<PAGE>
As filed with the Securities and Exchange Commission on December 23, 1998
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NCRIC GROUP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
DISTRICT OF COLUMBIA 6331 52-2134774
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
</TABLE>
1115 30TH STREET, N.W.
WASHINGTON, D.C. 20007
(202) 969-1866
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL
EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)
R. RAY PATE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1115 30TH STREET, N.W.
WASHINGTON, D.C. 20007
(202) 969-1866
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
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JAMES B. HALPERN, ESQ. JOHN J. GORMAN, ESQ.
JOHN P. FOLEY, ESQ. ROBERT I. LIPSHER, ESQ.
ARENT FOX KINTNER PLOTKIN & KAHN, PLLC LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
1050 CONNECTICUT AVENUE, N.W. 5335 WISCONSIN AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20036-5339 WASHINGTON, D.C. 20015
(202) 857-6246 (202) 274-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
============================================================================================================================
Title of Each Class of Securities Dollar Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price per Share Aggregate Offering Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value $12,880,000(1) $10.00(1) $12,880,000(1) $3,581
=============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
[TO BE USED IN CONNECTION WITH THE SYNDICATED COMMUNITY OFFERING ONLY]
SYNDICATED PROSPECTUS SUPPLEMENT
NCRIC GROUP, INC.
SHARES OF COMMON STOCK
NCRIC Group, Inc. ("Group") is offering for sale in a syndicated community
offering (the "Syndicated Community Offering") _________ shares of its common
stock at a per share price of $10.00. Group is the parent of NCRIC, Inc.
("NCRIC"), a stock insurance company. Group has a mutual holding company
parent, NCRIC, A Mutual Holding Company (the "Mutual Holding Company"), which
must at all times retain direct or indirect ownership or control of at least a
majority of the outstanding voting shares of NCRIC. ___ shares of the common
stock have been subscribed for in subscription and community offerings (the
"Initial Offerings"). The Initial Offerings and the Syndicated Community
Offering are collectively referred to as the "Stock Offering." The Prospectus
in the form used in the Initial Offerings (the "Prospectus") follows this page.
The purchase price for all shares purchased in the Syndicated Community Offering
will be $10.00 per share, which is the same purchase price paid by subscribers
in the Initial Offerings (the "Purchase Price").
The Syndicated Community Offering will expire no later than ________, 1999.
If the Syndicated Community Offering is not completed by ____________, 1999, the
Syndicated Community Offering will be terminated and all funds held will be
returned promptly to subscribers with interest. Group reserves the right, in
its absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions received in the Syndicated Community Offering.
Group has engaged Sandler, O'Neill & Partners, L.P. ("Sandler O'Neill") as
financial advisor to assist it with the sale of the common stock in the
Syndicated Community Offering. It is anticipated that Sandler O'Neill will use
the services of other registered broker-dealers ("Selected Dealers"). Fees to
Sandler O'Neill and the Selected Dealers will not exceed 7.5% of the aggregate
Purchase Price of the shares sold in the Syndicated Community Offering. Neither
Sandler O'Neill nor any Selected Dealer shall have any obligation to take or
purchase any shares of common stock in the Syndicated Community Offering.
Group has received approval to have its common stock listed on the Nasdaq
SmallCap Market under the symbol "____________," subject to completion of the
Stock Offering. Sandler O'Neill has advised Group that, following completion of
the Stock Offering, it intends to make a market in the common stock, but it is
under no obligation to do so. Prior to the Stock Offering, there was no market
for the common stock, and there can be no assurance that an active or liquid
trading market for the common stock will develop, or if developed, will be
maintained. The absence or discontinuance of a market may have an adverse
impact on both the price and liquidity of the common stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE DISTRICT OF COLUMBIA
DEPARTMENT OF INSURANCE AND SECURITIES REGULATION, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THE
PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Estimated Estimated Net
Underwriting Estimated Net Proceeds of
Syndicated Commission Proceeds of Initial
Community and Other Syndicated and Syndicated
Offering Fees and Community Community
Price /(1)/ Expenses /(2)/ Offering Offerings /(3)/
-------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Per Share.. $10.00 $ $ $
Total...... $ $ $ $
- --------------------
</TABLE>
(1) Group has received subscriptions for ___ shares of common stock in the
Initial Offerings. RP Financial, LC. has advised Group that, as of _______,
1998, the estimated consolidated pro forma market value of Group is between
$___ million and $___ million.
(2) Consists of the Syndicated Community Offering's pro rata allocation of the
estimated expenses of Group in connection with the Stock Offering (other
than estimated fees to be paid to Sandler O'Neill for services in connection
with the Initial Offerings) and estimated compensation for Sandler O'Neill
and Selected Dealers in connection with the sale of shares in the Syndicated
Community Offering, which fees are estimated to be $_______ and may be
deemed to be underwriting fees.
(3) The net proceeds of the Initial Offerings (based upon the sale of the shares
subscribed for at the Purchase Price and after the allocation to the Initial
Offerings of their pro rata portion of the estimated expenses related to the
Stock Offering) are estimated to be $______.
SANDLER O'NEILL & PARTNERS, L.P.
-------------------------------
The date of this Prospectus Supplement is ______________________, 1999.
<PAGE>
- --------------------------------------------------------------------------------
The information in this Prospectus is not complete and may be changed. Group may
not sell these securities until the registration statement that has been filed
with the Securities and Exchange Commission is effective. This Prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
Subject to Completion December 22, 1998
PROSPECTUS
NCRIC GROUP, INC.
1115 30/TH/ STREET, N.W.
WASHINGTON, DC 20007
(202) 989-1866
[NCRIC LOGO]
(UP TO 1,288,000 SHARES OF COMMON STOCK)
NCRIC Group, Inc. ("Group") is offering for sale up to 1,288,000 shares, or
40%, of its outstanding common stock. Group owns 100% of the common stock of
NCRIC, Inc. ("NCRIC"), a stock insurance company that provides medical
professional liability insurance and other products to physicians in the
District of Columbia, Maryland and Virginia. Through its subsidiaries, Group
also operates another medical professional liability insurance company, a
management services organization for physicians, a physicians' organization, a
reinsurance intermediary and an insurance agency.
RP Financial, LC., an independent appraiser, has estimated that the pro
forma market value of Group and its subsidiaries, as of September 30, 1998, was
between $23.8 million and $32.2 million. Based on this estimate, Group seeks to
sell between 1,288,000 and 952,000 shares of its common stock at a price per
share of $10.00. Group will offer these shares to policyholders and extended
reporting endorsement holders of NCRIC, Group's tax-qualified employee stock
ownership plan, Group's Stock Award Plan, directors, officers and employees of
NCRIC, A Mutual Holding Company, a mutual holding company (the "Mutual Holding
Company"), and its subsidiaries, and members of the general public. At all
times, NCRIC Holdings, Inc. ("NCRIC Holdings"), which is wholly owned by the
Mutual Holding Company, must own a majority of Group's outstanding voting
shares.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE DISTRICT OF COLUMBIA
DEPARTMENT OF INSURANCE AND SECURITIES REGULATION, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
Minimum Midpoint Maximum
---------- ----------- -----------
<S> <C> <C> <C>
Price per share....................... $ 10.00 $ 10.00 $ 10.00
Number of shares...................... 952,000 1,120,000 1,288,000
Offering expenses..................... 831,000 866,000 900,000
Net proceeds.......................... 8,689,000 10,334,000 11,980,000
Net proceeds per share................ 9.13 9.23 9.30
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE ___ OF THIS PROSPECTUS.
THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
THE AMOUNT INVESTED.
Sandler, O'Neill & Partners, L.P. will use its best efforts to assist
in selling at least the minimum number of shares of common stock but does not
guarantee that this number will be sold. An interest-bearing account at
_______________________ will hold all funds received from subscribers until the
completion or termination of the stock offering. Group has applied to have the
common stock quoted on the Nasdaq SmallCap Market under the symbol _______.
Sandler, O'Neill & Partners, L.P.
--------------------------
The date of this Prospectus is _______________, 1998.
<PAGE>
TABLE OF CONTENTS
Summary................................................................... 3
Risk Factors.............................................................. 13
The Stock Offering........................................................ 22
Purchases in the Stock Offering........................................... 26
Use of Proceeds........................................................... 33
Dividend Policy........................................................... 34
Market for Common Stock................................................... 34
Capitalization............................................................ 35
Pro Forma Financial Statements............................................ 37
Pro Forma Data............................................................ 43
Selected Financial and Operating Data..................................... 47
Management's Discussion and Analysis of Results of Operations
and Financial Condition................................................. 49
Business.................................................................. 72
The Reorganization........................................................ 95
Management................................................................ 96
Management Compensation................................................... 99
Certain Agreements........................................................ 103
Ownership of Common Stock................................................. 104
Description of Common Stock............................................... 104
Legal Opinions............................................................ 104
Experts................................................................... 104
Available Information..................................................... 105
Glossary of Selected Insurance Terms...................................... 106
Index to Financial Statements............................................. 108
---------------------------
FORWARD-LOOKING INFORMATION
Certain statements in this document are forward-looking statements which
involve known and unknown risks and uncertainties which may cause Group's actual
results to be materially different from historical results or from the results
expressed or implied by the forward-looking statements. These risks and
uncertainties include: general economic conditions including changes in interest
rates and the performance of financial markets; NCRIC's concentration in a
single line of business; the emergence of managed care; uncertainties inherent
in the estimate of loss and loss adjustment expense reserves and reinsurance;
price competition; regulatory changes; ratings assigned by A.M. Best Company;
the availability of bank financing and reinsurance; the Mutual Holding Company's
holding company structure; and uncertainties associated with Group's acquisition
strategy. Other factors not currently anticipated by management may also
materially and adversely affect Group's results of operations.
2
<PAGE>
SUMMARY
This summary highlights certain information concerning the Company and the
Stock Offering. It is not complete and may not contain all of the information
that you should consider before investing in the common stock. You should read
the entire Prospectus carefully, including the "Risk Factors" section (beginning
on page ___) and the financial statements and the notes to those statements.
Financial information in this Prospectus is presented in accordance with
generally accepted accounting principles, unless otherwise indicated.
You should note as you read this Prospectus that at times capitalized terms
are used to assist you in reading this Prospectus. References in this
Prospectus to "the Company" mean Group and its subsidiaries, including their
predecessors. References to the "Stock Offering" include the Subscription
Offering, the Community Offering and any Syndicated Community Offering, all of
which are described below. For an explanation of certain terms used in this
Prospectus that are commonly used in the insurance industry, see "Glossary of
Selected Insurance Terms."
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The Company...................... On _____________, 1998, National Capital
Reciprocal Insurance Company (the
"Reciprocal") reorganized into a stock
insurance company with a mutual holding
company parent (the "Reorganization").
Pursuant to a plan of reorganization (the
"Plan"), the Reciprocal formed a mutual
insurance holding company called NCRIC, A
Mutual Holding Company. The Reciprocal
continued its corporate existence as a stock
insurance company by adopting articles of
incorporation which authorized the issuance
of capital stock, and which changed the
Reciprocal's name to NCRIC, Inc. All of the
initially outstanding shares of the capital
stock of NCRIC were issued to the Mutual
Holding Company. Through a series of share
transfers, two newly-formed intermediate
stock holding companies, NCRIC Holdings and
Group, were inserted between the Mutual
Holding Company and NCRIC (see page __ for an
organizational chart). Immediately after the
Reorganization, the Mutual Holding Company
directly owned NCRIC Holdings, which directly
owned Group, which directly owned NCRIC.
The Company is the leading provider of
medical professional liability insurance in
the District of Columbia based on direct
premiums written in 1997. Medical
professional liability insurance insures the
physician against liabilities arising from
the rendering of, or failure to render,
professional medical services. According to
data compiled by A.M. Best Company, Inc.
("A.M. Best"), an insurance rating agency,
the Company's market share of physician and
hospital medical professional liability
direct premiums written in the District of
Columbia was 44%. In recent years, the
Company has expanded its operations to
Virginia, Maryland and West Virginia. The
Company currently provides claims-made
medical professional liability
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3
<PAGE>
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<S> <C>
and office premises liability insurance to
approximately 1,200 physicians who practice
alone or in medical groups, clinics or other
healthcare organizations. The Company also
offers other services to its insureds. The
Company's principal executive offices are
located at 1115 30/th/ Street, N.W.,
Washington, D.C. 20007. The Company's
telephone number is (202) 969-1866.
At September 30, 1998, the Company had
consolidated assets of $135.9 million and
total equity of $31.9 million. For the year
ended December 31, 1997, net premiums earned
were $13.5 million and net income was
$959,000.
Recent Development............... On December 20, 1998, the Company entered
into definitive agreements to purchase all of
the outstanding shares of HealthCare
Consulting, Inc. ("HCI"), a management
services organization for physicians, all of
the membership interests in HCI Ventures, LLC
("HCIV"), an organization which provides
capital to management services organizations,
and all of the assets of Employee Benefits
Services, Inc. ("EBSI"), a provider of
employee benefits services (collectively, the
"Practice Management and Financial Services
Acquisition"). HCI, HCIV and EBSI have
extensive experience providing practice
management, financial, benefits and tax
services to physicians. The Practice
Management and Financial Services Acquisition
will permit the Company to expand its
practice management and financial services
and to begin to offer employee benefits
services. The Company's insureds are a
potential new market for HCI, HCIV and EBSI,
while HCI's, HCIV's and EBSI's clients are a
potential new market for the Company's core
insurance products in Virginia.
The Purchase Agreements to acquire HCI, HCIV
and EBSI contemplate that the Company would
pay $5.1 million in cash and deliver a
$300,000 mandatorily convertible note
pursuant to which the Company would deliver
30,000 shares of its common stock after the
closing of the Stock Offering. The Company
would also pay a maximum of an additional
$3.1 million if HCI, HCIV and EBSI achieve
earnings targets in 2000, 2001 and 2002.
Description of the Mutual Holding
Company Structure............... The Company is organized in a mutual holding
company structure and is an indirect
subsidiary of the Mutual Holding Company. The
shares sold in the Stock Offering will
represent a minority ownership interest of
40% of Group's common stock. Except for
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4
<PAGE>
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the 30,000 shares delivered in connection
with the Practice Management and Financial
Services Acquisition, the remaining shares of
Group's common stock will be owned by NCRIC
Holdings, a wholly-owned subsidiary of the
Mutual Holding Company. Under District of
Columbia law, the Mutual Holding Company must
at all times own, directly or indirectly, a
majority of the voting shares of NCRIC.
The mutual holding company structure differs
in significant respects from the stock
holding company structure that is used in a
full demutualization transaction. A
reciprocal insurance company that reorganizes
to stock form of organization using the
mutual holding company structure sells only a
minority of its shares at the time of any
offering. By doing so, a reorganizing company
will raise less than half the capital that
would be raised in a full demutualization
transaction. The shares that are issued to
the mutual holding company may be
subsequently offered for sale to certain
policyholders of the reorganized stock
company and others if the mutual holding
company converts to stock form in a
demutualization transaction.
Because the Mutual Holding Company is a
mutual corporation, its actions will not
necessarily always be in the interests of the
Company's stockholders. In making business
decisions, the Mutual Holding Company's Board
of Directors will consider a variety of
constituencies, including the members of the
Mutual Holding Company, the policyholders of
NCRIC and the employees of the Company. The
Boards of Directors of the Mutual Holding
Company, Holdings and Group each include two
persons who are not policyholders or members
of management of NCRIC. The interests of the
stockholders of the Company and those of the
Mutual Holding Company's other constituencies
may be the same in many circumstances. For
example, all of the constituencies benefit
from the ongoing profitability of the Company
and continued quality service to NCRIC
policyholders.
Organizational Structure......... The following chart illustrates the
organization of the Mutual Holding Company
and its subsidiaries. The chart gives effect
to the issuance of stock in the Stock
Offering assuming that the maximum number of
Shares are issued.
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5
<PAGE>
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<CAPTION>
<S> <C> <C> <C> <C>
-------------------------
NCRIC, A Mutual
Holding Company
(a District of Columbia
mutual insurance
holding company)
-------------------------
100%
of
shares
-------------------------
NCRIC Holdings, Inc.
(a District of Columbia
stock holding company)
-------------------------
60% 40% --------------
of of shares Public
shares Stockholders
------------------------- --------------
NCRIC Group, Inc./1/
(a District of Columbia
stock holding company)
-------------------------
100% 100%
of of
shares shares
-------------------------
NCRIC, Inc.
(a District of Columbia
stock insurance
company)
-------------------------
100% 100% 100% 100%
of of of of
shares shares shares shares
- ----------------------- ------------------------- -------------------------- -------------------------
National Capital NCRIC Insurance Commonwealth NCRIC Physicians
Insurance Agency, Inc. Medical Liability Organization, Inc.
Brokerage, Ltd. (a District of Columbia Insurance Company (a District of Columbia
(a District of Columbia corporation) (a Virginia corporation) corporation)
corporation) corporation)
- ----------------------- ------------------------- -------------------------- --------------------------
</TABLE>
/1/ HCI and HCIV will be wholly owned by Group. The assets of EBSI will be
owned by HCI.
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<S> <C>
Business Strategy................ The Company's strategy is to provide
innovative, value-based, cost-effective
insurance products and practice management
and financial services to physicians and
other healthcare providers in the Mid-
Atlantic region. To achieve this goal, the
Company must supply comprehensive services
and timely solutions in a changing and
increasingly competitive healthcare
environment while maintaining financial
integrity through prudent underwriting,
conservative investing and controlled growth.
The key elements of the Company's strategy
are to:
. maintain its strong franchise and close
relationship with the District of Columbia
medical community;
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6
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<S> <C>
. enhance its insurance product offerings to
increase sales and strengthen ties with
physicians;
. expand its market share of the Mid-Atlantic
medical professional liability insurance
market;
. expand its ability to provide practice
management, financial, benefits and other
services for physicians;
. take advantage of strategic acquisition
opportunities including the Practice
Management and Financial Services
Acquisition;
. maintain underwriting discipline and
emphasize profitability over premium
growth;
. use legal and risk management expertise to
vigorously reduce loss costs; and
. expand distribution channels, increasing
utilization of insurance brokers and
physician management organizations.
THE STOCK OFFERING
Stock Pricing and Number of
Shares to Be Issued............. The aggregate purchase price of the common
stock is based on an independent appraisal of
the estimated consolidated pro forma market
value of the Company. The Company engaged RP
Financial LC. ("RP Financial"), a firm
experienced in corporate valuations, to
perform the appraisal. RP Financial estimates
that, as of September 30, 1998, the pro forma
market value of the Company ranged from $23.8
million to $32.2 million, with a midpoint of
$28 million (the "Estimated Valuation
Range"). The Company is offering 40% of its
common stock in the Stock Offering which,
based on the appraisal, ranges in value from
$9.5 million to $12.9 million, with a
midpoint of $11.2 million (the "Offering
Range"). The Company is offering the common
stock for sale at $10.00 per share (the
"Purchase Price"), representing 952,000
shares and 1,288,000 shares at the minimum
and maximum of the Offering Range, with a
midpoint of 1,120,000 shares. Group, in
consultation with its advisers, determined
the offering price per share.
The appraisal estimates the consolidated pro
forma market value of the Company. The
appraisal is based on a review of internal
projections, and a comparison of the
consolidated financial condition and
results of
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7
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<S> <C>
operations of the Company to medical
professional liability insurance company
averages and a peer group of representative
publicly-owned companies. The appraisal is
not intended, and must not be construed, as a
recommendation by the Company, Sandler
O'Neill or RP Financial as to the
advisability of purchasing common stock.
The appraisal will be updated immediately
prior to completion of the Stock Offering. If
the value reflected in the updated appraisal
is within the Estimated Valuation Range, the
Company will not notify subscribers of the
updated appraisal and the Stock Offering will
be consummated.
If the value reflected in the updated
appraisal is not within the Estimated
Valuation Range, the Company may terminate or
proceed with the Stock Offering. If the
Company proceeds with the Stock Offering, the
Company will deliver promptly to the
subscribers an updated prospectus containing
a description of the updated appraisal.
Subscribers will be given the opportunity to
confirm, modify or rescind their orders. The
funds of all subscribers who do not confirm
or modify their orders will be returned
promptly with interest. Subscription orders
may not be withdrawn for any reason if the
updated appraisal is within the Estimated
Valuation Range.
The Subscription Offering........ Pursuant to nontransferable subscription
rights, Group is offering (the "Subscription
Offering") shares to the following persons:
(1) named insureds under policies of
insurance issued by NCRIC and in force as of
the close of business on December 31, 1998
and extended reporting endorsement holders as
of such date (collectively, the "Eligible
Holders"), (2) Group's tax-qualified employee
stock ownership plan (the "ESOP") and Stock
Award Plan, and (3) directors, officers and
employees of the Mutual Holding Company and
its subsidiaries. Associates of an Eligible
Holder may also purchase shares of common
stock offered to the Eligible Holder.
"Associates" are members of an insured's
family or pension plans, other employee
benefit plans, trusts and other entities
established for the benefit of an insured or
one or more members of his or her family.
Insureds of the Company's Virginia insurance
company subsidiary, Commonwealth Medical
Insurance Liability Company ("CML"), are not
entitled to subscription rights.
The Community Offering........... Subject to the prior rights of subscribers in
the Subscription Offering, Group is
concurrently offering shares of common stock
in a community offering (the
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8
<PAGE>
<TABLE>
<S> <C>
"Community" Offering") to members of the
general public. Preference will be given to
(1) named insureds under NCRIC policies
issued after December 31, 1998; (2) named
insureds under CML policies; (3) providers of
goods and services to the Company; and
(4) residents of the District of Columbia,
Maryland and Virginia. Shares sold in the
Community Offering will be sold for the
Purchase Price. Group reserves the absolute
right to reject orders in the Community
Offering, in whole or in part.
Syndicated Community Offering.... If any shares of common stock are not
subscribed for in the Subscription and
Community Offerings, they may be offered for
sale in a syndicated community offering (the
"Syndicated Community Offering"). Sandler
O'Neill, as Group's agent, will assist in
forming a syndicate of registered broker
dealers to sell common stock on a best
efforts basis. A Syndicated Community
Offering will commence promptly after
__________________, 1999 and must be
completed within 90 days after commencement.
Group reserves the absolute right to reject
orders in the Syndicated Community Offering,
in whole or in part.
