and $12.2 million, respectively. Net investment income consists
entirely of earnings from the investment portfolio, excluding realized gains and
losses in 1997 and 1996. See the foregoing comments on the components of the
1998 investment income.
The loss ratios for 1998, 1997, and 1996 were 93 percent, 58 percent,
and 67 percent, respectively. The increase in the 1998 loss ratio of 35 percent
was due primarily to adverse gross loss development during the first quarter of
1998 in the 1997 and prior accident years from certain business written in
Florida of $10.3 million, gross favorable loss development in Alabama and North
Carolina of $2.6 million, and gross adverse loss development of $0.3 million in
business written by RNIC and RPC in several smaller states. The decrease in the
loss ratio from 1996 to 1997 was due primarily to favorable development in
Florida (7 percent) and North Carolina (1 percent) and unfavorable development
in Alabama (1 percent) relating to the Company's 1996 and earlier accident
years' loss and loss adjustment reserves. The favorable development in the
Florida business was due primarily to the reduction in the loss and loss
adjustment expense reserves resulting from an actuarial analysis completed in
the fourth quarter of 1997 and the favorable development for the 1996 accident
year resulting primarily from favorable development of post-1993 Florida
accident years due to enhanced savings form the legislative changes that became
effective in 1994.
Unallocated loss adjustment expenses for 1997 were $19.3 million
compared to $12.9 million for 1996, a net increase of $6.4 million. This
increase was primarily due to the increased premium volume, increased loss
reserves during 1997, and unfavorable loss development. The unallocated loss
adjustment expense ratio for 1998, 1997, and 1996 was 10 percent, 11 percent,
and 7 percent, respectively. The 4 percent increase in the 1996 to 1997 ratio
was primarily due to increased personnel and personnel related costs.
Commissions and general and administrative expenses for 1998, 1997, and
1996 were $34.2 million, $70.8 million, and $65.7 million, respectively. The net
increase of $5.1 million from 1996 to 1997 is primarily the result of a $6.3
million increase in the amortization of deferred acquisition costs, a $2.1
million increase in personnel expenses primarily related to severance payments
incurred in connection with the June 1997 workforce reduction, a $5.9 million
increase in accounting, auditing, consulting, and legal expenses primarily
resulting from the Company's inability to file its 1996 financial statements in
a timely manner, a $2.8 million increase in postage, telephone, and insurance
expenses, a $13 million expense recognized in the fourth quarter of 1997 in
connection with the proposed settlement of the securities class action lawsuit,
a $5 million increase relating to expenses associated with the NCCI pool
participation, a $5.3 million increase in commissions paid to agents, and a $1.7
million reduction in ceding commission income. These expense increases were
offset by reductions in marketing related travel expenses of $1.5 million,
decreases in premium taxes of $8.5 million resulting from a decline in written
premiums, and a decline in bad debt expenses of $27 million. The Company had no
employees at the end of 1998 and approximately 580 at December 31, 1997.
Interest expense for 1997 and 1996 was $1.9 million and $2.8 million,
respectively. The decrease was due to the repayment of $28.6 million of debt in
March 1996 using the proceeds from RISCORP's initial public offering.
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<PAGE> 178
Depreciation and amortization expense for 1997 and 1996 were $7.4
million and $11.5 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The Company's
primary sources of cash flow from operations were premiums and investment
income, and its cash requirements consisted primarily of payment of losses and
loss adjustment expenses, support of its operating activities, including various
reinsurance agreements and managed care programs and services, capital surplus
needs for its insurance subsidiaries, and other general and administrative
expenses. 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 this 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 flow 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 flow from operations for 1998, 1997, and 1996 was $(37.6)
million, $(22.9) million and $28.1 million, respectively. The decrease from 1997
to 1998 was due primarily to reductions in unearned premiums resulting from a
decrease in direct premiums written and increases in losses and loss adjustment
expenses, unallocated loss adjustment expenses, and commissions and underwriting
and administration expenses in relation to premiums earned during the first
quarter of 1998, and the expenses related to the sale to Zenith. These expenses
included severance payments to certain employees, the payment of accrued
employee benefits, and the payment of other expenses related to the sale. The
decrease from 1996 to 1997 was due primarily to reductions in unearned premiums,
and loss and loss adjustment expense reserves, resulting from a decrease in
direct premiums written of $76.2 million, as well as increases in commissions
and general and administrative expenses and unallocated loss adjustment expenses
of $4.8 million and $6.4 million, respectively.
The Company has projected cash flows through December 1999 and
believes it has sufficient liquidity and capital resources to support its
operations. The liquidity of the Company could be materially adversely affected
if Zenith should prevail in the dispute resolution process with respect to the
determination of the final purchase price. Furthermore, the adverse resolution
of certain legal issues or any material delay in the Company's receipt of the
final payment of the ultimate purchase price determined to be payable by Zenith
could have a material adverse effect on the Company's liquidity. See "Sale to
Zenith," "Legal Proceedings," and "Recent Developments."
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
27
<PAGE> 179
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
reasonably 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, notes, and
supplementary schedules are set forth on pages F-2 to F-50 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in, or disagreements with, accountants on
accounting or financial disclosure for the two years ended December 31, 1998.
28
<PAGE> 180
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors and Executive Officers
Set forth below is certain information as of December 31, 1998,
concerning the Company's executive officers, continuing directors, and nominees
for director.
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Frederick M. Dawson Chief Executive Officer, President and Director
Edward W. Buttner IV Chief Accounting Officer
Walter E. Riehemann Chief Investment Officer, Treasurer and Secretary
Seddon Goode, Jr. Director
George E. Greene III Director
Walter L. Revell Director
</TABLE>
Frederick M. Dawson, age 59, joined the Company in May 1997 as Chief
Executive Officer, and was elected to serve as President and as a director in
June 1997. Mr. Dawson holds a majority interest in The Phoenix Management
Company, Ltd. ("Phoenix"), a Florida limited partnership which provides
management services for the Company, and controls the operations of Phoenix as
president of its general partner. Prior to joining the Company, Mr. Dawson was
Chairman, President and Chief Executive Officer of Integon Life Insurance
Corporation from December 1994 to July 1995 and Harcourt General Insurance
Companies from August 1992 to December 1994. Mr. Dawson's previous experience
includes executive positions with Beneficial Corporation from October 1980 to
March 1987 and Citibank, N.A. from October 1987 to August 1992.
Edward W. Buttner IV, age 45, has served as the Company's Chief
Accounting Officer since April 1, 1998, pursuant to the Accounting Outsourcing
Agreement. See "Certain Relationships and Related Transactions." Since 1997, Mr.
Buttner has practiced as a Certified Public Accountant in Jacksonville, Florida,
where is currently a principal of BHC, a public accounting firm. Prior to
founding BHC, Mr. Buttner was employed in various capacities with Ernst & Young
LLP from June 1, 1976, including as a partner from October 1, 1988 to April 3,
1992.
Walter E. Riehemann, age 32, has served as Chief Investment Officer,
Treasurer and Secretary since April 2, 1998, pursuant to the Management
Agreement. See "Certain Relationships and Related Transactions." Prior to the
consummation of the Asset Sale, Mr. Riehemann served as Senior Vice President,
General Counsel and Secretary of the Company from October 1997. Mr. Riehemann
joined the Company as Associate General Counsel in August 1995 and was promoted
to Vice President, General Counsel and Secretary in June 1997. Prior to joining
the Company, Mr. Riehemann was associated with the law firms of Powell,
Goldstein, Frazer & Murphy, Atlanta, Georgia (1993 to 1995), Long, Aldridge &
Norman, Atlanta, Georgia (1993), and Jones, Day, Reaves & Pogue, Dallas, Texas
(1990 to 1993).
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<PAGE> 181
Seddon Goode, Jr., age 66, served as a Director of the Company since
1996. Mr. Goode has served as President and Director of University Research
Park, Inc. since 1981. From 1977 to 1984, Mr. Goode served as Chairman of First
Charlotte Corporation. From 1968 to 1977, Mr. Goode served as Senior Vice
President, Chief Financial Officer and Director of Interstate Securities
Corporation. Mr. Goode is also a director of Trion, Inc. and is a director and
chairman of Canal Industries, Inc.
George E. Greene III, age 63, served as a Director of the Company since
1995. Mr. Greene has been a private consultant since 1994. Mr. Greene served in
various management positions with Florida Power Corporation, and other
subsidiaries of Florida Progress Corporation from 1962 to 1993. Mr. Greene
retired from Florida Power Corporation as a Senior Vice President on January 1,
1994.
Walter L. Revell, age 63, served as a Director with the Company since
1995. Mr. Revell has been Chairman and Chief Executive Officer of H.J. Ross
Associates, Inc., a consulting, engineering, architectural and planning firm,
since 1991; Chairman and Chief Executive Officer of Revell Investments
International, Inc. since 1984 and was President and Chief Executive Officer of
Post, Buckley, Schuh & Jernigan, Inc., a consulting, engineering, architectural
and planning firm, from 1974 to 1983. Mr. Revell is also a director of St. Joe
Corporation and Dycom Industries, Inc.
Section 16(a) Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than ten percent of the Common Stock of the company, to file reports of
ownership and changes in ownership with the Commission. Officers, directors, and
ten percent shareholders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received by
it, and written representations from certain reporting persons that no
Commission Forms 3, 4, or 5 were required to be filed by those persons, the
Company believes that during 1998, its officers, directors and ten percent
beneficial owners timely complied with all applicable filing requirements, with
the exception of (i) Mr. Buttner, the Company's Chief Accounting Officer, who
filed, subsequent to the due date, a Form 3 indicating that he owns no shares of
Common Stock, and (ii) Phoenix, which filed as a joint filer with Dawson
Managers, Inc., its general partner, subsequent to the due date, a Form 3
reporting their ownership of 1,725,000 shares of Class A Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid by the Company to the Company's Chief Executive Officer during
1998. The Company had no executive officers as of December 31, 1998, and none of
the Company's other executive officers during 1998 earned more than $100,000 in
salary and bonus during 1998.
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<PAGE> 182
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------- ----------------
Name and Restricted Stock All Other
Principal Position Year Salary ($) Bonus ($) Award(s) ($) Compensation ($)
- ------------------ ---- ---------- --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Frederick M. Dawson 1998 $112,500(1) -- 1,725,000(2) $1,050,000(3)
Chief Executive Officer 1997 279,808 $525,000 -- 8,334(4)
1996 -- -- -- --
</TABLE>
(1) Represents payments made to Mr. Dawson from January 1, 1998 to April 1,
1998 pursuant to the terms of his employment agreement. As of the
consummation of the Asset Sale, Mr. Dawson's employment agreement was
terminated and Mr. Dawson received a severance payment which
constituted all amounts remaining to be paid to Mr. Dawson under his
employment agreement.
(2) Represents a restricted stock award for 1,725,000 of Class A Common
Stock (subject to certain vesting provisions) granted pursuant to the
Management Agreement dated February 18, 1998 between the Company and
Phoenix. Mr. Dawson owns a majority interest in Phoenix and controls
its operations as President of its general partner.
(3) Represents a severance payment paid to Mr. Dawson on April 2, 1998,
which constituted all amounts remaining to be paid to Mr. Dawson under
his employment agreement. In connection with this lump sum payment, Mr.
Dawson's employment agreement was terminated.
(4) Represents $7,397 for temporary housing and $937 in group term life
insurance premiums.
Compensation of Directors
For the period prior to April 1, 1998, directors who were not
employees of the Company were paid $40,000 annually plus $1,000 for each board
meeting attended and $1,000 for each day of committee meetings attended if such
meeting occurred on a day other than that of a scheduled meeting of the Board of
Directors. Effective April 1, 1998, directors who are not officers of the
Company were paid $60,000 annually plus $1,500 for each Board meeting attended,
and $1,500 for each day of committee meetings attended if such meeting day
occurred on a day other than that of a scheduled meeting of the Board of
Directors. All directors receive reimbursement of reasonable out-of-pocket
expenses incurred in connection with meetings of the Board of Directors. No
director who was an employee or officer of the Company received separate
compensation for services rendered as a director.
Employment Agreement and Severance Agreements
As a result of the Asset Sale, a change of control of the Company
occurred (as defined in Mr. Dawson's employment agreement with the Company) and
on April 2, 1998, Mr. Dawson received a lump sum payment of $1,050,000, which
constituted all amounts remaining to be paid under his employment agreement. In
connection with this lump sum payment, Mr. Dawson's employment agreement was
terminated.
At various times during the two years prior to the consummation of
the Asset Sale, RISCORP Management Services, Inc., a wholly owned subsidiary of
the Company ("RMS"), entered into employment agreements with certain of the
Company's management employees, including the following executive officers:
Steven J. Berling, Gregory Kuzma, Stephen C. Rece
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<PAGE> 183
and Walter E. Riehemann. Upon the consummation of the Asset Sale, Messrs. Kuzma
and Rece had the right to terminate their employment agreements with RMS and
receive termination benefits due to the material changes in the nature of their
duties and responsibilities in connection with their continued employment with
Zenith. The termination benefits for Messrs. Kuzma and Rece were three times
their base salary (using 1997 salary levels, the termination benefits were
$450,000 and $525,000, respectively). Each of the foregoing officers were also
entitled to receive outplacement services at RMS's expense for one year
following the termination of their employment. The RMS agreements between
Messrs. Berling and Kuzma were assumed by Zenith and each elected to become
employed by Zenith. Notwithstanding Mr. Berling's continued employment with
Zenith, Mr. Berling instituted a claim against the Company asserting his right
to receive severance benefits from the Company equal to three times his 1997
base salary of $225,000. The Company disputed Mr. Berling's right to receive any
additional compensation from the Company under the terms of his employment
agreement and the matter was submitted to binding arbitration for resolution of
the issues in dispute. On February 5, 1999 the arbitrator denied Mr. Berling's
claim in its entirety. In addition, Zenith has employed Messrs. Kuzma and Rece
at annual salaries of $150,000 and $175,000, respectively, plus bonuses and
benefits. Upon assuming the employment agreement of Mr. Kuzma, Zenith and RMS
agreed to share certain costs thereunder for a period of two years.
Specifically, RMS will fund 66.67% of the employer obligations under such
agreement and Zenith will fund 33.33% of such obligations. Mr. Kuzma is entitled
to receive a termination payment upon the termination of his employment with
Zenith of up to three times his base salary.
In connection with the consummation of the Asset Sale, Mr.
Riehemann's employment with the Company was terminated and he received a lump
sum payment of $450,000 from the Company pursuant to the terms of his employment
agreement. Mr. Riehemann is also entitled to receive outplacement services at
RMS's expense for one year following the date of his termination. The Company
also paid Mr. Rece $350,000 in connection with the consummation of the Asset
Sale which was 66.67% of the severance benefit he was entitled to receive
pursuant to the terms of his employment agreement. Zenith agreed to assume the
balance of such severance obligation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 31, 1999, information as to the
Company's Common Stock beneficially owned by: (i) each director of the of the
Company, (ii) each executive officer of the Company named in the Summary
Compensation Table, (iii) all directors and executive officers of the Company as
a group, and (iv) any person who is known by the Company to be the beneficial
owner of more than 5% of the outstanding shares of Class A Common Stock or Class
B Common Stock.
32
<PAGE> 184
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)
<TABLE>
<CAPTION>
Class A Common Class B Common
-------------- --------------
Percent of
Name of Beneficial Owner Number Percent Number Percent Common Stock
- ------------------------ ------ ------- ------ ------- ------------
<S> <C> <C> <C> <C> <C>
William D. Griffin(2) -- -- 22,176,052 91.1% 57.5%
L. Scott Merritt(3) -- -- 2,158,391 8.9 5.6
Blavin & Company,Inc.(4) 1,982,000 13.9% -- -- 5.1
Chap-Cap Partners, L.P.(5) 985,500 6.9 -- -- 2.6
Seth Hamot(6) 805,300 5.7 -- -- 2.1
Thomas K. Albrecht(7) 790,336 5.5 -- -- 2.0
Peter D. Norman(8) 790,336 5.5 -- -- 2.0
Frederick M. Dawson(9) 1,725,000 12.1 -- -- 4.5
Seddon Goode, Jr -- -- -- -- --
George E. Greene III 200 * -- -- *
Walter L. Revell -- -- -- -- --
All directors and executive officers 1,725,200 12.1 -- -- 4.5
as a group
(4 persons)(9)
</TABLE>
- ----------
*Less than 1%
(1) Beneficial ownership of shares, as determined in accordance with
applicable rules promulgated by the Securities and Exchange Commission
(the "Commission") includes shares as to which a person has or shares
voting power and/or investment power. The Company has been informed
that all shares shown are held of record with sole voting and
investment power, except as otherwise indicated.
(2) Mr. Griffin's business address is 1830 Osprey Avenue, Suite 100A,
Sarasota, Florida 34239. Mr. Griffin's shares of Class B Common Stock
are owned of record by RISCORP Group Holding Company L.P. (17,268,841
shares) and William D. Griffin Family Limited Partnership (4,907,211
shares). The general partners of such limited partnerships are Gryphus
Company I ("GI") and Gryphus Company II ("GII"), respectively. Mr.
Griffin is the president, a director and the controlling shareholder of
GI and GII. The business address of GI and GII is Bank of America
Plaza, Suite 1100, 300 N. Fourth Street, Las Vegas, Nevada 89101. All
of the shares of Class B Common Stock noted may be converted into
shares of Class A Common Stock, on a one for one basis. If all of the
Class B Common Stock shares noted were so converted into Class A Common
Stock, Mr. Griffin would beneficially own 60.9% of the shares of Class
A Common Stock. On September 18, 1997, Mr. Griffin resigned as a
director of the Company and all other positions with the Company and
its subsidiaries. The information herein regarding the stock ownership
of Mr. Griffin, GI and GII was obtained from a Schedule 13G filed by
such persons with the Commission on February 20, 1997. The Company
makes no representation as to the accuracy or completeness of the
information reported regarding Mr. Griffin, GI and GII.
(3) Mr. Merritt's business address is 4711 Meadowview Circle, Sarasota,
Florida 34233. Mr. Merritt has sole voting and investment power with
respect to 2,158,391 shares of Class B Common Stock as trustee of
certain irrevocable trusts created by Mr. Griffin for the benefit of
his children. Mr. Griffin disclaims beneficial ownership of those
shares. All of the shares of Class B Common Stock noted may be
converted into shares of Class A Common Stock, on a one for one basis.
If all of the Class B Common Stock shares noted were so converted into
Class A Common Stock, Mr. Merritt would have sole voting and investment
power with respect to 15.5% of the shares of Class A Common Stock. The
information herein regarding the stock ownership of Mr. Merritt was
obtained from a Schedule 13G filed by Mr. Merritt with the Commission
on February 20, 1997. The Company makes no representation as to the
accuracy or completeness of the information reported regarding Mr.
Merritt.
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<PAGE> 185
(4) The business address of Blavin & Company, Inc. is 29621 Northwestern
Highway, Southfield, Michigan 48034. The information herein regarding
the stock ownership of Blavin & Company, Inc. was obtained from a
Schedule 13D filed by Blavin & Company, Inc. on March 27, 1998, and as
amended on April 9, 1998, July 29, 1998, April 1, 1999 and May 7, 1999.
The Company makes no representation as to the accuracy or completeness
of the information reported regarding Blavin & Company, Inc.
(5) Chap-Cap Partners, L.P. shares voting, dispositive power and beneficial
ownership with respect to 985,500 shares of Class A Common Stock with
Chapman Capital L.L.C. and Robert L. Chapman, Jr. The business address
of Chap-Cap Partners, L.P., Chapman Capital , L.L.C. and Mr. Chapman is
725 South Figueroa Street, 23rd Floor, Suite 2369, Los Angeles,
California 90017. The information herein regarding the stock ownership
of Chap-Cap Partners, L.P. was obtained from a Schedule 13D filed by
Chap-Cap Partners, L.P. on March 23, 1999 and as amended on May 11,
1999. The Company makes no representation as to the accuracy or
completeness of the information reported regarding Chap-Cap Partners,
L.P., Chapman Capital, L.L.C. and Mr. Chapman.
(6) Mr. Hamot has sole voting and investment power with respect to 800,300
shares of Class A Common Stock and shared voting and investment power
with respect to 5,000 shares of Class A Common Stock. Of the 805,300
shares beneficially owned by Mr. Hamot, 756,300 shares are owned of
record by Costa Brava Partnership II Limited Partnership ("CBII") and
5,000 shares are owned by Seth W. Hamot, as custodian for Gideon B.
Hamot under the Massachusetts Uniform Transfers to Minors Act ("GBH").
The general partner of CBII is Roark, Reardon & Hamot, Inc. ("RRH").
Mr. Hamot is a principal of RRH. The business address of Mr. Hamot,
CBII and RRH is 121-B Tremont Street, Brighton, Massachusetts 02155.
The information herein regarding the stock ownership of Mr. Hamot, GBH,
CBII and RRH was obtained from a Schedule 13D filed by such persons
with the Commission on September 29, 1998, and as amended on April 21,
1999. Such Schedule 13D also disclosed ownership by certain other
individuals and entities who jointly filed such Schedule 13D with Mr.
Hamot, GBH, CBII, and RRH of an aggregate of 213,000 shares of Class A
Common Stock (or approximately 1.5% of the Class A shares outstanding),
which shares are in addition to those disclosed as beneficially owned
by Mr. Hamot. The Company makes no representations as to the accuracy
or completeness of the information reported regarding Mr. Hamot, GBH,
CBII, RRH or the other individuals and entities identified as joint
filers in such Schedule 13D.
(7) Mr. Albrecht's business address is 4137 Carmichael Road, Suite 330,
Montgomery, Alabama 36106. Represents shares issued to Mr. Albrecht by
the Company in connection with the settlement of claims made by Mr.
Albrecht against the Company.
(8) Mr. Norman's business address is 4137 Carmichael Road, Suite 330,
Montgomery, Alabama 36106. Represents shares issued to Mr. Norman by
the Company in connection with the settlement of claims made by Mr.
Norman against the Company.
(9) Includes 1,054,167 shares of restricted stock granted to Phoenix over
which Mr. Dawson has voting power, and 670,833 shares granted to
Phoenix that have vested or will vest within 60 days of the date hereof
and over which Mr. Dawson has voting and investment power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Management Agreement (the "Management
Agreement") as of February 18, 1998, with Phoenix for the provision of various
management services to the Company immediately following the consummation of the
Asset Sale. Mr. Dawson owns a majority interest in Phoenix, a Florida limited
partnership, and controls its operations as president of the general partner.
Walter E. Riehemann owns a minority interest in Phoenix and serves as vice
president and secretary of the general partner. While neither Mr. Dawson nor Mr.
Riehemann continue as employees of the Company following the consummation of the
Asset Sale, the Management Agreement specifically provides that Mr. Dawson will
hold the titles of President and Chief Executive Officer of the Company and Mr.
Riehemann will hold the titles of Chief Investment Officer, Treasurer and
Secretary of the Company.
34
<PAGE> 186
Pursuant to the terms of the Management Agreement, Phoenix is paid
$100,000 per month, plus expenses, and was granted a restricted stock award for
1,725,000 shares of Class A Common Stock (subject to certain vesting provisions)
in consideration for its management services. The Management Agreement has an
initial term of three years commencing immediately following the consummation of
the Asset Sale, and the Company has the right to extend the term for an
additional year. The Company paid Phoenix a retainer of $600,000 immediately
following the consummation of the Asset Sale which will be applied by Phoenix
against the fees payable by the Company during the final six months of the
initial term. The restricted stock grant will vest monthly over the initial term
of the Management Agreement, and Phoenix will be entitled to all rights
applicable to holders of shares of Class A Common Stock with respect to all such
shares from the date of grant including, without limitation, the right to
receive any dividends or distributions payable on the restricted stock. Pursuant
to the terms of the Management Agreement, the Company will pay Phoenix an amount
which, on an after-tax basis, is sufficient to reimburse the partners of the
Management Company for all taxes (exclusive of state taxes) incurred in
connection with the Section 83(b) election which was filed with respect to such
grant. It is currently anticipated that the amount of this payment will be
approximately $2,900,000, payable in installments as the taxes are due. In the
event the Management Agreement is terminated by the Company prior to the
expiration of its initial term due to (i) the complete liquidation, dissolution
and winding up of all of the business and affairs of the Company including,
without limitation, the final distribution to all shareholders of the Company,
or (ii) the final distribution to the holders of the Class A Common Stock of the
Company, the vesting under the restricted stock grant will accelerate
immediately prior to such event and the Company will make a lump sum payment to
Phoenix equal to the unpaid balance of the amount it would have received in
monthly management fees during the initial term of the Management Agreement.
Effective April 1, 1998, the Company entered into an Accounting
Outsourcing Agreement (the "Accounting Outsourcing Agreement") with Buttner
Hammock & Company, P.A. ("BHC"), pursuant to which BHC provides monthly
accounting, financial reporting, tax return preparation, and certain financial
and tax consulting services. Under the Accounting Outsourcing Agreement, Edward
Buttner has been designated as the Chief Accounting Officer for the Company and
each of its subsidiaries. The term of the Accounting Outsourcing Agreement is
thirty-six (36) months. In consideration for the services provided by BHC, the
Company is to pay BHC a monthly fee of approximately $100,000 during 1998, 1999,
and 2000, plus reasonable out-of-pocket costs. In addition, as defined in the
Accounting Outsourcing Agreement, BHC may also provide certain services to the
Company that are to be billed on an hourly rate basis. In connection with the
execution of the Accounting Outsourcing Agreement, the Company paid BHC a
retainer of $500,000 to be applied against the fees due for the final six months
of the initial term of the Accounting Outsourcing Agreement.
35
<PAGE> 187
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List the following documents filed as part of this report:
1. Financial Statements.
<TABLE>
<S> <C> <C>
- - Independent Auditors' Report.....................................................................................F-1
- - Consolidated Balance Sheets at December 31, 1998 and 1997........................................................F-2
- - Consolidated Statements of Operations for the Years Ended December 31, 1998,
1997, and 1996..............................................................................................F-4
- - Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996...........................................................................F-5
- - Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997, and 1996..............................................................................................F-6
- - Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997, and 1996...........................................................................F-8
- - Notes to Consolidated Financial Statements.......................................................................F-9
</TABLE>
2. Financial Statement Schedules
<TABLE>
<S> <C> <C>
- - I - Summary of investments - other than investments in related parties..........................................F-45
- - II - Condensed financial information of registrant...............................................................F-46
- - IV - Reinsurance.................................................................................................F-49
- - VI - Supplemental information concerning property-casualty insurance operations..................................F-50
</TABLE>
All other schedules are omitted because of the absence of conditions
under which they are required or because the necessary information is provided
in the consolidated financial statements or notes thereto.