Termination of Stock Offering
and Closing Date................ Subscription Offering subscription rights
expire at 1:00 p.m., Eastern Standard Time on
___________, 1999 (the "Subscription
Expiration Date"). The Community Offering may
also terminate on the Subscription Expiration
Date, but may be extended until ________,
1999. If the Stock Offering is not completed
on or before __________, 1999 (the "Offering
Termination Date"), the Company may extend
the Stock Offering or terminate the Stock
Offering and return all subscription funds
with interest. If the Stock Offering is
extended, Group will notify all subscribers
and give each subscriber an opportunity to
withdraw or confirm his or her subscription.
If a subscription is withdrawn, or is not
confirmed, the subscriber's funds will be
returned promptly with interest.
Subscription Irrevocable......... Orders to purchase common stock in the Stock
Offering are irrevocable. However, in certain
circumstances, Group may cancel the Stock
Offering and return all subscription funds
promptly to subscribers with interest. These
circumstances include the number of shares
subscribed for in the Stock Offering being
less than 952,000 shares.
Purchase Limitations............. No person may purchase fewer than 100 shares
in the Stock Offering. The ESOP may purchase
up to an aggregate of 128,800 shares of
common stock or 10% of the shares of common
stock offered in the Stock Offering. The
Stock Award Plan may purchase 64,400 shares
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9
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of common stock or 5% of the shares of common
stock offered in the Stock Offering. With the
exception of the ESOP and the Stock Award
Plan, no person, together with his or her
Associates, may purchase, in the aggregate,
more than 25,000 shares of common stock.
Stock Purchase Priorities........ In the event that Group receives orders for
more than 1,288,000 shares in the
Subscription Offering, the Community Offering
will be terminated and shares of common stock
will be allocated among Subscription Offering
subscribers as follows:
. Each Eligible Holder, together with his or
her Associates, will be entitled to
purchase the lesser of (1) 25,000 shares,
or (2) the number of shares for which such
Eligible Holder has subscribed. Any shares
remaining (up to a maximum of 1,050,800
shares) will be allocated ratably among
subscribing Eligible Holders with unfilled
subscriptions.
. The ESOP will be entitled to purchase up to
128,800 shares of common stock.
. The Stock Award Plan will be entitled to
purchase up to 64,400 shares of common
stock.
. Subscribing officers and employees of the
Mutual Holding Company and its subsidiaries
and certain directors of the Mutual Holding
Company and its subsidiaries who are not
Eligible Holders will be entitled in the
aggregate to purchase up to 44,000 shares
of common stock.
Group is unable to predict the number of
Eligible Holders who will participate in the
Subscription Offering or the number of shares
they will desire to purchase.
Nontransferability of
Subscription Rights............. No person may transfer or enter into any
agreement or understanding to transfer legal
or beneficial ownership of his or her
subscription rights or, prior to exercise of
the subscription rights, the common stock to
be issued upon their exercise. Persons
violating such prohibition will lose their
right to purchase common stock in the Stock
Offering.
Market for the Common Stock...... Group has never issued capital stock. Group
expects the common stock to be quoted on the
Nasdaq SmallCap Market under the symbol
"___," and has filed an application with the
Nasdaq Stock Market, Inc. requesting to be
listed and quoted. However,
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there can be no assurance that an active and
liquid trading market for the common stock
will develop or be maintained. The existence
of a public trading market having the
desirable depth, liquidity and orderliness
will depend upon the presence in the market
of a sufficient number of both willing buyers
and willing sellers at any given time. There
can be no assurance that quotations will be
available on the Nasdaq SmallCap Market. If
you purchase shares, you may not be able to
sell them when you want to at a price that is
equal to or more than the price you paid.
Voting Rights.................... The common stock has one vote per share.
Use of Proceeds.................. Group estimates that it will receive net
proceeds from the Stock Offering of between
approximately $8,689,000 and $11,980,000,
which will be used as follows:
. Group intends to use $5.1 million to repay
indebtedness incurred in connection with
the Practice Management and Financial
Services Acquisition. This includes
repayment of bank debt of $2.2 million.
. Up to $1,288,000 will be loaned to the ESOP
to fund its purchase of common stock. Upon
receipt of funds from the ESOP, Group will
use the funds for general corporate
purposes.
. Up to $644,000 will be loaned to the Stock
Award Plan to fund its purchase of common
stock. Upon receipt of funds from the Stock
Award Plan, Group will use the funds for
general corporate purposes.
. Group will retain the balance for expansion
and diversification of the Company's
activities, and for other general corporate
purposes. Pending such use, the funds will
be invested in interest-bearing securities.
Dividend Policy.................. Declaration of dividends by Group's Board of
Directors depends on a number of factors,
including the requirements of applicable law
and the determination by Group's Board of
Directors that the net income, capital and
financial condition of the Company, industry
trends, general economic conditions and other
factors justify the payment of dividends. At
present, Group has not determined whether it
intends to pay dividends to its stockholders
in the foreseeable future. There can be no
assurance that dividends will be paid or, if
paid initially, that they will continue to be
paid in the future.
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Purchase of Common Stock
by Management................... Directors and officers of the Mutual Holding
Company and its subsidiaries, together with
their Associates, propose to purchase, in the
aggregate, approximately 132,000 shares of
common stock in the Stock Offering, which
equals 10.2% of the common stock to be issued
in the Stock Offering assuming an offering at
the maximum of the Offering Range.
Benefits to Management........... The full-time employees of NCRIC will
participate in the ESOP, which is a form of
retirement plan that will purchase up to
128,800 shares in the Subscription Offering.
Directors, officers and employees of the
Mutual Holding Company and its subsidiaries
will participate in a Stock Award Plan that
will purchase up to 64,400 shares in the
Subscription Offering. Group will loan the
ESOP and the Stock Award Plan funds to enable
each entity to purchase shares in the
Subscription Offering.
Directors, officers and employees of the
Mutual Holding Company and its subsidiaries
will also participate a Stock Option Plan.
The Stock Option Plan will include up to
64,400 shares. Shares issued under the Stock
Option Plan will not be part of the Stock
Offering. Purchasers of shares issued on the
exercise of an option under the Stock Option
Plan will pay the fair market value of the
shares on the date of the grant of the stock
option.
Group has not determined the number of shares
to be awarded or option's granted to any
director, officer or employee under a benefit
plan.
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RISK FACTORS
You should carefully consider the "Risk Factors" and other information in
this Prospectus prior to making an investment decision regarding the common
stock.
POSSIBLE ADVERSE IMPACT OF CONCENTRATION OF BUSINESS
Substantially all of NCRIC's premiums are generated from medical
professional liability insurance policies issued to physicians. As a result,
negative developments in the economic, competitive or regulatory conditions
affecting the medical professional liability insurance industry, particularly as
such developments might affect medical professional liability insurance for
physicians, could have a material adverse effect on the Company's financial
condition and results of operations.
In 1997, approximately 90% of the Company's direct premiums written were
generated in the District of Columbia. The revenues and profitability of the
Company are, therefore, subject to prevailing regulatory, economic, competitive
and other conditions in the District of Columbia medical community.
VOLATILITY OF OPERATING RESULTS OF MEDICAL PROFESSIONAL LIABILITY INSURERS
The operating results of medical professional liability insurers are
subject to significant fluctuation due to a number of factors, including adverse
claims experience, regulation, competition, judicial trends, changes in the
investment and interest rate environment and general economic conditions.
Changes in the supply of, and the pricing for, medical professional liability
insurance and reinsurance, which historically have been highly cyclical, may
affect the Company's operating results. The unpredictability of claims
experience and competitive nature of the medical professional liability
insurance industry has contributed historically to significant quarter-to-
quarter and year-to-year fluctuations in the underwriting results and net
earnings of the Reciprocal. Because of these and other factors, historic
results of operations may not be indicative of future operations.
The availability of medical professional liability insurance, or the
industry's underwriting capacity, is determined principally by the industry's
level of capitalization, historical underwriting results, returns on investment
and perceived premium rate adequacy. Historically, the financial performance of
the medical professional liability industry has tended to fluctuate in cyclical
patterns characterized by periods of greater competition in pricing and
underwriting terms and conditions (a "soft insurance market") followed by
periods of capital shortage and lesser competition (a "hard insurance market").
In a soft insurance market, competitive conditions could result in unprofitable
premium rates and underwriting terms and conditions. For a number of years, the
medical professional liability insurance industry in the District of Columbia
and in many states has experienced a soft insurance market. There is a risk that
industry conditions will not improve or will further deteriorate. In addition,
an improvement in the medical professional liability insurance industry may not
benefit the Company.
HIGHLY COMPETITIVE NATURE OF INSURANCE INDUSTRY
The physician medical professional liability insurance market in the
District of Columbia, the Company's principal market, is highly competitive.
Competition is based on many factors, including perceived financial strength of
the insurer, premiums charged, dividend policy, policy terms and conditions,
service, reputation and experience. According to A.M. Best, in 1997 there were
at least 25 companies that wrote medical professional liability insurance in the
District of Columbia. The Company's principal competitors for physicians and
medical groups are CNA Insurance Group, Inc. and American International Group,
Inc. According to A.M. Best, the Company has 44% of the direct written premiums
generated in the District of Columbia physician and hospital professional
liability market. The Company's two principal competitors have a combined
market share of 30%. However, the A.M. Best data includes insurance purchased by
institutions such as hospitals, which the Company does not insure, but which are
insured by its principal competitors. Thus, the A.M. Best data does not
accurately reflect the Company's share of the medical professional liability
insurance markets in which it participates. Many of
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the Company's current and potential competitors have greater financial resources
than the Company and may seek to acquire market share by decreasing pricing for
their products below prevailing market rates, thereby reducing profitability.
There is a risk that the Company will not be able to compete effectively against
these potential and existing competitors.
As the Company expands into new product lines and new geographic markets,
it will compete with established companies which have existing relationships
with the physicians and other healthcare providers that the Company will seek to
insure. Competitors may also have existing relationships with insurance brokers
or other distribution channels. These factors may adversely affect the Company's
profitability.
POSSIBLE ADVERSE EFFECT OF CHANGES IN LOSS AND LAE RESERVES
The reserves for losses and loss adjustment expenses ("LAE") established by
the Company are estimates of amounts needed to pay reported and unreported
claims and related LAE. Establishment of appropriate reserves is an uncertain
process involving estimates of future losses. The estimates assume the ultimate
cost of settling such claims based on information then known, predictions of
future events, estimates of future trends in claims frequency and severity,
judicial theories of liability, legislative activity and other factors. In
addition, the medical professional liability insurance industry is subject to a
relatively high severity of claims. If the Company experiences greater than
expected severity and frequency of claims there is a risk that currently
established reserves will prove inadequate.
The inherent uncertainty is greater for certain types of insurance, such as
medical professional liability insurance, because lengthy periods may elapse
before notice of a claim or a determination of liability. Medical professional
liability claims and expenses may be paid over a period of 10 or more years,
which is longer than most property and casualty claims. Trends in losses on
"long-tail" medical professional liability policies may be slow to emerge.
Accordingly, the Company may not promptly modify underwriting practices and
change its premium rates to reflect underlying loss trends. In addition, changes
in the practice of medicine and healthcare delivery, such as the emergence of
new, larger medical groups that do not have an established claims history and
additional claims resulting from restrictions on treatment by managed care
organizations, may require the Company to adjust its underwriting and reserving
practices.
The Company cannot predict clusters of cases, such as breast implant or
"Fen-Phen" cases. There is also the risk of a very high jury award being
rendered against the Company. According to the National Practitioner Data Bank,
between September 1, 1990 and December 31, 1996, the District of Columbia had
the highest cumulative mean medical liability payment average in the United
States at $299,045. The next closest jurisdiction is Alabama with a cumulative
mean medical liability payment of $261,233 during the same period. There is
little current political support for tort reform in the District of Columbia
which, if implemented, might reduce the average medical liability payment.
CHANGES IN HEALTHCARE
Federal and state governments recently have focused on reforming the
healthcare system. Public discussion on a broad range of healthcare reform
measures will likely continue in the future. These measures include spending
limits, price controls, limits on increases in insurance premiums, limits on the
liability of doctors and hospitals for tort claims and changes in the healthcare
insurance system. The Company cannot predict which, if any, reform proposals
will be adopted, when they may be adopted or what impact they may have on the
Company. While some of these proposals could be beneficial to the Company, the
adoption of others could have a material adverse effect on the Company's
financial condition or results of operations.
In addition to regulatory and legislative efforts, significant market
driven changes have affected the healthcare environment in recent years. In
particular, "managed care" has negatively impacted or threatened to impact the
medical practice and economic independence of physicians. Physicians have had
difficulty conducting a
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traditional fee for service practice and many have joined or affiliated with
managed care organizations, healthcare delivery systems or practice management
organizations. This consolidation has reduced the role of the physician and the
medical group in the medical professional liability purchasing decision. In
addition, the consolidation could reduce primary medical professional liability
insurance premiums paid by healthcare systems, as larger healthcare systems
generally retain more risk by accepting higher deductibles and self-insured
retentions or form their own captive insurance companies. In 1997, 48% of the
Company's gross premiums came from physicians practicing alone or in groups of
less than three physicians. These factors could have a material adverse effect
on the Company's profitability.
REGULATORY AND RELATED MATTERS
The Company's business is subject to supervision and regulation by the
District of Columbia Department of Insurance and Securities Regulation (the
"DISR") and state insurance authorities in each state in which it transacts
business. Such supervision and regulation relate to the Company's business and
financial condition, including:
. limitations on lines of business;
. underwriting limitations;
. the setting of premium rates;
. the establishment of standards of solvency;
. statutory surplus requirements;
. the licensing of insurers and agents;
. concentration of investments;
. levels of reserves;
. the payment of dividends;
. transactions with affiliates; and
. the approval of policy forms.
Such regulation is concerned primarily with the protection of policyholders'
interests rather than stockholders' interests. Changes in regulation could
significantly reduce or eliminate the Company's ability to carry on its current
business lines profitably. See "Business -- Regulation."
Changes in state regulatory oversight and various proposals at the federal
level may in the future adversely affect the Company's results of operations.
In recent years, the state insurance regulatory framework has come under
increased federal scrutiny, and certain state legislatures have considered or
enacted laws that alter and, in many cases, increase state authority to regulate
insurance companies and insurance holding company systems. Further, the National
Association of Insurance Commissioners (the "NAIC") and state insurance
regulators are reexamining existing laws and regulations, which in many states
has resulted in the adoption of certain laws that specifically focus on
insurance company investments, issues relating to the solvency of insurance
companies, risk-based capital ("RBC") guidelines, interpretations of existing
laws, the development of new laws and the definition of extraordinary dividends.
See "Business -- Regulation."
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POSSIBLE ADVERSE IMPACT OF CHANGE IN A.M. BEST RATING
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. NCRIC is rated "A- (Excellent)" by
A.M. Best, the fourth highest rating of 15 ratings assigned by A.M. Best. A.M.
Best's ratings reflect its opinion of an insurance company's financial strength,
operating performance and ability to meet its obligations to policyholders and
are not evaluations directed to purchasers of an insurance company's securities.
NCRIC's rating is subject to periodic review by A.M. Best. If A.M. Best reduces
NCRIC's rating from its current level, the Company's results of operations could
be adversely affected because it may be more difficult to attract insureds and
to develop a network of insurance intermediaries.
REINSURANCE
The Company's ability to provide medical professional liability insurance
at competitive premium rates and coverage limits on a continuing basis will
depend in part on its ability to secure adequate reinsurance in amounts and at
rates that are commercially reasonable. The amount and cost of the Company's
reinsurance is governed by prevailing market conditions beyond the control of
the Company. At certain times in the past, reinsurance has been either
unavailable or prohibitively expensive.
While the Company seeks to obtain reinsurance with coverage limits that it
believes are appropriate for the risk exposures it assumes, there is a risk that
losses experienced by the Company will not be within the coverage limits of its
reinsurance treaties and facultative arrangements. In addition, in the future,
the Company may reduce its reliance on reinsurance by increasing the maximum
exposure retained by the Company on individual medical professional liability
risks. The Company may rely, in part, on the additional capital raised in the
Stock Offering to protect itself in the event of individual losses up to an
increased maximum exposure amount under its reinsurance agreements. Any
decrease in reinsurance will increase the Company's risk of loss.
The Company is subject to credit risk with respect to its reinsurers
because reinsurance does not relieve the Company of its obligation to pay claims
to its insureds for the risks ceded to reinsurers. A significant reinsurer's
inability or refusal to make payment under reinsurance terms could have a
material adverse effect on the Company. See "Business -- Reinsurance."
EXPANSION INTO NEW MARKETS
The Company's business strategy includes expanding and diversifying its
product lines. This will require adequate capital, marketing success and the
ability to set profitable rates and comply with applicable regulatory
requirements. The Company may also pursue growth through the acquisition of
other medical professional liability insurers or other entities. The Company
may not be successful in pursuing acquisition opportunities and any businesses
it acquires may not perform as well as expected. If the Company is unable to
successfully implement its business strategy, this inability could have a
material adverse effect on the Company's business or financial results. See
"Business -- Business Strategy" and "Business -- Practice Management and
Financial Services Acquisition."
Expansion and diversification of product lines into areas where the Company
is inexperienced will require the attraction and retention of qualified
personnel. Competition for such personnel may be intense, and the Company may
not be able to attract and retain such personnel. In addition, the Company will
have to seek distribution channels in its new markets and for its new products,
which channels may not be available to the Company. This will increase the
Company's dependence on insurance brokers and other intermediaries. In
addition, there is a risk that such brokers and other intermediaries will not be
willing to offer the Company's products or will only do so if the Company
contractually agrees not to directly market its policies to clients of the
insurance broker.
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DEPENDENCE ON KEY PERSONNEL
The Company believes that its ability to successfully implement its
business strategy and to operate profitably depends on the continued employment
of its senior management team led by R. Ray Pate, Jr. If Mr. Pate or other
members of the management team become unable or unwilling to continue in their
present positions, the Company's business and financial results could be
materially adversely affected. The Company has entered into employment
agreements with Mr. Pate and Stephen S. Fargis. See "Management."
GUARANTY FUND, ASSESSMENTS AND OTHER LIABILITIES
Property and casualty insurers like NCRIC are subject to assessments in
most states where they are licensed for the provision of funds necessary for the
settlement of covered claims under certain policies of impaired, insolvent or
failed insurance companies. Maximum contributions required by law in any one
year vary by jurisdiction, and have historically been between 1% and 2% of
annual premiums written. While NCRIC will not necessarily be liable to pay
assessments each year, the insolvency of another insurance company could result
in the maximum assessment being imposed on NCRIC over several years. The
Company cannot predict with certainty the amount of future assessments but
expects assessments in 1998 to be levied by the District of Columbia, Maryland,
Virginia and West Virginia. In each of these four jurisdictions, the amount of
the assessment under current law cannot exceed 2% of the direct premiums written
by the Company in that jurisdiction. Significant assessments could have a
material adverse effect on the Company's financial condition or results of
operations.
MINORITY PUBLIC OWNERSHIP AND CONTROL BY THE MUTUAL HOLDING COMPANY
Under District of Columbia law, the Mutual Holding Company must own,
directly or indirectly, a majority of NCRIC's outstanding voting shares. The
Mutual Holding Company will initially own almost 60% of Group's common stock
outstanding at the completion of the Stock Offering. Group will own 100% of
NCRIC's common stock. The Mutual Holding Company's executive officers and
directors initially will consist of persons who were executive officers and
directors of the Reciprocal and its attorney-in-fact. Assuming shares are sold
at the maximum of the Offering Range and including shares held by the Mutual
Holding Company, Group's officers and directors may control up to 3.4% of
Group's common stock outstanding following the Stock Offering. Such percentage
may increase assuming the exercise of stock options granted pursuant to the
Stock Option Plan and awards of shares under the ESOP and the Stock Award Plan.
The Mutual Holding Company will elect all members of the Board of Directors of
Group and, with certain exceptions, will control the outcome of matters
presented to the stockholders of Group for resolution by vote. Therefore, the
Mutual Holding Company, acting through its Board of Directors, will be able to
control the business and operations of the Company and will be able to prevent
any challenge to the ownership or control of Group by stockholders other than
the Mutual Holding Company. Although District of Columbia law permits the
Mutual Holding Company to convert to the stock form of organization, there is a
risk that a conversion of the Mutual Holding Company may not occur. See "--
Possible Adverse Impact of Conversion of the Mutual Holding Company to the Stock
Form of Organization."
Purchasers of the common stock will be minority stockholders of Group and
will have limited influence in electing directors or otherwise directing the
affairs of the Company as long as the Mutual Holding Company remains in
existence. There is a risk that the Mutual Holding Company will take action
that individual minority stockholders believe to be contrary to their interests.
CONTROL OF BOARDS OF DIRECTORS BY POLICYHOLDERS
The Mutual Holding Company's bylaws provide that 15 of 18 of the members of
the Mutual Holding Company's Board of Directors must be policyholders of NCRIC.
The Decision and Order of the District of Columbia Commissioner of Insurance and
Securities (the "Commissioner") permitting the Reorganization requires that at
least two-thirds of the members of the Mutual Holding Company's Board of
Directors must be policyholders of NCRIC. Currently, there are three non-
policyholders on the Mutual Holding Company's 18-member Board of
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Directors. Accordingly, the ultimate governance of the Company will remain in
the hands of policyholders of NCRIC. In addition, 7 of 10 members of Group's and
NCRIC Holding's Boards of Directors and 7 of 8 members of NCRIC's Board of
Directors are currently policyholders of NCRIC. The Decision and Order of the
Commissioner requires that at least two-thirds of NCRIC's Board of Directors
must be policyholders of NCRIC.
RELATIONSHIP WITH THE MUTUAL HOLDING COMPANY; POTENTIAL CONFLICTS OF INTEREST
The Mutual Holding Company is a mutual insurance holding company which is
operated for the benefit of its members. The members of the Mutual Holding
Company are policyholders of NCRIC. The interests of the Mutual Holding Company
may conflict with the interests of other stockholders of the Company. The
Boards of Directors of the Mutual Holding Company and Group, each of which
includes two persons who are not policyholders or members of management of
NCRIC, will seek to balance appropriately the interests of stockholders and
policyholders. See "Certain Agreements" and "Management."
CONVERSION OF THE MUTUAL HOLDING COMPANY TO THE STOCK FORM OF ORGANIZATION
District of Columbia law permits the Mutual Holding Company to convert from
the mutual to the stock form of organization. There is a risk that such a
transaction will never occur, and the Board of Directors has no current
intention or plan to undertake such a transaction. District of Columbia law
provides that if the Mutual Holding Company were to convert to the stock form of
organization, eligible policyholders would receive the right to subscribe for
additional shares of the new stock holding company that would be formed in the
demutualization. It is Group's intention, in accordance with District of
Columbia law, that in a demutualization, each share of common stock outstanding
and held by persons other than the Mutual Holding Company would be converted
automatically into shares of common stock of the new stock holding company.
Specifically, the number of shares that each stockholder would receive would be
determined pursuant to an exchange ratio that ensures that after the transaction
the percentage of the to-be outstanding shares of the new stock holding company
received by such stockholder in exchange for his or her common stock equals the
percentage of the outstanding shares of common stock owned by such stockholder
immediately prior to the demutualization. To date, the Commissioner has not
issued regulations regarding the conversion of a District of Columbia mutual
holding company to stock form, and there is a risk that such regulations will
not be effective at such time as the Mutual Holding Company may wish to
undertake a demutualization. Moreover, there is a risk as to what form any such
regulations may take and any conditions the Commissioner may impose on such a
demutualization.
Under legislation recently approved by the Council of the District of
Columbia, prior to the implementation of a proposed full demutualization, a
tender offer for more than 50% of the outstanding shares of the corporation is
prohibited unless approved by the Commissioner.
HOLDING COMPANY STRUCTURE; DIVIDENDS
Group's ability to meet its ongoing obligations in the future may depend
upon the receipt of sufficient funds from NCRIC in the form of dividends,
interest payments, loans, expense reimbursement and tax payments. District of
Columbia law regulates the payment of dividends by NCRIC to the Company.
Current law permits NCRIC to pay dividends of no greater than (1) 10% of the
Company's capital and statutory surplus as of the preceding year end or (2) the
net income (excluding realized capital gains) for the previous calendar year.
In calculating net income under the test, NCRIC may carry forward net income
(excluding realized capital gains) from the previous two calendar years that has
not been paid out as dividends. District of Columbia law gives the Commissioner
broad discretion to disapprove dividends even if the dividends are within the
above-described limits. Based on this limitation and 1997 results, NCRIC would
have been able to pay approximately $2 million in dividends to the Company in
1998 under the stated formula. NCRIC has the ability to loan funds to Group
with the approval of the Commissioner.
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ABSENCE OF SIMILAR STRUCTURES INVOLVING INSURANCE COMPANIES
Although there are numerous thrift institutions that are controlled by a
mutual holding company and have public stockholders who own a minority of the
outstanding shares, the Company knows of only one insurance company that has a
mutual holding company as a parent and has public stockholders who own a
minority of the outstanding shares. As a result, there is little experience on
which to base predictions concerning the responses the Company will receive from
its regulators, the marketplace and others.
REDUCED RETURN ON EQUITY AFTER STOCK OFFERING
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular insurance organization to its peers. The Company's equity will
significantly increase as a result of the net proceeds received in the Stock
Offering. The Company anticipates that, aside from its investment in HCI, HCIV
and EBSI, it will take time to prudently deploy the capital raised in the Stock
Offering. Following the Stock Offering, the Company's return on equity will
significantly decrease and will be less than the average return on equity for
publicly traded insurance companies and their holding companies.
EXPENSES ASSOCIATED WITH ESOP, STOCK OPTION PLAN AND STOCK AWARD PLAN
The Company may recognize material employee compensation and benefit
expenses relating to the ESOP and the Stock Option and Stock Award Plans. The
Company cannot predict the aggregate amount of these new expenses at the present
time because applicable accounting practices require that in some cases such
expenses be measured based on the fair market value of the shares of common
stock. In the case of the ESOP, fair market value will be measured when shares
are committed to be released for allocation to the ESOP participants; in the
case of the Stock Award Plan, fair market value will be measured at the grant
date and amortized over the vesting period except to the extent that the vesting
schedule of a stock award includes particular operating performance conditions
in which case the fair market value will be measured when the conditions are
satisfied; in the case of stock options, an expense is recognized with respect
to options granted to non-employee directors, based upon the amortization of the
initial value of such options over their vesting period and no expense is
recognized on Group's financial statements with respect to options granted to
employees. These expenses have been reflected in the pro forma financial
information under "Pro Forma Data" assuming the Purchase Price ($10.00 per
share) represents the fair market value for accounting purposes. Actual
expenses, however, will be based on the fair market value of the common stock at
future dates, which may be higher or lower than the Purchase Price.
POSSIBLE ADVERSE IMPACT OF BROAD VALUATION RANGE
If the value reflected in the updated appraisal is within the Estimated
Valuation Range and Group receives purchase orders for at least 952,000 shares,
Group will complete the Stock Offering. Group will sell between 952,000 shares
and 1,288,000 shares if any shares are sold. There is a difference of
$3,360,000 between the minimum and the maximum of the Offering Range. As a
result, the percentage interest in Group that a subscriber for a fixed number of
shares of common stock will have is approximately 26% smaller if 1,288,000
shares are sold than if 952,000 shares are sold. Furthermore, as a result of
this broad range, the updated appraisal may estimate a consolidated pro forma
market value for the Company that is materially more or less than the aggregate
dollar amount of purchase orders received by Group. Persons delivering purchase
orders will not receive a refund or have any right to withdraw orders if the
updated appraisal estimates a consolidated pro forma market value that is within
the Estimated Valuation Range, but is less than 2.5 times the aggregate dollar
amount of orders received by Group. Therefore, subscribers, in the aggregate and
on a per share basis, may pay materially more for the common stock than 40% of
the estimated consolidated pro forma market value of the Company. Accordingly,
there is a risk that the market price for the common stock immediately following
the Stock Offering will not equal or will not exceed the Purchase Price.
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DILUTIVE EFFECT OF ESOP, STOCK OPTION PLAN AND STOCK AWARD PLAN
Group intends to transfer shares of common stock to certain officers,
directors and employees through the ESOP, Stock Option Plan and Stock Award
Plan. These transfers will reduce Group's book value and earnings per share and
may reduce the trading price of the common stock. If the shares for the Stock
Option Plan are issued from Group's authorized but unissued common stock, the
book value and earnings per share of minority stockholders may be diluted, and
the trading price of Group's common stock may be reduced. See "Pro Forma Data"
and "Management Compensation."
EFFECT OF PARTIAL SUBSCRIPTION FOR SHARES; AMENDMENT, CANCELLATION OR RESCISSION
OF THE SUBSCRIPTION OFFERING
The sale of less than the maximum number of Shares offered in the
Subscription Offering and the Company's failure to complete the Community
Offering or the Syndicated Community Offering might have an adverse effect on:
. the market for the common stock;
. the ability of the purchasers of Shares in the Subscription Offering to
resell such Shares; and
. the ability of the Company to raise additional capital in the equity
markets in the future.
In addition, the Company may amend, cancel or rescind the Subscription Offering
in its sole discretion at any time prior to the closing of the Stock Offering;
accordingly, there is a risk that any person who subscribes for Shares will not
be able to purchase such Shares. See "The Stock Offering -- The Subscription
Offering."
NO PRIOR MARKET FOR COMMON STOCK; NO ASSURANCE OF ACTIVE AND LIQUID TRADING
MARKET; POSSIBLE VOLATILITY OF COMMON STOCK PRICE
Prior to the Stock Offering there has been no public market for shares of
the Company's common stock. Application has been made for quotation of the
common stock on the Nasdaq SmallCap Market. There is a risk, however, that an
active trading market for the common stock will not develop, or, if developed,
will not continue. The development of a liquid market depends on the
participation of willing buyers and sellers, which is not within the control of
the Company. The Company cannot assure investors that an active and liquid
trading market for the common stock will develop or that, if developed, it will
continue. The price at which the common stock is sold in the Stock Offering may
not be indicative of the market price of the common stock after completion of
the Stock Offering. In addition, factors such as variations in the Company's
financial results or other developments affecting the Company could cause the
market price of the common stock to fluctuate significantly after the Stock
Offering.
STOCK MARKET VOLATILITY
The market for publicly traded shares, including the shares of insurance
companies and insurance holding companies, has been volatile with very wide
price swings. The fluctuations in trading prices may be unrelated to the
operating performance of particular companies whose shares are traded. After
the Stock Offering, the trading price of the common stock will be determined by
the marketplace, and may be influenced by many factors, including investor
perceptions of the Company and the professional medical liability insurance
industry and general industry and economic conditions. Due to possible
continued market volatility, the Company cannot assure you that, following the
Stock Offering, the trading price of the common stock will be at or above the
initial offering price.
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RISK OF DELAYED STOCK OFFERING
Group expects to complete the Stock Offering within the time periods
indicated in this Prospectus. Nevertheless, it is possible, although not
anticipated, that adverse market, economic or regulatory conditions, or other
factors could significantly delay the completion of the Stock Offering and
result in increased costs or changes in the Estimated Valuation Range.
Subscription Offering subscription rights expire on ___________, 1999. The
Community Offering could be extended to ____________, 1999. The Syndicated
Community Offering could be extended until ___________, 1999. If the Stock
Offering is not completed by ____________, 1999, the Stock Offering will be
terminated and all funds held will be promptly returned with interest.
YEAR 2000 ISSUE
Many computer systems and computer programs accommodate only two-digit
fields to represent a given year (for example, "98" represents 1998). The
computer hardware and software automatically understand the two-digit indicator
to be associated with the twentieth century and assign the first two digits as
"19." Therefore, these computer systems are unable to recognize post-twentieth
century dates and to properly accept, process or display information related to
the next century. This could result in system or electronic equipment failures,
or miscalculations causing disruption of the Company's business operations.
The Company uses computer based systems extensively and, based on the
reviews carried out to date, the Company has determined that it must modify or
replace portions of its software or hardware so that its computers will properly
utilize dates beyond December 31, 1999. As of September 30, 1998, the Company
estimates that its year 2000 compliance program is substantially complete.
Management expects testing and implementation to be completed during 1999.
Total costs recorded as of December 31, 1997 relating to year 2000 compliance
are approximately $36,000. The Company expects to spend approximately an
additional $15,000 to complete the project. The Company expenses its costs
associated with year 2000 compliance and does not expect that such costs will be
material. There is a risk that year 2000 problems, including the identification
and remediation of all relevant year 2000 problems in a timely manner, will have
a material adverse effect on the Company.
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THE STOCK OFFERING
OFFERING OF COMMON STOCK
The Company is offering shares of common stock in the Subscription Offering
first to the Eligible Holders, second to the ESOP, and third to certain
directors, officers and employees of the Mutual Holding Company and its
subsidiaries. The Company is also concurrently offering common stock to the
general public in the Community Offering. Purchase orders received in the
Community Offering will be subordinated to the subscription rights in the
Subscription Offering. It is anticipated that all shares not subscribed for in
the Subscription Offering or the Community Offering will be offered by the
Company to the general public in the Syndicated Community Offering. See
"Purchases in the Stock Offering -- Syndicated Community Offering."
The completion of the Stock Offering is subject to market conditions and
other factors beyond the Company's control. In the event that the Stock
Offering is not completed, all subscription funds will be promptly returned to
subscribers with interest. In addition, the Company would be required to charge
all offering expenses against current income.
THE SUBSCRIPTION OFFERING
Nontransferable subscription rights to purchase shares of common stock are
being issued, at no cost, to all persons entitled to purchase stock in the
Subscription Offering. The amount of common stock that Eligible Holders may
purchase will be determined, in part, by the total number of shares of common
stock for which such Eligible Holders subscribe and the availability of common
stock for purchase under the following categories:
Subscription Category No. 1 is reserved for Eligible Holders. Each
Eligible Holder will receive, without payment, subscription rights to purchase
at the Purchase Price up to 25,000 shares of common stock subject to
reallocation. See "-- Stock Purchase Priorities."
Subscription Category No. 2 is reserved for the ESOP and the Stock Award
Plan, which will receive, without payment, nontransferable subscription rights
to purchase at the Purchase Price, in the aggregate, up to 128,800 shares or 10%
and up to 64,400 or 5%, respectively, of the shares of common stock being
offered in the Stock Offering.
Subscription Category No. 3 is reserved for directors, officers and
employees of the Mutual Holding Company and its subsidiaries who are not
policyholders of NCRIC. Each such person will receive, without payment,
subscription rights to purchase up to 25,000 shares of common stock subject to
reallocation. See "-- Stock Purchase Priorities."
The Company will make reasonable efforts to comply with the securities laws
of all states in the United States in which persons entitled to subscribe for
common stock reside. However, no person will be offered or allowed to purchase
any common stock under the Plan if he or she resides in a foreign country or in
a state of the United States with respect to which any or all of the following
apply: (1) compliance with securities laws or other laws would, in the opinion
of the Company, be onerous or impracticable for reasons of cost or otherwise;
(2) a small number of persons otherwise eligible to subscribe for shares under
the Stock Offering reside in such state or foreign country; (3) the granting of
subscription rights or the offer or sale of shares of common stock to such
persons would require Group or NCRIC or its employees to register, under the
securities laws of such state, as a broker, dealer, salesman or agent or to
register or otherwise qualify its securities for sale in such state or foreign
country; or (4) such registration or qualification would be impracticable for
reasons of cost or otherwise. No payments will be made in lieu of the granting
of subscription rights to any such person.
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STOCK PURCHASE PRIORITIES
If orders for more than 1,050,800 shares are received in the Subscription
Offering, shares of common stock will be allocated as follows:
. CATEGORY 1. An aggregate of 1,050,800 shares of common stock (or 81.6% of
the maximum shares of common stock offered in the Stock Offering) will be
allocated among subscribing Eligible Holders. Each Eligible Holder will be
entitled, to the extent possible, to purchase the lesser of (1) 25,000
shares, or (2) the number of shares for which such Eligible Holder has
subscribed. Any shares of common stock remaining after such initial
allocation will be allocated among the Eligible Holders whose subscriptions
remain unsatisfied in the proportion in which the aggregate number of
shares as to which each such Eligible Holder's subscription remains
unsatisfied bears to the aggregate number of shares as to which all
Eligible Holders' subscriptions remain unsatisfied; provided, however, that
no fractional shares of common stock will be issued. Insureds of CML will
not be entitled to subscription rights.
. CATEGORY 2. The ESOP will be entitled to purchase up to 128,800 shares (or
10% of the maximum shares of common stock offered in the Stock Offering),
and the Stock Award Plan will be entitled to purchase up to 64,400 shares
(or 5% of the maximum shares of common stock offered in the Stock
Offering).
. CATEGORY 3. Up to 44,400 shares (or 3.4% of the maximum shares of common
stock offered in the Stock Offering) will be allocated among subscribing
directors, officers and employees of the Mutual Holding Company and its
subsidiaries who are not policyholders of NCRIC, plus any shares available
to Eligible Holders but not purchased by them. In the event of an
oversubscription among such persons, shares of common stock will be
allocated in the proportion in which the number of shares subscribed for by
each such person bears to the aggregate number of shares subscribed for by
all such persons.
COMMUNITY OFFERING
Concurrently with the Subscription Offering, Group is offering shares of
the common stock to the general public in the Community Offering. Preference in
the Community Offering will be given to: (1) holders of policies of insurance
originally issued after December 31, 1998, (2) providers of goods or services
to, and identified by, the Company and (3) natural persons and trusts of natural
persons (including individual retirement and Keogh retirement accounts) who
reside in the District of Columbia or the states of Virginia and Maryland (the
"Local Community"). The term "resident," as used in relation to the preference
afforded natural persons in the Local Community, means any natural person who
occupies a dwelling within the Local Community, has an intention to remain
within the Local Community for a period of time (manifested by establishing a
physical, ongoing, non-transitory presence within one of the jurisdictions in
the Local Community) and continues to reside in the Local Community at the time
of the Community Offering. Group may utilize policyholder records or other
evidence provided to it to make the determination whether a person is a resident
of the Local Community. In the case of a corporation or other business entity,
such entity shall be deemed to be a resident of the Local Community only if its
principal place of business or headquarters is located within the Local
Community. All determinations as to the status of a person as a resident of the
Local Community shall be made by Group in its sole and absolute discretion.
Subscriptions for common stock received from members of the general public
in the Community Offering will be subject to the availability of shares of
common stock after satisfaction of all subscriptions in the Subscription
Offering. If 952,000 or more shares of common stock are subscribed for in the
Subscription Offering, the Company, in its sole discretion, will determine
whether to accept subscriptions for shares in the Community Offering. If
1,288,000 or more shares of common stock are subscribed for in the Subscription
Offering, no shares will be sold in the Community Offering. THE RIGHT OF ANY
PERSON TO PURCHASE SHARES IN THE COMMUNITY OFFERING, INCLUDING THE PREFERRED
SUBSCRIBERS DESCRIBED IN CLAUSES (1)-(3) ABOVE, IS SUBJECT TO THE ABSOLUTE RIGHT
OF GROUP TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART.
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THE APPRAISAL
The aggregate Purchase Price of the common stock was determined pursuant to
the appraisal conducted by RP Financial. RP Financial, as part of its financial
advisory business, is engaged regularly in the valuation of assets, securities
and companies in connection with various types of asset and security
transactions, including mergers, acquisitions and private placements, and
valuations for various other purposes and in the determination of adequate
consideration in such transactions. RP Financial will receive a fee from the
Company of approximately $25,000 for the appraisal.
The appraisal is based on a review of internal estimations, and a
comparison of the Company's performance relative to medical professional
liability insurance company averages and a peer group of representative
publicly-owned medical professional liability insurance companies. In preparing
the appraisal, RP Financial assumed that the financial and statistical
information provided by the Company was accurate and complete. RP Financial did
not independently verify the financial statements and other information provided
by the Company or value independently the assets and liabilities of the Company.
The appraisal considers the Company as a going concern only and is not an
indication of the liquidation value of the Company. THE APPRAISAL IS NOT
INTENDED, AND MUST NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND BY THE
MUTUAL HOLDING COMPANY OR ANY OF ITS SUBSIDIARIES, SANDLER O'NEILL OR RP
FINANCIAL AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK.
The appraisal will be updated immediately before the closing of the Stock
Offering. If the value reflected in the updated appraisal is within the
Estimated Valuation Range, the Stock Offering will be consummated. Subscription
orders may not be withdrawn if the updated appraisal is within the Estimated
Valuation Range.
If the value reflected in the updated appraisal is not within the Estimated
Valuation Range, the Company may terminate or proceed with the Stock Offering.
If the Company proceeds with the Stock Offering, the Company will promptly
deliver an updated prospectus containing a description of the updated appraisal
to you. You will be given the opportunity to confirm or modify your order or
rescind your order. All subscribers who do not confirm or modify their orders
will promptly receive their subscription funds with interest.
Because the appraisal is necessarily based upon estimates and expectations
for the future of a number of matters, all of which are subject to change from
time to time, no assurance can be given that persons purchasing common stock
will thereafter be able to sell such shares at or above the Purchase Price.
Copies of the appraisal report of RP Financial setting forth the method and
assumptions for such appraisal are on file and available for inspection at the
principal executive offices of the Company. Any subsequent updated appraisal
report of RP Financial also will be available for inspection.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
RP Financial has determined that, as of September 30, 1998, the estimated
consolidated pro forma market value of the Company was between $23.8 million and
$32.2 million. The Company, in consultation with its advisers, has determined
to offer the common stock in the Stock Offering at a price of $10.00 per share.
The Purchase Price will be $10.00 per share regardless of any change in the
estimated consolidated pro forma market value of the Company following the Stock
Offering as determined by RP Financial. The Company plans to issue between
952,000 and 1,288,000 shares of the common stock in the Stock Offering having an
aggregate price of between $9,520,000 and $12,880,000.
If the updated estimated valuation of RP Financial falls within the
Estimated Valuation Range, the following steps will be taken:
SUBSCRIPTION OFFERING MEETS OR EXCEEDS TOTAL MAXIMUM. If, upon conclusion
of the Subscription Offering, the number of shares subscribed for by
participants in the Subscription Offering is equal to or greater than 1,288,000
shares, then in such event the Stock Offering will be promptly consummated and
the Company will, on
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the closing date of the Stock Offering (the "Closing Date"), issue shares of
common stock to the subscribing participants. The number of shares of common
stock issued will be 1,288,000 shares. In the event of an oversubscription in
the Subscription Offering, shares of common stock will be allocated among the
subscribing participants in the priorities set forth in "The Stock Offering --
Stock Purchase Priorities" and any Community Offering will be canceled and any
funds received from subscribers in a Community Offering will be promptly
returned to such persons with interest based on the interest earned on the
funds.
SUBSCRIPTION OFFERING MEETS OR EXCEEDS TOTAL MINIMUM BUT DOES NOT MEET
TOTAL MAXIMUM. If, upon conclusion of the Subscription Offering, the number of
shares of common stock subscribed for by participants in the Subscription
Offering is equal to or greater than 952,000 shares, but less than 1,288,000
shares, then in such event the Company may promptly consummate the Stock
Offering, in which case the Company will on the Closing Date issue to the
subscribing participants shares of common stock in an amount sufficient to
satisfy the subscriptions of such participants in full. Prior to consummating
the Subscription Offering, however, the Company shall have the right in its
absolute discretion to accept, in whole or in part, subscriptions received from
any or all subscribers in the Community Offering and/or to offer shares of
common stock to purchasers in the Syndicated Community Offering; provided,
however, that no more than 1,288,000 shares of common stock shall be issued in
the Stock Offering (including shares issued to the ESOP and the Stock Award Plan
and to director, officer and employee purchasers); and, provided further, that
no fractional shares of common stock will be issued.
SUBSCRIPTION OFFERING DOES NOT MEET TOTAL MINIMUM. If, upon conclusion of
the Subscription Offering, the number of shares of common stock subscribed for
by participants in the Subscription Offering is less than 952,000 shares, the
Company may accept subscriptions received from subscribers in the Community
Offering and/or sell shares of common stock to purchasers in a Syndicated
Community Offering so that the aggregate number of shares of common stock sold
in the Stock Offering is equal to or greater than 952,000 shares. Upon reaching
the Total Minimum, the Stock Offering will be consummated promptly and the
Company will on the Closing Date: (1) issue to subscribing participants in the
Subscription Offering shares of common stock in an amount sufficient to satisfy
the subscriptions of such participants in full, and (2) issue to subscribers in
the Community Offering and/or to purchasers in any Syndicated Community Offering
such additional number of shares of common stock such that the aggregate number
of shares of common stock to be issued in the Stock Offering will be at least
952,000 shares; provided, however, that no fractional shares of common stock
will be issued.