3. Exhibits
Set forth in paragraph (c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits
The following are filed as exhibits to this report:
36
<PAGE> 188
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
- --------- -----------
<S> <C> <C>
3.1 - Amended and Restated Articles of Incorporation.* (Incorporated
herein by reference to Exhibit 3.1 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996, Commission File Number
33-99760)
3.2 - Bylaws.* (Incorporated herein by reference to Exhibit 3.2 to
RISCORP's Amendment No. 4 to Form S-1, as of February 28, 1996,
Commission File Number 33-99760)
4.1 - Form of Common Stock Certificate.* (Incorporated herein by
reference to Exhibit 4.1 to RISCORP's Amendment No. 4 to Form
S-1, as of February 28, 1996, Commission File Number 33-99760)
10.1 - Employment and Severance Agreement, dated as of January 1,
1995, by and between RISCORP Management Services, Inc. and
William D. Griffin.* (Incorporated herein by reference to
Exhibit 10.31 to RISCORP's Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number 33-99760)**
10.2 - Form of Registration Rights Agreement dated as of February 1,
1996, by and among RISCORP, Inc., RISCORP Management Services,
Inc., and William D. Griffin*. (Incorporated herein by
reference to Exhibit 10.57 of RISCORP's Amendment No. 4 to Form
5-1, as of February 28, 1996, Commission File Number 33-99760).
10.3 - Asset Purchase Agreement with Zenith Insurance Company dated
June 17, 1997* (Incorporated herein by reference to Exhibit No.
2.1 to RISCORP's Form 8-K, dated July 2, 1997, Commission File
Number 0-27462).
10.4 - Management Agreement of RISCORP, Inc., dated February 18, 1998,
by and between RISCORP, Inc. and subsidiaries and The Phoenix
Management Company, Ltd.* (Incorporated herein by reference to
Exhibit 10.83 to RISCORP's Annual Report on Form 10-K for the
year ended December 31, 1997, Commission File Number
0-27462.)**
10.6 - Outsourcing Services Agreement, dated April 1, 1998, by and
between RISCORP, Inc. and Buttner Hammock & Company, P.A.*
11 - Statement Re Computation of Per Share Earnings.*
21 - List of Subsidiaries of the Registrant.*
27 - Financial Data Schedule (for SEC use only).*
28.1 - Information from Reports Furnished to State Insurance
Regulatory Authorities.* (Incorporated herein by reference to
Exhibit 28.1 1.1 to RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commission File Number 33-99760)
</TABLE>
* Previously filed.
**Management contract or executive compensation plan or arrangement.
37
<PAGE> 189
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, the
Registrant has duly caused this Form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sarasota, State of
Florida, on the 2nd day of June 1999.
RISCORP, INC.
By: /s/ Frederick M. Dawson
-----------------------------------------
Frederick M. Dawson
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS FORM
10-K/A REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Frederick M. Dawson
- -------------------------------
Frederick M. Dawson President, Chief Executive June 2, 1999
Officer and Director
(principal executive officer)
/s/ Edward W. Buttner IV
- -------------------------------
Edward W. Buttner IV Chief Accounting Officer June 2, 1999
/s/ Seddon Goode, Jr.
- -------------------------------
Seddon Goode, Jr. Director June 2, 1999
/s/ George E. Greene III
- -------------------------------
George E. Greene III Director June 2, 1999
/s/ Walter L. Revell
- -------------------------------
Walter L. Revell Director June 2, 1999
</TABLE>
38
<PAGE> 190
Independent Auditors' Report
The Board of Directors and Shareholders
RISCORP, Inc.:
We have audited the consolidated financial statements of RISCORP, Inc. and
subsidiaries ("the Company") as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the related financial statement schedules listed in the accompanying index.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RISCORP, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Fort Lauderdale, Florida
March 5, 1999, except as to
Notes 1(b) and 20, which
are as of March 19, 1999
F-1
<PAGE> 191
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost
$6,666 in 1998 and $142,876 in 1997) $ 6,716 $145,571
Fixed maturities available for sale, at fair value (amortized cost
$9,047 in 1998 and $53,437 in 1997)--restricted 9,264 53,820
Fixed maturities held to maturity, at amortized cost (fair value
$24,347 in 1997) -- 24,090
-------- --------
Total investments 15,980 223,481
Cash and cash equivalents 6,864 16,858
Cash and cash equivalents--restricted 14,842 13,295
Receivable from Zenith 49,933 --
Premiums receivable, net -- 100,183
Accounts receivable--other 7,674 16,720
Recoverable from Florida Special Disability Trust Fund -- 45,211
Reinsurance recoverables -- 184,251
Prepaid reinsurance premiums -- 29,982
Prepaid managed care fees -- 8,420
Accrued reinsurance commissions -- 37,188
Income taxes recoverable 17,277 --
Deferred income taxes 3,141 22,120
Property and equipment, net 337 26,665
Goodwill -- 15,286
Other assets 7,345 9,990
-------- --------
Total assets $123,393 $749,650
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 192
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $ -- $ 437,038
Unearned premiums -- 56,324
Notes payable of parent company -- 15,000
Notes payable of subsidiaries -- 609
Deposit balances payable -- 5,512
Accrued expenses and other liabilities 27,827 65,885
Net assets in excess of cost of business acquired -- 5,749
--------- ---------
27,827 586,117
--------- ---------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized;
shares issued: 14,258,671 and 11,855,917 in 1998 and 1997,
respectively 143 120
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 or outstanding -- --
Additional paid-in capital 140,688 135,974
Retained earnings (deficit) (45,680) 25,195
Treasury Class A Common Stock--at cost, 112,582 shares (1) (1)
Accumulated Other Comprehensive Income:
Net unrealized gains on investments 173 2,002
--------- ---------
Total shareholders' equity 95,566 163,533
--------- ---------
Total liabilities and shareholders' equity $ 123,393 $ 749,650
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 193
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Premiums earned $ 25,819 $ 179,729 $ 173,557
Fees and other income 5,906 20,369 31,733
Net realized gains 4,280 1,546 105
Net investment income 7,103 16,447 12,194
------------ ----------- -----------
Total revenues 43,108 218,091 217,589
------------ ----------- -----------
Expenses:
Losses and loss adjustment expenses 24,016 104,052 114,093
Unallocated loss adjustment expenses 2,561 19,311 12,916
Commissions and general and administrative expenses 34,191 70,800 65,685
Interest 676 1,919 2,795
Depreciation and amortization 2,736 7,423 11,500
------------ ----------- -----------
Total expenses 64,180 203,505 206,989
------------ ----------- -----------
Income (loss) from operations (21,072) 14,586 10,600
Loss on sale of net assets to Zenith (47,747) -- --
------------ ----------- -----------
Income (loss) before income taxes (68,819) 14,586 10,600
Income taxes 2,056 7,300 8,202
------------ ----------- -----------
Net income (loss) $ (70,875) $ 7,286 $ 2,398
============ =========== ===========
Per share data:
Net income (loss) per common share-basic $ (1.91) $ 0.20 $ 0.07
============ =========== ===========
Net income (loss) per common share-diluted $ (1.91) $ 0.20 $ 0.07
============ =========== ===========
Weighted average common shares outstanding 37,011,864 36,891,864 34,647,986
============ =========== ===========
Weighted average common shares and common share
equivalents outstanding 37,011,864 37,115,672 36,405,588
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 194
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
--------------------------------------------
(IN THOUSANDS)
NET
CLASS A CLASS B ADDITIONAL UNREALIZED RETAINED TOTAL
COMMON COMMON PAID-IN GAINS ON UNEARNED EARNINGS TREASURY SHAREHOLDERS'
STOCK STOCK CAPITAL INVESTMENTS COMPENSATION (DEFICIT) STOCK EQUITY
-------- ------- ---------- ------------ ------------ --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ -- $ 281 $ 349 $ 510 $(215) $ 15,232 $-- $ 16,157
Net income -- -- -- -- -- 2,398 -- 2,398
Issuance of common stock 72 -- 125,789 -- -- -- -- 125,861
Conversion of common stock 38 (38) -- -- -- -- -- --
Stock options exercised 2 -- 63 -- -- -- -- 65
Issuance of common stock for
acquisitions 8 -- 10,891 -- -- -- -- 10,899
Change in unearned compensation -- -- 721 -- (331) -- -- 390
Change in net unrealized gains
on investments -- -- -- 1,259 -- -- -- 1,259
Other -- -- -- -- -- 279 -- 279
----- ----- --------- ------- ----- -------- --- ---------
BALANCE, DECEMBER 31, 1996 120 243 137,813 1,769 (546) 17,909 -- 157,308
Net income -- -- -- -- -- 7,286 -- 7,286
Purchase of treasury stock -- -- 1 -- -- -- (1) --
Change in unearned compensation -- -- (1,840) -- 546 -- -- (1,294)
Change in net unrealized gains on
investments -- -- -- 233 -- -- -- 233
----- ----- --------- ------- ----- -------- --- ---------
BALANCE, DECEMBER 31, 1997 120 243 135,974 2,002 -- 25,195 (1) 163,533
Net loss -- -- -- -- -- (70,875) -- (70,875)
Issuance of common stock 26 -- 4,714 -- -- -- -- 4,740
Change in net unrealized gains
on investments -- -- -- (1,829) -- -- -- (1,829)
Other adjustments (3) -- -- -- -- -- -- (3)
----- ----- --------- ------- ----- -------- --- ---------
BALANCE, DECEMBER 31, 1998 $ 143 $ 243 $ 140,688 $ 173 $ -- $(45,680) $(1) $ 95,566
===== ===== ========= ======= ===== ======== === =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 195
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(70,875) $ 7,286 $ 2,398
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 2,736 7,423 11,500
Loss on sale of net assets to Zenith 47,747 -- --
Loss (gain) on disposal of property and equipment (99) 291 294
Net realized gain on sale of investments (4,280) (1,545) (140)
Gain on sale of personal residence (1) -- --
Net amortization of discounts on investments 166 14 174
Issuance of RISCORP, Inc. stock 4,740 -- --
Other 1,181 -- --
Change in:
Premiums receivable, net 16,627 22,026 (24,275)
Accounts receivable--other (1,558) (5,104) (11,676)
Recoverable from Florida State Disability Trust Fund, net 659 4,295 2,331
Reinsurance recoverables (30,051) (3,553) (76,971)
Prepaid reinsurance premiums 8,301 19,807 (27,908)
Prepaid managed care fees 2,238 23,537 (15,589)
Accrued reinsurance commissions (1,481) (16,770) (12,870)
Income taxes recoverable (17,277) -- --
Deferred income taxes 20,181 431 (8,448)
Other assets 495 (3,249) 21,026
Losses and loss adjustment expenses 25,253 (21,502) 106,484
Unearned premiums (13,147) (46,280) 30,891
Accounts payable--related party -- (1,171) 171
Accounts and notes receivable--related party -- -- 10,754
Accrued expenses and other liabilities (29,140) (8,880) 19,909
-------- --------- ---------
Net cash provided by (used in) operating activities (37,585) (22,944) 28,055
-------- --------- ---------
Cash flows from investing activities:
Proceeds from:
Sale of fixed maturities--available for sale 80,404 110,299 88,900
Maturities of fixed maturities--available for sale 6,129 20,243 6,295
Maturities of fixed maturities--held to maturity 6,000 1,885 4,400
Sale of equity securities 1,324 4,284 732
Sale of equipment 255 158 532
Sale of personal residence 436 -- --
Purchase of:
Fixed maturities--available for sale (69,215) (100,499) (191,153)
Fixed maturities--held to maturity (5,874) (1,237) (2,452)
Equity securities -- (637) (3,952)
Property and equipment (971) (4,477) (13,215)
Personal residence (435) -- --
Cash received from Zenith for sale of net assets 35,000 -- --
</TABLE>
F-6
<PAGE> 196
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from investing activities (continued):
Purchase (net of cash acquired) of:
Cash and investments not yet transferred to Zenith 7,404 -- --
CompSource and Insura -- -- (10,733)
Atlas Insurance Company -- -- (5,573)
NARM -- -- 2,717
Virginia Funds -- -- 1,300
IAA -- -- 282
RISC -- -- (538)
Maryland NARM Fund -- 134 --
-------- -------- ---------
Net cash provided by (used in) investing activities 60,457 30,153 (122,458)
-------- -------- ---------
Cash flows from financing activities:
Increase (decrease) in deposit balances payable (1,598) 725 968
Decrease (increase) in unearned compensation -- 546 (331)
Transfer of cash and cash equivalents to restricted balances (30,856) (13,295) --
Purchase of treasury stock subject to put options -- (2,100) --
Principal repayments of notes payable (412) (694) (30,202)
Proceeds of initial offering of common stock -- -- 127,908
Stock options exercised -- -- 65
Other, net -- (1,840) (1,046)
-------- -------- ---------
Net cash provided by (used in) financing activities (32,866) (16,658) 97,362
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents (9,994) (9,449) 2,959
Cash and cash equivalents, beginning of year 16,858 26,307 23,348
-------- -------- ---------
Cash and cash equivalents, end of year $ 6,864 $ 16,858 $ 26,307
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 493 $ 1,928 $ 3,689
======== ======== =========
Income taxes $ 2,341 $ 6,566 $ 15,127
======== ======== =========
Supplemental schedule of noncash investing and financing activities:
As of April 1, 1998, the Company sold substantially all of its insurance
assets and transferred certain liabilities to Zenith. In conjunction with
the sale and transfer, a $49,933 receivable from Zenith was recorded as of
December 31, 1998 [see Note 1(b)]
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 197
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Net income (loss) $(70,875) $ 7,286 $2,398
-------- ------- ------
Other comprehensive income (loss), before income taxes:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during year 194 (2,392) 2,044
Income tax expense (benefit) related to items of other
comprehensive income (loss) 68 (837) 696
-------- ------- ------
Other comprehensive income (loss), net of income taxes 126 (1,555) 1,348
-------- ------- ------
Total comprehensive income (loss) $(70,749) $ 5,731 $3,746
======== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 198
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND SALE TO ZENITH INSURANCE COMPANY
(A) BACKGROUND
RISCORP, Inc. ("RISCORP") was formed on February 28, 1996 through the
reorganization and consolidation of several affiliated companies (collectively,
the "Company") which were under the common control of a majority shareholder,
who, at that time, was the Chairman of the Board and Chief Executive Officer of
RISCORP. The reorganization and consolidation qualified as a tax-free
reorganization of commonly controlled entities and was accounted for in a manner
similar to a "pooling of interests."
On November 9, 1996, at a special meeting of the Board of Directors of
RISCORP, the Board voted to establish a Strategic Alternatives Committee to
evaluate alternatives to maximize shareholder value, including, without
limitation, potential acquisitions, joint ventures, mergers, strategic
alliances, and the sale of all or part of RISCORP and its subsidiaries. The
actions of the Strategic Alternatives Committee during the period from November
1996 through June 1997 culminated in the execution of the Asset Purchase
Agreement on June 17, 1997 [as more fully described in Note 1(b)] for the sale
and transfer of certain of RISCORP's and its subsidiaries' assets and
liabilities to another insurer for cash. In addition, the Florida Insurance
Department requested the purchaser to provide an interim reinsurance agreement
and cut-through endorsement on all inforce business as of June 17, 1997 and all
new and renewed business written after June 17, 1997. This reinsurance agreement
only provided coverage for Florida workers' compensation policyholders and was
approved by the Florida Insurance Department.
Following RISCORP's inability to timely file its Annual Report on Form
10-K for the year ended December 31, 1996 or its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, RISCORP's Class A Common Stock was
delisted on July 2, 1997 by the NASDAQ Stock Market's National Market, on which
its stock was traded. RISCORP filed its 1996 Form 10-K/A on October 28, 1997 and
amended that filing on February 27, 1998 in response to comments received from
the Securities and Exchange Commission ("SEC") in connection with the
preparation of RISCORP's special meeting proxy statement which was mailed to
shareholders on March 3, 1998. Despite RISCORP's timely filing of all periodic
reports for all periods subsequent to the third quarter of 1997, RISCORP's Class
A Common Stock has remained delisted, and RISCORP has no intention to seek
readmission for listing on NASDAQ or any national securities exchange.
(B) SALE TO ZENITH INSURANCE COMPANY
As of April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith
Insurance Company ("Zenith"). 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.
In connection with the closing of this transaction, Zenith paid
RISCORP $35 million in cash, of which $10 million was placed in escrow pursuant
to the terms of the Asset Purchase Agreement. The final purchase price to be
paid by Zenith will be the amount by which the book value of the transferred
F-9
<PAGE> 199
assets exceeds the book value of the transferred liabilities assumed by Zenith
at closing. On June 9, 1998, RISCORP delivered to Zenith a balance sheet (the
"Proposed Business Balance Sheet"), representing the audited statement of
transferred assets and transferred liabilities as of Apri1 1, 1998. The Proposed
Business Balance Sheet indicated RISCORP's proposal as to the final purchase
price of approximately $141 million, less the $35 million previously paid by
Zenith.
Subsequent to June 9, 1998, Zenith suggested adjustments to the
Proposed Business Balance Sheet that totaled approximately $211 million. Those
suggested adjustments principally related to differences in the estimation of
loss and loss adjustment expense reserves and the estimate of the allowance for
uncollectible receivables. The adjustments proposed by Zenith reflected its
position that the aggregate value of the liabilities assumed by Zenith exceeded
the value of the assets transferred by approximately $70 million.
On July 10, 1998, RISCORP and Zenith engaged a nationally recognized
independent accounting firm to serve as neutral auditors and neutral actuaries
(the "Independent Expert") to resolve the items in dispute between the parties
and to determine the Final Business Balance Sheet, as that term is defined in
the Asset Purchase Agreement. On March 19, 1999, the Independent Expert
delivered its determination of the Final Business Balance Sheet and, as such,
its conclusion that the book value of the transferred assets exceeded the book
value of the transferred liabilities assumed by Zenith at closing by $92.3
million. Therefore, pursuant to the terms of the Asset Purchase Agreement and
given the $35 million previously paid by Zenith at closing, Zenith is required
to pay an additional $57.3 million in immediately available funds on or before
March 26, 1999, plus interest thereon of 6.13 percent from April 1, 1998 through
the final payment date. Of this amount, $53.5 million, plus the interest
component, is required to be paid to RISCORP, and $3.8 million is required to be
deposited into escrow to secure the Company's indemnification obligations to
Zenith. RISCORP has reported the results of the Independent Expert's
determinations in the accompanying 1998 consolidated financial statements;
however, RISCORP is in the process of analyzing the basis for the adjustments to
the Proposed Business Balance Sheet and is evaluating its alternatives related
thereto.
In accordance with the terms of the Asset Purchase Agreement, 15
percent of the total purchase price is required to be held in escrow for a
period of two years from the Closing Date. The escrowed funds are to be used to
indemnify Zenith against any liabilities or obligations (other than those
transferred) arising out of or related to any misrepresentation, breach, or
nonfulfillment of any covenant or agreement by the Company. The escrowed funds
are to be invested in United States government debt obligations or in money
market funds secured by such debt obligations, with such funds to be disbursed
pursuant to the terms of the Escrow Agreement. Interest income on the escrowed
funds is to be paid to RISCORP at the end of each calendar quarter.
In connection with the closing of this transaction, the parties
entered into a letter agreement dated April 1, 1998, pursuant to which RISCORP
retained certain assets necessary for each of its insurance subsidiaries to
maintain the minimum capital and surplus required by law to remain in good
standing in each state where each company is licensed (the "Definite
Exclusions"). In accordance with the provisions of this letter agreement,
RISCORP's insurance subsidiaries retained marketable securities with carrying
values of $11.4 million as of April 1, 1998. Zenith has subsequently disputed
RISCORP's determination of the amount of minimum capital and surplus required to
be retained pursuant to the letter agreement.
In addition to the aforereferenced insurance company minimum capital
and surplus amounts, in the event that RISCORP is unable to transfer to Zenith
(i) certain certificates of deposit and securities held by regulatory
authorities, (ii) the stated capital of the selling entities other than the
insurance subsidiaries, or (iii) certain certificates of deposit and securities
held in trust under certain reinsurance
F-10
<PAGE> 200
agreements prior to the date that Zenith is required to pay the final purchase
price, such assets, at Zenith's option and in its sole discretion, are to be
deemed not to be transferred to Zenith (the "Possible Exclusions"). As of
December 31, 1998, the amortized cost of such cash, certificates of deposit, and
securities that were identified as a transferred asset, but that had not been
physically transferred to Zenith, totaled $7.4 million. If the retention by
RISCORP of the Definite Exclusions or any of the Possible Exclusions results in
the value of the transferred liabilities to exceed the value of the transferred
assets, the minimum purchase price specified in the Asset Purchase Agreement is
to be reduced.
Pursuant to various provisions of the Asset Purchase Agreement, Zenith
has provided notice to RISCORP of certain alleged breaches of the
representations, warranties, or covenants made by RISCORP. RISCORP has disputed
the allegations asserted by Zenith and has also provided notice to Zenith of the
occurrence of various indemnifiable events for which RISCORP believes it is
entitled to seek indemnification from Zenith. On October 16, 1998, RISCORP filed
suit against Zenith in federal court in Tampa, Florida (the "Florida
Litigation"). RISCORP's complaint was amended on January 25, 1999, and sets
forth numerous claims arising out of Zenith's failure to indemnify RISCORP in
accordance with the terms of the Asset Purchase Agreement, as well as for
Zenith's conversion of certain funds that RISCORP had on deposit with the South
Carolina Insurance Department.
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 "New York Litigation"). The complaint seeks an
unspecified total amount of damages, but the amount of compensatory damages
sought is in excess of $30 million, together with an unspecified amount of
punitive damages and attorneys' fees. Zenith's claims include, among others,
that the Company (i) breached certain representations and warranties set forth
in the Asset Purchase Agreement, (ii) failed to transfer certain assets to
Zenith, (iii) failed to operate its business in the ordinary course, (iv) failed
to reimburse Zenith for certain payments, and (v) fraudulently induced Zenith to
execute the Asset Purchase Agreement due to certain alleged verbal
representations made with respect to RISCORP's Year 2000 compliance.
While the Asset Purchase Agreement provides that the decision of the
Independent Expert is final, binding, and conclusive, given the litigation
between the parties currently pending in both Florida and New York, there can be
no assurance that Zenith will honor its obligations under the Asset Purchase
Agreement and deliver the balance of the purchase price due within the requisite
five business day period.
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 to discontinue writing any new or renewal insurance
business for an indefinite period of time.
F-11
<PAGE> 201
The Proposed Business Balance Sheet, as of April 1, 1998, indicated
RISCORP's calculation of its proposal of the final purchase price to be
approximately $141 million, calculated as follows:
<TABLE>
<S> <C>
TRANSFERRED ASSETS
Investments:
Fixed maturities available for sale, at fair value
(amortized cost $112,937,628) $115,535,609
Fixed maturities available for sale, at fair value
(amortized cost $59,447,736)--restricted 59,843,713
Fixed maturities held to maturity, at amortized cost
(fair value $14,602,160) 14,437,092
------------
Total investments 189,816,414
Cash and cash equivalents 15,167,683
Cash and cash equivalents--restricted 14,141,010
Premiums receivable, net 83,556,333
Accounts receivable--other, net 10,603,762
Recoverable from Florida Special Disability Trust Fund 44,552,000
Reinsurance recoverables 213,667,000
Prepaid reinsurance premiums 21,680,084
Prepaid managed care fees 6,182,364
Accrued reinsurance commissions 38,669,647
Property and equipment, net 25,221,907
Goodwill 14,068,754
Other assets 2,134,412
------------
Total assets transferred to Zenith Insurance Company $679,461,370
============
TRANSFERRED LIABILITIES
Losses and loss adjustment expenses $461,656,421
Unearned premiums 43,177,363
Notes payable of parent company 15,000,000
Notes payable of subsidiaries 197,018
Deposit balances payable 3,913,334
Accrued expenses and other liabilities 8,918,875
Net assets in excess of cost of business acquired 5,543,563
Total liabilities assumed by Zenith Insurance Company $538,406,574
------------
Excess of assets transferred over liabilities assumed $141,054,796
============
</TABLE>
The receivable from Zenith included in the accompanying December 31, 1998
consolidated balance sheet differs from the Proposed Business Balance Sheet due
primarily to the retention by RISCORP of certain cash, certificates of deposits,
and securities that were identified as transferred assets, but had not been
physically transferred to Zenith, certain adjustments to the Proposed Business
Balance Sheet
F-12
<PAGE> 202
subsequently agreed to by RISCORP and Zenith, and the net adjustment determined
by the Independent Expert as follows:
<TABLE>
<S> <C> <C>
Excess of assets transferred over liabilities assumed at April 1, 1998 $141,054,796
------------
Less: Payment of minimum purchase price made by Zenith on
April 2, 1998 $35,000,000
Cash and securities not yet transferred to Zenith 7,403,679
Subsequent agreed-upon adjustments 971,323
Adjustment determined by the Independent Expert 47,747,097 91,122,099
------------ ------------
Receivable from Zenith as of December 31, 1998 $ 49,932,697
============
</TABLE>
The $49.9 million net receivable from Zenith is included in the
accompanying December 31, 1998 consolidated balance sheet. The $47.7 million
adjustment, as determined by the Independent Expert, is included in the
accompanying 1998 consolidated statement of operations. In addition, interest of
$1.8 million from the Closing Date through December 31, 1998 is included in
other assets in the accompanying December 31, 1998 consolidated balance sheet
and in net investment income in the accompanying 1998 consolidated statement of
operations.
(C) INITIAL PUBLIC OFFERING OF COMMON STOCK
On February 29, 1996, RISCORP completed an Initial Public Offering
("IPO") of common stock with the issuance of 10.935 million shares of Class A
Common Stock. Of the shares offered, 7.2 million shares were sold by RISCORP and
3.735 million shares were sold by the majority shareholder of RISCORP. The
following table summarizes certain IPO information:
<TABLE>
<CAPTION>
PRICE UNDERWRITING
NUMBER PER SHARE DISCOUNTS AND NET
SHARES SOLD BY OF SHARES TO PUBLIC COMMISSIONS PROCEEDS
-------------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
RISCORP 7,200,000 $19 $ 8,892,000 $127,908,000
Shareholder 3,735,000 $19 4,612,725 66,352,275
---------- ----------- ------------
Total 10,935,000 $13,504,725 $194,260,275
========== =========== ============
</TABLE>
The foregoing net proceeds are before deducting other expenses of $2
million incurred in conjunction with the IPO.
RISCORP used the proceeds from the IPO to repay outstanding debt, fund
acquisitions, increase the capital and surplus of RISCORP's insurance
subsidiaries, and fund general corporate matters.