STOCK OFFERING DOES NOT MEET MINIMUM. If the aggregate number of shares of
common stock subscribed for in the Stock Offering is less than 952,000 shares,
then in such event the Company will cancel the Stock Offering and all
subscription funds will be returned promptly to subscribers with interest.
GENERAL
The Company will have the right in its absolute discretion and without
liability to any subscriber, purchaser, underwriter or any other person: (1) to
determine which subscriptions, if any, to accept in the Community Offering and
to accept or reject any such subscription in whole or in part for any reason or
for no reason, and (2) to determine whether and to what extent shares of common
stock are to be offered or sold in a Syndicated Community Offering.
There is a difference of $3,360,000 between the Total Minimum and the Total
Maximum of the Offering Range. As a result, the percentage interest in the
Company that a subscriber for a fixed number of shares of common stock will have
is approximately 26% smaller if 1,288,000 shares are sold than if 952,000 shares
are sold. Furthermore, as a result of this broad range, the updated appraisal
may estimate a consolidated pro forma market value for the Company that is
materially more or less than the aggregate dollar amount of subscriptions
received by the Company. Subscribers will not receive a refund or have any right
to withdraw subscriptions if the updated appraisal estimates a consolidated pro
forma market value that is less than the aggregate dollar amount of
subscriptions received by the Company. Therefore, subscribers, in the aggregate
and on a per share basis, may pay more for the common stock than the estimated
consolidated pro forma market value of the Company. Accordingly,
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no assurance can be given that the market price for the common stock immediately
following the Stock Offering will equal or exceed the Purchase Price. Also,
subscribers should be aware that, prior to the consummation of the Stock
Offering, they will not have available to them information concerning the final
updated appraisal. After completion of the Stock Offering, the final updated
appraisal will be filed with the Securities and Exchange Commission (the
"Commission"). See "Available Information."
TERMINATION DATES
The Subscription Expiration Date is ________ p.m., Eastern Standard Time,
on ____________, 1999. Subscription rights not exercised prior to the
Subscription Expiration Date will be void. The Community Offering may also
terminate on ____________, 1999, but in no event later than __________, 1999.
If the Stock Offering, including any Syndicated Community Offering, is not
completed on or before _____________, 1999 (the "Offering Termination Date"),
Group may extend the Stock Offering or terminate the Stock Offering and return
all subscriptions with interest. If the Stock Offering is extended, Group will
give written notice to all subscribers, at which time each subscriber may
withdraw or confirm his or her subscription. If a subscription is withdrawn, or
is not confirmed, the subscriber's funds will be returned promptly with
interest. No action to extend the Subscription Offering or Community Offering
will be taken by Group after ____________, 1999.
Orders will not be executed by Group until at least 952,000 shares of
common stock have been subscribed for or sold. If at least 952,000 shares of
common stock have not been subscribed for or sold by the extended Offering
Termination Date, all funds delivered to Group pursuant to the Stock Offering
will be promptly returned to subscribers with interest. If Group returns funds
to subscribers, interest paid on such funds shall be equal to the interest
earned on such funds while they were held by Group.
PURCHASES IN THE STOCK OFFERING
USE OF ORDER FORMS
Subscriptions in the Subscription and Community Offerings may be exercised
only by completion of a stock order form (the "Stock Order Form"). Any person
who desires to subscribe for shares of common stock in the Subscription and
Community Offerings must do so by delivering by mail to
___________________________, or in person at NCRIC's principal executive offices
located at 1115 30/th/ Street, N.W., Washington, D.C. 20007, a properly
executed and completed Stock Order Form, together with full payment for all
shares for which the subscription is made. All checks or money orders must be
made payable to "NCRIC Group, Inc." All subscription rights under the
Subscription Offerings will expire at 1:00 p.m., local time, on the Subscription
Expiration Date whether or not the Company has been able to locate each person
entitled to such subscription rights. The Community Offering may continue for
up to 90 days after the Subscription Expiration Date. ONCE TENDERED, ORDERS TO
PURCHASE COMMON STOCK IN THE STOCK OFFERING CANNOT BE REVOKED.
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Subscription Expiration Date in the case of the Subscription Offering and
the expiration of the Community Offering in the case of the Community Offering
in accordance with Rule 15c2-8 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no Prospectus will be mailed any later than five
days prior to such dates or hand delivered any later than two days prior to such
dates. Execution of the Stock Order Form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock Order Forms will be distributed only with a
Prospectus. Photocopies and facsimile copies of Stock Order Forms will not be
accepted. Payment by check or money order must accompany the Stock Order Form.
No wire transfers will be accepted.
Each subscription right granted in the Subscription Offering may be
exercised only by the person to whom it is issued and only for his or her own
account. THE SUBSCRIPTION RIGHTS GRANTED UNDER THE SUBSCRIPTION OFFERING ARE
NONTRANSFERABLE. Each Eligible Holder subscribing for shares of common stock in
the Subscription Offering is required to represent to Group that such Eligible
Holder is purchasing such shares for such Eligible
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Holder's own account and that such Eligible Holder has no agreement or
understanding with any other person for the sale or transfer of such shares.
Group is not aware of any restrictions which would prohibit Eligible Holders who
purchase shares of common stock in the Subscription Offering, and who are not
executive officers or directors of the Mutual Holding Company or its
subsidiaries, from freely transferring such shares after the Stock Offering.
In the event a subscriber submits a Stock Order Form that (1) is not
delivered to Group, (2) is received after the Subscription Expiration Date, (3)
is defectively completed or executed, or (4) is not accompanied by payment in
full for the shares of common stock subscribed for, such subscription will not
be honored, and such subscriber will be treated as having failed to return the
completed Stock Order Form within the specified time period. Alternatively,
Group may (but will not be required to) waive any irregularity relating to any
Stock Order Form or require the submission of a corrected Stock Order Form or
the remittance of full payment for the shares of common stock subscribed for by
such date as Group may specify. Subscription orders, once tendered, may not be
revoked. Group's interpretations of the terms and conditions of the Stock
Offering and determinations with respect to the acceptability of the Stock Order
Forms will be final, conclusive and binding upon all persons, and neither Group
nor its directors, officers, employees and agents shall be liable to any person
in connection with any such interpretation or determination.
PAYMENT FOR SHARES
Payment in full for all subscribed shares of common stock must accompany
all completed Stock Order Forms in order for subscriptions to be considered
complete. Payment for subscribed shares of common stock may be made by check or
money order in U.S. Dollars. Payments will be placed in an Escrow Account at
_______________________ (the "Escrow Agent"). The Escrow Account will be
administered by the Escrow Agent. An executed Stock Order Form, once received
by the Company, may not be modified, amended or rescinded without the consent of
the Company. Funds accompanying Stock Order Forms will not be released until
the Stock Offering is completed or terminated. The ESOP will not be required to
pay for its shares at the time it subscribes, but is required to pay for such
shares at or before the completion of the Stock Offering.
DELIVERY OF CERTIFICATES
Certificates representing shares of the common stock will be delivered to
subscribers promptly after completion of the Stock Offering. Until certificates
for the common stock are available and delivered to subscribers, subscribers may
not be able to sell the shares of common stock for which they subscribed even
though trading of the common stock will have commenced.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Company has engaged Sandler O'Neill as a marketing advisor in
connection with the Stock Offering, and Sandler O'Neill has agreed to use its
best efforts to assist Group with its solicitation of subscriptions and purchase
orders for shares of common stock in the Stock Offering. Sandler O'Neill is not
obligated to take or purchase any shares of common stock in the Stock Offering.
The Company has agreed to pay Sandler O'Neill a fee equal to 2.0% of the
aggregate Purchase Price of common stock sold in the Subscription and Community
Offerings. In the event that the Company enters into selected dealers'
agreements with one or more National Association of Securities Dealers, Inc.
("NASD") member firms in connection with a Syndicated Community Offering, Group
will pay a fee to such selected dealers, any sponsoring dealer's fees, and a
management fee to Sandler O'Neill of 2.0% for shares sold by the NASD member
firm pursuant to such selected dealer's agreement; provided, however, that the
aggregate fees payable to Sandler O'Neill for common stock sold pursuant to such
selected dealer's agreement shall not exceed 2.0% of the aggregate Purchase
Price and that the aggregate fees payable to Sandler O'Neill and the selected
and sponsoring dealers will not exceed 7.5% of the aggregate Purchase Price of
the shares sold under any such agreement. If any fees are paid to Sandler
O'Neill pursuant to an advisory services agreement between the Company and
Sandler O'Neill entered into in connection with the Practice Management and
Financial Services Acquisition, $25,000 of such fees will be credited against
Sandler O'Neill's fee for the Stock Offering. Fees to
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Sandler O'Neill and to any other broker-dealer may be deemed to be underwriting
fees and Sandler O'Neill and such broker-dealers may be deemed to be
underwriters. Sandler O'Neill shall be reimbursed for legal fees, in an amount
not to exceed $60,000. Sandler O'Neill will also be reimbursed for its other
reasonable out-of-pocket expenses. In the event the Stock Offering is not
consummated or Sandler O'Neill ceases, under certain circumstances after the
subscription solicitation activities are commenced, to provide assistance to
Group, Sandler O'Neill will be entitled to be reimbursed for its reasonable out-
of-pocket expenses incurred prior to such termination. The Company has agreed to
indemnify Sandler O'Neill in connection with certain claims or liabilities,
including certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). Total fees to Sandler O'Neill are expected to be $190,400 and
$257,600 at the minimum and the maximum. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
In addition, in consideration for the provision of certain advisory
services provided in connection with the Reorganization, the Company has agreed
to pay Sandler, O'Neill a fee equal to $50,000; $37,500 of this fee has already
been paid, and the remaining $12,500 is due January 1, 1999. Sandler O'Neill
has from time to time performed investment banking services for the Company,
including in connection with the Practice Management and Financial Services
Acquisition, and has received fees in connection with such services.
Directors and executive officers of the Mutual Holding Company and its
subsidiaries may participate in the solicitation of offers to purchase common
stock. Other employees of the Company may participate in the Stock Offering in
ministerial capacities or by providing clerical work in effecting a sales
transaction. Questions from prospective purchasers will be directed to
executive officers or registered representatives. Such other employees have
been instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock. The Mutual Holding Company and its
subsidiaries will rely on Rule 3a4-1 under the Exchange Act, and sales of common
stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of common stock.
No officer, director or employee of the Company or the Mutual Holding Company
and its subsidiaries will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the common stock.
SYNDICATED COMMUNITY OFFERING
In the sole discretion of Group, all shares of common stock not purchased
in the Subscription and Community Offerings, if any, may be offered for sale to
the general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers to be formed and managed by Sandler O'Neill acting as
agent of Group, to assist Group in the sale of the common stock. Neither
Sandler O'Neill nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the common stock in the Syndicated Community
Offering; however, Sandler O'Neill has agreed to use its best efforts in the
sale of shares in the Syndicated Community Offering.
The price at which common stock is sold in the Syndicated Community
Offering will be the Purchase Price. Shares of common stock purchased in the
Syndicated Community Offering by any persons, together with associates of or
persons acting in concert with such persons, will be aggregated with purchases
in the Subscription and Community Offerings for purposes of the maximum purchase
limitation of 25,000 shares.
If a syndicate of broker-dealers ("selected dealers") is formed to assist
in the Syndicated Community Offering, a purchaser may pay for his or her shares
with funds held by or deposited with a selected dealer. If a Stock Order Form
is executed and forwarded to the selected dealer or if the selected dealer is
authorized to execute the Stock Order Form on behalf of a purchaser, the
selected dealer is required to forward the Stock Order Form and funds to Group
for deposit in a segregated account on or before noon of the business day
following receipt of the Stock Order Form or execution of the Stock Order Form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers must subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to
28
<PAGE>
purchase. Those indicating an intent to purchase shall execute Stock Order Forms
and forward them to their selected dealer or authorize the selected dealer to
execute such forms. The selected dealer will acknowledge receipt of the order to
its customer in writing on the following business day and will debit such
customer's account on the third business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before noon of the next
business day following the debit date will send Stock Order Forms and funds to
Group for deposit in a segregated account. Although purchasers' funds are not
required to be in their accounts with selected dealers until the debit date, in
the event that such alternative procedure is employed, once a confirmation of an
intent to purchase has been received by the selected dealer, the purchaser has
no right to rescind his or her order.
Certificates representing shares of common stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
Stock Order Form as soon as practicable following consummation of the sale of
the common stock. Any certificates returned as undeliverable will be disposed
of in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 90 days
following the Subscription Expiration Date.
TAX EFFECTS
REORGANIZATION. The Reciprocal has submitted to the Internal Revenue
Service (the "IRS") a request (the "Ruling Request Submission") for a private
letter ruling (the "PLR") concerning the material tax effects of the
Reorganization. The Company expects that the IRS will issue the PLR
substantially in the form requested by the Reciprocal, but the IRS has not taken
action on the Ruling Request Submission as of the date hereof. If the Ruling
Request Submission is still pending before the IRS at the Closing Date, the
Company will rely on the Tax Opinion (the "Tax Opinion") described below. Unlike
a private letter ruling issued by the IRS, the Tax Opinion is not binding on the
IRS and the IRS could disagree with one or more of the opinions provided in the
Tax Opinion. In the event of such disagreement, no assurance can be given that
the opinions provided in the Tax Opinion would be sustained by a court if
challenged by the IRS.
In the Ruling Request Submission, NCRIC has requested that the IRS confirm,
among other things, that the Reorganization of NCRIC from a mutual to stock form
of corporation will constitute a reorganization within the meaning of Section
368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the "Code"), and
that, for federal income tax purposes: (1) no gain or loss will be recognized by
the Reciprocal or NCRIC as a result of the Reorganization; and (2) NCRIC's basis
in its assets, holding period for its assets, net operating loss carryforward,
if any, capital loss carryforward, if any, earnings and profits and accounting
methods will not be affected by the Reorganization.
SUBSCRIPTION RIGHTS. RP Financial believes that the subscription rights do
not have any ascertainable market value, based upon their observation that such
rights are available to participants without cost, are legally nontransferable
and of short duration and will afford participants the right only to purchase
shares of common stock at the same price as will be paid by members of the
general public in the Community and Syndicated Community Offerings. Although
the matter is not free from doubt, NCRIC believes that in the event the Internal
Revenue Service were to nevertheless successfully assert that the subscription
rights did have a fair market value, any gain realized by an Eligible Holder as
a result of the receipt of subscription rights with any such fair market value
must be recognized, whether or not such rights are exercised. In such an event,
the amount of gain recognized by each Eligible Holder would equal the fair
market value of subscription rights received by the Eligible Holder. If an
Eligible Holder were to be required to recognize gain on the receipt of
subscription rights and does not exercise some or all of such subscription
rights, such Eligible Holder should recognize a corresponding loss upon the
expiration or lapse of such Eligible Holder's unexercised subscription rights.
The amount of such loss should equal any gain previously recognized upon receipt
of such unexercised subscription rights, although such loss may not have the
same character as the corresponding gain. Although not free from doubt, provided
the subscription rights are capital assets in the hands of an Eligible Holder
and are treated as issued to the Eligible Holder by the Company,
29
<PAGE>
any gain resulting from the receipt of the subscription rights should constitute
a capital gain, and provided the common stock that an Eligible Holder would have
received upon exercise of the lapsed subscription rights would have constituted
a capital asset, the resulting loss upon expiration of such subscription rights
should constitute a capital loss. Again, for purposes of determining gain, it is
unclear whether and how the Internal Revenue Service would attempt to ascribe a
fair market value to the subscription rights or how to determine the number of
subscription rights that may be allocated to each Eligible Holder during the
Subscription Offering.
The above discussion addresses the potential income tax consequences should
the IRS successfully treat Eligible Holders as transferring certain policyholder
rights to Group in exchange for subscription rights which had an ascertainable
fair market value and which were issued by Group to the Eligible Holders. In
the alternative, the IRS could attempt to assert that, for federal income tax
purposes, Group will be treated as issuing subscription rights to NCRIC and that
Eligible Holders will be treated as transferring certain policyholder rights to
NCRIC in exchange for subscription rights. If the IRS were to make such an
assertion concerning the path of subscription rights and if the IRS were to also
successfully assert that the subscription rights had an ascertainable fair
market value, the IRS might also assert that NCRIC will recognize gain on its
deemed distribution of subscription rights to Eligible Holders and that gain
recognized by Eligible Holders on the receipt of subscription rights is taxable
as a dividend. Although not free from doubt, the amount of gain that would be
recognized by NCRIC on a deemed distribution of subscription rights, and by
Eligible Holders on receipt of a deemed dividend of subscription rights, should
equal the fair market value, if any, of the subscription rights distributed or
received by NCRIC and the Eligible Holders. Deloitte & Touche LLP did not
express any opinion on the path of the subscription rights or on the potential
tax effects to NCRIC and the Eligible Holders if the IRS asserts that, for
federal income tax purposes, Eligible Holders will be treated as receiving
subscription rights from NCRIC and that such subscription rights have an
ascertainable fair market value.
Eligible Holders are encouraged to consult with their tax advisors about
the tax consequences of the Reorganization and the Subscription Offering.
THE TAX OPINION. If the Ruling Request Submission is pending before the
IRS at the conclusion of the Offerings, the Company will rely on the Tax
Opinion, in which Deloitte & Touche LLP will opine, among other things, on the
basis of certain facts and assumptions set forth in the Tax Opinion, that for
federal income tax purposes, the reorganization of the Reciprocal to a stock
form of corporation in a mutual holding company structure will constitute a
reorganization within the meaning of Section 368(a)(1)(E) of the Code, and that:
(1) no gain or loss will be recognized by the Reciprocal or NCRIC as a result of
the Reorganization; and (2) NCRIC's basis in its assets, holding period for its
assets, net operating loss carry forward, if any, capital loss carry forward, if
any, earnings and profits and accounting methods will not be affected by the
Reorganization.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO
CONSIDER ALL ASPECTS OF FEDERAL INCOME TAXATION WHICH MAY BE RELEVANT TO EACH
ELIGIBLE HOLDER THAT MAY BE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS
TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE
COMPANIES, AND ELIGIBLE HOLDERS WHO ARE EMPLOYEES OF AN INSURANCE COMPANY OR WHO
ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE
OF TAX CONSEQUENCES, EACH ELIGIBLE POLICYHOLDER IS URGED TO CONSULT HIS OR HER
TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX
CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE
RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY STATE, LOCAL,
FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF THE REORGANIZATION.
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate number
of shares of common stock intended to be purchased by each of the directors and
executive officers of the Mutual Holding Company and its
30
<PAGE>
subsidiaries, including each such person's Associates, and by all directors and
executive officers as a group, including all of their Associates, and other
related information. For purposes of the following table, it has been assumed
that sufficient shares will be available to satisfy subscriptions in all
categories.
<TABLE>
<CAPTION>
Name Total Shares(1)(2)(3)
---- ---------------------
<S> <C>
-- ---
-- ---
-- ---
-- ---
</TABLE>
______________________
(1) Does not include shares that could be allocated to participants in the
ESOP, under which officers and other employees may be allocated, at no cost
to them, 128,800 shares of common stock (which is the equivalent of 10% of
the shares of common stock offered in the Stock Offering). See "Management
Compensation -- Employee Stock Ownership Plan and Trust."
(2) Does not include shares that may be awarded to participants in the Stock
Award Plan, under which directors, officers and other employees will be
awarded, at no cost to them, 64,400 shares of common stock (which is the
equivalent of 5% of the shares of common stock offered in the Stock
Offering). See "Management Compensation -- Stock Award Plan."
(3) Does not include shares that may be purchased by participants in the Stock
Option Plan, under which directors, executive officers and other employees
will be granted options to purchase 64,400 shares of common stock (which is
the equivalent of 5% of the shares of common stock offered in the Stock
Offering). See "Management Compensation -- Stock Option Plan."
LIMITATIONS ON PURCHASES OF COMMON STOCK
No person may purchase fewer than 100 shares of common stock in the Stock
Offering. Except for the ESOP and the Stock Award Plan, which intend to
purchase 10% and 5%, respectively, of the total number of shares of common stock
issued in the Stock Offering, no purchaser (including Eligible Holders),
together with such person's Associates, may purchase more than 25,000 shares of
common stock in the Stock Offering. Each subscriber in the Subscription
Offering can purchase up to 25,000 shares. There are _____ Eligible Holders.
In the event that subscriptions by Eligible Holders for common stock exceed
1,050,800 shares, the Company will be obligated to sell to Eligible Holders
1,050,800 shares. If each Eligible Holder subscribed for ____ shares of common
stock offered, then each Eligible Holder would receive only approximately _____
shares. The Company is unable to predict the number of Eligible Holders that
may participate in the Subscription Offering.
Shares of common stock to be held by the ESOP and attributable to a
participant thereunder are not aggregated with shares of common stock purchased
by such participant or any other purchase of common stock in the Stock Offering.
Directors of the Mutual Holding Company and its subsidiaries are not deemed
to be associates of one another solely as a result of membership on the Board of
Directors of the Mutual Holding Company or any subsidiary.
Subject to any required regulatory approval and the requirements of
applicable law, Group may increase or decrease any of the subscriber purchase
limitations at any time. In the event that the individual purchase limitation is
increased after commencement of the Subscription and Community Offerings, Group
will permit any person who subscribed for the maximum number of shares of common
stock to purchase an additional number of shares, such that such person will be
permitted to subscribe for the then maximum number of shares permitted to be
subscribed for by such person, subject to the rights and preferences of any
person who has priority subscription rights. In the
31
<PAGE>
event that either the individual purchase limitation or the number of shares of
common stock to be sold in the Stock Offering is decreased after commencement of
the Subscription Offering, the order of any person who subscribed for the
maximum number of shares of common stock will be decreased by the minimum amount
necessary so that such person will be in compliance with the then maximum number
of shares permitted to be subscribed for by such person.
Each person purchasing common stock in the Stock Offering will be deemed to
confirm that such purchase does not conflict with the applicable purchase
limitations. In the event that such purchase limitations are violated by any
person (including any associate or affiliate of such person or person otherwise
acting in concert with such person), the Company will have the right to purchase
from such person at the Purchase Price all shares acquired by such person in
excess of any such purchase limitation or, if such excess shares have been sold
by such person, to receive the remainder obtained by subtracting the aggregate
Purchase Price paid for such excess shares from the proceeds received by such
person from the sale of such excess shares. This right of the Company to
purchase such excess shares or obtain such remainder is assignable by the
Company.