RISCORP did not receive any proceeds from the sale of Class A Common
Stock by the majority shareholder; however, a portion of the majority
shareholder's proceeds was used to repay $9.8 million in his then outstanding
indebtedness to RISCORP.
F-13
<PAGE> 203
(D) BUSINESS
Prior to April 1, 1998, RISCORP, through its wholly-owned insurance
subsidiaries, was principally engaged in providing workers' compensation
insurance under a managed care philosophy. RISCORP provided managed care
workers' compensation products and services to clients throughout the Southeast
and other select markets. In addition, RISCORP, through its wholly-owned
non-insurance subsidiaries, provided reinsurance, risk management advisory
services, and insurance managerial services.
As more fully described in Note 1(b), RISCORP and certain of its
subsidiaries entered into an Asset Purchase Agreement with Zenith for the sale
of substantially all of their assets and the transfer of certain liabilities in
exchange for cash. The Company's computer systems and proprietary computer
software, including the policy issue, management system, and claims systems,
were included in the assets sold to Zenith. Management believes the computer
programs retained by the Company to support the current operations are presently
Year 2000 compliant.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with GAAP
requires the use of assumptions and estimates in reporting certain assets and
liabilities and related disclosures. Actual results could differ from those
estimates.
(B) RECOGNITION OF REVENUES
Workers' compensation and employer liability insurance premiums
consisted of deposit premiums and installment premiums billed under the terms of
the policy, and estimates of retrospectively-rated premiums based on experience
incurred under those contracts. Unbilled installment premiums and audit premiums
were recognized as revenue on the accrual basis. Premiums were primarily
recognized as revenue over the period to which the premiums related using the
daily pro rata basis with a liability for unearned premiums recorded for the
excess of premiums billed over the premiums earned.
Service fee revenue was recorded as a percentage of standard earned
premiums of the underlying insurance policies of the facilities managed, in
accordance with the specific contractual provisions.
Reinsurance premiums were recognized as revenue on a pro rata basis
over the contract terms with a liability for unearned premiums established for
the unexpired portion of the contracts.
As more fully described in Note 1(b), the Company transferred the
unearned premium reserve to Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.
(C) FLORIDA SPECIAL DISABILITY TRUST FUND
The State of Florida operates a Special Disability Trust Fund ("SDTF")
for the purpose of providing benefits to workers who have a pre-existing
condition and incur a second or subsequent injury.
F-14
<PAGE> 204
The SDTF is financed through annual assessments imposed on workers'
compensation insurers, which assessments are based on a percentage of net
workers' compensation premiums written. The Company submitted claims to the SDTF
for recovery of applicable claims paid on behalf of the Company's insureds. The
Company estimated such recoveries based on industry statistics applied to
ultimate projected claims. At December 31, 1997, the Company's actuarially
estimated recoverable amount exceeded the amount of the estimated recoveries on
its reported claims to the SDTF.
As more fully described in Note 1(b), the Company transferred the SDTF
recoverable to Zenith on April 1, 1998, in accordance with the terms of the
Asset Purchase Agreement.
(D) INVESTMENTS
Fixed maturity investments are securities that mature at a specified
future date more than one year after being acquired. Fixed maturity securities
that the Company intends to hold until maturity are classified as "fixed
maturities held to maturity" and are carried at amortized cost. Amortized cost
is based on the purchase price and is adjusted periodically so the carrying
value of the security will equal the face or par value at maturity. Fixed
maturity securities that may be sold prior to maturity due to changes in
interest rates, prepayment risks, liquidity needs, tax planning purposes, or
other similar factors, are classified as "available for sale" and are carried at
fair value as determined using values from independent pricing services.
Equity securities (common and nonredeemable preferred stocks) are
carried at fair value. If the current market value of equity securities is
higher than the original cost, the excess is an unrealized gain, and if lower
than the original cost, the difference is an unrealized loss. The net unrealized
gains or losses on equity securities, net of the related deferred income taxes,
are reported as a separate component of shareholders' equity, along with the net
unrealized gains or losses on fixed maturity securities available for sale.
Realized gains and losses on sales of investments are recognized as
income or loss on the specific identification basis, as of the trade date.
Impairment losses, if any, resulting from other-than-temporary declines in fair
value are included in net investment income.
As more fully described in Note 1(b), the Company transferred the
major portion of its investment portfolio, including restricted investments, to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.
(E) LOSSES AND LOSS ADJUSTMENT EXPENSES
The liabilities for losses and loss adjustment expenses were based on
an actuarial determination and represent management's best estimate of the
ultimate cost of losses and loss adjustment expenses that were unpaid at the
balance sheet date, including incurred but not reported claims. Although the
liabilities were supported by actuarial projections and other data, such
liabilities were ultimately based on management's reasoned expectations of
future events. The liabilities for losses and loss adjustment expenses were
continually reviewed and, as adjustments become necessary, such adjustments were
included in current operations. Management believes that the liabilities for
losses and loss adjustment expenses at December 31, 1997 were adequate to cover
the ultimate liability. However, the ultimate settlement of losses and the
related loss adjustment expenses may vary from the amounts reported in the
accompanying financial statements.
The Company recognized reinsurance recoveries, estimated recoveries
from the SDTF, and subrogation from third parties as reductions to losses
incurred.
F-15
<PAGE> 205
As more fully described in Note 1(b), the Company transferred the
liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998,
in accordance with the terms of the Asset Purchase Agreement.
(F) REINSURANCE
Premiums and losses and loss adjustment expenses ceded by the Company
under reinsurance contracts in which the Company was provided indemnification
against loss or liability relating to specified insurance risks were reported as
reductions to premiums earned and losses and loss adjustment expenses,
respectively. Amounts recoverable for ceded losses and loss adjustment expenses
and ceded unearned premiums under reinsurance agreements were reported as assets
in the accompanying consolidated balance sheets. Reinsurance contracts that did
not transfer risk were accounted for as deposits in the accompanying
consolidated balance sheets.
As more fully described in Note 1(b), the Company transferred the
reinsurance assets and liabilities to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.
(G) INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets
and deferred tax liabilities are established for temporary differences between
the financial reporting basis and tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
recovered or settled. Such temporary differences are principally related to the
deferral of policy acquisition costs, tax-basis discount on reserves for unpaid
losses and loss adjustment expenses, the deductibility of unearned premiums, the
allowance for uncollectible premiums receivable, and the amortization of
goodwill. A valuation allowance has been established to reduce the net deferred
tax asset to an amount that, in the opinion of management, is more likely than
not to be realized.
(H) POLICY ACQUISITION COSTS
The costs of acquiring and renewing business, principally commissions,
premium taxes, and other underwriting expenses, were deferred to the extent
recoverable and amortized over the terms of the related policies. Anticipated
investment income was considered in the determination of recoverability.
Unearned ceding commissions were reported as a reduction to deferred policy
acquisition costs. The policy acquisition costs deferred in 1998, 1997, and 1996
totaled $8.9 million, $41 million, and $31.8 million, respectively. The 1998,
1997, and 1996 policy acquisition costs amortized totaled $11.4 million, $49.2
million, and $33.7 million, respectively. The deferred policy acquisition costs
were included in other assets in the accompanying December 31, 1997 consolidated
balance sheet. The amortization of policy acquisition costs was included in
commissions and general and administrative expenses in the accompanying
consolidated statements of operations.
As more fully described in Note 1(b), the Company transferred the
deferred policy acquisition cost asset to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.
(I) GOODWILL
The costs in excess of net assets acquired, or goodwill, represent the
unamortized excess of the cost over the underlying net assets of companies
acquired. The goodwill has been amortized on a straight-line basis over periods
ranging from five to 15 years. The amortization expense for 1998, 1997,
F-16
<PAGE> 206
and 1996 totaled $0.9 million, $3.3 million, and $7.9 million, respectively, and
accumulated amortization as of December 31, 1997 was $11.3 million.
The Company periodically reviews its assets subject to Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") and,
when events or changes in circumstances indicate that the carrying amount of an
asset may no longer be fully recoverable, the Company tests the recoverability
of the asset principally by estimating the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying value of the asset, the Company recognizes an impairment loss.
The measurement of an impairment loss is based on the carrying amount and
estimated fair value of the asset.
During 1996, using the criteria contained in SFAS 121, the Company
recognized an impairment loss of $3.2 million and reduced goodwill that was
recorded in 1995 in conjunction with the purchase of RISCORP West, formerly
known as the Self Insurers Service Bureau, Inc. ("SISB"). The Company's
impairment assessment was primarily based on the closing of former SISB offices
in certain states and the Company's then current focus on at-risk business. The
impairment loss was recorded as a component of depreciation and amortization in
the accompanying 1996 consolidated statement of operations. The unamortized
goodwill related to the SISB purchase was $0 and $432,000 at December 31, 1998
and 1997, respectively.
In 1996, the Company recorded an impairment loss of $2.8 million in
connection with the acquisition of Independent Association Administrators, Inc.
The remaining unamortized goodwill relating to that acquisition was $0 and $7.9
million at December 31, 1998 and 1997, respectively.
The net assets acquired in excess of cost, or "negative" goodwill,
have been amortized on a straight-line basis over 10 years. The income from
amortization of negative goodwill totaled $0.2 million, $0.8 million, and $0.9
million for 1998, 1997, and 1996, respectively. The accumulated amortization as
of December 31, 1997 was $2.5 million.
As more fully described in Note 1(b), the Company transferred the
goodwill, including "negative" goodwill, to Zenith on April 1, 1998, in
accordance with the terms of the Asset Purchase Agreement.
(J) PROPERTY AND EQUIPMENT
Property and equipment have been recorded at cost less accumulated
depreciation. Depreciation was computed using the straight-line method over the
useful lives of the related assets. Property and equipment recorded under
capital lease arrangements was being amortized over the shorter of the asset's
useful life or the lease term.
The Company capitalized incremental internal and external costs
directly related to internally developed software to meet the Company's needs.
Those software development projects represented major system enhancements or
replacements of existing operating management information systems.
Capitalization commenced when management had committed to funding the software
project and it was probable that upon completion the software would perform its
intended function. The capitalized costs were recorded as property and equipment
and amortized using the straight-line method over three years. In 1998 and 1997,
the Company capitalized costs of $0.3 million and $1.3 million, respectively,
and recorded amortization expense for internally developed software costs of
$0.1 million, $0.3 million, and $0.4 million for 1998, 1997, and 1996,
respectively.
F-17
<PAGE> 207
As more fully described in Note 1(b), the Company transferred the
major portion of the property and equipment, including the internally developed
software, to Zenith on April 1, 1998, in accordance with the terms of the Asset
Purchase Agreement.
(K) INVESTMENT IN JOINT VENTURE
The Company accounted for its 50 percent investment in a joint venture
arrangement on the equity basis of accounting whereby the Company's recorded
investment was adjusted for its proportionate share of earnings or losses of the
joint venture.
(L) CASH AND CASH EQUIVALENTS
The Company considered all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The Company had restricted cash at December 31, 1998 of $14.8 million,
consisting of $10 million held in escrow in connection with the sale to Zenith,
$3.8 million on deposit with various governmental agencies, $0.6 million held in
escrow in connection with the acquisition of RISCORP National Insurance Company
(this escrow arrangement expires in March 1999 and the Company expects that
these funds held in escrow will be released by March 31, 1999), $0.3 million
pledged to secure a letter of credit, and $0.1 million held in trust in
connection with a fronting agreement between Virginia Surety Insurance Company,
Inc. and RISCORP Management Services, Inc.
(M) BAD DEBT ALLOWANCE
The bad debt allowance was based on the Company's experience with
uncollectible premiums receivable and represents the Company's best estimate of
the ultimate uncollectible amounts incurred through the balance sheet date. The
premiums receivable reported in the accompanying consolidated balance sheets
have been shown net of this valuation allowance.
As more fully described in Note 1(b), the Company transferred the
premiums receivable balance and related allowance for uncollectible amounts to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.
(N) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the presentation of two earnings per share ("EPS")
calculations, basic EPS and diluted EPS, in the consolidated statements of
operations; SFAS 128 also requires restatement of all prior-period EPS data that
is presented in the financial statements. Basic EPS is computed by dividing net
income or loss by the weighted average number of shares outstanding for the
period. Diluted EPS is computed by dividing net income by the weighted average
number of shares outstanding for the period plus the shares for the dilutive
effect of stock options, contingent shares, and other common stock equivalents.
The components of the weighted average shares used in the EPS
calculations are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Average outstanding shares used for
calculating basic EPS 37,011,864 36,891,864 34,647,986
Effect of stock options -- 223,808 1,757,602
---------- ---------- ----------
Average outstanding shares used for
calculating diluted EPS 37,011,864 37,115,672 36,405,588
========== ========== ==========
</TABLE>
F-18
<PAGE> 208
(O) STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for
stock-based compensation that is based on the fair value of stock options and
similar instruments and encourages, but does not require, adoption of that
method. The Company has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measuring
compensation cost. However, as required by SFAS 123, the Company has disclosed
pro forma net income or loss per share for 1998, 1997, and 1996, as if the
provisions of SFAS 123 had been adopted.
(P) YEAR 2000
As more fully described in Note 1(b), the Company transferred the
computer systems and proprietary computer software, including the policy issue
and management system and the claims systems, to Zenith on April 1, 1998, in
accordance with the terms of the Asset Purchase Agreement.
Management believes the computer programs retained by RISCORP to
support its current operations are presently Year 2000 compliant.
F-19
<PAGE> 209
(Q) CONCENTRATIONS OF RISK
A description of significant risks that faced RISCORP and its property
and casualty insurance subsidiaries and how those risks were minimized is as
follows:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates that can create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those currently reported in the financial statements.
The Company minimized this risk by reviewing legislative and other
regulatory changes and adjusting rates whenever possible. All of the
Company's premiums were derived from products offered to customers
located in the United States. Accordingly, an insurer could be
adversely affected by economic downturns, significant unemployment,
and other conditions that may occur from time to time.
Credit Risk is the risk that issuers of securities owned by the
Company will default, or other parties, including reinsurers, the
SDTF, agents, and insureds that may owe the Company money, will not
pay. The Company minimized this risk by, among other means, adhering
to a conservative investment strategy, by placing reinsurance with
highly rated reinsurers, and by actively monitoring collections of the
SDTF recoverable and premiums receivable.
Interest Rate Risk is the risk that interest rates will change
and cause a decrease in the value of the Company's investments. The
Company mitigated this risk by attempting to match the maturity
schedule of its assets with the expected payout of its liabilities. To
the extent that liabilities come due more quickly than assets mature,
an insurer would have to sell assets prior to maturity and recognize
potential gains or losses.
Liquidity Risk is the risk that the liquidity of the Company
could be materially adversely affected if Zenith should prevail in the
dispute resolution process with respect to the determination of the
final purchase price or if there is a material delay in the Company's
receipt of the final payment determined to be payable by Zenith. See
Note 1(b) for further discussion of this issue.
(R) RESTRUCTURING CHARGES
In June 1997, the Company implemented a workforce reduction and a
consolidation of the Company's management team, field offices, and products. The
reduction in the work force resulted in the termination of 128 employees. The
Company also announced in June 1997 its intention to focus solely on its core
workers' compensation insurance business and to close all field offices, except
Charlotte and Birmingham, by the end of 1997. The Company recorded $5.8 million
in non-recurring expenses during the second quarter of 1997 in connection with
the workforce reduction and consolidation of the field offices and products.
Those non-recurring expenses consisted principally of severance expenses of $5.1
million and occupancy costs of $0.7 million, of which $0.4 million and $0.2
million, respectively, were unpaid as of December 31, 1998, and $3.2 million and
$0.4 million were unpaid as of December 31, 1997. Those non-recurring expenses
were included in commissions and underwriting and administrative expenses in the
accompanying 1997 consolidated statement of operations.
(S) PARTICIPATING INSURANCE POLICIES
The Company offered participating insurance policies in connection
with custom plans, flexible retention plans, and preferred account dividend
plans. Policyholder dividends were approved quarterly by
F-20
<PAGE> 210
the Board of Directors and were based on the actual loss experience of each of
the policies. Participating policies represented 20 percent, 16 percent, and 17
percent of written premiums as of March 31, 1998 (just prior to the sale to
Zenith), and December 31, 1997 and 1996, respectively. The Company paid
dividends to participating policyholders of $8.5 million and $9.2 million during
1997 and 1996, respectively. No policyholder dividends were paid in 1998;
however, the policyholder dividends expected to be paid after 1997 were reduced
by $0.5 million during the quarter ended March 31, 1998 due to loss experience.
As more fully described in Note 1(b), the Company transferred the
liability for policyholder dividends to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.
(T) DETERMINATION OF FAIR VALUES OF FINANCIAL INSTRUMENTS
In the accompanying financial statements, cash and cash equivalents,
fixed maturities and equity securities, receivables, and other liabilities have
been identified as financial instruments. The fair values of fixed maturities
and equity securities are presented in Note 5. For the remaining financial
instruments, management believes the carrying values approximate fair value due
to the short maturity, terms, and fluctuations in market conditions of those
instruments. The estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates reported herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies could have a material effect
on the estimated fair value amounts.
(U) COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this standard had no impact
on the Company's net income or shareholders' equity. In addition to certain
other adjustments, SFAS 130 requires unrealized gains or losses on the Company's
available for sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.
(V) RECLASSIFICATIONS
For comparative purposes, certain amounts in the accompanying 1997 and
1996 financial statements have been reclassified from amounts previously
reported. Those reclassifications had no effect on previously reported
shareholders' equity or net income.
F-21
<PAGE> 211
(3) MANAGEMENT AND OUTSOURCING AGREEMENTS
Following the consummation of the sale to Zenith on April 1, 1998, the
Company has had no employees. Therefore, as more fully described below, the
Company entered into a management agreement and certain outsourcing service
agreements to provide the Company with the necessary resources to conduct its
day-to-day activities.
In February 1998, the Company entered into a Management Agreement (the
"Management Agreement") with The Phoenix Management Company, Ltd. ("Phoenix")
for the provision of various management services to the Company immediately
following the consummation of the transactions contemplated by the Asset
Purchase Agreement with Zenith. Mr. Frederick M. Dawson owns a majority interest
in Phoenix, a Florida limited partnership, and controls its operations as
President of the General Partner. Mr. Walter E. Riehemann owns a minority
interest in Phoenix and serves as Vice President and Secretary of the General
Partner. Although neither Mr. Dawson nor Mr. Riehemann have been employees of
the Company since the consummation of the transactions contemplated by the Asset
Purchase Agreement with Zenith, the Management Agreement specifically provides
that Mr. Dawson is to hold the titles of President and Chief Executive Officer
of the Company and Mr. Riehemann is to hold the titles of Chief Investment
Officer, Treasurer, and Secretary of the Company.
Pursuant to the terms of the Management Agreement, the Company is to
pay Phoenix $0.1 million per month, plus expenses, and has granted Phoenix a
restricted stock award for 1,725,000 shares of RISCORP's Class A Common Stock
(subject to certain vesting provisions) in consideration for its management
services. The Management Agreement has an initial term of three years which
commenced immediately following the consummation of the transactions
contemplated by the Asset Purchase Agreement with Zenith, and the Company has
the right to extend the term for an additional year. The Company paid Phoenix a
retainer of $0.6 million, which retainer is to be applied by Phoenix against the
fees payable by the Company during the final six months of the initial term.
That retainer is included in other assets in the accompanying December 31, 1998
consolidated financial statement. The restricted stock grant vests monthly over
the initial term of the Management Agreement, and Phoenix is entitled to all
rights applicable to holders of shares of RISCORP's Class A Common Stock with
respect to all such shares from the date of grant, including, without
limitation, the right to receive any dividends or distributions payable on the
restricted stock. Pursuant to the terms of the Management Agreement, the Company
paid Phoenix $2.8 million to reimburse the partners of the Management Company,
on an after-tax basis, for all taxes (exclusive of state taxes) incurred in
connection with the Section 83(b) election filed with respect to the restricted
stock grant. In the event that the Management Agreement is terminated by the
Company prior to the expiration of its initial term due to (i) the complete
liquidation, dissolution, and winding up of all of the business and affairs of
the Company, including, without limitation, the final distribution to all
RISCORP shareholders or (ii) the final distribution to the holders of RISCORP's
Series A Common Stock, the vesting under the restricted stock grant will
accelerate immediately prior to such event and the Company will make a lump sum
payment to Phoenix equal to the unpaid balance of the amount that Phoenix would
have received in monthly management fees during the initial term of the
Management Agreement.
The fair market value of the restricted stock grant to Phoenix on its
effective date was $4.1 million. In October 1998, the Company paid Phoenix $2.8
million in connection with the income taxes incurred by the partners of Phoenix
on the restricted stock grant. Those amounts have been included in commissions
and general and administrative expenses in the accompanying 1998 consolidated
statement of operations.
F-22
<PAGE> 212
Pursuant to the terms of the Management Agreement, Phoenix provides, among
other things, the following services to the Company: (i) management of the
day-to-day operations of the Company and its subsidiaries, (ii) management of
the preparation, negotiation, and defense of the Final Business Balance Sheet
(as defined in the Asset Purchase Agreement), (iii) assistance in the overall
planning and coordination of the business of the Company, (iv) assistance in the
resolution of all claims and contingencies pending or subsequently asserted
against the Company, (v) coordination of the finance, accounting, and tax
requirements of the Company with the specific duties to be delegated, at the
expense of the Company, to competent professionals approved by the Board of
Directors of the Company, (vi) preparation of the investment policy for the
Company and coordination of the investment transactions through one or more
investment advisors, and (vii) performance of such other duties as may from time
to time be requested by the Board of Directors of the Company not inconsistent
with the terms of the Management Agreement.
In May 1997, subject to shareholder approval, RISCORP granted to Mr.
Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of
RISCORP's Class A Common Stock. Pursuant to the terms of the Management
Agreement, immediately following the consummation of the transactions
contemplated by the Asset Purchase Agreement with Zenith and the receipt of the
applicable cash payments under his employment agreement, the Company and Mr.
Dawson entered into a Termination Agreement evidencing the termination of each
party's rights, duties, and obligations under Mr. Dawson's employment agreement,
including the termination of the stock option grants and Mr. Dawson's right to
receive any of the shares thereunder.
Effective April 1, 1998, the Company entered into an accounting
outsourcing agreement with Buttner Hammock & Company, P.A. ("BHC"). Under the
terms of the agreement, BHC is to provide monthly accounting, financial
reporting, tax return preparation, and certain financial and tax consulting
services. Under that agreement, Mr. Buttner has been designated as the chief
accounting officer for RISCORP and each of its subsidiaries. The agreement with
BHC is for a period of 36 months. In consideration for the services provided by
BHC, the Company is to pay BHC a monthly fee of approximately $0.1 million
during 1998, 1999, and 2000, plus reasonable out-of-pocket costs. In addition,
as defined in the agreement, BHC may also provide certain services to the
Company that are to be billed on an hourly rate basis. The Company paid BHC a
retainer of $0.5 million against the fees due for the final six months of the
initial term of the agreement. That retainer is included in other assets in the
accompanying December 31, 1998 consolidated balance sheet.
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. In consideration of the services provided, the Company is to pay a
fee of $100 per hour plus reasonable out-of-pocket costs with a minimum
commitment of 1,020 hours for year one of the contract and a minimum commitment
of 900 hours for years two and three of the contract.
F-23
<PAGE> 213
During 1998, the Company expensed $3.4 million in fees, excluding
restricted stock grants, and tax payments previously discussed, in connection
with the services provided under the foregoing management and outsourcing
agreements. Those expenses are included in commissions and general and
administrative expenses in the accompanying 1998 consolidated statement of
operations.
(4) ACQUISITIONS AND JOINT VENTURE
ACQUISITIONS
As more fully described below, RISCORP acquired RISCORP National Insurance
Company ("RNIC") and two workers' compensation management services companies in
1996. Each of those transactions was accounted for under the purchase method of
accounting under which the aggregate purchase price paid for the entity was
allocated to the assets acquired and liabilities assumed based on the estimated
fair value of such assets and liabilities at the dates of acquisition. The
excess of the purchase prices over the fair value of the net assets acquired has
been reported as costs in excess of net assets acquired and has been amortized
over periods ranging from five to 15 years. For acquisitions in which net assets
acquired exceeded the purchase price, a liability for net assets acquired in
excess of costs has been recorded and has been accreted over 10 years.
The operating results of the acquired entities have been included in the
consolidated financial statements from their dates of acquisition. The following
schedule summarizes certain pro forma consolidated results of operations for
1996, as if the acquisitions took place on January 1, 1996 (in thousands, except
the per share amount):
<TABLE>
<S> <C>
Total revenues $ 275,410
Income before income taxes 18,503
Net income 6,860
Earnings per share 0.19
</TABLE>
ACQUISITION OF COMPSOURCE
In March 1996, RISCORP purchased all of the outstanding stock of
CompSource, Inc. and Insura, Inc. (collectively, "CompSource") in exchange for
$12.1 million in cash and 112,582 shares of RISCORP's Class A Common Stock
valued at $2.1 million on the date of acquisition. On the acquisition date, the
excess of the purchase price over the fair value of the net assets acquired was
$12.6 million and was recorded as goodwill. CompSource is a workers'
compensation management services company offering its services in North
Carolina. Pursuant to a stock redemption agreement entered into as part of this
transaction, the former shareholders of CompSource elected to have RISCORP
repurchase the 112,582 shares on March 8, 1997, and RISCORP repurchased those
shares from the former shareholders for $2.1 million in accordance with the
terms of the redemption agreement.
ACQUISITION OF INDEPENDENT ASSOCIATION ADMINISTRATORS, INC. ("IAA") AND RISK
INSPECTION SERVICES AND CONSULTING, INC. ("RISC")
In September 1996, RISCORP purchased all of the outstanding stock of IAA
and 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.
F-24
<PAGE> 214
During the first quarter of 1997, the Company determined that the goodwill
recorded when IAA and RISC were acquired could not be fully recovered from the
profitability of the workers' compensation business that was then under
contract. Therefore, as of December 31, 1996, $2.8 million of goodwill was
written off and was reported as amortization expense. The remaining unamortized
goodwill relating to those acquisitions was $7.8 million and $7.9 million at
March 31, 1998 (just prior to the transfer of the goodwill to Zenith on April 1,
1998) and December 31, 1997, respectively.
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 on January 9, 1998 to the former shareholders of IAA.
ACQUISITION OF ATLAS INSURANCE COMPANY
In March 1996, a wholly-owned subsidiary of RISCORP acquired 100 percent
of the outstanding capital stock of Atlas Insurance Company for $5 million in
cash. Following the acquisition, the name was changed from Atlas Insurance
Company to RISCORP National Insurance Company ("RNIC"). RNIC, which primarily
provided workers' compensation insurance, is licensed to do business in 19
states and is authorized to operate on an excess and surplus lines basis in five
additional states. On the acquisition date, the excess of the purchase price
over the fair value of the net assets acquired was $2.6 million and was recorded
as goodwill.
JOINT VENTURE ARRANGEMENT
In January 1996, RISCORP, through one of its wholly-owned subsidiaries,
entered into a joint venture arrangement with Health Care Service Corporation
("HCSC"), a subsidiary of Blue Cross and Blue Shield of Illinois, to underwrite
and sell managed care workers' compensation insurance in Illinois. RISCORP and
HCSC each held 50 percent ownership in the joint venture known as Third Coast
Holding Company ("Third Coast"). RISCORP contributed the use of its expertise,
insurance systems, and intellectual property, while HCSC contributed cash of $10
million. RISCORP's contributed property in Third Coast was valued at $10
million; however, RISCORP's cost basis in the contributed property was $0 and,
as of December 31, 1996, RISCORP recorded its initial investment in Third Coast
at $0. The carrying value of RISCORP's investment in Third Coast at December 31,
1997 was $0.
Initially, RISCORP accounted for its 50 percent investment in Third Coast
on the equity basis of accounting, whereby RISCORP's recorded investment was
adjusted for its proportionate share of earnings or losses of Third Coast.
RISCORP discontinued the use of the equity method of accounting for Third Coast
in the first quarter of 1997 when the cumulative losses reduced RISCORP's
investment in Third Coast to $0. RISCORP has not made any financial guarantees
relating to Third Coast and has not made any financial commitments to provide
any future funding to Third Coast.
Effective January 1, 1998, RISCORP entered into an agreement with HCSC to
sell RISCORP's 50 percent interest in Third Coast for $1.3 million. The $1.3
million gain on the sale of Third Coast was included in the 1998 net realized
gains. RISCORP received the funds due in connection with this transaction in
April 1998. In connection with the closing of the sale to Zenith, RISCORP
received notice that Zenith believes that it is entitled to the proceeds from
the sale of Third Coast. RISCORP disputes Zenith's entitlement to these proceeds
and intends to vigorously defend any claim asserted by Zenith related to the
Third Coast transaction.
As more fully described in Note 1(b), the Company transferred the
unamortized balance of goodwill to Zenith on April 1, 1998, in accordance with
the terms of the Asset Purchase Agreement.
F-25
<PAGE> 215
(5) INVESTMENTS
Investments (including restricted investments) included in the
accompanying consolidated balance sheets as of December 31, 1998 and 1997 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Available for sale:
Fixed maturity securities:
U.S. government obligations $ 13,681 $ 219 $-- $ 13,900
Corporate obligations 2,032 48 -- 2,080
-------- ------ --- --------
Total investments $ 15,713 $ 267 $-- $ 15,980
======== ====== === ========
Available for sale:
Unrestricted $ 6,666 $ 50 $-- $ 6,716
Restricted 9,047 217 -- 9,264
-------- ------ --- --------
Total $ 15,713 $ 267 $-- $ 15,980
======== ====== === ========
DECEMBER 31, 1997:
Available for sale:
Fixed maturity securities:
Municipal government obligations $ 58,294 $ 718 $ 2 $ 59,010
U.S. government obligations 38,065 1,193 10 39,248
Corporate obligations 88,102 1,119 22 89,199
Mortgage backed securities 1,932 36 -- 1,968
Asset backed securities 9,920 49 3 9,966
-------- ------ --- --------
Total available for sale 196,313 3,115 37 199,391
-------- ------ --- --------
Held to maturity:
Fixed maturity securities:
U.S. government obligations 18,434 204 9 18,629
Municipal government obligations 4,186 62 -- 4,248
Certificates of deposit 1,470 -- -- 1,470
-------- ------ --- --------
Total held to maturity 24,090 266 9 24,347
-------- ------ --- --------
Total investments $220,403 $3,381 $46 $223,738
======== ====== === ========
Available for sale:
Unrestricted $142,876 $2,732 $37 $145,571
Restricted 53,437 383 -- 53,820
-------- ------ --- --------
Total $196,313 $3,115 $37 $199,391
======== ====== === ========
</TABLE>
The fair values of investments (including restricted investments) at
December 31, 1998 and 1997 were determined using independent pricing services.
The amortized cost and estimated fair value of fixed maturities
(including restricted investments) by contractual maturity, as of December 31,
1998, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in 1999 $ 8,195 $ 8,227
Due in 2000 to 2003 7,020 7,205
Due in 2004 to 2008 498 548
-------- --------
Total $ 15,713 $ 15,980
======== ========
</TABLE>
F-26
<PAGE> 216
The actual maturities may differ from the contractual maturities
because certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
During 1998, 1997, and 1996, proceeds from sales of fixed maturities
available for sale totaled $80.4 million, $110.3 million, and $88.9 million,
respectively.
Gross realized gains and gross realized losses from the sale of
investments for 1998, 1997, and 1996 are summarized in the following table and
were reported in net investment income in the accompanying consolidated
statements of operations (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Gross realized gains $ 4,348 $ 1,770 $ 178
Gross realized losses (68) (224) (73)
------- ------- -----
Net realized gains $ 4,280 $ 1,546 $ 105
======= ======= =====
</TABLE>
As more fully described in Note 1(b), a gross realized gain of $2.9
million and a gross realized loss of $0.1 million relating to securities that
were transferred to Zenith in connection with the Asset Purchase Agreement were
included in the foregoing 1998 net realized gains.
The following table summarizes the components of net investment income
for 1998, 1997, and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities $ 3,733 $ 13,815 $ 10,444
Equity securities (166) 469 547
Cash and cash equivalents 1,633 2,516 1,700
Zenith receivable and other accounts
receivable 2,080 -- --
-------- -------- --------
7,280 16,800 12,691
Investment expenses (177) (353) (497)
-------- -------- --------
Net investment income $ 7,103 $ 16,447 $ 12,194
======== ======== ========
</TABLE>
Although the Company has credit risk in the investment portfolio, no
fixed maturity security had a Standard & Poor's rating of less than A at
December 31, 1998. The carrying value of securities on deposit with various
governmental agencies was $11.6 million and $23.8 million at December 31, 1998
and 1997, respectively. In addition, the carrying value of securities held in
trust in connection with a fronting agreement between Virginia Surety Company,
Inc. and RISCORP Management Services, Inc. was $1.6 and $1.5 at December 31,
1998 and 1997, respectively. Such securities are included in fixed maturities
available for sale-restricted classification at December 31, 1998 and in fixed
maturities held to maturity-restricted classification at December 31, 1997 in
the accompanying consolidated balance sheets.
The carrying value of the Company's investments in excess of 10 percent
of RISCORP's shareholders' equity at December 31, 1998 and 1997, aggregated by
issuer and excluding investments issued or guaranteed by the United States,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- ---------
<S> <C> <C>
Fixed maturities - State of Florida $ - $ 20,980
============= ========
</TABLE>
(6) LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
F-27
<PAGE> 217
The Company established an estimated liability for losses and loss
adjustment expenses with respect to reported claims and claims incurred but not
yet reported as of the end of each accounting period. The Company established
that liability based on facts then known, estimates of future claims trends, and
other factors, including the Company's experience with similar cases and
historical Company and industry trends, such as reserving patterns, loss payment
patterns, claim closure and reporting patterns, and product mix.
The activity in the liability for losses and loss adjustment expenses
for 1998, 1997, and 1996, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Gross liability for losses and loss adjustment expenses,
beginning of year $ 437,038 $ 458,239 $ 261,700
Reinsurance recoverables (184,251) (180,698) (100,675)
SDTF recoverables (45,211) (49,505) (51,836)
Prepaid managed care fees (8,420) (31,958) (16,369)
--------- --------- ---------
Net balance at January 1 199,156 196,078 92,820
--------- --------- ---------
Assumed during the year from loss portfolio transfers
and acquisitions -- -- 88,212
--------- --------- ---------
Incurred losses and loss adjustment expenses related to:
Current year 14,860 125,764 123,986
Prior years 11,717 (2,401) 3,023
--------- --------- ---------
Total incurred losses and loss adjustment expenses 26,577 123,363 127,009
--------- --------- ---------
Paid related to:
Current year 1,717 45,646 56,088
Prior years 26,760 74,639 55,875
--------- --------- ---------
Total paid 28,477 120,285 111,963
--------- --------- ---------
Net balance at December 31 197,256 199,156 196,078
</TABLE>
F-28
<PAGE> 218
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Plus reinsurance recoverables 214,302 184,251 180,698
Plus SDTF recoverables 44,552 45,211 49,505
Plus prepaid managed care fees 6,182 8,420 31,958
--------- -------- --------
Gross liability at December 31 462,292 437,038 458,239
Gross liability for losses and loss adjustment expenses
transferred to Zenith [see Note 1(b)] (462,292) -- --
--------- -------- --------
Gross liability for losses and loss adjustment expenses,
at December 31 $ -- $437,038 $458,239
========= ======== ========
</TABLE>
The 1998 adverse loss development was primarily related to increases in
the actuarial estimates of remaining loss liabilities pertaining to the Florida
business offset somewhat by decreases in the actuarial estimates of remaining
loss liabilities pertaining to the Alabama and North Carolina business. The 1996
adverse development occurred due to deterioration in pre-1994 accident years
offset in part by improved expenses for the 1995 accident year.
The Company recognized recoveries from the SDTF and subrogation from
third parties as a reduction of incurred losses. In determining the best
estimate of the effect of these recoveries on the ultimate cost of all unpaid
losses and loss adjustment expenses, the Company utilized historical and
industry statistics. The estimated amount of recoveries from the SDTF included
as a reduction to the liability for losses and loss adjustment expenses was $0,
$45.2 million, and $49.5 million at December 31, 1998, 1997, and 1996,
respectively.
As more fully described in Note 1(b), the Company transferred the
liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998,
in accordance with the terms of the Asset Purchase Agreement.
(7) FLORIDA SPECIAL DISABILITY TRUST FUND ("SDTF")
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds, and self-insured employers in Florida for certain workers'
compensation benefits paid to injured employees. The SDTF reimburses claim
payments made to a claimant whose injury merges with, aggravates, or accelerates
a pre-existing permanent physical impairment. The SDTF is managed by the State
of Florida and is funded through assessments against insurers and self-insurers
providing workers' compensation coverage in Florida. The Company's pro-rata
amount of the SDTF assessment is based on their written premiums compared to the
total workers' compensation premiums written by all Florida insurers and
self-insurance funds. Should a carrier stop writing business, it has no
obligation for future assessments. The SDTF's assessment formula has
historically yielded sufficient revenues for annual reimbursement payments and
for costs associated with administering the SDTF. The SDTF has not prefunded its
claims liability and no reserves currently exist. The Company has been informed
that, as of September 30, 1996, the SDTF had an actuarially projected
undiscounted liability of $4 billion based on a study performed for the SDTF by
independent actuarial consultants. The SDTF actuarial study also indicated that,
at the current assessment rates, the payment of the existing liability would
take numerous years.
Under Florida's sunset laws applicable to some state-sponsored funds,
the SDTF would have expired in November 1996 unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
F-29
<PAGE> 219
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. Under that 1997 bill, the SDTF is not to
accept claims with accident dates after December 31, 1997; as such, certain SDTF
claims may have to be refiled for reimbursement and any such filing may require
a refiling fee. Additionally, companies accruing SDTF recoveries may be
statutorily limited in the level of recoverables they may be allowed to carry.
The bill provides for a funding mechanism through which companies writing
workers' compensation insurance in Florida will be assessed an annual charge to
cover payments made by the SDTF. The Company believes that, even in the event of
default by the SDTF, the existing reimbursements of the SDTF would become
general obligations of the State of Florida.
For 1998, 1997, and 1996, the Company's cash recoveries from the SDTF
were $1.8 million, $5.9 million, and $2.5 million, respectively. The Company's
SDTF assessments were $2 million, $6.8 million, and $11.7 million for 1998,
1997, and 1996, respectively.
As more fully described in Note 1(b), the Company transferred the
recoverable from the SDTF to Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.
(8) REINSURANCE
The Company was involved in the cession of insurance to certain
unaffiliated insurance and reinsurance companies under specific excess-of-loss
and quota-share reinsurance contracts. The amounts by which certain financial
statement balances have been reduced as a result of these reinsurance contracts
as of and for the years ended December 31, 1998, 1997, and 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Premiums written $ 16,785 $143,983 $192,528
Premiums earned 24,420 167,274 165,022
Ceded losses and loss adjustment expenses 47,667 73,868 153,200
Liabilities for losses and loss adjustment expenses 645,892 183,150 180,698
Unearned premiums 61,384 25,842 49,788
</TABLE>
Effective April 1, 1998, the Company entered into an assumption and
indemnity reinsurance agreement with Zenith in connection with the sale to
Zenith [see Note 1(b)]. Under the terms of the assumption and indemnity
reinsurance agreement, the Company ceded to Zenith 100 percent of the
outstanding liabilities for losses and loss adjustment expenses (including
incurred but not reported losses) and 100 percent of the unearned premiums as of
April 1, 1998. Zenith issued assumption certificates to all the Company's former
policyholders. The liabilities for losses and loss adjustment expenses and
unearned premiums that were transferred to Zenith on April 1, 1998 were $462.3
million and $43.2 million, respectively. In accordance with the terms of the
Asset Purchase Agreement, Zenith assumed all of the Company's obligations under
its then current and prior insurance and reinsurance contracts. The terms of the
Asset Purchase Agreement, including the assumption and indemnity reinsurance
agreement, was approved by the Florida and Missouri Insurance Departments on
March 31, 1998 and April 1, 1998, respectively.
Effective January 1, 1995, RISCORP Insurance Company ("RIC") and
RISCORP Property & Casualty Insurance Company ("RPC") entered into quota-share
reinsurance agreements with American Re-Insurance Company ("AmRe"), whereby RIC
and RPC ceded 50 percent of new and renewal premiums written and losses
incurred. These agreements provided for the payment of a ceding commission at
rates that varied from 27.5 percent to 60 percent based on the loss ratio of the
business ceded, excluding unallocated loss adjustment expenses. The provisional
ceding commission provided for
F-30
<PAGE> 220
in the agreements was 33 percent. The agreements were to remain in force for an
unlimited period of time, but could be terminated by either party at any
December 31. RISCORP and AmRe were parties to a senior subordinated note
agreement in the principal amount of $15 million due 2002. Under the terms of
the note agreement, the Company was to maintain the quota-share treaty or other
comparable reinsurance agreements with AmRe for a minimum period of five years
beginning January 1, 1995. Ceding commissions earned under the AmRe reinsurance
agreements were $7.7 million, $50 million, and $58.2 million during 1998, 1997,
and 1996, respectively. At December 31, 1998 and 1997, the Company may be
contingently liable for the return of ceding commissions to AmRe of $0 and $9.3
million, respectively.
Effective September 1, 1996, RIC entered into a retrocessional
reinsurance agreement with Chartwell Reinsurance Company ("Chartwell"), whereby
Chartwell was to retrocede to the Company 50 percent of workers' compensation
business written by RISCORP Management Services, Inc. (an affiliate of the
Company) as underwriting manager for Virginia Surety Company, Inc. The agreement
provided for a profit commission in addition to the 30 percent ceding commission
based on the loss ratio and other expenses incurred under the contract. The
initial profit commission calculation was scheduled to occur as of September 1,
2000. This agreement was terminated on December 31, 1997.
On April 18, 1997, RIC entered into a trust agreement with Chartwell
whereby RIC agreed to maintain in trust for the benefit of Chartwell 102 percent
of RIC's portion of the outstanding loss liabilities and unearned premiums. The
balance in this trust account was generally adjusted on a monthly basis, one
month in arrears.
Effective January 1, 1996, RPC entered into a quota-share reinsurance
agreement with Allstate Insurance Company ("Allstate"), Chartwell, Signet Star
Reinsurance Company ("Signet"), and San Francisco Reinsurance Company ("San Fran
Re"), whereby RPC ceded 90 percent of its inforce, and its new or renewal 1996
gross written premiums, for commercial umbrella coverage. The maximum limit
under this agreement was $5 million per insured, per occurrence. The agreement
provided for the payment of a ceding commission of 30 percent of the ceded
premiums. This agreement was to remain in force for an unlimited period of time,
but could be terminated by either party at any December 31. During 1997,
Allstate and San Fran Re were replaced on this agreement by Scor Reinsurance
Company ("Scor") and Hartford Fire Insurance Company ("Hartford"), respectively.
All other terms and conditions of the agreement were unchanged. This agreement
was terminated as of December 31, 1997; however, the reinsurers continue to be
responsible for their portion of all losses incurred on policies effective
before the termination date.
Effective January 1, 1996, RPC entered into a quota-share reinsurance
agreement with Allstate, Chartwell, Signet, San Fran Re, and Great Lakes
American Reinsurance Company, whereby RPC ceded 90 percent of its inforce, and
its 1996 new or renewal gross written premiums, for commercial property
coverage. The limit of coverage under this agreement was 90 percent of $2.5
million per risk, subject to an occurrence limitation of not less than $10
million nor greater than $15 million. The agreement provided for the payment of
a ceding commission of 30 percent of ceded premiums. This agreement was to
remain in force for an unlimited period of time, but could be terminated by
either party at any December 31. During 1997, Allstate and San Fran Re were
replaced on this agreement by Scor and Hartford, respectively. All other terms
and conditions of the agreement were unchanged. This agreement was terminated as
of December 31, 1997; however, the reinsurers continue to be responsible for
their portion of all losses incurred on policies effective before the
termination date.
Effective January 1, 1996, RPC entered into a commercial casualty
excess-of-loss reinsurance agreement with Allstate, Chartwell, Signet, and San
Fran Re, whereby RPC ceded 100 percent of all losses incurred on business
inforce, written or renewed during the term of this agreement, per occurrence,
in excess of $0.25 million to $1 million. RPC was required to pay 11.5 percent
of earned premiums,
F-31
<PAGE> 221
subject to a minimum premium of $0.5 million under the agreement. This agreement
was to remain in force for an unlimited period of time, but could be terminated
by either party at any December 31. During 1997, Allstate and San Fran Re were
replaced on this agreement by Scor and Hartford, respectively. All other terms
and conditions of the agreement were unchanged. This agreement was terminated as
of December 31, 1997; however, the reinsurers continue to be responsible for
their portion of all losses incurred on policies effective before the
termination date.
Effective September 1, 1995, RPC entered into a medical excess-of-loss
reinsurance agreement with Cologne Life Reinsurance Company, whereby RPC ceded
100 percent of all losses incurred per insured, per agreement year, in excess of
$0.15 million up to $1 million. RPC paid $6.79 per certificate of insurance per
month for this coverage. The agreement was to be continuous, but could be
canceled by either party at any September 1. The agreement was transferred to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.
Effective January 1, 1997, RIC, RNIC, and RPC ceded losses in excess of
$0.5 million to Continental Casualty Company ("CNA") under an excess-of-loss
reinsurance treaty. This treaty contained a corridor deductible of $1.25 million
which is applicable in the aggregate to claims in the $0.5 million excess of
$0.5 million corridor for the Company. RIC and RPC had a similar contract with
CNA effective January 1, 1996 with a corridor deductible of $1 million. Although
the contract contained provisions for minimum and deposit premiums, the premiums
for 1997, based on earned premiums, exceeded the minimum premium provisions
specified under the contract.
Beginning in 1996, RNIC ceded losses in excess of $0.5 million to CNA
under three separate excess-of-loss reinsurance treaties. Those treaties
provided for the payment of premiums to CNA based on earned premiums. Although
the contracts contained provisions for minimum premiums, the premiums for 1996
exceeded the minimum premium provisions specified under these contracts. Each of
those treaties with CNA expired on January 1, 1997.
Effective October 1, 1996, RNIC entered into a quota-share reinsurance
agreement with Chartwell, Swiss Reinsurance America Corporation, and Trenwick
America Reinsurance Corporation (collectively the "Reinsurers"), whereby RNIC
ceded 65 percent of its net unearned premiums as of October 1, 1996 and 65
percent of net written workers' compensation and employers liability premiums,
new or renewal, for the last four months of 1996. Effective January 1, 1997,
RNIC reduced the ceded quota-share amount to 60 percent. The agreement provided
for the payment of a ceding commission at rates which varied from 27 percent to
49 percent based on the loss ratio of the business ceded. The provisional ceding
commission contained in the agreement was 33 percent. This agreement was
terminated as of December 31, 1997; however, the reinsurers continue to be
responsible for their portion of all losses incurred on policies effective
before the termination date.
Effective January 1, 1997, RNIC entered into an agreement with the
Insurance Company of New York ("INSCORP") and Chartwell to issue
assumption-of-liability endorsements ("ALE") to certain policyholders of RNIC.
This agreement expired on December 31, 1997 and was not renewed. In connection
with this agreement, RNIC was required to provide INSCORP and Chartwell with
letters of credit in amounts equal to 29.2 percent of the gross written premiums
on all ALE policies plus $1.25 million in fixed maturities. The agreement also
required RNIC to pay a fee of .5 percent of gross premiums subject to a minimum
fee of $50 and a maximum fee of $1,000 per ALE. As of December 31, 1998 and
1997, based on the gross premiums subject to ALE's, RNIC provided letters of
credit of $0 and $3.7 million, respectively, under this agreement. These letters
of credit were secured by certificates of deposits and were reported in the
accompanying consolidated balance sheets under the caption "Cash and short-term
investments--restricted." RNIC incurred fees of $0 and $38,797 during 1998 and
1997, respectively, under this agreement.
F-32
<PAGE> 222
RNIC also maintained specific excess-of-loss coverage with Allstate on
the run-off of the book of business acquired by RNIC in March 1996.
In connection with the sale to Zenith [as more fully described in Note
1(b)], RIC and RPC entered into an interim reinsurance agreement and cut-through
endorsement with Zenith covering all inforce business as of June 17, 1997 and
all new and renewal business written after June 17, 1997 on Florida workers'
compensation policies. In connection with this agreement, Zenith required that
33 percent of the direct written premiums and 33 percent of the initial unearned
premiums subject to this agreement were to be deposited into a trust account for
the benefit of Zenith. In addition, the agreement required the Company to pay a
fee to Zenith of one percent of the subject premiums. The agreement with Zenith
was terminated on April 1, 1998. As of December 31, 1998 and 1997, the market
value of the securities in the trust account was $0 and $52.4 million,
respectively, and the required trust account balance was $0 and $51.6 million,
respectively, based on the direct written premiums for the period June 18, 1997
through March 31, 1998 and the unearned premiums at June 17, 1997. The balance
in the trust account was to be adjusted on a monthly basis, one month in
arrears. The Company incurred fees to Zenith of $0.1 million and $1.4 million
during 1998 and 1997, respectively, under this agreement.
All of the reinsurance contracts described in this note and in force on
April 1, 1998 were assumed by Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.
The Company had no combined reinsurance recoverables and ceded unearned
premiums in excess of three percent of shareholders' equity as of December 31,
1998.
At December 31, 1997, reinsurance recoverables consisted of $184.3
million of recoverables for unpaid losses and loss adjustment expenses. At
December 31, 1997, $89.4 million of the reinsurance recoverable balance related
to RIC's and RPC's quota-share agreement with one reinsurer. The remaining
recoverable balance of $94.9 million at December 31, 1997 represented estimated
recoveries from 17 unaffiliated reinsurers that provided quota-share and
specific and aggregate excess-of-loss coverage.
To the extent that the reinsurers, including Zenith, are unable to meet
their contractual obligations, the Company may be contingently liable for any
losses and loss adjustment expenses ceded.
(9) MANAGED CARE AGREEMENTS
RIC and RPC were parties to arrangements with both Humana Medical
Plans, Inc. ("Humana"), an unaffiliated health maintenance organization ("HMO"),
and RISCORP Health Plans, Inc. ("RHP"), an affiliated HMO, whereby, upon
policyholder election to participate, RIC's and RPC's medical claim costs were
capped for the first three years of each claim. In May 1996, RIC and RPC
terminated those arrangements with RHP; however, injured individuals were
covered for three years following any accident that occurred during policy
periods in effect prior to termination. The Humana arrangement, which commenced
July 1, 1995, was renewed for one additional year at the anniversary date. Under
the Humana arrangement, injured individuals were covered for three years
following any accident occurring within the policy periods. In October 1997, RIC
and RPC entered into loss portfolio transfer agreements under which RHP
transferred its liability to RIC and RPC under the managed care agreements; at
that date, RHP's remaining liability under the managed care agreement was
determined by an independent consulting actuarial firm to be $8 million and, in
November 1997, RHP transferred that amount to RIC and RPC in full satisfaction
of RHP's liability.
F-33
<PAGE> 223
The fees paid to Humana and RHP have been reported as prepaid assets
and losses and loss adjustment expenses in the accompanying consolidated balance
sheets. Included in losses and loss adjustment expenses were $0.3 million, $6.1
million, and $30.6 million of such fees for 1998, 1997, and 1996, respectively.
To the extent that Humana was unable to meet its contractual
obligations under its agreement with RIC, RIC may be contingently liable for any
unpaid losses and loss adjustment expenses. At December 31, 1997, the estimated
unpaid losses and loss adjustment expenses to be covered by Humana were $4.8
million.
As described in Note 1(b), RISCORP transferred the Humana and RHP
contractual obligations, in accordance with the terms of the Asset Purchase
Agreement.
(10) INCOME TAXES
The components of income taxes for 1998, 1997, and 1996 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ --------
<S> <C> <C> <C>
Current:
Federal $(19,165) $6,197 $ 17,919
State 1,040 798 2,280
-------- ------ --------
Total current (18,125) 6,995 20,199
-------- ------ --------
Deferred:
Federal 20,181 305 (12,126)
State -- -- 129
------ --------
Total deferred 20,181 305 (11,997)
-------- ------ --------
Total income taxes $ 2,056 $7,300 $ 8,202
======== ====== ========
</TABLE>
The differences between taxes computed at the statutory rates and recorded
income tax expense for 1998, 1997, and 1996 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $(24,087) $ 5,105 $ 3,710
State taxes in excess of federal benefit 807 519 1,336
Non-taxable income (231) (1,188) (982)
Goodwill and other amortization 3,339 801 2,437
Valuation allowance 21,168 412 --
Fines and penalties 6 64 543
Amounts related to prior years -- -- 980
Other 1,054 1,587 178
-------- ------- -------
Income tax expense $ 2,056 $ 7,300 $ 8,202
======== ======= =======
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities December 31,
1998 and 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating losses $17,479 $ --
Accrued litigation settlement costs 5,415 4,550
Accrued employee benefits 224 575
Unearned premiums -- 2,132
Discount on reserve for losses and loss adjustment expenses -- 14,160
Bad debts -- 2,450
Deferred policy acquisition costs -- 422
Other 1,603 811
------- -------
Gross deferred tax assets 24,721 25,100
------- -------
Deferred tax liabilities:
Unrealized gains on investments -- 1,077
Depreciation -- 645
Other -- 846
Gross deferred tax liabilities -- 2,568
------- -------
Net deferred tax assets before valuation allowance 24,721 22,532
Valuation allowance 21,580 412
------- -------
Net deferred tax asset $ 3,141 $22,120
======= =======
</TABLE>
F-34
<PAGE> 224
The Company estimated that approximately $3.1 million of its December 31,
1998 net deferred tax asset could be realized through the carryback of future
tax losses to prior years or the generation of future taxable income, and it is
more likely than not that the tax benefits of the deferred tax assets will be
realized. Accordingly, a valuation allowance of $21.6 million relating to the
December 31, 1998 deferred tax balance has been established.