LIMITATIONS ON RESALES
The common stock issued in the Stock Offering will be freely transferable
under the Securities Act; provided, however, that shares issued to directors and
certain officers of the Mutual Holding Company and its subsidiaries will be
subject to resale restrictions under Rule 144 under the Securities Act. Shares
of common stock issued to such directors and officers will bear a legend giving
appropriate notice of these restrictions and the Company will give instructions
to the transfer agent for the common stock with respect to these transfer
restrictions.
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
INTERPRETATION, AMENDMENT AND TERMINATION OF THE STOCK ISSUANCE PLAN
The terms of the Stock Offering described in this Prospectus are set forth
in Group's Stock Issuance Plan. To the extent permitted by law, all
interpretations of the Stock Issuance Plan by Group will be final. The Stock
Issuance Plan may be amended or terminated at any time by the affirmative vote
of two-thirds of the directors of Group.
SUBSCRIPTION AGENT
Sandler, O'Neill, a registered broker-dealer, has been engaged by the
Company to assist it in effecting the Subscription Offering by serving as
Subscription Agent. The Subscription Agent will forward copies of this
Prospectus and subscription materials to subscribers upon request. In addition,
the Subscription Agent will be available to answer questions from potential
subscribers during the Stock Offering. It is anticipated that the Subscription
Agent will be the lead underwriter in any Syndicated Community Offering.
Following receipt of subscription order forms from prospective subscribers, the
Subscription Agent will, among other things, verify that (1) the submitted
checks and money orders are honored, (2) the subscription order form has been
fully and properly completed and signed, (3) the subscriber has not previously
submitted a subscription, and (4) the subscriber is eligible to be an Eligible
Holder. All subscriptions which the Subscription Agent is not able to so verify
will be rejected and returned to the prospective subscriber, unless the defect
is waived by the Company.
In addition, the Subscription Agent will receive and hold all funds
submitted by subscribers at an account at the Escrow Agent, and will disburse
funds in the event a refund or other return of funds is required.
32
<PAGE>
USE OF PROCEEDS
Group estimates that it will receive net proceeds from the Stock Offering
of between approximately $8,689,000 and $11,980,000, which will be used as
follows:
. Group intends to use $5.1 million to repay indebtedness which it will
incur if the Practice Management and Financial Services Acquisition is
completed. This includes repayment of bank debt of $2.2 million.
. a loan to the ESOP in the amount necessary to purchase 10% of the shares
of common stock sold in the Stock Offering (the "ESOP Loan"). The amount
of the ESOP Loan may range from $952,000 to $1,288,000 based on a sale
at the Purchase Price of 952,000 shares to the ESOP (at the minimum) and
1,288,000 shares to the ESOP (at the maximum). It is anticipated that
the ESOP Loan will have a ____-year term with interest payable at the
prime rate as published in The Wall Street Journal on the closing date
of the Stock Offering. The ESOP Loan will be repaid principally from
NCRIC's contributions to the ESOP. See "Management Compensation --
Employee Stock Ownership Plan and Trust."
. a loan to the Stock Award Plan in the amount necessary to purchase 5% of
the shares of common stock sold in the Stock Offering (the "Stock Plan
Loan"). The amount of the Stock Plan Loan may range from $476,000 to
$644,000 based on a sale at the Purchase Price of 47,600 shares to the
Stock Award Plan (at the minimum) and 64,400 shares to the Stock Award
Plan (at the maximum). The Company anticipates that the Stock Plan Loan
will have a ____-year term with interest payable at the prime rate as
published in The Wall Street Journal on the closing date of the Stock
Offering. The Stock Plan Loan will be repaid principally from NCRIC's
contributions to the Stock Award Plan. See "Management Compensation --
Stock Award Plan."
. Group will retain the balance for expansion and diversification of the
Company's activities, and for other general corporate purposes. Pending
such use, the funds will be invested in interest-bearing securities.
On a short-term basis, the remaining net proceeds retained by Group will be
invested primarily in U.S. government securities, other federal agency
securities and other interest-bearing securities. The net proceeds retained by
Group will be available for a variety of corporate purposes, including
additional capital contributions, future acquisitions and diversification of
business and dividends to stockholders. The Company also may use a portion of
the net proceeds of the Stock Offering to fund the purchase by the Stock Option
Plan, in the open market of all or a portion of the shares of common stock to be
acquired under the Stock Option Plan. See "Management Compensation --Stock
Option Plan."
With the exception of the Practice Management and Financial Services
Acquisition, the ESOP Loan, the Stock Plan Loan and the possible funding of the
Stock Option Plan, Group currently has no specific plans, arrangements or
understandings regarding the use of the net proceeds from the Stock Offering.
In the judgment of Group's Board of Directors, it is not necessary to utilize
any of the proceeds of the Stock Offering to improve the quality of NCRIC's
medical professional liability insurance product, maintain its competitive
pricing structure and ensure the stability and longevity of NCRIC. See
"Business -- Practice Management and Financial Services Acquisition" and
"Management Compensation -- Employee Stock Ownership Plan and Trust -- Stock
Award Plan -- Stock Option Plan."
The amount of proceeds from the sale of common stock in the Stock Offering
will depend upon the total number of shares actually sold, the relative
percentages of common stock sold in the Subscription, Community and Syndicated
Community Offerings and the actual expenses of the Reorganization. As a result,
the net proceeds from the sale of common stock cannot be determined until the
Stock Offering is completed. Set forth below are the
33
<PAGE>
estimated net proceeds to Group, assuming the sale of common stock at the
minimum, midpoint and maximum, based upon the following assumptions: (1) shares
of common stock will be sold as follows: 10% of the shares will be sold to the
ESOP, 5% of the shares will be sold to the Stock Award Plan and 3.4% of the
shares will be sold to certain directors, officers and employees of the Mutual
Holding Company and its subsidiaries, and the remaining shares will be sold to
Eligible Holders and the community; (2) the purchase of the shares sold to the
ESOP will be financed with the proceeds of the ESOP Loan from the Company; (3)
the purchase of the shares sold to the Stock Award Plan will be financed with
the proceeds of the Stock Plan Loan from the Company; and (4) other Stock
Offering expenses, not including sales commissions, will be approximately
$642,381. Actual expenses may vary from those estimated.
<TABLE>
<CAPTION>
MINIMUM OF MIDPOINT OF MAXIMUM OF
952,000 1,120,000 1,288,000
SHARES SHARES SHARES
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross proceeds of Stock Offering........ $ 9,520 $ 11,200 $ 12,880
Less estimated expenses, including
underwriting fees................. (831) (866) (900)
-------- ---------- ----------
Estimated net proceeds.................. 8,689 10,334 11,980
Less:
Common Stock to be acquired by ESOP.. (952) (1,120) (1,288)
Common Stock to be acquired by the
Stock Award Plan................. (476) (560) (644)
-------- ---------- ----------
Estimated net proceeds, as adjusted(1).. $ 7,261 $ 8,654 $ 10,048
======== ========== ==========
</TABLE>
(1) Does not include any adjustment for the portion of the estimated net
proceeds of the Stock Offering which may be used to fund the purchase by
the Stock Option Plan of shares of common stock in the open market because
(1) any such implementation would not occur until after the Stock Offering
and Group is unable to predict with any certainty the market price of the
common stock at that time, (2) Group may fund a portion of the costs of
such purchase from its cash flow, and (3) Group may issue new shares
directly to the Stock Option Plan in lieu of purchasing shares in the open
market.
DIVIDEND POLICY
Historically, neither the Reciprocal's insurance policies nor its Rules,
Regulations and Bylaws required the payment of dividends, and no dividends were
paid. Declaration of dividends by Group's Board of Directors depends on a
number of factors, including the requirements of applicable law and the
determination by Group's Board of Directors that the net income, capital and
financial condition of the Company, industry trends, general economic conditions
and other factors justify the payment of dividends. At present, Group has not
determined whether it intends to pay dividends to its stockholders in the
foreseeable future. There can be no assurance that dividends will be paid or,
if paid initially, that they will continue to be paid in the future. In
addition, because Group initially will have no significant source of income
other than dividends from NCRIC and earnings from the repayment of the ESOP
Loan, the Stock Plan Loan and the investment of the net proceeds of the Stock
Offering retained by Group, the payment of dividends by Group will depend
significantly upon receipt of dividends from NCRIC, which may be subject to
regulatory restrictions. See "Business -- Regulation."
MARKET FOR COMMON STOCK
Group has applied to have its common stock quoted on the Nasdaq SmallCap
Market under the symbol _______________. The requirements for listing include a
minimum number of publicly traded shares, a minimum market capitalization, and a
minimum number of market makers and record holders. Sandler O'Neill has
indicated its intention to make a market in the common stock, and Group
anticipates that it will satisfy the listing requirements.
34
<PAGE>
There is no market for Group's common stock. The existence of a public
trading market having the desirable depth, liquidity and orderliness will depend
upon the presence in the market of a sufficient number of both willing buyers
and willing sellers at any given time. The presence of a sufficient number of
buyers and sellers at any given time is a factor over which neither Group nor
any broker or dealer has control. There can be no assurance that a deep, liquid
or orderly market for Group's common stock will develop or, if one develops,
that it will continue. Sandler O'Neill has advised Group that it intends to make
a market in Group's common stock, but it is not obligated to do so. The absence
of an active and liquid trading market may make it difficult to sell common
stock and may have an adverse effect on the price of the common stock. There
can be no assurance that purchasers will be able to resell their shares of
common stock or that quotations will be available on the Nasdaq SmallCap Market.
Purchasers should consider the potentially illiquid and long-term nature of
their investment in the common stock.
CAPITALIZATION
The following table presents Group's pro forma capitalization, assuming
that the Practice Management and Financial Services Acquisition, at
September 30, 1998, and the Company's pro forma consolidated capitalization as
of that date, giving effect to (1) the sale of common stock of Group in the
Stock Offering at the minimum, midpoint and maximum of the Estimated Valuation
Range, (2) the Practice Management and Financial Services Acquisition and (3)
the other assumptions set forth below. The pro forma data set forth below may
change significantly at the time Group completes the Stock Offering due to,
among other factors, a change in the valuation or a change in the current
estimated expenses of the Stock Offering.
<TABLE>
<CAPTION>
At September 30, 1998
Pro Forma Capitalization of NCRIC Group, Inc.
------------------------------------------------------------
Assuming that the Practice Management and Financial
Services Acquisition has been completed and assuming the
sale of
----------------------------------------------------------
PRO FORMA
ASSUMING THE 952,000 1,120,000 1,288,000
COMPLETION OF SHARES SHARES SHARES
THE ACQUISITION (MINIMUM) (MIDPOINT) (MAXIMUM)
--------------- ---------------- ------------------ ----------------
(in thousands)
<S> <C> <C> <C> <C>
Borrowed Funds(1)................................... $ 2,200 $ 0 $ 0 $ 0
======= ======== ========== ==========
Stockholders' equity(2):
Group Common stock, $0.01 par value per share;
10,000,000 shares authorized; shares to be issued
as shown(3)(4)..................................... 0 24 28 32
Additional paid-in capital.......................... 797 9,762 11,403 13,045
Retained earnings(5)................................ 28,422 28,172 28,172 28,172
Accumulated other comprehensive income.............. 2,661 2,661 2,661 2,661
Less:
common stock acquired by ESOP(6)................ -- (952) (1,120) (1,288)
common stock acquired by Stock Award Plan (7)... -- (476) (560) (644)
-------- ---------- ----------
Total stockholders' equity.......................... $31,880 $ 39,191 $ 40,584 $ 41,978
======= ======== ========== ==========
</TABLE>
(1) The Company intends to borrow $2.2 million from Sequoia National Bank to
partially finance the Practice Management and Financial Services
Acquisition. The Company intends to repay this debt out of the proceeds
from the Stock Offering.
(2) Pro forma stockholders' equity is not intended to represent the fair
market value of Group's common stock, the net fair market value of Group's
assets and liabilities or the amounts, if any, that would be
35
<PAGE>
available for distribution to stockholders in the event of liquidation.
Such pro forma data may be affected by a change in the number of shares to
be sold in the Stock Offering and by other factors.
(3) Includes all shares to be issued by Group (1) in the Stock Offering,
(2) to NCRIC Holdings and (3) pursuant to the Practice Management and
Financial Services Acquisition $300,000 mandatorily convertible note. The
number of shares of Group common stock to be issued in the Stock Offering
may be increased or decreased based on market and financial conditions
prior to completion of the Stock Offering. Assumes estimated offering
expenses of $831,000, $866,000 and $900,000 at the minimum, midpoint and
maximum of the Estimated Valuation Range, respectively.
(4) Does not reflect additional shares of Group common stock that could be
issued pursuant to the Stock Option Plan, under which certain directors,
officers and employees of the Mutual Holding Company and its subsidiaries
will be granted options to purchase an aggregate amount of Group common
stock equal to up to 64,400 shares (which is the equivalent of 5% of the
shares of Group common stock offered in the Stock Offering).
(5) Pro forma retained earnings reflects a dividend of $250,000 paid by NCRIC
to the Mutual Holding Company paid prior to the closing of the Stock
Offering. The purpose of the dividend was to capitalize the Mutual
Holding Company.
(6) Assumes purchases by the ESOP of a number of shares of Group common stock
equal to 10% of the Stock Offering. The funds used to acquire the ESOP
shares will be borrowed from the Company. The Company intends to make
contributions to the ESOP sufficient to service and ultimately retire this
debt. Common stock acquired by the ESOP is reflected as a reduction of
stockholders' equity. As the ESOP debt is repaid, shares will be released
and allocated to participants' accounts, compensation expense will be
recognized, and a corresponding reduction in the charge against
stockholders' equity will occur. Shares designated for allocation to
particular accounts will be recognized as compensation expense.
(7) Assumes purchases by the Stock Award Plan of a number of shares of Group
common stock equal to 5% of the Stock Offering. The funds used to acquire
the Stock Award Plan shares will be borrowed from the Company. The Company
intends to make contributions to the Stock Award Plan sufficient to
service and ultimately retire this debt. Common stock acquired by the
Stock Award Plan is reflected as a reduction of stockholders' equity. As
the Stock Award Plan is repaid, shares will be awarded to participants,
and a corresponding reduction in the charge against stockholders' equity
will occur. Share awards to participants will be recognized as
compensation expense.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following financial statements reflect the Practice Management and
Financial Services Acquisition, the Reorganization and the Stock Offering. Pro
forma adjustments related to the unaudited pro forma combined statements of
operations for the nine months ended September 30, 1998 and the year ended
December 31, 1997 have been prepared assuming that each of the Practice
Management and Financial Services Acquisition, the Reorganization and the Stock
Offering (with net proceeds, as adjusted, of $7.3 million at the minimum of the
offering range) were consummated as of January 1, 1998 and January 1, 1997,
respectively. The unaudited pro forma combined balance sheets were prepared
assuming that the Practice Management and Financial Services Acquisition, the
Reorganization and the Stock Offering were all consummated on September 30,
1998.
The unaudited pro forma combined financial statements have been prepared
using the purchase method of accounting for the Practice Management and
Financial Services Acquisition to record the purchase of the stock of HCI, the
interests of HCIV and the assets of EBSI.
The historical portion of the unaudited pro forma combined statement of
operations for the nine months ended September 30, 1998 and for the year ended
December 31, 1997 has been derived from the historical consolidated statements
of operations of the Reciprocal and from the historical combined statements of
income and comprehensive income of the management services of HCI, HCIV and EBSI
for the same periods. The unaudited pro forma combined financial statements
should be read in conjunction with the historical financial statements of NCRIC
and of the management services of HCI, HCIV and EBSI and the other financial
information pertaining to the Company and HCI, HCIV and EBSI included elsewhere
in this Prospectus.
The pro forma combined financial statements do not purport to be indicative
of the financial position or operating results which would have been achieved
had the Practice Management and Financial Services Acquisition, the
Reorganization and the Stock Offering been consummated as of the dates indicated
and should not be construed as being representative of future financial position
or operating results of the Company. The pro forma adjustments are based upon
available information and assumptions that the Company believes are reasonable
under the circumstances.
37
<PAGE>
NCRIC GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Reorganization
HCI, and Stock
HCIV and Purchase Combined Offering Pro Forma Footnote
NCRIC EBSI Adjustments Total Adjustments Combined References
--------- ---------- ------------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands except per share data)
ASSETS:
INVESTMENTS:
Securities available for sale, at fair
value:
Bonds and U.S. Treasury Notes $ 98,612 $ - $ - $ 98,612 $ - $ 98,612
Preferred stocks 5,273 - - 5,273 - 5,273
-------- ------ ------- -------- ----------- --------
Total securities available for sale 103,885 - - 103,885 - 103,885
Investments in management service
organizations - 22 - 22 - 22
-------- ------ ------- -------- ----------- --------
Total Investments 103,885 22 - 103,907 - 103,907
OTHER ASSETS:
Cash and cash equivalents 5,159 207 (3,050) 2,316 4,811 7,127 (1),(2)
Accrued investment income 1,176 - - 1,176 - 1,176
Accounts and notes receivable, net - 1,049 - 1,049 - 1,049
Reinsurance recoverable 20,603 - - 20,603 - 20,603
Deferred federal income taxes 2,630 - (280) 2,350 - 2,350 (3)
Premiums receivable 1,081 - - 1,081 - 1,081
Property and equipment, net 1,079 263 - 1,342 - 1,342
Advances to affiliates - 90 - 90 - 90
Goodwill - - 4,907 4,907 - 4,907 (4)
Deferred policy acquisition costs 110 - - 110 - 110
Other assets 127 67 (53) 141 - 141
-------- ------ ------- -------- ----------- --------
TOTAL ASSETS $135,850 $1,698 $ 1,524 $139,072 $4,811 $143,883
======== ====== ======= ======== =========== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
LIABILITIES:
<S> <C> <C> <C> <C> <C> <C> <C>
Losses and loss adjustment expenses $ 82,330 $ - $ - $ 82,330 $ - $ 82,330
Retrospective premiums accrued 7,721 - - 7,721 - 7,721
Renewal credit dividends to policyholders 1,266 - - 1,266 - 1,266
Unearned and advance premiums 6,954 - - 6,954 - 6,954
Federal income taxes payable 1,759 25 - 1,784 - 1,784
Deferred income taxes - 280 (280) - - - (3)
Accounts payable and accrued expenses 1,715 607 - 2,322 - 2,322
Bank debt - - 2,200 2,200 (2,200) - (1),(2)
Long-term liabilities - 90 - 90 - 90
Other liabilities 2,225 - 300 2,525 (300) 2,225 (1),(2)
-------- ------ ------ -------- ------- --------
TOTAL LIABILITIES 103,970 1,002 2,220 107,192 (2,500) 104,692
-------- ------ ------ -------- ------- --------
STOCKHOLDERS' EQUITY:
Common Stock - 1 (1) - 24 24 (2)
Limited Liability Company capital - 21 (21) - - -
Additional paid in capital 797 4 (4) 797 8,965 9,762 (2)
Unearned ESOP shares - - - - (952) (952) (2)
Unearned Stock Award Plan shares - - - - (476) (476) (2)
Retained earnings 28,422 670 (670) 28,422 (250) 28,172 (1)
Accumulated other comprehensive income 2,661 - - 2,661 - 2,661
-------- ------ ------ -------- ------- --------
TOTAL STOCKHOLDERS' EQUITY 31,880 696 (696) 31,880 7,311 39,191
-------- ------ ------ -------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $135,850 $1,698 $1,524 $139,072 $ 4,811 $143,883
======== ====== ====== ======== ======= ========
(Notes follow tables)
</TABLE>
38
<PAGE>
NCRIC GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Reorganization
HCI and Stock
HCIV and Purchase Combined Offering Pro Forma Footnote
NCRIC EBSI Adjustments Total Adjustments Combined References
--------- --------- ------------ --------- ------------ --------- ---------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Premium income:
Premium written $18,753 $ - $ - $18,753 $ - $18,753
Premiums ceded 3,724 - - 3,724 - 3,724
Change in unearned premiums (6,547) - - (6,547) - (6,547)
Renewal credit dividends to policyholders (1,417) - - (1,417) - (1,417)
------- ----------- ------- ----------- ------- --------
Net premiums earned 14,513 - - 14,513 - 14,513
Practice management revenues - 3,480 - 3,480 - 3,480
Net investment income 4,465 31 - 4,496 - 4,496 (5)
Net realized investment gains 128 - - 128 - 128
Other income 323 - - 323 - 323
------- ------- ----------- ------- ----------- -------
Total Revenues 19,429 3,511 - 22,940 - 22,940
------- ------- ----------- ------- ----------- -------
EXPENSES:
Losses and loss adjustment expenses 11,821 - - 11,821 - 11,821
Underwriting expenses 2,740 - - 2,740 26 2,766 (6)
Amortization of goodwill - - 184 184 - 184 (7)
Other expenses 1,377 3,440 (590) 4,227 - 4,227 (8)
------- ------- ----------- ------- ----------- -------
Total Expenses 15,938 3,440 (406) 18,972 26 18,998
------- ------- ----------- ------- ----------- -------
INCOME BEFORE INCOME TAXES 3,491 71 406 3,968 (26) 3,942
------- ------- ----------- ------- ----------- -------
Income tax provision 969 4 250 1,223 (9) 1,214 (9)
------- ------- ----------- ------- ----------- -------
NET INCOME $ 2,522 $ 67 $ 156 $ 2,745 $ (17) $ 2,728
======= ======= =========== ======= =========== =======
Net income per common share $1.20 (10)
=======
(Notes follow tables)
</TABLE>
39
<PAGE>
NCRIC GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Reorganization
HCI, and Stock
HCIV and Purchase Combined Offering Pro Forma Footnote
NCRIC EBSI Adjustments Total Adjustments Combined References
--------- --------- ------------ --------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands except per share data)
REVENUES:
Premium income:
Premium written $17,869 $ - $ - $17,869 $ - $17,869
Premiums ceded (1,854) - - (1,854) - (1,854)
Change in unearned premiums (403) - - (403) - (403)
Renewal credit dividends to policyholders (2,080) - - (2,080) - (2,080)
------- -------- ------- -------- ------- --------
Net premiums earned 13,532 - - 13,532 - 13,532
Practice management revenues - 3,928 - 3,928 - 3,928
Net investment income 6,045 69 - 6,114 - 6,114 (5)
Net realized investment gains 90 - - 90 - 90
Other income 355 - - 355 - 355
------- ------- ----------- ------- ----------- -------
Total Revenues 20,022 3,997 - 24,019 - 24,019
------- ------- ----------- ------- ----------- -------
EXPENSES:
Losses and loss adjustment expenses 15,591 - - 15,591 - 15,591
Underwriting expenses 2,918 - - 2,918 35 2,953 (6)
Amortization of goodwill - - 245 245 - 245 (7)
Other expenses 676 3,754 (534) 3,896 - 3,896 (8)
------- ------- ----------- ------- ----------- -------
Total Expenses 19,185 3,754 (289) 22,650 35 22,685
------- ------- ----------- ------- ----------- -------
INCOME BEFORE INCOME TAXES 837 243 289 1,369 (35) 1,334
------- ------- ----------- ------- ----------- -------
Income tax (benefit) provision (122) 74 223 175 (12) 163 (9)
------- ------- ----------- ------- ----------- -------
NET INCOME $ 959 $ 169 $ 66 $ 1,194 $ (23) $ 1,171
======= ======= =========== ======= =========== =======
Net income per share of common stock $0.51 (10)
=======
(Notes follow tables)
</TABLE>
40
<PAGE>
The following notes describe the pro forma adjustments reflected in the
accompanying pro forma combined financial statements:
(1) Purchase adjustment represents cash paid at closing of $2.9 million plus
$150,000 for Practice Management and Financial Services Acquisition
expenses. The source of funds for the Practice Management and Financial
Services Acquisition consideration is anticipated to be as follows (in
thousands):
<TABLE>
<S> <C>
Cash $2,900
Bank debt 2,200
Mandatorily convertible note 300
------
Purchase price $5,400
======
</TABLE>
See "Business - Practice Management and Financial Services Acquisition."
(2) Reorganization and Stock Offering Adjustments represent the net Stock
Offering proceeds, as adjusted, of $7.3 million, at the minimum of the
offering range less (a) repayment of the Practice Management and Financial
Services Acquisition bank debt of $2.2 million and (b) a $250,000 dividend
from NCRIC to the Mutual Holding Company paid prior to the Stock Offering.
This dividend was paid to capitalize the Mutual Holding Company.
(3) Represents the reclassification of HCI, HCIV and EBSI deferred federal
income tax to be consistent with NCRIC's combined financial statements.
(4) Since the Practice Management and Financial Services Acquisition has been
accounted for as a purchase, the excess of the Practice Management and
Financial Services Acquisition cost over the fair value of net assets
acquired has been recorded as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $5,400
Plus acquisition expenses 150
Less estimated fair value of net assets acquired 643
------
Goodwill $4,907
======
</TABLE>
The final allocation of the purchase price will be made shortly after the
Practice Management and Financial Services Acquisition is consummated.
Under the terms of the Practice Management and Financial Services
Acquisition purchase agreement, the Company could also pay up to an
additional $3.1 million if HCI, HCIV and EBSI achieve earnings targets in
2000, 2001 and 2002. This contingent payment would be an addition to
goodwill and would be amortized over 20 years. This contingent payment has
not been included in the pro forma financial statements.
(5) No interest earnings on the proceeds of the Stock Offering have been
included in this pro forma statement. If interest were applied at a rate of
5% per annum, approximating the current commercial paper rate, to the
estimated adjusted net proceeds of $7.3 million (at the minimum of the
offering range) less the $250,000 dividend, the $2.2 million bank debt
repayment and the $2.9 million initial Practice Management and Financial
Services Acquisition cash payment, net investment income would increase by
$69,000 and $88,000 for the nine months ended September 30, 1998 and for the
year ended December 31, 1997, respectively.
(6) Reflects the net increase in employee benefit expense resulting from the
ESOP and Stock Award Plan offset by a reduction in the existing 401(k)
profit-sharing plan expense. There is no incremental expense reflected in
the pro forma financial statements for the Stock Award Plan because such
expense has been completely offset by a reduction in the Company's existing
management incentive compensation plan. The annual expense from the ESOP
and Stock Award Plan, assuming a per share market value equal to the
Purchase Price, has been assumed to be $190,000 before being offset by a
reduction of $155,000 in contributions to the existing 401(k) profit-sharing
plan and management incentive compensation plan.
(7) Represents straight-line amortization of $4.9 million of Practice Management
and Financial Services Acquisition goodwill over a period of 20 years.
(8) Represents a reduction in compensation expense resulting from the Practice
Management and Financial Services Acquisition. The Combined Financial
Statements of the Practice Management Services of HCI,
41
<PAGE>
HCIV and EBSI reflect owners' compensation of $927,000 for the nine months
ended September 30, 1998 and $984,000 for year ended December 31, 1997.
As a result of the Practice Management and Financial Services Acquisition,
the Company has entered into employment agreements with each of the former
owners of HCI, HCIV and EBSI. The employment agreements reduce the
aggregate compensation of the former owners to $450,000 per year.
(9) To record the income tax effect of the adjustments described in Notes (5)
through (8). The Purchase Adjustment income tax provision includes the
following three components: (a) additional income tax on the historical
pre-tax income of HCI, HCIV and EBSI to raise the effective tax rate to 40%
to recognize the change in tax posture of the acquired companies, (b) a tax
benefit on the reduction in compensation expense described in note (8)
above, and (c) a tax benefit on deductible goodwill amortization.
(10) Represents the net income of Group divided by outstanding shares, which
represent the total number of outstanding shares, assuming a Stock Offering
at the minimum of the offering range, excluding the unallocated ESOP and
Stock Award Plan shares. For the nine months ended September 30, 1998,
2,281,480 shares have been assumed to be outstanding. For the year ended
December 31, 1997, 2,286,240 shares have been assumed to be outstanding.
42
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Group common stock cannot be
determined until the Stock Offering is completed. However, net proceeds are
currently estimated to be between $8.7 million and $12.0 million based upon the
following assumptions: (a) Sandler O'Neill will receive a fee equal to 2.0% of
the aggregate actual purchase price of all shares of common stock sold in the
Stock Offering; (b) no shares will be sold in the Syndicated Community Offering;
and (c) Stock Offering expenses, excluding the fees paid to Sandler O'Neill,
will be approximately $642,000.
Pro forma net income of the Company for the nine months ended September 30,
1998 and the year ended December 31, 1997 assume a cost of $5.6 million for the
Practice Management and Financial Services Acquisition. Pro forma earnings have
been calculated assuming the shares of Group common stock had been sold in the
Stock Offering and the Practice Management and Financial Services Acquisition
had been consummated at January 1, 1998 and January 1, 1997, respectively.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma stockholders' equity is
not intended to represent the fair market value of Group's common stock and may
be greater than amounts that would be available for distribution to stockholders
in the event of liquidation.
The following table summarizes pro forma data of the Company at or for the
year ended December 31, 1997 and at or for the nine-month period ended September
30, 1998 based on the assumptions set forth above and in the table and should
not be used as a basis for projections of market value of the Group's common
stock following the Stock Offering. The table gives effect to the ESOP and Stock
Award Plan as they are described in this Prospectus. No effect has been given in
the table to the possible issuance of additional shares of Group common stock
pursuant to the Stock Option Plan.
43
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------
952,000 SHARES 1,120,000 SHARES 1,288,000 SHARES
SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00
PER SHARE PER SHARE PER SHARE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF
RANGE) RANGE) RANGE) NOTES
-------------- ---------------- ---------------- ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross Proceeds $ 9,520 $11,200 $12,880
Less offering expenses and commissions (831) (866) (900)
------- ------- -------
Estimated net proceeds 8,689 10,334 11,980
Less: Common Stock purchased by ESOP (952) (1,120) (1,288)
Common Stock purchased by Stock Award Plan (476) (560) (644)
------- ------- -------
Estimated net proceeds, as adjusted $ 7,261 $ 8,654 $10,048
======= ======= =======
Net income:
Pro forma combined $ 2,745 $ 2,745 $ 2,745
Pro forma ESOP adjustment (17) (17) (17) (1)
------- ------- -------
Pro forma net income $ 2,728 $ 2,728 $ 2,728
======= ======= =======
Per share net income:
Pro forma combined $ 1.21 $ 1.03 $ 0.90
Pro forma ESOP adjustment (0.01) (0.01) (0.01) (1)
------- ------- -------
Pro forma net income per share $ 1.20 $ 1.02 $ 0.89
======= ======= =======
Stockholders' equity:
Pro forma combined $31,880 $31,880 $31,880 (3)
Estimated net proceeds 8,689 10,334 11,980
Acquisition stock issuance 300 300 300 (4)
Dividend to Mutual Holding Company (250) (250) (250) (5)
Less: Common Stock acquired by ESOP (952) (1,120) (1,288) (1)
Common Stock acquired by Stock Award Plan (476) (560) (644) (1)
------- ------- -------
Pro forma stockholders' equity $39,191 $40,584 $41,978
======= ======= =======
Pro forma tangible stockholders' equity $34,284 $35,677 $37,071
======= ======= =======
Stockholders' equity per share:
Pro forma combined $ 13.23 $ 11.27 $ 9.82
Estimated net proceeds 3.61 3.65 3.69
Acquisition stock issuance 0.12 0.11 0.09
Dividend to Mutual Holding Company (0.10) (0.09) (0.08)
Less: Common Stock acquired by ESOP (0.40) (0.40) (0.40)
Common Stock acquired by Stock Award Plan (0.20) (0.20) (0.20)
------- ------- -------
Pro forma stockholders' equity per share $ 16.26 $ 14.34 $ 12.92
======= ======= =======
Pro forma tangible stockholders' equity per share $ 14.23 $ 12.61 $ 11.41
======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share 61.50% 69.74% 77.40%
======= ======= =======
Offering price as a percentage of pro forma tangible
stockholders' equity per share 70.27% 79.38% 87.64%
======= ======= =======
Offering price to pro forma net income per share 8.33x 9.80x 11.24x
======= ======= =======
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
952,000 SHARES 1,120,000 SHARES 1,288,000 SHARES
SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00
PER SHARE PER SHARE PER SHARE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF
RANGE) RANGE) RANGE) NOTES
-------------- ---------------- ----------------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross Proceeds $ 9,520 $11,200 $12,880
Less offering expenses and commissions (831) (866) (900)
------- ------- -------
Estimated net proceeds 8,689 10,334 11,980
Less: Common Stock purchased by ESOP (952) (1,120) (1,288)
Common Stock purchased by Stock Award Plan (476) (560) (644)
------- ------- -------
Estimated net proceeds, as adjusted $ 7,261 $ 8,654 $10,048
======= ======= =======
Net income:
Pro forma combined $ 1,194 $ 1,194 $ 1,194
Pro forma ESOP adjustment (23) (23) (23) (1),(2)
------- ------- -------
Pro forma net income $ 1,171 $ 1,171 $ 1,171
======= ======= =======
Per share net income:
Pro forma combined $ 0.52 $ 0.45 $ 0.39
Pro forma ESOP adjustment (0.01) (0.01) (0.01) (1),(2)
------- ------- -------
Pro forma net income per share $ 0.51 $ 0.44 $ 0.38
======= ======= =======
Stockholders' equity:
Pro forma combined $27,486 $27,486 $27,486 (3)
Estimated net proceeds 8,689 10,334 11,980
Acquisition stock issuance 300 300 300 (4)
Dividend to Mutual Holding Company (250) (250) (250) (5)
Less: Common Stock acquired by ESOP (952) (1,120) (1,288) (1)
Common Stock acquired by Stock Award Plan (476) (560) (644) (1)
------- ------- -------
Pro forma stockholders' equity $34,797 $36,190 $37,584
======= ======= =======
Pro forma tangible stockholders' equity $29,852 $31,245 $32,639
======= ======= =======
Stockholders' equity per share:
Pro forma combined $ 11.41 $ 9.72 $ 8.46
Estimated net proceeds 3.61 3.65 3.69
Acquisition stock issuance 0.12 0.11 0.09
Reorganization adjustment (0.10) (0.09) (0.08)
Less: Common Stock acquired by ESOP (0.40) (0.40) (0.40)
Common Stock acquired by Stock Award Plan (0.20) (0.20) (0.20)
------- ------- -------
Pro forma stockholders' equity per share $ 14.44 $ 12.79 $ 11.56
======= ======= =======
Pro forma tangible stockholders' equity per share $ 12.39 $ 11.04 $ 10.04
======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share 69.25% 78.19% 86.51%
======= ======= =======
Offering price as a percentage of pro forma tangible
stockholders' equity per share 80.71% 90.58% 99.60%
======= ======= =======
Offering price to pro forma net income per share 19.61x 22.73x 26.32x
======= ======= =======
</TABLE>
(1) For purposes of this table, the funds used to acquire the shares of Group
common stock purchased by the ESOP and the Stock Award Plan are assumed to
have been loaned to the ESOP and the Stock Award Plan by the Company. The
amount loaned is reflected as a reduction of stockholders' equity. The
Company intends to make annual contributions to the ESOP and to the Stock
Award Plan. The annual expense from the ESOP and Stock Award Plan, assuming
a per share market value equal to the Purchase Price, has been assumed to
be $190,000 before being offset by a reduction of $155,000 in contributions
to the existing 401(k) profit-sharing plan and management incentive
compensation plan. This net additional expense of $35,000 equals after-tax
expense of $23,000. The annual net additional expense is assumed to remain
constant across the entire offering range because management intends to
adjust the offsetting expense to maintain this level of incremental
expense. The Company's total annual payment of the ESOP and Stock Award
Plan loans are based upon the assumptions that (a) 14,280, 16,800 and
19,320 shares at the minimum, midpoint and maximum of the offering range,
respectively, have been committed to be released during the nine months
ended September 30, 1998 and that 19,040, 22,400 and 25,760 shares at the
45
<PAGE>
minimum, midpoint, maximum of the offering range, respectively, have been
committed to be released during the year ended December 31, 1997 at an
average fair value of $10.00 per share and were accounted for as a charge
to expense in accordance with Statement of Position ("SOP") No. 93-6; and
(b) only the ESOP and Stock Award Plan shares committed to be released were
considered outstanding for purposes of the net earnings per share
calculations, while all ESOP and Stock Award Plan shares were considered
outstanding for purposes of the stockholders' equity per share
calculations.
(2) No effect has been given to the issuance of additional shares of Group
common stock pursuant to the Stock Option Plan. The Stock Option Plan
intends to acquire shares of Group common stock equal to 5% of the Stock
Offering, or 47,600, 56,000 and 64,400 shares, respectively, at the
minimum, midpoint and maximum of the offering range. These shares will be
acquired either through open market purchases or from authorized but
unissued shares of Group's common stock or treasury stock of Group, if any.
Funds used by the Stock Option Plan to purchase the shares will be
contributed to the Stock Option Plan by Group. The issuance of authorized
but unissued shares of Group's common stock to the Stock Option Plan
instead of open market purchases would dilute the voting interests of
existing stockholders.
(3) The pro forma combined net income and stockholders' equity amounts
represent the amounts reported in the historical financial statements of
the Company and of the Practice Management Services of HCI, HCIV and EBSI
and adjusted to reflect purchase adjustments.
(4) The Practice Management and Financial Services Acquisition stock issuance
represents the amount for the 30,000 shares of common stock to be issued on
conversion of the $300,000 mandatorily convertible note.
(5) The $250,000 dividend from NCRIC to the Mutual Holding Company will be paid
prior to the Stock Offering.
(6) The pro forma financials include no assumption for interest earnings on the
net new investible funds available as the result of the Stock Offering. If
interest at 5% per annum, approximating the current commercial paper rate,
had been assumed to have been earned on the net proceeds, as adjusted, less
the $250,000 dividend, the $2.2 million bank debt repayment and the $2.9
million initial Practice Management and Financial Services Acquisition cash
payment, net income would have included an additional $46,000, $81,000 and
$117,000 and net income per share would have been $1.22, $1.05 and $0.92 at
the minimum, midpoint and maximum levels of the offering range,
respectively, for the nine months ended September 30, 1998. For the year
ended December 31, 1997, if interest had been assumed to have been earned
under the same assumptions as noted immediately above, net income would
have included an additional $58,000, $104,000 and $150,000 and net income
per share would have been $0.54, $0.47 and $0.43 at the minimum, midpoint
and maximum levels of the offering range.
46
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table contains financial information which has been derived
from the consolidated financial statements of the Company. The consolidated
financial statements of the Company for each of the years in the three-year
period ended December 31, 1997 have been audited by Deloitte & Touche LLP. The
consolidated financial statements of the Company for the nine months ended
September 30, 1997 and September 30, 1998 are unaudited, but reflect all
adjustments, consisting of normal recurring accruals which, in the opinion of
management, are necessary for a fair presentation of the financial position and
results of operations for such periods. The results for the nine months ended
September 30, 1998 are not necessarily indicative of the operating results to be
expected for the full year. The selected consolidated financial data below
should be read in conjunction with the consolidated financial statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
September 30, December 31,
-------------------- -----------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- ------------- ---------
(dollars in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross premiums written $ 18,753 $ 17,666 $ 17,869 $ 19,017 $ 19,506
======== ======== ======== ======== ========
Net premiums written $ 19,838 $ 13,800 $ 13,935 $ 13,351 $ 8,362
======== ======== ======== ======== ========
Net premiums earned $ 14,513 $ 10,369 $ 13,532 $ 13,351 $ 8,362
Net investment income 4,465 4,589 6,045 5,656 5,582
Net realized investment gains 128 96 90 229 1,703
Other income 323 270 355 660 635
-------- -------- -------- -------- --------
Total revenues 19,429 15,324 20,022 19,896 16,282
Losses and LAE 11,821 11,694 15,591 15,236 11,289
Other underwriting expenses 2,740 2,486 2,918 2,438 2,483
Other expenses 1,377 428 676 928 1,707
-------- -------- -------- -------- --------
Total expenses 15,938 14,608 19,185 18,602 15,479
Income before income taxes 3,491 716 837 1,294 803
Income tax (benefit) provision 969 (63) (122) 303 104
-------- -------- -------- -------- --------
Net income 2,522 779 959 991 699
Other comprehensive income (loss) 1,872 885 1,103 (1,349) 4,285
-------- -------- -------- -------- --------
Comprehensive income (loss) $ 4,394 $ 1,664 $ 2,062 $ (358) $ 4,984
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Invested assets $103,885 $ 89,826 $ 94,362 $ 91,008 $ 84,930
Total assets 135,850 121,254 121,841 116,664 114,516
Total liabilities 103,970 94,167 94,355 91,240 88,734
Total equity 31,880 27,088 27,486 25,424 25,782
GAAP UNDERWRITING RATIOS:
Loss and LAE ratio 81.5% 112.8% 115.2% 114.1% 135.0%
Underwriting expense ratio 18.9% 24.0% 21.6% 18.3% 29.7%
Combined ratio after Renewal Credits 100.4% 136.8% 136.8% 132.4% 164.7%
Combined ratio before Renewal Credits 89.5% 114.1% 118.6% 119.6% 138.5%
SELECTED STATUTORY DATA:
Loss and LAE ratio 81.7% 98.2% 99.9% 103.2% 113.8%
Underwriting expense ratio 10.9% 16.7% 19.7% 18.4% 32.0%
Combined ratio 92.6% 114.9% 119.6% 121.6% 145.8%
Policyholders' surplus $ 24,836 $ 23,110 $ 23,258 $ 22,365 $ 21,177
</TABLE>
47
<PAGE>
___________________________
In calculating GAAP underwriting ratios, Renewal Credits are considered a
reduction of premium income. In addition, earned premium is used to calculate
the GAAP loss and underwriting expense ratios. For statutory purposes, Renewal
Credits are not considered a reduction in premium income, and written premiums
are used to calculate the statutory underwriting expense ratio. Due to these
differences in treatment, GAAP combined ratios can differ significantly from
statutory combined ratios. For a discussion of the differences between
statutory and GAAP reporting, see Note 9 to the Consolidated Financial
Statements
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA AND CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The financial statements and data presented herein have been prepared in
accordance with generally accepted accounting principles ("GAAP"), unless
otherwise noted. GAAP differs from statutory accounting practices used by
regulatory authorities in their oversight responsibilities of insurance
companies. See note 10 to the Consolidated Financial Statements for a
reconciliation of the Company's net income and equity between GAAP and statutory
accounting bases. Discussed below are certain key financial concepts:
PREMIUM INCOME. Gross premiums written represent the amounts billed to
policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers and Renewal Credits in determining net premiums written. Premiums
ceded to reinsurers represent the cost to the Company of reducing the Company's
exposure to medical professional liability losses by transferring certain risks
to reinsurers through a reinsurance contract or treaty. Renewal Credits are
reductions in premium billings to renewing policyholders. Net premiums written
are adjusted by any amount which has been billed but not yet earned during the
period in arriving at earned premiums. The Company has certain insurance
programs for large groups of policyholders where the premium is retrospectively
determined based on losses during the period. Premiums accrued under
retrospective programs are recorded as premiums written, while premium refunds
accrued under retrospective programs are recorded as unearned premiums. Under
retrospective programs, premiums earned are premiums written reduced by premium
refunds accrued.
Prior to 1997, the Company's policies were written with a January 1 renewal
date. During 1997 and 1998, the Company began to stagger policy renewal dates
throughout the year which results in a one-time effect when the policy is
staggered. (Written premiums are increased during the periods when policies are
being re-issued, returning to the previous level in the subsequent period.) In
accordance with GAAP, premiums are earned ratably over the terms of the
Company's policies, so this change in renewal dates has no effect on premiums
earned for any period.
The balance sheet item "advance premiums" represents those premiums
collected on policies prior to their renewal dates. Unearned premiums represent
premiums billed but not yet fully earned at the end of the reporting period.
Premiums receivable represent either annual billed premiums or experience-rated
premiums which have not yet been collected.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Loss and LAE reserves are estimates
of future payments for reported and unreported claims and related expenses of
adjudicating claims with respect to insured events that have occurred. The
change in these reserves from year to year is reflected as an increase or
decrease to the Company's loss and loss adjustment expenses. Medical
professional liability loss and LAE reserves are established based on an
estimate of these future payments as reflected in the Company's past experience
with similar cases and historical trends involving claim payment patterns.