The Company has filed refund claims of $19.7 million related to the 1998
loss. The Company received $11.9 million of these refunds in March 1999 and the
remaining balance is expected to be received prior to the end of 1999.
(11) NOTES PAYABLE
<TABLE>
<S> <C>
A December 31, 1997, notes payable are summarized as follows (in thousands):
Subordinated notes to AmRe, a quota-share reinsurer, bearing interest
at 12%; matures December 31, 2002 $ 15,000
Note payable from acquisition of subsidiary, with implicit interest rate
of 9.76% computed on the payment stream; matured November 9, 1998 330
Term loan, implicit interest rate of 12% computed on the payment stream;
matured January 1, 1999 279
--------
Total $ 15,609
========
</TABLE>
As more fully described in Note 1(b), the Company transferred the $15
million liability in connection with the AmRe note agreement to Zenith on April
1, 1998, in accordance with the terms of the Asset Purchase Agreement. The other
note payable amounts were paid in full during 1998.
(12) SHAREHOLDERS' EQUITY
RISCORP has 100 million shares of $.01 par value Class A Common Stock
authorized and 14,258,671 and 11,855,917 issued shares at December 31, 1998 and
1997, respectively. RISCORP's
F-35
<PAGE> 225
Class B Common Stock, par value $.01, consists of 100 million shares authorized
and 24,334,443 million shares issued and outstanding at December 31, 1998 and
1997. Ten million shares of preferred stock are authorized, but no shares are
issued or outstanding. The characteristics of the Class B Common Stock are
identical to those of the Class A Common Stock, except that each holder of the
Class B Common Stock is entitled to 10 votes for each share held. The Class B
Common Stock may be converted into Class A Common Stock at any time at the
election of the holders on a one-for-one basis. RISCORP did not declare any
shareholder dividends during 1998, 1997, or 1996. At December 31, 1998 and 1997,
there were 112,582 shares of RISCORP's Class A Common Stock in treasury.
RISCORP's insurance subsidiaries are limited by statute in their
ability to distribute unassigned surplus without the approval of their
respective domiciliary insurance department. Dividends or distributions to
shareholders that are made under these statutes and that do not require the
prior approval of the Florida or the Missouri Insurance Departments are
determined based on a consideration of an insurer's net income, realized and
unrealized capital gains, percentages of dividends and distribution of surplus,
and the relationship of surplus after the dividend or distribution is made to
the minimum required statutory surplus. In December 1997, RPC paid a $2.2
million dividend to its parent. During 1999, RISCORP's insurance subsidiaries
have the ability to dividend $6.4 million to their parents without the prior
approval of the Florida or Missouri Insurance Departments, consisting of $2.4
million from RPC, $3.1 million from RNIC, and $0.9 million from RIC.
The combined statutory surplus as of December 31, 1998 and 1997, and
the combined statutory net income for 1998, 1997, and 1996, for RISCORP's
insurance subsidiaries, were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Surplus $156,480 $96,280 $90,639
Net income 14,672 11,042 13,980
</TABLE>
To facilitate the regulators' responsibility to monitor insurer solvency,
the National Association of Insurance Commissioners issued a model law in
January 1995 to implement risk-based capital ("RBC") reporting requirements for
property and casualty insurance companies. The model law is designed to assess
capital adequacy and the level of protection that statutory surplus provides for
policyholder obligations. The RBC formula for property and casualty insurance
companies measures four major areas of risk facing property and casualty
insurers: (i) underwriting, which encompasses the risk of adverse loss
development and inadequate pricing; (ii) credit risk, which evaluates the
declines in asset values; (iii) investment risk, which evaluates declines in
asset values; and (iv) off balance sheet risk. Pursuant to the model law,
insurers having less statutory surplus than required by the RBC calculation are
subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. RPC and RIC are domiciled in the State of Florida, which has
yet to adopt the provisions of the RBC model law; however, these insurance
companies monitor their RBC results in anticipation of future filings. The other
RISCORP insurance subsidiary, RNIC, is domiciled in Missouri and RBC information
is filed with state regulators. RBC is calculated on an annual basis. At
December 31, 1998 and 1997, RISCORP's insurance subsidiaries had statutory
surplus in excess of any action level requirements.
(13) STOCK OPTIONS
In conjunction with the reorganization discussed in Note 1(a), stock
options of RISCORP were substituted for options previously granted to certain
officers and employees of RISCORP's affiliates. The options granted in 1997 were
exercisable for 10 years after the date and the options vested over periods
ranging from immediately to two years. The options granted in 1996 were
exercisable over a 12 year period after the date of the grant and the options
vested over periods ranging from two to nine years.
F-36
<PAGE> 226
At December 31, 1998, the Company had no stock options outstanding. A
summary of the status of RISCORP's stock option plan as of and for the years
ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 2,533,326 $ 4.43 3,078,779 $3.67 2,556,557 $3.96
Granted - - 2,533,326 4.43 1,572,538 6.84
Exercised - - - - (17,999) 3.61
Canceled (2,533,326) 4.43 (3,078,779) 3.67 (1,032,317) 9.22
---------- ------ ---------- ----- ---------- -----
Outstanding, end of year - $ - 2,533,326 $4.43 3,078,779 $3.67
========== ====== ========== ===== ========== =====
Options exercisable at end of year - - 1,085,711 $6.67 731,849 $2.08
========== ====== ========== ===== ========== =====
Weighted average fair value of
options granted during
the year $ - $1.92 $5.44
======== ===== =====
</TABLE>
The fair value of each option was estimated on the date that the option
was granted. The exercise prices of options of options granted were determined
to be not less than the fair market value of RISCORP's Class A Common Stock on
the dates that the options were granted, with the exception of options for
387,314 and 2,604 shares made to two employees at exercise prices of $0.72 and
$4.50, respectively, and fair values of $22.78 and $12.54, respectively.
Compensation expense recognized for options with exercise prices below fair
market value totaled $0 for 1998 and 1997 and $0.3 million for 1996. This
compensation expense was reversed in the fourth quarter of 1997 following the
cancellation of those options.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for
stock-based compensation that is based on the fair value of stock options and
similar instruments. The adoption of SFAS 123 is not required and the Company
has elected to continue following Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for measuring compensation cost. Had
the Company adopted SFAS 123, the pro forma net income or loss per share for
1998, 1997, and 1996 would have been as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) - as reported $ (70,875) $ 7,286 $ 2,398
- pro forma (70,875) 5,286 1,933
Net income (loss) per
common share-diluted - as reported (1.91) 0.20 0.07
- pro forma (1.91) 0.14 0.06
</TABLE>
(14) PROPERTY AND EQUIPMENT
The components of the property and equipment at December 31, 1998 and 1997
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED ---------------------------
USEFUL LIFE 1998 1997
----------- ----------- -------------
<S> <C> <C> <C>
Furniture and equipment 3-7 years $ 358 $ 16,542
</TABLE>
F-37
<PAGE> 227
<TABLE>
<S> <C> <C> <C>
Building 39 years - 8,084
Leasehold improvements 5-10 years 9 4,810
Software 3 years 81 6,758
Land - 1,200
---------- --------
448 37,394
Less accumulated depreciation and
amortization 111 10,729
---------- --------
Net carrying amount $ 337 $ 26,665
========== ========
</TABLE>
F-38
<PAGE> 228
Depreciation and amortization expense related to property and equipment
totaled $1.8 million, $4.9 million, and $3.6 million for 1998, 1997, and 1996,
respectively. Included in those amounts is amortization expense of $0.4 million,
$1.4 million, and $0.8 million for 1998, 1997, and 1996, respectively, related
to both purchased and capitalized internally developed software costs. As more
fully described in Note 1(b), the Company transferred the major portion of the
Company's property and equipment, including computer software, to Zenith on
April 1, 1998, in accordance with the terms of the Asset Purchase Agreement.
(15) LEASES
The Company leases space for some of its office facilities under
non-cancelable operating leases expiring through 2001, with renewal options
available for certain leases. Total rental expense for 1998, 1997, and 1996 was
$0.2 million, $1.7 million, and $1.3 million, respectively. At December 31,
1998, the Company was obligated under aggregate minimum annual rentals as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ANNUAL RENTAL
---- -------------
<S> <C>
1999 $ 218
2000 184
2001 8
------
Total $ 410
======
</TABLE>
(16) EMPLOYEE HEALTH BENEFITS
The Company self-insured its employees' health benefits and purchased
excess insurance that limits its exposure to $1.1 million in the aggregate and
$50,000 per occurrence. The Company estimated its liability for unpaid claims
based on aggregate limits for health insurance payments less actual payments
made. Those estimates were continually reviewed and adjustments, if any, were
reported in current operations. Included in accrued expenses at December 31,
1998 and 1997 is a liability for self-insured health benefits of $0.6 million
and $0.9 million, respectively. The expense incurred for self-insured health
benefits was $0.6 million, $3.3 million, and $2.6 million for 1998, 1997, and
1996, respectively.
(17) RELATED PARTY TRANSACTIONS
The Company had accounts receivable of $0.5 million and $0.8 million from
companies owned by RISCORP's majority shareholder ("affiliates or affiliated
entity") that are included in accounts and notes receivable-other in the
accompanying consolidated balance sheets at December 31, 1998 and 1997,
respectively.
The Company contracted with affiliated entities for transportation,
facilities management, and custodial and maintenance services. The Company also
leased parking facilities from affiliated entities. Expenses relating to these
services totaled $0, $0.1 million, and $1.6 million for 1998, 1997, and 1996,
respectively. These expenses are included in commissions and general and
administrative expenses in the accompanying consolidated statements of
operations.
In 1996, the Company paid $0.9 million of brokerage fees to an affiliated
entity for the negotiation and placement of reinsurance under several specific
excess-of-loss coverages. The Company terminated its agreement with the
affiliated entity during 1997.
F-39
<PAGE> 229
The Company provided administrative and support services to three
affiliated entities. Under these arrangements, one of which was terminated in
1996, the Company received $0.2 million, $0.6 million, and $0.8 million during
1998, 1997, and 1996, respectively.
As described in Note 9, RIC was party to a managed care arrangement with
RHP, an affiliated HMO, until May 1996. Fees paid by RIC to RHP during 1998,
1997, and 1996 totaled $0, $3.7 million, and $17.1 million, respectively. The
managed care arrangement with RHP was terminated in October 1997 following the
sale of RHP to an unaffiliated entity. RIC assumed the outstanding liability for
unpaid losses and loss adjustment expenses that totaled $8 million in November
1997.
During 1998, all of the foregoing contracts with the related parties were
cancelled and the Company has no further obligations under any of the contracts
as of December 31, 1998. See Note 3 for a discussion of the agreements between
the Company and Phoenix and BHC.
(18) BAD DEBT ALLOWANCE
The following table summarizes activity in the bad debt allowance account
for premiums receivable for 1998, 1997, and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 7,000 $ 17,000 $ 5,899
Allowance acquired from acquisition -- -- 782
Addition (reduction) to allowance (1,100) 4,374 31,424
Recoveries (write-offs) against allowance 100 (14,374) (21,105)
Balance transferred to Zenith [see Note 1(b)] (6,000) -- --
------- -------- --------
Balance at end of year $ -- $ 7,000 $ 17,000
======= ======== ========
</TABLE>
Premiums receivable included in the accompanying December 31, 1997
consolidated balance sheet are summarized as follows (in thousands):
<TABLE>
<S> <C>
Commercial accounts, including final
premium audit adjustments $ 29,612
Loss sensitive contracts 68,804
NCCI pool accounts 6,987
Other 1,780
---------
107,183
Less bad debt allowance (7,000)
Premiums receivable, net $ 100,183
=========
</TABLE>
As more fully described in Note 1(b), the Company transferred the
outstanding premiums receivable balance, net of the allowance for bad debts, to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.
(19) CONCENTRATION IN A SINGLE STATE
Although the Company had expanded its operations into additional states,
75 percent, 70 percent, and 74 percent of its premium revenues for 1998, 1997,
and 1996, respectively, were derived from products and services offered to
customers located in Florida. Accordingly, the Company previously could have
been adversely affected by economic downturns, significant unemployment, and
other
F-40
<PAGE> 230
conditions that could have occurred from time to time in Florida, which
conditions may not have significantly affected its more geographically
diversified competitors.
(20) 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 seeks an unspecified total
amount of damages, but the amount of compensatory damages sought is in excess of
$30 million, together with an unspecified amount of punitive damages and
attorneys' fees. Zenith's claims include, among others, that the Company (i)
breached certain representations and warranties set forth in the Asset Purchase
Agreement, (ii) failed to transfer certain assets to Zenith, (iii) failed to
operate its business in the ordinary course, (iv) failed to reimburse Zenith for
certain payments, and (v) fraudulently induced Zenith to execute the Asset
Purchase Agreement due to certain alleged verbal representations made with
respect to RISCORP's Year 2000 compliance.
On October 16, 1998, RISCORP and certain of its subsidiaries filed an action
against Zenith in federal court in Tampa, Florida a breach of the Asset Purchase
Agreement. The Company amended its complaint in Florida on January 25, 1999, and
added ten additional claims arising out of Zenith's failure to indemnify the
Company for certain claims of third parties. The Company also added two other
claims, one for breach of contract and one for conversion, related to Zenith's
taking of $4.1 million the Company had on deposit with the South Carolina
Insurance Department.
The Company intends to vigorously defend those claims asserted by Zenith and to
vigorously prosecute the Company's claims; however, there can be no assurance as
to the ultimate outcome of this litigation.
Between November 20, 1996 and January 31, 1997, nine shareholder
class-action lawsuits were filed against RISCORP and other defendants in the
United States District Court for the Middle District of Florida (the "Securities
Litigation"). In March 1997, the court consolidated these lawsuits and appointed
co-lead plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants RISCORP,
three of its executive officers, one non-officer director, and three of the
underwriters for RISCORP's initial public offering. The plaintiffs in the
consolidated complaint purport to represent the class of shareholders who
purchased RISCORP's Class A Common Stock between February 28, 1996 and November
14, 1996. The consolidated complaint alleges that RISCORP's Registration
Statement and Prospectus of February 28, 1996, as well as subsequent statements,
contained false and misleading statements of material fact and omissions, in
violation of Sections 11 and 15 of the Securities Act of 1993, Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder. The consolidated complaint seeks unspecified compensatory damages.
In July 1998, the parties executed a stipulation and agreement of
settlement in which the Company agreed to pay $21 million in cash to a
settlement fund to settle this litigation. The Company has paid $0.5 million as
an advance to the settlement fund. The remainder of the settlement fund is to be
paid from the proceeds of the second payment due under the Asset Purchase
Agreement with Zenith. On July 29, 1998, the court issued a preliminary approval
order in which it certified the purported class for settlement purposes. The
court held a settlement fairness hearing on December 15, 1998. At that hearing,
the court
F-41
<PAGE> 231
announced its opinion that the settlement was fair and reasonable and should be
approved. The parties have executed several amendments to the settlement
agreement extending the deadline after which plaintiffs may terminate the
settlement agreement and resume litigation. Under the most recent amendment, the
Company has until March 24, 1999 in which to fully fund the settlement agreement
from the proceeds of the Zenith transaction. If the settlement fund is not fully
funded by that date, plaintiffs have the right to terminate the settlement
agreement pursuant to procedures specified in the agreement.
The Company estimates that $8 million of insurance proceeds will be
available for contribution to the settlement amount, as well as related costs
and expenses. The Company recognized the $21 million proposed settlement and the
related insurance proceeds in the accompanying 1997 consolidated statement of
operations. Because the settlement agreement is contingent upon the timely and
adequate payment from the Zenith transaction, there can be no assurance that
this litigation will be ultimately settled on the terms described herein.
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. RNIC has
appealed the trial court's ruling which prevents the American Arbitration
Association from administering the arbitration between RNIC and the Fund. The
Alabama Supreme Court has stayed the current arbitration. 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 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.
F-42
<PAGE> 232
On August 26, 1998, the district court issued an order dismissing the
entire suit against all defendants. 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. Although the Plaintiffs have
indicated that they will seek to have the appeal terminated and the case
remanded to the district court, no formal motion has been filed with the Court
of Appeals. Management will continue to monitor the progress of the appeals
process as necessary and intends to defend the case vigorously if it is returned
to the district court for further proceedings.
In June 1997, the Company terminated a number of employees in connection
with a workforce reduction. As a result of the workforce reduction, a number of
former employees have initiated proceedings, including arbitration, against the
Company for certain severance benefits. The Company intends to vigorously defend
these suits; however, there can be no assurance that it will prevail in these
proceedings.
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.
The Company has historically met its cash requirements and financed its
growth through cash flow generated from the sale of stock, 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 companies, and other
general and administrative expenses.
As discussed more fully in Note 1(b), 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 consummation of
that transaction, RISCORP received $35 million in cash, of which $10 million was
placed in escrow, with the balance of the purchase price, if any, to be the
amount by which the book value of the transferred assets exceeds the book value
of the transferred liabilities as of the closing date, determined in accordance
with GAAP and generally accepted actuarial principles, consistently applied.
Pursuant to the terms of the Asset Purchase Agreement, Zenith is required to pay
the remaining purchase price to RISCORP, plus interest thereon of 6.13 percent
from the Closing Date through the final payment date, in cash, less the
additional amount required to be deposited into escrow, not later than five
business days after receipt of the Final Business Balance Sheet, as determined
by the Independent Expert.
On March 19, 1999, the Independent Expert delivered its determination of
the Final Business Balance Sheet [see Note 1(b) for a detailed discussion].
As a result of this sale, the Company and its subsidiaries ceased
substantially all of their former business operations and, accordingly, since
April 1, 1998, the Company's cash requirements have been, and are expected to
continue to be, satisfied through investment income, the liquidation of
investments and other assets, and the receipt of certain federal income tax
claims.
F-43
<PAGE> 233
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
RISCORP, INC. AND SUBSIDIARIES
DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
MARKET
TYPE OF INVESTMENT COST VALUE
- ------------------ ------- -------
<S> <C> <C>
Available for sale:
Fixed maturity securities:
U.S. government obligations $13,681 $13,900
Corporate obligations 2,032 2,080
------- -------
Total available for sale $15,713 $15,980
======= =======
Available for sale:
Unrestricted $ 6,666 $ 6,716
Restricted 9,047 9,264
------- -------
Total $15,713 $15,980
======= =======
</TABLE>
See accompanying Auditors' Report.
F-44
<PAGE> 234
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Investments at fair value (cost $4,635 and $1,000) $ 4,636 $ 1,000
Cash and cash equivalents 1,140 (1,152)
Cash and cash equivalents - restricted 10,000 --
Investment in wholly-owned subsidiaries 148,357 172,463
Surplus note receivable from subsidiary 13,000 13,000
Other assets 18,840 28,145
--------- ---------
Total assets $ 195,973 $ 213,456
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ -- $ 15,000
Accrued expenses and other liabilities 38,572 34,923
Payable to affiliates 61,835 --
--------- ---------
Total liabilities 100,407 49,923
--------- ---------
Shareholders' equity:
Common stock 386 362
Additional paid-in capital 140,688 135,975
Net unrealized gains on investments 173 2,002
Retained earnings (deficit) (45,680) 25,195
Treasury stock at cost (1) (1)
--------- ---------
Total shareholders' equity 95,566 163,533
--------- ---------
Total liabilities and shareholders' equity $ 195,973 $ 213,456
========= =========
</TABLE>
See accompanying Auditors' Report.
F-45
<PAGE> 235
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net investment income $ 2,681 $ 517 $ 2,590
Dividend income -- 3,446 18,335
Other income 146 -- 3
-------- -------- --------
Total revenue 2,827 3,963 20,928
-------- -------- --------
Expenses:
General and administrative expenses 10,871 16,421 1,995
Interest expense 641 1,800 2,234
Depreciation and amortization 359 857 3,830
-------- -------- --------
Total expenses 11,871 19,078 8,059
-------- -------- --------
Income (loss) from operations (9,044) (15,115) 12,869
Loss on sale of net assets to Zenith (47,747) -- --
-------- -------- --------
Income (loss) before equity in income or loss
of subsidiaries and income taxes (56,791) (15,115) 12,869
Equity in income (loss) of subsidiaries (20,322) 20,935 (11,428)
-------- -------- --------
Income (loss) before income taxes (77,113) 5,820 1,441
Income tax benefit (6,238) (1,466) (957)
-------- -------- --------
Net income (loss) $(70,875) $ 7,286 $ 2,398
======== ======== ========
</TABLE>
See accompanying Auditors' Report.
F-46
<PAGE> 236
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOW
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(70,875) $ 7,286 $ 2,398
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Equity in net loss (income) of subsidiaries 20,322 (18,344) 5,967
Depreciation and amortization 359 857 3,830
Net amortization of discounts on investments -- -- 80
Net realized loss (gain) on sale of investments -- 35 (4)
Loss on sale of net assets to Zenith 47,747 -- --
Issuance of RISCORP, Inc. stock 4,740 -- --
Decrease (increase) in other assets 4,166 (20,555) 2,750
Increase in accrued expenses and other liabilities 3,751 26,934 3,421
-------- -------- ---------
Net cash provided by (used in) operating activities 10,210 (3,787) 18,442
-------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of fixed maturities--available for sale 68,617 4,206 44,124
Proceeds from maturities of fixed maturities--available for sale 1,000 1,000 1,000
Proceeds from the sale of equity securities -- 1,548 353
Cash received from Zenith for sale of net assets 9,345 -- --
Cash due to Zenith 388 -- --
Purchase of fixed maturities--available for sale (73,252) -- (48,438)
Purchase of equity securities -- -- (1,905)
Capital contributions to subsidiaries (1,000) (1,000) (114,375)
Purchase of property and equipment (448) -- --
Purchase of IAA, net of cash acquired -- -- 282
Purchase of RISC, net of cash acquired -- -- (538)
-------- -------- ---------
Net cash provided by (used in) investing activities 4,650 5,754 (119,497)
-------- -------- ---------
Cash flows from financing activities:
Purchase of treasury stock subject to put option -- (2,100) --
Transfer of cash and cash equivalents to restricted balances (12,568) -- --
Principal repayment of notes payable -- -- (27,000)
Exercise of stock options -- -- 65
Proceeds of initial offering of common stock -- -- 127,908
Other, net -- (1,293) 709
-------- -------- ---------
Net cash provided by (used in) financing activities (12,568) (3,393) 101,682
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 2,292 (1,426) 627
Cash and cash equivalents, beginning of year (1,152) 274 (353)
-------- -------- ---------
Cash and cash equivalents, end of year $ 1,140 $ (1,152) $ 274
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 450 $ 1,800 $ 2,684
======== ======== =========
Income taxes $ -- $ 6,556 $ 15,127
======== ======== =========
</TABLE>
See accompanying Auditors' Report.
F-47
<PAGE> 237
SCHEDULE IV - REINSURANCE
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
Premiums Earned
--------------------------------------------------------------------------------------------
CEDED TO ASSUMED PERCENTAGE
YEAR ENDED GROSS OTHER FROM OTHER NET OF AMOUNT
DECEMBER 31 AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
- ----------- ----------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
1998 $ 48,416* $ 22,676* $ 79* $ 25,819* --*
=========== =========== ============ =========== ==============
1997 $ 328,191 $ 167,274 $ 18,812 $ 179,729 10%
=========== =========== ============ =========== ==============
1996 $ 326,875 $ 165,022 $ 11,704 $ 173,557 7%
=========== =========== ============ =========== ==============
</TABLE>
These amounts represent the first three months of 1998.
See accompanying Auditors' Report.
F-48
<PAGE> 238
SCHEDULE VI - SUPPLEMENTAL INFORMATION
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
- ------------------------------------------------------- -----------------------------------------------------------
Losses and Loss
Reserves for Discount, Adjustment Expenses Amortization
Deferred Unpaid Losses if any, Incurred Related to: of Deferred
Policy and Loss deducted Net Net --------------------- Policy
Acquisition Adjustment in Previous Unearned Earned Investment Current Prior Acquisition
Year Costs Expenses Column Premiums Premiums Income Year Years Costs
- ---- ----------- ------------- ----------- -------- -------- ---------- -------- -------- ------------
1998 $ -- $ -- $ -- $ -- $ 25,819* $ 7,103 $ 14,860* $ 11,717* $ 3,681*
1997 $(2,053) $437,038 $ -- $ 56,324 $179,729 $16,447 $125,764 $ (2,401) $49,221
1996 $ 446 $458,239 $ -- $102,562 $173,557 $12,194 $123,986 $ 3,023 $33,716
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
Net
Paid Losses
and Loss Net
Acquisition Premiums
Year Expenses Written
- ---- ----------- --------
<S> <C> <C>
1998 $ 28,501 $ 20,209
1997 $120,285 $157,495
1996 $111,963 $179,706
</TABLE>
* These amounts represent the first three months of 1998.