Other factors that modify past experience are also considered in setting the
reserves, including court decisions; economic conditions; current trends in
losses; and inflation. Reserving for medical professional liability claims
continues to be a complex and uncertain process, requiring the use of informed
estimates and judgments. Although the Company follows a practice of
conservatively estimating its future payments relating to losses incurred, there
can be no assurance that currently established reserves will prove adequate in
light of subsequent actual experience.
49
<PAGE>
The Company, in consultation with its independent actuaries, utilizes
several methods in order to estimate loss and LAE reserves by projecting
ultimate losses. By utilizing and comparing the results of these methods, the
Company is better able to analyze loss data and establish an appropriate
reserve. The loss and LAE reserves are estimated by management on a monthly
basis and reviewed periodically by the Company's independent actuaries. Such
updates include review of the appropriateness of methods used and changes in
methodology if needed, as well as a reflection of updated experience.
The inherent uncertainty in establishing reserves is relatively greater for
companies writing long-tail casualty business like the Company. Due to the
extended nature of the claim resolution process of professional liability
claims, established reserve estimates may be adversely impacted by: judicial
expansion of liability standards; expansive interpretations of contracts;
inflation associated with medical claims; and the propensity of individuals to
file claims. Because of the existence of these uncertainties, the Company has
historically taken a conservative posture in establishing reserves. The Company
refines reserve estimates as experience develops and additional claims are
reported or existing claims are closed; adjustments to losses reserved in prior
periods are reflected in the results of the periods in which such adjustments
are made.
Losses and LAE reserve liabilities as stated on the balance sheet are
reported gross before recovery from reinsurers for the portion of the claims
covered under the reinsurance program. Losses and LAE expenses as stated on the
income statement are reported net of reinsurance recoveries.
REINSURANCE. The Company manages its exposure both to individual claim
losses (including certain LAE) and annual aggregate losses (including certain
LAE) on all claims through its reinsurance program. Reinsurance is a customary
practice in the industry. It allows the Company to obtain indemnification
against certain losses associated with insurance policies it has underwritten by
entering into a reinsurance agreement with other insurance enterprises (the
reinsurers). The Company pays or cedes part of its policyholder premium to the
reinsurers. The reinsurers in return agree to reimburse the Company for a
specified portion of any claims covered under the reinsurance contract. While
reinsurance arrangements are designed to limit losses from large exposures and
to permit recovery of a portion of direct losses, reinsurance does not relieve
the Company of liability to its insureds.
Under one of the Company's primary reinsurance contracts, the portion of
the policyholder premium ceded to the reinsurers is "swing rated" or experience
rated on a retrospective basis. This swing rated cession program is subject to
a minimum and maximum premium range to be paid to the reinsurers in the future,
depending upon the extent of losses actually paid by the reinsurers. A deposit
premium is paid by the Company during the initial policy year. An additional
liability, "retrospective premiums accrued under reinsurance treaties" is
recorded by the Company to represent an estimate of net additional payments to
be made to the reinsurers under the program, based on the level of loss and LAE
reserves recorded. Like loss and LAE reserves, adjustments to prior year ceded
premiums payable to the reinsurers are reflected in the results of the periods
in which such adjustments are made. The Company follows a practice of
conservatively estimating its liabilities relating to the swing rated cession
program based on historical loss experience. The swing rated reinsurance
premiums are recorded in a manner consistent with the recording of the Company's
loss reserves.
The Company has historically ceded to its reinsurers over 90% of the
Company's exposure to individual losses in excess of $1 million (excess layer
coverage). Excess layer premiums are recorded as current year reinsurance
ceded costs.
RECENT INDUSTRY PERFORMANCE. The Company's results of operations have
historically been influenced by factors affecting the medical professional
liability industry in general. The operating results of the US medical
professional liability industry have been subject to significant variations over
time due
50
<PAGE>
to competition, general economic conditions, judicial trends and
fluctuations in interest rates. According to the August, 1998 Best's Review
(published by A. M. Best Company), in recent years, medical professional
liability insurers have successfully stabilized premium rates and maintained
profits by drawing on reserve redundancies from the early 1990's. Over the last
several years, premium rates for the industry were basically flat while claim
costs were beginning to rise. The Company continues to monitor these industry
trends and consider them in relation to the Company's circumstances when setting
rates or establishing reserves.
51
<PAGE>
CONSOLIDATED NET INCOME AND COMPREHENSIVE INCOME RESULTS--
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net income for the Company increased $1.7 million, from $779,000 for the
nine months ended September 30, 1997 to $2.5 million for the nine months ended
September 30, 1998. The substantial increase in income for the nine months
ended September 30, 1998 was principally due to a $4.0 million increase in net
premiums earned before Renewal Credits, partially offset by a $1.2 million
increase in expenses and by a $1.0 million increase in Federal income taxes.
The increase in net premiums earned is primarily due to a $5.7 million decrease
in reinsurance costs offset by approximately $1.9 million in retrospective
policyholder premiums under certain experience-rated plans. Both the decrease
in reinsurance costs and the decrease in premiums due under certain
retrospective plans are related to favorable loss development. Expenses
increased in 1998 due to costs associated with the Reorganization, as well as
start-up costs for the management services organization. Federal income taxes
increased due to increased income before income taxes.
Comprehensive income was $4.4 million for the nine months ended September
30, 1998 compared to $1.7 million for the nine months ended September 30, 1997.
Other comprehensive income consists of unrealized investment gains net of
deferred income taxes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net income for the Company was $959,000 for the year ended December 31,
1997, down 3% from $991,000 for the year ended December 31, 1996. This decline
was largely due to a combination of offsetting factors. Net premiums earned
increased by $181,000, net investment income increased by $389,000 and a change
from a tax expense in 1996 to a tax benefit in 1997 contributed $425,000. More
than offsetting these positives was an increase in losses and LAE of $355,000,
a decrease in other income and realized capital gains of $444,000 and an
increase in underwriting and other expenses of $228,000.
The $181,000 increase in net premiums earned primarily resulted from three
significant factors: (1) increasingly competitive market conditions and
additional risk-sharing with larger insureds led to an additional $1.5 million
in discounts from the Company's base rates; (2) higher Renewal Credits reduced
net premiums earned by $653,000 (the Renewal Credits were granted in
anticipation of a 6% increase in base rates for 1998); and (3) these reductions
were more than offset by a $2.4 million decrease in reinsurance costs,
reflecting a reduction in reinsurers' pricing based on the Company's improved
loss exposure on recent loss years as well as favorable development in
retrospective premiums accrued under reinsurance treaties.
Comprehensive income was $2.1 million for the year ended December 31, 1997
compared to a loss of $358,000 for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net income for the Company increased $292,000, or 42%, to $991,000 for the
year ended December 31, 1996, from $699,000 for the year ended December 31,
1995. The increase in net income for 1996 was primarily due to a $5.3 million
reduction in reinsurance costs, which was partially offset by higher losses and
LAE and reduced realized investment gains. As more fully described in "Net
Premiums Earned" below, both favorable loss experience and a renegotiation of
the Company's reinsurance treaties caused a 56% reduction in reinsurance costs
for the year ended December 31, 1996 compared to the year
52
<PAGE>
ended December 31, 1995. The significant impact of this reinsurance cost
reduction was offset by increased losses and LAE of $3.9 million. For the year
ended December 31, 1996 favorable loss development for the 1992 through 1995
loss years was partially offset by higher than expected severity for newly-
reported claims during 1996. Consistent with its past practices, the Company
responded to this increased uncertainty by establishing reserves to adequately
cover the indicated higher severity level for unsettled claims.
Comprehensive income was a loss of $358,000 for the year ended December 31,
1996 compared to income of $5.0 million for the year ended December 31, 1995.
----------------------------------------------------------
NET PREMIUMS EARNED
----------------------------------------------------------
Following is a summary of the Company's net premiums earned:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
---------- --------- --------- -------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Gross premiums written* $18,753 $17,666 $17,869 $19,017 $19,506
Change in unearned premiums (6,547) (3,760) (403) ----- ----
------- ------- ------- ------- -------
Gross premiums earned before
Renewal Credits 12,206 13,906 17,466 19,017 19,506
Reinsurance premiums ceded related to:
- current year (4,632) (4,245) (5,474) (7,312) (8,957)
- prior year 8,356 2,245 3,620 3,073 (604)
------- ------- ------- ------- -------
Total reinsurance premiums ceded 3,724 (2,000) (1,854) (4,239) (9,561)
------- ------- ------- ------- -------
Net premium earned before
Renewal Credits 15,930 11,906 15,612 14,778 9,945
Renewal Credits (1,417) (1,537) (2,080) (1,427) (1,583)
------- ------- ------- ------- -------
Net premiums earned $14,513 $10,369 $13,532 $13,351 $ 8,362
======= ======= ======= ======= =======
* Net premiums written after
Renewal Credits $19,838 $ 13,800 $13,935 $13,351 $ 8,362
======= ======= ====== ====== =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Gross premiums written increased by $1.1 million, or 6%, from $17.7 million
for the nine months ended September 30, 1997 to $18.8 million for the nine
months ended September 30, 1998. Starting in the fourth quarter of 1997 and
continuing through 1998, the Company began to stagger policy renewal dates.
Premiums written increased $520,000 for the nine months ended September 30, 1998
due
53
<PAGE>
to re-writing of policies; there was no effect for the first nine months of
1997. There is a one-time effect when the policy renewal is staggered which
increases premiums written in the current period; premiums written will, all
else being equal, return to the previous level in the subsequent period. While
the staggering of the renewal dates affects premiums written, earned premiums
are not affected for either period. The $17.7 million of gross premiums written
for the nine months ended September 30, 1997 includes $1.4 million related to
experience-rated programs. The $18.8 million of gross premiums written for the
nine months ended September 30, 1998 includes $701,000 related to experience-
rated programs and $520,000 related to the staggering of renewal dates.
Gross premiums written adjusted for the staggering of renewal dates and
experience-rated premiums increased $1.2 million, or 7%, from $16.3 million for
the nine months ended September 30, 1997 to $17.5 million for the nine months
ended September 30, 1998. The increase reflects both a 2% policyholder increase
(to 1,197) and the 6% premium rate increase for 1998. Discounts under
policyholder programs (described more fully below in "Year Ended December 31,
1997 Compared to Year Ended December 31, 1996") were largely unchanged for the
nine months ended September 30, 1998 compared to the nine months ended September
30, 1997. Gross premiums written on excess layer coverage increased $345,000
from $1.7 million for the nine months ended September 30, 1997 to $2.0 million
for the nine months ended September 30, 1998.
The change in unearned premiums for the period increased by $2.8 million to
$6.5 million for the nine months ended September 30, 1998 from $3.8 million for
the nine months ended September 30, 1997. This change resulted from a $1.6
million increase in the unearned portion of the policy premium due to non-
January 1 renewal dates, as well as a $1.2 million increase in retrospectively-
determined policyholder refunds for 1998 due to favorable loss experience.
Gross premiums earned before Renewal Credits decreased $1.7 million, or
12%, from $13.9 million for the nine months ended September 30, 1997 to $12.2
million for the nine months ended September 30, 1998. This decrease was due to
a $1.9 million net reduction in premiums earned under experience-rated programs,
offset by approximately $200,000 of additional premiums earned for the nine
months ended September 30, 1998.
Reinsurance premiums ceded decreased by $5.7 million from $2.0 million for
the nine months ended September 30, 1997 to a credit of $3.7 million for the
nine months ended September 30, 1998. Reinsurance premiums are affected by
current year premiums payable to the reinsurers, as well as the retrospective
adjustments to accruals for prior year premiums. Due to favorable loss
development of reinsured losses compared to prior estimates by the Company, the
swing rated reinsurance premiums related to prior years were reduced by
approximately $8.4 million. This change in estimate is reflective of the
favorable loss development for the 1993 through 1995 loss years.
Current year reinsurance premiums ceded increased by $387,000, or 9%, from
$4.2 million for the nine months ended September 30, 1997 to $4.6 million for
the nine months ended September 30, 1998. This increase is due to an increase
in the excess layer coverages purchased by the policyholders, partially offset
by a decrease in the swing-rated premium. The reinsurance premium due for
excess layer coverage increased by $348,000 or 21%, from $1.6 million for the
nine months ended September 30, 1997 to $2.0 million for the nine months ended
September 30, 1998, consistent with an increase in premiums written for the
excess layer coverage. In addition, the premiums related to the swing rated
cession program increased by $38,000, or 1%. The liability "retrospective
premiums accrued under reinsurance treaties" decreased from $14.6 million at
September 30, 1997 to $7.7 million at September 30, 1998.
Renewal Credits decreased $120,000, or 8%, from $1.5 million for the nine
months ended September 30, 1997 to $1.4 million for the nine months ended
September 30, 1998 reflecting a decrease in the credit rate from 16% to 12.5%,
partially offset by an increasing premium base subject to the discount.
54
<PAGE>
Net premiums earned before Renewal Credits increased by $4.0 million, or
34%, from $11.9 million for the nine months ended September 30, 1997 to $15.9
million for the nine months ended September 30, 1998. This increase primarily
reflects the change in estimate of reinsurance premiums due under the swing
rated program. Net premiums earned after Renewal Credits increased similarly by
$4.1 million, or 40%, from $10.4 million for the nine months ended September 30,
1997 to $14.5 million for the nine months ended September 30, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Gross premiums written decreased by $1.1 million, or 6%, from $19.0 million
for the year ended December 31, 1996 to $17.9 million for the year ended
December 31, 1997. The decrease in policyholder premiums was more than accounted
for by a $2.1 million increase in discounts granted to policyholders under
various discount and risk-sharing programs offered by the Company. The decrease
was offset by an additional $1.3 million of premium collected in 1997 related to
experience-rated programs. Base premium rates and the number of policyholders
were essentially unchanged. Policyholder renewal rates were 97% in 1997 and 95%
in 1996. Gross premiums written on excess layer coverage decreased $419,000
from $2.1 million for the year ended December 31, 1996 to $1.7 million for the
year ended December 31, 1997.
Discounts are granted to provide incentives and rewards for policyholders
to minimize loss experience. Policyholders with favorable loss experience
("claims free" experience), those who participate in risk-management programs
and those who wish to participate in the loss experience of a group (risk
sharing premium plans) are granted discounts. The discounts for attending risk-
management programs were first implemented in 1997, and accounted for $843,000
of the $1.5 million increase in discounts for the year. While these programs
reduce net premiums due to the discounts granted, management believes its risk-
management programs are likely to reduce losses in the future.
In addition to the discounts granted, under certain retrospective programs,
the policyholders associated with a group may initially pay reduced premiums for
that policy year. The Company will subsequently increase these premiums through
additional billings if the group's loss experience warrants. Under other risk
sharing programs, the policyholder group initially pays a premium for the policy
year which may later be partially refunded by the Company if losses for the
group are under certain limits. Consistent with the Company's treatment of both
losses and other reinsurance programs, premium refunds or additional billings
are reflected in premiums in the periods in which such adjustments are made.
For the year ended December 31, 1997, approximately $1.6 million of premiums
earned under retrospective programs are subject to adjustment based upon
experience. Retrospective premium refunds of $240,000 were made during
1997(compared to zero in 1996). The Company also grants discounts for those
policyholders in certain group or part-time practices. The premiums from excess
layer coverage purchased by policyholders decreased primarily due to premium
discounts granted.
The change in unearned premiums for the period increased by $403,000 for
the year ended December 31, 1997 due to the staggering of policy renewal dates
for the first time in 1997. The amount was zero in 1996.
Reinsurance premiums ceded decreased by $2.4 million, or 56%, from $4.2
million for the year ended December 31, 1996 to $1.9 million for the year ended
December 31, 1997. Reinsurance premiums ceded are affected by current year
premiums due to the reinsurers, as well as by retrospective adjustments to prior
year premiums ceded. Due to favorable loss development of reinsured losses
compared to prior estimates by the Company, the swing rated reinsurance premiums
related to prior years produced an additional $547,000 benefit, increasing from
$3.1 million for the year ended December 31, 1996 to $3.6 million for the year
ended December 31, 1997.
55
<PAGE>
Current year reinsurance premiums ceded decreased $1.8 million, or 25%, to
$5.5 million for the year ended December 31, 1997 from $7.3 million for the year
ended December 31, 1996. The maximum premium due under the swing rated program
was decreased from 30% of net policyholder premiums (as defined under the
reinsurance treaty) in 1996 to 22.5% in 1997 to reflect the Company's favorable
loss experience. Reinsurance coverages were unaffected. The favorable loss
experience produced a reduction in the costs of the swing rated reinsurance
program. Current year ceded premiums decreased by $1.4 million, or 27%, from
$5.2 million in 1996 to $3.8 million in 1997. The reinsurance premium due for
excess layer coverage decreased by $415,000 or 20% for the year ended December
31, 1997 compared to the year ended December 31, 1996 as previously described.
These factors caused a decrease in the cost of the Company's reinsurance program
in 1997 and 1996. The liability "retrospective premiums accrued under
reinsurance treaties" decreased from $14.8 million at December 31, 1996 to $13.8
million at December 31, 1997.
Renewal Credits increased $653,000, or 46%, from $1.4 million for the year
ended December 31, 1996 to $2.1 million for the year ended December 31, 1997 due
to an increase in the Renewal Credit percentage from 10% to 16%, partially
offset by a decrease in the premium base. This increase was intended to offset
a 6% premium rate increase for 1998 for those qualifying for the Renewal Credit,
as well as to respond to the competitive pressures in the marketplace. Because
the Company accrues Renewal Credits in the period declared, the Renewal Credit
is reflected as a reduction in premiums earned in 1997 while the 6% premium rate
increase was not realized until 1998.
Net premiums earned before Renewal Credits increased by $834,000, or 6%,
from $14.8 million for the year ended December 31, 1996 to $15.6 million for the
year ended December 31, 1997. Net premiums earned after Renewal Credits
increased by $181,000, or 1%, from $13.4 million for the year ended December 31,
1996 to $13.5 million for the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Gross premiums written decreased by $489,000, or 3%, from $19.5 million for
the year ended December 31, 1995 to $19.0 million for the year ended December
31, 1996. The decrease was due to $1.2 million in discounts granted to
retrospective premium plan groups (compared to $538,000 for 1995), as well as a
.5% decrease in policyholders, offset by a base rate increase of 5.6% for 1996.
The increase in discounts for 1996 was primarily due to increased risk sharing
under retrospective premium plans. Gross premiums written on excess layer
coverage were largely unchanged for the year ended December 31, 1996 compared to
the year ended December 31, 1995.
Reinsurance premiums ceded decreased by $5.3 million, or 56%, from $9.6
million for the year ended December 31, 1995 to $4.2 million for the year ended
December 31, 1996. Reinsurance premiums ceded are affected by current year
premiums due to the reinsurers, as well as by retrospective adjustments to prior
year premiums. Due to favorable loss development of reinsured losses compared
to prior estimates by the Company, the swing rated reinsurance premiums related
to prior years were reduced to a $3.1 million credit in 1996 compared to a
$604,000 cost for 1995.
Current year reinsurance premiums decreased $1.6 million, or 18%, to $7.3
million for the year ended December 31, 1996 from $9.0 million for the year
ended December 31, 1995. This was fully accounted for by a decline of $1.6
million from the swing-rated treaty attributable to improved expectations for
loss experience. The maximum premium due under the swing rated program was
decreased to 30% of net policyholder premiums (as defined under the reinsurance
treaty) in 1996 compared to a previous maximum of 40% for the years 1993 through
1995 due to the Company's favorable loss experience. The reinsurance premium
due for excess layer coverage remained largely unchanged for the year ended
December 31, 1996 compared to the year ended December 31, 1995. The liability
"retrospective premiums accrued under reinsurance treaties" increased from $12.0
million at December 31, 1995 to $14.8 million at December 31, 1996.
56
<PAGE>
Renewal Credits decreased $156,000, or 10%, from $1.6 million for the year
ended December 31, 1995 to $1.4 million for the year ended December 31, 1996
reflecting a decrease in the premiums generated by those eligible for the
Renewal Credit.
Net premiums earned before Renewal Credits increased by $4.8 million, or
49%, from $9.9 million for the year ended December 31, 1995 to $14.8 million for
the year ended December 31, 1996. Net premiums earned after Renewal Credits
increased by $5.0 million, or 60%, from $8.4 million for the year ended December
31, 1995 to $13.4 million for the year ended December 31, 1996. The increase in
net premiums for 1996 was principally due to the 56% reduction in reinsurance
premiums ceded.
------------------------------
NET INVESTMENT INCOME
------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net investment income decreased by $124,000, or 3%, from $4.6 million for
the nine months ended September 30, 1997 to $4.5 million for the nine months
ended September 30,1998 due to a decline in yields, which was only partially
offset by an increase in invested funds. Average invested assets (including
short-term cash equivalents and excluding real estate held) increased by $6.2
million, or 6%, from $97.5 million at September 30, 1997 to $103.7 million at
September 30, 1998 due to a change in unrealized gains and of additional
invested funds. Positive cash flow and maturing investments were primarily
invested in U. S. Government/Agency and corporate bonds for both periods. In
order to increase yield and to better utilize the Company's positive cash flow
position, the duration of the portfolio was increased from 4.0 years to 5.3
years. The average effective yield was approximately 6.27% for the nine months
ended September 30, 1997 and 5.74% for the nine months ended September 30, 1998.
The tax equivalent yield was approximately 6.94% at September 30, 1997 and 6.32%
at September 30, 1998. The increase in investment yields is reflective of the
market increase in interest rates in 1997 over 1996.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net investment income increased by $389,000, or 7%, from $5.7 million for
the year ended December 31, 1996 to $6.0 million for the year ended December 31,
1997 due to both an increase in the invested assets in the securities portfolio
and an increase in the yield rate. Average invested assets (including short-
term cash equivalents and excluding real estate held) increased by $3.4 million,
or 4%, from $93.1 million at December 31, 1996 to $96.5 million at December 31,
1997 due to unrealized gains and additional invested funds. Positive cash
flow and maturing investments were primarily invested in U. S. Government/Agency
and corporate bonds for 1997 and in tax-advantaged securities for 1996. In
1997, the Company sold its building and invested the $1.2 million net proceeds
in fixed maturity securities. In late 1996, in accordance with the after-tax
income optimization program, the Company sold approximately $10 million of
existing taxable securities and re-invested the proceeds in tax-advantaged
municipals and preferred stock. The average effective yield was approximately
6.26% for 1997 and 6.08% for 1996. The tax equivalent yield was 6.92% for 1997
and 6.27% for 1996. The increase in investment yields is reflective of the
market increase in interest rates in 1997 over 1996.