See accompanying Auditors' Report
F-49
<PAGE> 239
APPENDIX D
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
<PAGE> 240
Independent Auditors' Report
The Board of Directors and Shareholders
RISCORP, Inc.:
We have audited the accompanying consolidated balance sheets of RISCORP, Inc.
and subsidiaries ("the Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity,
cash flows and comprehensive income (loss) for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 19 to the accompanying consolidated financial statements,
the Company, its subsidiaries, and certain of its current and former officers
and directors, have been named as defendants in various litigation matters
which, if the plaintiffs prevail, could have a material adverse effect on the
accompanying financial statements. Management's plans with respect to these
matters are also discussed in Note 19. The accompanying financial statements do
not include any adjustments that might result from the outcome of the
aforementioned litigation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RISCORP, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
Schedules 1, 2, 4 and 6 is presented for purposes of additional analysis and is
not a required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ KPMG LLP
Atlanta, Georgia
February 22, 2000
F-1
<PAGE> 241
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost
$76,058 in 1999 and $6,666 in 1998) $ 75,959 $ 6,716
Fixed maturities available for sale, at fair value (amortized cost
$2,995 in 1999 and $9,047 in 1998)--restricted 3,022 9,264
--------- ---------
Total investments 78,981 15,980
Cash and cash equivalents 4,668 6,864
Cash and cash equivalents--restricted 1,925 14,842
Receivable from Zenith -- 49,933
Accounts receivable--other 2,545 7,674
Income taxes recoverable -- 17,277
Deferred income taxes 1,010 3,141
Property and equipment, net 196 337
Other assets 5,751 7,345
--------- ---------
Total assets $ 95,076 $ 123,393
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities - accrued expenses and other liabilities $ 4,778 $ 27,827
--------- ---------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized;
14,258,671 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 or outstanding -- --
Additional paid-in capital 142,688 142,688
Retained deficit (52,728) (45,680)
Unearned compensation--restricted stock -- (2,000)
Treasury Class A Common Stock--at cost, 112,582 shares (1) (1)
Accumulated Other Comprehensive Income (Loss):
Net unrealized gains (losses) on investments (47) 173
--------- ---------
Total shareholders' equity 90,298 95,566
--------- ---------
Total liabilities and shareholders' equity $ 95,076 $ 123,393
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 242
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Fees and other income $ 778 $ 5,906 $ 20,369
Net realized gains 150 4,280 1,546
Net investment income 5,473 7,103 16,447
Premiums earned -- 25,819 179,729
------------ ------------ -----------
Total revenues 6,401 43,108 218,091
------------ ------------ -----------
Expenses:
Commissions and general and administrative expenses 11,083 34,191 70,800
Interest 1,349 676 1,919
Depreciation and amortization 142 2,736 7,423
Losses and loss adjustment expenses -- 24,016 104,052
Unallocated loss adjustment expenses -- 2,561 19,311
------------ ------------ -----------
Total expenses 12,574 64,180 203,505
------------ ------------ -----------
Income (loss) from operations (6,173) (21,072) 14,586
Loss on sale of net assets to Zenith (3,292) (47,747) --
------------ ------------ -----------
Income (loss) before income taxes (9,465) (68,819) 14,586
Income tax expense (benefit) (2,417) 2,056 7,300
------------ ------------ -----------
Net income (loss) $ (7,048) $ (70,875) $ 7,286
============ ============ ===========
Per share data:
Net income (loss) per common share-basic $ (0.19) $ (1.91) $ 0.20
============ ============ ===========
Net income (loss) per common share-diluted $ (0.19) $ (1.91) $ 0.20
============ ============ ===========
Weighted average common shares outstanding 37,562,906 37,011,864 36,891,864
============ ============ ===========
Weighted average common shares and common share
equivalents outstanding 37,562,906 37,011,864 37,115,672
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 243
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(in thousands)
<TABLE>
<CAPTION>
NET
UNREALIZED
CLASS A CLASS B ADDITIONAL GAINS RETAINED TOTAL
COMMON COMMON PAID-IN (LOSSES) ON UNEARNED EARNINGS TREASURY SHAREHOLDERS'
STOCK STOCK CAPITAL INVESTMENTS COMPENSATION (DEFICIT) STOCK EQUITY
-------- ------ -------- ----------- ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 120 $243 $ 137,813 $ 1,769 $ (546) $ 17,909 $-- $ 157,308
Net income -- -- -- -- -- 7,286 -- 7,286
Purchase of treasury stock -- -- 1 -- -- -- (1) --
Change in unearned compensation -- -- (1,840) -- 546 -- -- (1,294)
Increase in net unrealized gains
on investments -- -- -- 233 -- -- -- 233
----- ---- --------- ------- ------- -------- --- ---------
BALANCE, DECEMBER 31, 1997 120 243 135,974 2,002 -- 25,195 (1) 163,533
Net loss -- -- -- -- -- (70,875) -- (70,875)
Issuance of common and restricted
stock 26 -- 6,714 -- (2,000) -- -- 4,740
Decrease in net unrealized
gains on investments -- -- -- (1,829) -- -- -- (1,829)
Other adjustments (3) -- -- -- -- -- -- (3)
----- ---- --------- ------- ------- -------- --- ---------
BALANCE, DECEMBER 31, 1998 143 243 142,688 173 (2,000) (45,680) (1) 95,566
Net loss -- -- -- -- -- (7,048) -- (7,048)
Unearned compensation -- -- -- -- 2,000 -- -- 2,000
Change in net unrealized
gains on investments -- -- -- (220) -- -- -- (220)
----- ---- --------- ------- ------- -------- --- ---------
BALANCE, DECEMBER 31, 1999 $ 143 $243 $ 142,688 $ (47) $ -- $(52,728) $(1) $ 90,298
===== ==== ========= ======= ======= ======== === =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 244
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,048) $(70,875) $ 7,286
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 142 2,736 7,423
Amortization of unearned compensation 2,000 -- --
Loss on sale of net assets to Zenith 3,292 47,747 --
Loss (gain) on disposal of property and equipment -- (99) 291
Net realized gain on sale of investments (150) (4,280) (1,545)
Gain on sale of personal residence -- (1) --
Net amortization of discounts on investments (73) 166 14
Issuance of RISCORP, Inc. stock -- 4,740 --
Other 15 1,181 --
Change in:
Premiums receivable, net -- 16,627 22,026
Accounts receivable--other 5,129 (1,558) (5,104)
Recoverable from Florida State Disability Trust Fund, net -- 659 4,295
Reinsurance recoverables -- (30,051) (3,553)
Prepaid reinsurance premiums -- 8,301 19,807
Prepaid managed care fees -- 2,238 23,537
Accrued reinsurance commissions -- (1,481) (16,770)
Income taxes recoverable 17,277 (17,277) --
Deferred tax assets 2,250 20,181 431
Other assets 1,594 495 (3,249)
Loss and loss adjustment expense reserves -- 25,253 (21,502)
Unearned premiums -- (13,147) (46,280)
Accounts payable--related party -- -- (1,171)
Accrued expenses and other liabilities (22,832) (29,140) (8,880)
--------- -------- ---------
Net cash provided by (used in) operating activities 1,596 (37,585) (22,944)
--------- -------- ---------
Cash flows from investing activities:
Proceeds from:
Sales and maturities of fixed maturities--available for sale 357,510 86,533 130,542
Maturities of fixed maturities--held to maturity -- 6,000 1,885
Sale of equity securities 150 1,324 4,284
Sale of equipment -- 255 158
Sale of personal residence -- 436 --
Purchase of:
Fixed maturities--available for sale (420,800) (69,215) (100,499)
Fixed maturities--held to maturity -- (5,874) (1,237)
Equity securities -- -- (637)
Property and equipment -- (971) (4,477)
Personal residence -- (435) --
</TABLE>
(continued)
F-5
<PAGE> 245
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from investing activities (continued):
Net cash received from Zenith for sale of net assets 46,431 35,000 --
Purchase (net of cash acquired) of:
Cash and investments not yet transferred to Zenith -- 7,404 --
Maryland NARM Fund -- -- 134
-------- -------- --------
Net cash provided by (used in) investing activities (16,709) 60,457 30,153
-------- -------- --------
Cash flows from financing activities:
Transfer of cash and cash equivalents from (to) restricted balances 12,917 (30,856) (13,295)
Increase (decrease) in deposit balances payable -- (1,598) 725
Decrease in unearned compensation -- -- 546
Purchase of treasury stock subject to put options -- -- (2,100)
Principal repayments of notes payable -- (412) (694)
Other, net -- -- (1,840)
-------- -------- --------
Net cash provided by (used in) financing activities 12,917 (32,866) (16,658)
-------- -------- --------
Net decrease in cash and cash equivalents (2,196) (9,994) (9,449)
Cash and cash equivalents, beginning of year 6,864 16,858 26,307
-------- -------- --------
Cash and cash equivalents, end of year $ 4,668 $ 6,864 $ 16,858
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,154 $ 493 $ 1,928
======== ======== ========
Income taxes $ 247 $ 2,341 $ 6,566
======== ======== ========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
As of April 1, 1998, the Company sold substantially all of its insurance
assets and transferred certain liabilities to Zenith. In conjunction with
the sale and transfer, a $49,933 receivable from Zenith was recorded as of
December 31, 1998 [see Note 1(c)].
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 246
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Net income (loss) $(7,048) $(70,875) $ 7,286
------- -------- -------
Other comprehensive income (loss), before income taxes:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during year (339) 194 (2,392)
Income tax expense (benefit) related to items of other
comprehensive income (loss) (119) 68 (837)
------- -------- -------
Other comprehensive income (loss), net of income taxes (220) 126 (1,555)
------- -------- -------
Total comprehensive income (loss) $(7,268) $(70,749) $ 5,731
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 247
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND SALE TO ZENITH INSURANCE COMPANY
(A) BACKGROUND
RISCORP, Inc. ("RISCORP") was formed in February 1996 through the
reorganization and consolidation of several affiliated companies (collectively,
the "Company") that were under the common control of a majority shareholder,
who, at that time, was the Chairman of the Board and Chief Executive Officer of
RISCORP. The reorganization and consolidation qualified as a tax-free
reorganization of commonly controlled entities and was accounted for in a manner
similar to a "pooling of interests."
In November 1996, at a special meeting of the Board of Directors of
RISCORP, the Board voted to establish a Strategic Alternatives Committee to
evaluate alternatives to maximize shareholder value, including, without
limitation, potential acquisitions, joint ventures, mergers, strategic
alliances, and the sale of all or part of RISCORP and its subsidiaries. The
actions of the Strategic Alternatives Committee during the period from November
1996 through June 1997 culminated in the execution of the Asset Purchase
Agreement on June 17, 1997 [as more fully described in Note 1(c)] for the sale
and transfer of certain of RISCORP's and its subsidiaries' assets and
liabilities to another insurer for cash. In addition, the Florida Insurance
Department requested the purchaser to provide an interim reinsurance agreement
and cut-through endorsement on all inforce business as of June 17, 1997 and all
new and renewed business written after June 17, 1997. This reinsurance agreement
only provided coverage for Florida workers' compensation policyholders and was
approved by the Florida Insurance Department.
Following RISCORP's inability to timely file its Annual Report on Form
10-K for the year ended December 31, 1996 or its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, RISCORP's Class A Common Stock was
delisted in July 1997 by the NASDAQ Stock Market's National Market, on which its
stock was traded. RISCORP filed its 1996 Form 10-K/A on October 28, 1997 and
amended that filing on February 27, 1998 in response to comments received from
the Securities and Exchange Commission ("SEC") in connection with the
preparation of RISCORP's special meeting proxy statement that was mailed to
shareholders on March 3, 1998. Despite RISCORP's timely filing of all periodic
reports for all periods subsequent to the third quarter of 1997, RISCORP's Class
A Common Stock has remained delisted, and RISCORP has no intention to seek
readmission for listing on NASDAQ or any national securities exchange.
(B) EXECUTION OF MERGER AGREEMENT WITH WILLIAM D. GRIFFIN
In November 1999, RISCORP entered into a definitive agreement (the
"Merger Agreement") to merge with Griffin Acquisition Corp. ("Acquiror"), a
company controlled by Mr. William D. Griffin, the majority shareholder of
RISCORP. Pursuant to the terms of the Merger Agreement, each issued and
outstanding share of Class A Common Stock will receive $2.85 in cash, plus a
contingent right to receive an additional pro rata cash amount if RISCORP
recovers any additional amounts from Zenith Insurance Company. Under the terms
of the Merger Agreement, Acquiror will assume all of the liabilities of RISCORP,
including its pending litigation. The transaction is subject to customary
closing conditions, including shareholder approval, and is expected to close in
the second quarter of 2000. This transaction, if consummated, will constitute a
going private transaction.
(C) SALE TO ZENITH INSURANCE COMPANY
As of April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith
Insurance Company ("Zenith"). In connection with the sale to
F-8
<PAGE> 248
Zenith, the Company ceased substantially all of its former business operations,
including its insurance operations. 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, RISCORP's right to
seek correction of alleged errors made by the neutral auditors in connection
with its determination of certain reinsurance recoverable adjustments contained
in the Final Business Balance Sheet. On October 7, 1999, the neutral auditors
denied RISCORP's request for correction of these errors. On January 5, 2000,
RISCORP filed a lawsuit against Zenith and the neutral auditors in the Superior
Court of Fulton County, Georgia, seeking correction of these alleged errors.
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.
(D) BUSINESS
Prior to April 1, 1998, RISCORP, through its wholly-owned insurance
subsidiaries, was principally engaged in providing workers' compensation
insurance under a managed care philosophy. RISCORP provided managed care
workers' compensation products and services to clients throughout the Southeast
and other select markets. In addition, RISCORP, through its wholly-owned
non-insurance subsidiaries, provided reinsurance, risk management advisory
services, and insurance managerial services.
As more fully described in Note 1(c), RISCORP and certain of its
subsidiaries entered into an Asset Purchase Agreement with Zenith for the sale
of substantially all of their assets and the transfer of certain liabilities in
exchange for cash. The Company's computer systems and proprietary computer
software, including the policy issue, management system, and claims systems,
were included in the assets sold to Zenith.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with GAAP
requires the use of assumptions and estimates in reporting certain assets and
liabilities and related disclosures. Actual results could differ from those
estimates.
F-9
<PAGE> 249
(B) RECOGNITION OF REVENUES
Workers' compensation and employer liability insurance premiums
consisted of deposit premiums and installment premiums billed under the terms of
the policy, and estimates of retrospectively-rated premiums based on experience
incurred under those contracts. Unbilled installment premiums and audit premiums
were recognized as revenue on the accrual basis. Premiums were primarily
recognized as revenue over the period to which the premiums related using the
daily pro rata basis with a liability for unearned premiums recorded for the
excess of premiums billed over the premiums earned.
Service fee revenue was recorded as a percentage of standard earned
premiums of the underlying insurance policies of the facilities managed, in
accordance with the specific contractual provisions.
Reinsurance premiums were recognized as revenue on a pro rata basis
over the contract terms with a liability for unearned premiums established for
the unexpired portion of the contracts.
As more fully described in Note 1(c), the Company transferred the
unearned premium reserve to Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.
(C) FLORIDA SPECIAL DISABILITY TRUST FUND
The State of Florida operates a Special Disability Trust Fund ("SDTF")
for the purpose of providing benefits to workers who have a pre-existing
condition and incur a second or subsequent injury.
The SDTF is financed through annual assessments imposed on workers'
compensation insurers, which assessments are based on a percentage of net
workers' compensation premiums written. The Company submitted claims to the SDTF
for recovery of applicable claims paid on behalf of the Company's insureds. The
Company estimated such recoveries based on industry statistics applied to
ultimate projected claims.
As more fully described in Note 1(c), the Company transferred the SDTF
recoverable to Zenith on April 1, 1998, in accordance with the terms of the
Asset Purchase Agreement.
(D) INVESTMENTS
Fixed maturity investments are securities that mature at a specified
future date more than one year after being acquired. Fixed maturity securities
that may be sold prior to maturity due to changes in interest rates, prepayment
risks, liquidity needs, tax-planning purposes, or other similar factors, are
classified as "available for sale" and are carried at fair value as determined
using values from independent pricing services.
When owned, equity securities (common and nonredeemable preferred
stocks) were carried at fair value. If the current market value of equity
securities was higher than the original cost, the excess was an unrealized gain,
and if lower than the original cost, the difference was an unrealized loss. The
net unrealized gains or losses on equity securities, net of the related deferred
income taxes, were reported as a separate component of shareholders' equity,
along with the net unrealized gains or losses on fixed maturity securities
available for sale.
Realized gains and losses on sales of investments are recognized as
income or loss on the
F-10
<PAGE> 250
specific identification basis, as of the trade date. Impairment losses, if any,
resulting from other-than-temporary declines in fair value are included in net
investment income.
As more fully described in Note 1(c), the Company transferred the major
portion of its investment portfolio, including restricted investments, to Zenith
on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement.
(E) LOSSES AND LOSS ADJUSTMENT EXPENSES
The liabilities for losses and loss adjustment expenses were based on
an actuarial determination and represented management's best estimate of the
ultimate cost of losses and loss adjustment expenses that were unpaid at the
balance sheet date, including incurred but not reported claims. Although the
liabilities were supported by actuarial projections and other data, such
liabilities were ultimately based on management's reasoned expectations of
future events. The liabilities for losses and loss adjustment expenses were
continually reviewed and, as adjustments became necessary, such adjustments were
included in current operations.
The Company recognized reinsurance recoveries, estimated recoveries
from the SDTF, and subrogation from third parties as reductions to losses
incurred.
As more fully described in Note 1(c), the Company transferred the
liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998,
in accordance with the terms of the Asset Purchase Agreement.
(F) REINSURANCE
Premiums and losses and loss adjustment expenses ceded by the Company
under reinsurance contracts in which the Company was provided indemnification
against loss or liability relating to specified insurance risks were reported as
reductions to premiums earned and losses and loss adjustment expenses,
respectively. Amounts recoverable for ceded losses and loss adjustment expenses
and ceded unearned premiums under reinsurance agreements were reported as
assets. Reinsurance contracts that did not transfer risk were accounted for as
deposits.
As more fully described in Note 1(c), the Company transferred the
reinsurance assets and liabilities to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.
(G) INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets
and deferred tax liabilities are established for temporary differences between
the financial reporting basis and tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
recovered or settled. Such temporary differences were principally related to the
deferral of policy acquisition costs, tax-basis discount on reserves for unpaid
losses and loss adjustment expenses, the deductibility of unearned premiums, the
allowance for uncollectible premiums receivable, and the amortization of
goodwill. A valuation allowance has been established to reduce the net deferred
tax asset to an amount that, in the opinion of management, is more likely than
not to be realized.
F-11
<PAGE> 251
(H) POLICY ACQUISITION COSTS
The costs of acquiring and renewing business, principally commissions,
premium taxes, and other underwriting expenses, were deferred to the extent
recoverable and amortized over the terms of the related policies. Anticipated
investment income was considered in the determination of recoverability.
Unearned ceding commissions were reported as a reduction to deferred policy
acquisition costs. The policy acquisition costs deferred in 1998 and 1997
totaled $8.9 million and $41 million, respectively. The 1998 and 1997 policy
acquisition costs amortized totaled $11.4 million and $49.2 million,
respectively. The amortization of policy acquisition costs was included in
commissions and general and administrative expenses in the accompanying
consolidated statements of operations for 1998 and 1997.
As more fully described in Note 1(c), the Company transferred the
deferred policy acquisition cost asset to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.
(I) GOODWILL
The costs in excess of net assets acquired, or goodwill, represent the
unamortized excess of the cost over the underlying net assets of companies
acquired. The goodwill has been amortized on a straight-line basis over periods
ranging from five to 15 years. The amortization expense for 1998 and 1997
totaled $0.9 million and $3.3 million, respectively, and accumulated
amortization as of December 31, 1997 was $11.3 million. The net assets acquired
in excess of cost, or "negative" goodwill, have been amortized on a
straight-line basis over 10 years. The income from amortization of negative
goodwill totaled $0.2 million and $0.8 million for 1998 and 1997, respectively.
As more fully described in Note 1(c), the Company transferred the goodwill,
including "negative" goodwill, to Zenith on April 1, 1998, in accordance with
the terms of the Asset Purchase Agreement.
The Company periodically reviewed its assets subject to Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and, when events
or changes in circumstances indicated that the carrying amount of an asset may
no longer be fully recoverable, the Company reviewed the recoverability of the
asset principally by estimating the future cash flows expected to result from
the use of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) was less than the
carrying value of the asset, the Company recognized an impairment loss. The
measurement of an impairment loss was based on the carrying amount and estimated
fair value of the asset.
(J) PROPERTY AND EQUIPMENT
Property and equipment have been recorded at cost less accumulated
depreciation. Depreciation was computed using the straight-line method over the
useful lives of the related assets. Property and equipment recorded under
capital lease arrangements was being amortized over the shorter of the asset's
useful life or the lease term.
The Company capitalized incremental internal and external costs
directly related to internally developed software to meet the Company's needs.
Those software development projects represented major system enhancements or
replacements of existing operating management information systems.
Capitalization commenced when management had committed to funding the software
project and it was probable that upon completion the software would perform its
intended function. The capitalized costs were recorded as property and equipment
and amortized using the straight-line method over three years. In 1998, the
Company capitalized costs of $0.3 million and recorded amortization expense for
internally developed software costs of $0, $0.1 million, and $0.3 million for
1999, 1998, and 1997, respectively.
F-12
<PAGE> 252
As more fully described in Note 1(c), the Company transferred the major
portion of the property and equipment, including the internally developed
software, to Zenith on April 1, 1998, in accordance with the terms of the Asset
Purchase Agreement.
(K) INVESTMENT IN JOINT VENTURE
The Company accounted for its 50 percent investment in a joint venture
arrangement on the equity basis of accounting whereby the Company's recorded
investment was adjusted for its proportionate share of earnings or losses of the
joint venture.
(L) CASH AND CASH EQUIVALENTS
The Company considered all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The Company had restricted cash at December 31, 1999 of $1.9 million,
consisting of deposits with various governmental agencies.
(M) PREMIUMS RECEIVABLE, NET
As more fully described in Note 1(c), the Company transferred the
premiums receivable balance and related allowance for uncollectible amounts to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.
(N) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the presentation of two earnings per share ("EPS")
calculations, basic EPS and diluted EPS, in the consolidated statements of
operations. Basic EPS is computed by dividing net income or loss by the weighted
average number of shares outstanding for the period. Diluted EPS is computed by
dividing net income by the weighted average number of shares outstanding for the
period plus the shares for the dilutive effect of stock options, contingent
shares, and other common stock equivalents.
The components of the weighted average shares used in the EPS
calculations are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Average outstanding shares used for
calculating basic EPS 37,562,906 37,011,864 36,891,864
Effect of stock options -- -- 223,808
---------- ---------- ----------
Average outstanding shares used for
calculating diluted EPS 37,562,906 37,011,864 37,115,672
========== ========== ==========
</TABLE>
(O) STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for
stock-based compensation that is based on the fair value of stock
F-13
<PAGE> 253
options and similar instruments and encourages, but does not require, adoption
of that method. RISCORP has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measuring
compensation cost. However, as required by SFAS 123, RISCORP has disclosed pro
forma net income or loss per share for 1999, 1998, and 1997, as if the
provisions of SFAS 123 had been adopted (see Note 12).
(P) YEAR 2000
Neither the Company, its suppliers, nor the financial institutions with
which the Company maintains banking or investment accounts, experienced any
known Year 2000 computer problems.
(Q) CONCENTRATIONS OF RISK
A description of significant risks that faced RISCORP and its property
and casualty insurance subsidiaries and how those risks were minimized is as
follows:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates that can create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those currently reported in the financial statements.
The Company minimized this risk by reviewing legislative and other
regulatory changes and adjusting rates whenever possible. All of the
Company's premiums were derived from products offered to customers
located in the United States. Accordingly, an insurer could be
adversely affected by economic downturns, significant unemployment, and
other conditions that may occur from time to time.
Credit Risk is the risk that issuers of securities owned by
the Company will default, or other parties, including reinsurers, the
SDTF, agents, and insureds that may owe the Company money, will not
pay. The Company minimized this risk by, among other means, adhering to
a conservative investment strategy, by placing reinsurance with highly
rated reinsurers, and by actively monitoring collections of the SDTF
recoverable and premiums receivable.
Interest Rate Risk is the risk that interest rates will change
and cause a decrease in the value of the Company's investments. The
Company mitigated this risk by attempting to match the maturity
schedule of its assets with the expected payout of its liabilities. To
the extent that liabilities come due more quickly than assets mature,
an insurer would have to sell assets prior to maturity and recognize
potential gains or losses.
Liquidity Risk is the risk that the liquidity of the Company
could have been materially adversely affected if Zenith had prevailed
in the dispute resolution process with respect to the determination of
the final purchase price or if there had been a material delay in the
Company's receipt of the final payment determined to be payable by
Zenith. See Note 1(c) for further discussion of this issue.
(R) RESTRUCTURING CHARGES
In June 1997, the Company implemented a workforce reduction and a
consolidation of the Company's management team, field offices, and products. The
reduction in the work force resulted in the termination of 128 employees. The
Company also announced in June 1997 its intention to focus solely
F-14
<PAGE> 254
on its core workers' compensation insurance business and to close all field
offices, except Charlotte and Birmingham, by the end of 1997. The Company
recorded $5.8 million in non-recurring expenses during the second quarter of
1997 in connection with the workforce reduction and consolidation of the field
offices and products. Those non-recurring expenses consisted principally of
severance expenses of $5.1 million and occupancy costs of $0.7 million, of which
$0.1 million and $7,000, respectively, were unpaid as of December 31, 1999 and
$0.4 million and $0.2 million were unpaid as of December 31, 1998. Those
non-recurring expenses were included in commissions and underwriting and
administrative expenses in the accompanying 1997 consolidated statement of
operations.
(S) PARTICIPATING INSURANCE POLICIES
The Company offered participating insurance policies in connection with
custom plans, flexible retention plans, and preferred account dividend plans.
Policyholder dividends were approved quarterly by the Board of Directors and
were based on the actual loss experience of each of the policies. Participating
policies represented 20 percent and 16 percent of written premiums as of March
31, 1998 (just prior to the sale to Zenith) and December 31, 1997, respectively.
The Company paid dividends to participating policyholders of $8.5 million during
1997. No policyholder dividends were paid in 1998; however, the policyholder
dividends expected to be paid after 1997 were reduced by $0.5 million during the
quarter ended March 31, 1998 due to loss experience.
As more fully described in Note 1(c), the Company transferred the
liability for policyholder dividends to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.
(T) DETERMINATION OF FAIR VALUES OF FINANCIAL INSTRUMENTS
In the accompanying financial statements, cash and cash equivalents,
fixed maturity securities, receivables, and other liabilities have been
identified as financial instruments. The fair values of fixed maturities and
equity securities are presented in Note 5. For the remaining financial
instruments, management believes the carrying values approximate fair value due
to the short maturity, terms, and fluctuations in market conditions of those
instruments. The estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates reported herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies could have a material effect
on the estimated fair value amounts.
(U) COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this standard had no impact
on the Company's net income or shareholders' equity. In addition to certain
other adjustments, SFAS 130 requires unrealized gains or losses on the Company's
available for sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.
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<PAGE> 255
(V) RECLASSIFICATIONS
For comparative purposes, certain amounts in the accompanying 1998 and
1997 financial statements have been reclassified from amounts previously
reported. Those reclassifications had no effect on previously reported
shareholders' equity or net income (loss).
(3) MANAGEMENT AND OUTSOURCING AGREEMENTS
Following the consummation of the sale to Zenith on April 1, 1998, the
Company has had no employees. Therefore, as more fully described below, the
Company entered into a management agreement and certain outsourcing service
agreements to provide the Company with the necessary resources to conduct its
day-to-day activities.
In February 1998, the Company entered into a Management Agreement (the
"Management Agreement") with The Phoenix Management Company, Ltd. ("Phoenix")
for the provision of various management services to the Company immediately
following the consummation of the transactions contemplated by the Asset
Purchase Agreement with Zenith. Mr. Frederick M. Dawson owned a majority
interest in Phoenix, a Florida limited partnership, and controlled its
operations as President of the General Partner until his death in October 1999.
Mr. Walter E. Riehemann owned a minority interest in Phoenix and serves as Vice
President and Secretary of the General Partner. Although neither Mr. Dawson nor
Mr. Riehemann have been employees of the Company since the consummation of the
transactions contemplated by the Asset Purchase Agreement with Zenith, the
Management Agreement specifically provided that Mr. Dawson was to hold the
titles of President and Chief Executive Officer of the Company and Mr. Riehemann
was to hold the titles of Chief Investment Officer, Treasurer, and Secretary of
the Company. Following Mr. Dawson's death, the Board of Directors named Mr.
Riehemann to also fill the position of President of RISCORP.
Pursuant to the terms of the Management Agreement, the Company was to
pay Phoenix $100,000 per month, plus expenses, and granted Phoenix a restricted
stock award for 1,725,000 shares of RISCORP's Class A Common Stock (subject to
certain vesting provisions) in consideration for its management services.
Following Mr. Dawson's death, the amount paid to Phoenix by the Company was
reduced to $70,000 per month effective on December 1, 1999. The Management
Agreement has an initial term of three years which commenced immediately
following the consummation of the transactions contemplated by the Asset
Purchase Agreement with Zenith, and the Company has the right to extend the term
for an additional year. The Company paid Phoenix a retainer of $0.6 million,
which retainer is to be applied by Phoenix against the fees payable by the
Company during the final six months of the initial term. That retainer is
included in other assets in the accompanying December 31, 1999 and 1998
consolidated balance sheets. The restricted stock grant vests monthly over the
initial term of the Management Agreement, and Phoenix is entitled to all rights
applicable to holders of shares of RISCORP's Class A Common Stock with respect
to all such shares from the date of grant, including, without limitation, the
right to receive any dividends or distributions payable on the restricted stock.
Pursuant to the terms of the restricted stock award agreement, Phoenix may not
dispose of or otherwise transfer the restricted stock until vested. For the
grant of restricted stock, unearned compensation equivalent to the fair market
value of the shares at the date of the grant was recorded as a separate
component of shareholders' equity and subsequently amortized to expense over the
vesting period. The Company recognized amortization of $2 million and $4.1
million to consulting expense for the years ended December 31, 1999 and 1998,
respectively. Pursuant to the terms of the Management Agreement, the Company
paid Phoenix $2.8 million to reimburse the partners of the Management Company,
on an
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after-tax basis, for all taxes (exclusive of state taxes) incurred in connection
with the Section 83(b) election filed with respect to the restricted stock
grant. In the event that the Management Agreement is terminated by the Company
prior to the expiration of its initial term due to (i) the complete liquidation,
dissolution, and winding up of all of the business and affairs of the Company,
including, without limitation, the final distribution to all RISCORP
shareholders or (ii) the final distribution to the holders of RISCORP's Series A
Common Stock, the vesting under the restricted stock grant will accelerate
immediately prior to such event and the Company will make a lump sum payment to
Phoenix equal to the unpaid balance of the amount that Phoenix would have
received in monthly management fees during the initial term of the Management
Agreement.
Pursuant to the terms of the Management Agreement, Phoenix provides,
among other things, the following services to the Company: (i) management of the
day-to-day operations of RISCORP and its subsidiaries, (ii) management of the
preparation, negotiation, and defense of the Final Business Balance Sheet (as
defined in the Asset Purchase Agreement), (iii) assistance in the overall
planning and coordination of the business of the Company, (iv) assistance in the
resolution of all claims and contingencies pending or subsequently asserted
against the Company, (v) coordination of the finance, accounting, and tax
requirements of the Company with the specific duties to be delegated, at the
expense of the Company, to competent professionals approved by the Board of
Directors of the Company, (vi) preparation of the investment policy for the
Company and coordination of the investment transactions through one or more
investment advisors, and (vii) performance of such other duties as may from time
to time be requested by the Board of Directors of the Company not inconsistent
with the terms of the Management Agreement.
In May 1997, subject to shareholder approval, RISCORP granted to Mr.
Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of
RISCORP's Class A Common Stock. Pursuant to the terms of the Management
Agreement, immediately following the consummation of the transactions
contemplated by the Asset Purchase Agreement with Zenith and the receipt of the
applicable cash payments under his employment agreement, RISCORP and Mr. Dawson
entered into a Termination Agreement evidencing the termination of each party's
rights, duties, and obligations under Mr. Dawson's employment agreement,
including the termination of the stock option grants and Mr. Dawson's right to
receive any of the shares thereunder.
Effective April 1, 1998, the Company entered into an accounting
outsourcing agreement with Buttner Hammock & Company, P.A. ("BHC"). Under the
terms of the agreement, BHC is to provide monthly accounting, financial
reporting, tax return preparation, and certain financial and tax consulting
services. Under that agreement, Mr. Buttner has been designated as the chief
accounting officer for RISCORP and each of its subsidiaries. The agreement with
BHC is for a period of 36 months. In consideration for the services provided by
BHC, the Company is to pay BHC a monthly fee of approximately $0.1 million
during 1998, 1999, and 2000, plus reasonable out-of-pocket costs. In addition,
as defined in the agreement, BHC may also provide certain services to the
Company that are to be billed on an hourly rate basis. The Company paid BHC a
retainer of $0.5 million against the fees due for the final six months of the
initial term of the agreement. That retainer is included in other assets in the
accompanying December 31, 1999 and 1998 consolidated balance sheets.
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. In consideration of the services provided, the Company is to pay a
fee of $100 per hour plus reasonable out-
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<PAGE> 257
of-pocket costs with a minimum commitment of 1,020 hours for year one of the
contract and a minimum commitment of 900 hours for years two and three of the
contract.
During 1999 and 1998, the Company expensed $3.0 million and $3.4
million in fees, respectively, excluding restricted stock grants, and tax
payments previously discussed, in connection with the services provided under
the foregoing management and outsourcing agreements. Those expenses are included
in commissions and general and administrative expenses in the accompanying 1999
and 1998 consolidated statement of operations, respectively.
(4) ACQUISITIONS AND JOINT VENTURE
ACQUISITION OF COMPSOURCE
In March 1996, RISCORP purchased all of the outstanding stock of
CompSource, Inc. and Insura, Inc. (collectively, "CompSource") in exchange for
$12.1 million in cash and 112,582 shares of RISCORP's Class A Common Stock
valued at $2.1 million on the date of acquisition. On the acquisition date, the
excess of the purchase price over the fair value of the net assets acquired was
$12.6 million and was recorded as goodwill. CompSource is a workers'
compensation management services company offering its services in North
Carolina. Pursuant to a stock redemption agreement entered into as part of this
transaction, the former shareholders of CompSource elected to have RISCORP
repurchase the 112,582 shares in March 1997, and RISCORP repurchased those
shares from the former shareholders for $2.1 million in accordance with the
terms of the redemption agreement.
ACQUISITION OF INDEPENDENT ASSOCIATION ADMINISTRATORS, INC. ("IAA") AND RISK
INSPECTION SERVICES AND CONSULTING, INC. ("RISC")
In September 1996, RISCORP purchased all of the outstanding stock of
IAA and 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.
JOINT VENTURE ARRANGEMENT
In January 1996, RISCORP, through one of its wholly-owned subsidiaries,
entered into a joint venture arrangement with Health Care Service Corporation
("HCSC"), a subsidiary of Blue Cross and Blue Shield of Illinois, to underwrite
and sell managed care workers' compensation insurance in Illinois. RISCORP and
HCSC each held 50 percent ownership in the joint venture known as Third Coast
Holding Company ("Third Coast"). RISCORP contributed the use of its expertise,
insurance systems, and intellectual property, while HCSC contributed cash of $10
million. RISCORP's contributed property in Third Coast was valued at $10
million; however, RISCORP's cost basis in the contributed property was
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<PAGE> 258
$0 and, as of December 31, 1996, RISCORP recorded its initial investment in
Third Coast at $0. The carrying value of RISCORP's investment in Third Coast at
December 31, 1997 was $0.
Initially, RISCORP accounted for its 50 percent investment in Third
Coast on the equity basis of accounting, whereby RISCORP's recorded investment
was adjusted for its proportionate share of earnings or losses of Third Coast.
RISCORP discontinued the use of the equity method of accounting for Third Coast
in the first quarter of 1997 when the cumulative losses reduced RISCORP's
investment in Third Coast to $0. RISCORP has not made any financial guarantees
relating to Third Coast and has not made any financial commitments to provide
any future funding to Third Coast.
Effective January 1, 1998, RISCORP entered into an agreement with HCSC
to sell RISCORP's 50 percent interest in Third Coast for $1.3 million. The $1.3
million gain on the sale of Third Coast was included in the 1998 net realized
gains. RISCORP received the funds due in connection with this transaction in
April 1998.
As more fully described in Note 1(c), the Company transferred the
unamortized balance of goodwill to Zenith on April 1, 1998, in accordance with
the terms of the Asset Purchase Agreement.
(5) INVESTMENTS
Investments (including restricted investments) included in the
accompanying consolidated balance sheets as of December 31, 1999 and 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Available for sale:
Fixed maturity securities:
U.S. government obligations $20,181 $ 32 $ (50) $20,163
Corporate obligations 58,872 1 (55) 58,818
------- ---- ----- -------
Total investments $79,053 $ 33 $(105) $78,981
======= ==== ===== =======
Available for sale:
Unrestricted $76,058 $ 6 $(105) $75,959
Restricted 2,995 27 -- 3,022
------- ---- ----- -------
Total $79,053 $ 33 $(105) $78,981
======= ==== ===== =======
DECEMBER 31, 1998:
Available for sale:
Fixed maturity securities:
U.S. government obligations $13,681 $219 $ -- $13,900
Corporate obligations 2,032 48 -- 2,080
------- ---- ----- -------
Total investments $15,713 $267 $ -- $15,980
======= ==== ===== =======
Available for sale:
Unrestricted $ 6,666 $ 50 $ -- $ 6,716
Restricted 9,047 217 -- 9,264
------- ---- ----- -------
Total $15,713 $267 $ -- $15,980
======= ==== ===== =======
</TABLE>
The fair values of investments (including restricted investments) at
December 31, 1999 and 1998 were determined using independent pricing services.
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<PAGE> 259
The amortized cost and estimated fair value of fixed maturities
(including restricted investments) by contractual maturity, as of December 31,
1999, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in 2000 $66,667 $66,613
Due in 2001 to 2004 11,987 11,964
Due in 2005 to 2009 399 404
------- -------
Total $79,053 $78,981
======= =======
</TABLE>
The actual maturities may differ from the contractual maturities
because certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
During 1999, 1998, and 1997, proceeds from sales and maturities of
fixed maturities available for sale totaled $357.5 million, $86.5 million, and
$130.5 million, respectively.
Gross realized gains and gross realized losses from the sale of
investments for 1999, 1998, and 1997 are summarized in the following table and
were reported in net investment income in the accompanying consolidated
statements of operations (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ------- -------
<S> <C> <C> <C>
Gross realized gains $150 $ 4,348 $ 1,770
Gross realized losses -- (68) (224)
---- ------- -------
Net realized gains $150 $ 4,280 $ 1,546
==== ======= =======
</TABLE>
A gross realized gain of $2.9 million and a gross realized loss of $0.1
million relating to securities that were transferred to Zenith in connection
with the Asset Purchase Agreement were included in the foregoing 1998 net
realized gains.
The following table summarizes the components of net investment income
for 1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Fixed maturities $ 3,258 $ 3,733 $ 13,815
Equity securities -- (166) 469
Cash and cash equivalents 491 1,633 2,516
Zenith receivable and other accounts
receivable 1,831 2,080 --
------- -------- --------
5,580 7,280 16,800
Investment expenses (107) (177) (353)
------- -------- --------
Net investment income $ 5,473 $ 7,103 $ 16,447
======= ======== ========
</TABLE>
Although the Company has credit risk in the investment portfolio, no
fixed maturity security had a Standard & Poor's rating of less than A at
December 31, 1999. The carrying value of securities on deposit with various
governmental agencies was $3.0 million and $11.6 million at December 31, 1999
and 1998, respectively. In addition, the carrying value of securities held in
trust in connection with a fronting agreement between Virginia Surety Company,
Inc. and RISCORP Management Services, Inc. was $1.6
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<PAGE> 260
million at December 31, 1998; such securities were included in fixed maturities
available for sale-restricted classification at December 31, 1998 in the
accompanying consolidated balance sheets.
Excluding investments issued or guaranteed by the United States, the
Company had no investments in any insurer in excess of 10 percent of RISCORP's
shareholders' equity at December 31, 1999 or 1998.
(6) LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
As more fully described in Note 1(c), the Company transferred the
liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998,
in accordance with the terms of the Asset Purchase Agreement.
Prior to the sale to Zenith, the Company established an estimated
liability for losses and loss adjustment expenses with respect to reported
claims and claims incurred but not yet reported as of the end of each accounting
period. The Company established that liability based on facts then known,
estimates of future claims trends, and other factors, including the Company's
experience with similar cases and historical Company and industry trends, such
as reserving patterns, loss payment patterns, claim closure and reporting
patterns, and product mix.
The activity in the liability for losses and loss adjustment expenses
for 1998 and 1997 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Gross liability for losses and loss adjustment expenses,
at January 1 $ 437,038 $ 458,239
Reinsurance recoverables (184,251) (180,698)
SDTF recoverables (45,211) (49,505)
Prepaid managed care fees (8,420) (31,958)
--------- ---------
Net balance at January 1 199,156 196,078
--------- ---------
Incurred losses and loss adjustment expenses related to:
Current year 14,860 125,764
Prior years 11,717 (2,401)
--------- ---------
Total incurred losses and loss adjustment expenses 26,577 123,363
--------- ---------
Paid related to:
Current year 1,717 45,646
Prior years 26,760 74,639
--------- ---------
Total paid 28,477 120,285
--------- ---------
Net balance at December 31 197,256 199,156
Plus reinsurance recoverables 214,302 184,251
Plus SDTF recoverables 44,552 45,211
Plus prepaid managed care fees 6,182 8,420
--------- ---------
Gross liability at December 31 462,292 437,038
Gross liability for losses and loss adjustment expenses
transferred to Zenith [see Note 1(c)] (462,292) --
--------- ---------
Gross liability for losses and loss adjustment expenses,
at December 31 $ -- $ 437,038
========= =========
</TABLE>
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<PAGE> 261
The 1998 adverse loss development was primarily related to increases in
the actuarial estimates of remaining loss liabilities pertaining to the Florida
business offset somewhat by decreases in the actuarial estimates of remaining
loss liabilities pertaining to the Alabama and North Carolina business.
The Company recognized recoveries from the SDTF and subrogation from
third parties as a reduction of incurred losses. In determining the best
estimate of the effect of these recoveries on the ultimate cost of all unpaid
losses and loss adjustment expenses, the Company utilized historical and
industry statistics. The estimated amount of recoveries from the SDTF included
as a reduction to the liability for losses and loss adjustment expenses was
$45.2 million at December 31, 1998.
(7) FLORIDA SPECIAL DISABILITY TRUST FUND ("SDTF")
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds, and self-insured employers in Florida for certain workers'
compensation benefits paid to injured employees. The SDTF reimburses claim
payments made to a claimant whose injury merges with, aggravates, or accelerates
a pre-existing permanent physical impairment. The SDTF is managed by the State
of Florida and is funded through assessments against insurers and self-insurers
providing workers' compensation coverage in Florida. The Company's pro-rata
amount of the SDTF assessment is based on their written premiums compared to the
total workers' compensation premiums written by all Florida insurers and
self-insurance funds. Should a carrier stop writing business, it has no
obligation for future assessments. The SDTF's assessment formula has
historically yielded sufficient revenues for annual reimbursement payments and
for costs associated with administering the SDTF. The SDTF has not prefunded its
claims liability and no reserves currently exist. The Company has been informed
that, as of September 30, 1996, the SDTF had an actuarially projected
undiscounted liability of $4 billion based on a study performed for the SDTF by
independent actuarial consultants. The SDTF actuarial study also indicated that,
at the current assessment rates, the payment of the existing liability would
take numerous years.
Under Florida's sunset laws applicable to some state-sponsored funds,
the SDTF would have expired in November 1996 unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. Under that 1997 bill, the SDTF is not to
accept claims with accident dates after December 31, 1997; as such, certain SDTF
claims may have to be refiled for reimbursement and any such filing may require
a refiling fee. Additionally, companies accruing SDTF recoveries may be
statutorily limited in the level of recoverables they may be allowed to carry.
The bill provides for a funding mechanism through which companies writing
workers' compensation insurance in Florida will be assessed an annual charge to
cover payments made by the SDTF. The Company believes that, even in the event of
default by the SDTF, the existing reimbursements of the SDTF would become
general obligations of the State of Florida.
For 1998 and 1997, the Company's cash recoveries from the SDTF were
$1.8 million and $5.9 million, respectively. The Company's SDTF assessments were
$2 million and $6.8 million for 1998 and 1997, respectively.
As more fully described in Note 1(c), the Company transferred the
recoverable from the SDTF to Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.
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<PAGE> 262
(8) REINSURANCE
All of the reinsurance contracts described in this note and in force on
April 1, 1998 were assumed by Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.
The Company was involved in the cession of insurance to certain
unaffiliated insurance and reinsurance companies under specific excess-of-loss
and quota-share reinsurance contracts. The amounts by which certain financial
statement balances have been reduced as a result of these reinsurance contracts
as of and for the quarter and year ended March 31, 1998 and December 31, 1997,
respectively, are as follows (in thousands):
<TABLE>
<CAPTION>
1998(A) 1997
-------- --------
<S> <C> <C>
Premiums written $ 16,785 $143,983
Premiums earned 24,420 167,274
Ceded losses and loss adjustment expenses 47,667 73,868
Liabilities for losses and loss adjustment expenses 645,892 183,150
Unearned premiums 61,384 25,842
</TABLE>
(a) 1st quarter 1998, prior to the sale to Zenith
Effective April 1, 1998, the Company entered into an assumption and
indemnity reinsurance agreement with Zenith in connection with the sale to
Zenith [see Note 1(c)]. Under the terms of the assumption and indemnity
reinsurance agreement, the Company ceded to Zenith 100 percent of the
outstanding liabilities for losses and loss adjustment expenses (including
incurred but not reported losses) and 100 percent of the unearned premiums as of
April 1, 1998. Zenith was responsible for issuing assumption certificates to all
the Company's former policyholders. The liabilities for losses and loss
adjustment expenses and unearned premiums that were transferred to Zenith on
April 1, 1998 were $462.3 million and $43.2 million, respectively. In accordance
with the terms of the Asset Purchase Agreement, Zenith assumed all of the
Company's obligations under its then current and prior insurance and reinsurance
contracts. The terms of the Asset Purchase Agreement, including the assumption
and indemnity reinsurance agreement, was approved by the Florida and Missouri
Insurance Departments on March 31, 1998 and April 1, 1998, respectively.
Effective January 1, 1995, RISCORP Insurance Company ("RIC") and
RISCORP Property & Casualty Insurance Company ("RPC") entered into quota-share
reinsurance agreements with American Re-Insurance Company ("AmRe"), whereby RIC
and RPC ceded 50 percent of new and renewal premiums written and losses
incurred. These agreements provided for the payment of a ceding commission at
rates that varied from 27.5 percent to 60 percent based on the loss ratio of the
business ceded, excluding unallocated loss adjustment expenses. The provisional
ceding commission provided for in the agreements was 33 percent. The agreements
were to remain in force for an unlimited period of time, but could be terminated
by either party at any December 31. RISCORP and AmRe were parties to a senior
subordinated note agreement in the principal amount of $15 million due 2002.
Under the terms of the note agreement, the Company was to maintain the
quota-share treaty or other comparable reinsurance agreements with AmRe for a
minimum period of five years beginning January 1, 1995. Ceding commissions
earned under the AmRe reinsurance agreements were $7.7 million and $50 million
during 1998 and 1997, respectively.
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<PAGE> 263
Effective September 1, 1996, RIC entered into a retrocessional
reinsurance agreement with Chartwell Reinsurance Company ("Chartwell"), whereby
Chartwell was to retrocede to the Company 50 percent of workers' compensation
business written by RISCORP Management Services, Inc. (an affiliate of the
Company) as underwriting manager for Virginia Surety Company, Inc. The agreement
provided for a profit commission in addition to the 30 percent ceding commission
based on the loss ratio and other expenses incurred under the contract. The
initial profit commission calculation was scheduled to occur as of September 1,
2000. This agreement was terminated on December 31, 1997.
On April 18, 1997, RIC entered into a trust agreement with Chartwell
whereby RIC agreed to maintain in trust for the benefit of Chartwell 102 percent
of RIC's portion of the outstanding loss liabilities and unearned premiums. The
balance in this trust account was generally adjusted on a monthly basis, one
month in arrears.
Effective January 1, 1996, RPC entered into a quota-share reinsurance
agreement with Allstate Insurance Company ("Allstate"), Chartwell, Signet Star
Reinsurance Company ("Signet"), and San Francisco Reinsurance Company ("San Fran
Re"), whereby RPC ceded 90 percent of its inforce, and its new or renewal 1996
gross written premiums, for commercial umbrella coverage. The maximum limit
under this agreement was $5 million per insured, per occurrence. The agreement
provided for the payment of a ceding commission of 30 percent of the ceded
premiums. This agreement was to remain in force for an unlimited period of time,
but could be terminated by either party at any December 31. During 1997,
Allstate and San Fran Re were replaced on this agreement by Scor Reinsurance
Company ("Scor") and Hartford Fire Insurance Company ("Hartford"), respectively.
All other terms and conditions of the agreement were unchanged. This agreement
was terminated as of December 31, 1997; however, the reinsurers continue to be
responsible for their portion of all losses incurred on policies effective
before the termination date.
Effective January 1, 1996, RPC entered into a quota-share reinsurance
agreement with Allstate, Chartwell, Signet, San Fran Re, and Great Lakes
American Reinsurance Company, whereby RPC ceded 90 percent of its inforce, and
its 1996 new or renewal gross written premiums, for commercial property
coverage. The limit of coverage under this agreement was 90 percent of $2.5
million per risk, subject to an occurrence limitation of not less than $10
million nor greater than $15 million. The agreement provided for the payment of
a ceding commission of 30 percent of ceded premiums. This agreement was to
remain in force for an unlimited period of time, but could be terminated by
either party at any December 31. During 1997, Allstate and San Fran Re were
replaced on this agreement by Scor and Hartford, respectively. All other terms
and conditions of the agreement were unchanged. This agreement was terminated as
of December 31, 1997; however, the reinsurers continue to be responsible for
their portion of all losses incurred on policies effective before the
termination date.
Effective January 1, 1996, RPC entered into a commercial casualty
excess-of-loss reinsurance agreement with Allstate, Chartwell, Signet, and San
Fran Re, whereby RPC ceded 100 percent of all losses incurred on business
inforce, written or renewed during the term of this agreement, per occurrence,
in excess of $0.25 million to $1 million. RPC was required to pay 11.5 percent
of earned premiums, subject to a minimum premium of $0.5 million under the
agreement. This agreement was to remain in force for an unlimited period of
time, but could be terminated by either party at any December 31. During 1997,
Allstate and San Fran Re were replaced on this agreement by Scor and Hartford,
respectively. All other terms and conditions of the agreement were unchanged.
This agreement was terminated as of December 31, 1997; however, the reinsurers
continue to be responsible for their portion of all losses incurred on policies
effective before the termination date.
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<PAGE> 264
Effective September 1, 1995, RPC entered into a medical excess-of-loss
reinsurance agreement with Cologne Life Reinsurance Company, whereby RPC ceded
100 percent of all losses incurred per insured, per agreement year, in excess of
$0.15 million up to $1 million. RPC paid $6.79 per certificate of insurance per
month for this coverage. The agreement was to be continuous, but could be
canceled by either party at any September 1. The agreement was transferred to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.
Effective January 1, 1997, RIC, RNIC, and RPC ceded losses in excess of
$0.5 million to Continental Casualty Company ("CNA") under an excess-of-loss
reinsurance treaty. This treaty contained a corridor deductible of $1.25 million
which is applicable in the aggregate to claims in the $0.5 million excess of
$0.5 million corridor for the Company. RIC and RPC had a similar contract with
CNA effective January 1, 1996 with a corridor deductible of $1 million. Although
the contract contained provisions for minimum and deposit premiums, the premiums
for 1997, based on earned premiums, exceeded the minimum premium provisions
specified under the contract.
Effective October 1, 1996, RNIC entered into a quota-share reinsurance
agreement with Chartwell, Swiss Reinsurance America Corporation, and Trenwick
America Reinsurance Corporation (collectively the "Reinsurers"), whereby RNIC
ceded 65 percent of its net unearned premiums as of October 1, 1996 and 65
percent of net written workers' compensation and employers liability premiums,
new or renewal, for the last four months of 1996. Effective January 1, 1997,
RNIC reduced the ceded quota-share amount to 60 percent. The agreement provided
for the payment of a ceding commission at rates which varied from 27 percent to
49 percent based on the loss ratio of the business ceded. The provisional ceding
commission contained in the agreement was 33 percent. This agreement was
terminated as of December 31, 1997; however, the reinsurers continue to be
responsible for their portion of all losses incurred on policies effective
before the termination date.
Effective January 1, 1997, RNIC entered into an agreement with the
Insurance Company of New York ("INSCORP") and Chartwell to issue
assumption-of-liability endorsements ("ALE") to certain policyholders of RNIC.
This agreement expired on December 31, 1997 and was not renewed. In connection
with this agreement, RNIC was required to provide INSCORP and Chartwell with
letters of credit in amounts equal to 29.2 percent of the gross written premiums
on all ALE policies plus $1.25 million in fixed maturities. The agreement also
required RNIC to pay a fee of .5 percent of gross premiums subject to a minimum
fee of $50 and a maximum fee of $1,000 per ALE. As of December 31, 1998 and
1997, based on the gross premiums subject to ALE's, RNIC provided letters of
credit of $0 and $3.7 million, respectively, under this agreement. RNIC incurred
fees of $39,000 during 1997 and $0 in 1998 prior to the transfer to Zenith.
RNIC also maintained specific excess-of-loss coverage with Allstate on
the run-off of the book of business acquired by RNIC in March 1996.
In connection with the sale to Zenith [as more fully described in Note
1(c)], RIC and RPC entered into an interim reinsurance agreement and cut-through
endorsement with Zenith covering all inforce business as of June 17, 1997 and
all new and renewal business written after June 17, 1997 on Florida workers'
compensation policies. In connection with this agreement, Zenith required that
33 percent of the direct written premiums and 33 percent of the initial unearned
premiums subject to this agreement were to be deposited into a trust account for
the benefit of Zenith. In addition, the agreement required the Company to pay a
fee to Zenith of one percent of the subject premiums. The agreement with Zenith
was terminated on April 1, 1998. As of December 31, 1998 and 1997, the market
value of the securities in the trust account was $0 and $52.4 million,
respectively, and the required trust account balance was $0 and $51.6 million,
respectively, based on the direct written premiums for the period June 18, 1997
through
F-25
<PAGE> 265
March 31, 1998 and the unearned premiums at June 17, 1997. The balance in the
trust account was to be adjusted on a monthly basis, one month in arrears. The
Company incurred fees to Zenith of $0.1 million and $1.4 million during 1998 and
1997, respectively, under this agreement.
The Company had no reinsurance recoverables or ceded unearned premiums
as of December 31, 1999 and 1998.
The Company is contingently liable to the extent that the reinsurers,
including Zenith, are unable to meet their contractual obligations for any
losses and loss adjustment expenses ceded.
(9) MANAGED CARE AGREEMENTS
RIC and RPC were parties to arrangements with both Humana Medical
Plans, Inc. ("Humana"), an unaffiliated health maintenance organization ("HMO"),
and RISCORP Health Plans, Inc. ("RHP"), an affiliated HMO, whereby, upon
policyholder election to participate, RIC's and RPC's medical claim costs were
capped for the first three years of each claim. In May 1996, RIC and RPC
terminated those arrangements with RHP; however, injured individuals were
covered for three years following any accident that occurred during policy
periods in effect prior to termination. The Humana arrangement, which commenced
July 1, 1995, was renewed for one additional year at the anniversary date. Under
the Humana arrangement, injured individuals were covered for three years
following any accident occurring within the policy periods. In October 1997, RIC
and RPC entered into loss portfolio transfer agreements under which RHP
transferred its liability to RIC and RPC under the managed care agreements; at
that date, RHP's remaining liability under the managed care agreement was
determined by an independent consulting actuarial firm to be $8 million and, in
November 1997, RHP transferred that amount to RIC and RPC in full satisfaction
of RHP's liability. Included in losses and loss adjustment expenses were $0.3
million and $6.1 million of managed care fees for 1998 and 1997, respectively.
RIC is no longer contingently liable for any unpaid losses and loss
adjustment expenses based on the terms of the July 7, 1999 settlement agreement
between Zenith and the Company, to the extent that Humana was unable to meet its
contractual obligations under its agreement with RIC
As described in Note 1(c), RISCORP transferred the Humana and RHP
contractual obligations to Zenith on April 1, 1998, in accordance with the terms
of the Asset Purchase Agreement.
(10) INCOME TAXES
The components of income taxes for 1999, 1998, and 1997 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ------
<S> <C> <C> <C>
Current:
Federal $(4,768) $(19,165) $6,197
State 320 1,040 798
------- -------- ------
Total - current (4,448) (18,125) 6,995
Deferred - Federal 2,031 20,181 305
------- -------- ------
Total income tax expense (benefit) $(2,417) $ 2,056 $7,300
======= ======== ======
</TABLE>
F-26
<PAGE> 266
The differences between taxes computed at the statutory rates and
recorded income tax expense for 1999, 1998, and 1997 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $(3,313) $(24,087) $ 5,105
State taxes in excess of federal benefit 320 807 519
Non-taxable income -- (231) (1,188)
Goodwill and other amortization -- 3,339 801
Valuation allowance 2,844 21,168 412
Fines and penalties -- 6 64
Benefits not previously recorded (2,268) -- --
Other -- 1,054 1,587
------- -------- -------
Income tax expense (benefit) $(2,417) $ 2,056 $ 7,300
======= ======== =======
</TABLE>
The tax effects of temporary differences that gave rise to the deferred
tax assets at December 31, 1999 and 1998 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 22,772 $ 17,479
Accrued litigation settlement costs 70 5,415
Accrued employee benefits 4 224
Tax credit carryforwards 985 --
State refunds 1,603 1,603
-------- --------
Gross deferred tax assets 25,434 24,721
Valuation allowance (24,424) (21,580)
-------- --------
Net deferred tax asset $ 1,010 $ 3,141
======== ========
</TABLE>
The Company estimated that $1 million of its December 31, 1999 net
deferred tax asset could be realized through the generation of future taxable
income, and it is more likely than not that the tax benefits of the deferred tax
assets will be realized. Accordingly, a valuation allowance of $25 million
relating to the December 31, 1999 deferred tax asset balance has been
established.
The Company has $43.4 million of net operating loss carryforwards that
expire in 2018 and $21.6 million that expire in 2019. The Company has
approximately $1 million of alternative minimum tax credit carryforwards that
are available indefinitely.
The Company received $22.8 million in federal income tax refunds during
1999. The filed federal income tax refund claim relating to the 1998 loss is
currently under examination. Although the ultimate results of that examination
cannot be predicted with certainty, the Company's management believes that the
examination will not have a material adverse effect on its consolidated
financial condition or results of operations.
F-27
<PAGE> 267
(11) SHAREHOLDERS' EQUITY
RISCORP has 100 million shares of $.01 par value Class A Common Stock
authorized and 14,258,671 issued shares at December 31, 1999 and 1998. RISCORP's
Class B Common Stock, par value $.01, consists of 100 million shares authorized
and 24,334,443 shares issued and outstanding at December 31, 1999 and 1998. Ten
million shares of preferred stock are authorized, but no shares are issued or
outstanding. The characteristics of the Class B Common Stock are identical to
those of the Class A Common Stock, except that each holder of the Class B Common
Stock is entitled to 10 votes for each share held. The Class B Common Stock may
be converted into Class A Common Stock at any time at the election of the
holders on a one-for-one basis. RISCORP did not declare any shareholder
dividends during 1999, 1998, or 1997. At December 31, 1999 and 1998, there were
112,582 shares of RISCORP's Class A Common Stock in treasury.
RISCORP's insurance subsidiaries are limited by statute in their
ability to distribute unassigned surplus without the approval of their
respective domiciliary insurance department. Dividends or distributions to
shareholders that are made under these statutes and that do not require the
prior approval of the Florida or the Missouri Insurance Departments are
determined based on a consideration of an insurer's net income, realized and
unrealized capital gains, percentages of dividends and distributions of surplus,
and the relationship of surplus after any such dividend or distribution is made
to the minimum required statutory surplus. During 2000, RISCORP's insurance
subsidiary, RNIC, has the ability to dividend $0.4 million to RISCORP without
the prior approval of the Missouri Insurance Department.
The combined statutory surplus as of December 31, 1999, 1998, and 1997,
and the combined statutory net income for the years then ended for RISCORP's
insurance subsidiaries, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Surplus $12,004 $156,480 $96,280
Net income 305 14,672 11,042
</TABLE>
The decline in combined statutory surplus from 1998 to 1999 is
primarily the result of 1) the determination of the final purchase price to be
paid by Zenith resulted in a $34.3 million loss on the sale being recorded by
RISCORP's insurance subsidiaries, and 2) RISCORP's receiving and retaining of
the proceeds from the sale to Zenith. Consequently, RISCORP's insurance
subsidiaries recorded $94 million of receivables from RISCORP for their portion
of those proceeds. Those receivable balances are classified as a non-admitted
asset at December 31, 1999 because those receivables are more than 90 days past
due. 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.
To facilitate the regulators' responsibility to monitor insurer
solvency, the National Association of Insurance Commissioners issued a model law
in January 1995 to implement risk-based capital ("RBC") reporting requirements
for property and casualty insurance companies. The model law is designed to
assess capital adequacy and the level of protection that statutory surplus
provides for policyholder obligations. The RBC formula for property and casualty
insurance companies measures four major areas of risk facing property and
casualty insurers: (i) underwriting, which encompasses the risk of adverse loss
development and inadequate pricing; (ii) credit risk, which evaluates the
declines in asset values; (iii) investment risk, which evaluates declines in
asset values; and (iv) off balance sheet risk. Pursuant to the model law,
insurers having less statutory surplus than required by the RBC calculation are
subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. RPC and RIC are
F-28
<PAGE> 268
domiciled in the State of Florida, which has yet to adopt the provisions of the
RBC model law; however, these insurance companies monitor their RBC results in
anticipation of future filings. The other RISCORP insurance subsidiary, RNIC, is
domiciled in Missouri and RBC information is filed with state regulators. RBC is
calculated on an annual basis. At December 31, 1999 and 1998, RISCORP's
insurance subsidiaries had statutory surplus in excess of any action level
requirements.
(12) STOCK OPTIONS
In conjunction with the reorganization discussed in Note 1(a), stock
options of RISCORP were substituted for options previously granted to certain
officers and employees of RISCORP's affiliates. The options granted in 1997 were
exercisable for 10 years after the date and the options vested over periods
ranging from immediately to two years. The options granted in 1996 were
exercisable over a 12 year period after the date of the grant and the options
vested over periods ranging from two to nine years.
At December 31, 1999 and 1998, RISCORP had no stock options
outstanding. A summary of the status of RISCORP's stock option plan as of and
for the years ended December 31, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ------ -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year - $ -- 2,533,326 $ 4.43 3,078,779 $ 3.67
Granted - -- -- -- 2,533,326 4.43
Canceled - -- (2,533,326) 4.43 (3,078,779) 3.67
Outstanding, end of year - $ -- -- $ -- 2,533,326 $ 4.43
--- ------- ---------- -------- ---------- --------
Options exercisable at end of year - $ -- -- $ -- 1,085,711 $ 6.67
=== ======= ========== ======== ========== ========
Weighted average fair value of
options granted during
the year $ -- $ -- $ 1.92
======= ======== ========
</TABLE>
The fair value of each option was estimated on the date that the option
was granted. The exercise prices of options granted were determined to be not
less than the fair market value of RISCORP's Class A Common Stock. Compensation
expense recognized for options with exercise prices below fair market value
totaled $0 for 1999, 1998, and 1997.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for
stock-based compensation that is based on the fair value of stock options and
similar instruments. The adoption of SFAS 123 is not required and the Company
has elected to continue following Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for measuring compensation cost. Had
the Company adopted SFAS 123, the pro forma net
F-29
<PAGE> 269
income or loss per share for 1999, 1998, and 1997, would have been as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C> <C>
Net income (loss) - as reported $ (7,048) $ (70,875) $ 7,286
- pro forma (7,048) (70,875) 5,286
Net income (loss) per
common share-diluted - as reported (0.19) (1.91) 0.20
- pro forma (0.19) (1.91) 0.14
</TABLE>
(13) PROPERTY AND EQUIPMENT
The components of the property and equipment at December 31, 1999 and
1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED -------------------------
USEFUL LIFE 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Furniture and equipment 3-7 years $ 358 $ 358
Leasehold improvements 5-10 years 9 9
Software 3 years 81 81
---------- ----------
448 448
Less accumulated depreciation and
amortization 252 111
---------- ----------
Net carrying amount $ 196 $ 337
========== ==========
</TABLE>
Depreciation and amortization expense related to property and equipment
totaled $0.1 million, $1.8 million, and $4.9 million, for 1999, 1998, and 1997,
respectively. Included in those amounts is amortization expense of $29,000, $0.4
million, and $1.4 million, for 1999, 1998, and 1997, respectively, related to
both purchased and capitalized internally developed software costs. As more
fully described in Note 1(c), the major portion of the Company's property and
equipment, including computer software, was transferred to Zenith on April 1,
1998, in accordance with the terms of the Asset Purchase Agreement.
(14) LEASES
The Company leases space for some of its office facilities under
non-cancelable operating leases expiring through 2001, with renewal options
available for certain leases. Total rental expense for 1999, 1998, and 1997 was
$0.1 million, $0.2 million, and $1.7 million, respectively. At December 31,
1999, the Company was obligated under aggregate minimum annual rentals as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ANNUAL RENTAL
---- -------------
<S> <C>
2000 $ 103
2001 8
------
Total $ 111
======
</TABLE>
F-30
<PAGE> 270
(15) EMPLOYEE HEALTH BENEFITS
The Company self-insured its employees' health benefits and purchased
excess insurance that limits its exposure to $1.1 million in the aggregate and
$50,000 per occurrence. The Company estimated its liability for unpaid claims
based on aggregate limits for health insurance payments less actual payments
made. Those estimates were continually reviewed and adjustments, if any, were
reported in current operations. Included in accrued expenses at December 31,
1999 and 1998 is a liability for self-insured health benefits of $10,000 and
$0.6 million, respectively. The Company realized $0.6 million of income in 1999
due to the reduction of the self insured health benefits payable and incurred
expenses of $0.6 million and $3.3 million for 1998 and 1997, respectively.
(16) RELATED PARTY TRANSACTIONS
The Company had accounts receivable of $0.2 million and $0.5 million
from companies owned by RISCORP's majority shareholder ("affiliates or
affiliated entity") that are included in accounts receivable-other in the
accompanying consolidated balance sheets at December 31, 1999 and 1998,
respectively.
The Company contracted with affiliated entities for transportation,
facilities management, and custodial and maintenance services. The Company also
leased parking facilities from affiliated entities. The expense for those
services amounted to $0.1 million for 1997 and is included in commissions and
general and administrative expenses in the accompanying consolidated statements
of operations.
In 1997 and the first quarter of 1998, the Company provided
administrative and support services to three affiliated entities. Under those
arrangements, the Company received $0.2 million and $0.6 million during 1998 and
1997, respectively.
As described in Note 9, RIC was party to a managed care arrangement
with RHP, an affiliated HMO. Fees paid by RIC to RHP during 1997 totaled $3.7
million and no fees were paid in 1998 or 1999. The managed care arrangement with
RHP was terminated in October 1997 following the sale of RHP to an unaffiliated
entity. RIC assumed the outstanding liability for unpaid losses and loss
adjustment expenses that totaled $8 million in November 1997.
During 1998, all of the foregoing contracts with the related parties
were cancelled and the Company has no further obligations under any of the
contracts as of December 31, 1998. See Note 3 for a discussion of the agreements
between the Company and Phoenix and BHC.
(17) BAD DEBT ALLOWANCE
As more fully described in Note 1(c), the Company transferred the
outstanding premiums receivable balance, net of the allowance for bad debts, to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement. The Company did not record any bad debt allowance at December 31,
1999.
F-31
<PAGE> 271
The following table summarizes activity in the bad debt allowance
account for premiums receivable for 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Balance at beginning of year $ 7,000 $ 17,000
Addition (reduction) to allowance (1,100) 4,374
Recoveries (write-offs) against allowance 100 (14,374)
Balance transferred to Zenith [see Note 1(c)] (6,000) --
------- --------
Balance at end of year $ -- $ 7,000
======= ========
</TABLE>
(18) CONCENTRATION IN A SINGLE STATE
Although the Company had expanded its operations into additional
states, 75 percent and 70 percent of its premium revenues for 1998 and 1997,
respectively, were derived from products and services offered to customers
located in Florida. Accordingly, the Company previously could have been
adversely affected by economic downturns, significant unemployment, and other
conditions that could have occurred from time to time in Florida, which
conditions may not have significantly affected its more geographically
diversified competitors.
(19) COMMITMENTS AND CONTINGENCIES
In August 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 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.
In March 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
F-32
<PAGE> 272
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.
In August 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. In September 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. In June 1999, the Eleventh Circuit remanded
the case to the district court, and the district court has assigned the case to
a magistrate for handling pre-trial matters. At a status conference held in
October 1999, the magistrate established deadlines for the filing of a motion
for leave to amend the complaint, for supplemental briefing on pending motions,
and set a hearing for March 7, 2000. Management intends to defend vigorously any
and all claims asserted against RIC and RPC included in any amended complaint
that may be permitted. Plaintiffs' counsel has recently agreed to dismiss all
claims against the Company without prejudice, and has filed a Second Amended
Complaint that does not state claims against the Company. A consent motion for
approval of the dismissal is being prepared.
In July 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.
On or about February 15, 2000, an alleged shareholder of RISCORP filed
a putative class action suit against the Company, its Directors, and its
majority shareholder in the Circuit Court of the 12th Judicial Circuit, Sarasota
County, Florida, styled Harris Blackman v. William D. Griffin, Seddon Goode,
Jr., George E. Green, III, Walter L. Revell, and RISCORP, Inc., Case No.
20002103 CA DIV-A. The suit contends that the pending transaction - pursuant to
which William Griffin, the majority shareholder, will purchase the Class A
shares of RISCORP held by public shareholders - is inadequately priced. The suit
alleges that the defendants are liable for breach of fiduciary duty, and seeks
either to enjoin the transaction or to recover an unspecified amount of damages.
RISCORP has received no notice of any hearing on the plaintiff's claim for
equitable relief. RISCORP denies the plaintiff's allegations and
F-33
<PAGE> 273
intends to defend the suit vigorously. Since the suit has just been filed, we
are unable to predict the outcome at this time.
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.
F-34
<PAGE> 274
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
RISCORP, INC. AND SUBSIDIARIES
DECEMBER 31, 1999
(in thousands)
<TABLE>
<CAPTION>
TYPE OF INVESTMENT COST MARKET VALUE
- ------------------ ---- ------------
<S> <C> <C>
Available for sale:
Fixed maturity securities:
U.S. government obligations $20,181 $20,163
Corporate obligations 58,872 58,818
------- -------
Total available for sale $79,053 $78,981
======= =======
Available for sale:
Unrestricted $76,058 $75,959
Restricted 2,995 3,022
------- -------
Total $79,053 $78,981
======= =======
</TABLE>
See accompanying Auditors' Report.
F-35
<PAGE> 275
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Investments at fair value (cost $65,355 and $4,635) $ 65,291 $ 4,636
Cash and cash equivalents 3,800 1,140
Cash and cash equivalents - restricted -- 10,000
Investment in wholly-owned subsidiaries 142,405 148,357
Surplus note receivable from subsidiary 13,000 13,000
Other assets 8,100 18,840
--------- ---------
Total assets $ 232,596 $ 195,973
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities $ 24,256 $ 38,572
Payable to affiliates 118,042 61,835
--------- ---------
Total liabilities 142,298 100,407
--------- ---------
Shareholders' equity:
Common stock 386 386
Additional paid-in capital 142,688 142,688
Retained deficit (52,728) (45,680)
Unearned compensation -- (2,000)
Treasury stock at cost (1) (1)
Net unrealized gains (losses) on investments (47) 173
--------- ---------
Total shareholders' equity 90,298 95,566
--------- ---------
Total liabilities and shareholders' equity $ 232,596 $ 195,973
========= =========
</TABLE>
See accompanying Auditors' Report.
F-36
<PAGE> 276
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Revenues:
Net investment income $ 4,483 $ 2,681 $ 517
Dividend income -- -- 3,446
Other income 27 146 --
------- -------- --------
Total revenue 4,510 2,827 3,963
------- -------- --------
Expenses:
General and administrative expenses 5,030 10,871 16,421
Interest expense 1,316 641 1,800
Depreciation and amortization 142 359 857
------- -------- --------
Total expenses 6,488 11,871 19,078
------- -------- --------
Income (loss) from operations (1,978) (9,044) (15,115)
Loss on sale of net assets to Zenith (3,292) (47,747) --
------- -------- --------
Loss before equity in income or loss
of subsidiaries and income taxes (5,270) (56,791) (15,115)
Equity in income (loss) of subsidiaries (4,195) (20,322) 20,935
------- -------- --------
Income (loss) before income taxes (9,465) (77,113) 5,820
Income tax benefit (2,417) (6,238) (1,466)
------- -------- --------
Net income (loss) $(7,048) $(70,875) $ 7,286
======= ======== ========
</TABLE>
See accompanying Auditors' Report.
F-37
<PAGE> 277
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOW
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,048) $(70,875) $ 7,286
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Equity in net loss (income) of subsidiaries 4,195 20,322 (18,344)
Amortization of unearned compensation 2,000 -- --
Depreciation and amortization 142 359 857
Net amortization of discounts on investments 23 -- --
Net realized loss (gain) on sale of investments -- -- 35
Loss on sale of net assets to Zenith 3,292 47,747 --
Issuance of RISCORP, Inc. stock -- 4,740 --
Decrease (increase) in other assets 10,716 4,166 (20,555)
Increase (decrease) in total liabilities (2,640) 3,751 26,934
Other, net 1,468 -- --
--------- -------- --------
Net cash provided by (used in) operating activities 12,148 10,210 (3,787)
--------- -------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of investments 350,541 69,617 5,206
Proceeds from the sale of equity securities -- -- 1,548
Net cash received from Zenith for sale of net assets 46,431 9,345 --
Cash due to Zenith -- 388 --
Purchase of fixed maturities--available for sale (416,460) (73,252) --
Capital contributions to subsidiaries -- (1,000) (1,000)
Purchase of property and equipment -- (448) --
--------- -------- --------
Net cash provided by (used in) investing activities (19,488) 4,650 5,754
--------- -------- --------
Cash flows from financing activities:
Purchase of treasury stock subject to put option -- -- (2,100)
Transfer of cash and cash equivalents to restricted balances 10,000 (12,568) --
Other, net -- -- (1,293)
--------- -------- --------
Net cash provided by (used in) financing activities 10,000 (12,568) (3,393)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,660 2,292 (1,426)
Cash and cash equivalents, beginning of year 1,140 (1,152) 274
========= ======== ========
Cash and cash equivalents, end of year $ 3,800 $ 1,140 $ (1,152)
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,120 $ 450 $ 1,800
========= ======== ========
Income taxes $ 173 $ -- $ 6,556
========= ======== ========
</TABLE>
See accompanying Auditors' Report.
F-38
<PAGE> 278
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
RISCORP, INC. (PARENT COMPANY ONLY)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Net income (loss) $(7,048) $(70,875) $ 7,286
------- -------- -------
Other comprehensive income (loss), before income taxes:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during year (339) 194 (2,392)
Income tax expense (benefit) related to items of other
comprehensive income (loss) (119) 68 (837)
------- -------- -------
Other comprehensive income (loss), net of income taxes (220) 126 (1,555)
------- -------- -------
Total comprehensive income (loss) $(7,268) $(70,749) $ 5,731
======= ======== =======
</TABLE>
See accompanying Auditors' Report.
F-39
<PAGE> 279
SCHEDULE IV - REINSURANCE
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
PREMIUMS EARNED
--------------------------------------------------------------------------------------------------
CEDED TO ASSUMED PERCENTAGE
YEAR ENDED GROSS OTHER FROM OTHER NET OF AMOUNT
DECEMBER 31 AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
- ----------- ------ --------- --------- ------ --------------
<S> <C> <C> <C> <C> <C>
1999 $ -- $ -- $ -- $ -- $ --
================ ================ ============== ================ =========
1998 $ 48,416* $ 22,676* $ 79* $ 25,819* -*
================ ================ ============== ================ =========
1997 $ 328,191 $ 167,274 $ 18,812 $ 179,729 10%
================ ================ ============== ================ =========
</TABLE>
* These amounts represent the first three months of 1998.
See accompanying Auditors' Report.
F-40
<PAGE> 280
SCHEDULE VI - SUPPLEMENTAL INFORMATION
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
- ---------------------------------------------------- ------------------------------------------------------------------------------
Losses and Loss
Reserves for Discount, Adjustment Expenses Amortization Net
Deferred Unpaid Losses if any, Incurred Related to: of Deferred Paid Losses
Policy and Loss deducted Net Net -------------------- Policy and Loss Net
Acquisition Adjustment in Previous Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Year Costs Expenses Column Premiums Premiums Income Year Years Costs Expenses Written
- ---- ----------- ------------- ----------- -------- -------- ---------- -------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $ - $ - $ - $ - $ - $ 5,473 $ - $ $ - $ - $ -
1998 $ - $ - $ - $ - $ 25,819* $ 7,103 $ 14,860* $ 11,717* $ 3,681* $ 28,501* $ 20,209*
1997 $ (2,053) $ 437,038 $ - $ 56,324 $179,729 $ 16,447 $125,764 $ (2,401) $ 49,221 $ 120,285 $ 157,495
</TABLE>
* These amounts represent the first three months of 1998.
See accompanying Auditors' Report.
F-41
<PAGE> 281
RISCORP, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF RISCORP, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH , 2000
The undersigned hereby appoints WALTER E. RIEHEMANN, with the power of
substitution, a proxy to vote all shares of Class A and Class B Common Stock of
RISCORP, Inc. that the undersigned may be entitled to vote at the Special
Meeting of Shareholders to be held in Atlanta, Georgia on March , 2000, and at
any reconvened meeting following any adjournment thereof. Said proxy will vote
on the proposals set forth in the Notice of Special Meeting and Proxy Statement
as specified on this card, and is authorized to vote in his discretion as to any
other matters that may properly come before the meeting.
(Continued and to be signed on the reverse side.)
<PAGE> 282
1. Adoption and approval of the Plan and Agreement of Merger, dated November 3,
1999, by and among Griffin Acquisition Corp., William D. Griffin and RISCORP,
Inc., and the consummation of the transactions contemplated therein,
including the merger of Griffin Acquisition Corp. with and into RISCORP, Inc.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the adjournment or postponement of the Special Meeting for a
period of not more than sixty days for the purpose of soliciting additional
proxies in the event RISCORP fails to receive a sufficient number of votes to
approve the Plan and Agreement of Merger and the merger. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IF A VOTE IS NOT SPECIFIED, THE PROXY WILL VOTE "FOR" THE ABOVE PROPOSALS. THE
PROXY WILL VOTE WITH DISCRETIONARY AUTHORITY ON ALL OTHER MATTERS THAT MAY
PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENTS THEREOF.
IMPORTANT: Please sign this
Proxy exactly as your name or
names appear to the left. When
shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by
President or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
SHARES
------------------------------
<TABLE>
<S> <C> <C>
SIGNATURE(S) SIGNATURE(S) DATE
-------------------- ------------------- ------------------
</TABLE>
PLEASE VOTE, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