57
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net investment income increased by $74,000, or 1%, from $5.6 million for
the year ended December 31, 1995 to $5.7 million for the year ended December 31,
1996 due to an increase in the invested assets in the securities portfolio
offset a decrease in the yield rate. Average invested assets (including short-
term cash equivalents and excluding real estate held) increased by $3.7 million,
or 4%, from $89.4 million at December 31, 1995 to $93.1 million at December 31,
1996 due to additional invested funds net of unrealized losses. Positive cash
flow and maturing investments were primarily invested in tax-advantaged
securities for 1996. In addition, in accordance with the after-tax income
optimization program adopted by the Company, approximately $10 million of
existing taxable securities were sold in late 1996 in order to re-invest in tax-
advantaged municipals and preferred stocks. For the year ended December 31,
1996, a lower pre-tax yield on tax-advantaged securities tended to offset the
positive effect of an increase in invested assets compared to the year ended
December 31, 1995. The average effective yield was approximately 6.08% for
1996 and 6.25% for 1995. The tax equivalent yield decreased to 6.27% in 1996
from 6.54% in 1995. The lower 1996 yields reflect the market decline in
interest rates in 1996 compared to 1995.
------------------------------
NET REALIZED INVESTMENT GAINS
------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net realized investment gains were $128,000 for the nine months ended
September 30, 1998 and $96,000 for the nine months ended September 30, 1997.
Net realized gains for both periods were primarily from the sale of corporate
bonds.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net realized investment gains were $90,000 for the year ended December 31,
1997 and $229,000 for the year ended December 31, 1996. Net realized gains for
1997 and 1996 were primarily from the sale of corporate bonds.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net realized investment gains were $229,000 for the year ended December 31,
1996 and $1,703,000 for the year ended December 31, 1995. Net realized gains
for 1996 were primarily from the sale of corporate bonds. Net realized gains
for 1995 were primarily from the sale of mortgage-backed securities where the
Company had accumulated significant gains over the years. During 1995, falling
interest rates caused the Company to shorten the duration of the portfolio by
selling off longer maturity securities, principally mortgage-backed securities.
------------------------------
OTHER INCOME
------------------------------
Other income includes revenues from insurance brokerage, insurance agency and
physician services; as well as finance and service charge income from the
Company's financing of physician premiums.
58
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Other income increased $53,000, or 20%, from $270,000 for the nine months
ended September 30, 1997 to $323,000 for the nine months ended September 30,
1998. This increase in income is primarily due to revenues from the start-up
operations of the management services organization as well as increased
insurance brokerage revenues.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Other income decreased $305,000, or 46%, from $660,000 for the year ended
December 31, 1996 to $355,000 for the year ended December 31, 1997. Prior to
1997 the Company provided premium financing to its member physicians. During
1997 the Company arranged a premium financing facility to be provided by an
independent party. This caused a $252,000 decrease in finance and service
charge income and an increase in net investment income as a result of improved
cash flow. The remainder of the reduction in other income was due to decreased
insurance brokerage and insurance agency commissions and income.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Other income increased $25,000, or 4%, from $635,000 for the year ended
December 31, 1995 to $660,000 for the year ended December 31, 1996. This
increase was primarily due to increased finance and service charge income from
the financing of physician premiums.
59
<PAGE>
-----------------------------------------
LOSS AND LOSS ADJUSTMENT EXPENSES
INCURRED AND COMBINED RATIO RESULTS
-----------------------------------------
The expense for incurred losses and LAE for each year net of reinsurance can be
summarized as follows. All loss expense amounts incurred are reported net of
reinsurance amounts recoverable.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
----------------------------- --------------------------------
1998 1997 1997 1996 1995
--------------- ------------ --------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Incurred losses and LAE
related to:
Current year - losses $12,653 $14,816 $19,444 $16,775 $16,094
Prior years -
development (832) (3,122) (3,853) (1,539) (4,805)
------- ------- ------- ------- -------
Total incurred for the year $11,821 $11,694 $15,591 $15,236 $11,289
</TABLE>
Traditionally, property and casualty insurer results are judged using ratios of
losses and underwriting expenses compared to net premiums earned. Following is
a summary of these ratios for each period:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- --------------------------------
1998 1997 1997 1996 1995
------------ ------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Before Renewal Credits:
- -----------------------
Loss and LAE ratio
Current year losses 79.4 % 124.4 % 124.5 % 113.5 % 161.8 %
Prior year losses (5.2)% (26.2)% (24.6)% (10.4)% (48.3)%
----- ------ ------ ------ ------
Total Loss and LAE ratio 74.2 % 98.2 % 99.9 % 103.1 % 113.5 %
Underwriting expense ratio 17.2 % 20.9 % 18.7 % 16.5 % 25.0 %
----- ------ ------ ------ ------
Combined ratio before
Renewal Credits 91.4 % 119.1 % 118.6 % 119.6 % 138.5 %
===== ====== ====== ====== ======
After Renewal Credits:
- ----------------------------------------
Loss and LAE ratio
Current year losses 87.2 % 142.9 % 143.7 % 125.6 % 192.5 %
Prior year losses (5.7)% (30.1)% (28.5)% (11.5)% (57.5)%
----- ------ ------ ------ ------
Total Loss and LAE ratio 81.5% 112.8% 115.2% 114.1% 135.0%
Underwriting expense ratio 18.9% 24.0% 21.6% 18.3% 29.7%
----- ------ ------ ------ ------
Combined ratio after
Renewal Credits 100.4% 136.8% 136.8% 132.4% 164.7%
===== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Total incurred loss and LAE expense of $11.8 million for the nine months
ended September 30, 1998 represented an increase of $127,000, or 1%, compared to
$11.7 million incurred for the nine months ended September 30, 1997. Although
the Company has noticed a higher severity (reported average claim cost) compared
to earlier coverage years, this has been more than offset by a substantially
lower frequency
60
<PAGE>
(number of claims). According to the August, 1998 Best's Review, this increase
in severity has also been observed in other medical professional liability
insurers. Consistent with its historical practice, the Company has taken a
conservative posture in establishing reserves related to the higher severity
indications. The Company cannot predict the ultimate outcome of these
uncertainties.
The total incurred losses are broken into two components--incurred losses
related to the current coverage year and development on prior coverage year
losses. Current year incurred losses decreased by $2.2 million, or 15%, from
$14.8 million for the nine months ended September 30, 1997 to $12.7 million for
the nine months ended September 30, 1998 due to the lower frequency of claims
previously described. At the same time, net premiums (before Renewal Credits)
increased by 34% as also previously described. The loss and LAE ratio reflected
these changes, decreasing from 124.4% for the nine months ended September 30,
1997 to 79.4% for the nine months ended September 30, 1998.
The Company experienced favorable development on estimated losses for prior
years' claims for both nine month periods. The favorable loss development
related to prior years claims was $832,000 for the nine months ended September
30, 1998, and $3.1 million for the nine months ended September 30, 1997. The
total loss and LAE ratio was reduced by 5 points for the nine months ended
September 30, 1998 and 26 points for the nine months ended September 30, 1997,
as a result of this favorable development. For both periods, this favorable
development related to the 1993 through 1995 loss years reduced losses in 1997
substantially and to a lesser degree in 1998. Loss development can be affected
by a variety of factors as explained in "Losses and Loss Adjustment Expenses."
The underwriting expense ratio before Renewal Credits decreased from 20.9%
for the nine months ended September 30, 1997 to 17.2% for the nine months ended
September 30, 1998. This decrease is reflective of the 34% increase in net
premiums (before Renewal Credits) due to the substantial decrease in reinsurance
premiums previously described, offset by a 10% increase in underwriting
expenses. Underwriting expenses increased $254,000 to $2.7 million for the nine
months ended September 30, 1998 from $2.5 million for the nine months ended
September 30, 1997. See "Underwriting Expenses."
The combined ratio before Renewal Credits decreased from 119.1% for the
nine months ended September 30, 1997 to 91.4% for the nine months ended
September 30, 1998. The 34% increase in net premiums (before Renewal Credits)
previously described, combined with stable incurred losses helped to drive the
combined ratio to its lowest level for the 1995 through 1998 period. The GAAP
combined ratio before Renewal Credits for the nine months ended September 30,
1998 was 91.4% while the statutory combined ratio was 94.9%. Likewise, for the
nine months ended September 30, 1997, the GAAP combined ratio before Renewal
Credits was 119.1% compared to the statutory combined ratio of 113.8%.
The GAAP combined ratio after Renewal Credits for the nine months ended
September 30, 1998 of 100.4% improved by 36 points from the combined ratio for
the nine months ended September 30, 1997 of 136.8% due to an 8% decrease in
Renewal Credits as well as the net premium changes already described.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total incurred loss and LAE expense of $15.6 million for the year ended
December 31, 1997 represented an increase of $355,000, or 2%, compared to $15.2
million incurred for the year ended December 31, 1996. The total incurred is
broken into two components--incurred losses related to the current coverage year
and development on prior coverage year losses.
Current year incurred losses increased by $2.7 million, or 16%, from $16.8
million for the year ended December 31, 1996 to $19.4 million for the year ended
December 31, 1997. This increase was due to a 12% increase in the number of
claims reported or "opened" for 1997 as compared to 1996 and due to
61
<PAGE>
indications of a higher average claim cost relative to earlier coverage years.
The loss and LAE ratio reflected this increase, changing from 113.5% for the
year ended December 31, 1996 to 124.5% for the year ended December 31, 1997.
The Company experienced favorable development on expected losses for prior
year claims compared to previous estimates in both 1997 and 1996 based on
updated loss experience for those prior coverage periods. The favorable loss
development related to prior years' claims was $3.9 million for the year ended
December 31, 1997 and $1.5 million for the year ended December 31, 1996. The
1997 favorable development was primarily related to the 1993 through 1995 loss
years. For the year 1996, favorable development primarily related to the 1994
and 1995 loss years. The total loss and LAE ratio was reduced by 25 points for
the year ended December 31, 1997, and 10 points for the year ended December 31,
1996 as a result of this favorable development.
The Company believes that its favorable development has resulted for the
most part from the comparatively low number of claims reported for the 1995
through 1996 period, as well as its conservative reserving practice. For 1996,
the favorable development related to the immediately preceding coverage years
was relatively low by historical standards. In addition, this favorable
development was offset by upward adjustment on the claim severities for earlier
years and an upward adjustment for tail coverage issued in 1992.
The underwriting expense ratio before Renewal Credits increased from 16.5%
in 1996 to 18.7% in 1997. The 20% increase in underwriting expenses was only
partially offset by the 6% increase in net premiums (before Renewal Credits).
Underwriting expenses increased $480,000 to $2.9 million for the year ended
December 31, 1997 from $2.4 million for the year ended December 31, 1996. See
"Underwriting Expenses".
The combined ratio before Renewal Credits decreased from 119.6% for the
year ended December 31, 1996 to 118.6% for the year ended December 31, 1997.
The 2% increase in incurred loss and LAE expense was more than offset by the 6%
increase in net premiums (before Renewal Credits) previously described. The
GAAP combined ratio before Renewal Credits for 1997 was 118.6% while the
statutory combined ratio was 119.6%. Likewise for 1996, the GAAP combined ratio
before Renewal Credits was 119.6% while the statutory combined ratio was 121.6%.
The GAAP combined ratio for the year ended December 31, 1997 of 136.8%
worsened by 4 points from the combined ratio for the year ended December 31,
1996 of 132.4% primarily due to the 46% increase in Renewal Credits previously
described.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total incurred loss and LAE expense of $15.2 million for the year ended
December 31, 1996 represented an increase of $3.9 million, or 35%, compared to
$11.3 million incurred for the year ended December 31, 1995. The 1996 expense
reflects the reduced favorable development from prior years. The total incurred
is broken into two components--incurred losses related to the current coverage
year and development on prior coverage year losses.
Current year incurred losses increased by $681,000, or 4%, from $16.1
million for the year ended December 31, 1995 to $16.8 million for the year ended
December 31, 1996. The loss and LAE ratio decreased, however, from 161.8% for
the year ended December 31, 1995 to 113.5% for the year ended December 31, 1996.
The decrease in the loss and LAE ratio is reflective of the substantial
increase in net premiums due to the reduced reinsurance premium cost for 1996.
The Company experienced favorable loss development in 1996 and 1995,
reflected as a decrease in the loss reserve and LAE expense for the year
indicated. The favorable loss development related to
62
<PAGE>
prior years' claims was $1.5 million for the year ended December 31, 1996 and
$4.8 million for the year ended December 31, 1995. The 1995 favorable
development was primarily related to the 1992 through 1994 loss years. For 1996,
otherwise favorable development was partially offset by an upward adjustment on
the claim severities for earlier years and an upward adjustment for tail
coverage issued in 1992. The total loss and LAE ratio was reduced by 10 points
for the year ended December 31, 1996, and 48 points for the year ended December
31, 1995 as a result of favorable development.
The underwriting expense ratio before Renewal Credits decreased
significantly from 25.0% in 1995 to 16.5% in 1996. The decrease is reflective
of a 49% increase in net premiums earned before Renewal Credits and a 2%
decrease in underwriting expenses. Underwriting expenses decreased $45,000 to
$2.4 million for the year ended December 31, 1996 from $2.5 million for the year
ended December 31, 1995. See "Underwriting Expenses."
The combined ratio before Renewal Credits decreased from 138.5% for the
year ended December 31, 1995 to 119.6% for the year ended December 31, 1996.
The 35% increase in incurred loss and LAE expense was more than offset by the
49% increase in net premiums (before Renewal Credits) due to reduced reinsurance
costs previously described. The GAAP combined ratio before Renewal Credits for
1996 was 119.6% while the statutory combined ratio was 121.6%. Likewise for
1995, the GAAP combined ratio before Renewal Credits was 138.5% while the
statutory combined ratio was 145.8%.
The GAAP combined ratio for the year ended December 31, 1996 of 132.4%
improved by 32 points from the combined ratio for the year ended December 31,
1995 of 164.7% due to both the increase in net premiums and a 10% decrease in
Renewal Credits also previously described. The 164.7% ratio in 1995 is
reflective of relatively higher reinsurance costs in 1995 compared to 1996 and
later years.
63
<PAGE>
----------------------------------------------------------
LOSS AND LOSS ADJUSTMENT EXPENSES
LIABILITY
----------------------------------------------------------
The loss and LAE reserve liabilities for unpaid claims as of each period are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
-------------------------------- ----------------------------------
1998 1997 1997 1996 1995
-------------- -------------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Liability for:
Losses $62,045 $51,471 $53,661 $51,035 $56,401
Loss adjustment expenses 20,285 20,353 21,475 20,171 15,632
------ ------ ------ ------- -------
Liability $82,330 $71,824 $75,136 $71,206 $72,033
======= ======= ======= ======= =======
Reinsurance recoverable on losses $(20,600) $(12,793) $(17,077) $(14,679) $(16,182)
======= ======= ======= ======= =======
</TABLE>
Losses in the medical professional liability industry can take up to eight
to ten years, or occasionally more, to fully settle. Actual amounts are not due
from the reinsurers until the Company settles a claim.
The Company believes that all of its reinsurance recoverables are
collectible. See "Business-Reinsurance" for a discussion of the reinsurance
program.
---------------------------------------------------
UNDERWRITING EXPENSES
---------------------------------------------------
Salaries and benefits accounted for approximately 20 to 30% of other
underwriting expenses; with professional fees (including legal, auditing and
directors' fees) accounting for approximately another 30% of such underwriting
expenditures. Premium taxes remained level from year to year at approximately
2% of gross premiums written. Starting in 1998, premium taxes related to the
change in unearned premiums due to the staggering of renewal dates have been
treated as deferred acquisition costs. Guaranty Fund assessments are based on
industry loss experience, which is not entirely predictable. In 1998, the
Company began to accrue future Guaranty Fund assessments related to the current
year based on recent years' experience. Prior to 1998, Guaranty Fund
assessments were expensed when paid.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Underwriting expenses increased $254,000, or 10%, from $2.5 million for the
nine months ended September 30, 1997 to $2.7 million for the nine months ended
September 30, 1998. The increase in expenditures was due to a variety of
factors, including increases in salary and employee relations costs ($295,000);
guaranty assessments ($174,000) and premium taxes ($139,000); offset with
decreases in
64
<PAGE>
other categories. Salary and employee relations costs increased due to the
continued upgrading of management positions in anticipation of the
Reorganization. Guaranty Fund assessments reflect expected future assessments
for the current year. Premium taxes increased due to an increase in written
premium. For the nine months ended September 30, 1998, premium taxes of $110,000
have been deferred as acquisition costs.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Underwriting expenses increased $480,000, or 20%, to $2.9 million for the
year ended December 31, 1997 from $2.4 million for the year ended December 31,
1996. The increase in expenditures was due primarily to increases in salary and
employee relations costs ($207,000); Guaranty Fund assessments ($145,000); and
legal and auditing fees ($87,000). The increase in salary and employee
relations costs is attributable to the upgrading of staff and management
positions by the Company in marketing, underwriting and accounting. Guaranty
Fund assessments increased substantially due to payments in 1997 compared to
refunds received in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Underwriting expenses decreased $45,000, or 2%, to $2.4 million for the
year ended December 31, 1996 from $2.5 million for the year ended December 31,
1995. Decreased salary and employee relations costs ($225,000) was offset by
increased legal and auditing fees ($92,000) as well as other increased
expenditures.
-----------------------------------------
OTHER EXPENSES
-----------------------------------------
Other expenses include expenditures for subsidiary operations which are not
directly related to the issuance of medical professional liability insurance,
including insurance brokerage, insurance agency and physician services; as well
as costs associated with unrelated one-time events such as the Reorganization.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Other expenses increased $949,000, or 222%, from $428,000 for the nine
months ended September 30, 1997 to $1.4 million for the nine months ended
September 30, 1998. The substantial increase for the nine months ended
September 30, 1998 was due to $509,000 of legal, accounting and professional
fees associated with the Reorganization; and $268,000 in expenditures for start-
up operations of the management services organization. The management services
organization was established in 1997 to provide physicians with a variety of
administrative support and other services, but did not have substantive
operations until 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Other expenses decreased $252,000, or 27%, from $928,000 for the year
ended December 31, 1996 to $676,000 for the year ended December 31, 1997. This
decrease is reflective of reduced salary and other operating expenditures in
both the insurance brokerage and insurance agency subsidiaries.
65
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Other expenses decreased $779,000, or 46%, from $1.7 million for the year
ended December 31, 1995 to $928,000 for the year ended December 31, 1996.
Expenditures related to the physicians services organization decreased by
$279,000 for the year ended December 31, 1996 compared to higher start-up costs
incurred for the year ended December 31, 1995. In addition, in 1995, $487,000
of salary costs were incurred associated with a management transition.
-----------------------------------------
FEDERAL INCOME TAXES
-----------------------------------------
The effective tax rate for the Company is lower than the federal statutory rate
almost entirely due to nontaxable investment income.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
----------------------------------- ----------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Federal income tax at
statutory rates 34% 34% 34% 34% 34%
Tax exempt income, net (7) (38) (42) (4) (13)
Dividends received, net (1) (7) (8) (6) (9)
Reorganization costs 4 --- --- --- ---
Other, net (2) 2 1 (1) 1
-- ---- ---- ---- ----
Federal income tax at
effective rates 28% (9)% (15)% 23% 13%
== ==== ==== ==== ====
</TABLE>
The Company's net deferred tax assets are created by temporary differences that
will result in tax benefits in future years due to the differing treatment of
certain items for tax and financial statement purposes. The primary difference
is the requirement to discount or reduce loss reserves for tax purposes because
of their long-term nature.
<TABLE>
<CAPTION>
September 30, December 31,
------------------------- -----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Deferred federal income tax asset $ 2,630,000 $ 3,159,000 $2,793,000 $ 3,495,000 $ 2,999,000
========= ========== ========= ========= =========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Tax expense for the nine months ended September 30, 1998 was $969,000
compared to a $63,000 tax benefit for the nine months ended September 30, 1997.
The Federal corporate income tax rate of 34% was reduced to an effective tax
benefit rate of 9% for the nine months ended September 30 1997 due to tax-
exempt income and nontaxable dividends received. The effective rate was 28% for
the nine months ended September 30, 1998. This increase in federal income tax
is reflective of the increased income before income tax for the period.
66
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The tax benefit for the year ended December 31, 1997 was $122,000, compared
to a tax expense of $303,000 for the year ended December 31, 1996. The Federal
corporate income tax rate of 34% was reduced to an effective rate of 23% for
1996 due to tax-exempt income and nontaxable dividends received. The 15% tax
benefit rate for 1997 was achieved primarily due to a 42 point reduction to the
34% Federal tax income tax rate due to the exclusion of tax-exempt income, as
well as an 8 point reduction due to nontaxable dividends received.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Tax expense for the years ended December 31, 1996 and 1995 was $303,000 and
$104,000, respectively. The Federal corporate income tax rate of 34% was
reduced to an effective rate of 23% for 1996 and an effective rate of 13% in
1995 due to tax-exempt income and nontaxable dividends received.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GROUP
FINANCIAL CONDITION AND CAPITAL RESOURCES. Group is a stock holding
company whose operations and assets primarily consist of its ownership of NCRIC
and other subsidiaries. In addition, as a result of the Reorganization, Group
has greater access to the capital markets. This allows Group to assist its
subsidiaries in their efforts to compete effectively and create long-term
growth. As a part of this strategy, Group may seek to take advantage of
acquisition opportunities and alternative financing. In connection with the
loan to finance the acquisition of HCI and HCIV and the assets of EBSI, NCRIC is
required to covenant to pay dividends to Group (subject to regulatory limits) to
service the loan if the cash flow of NCRIC MSO is inadequate to service the
loan. See "Business--Business Strategy" and "Business--HCI and EBSI
Acquisitions."
LIQUIDITY. Liquidity is a measure of an entity's ability to secure enough
cash to meet its contractual obligations and operating needs. Group's cash flow
from operations will consist of dividends from subsidiaries, if declared and
paid, and other permissible payments from its subsidiaries, offset by fees paid
to NCRIC, for management services and other expenses. Group intends to rely
primarily on such cash flow from NCRIC to pay dividends on its common stock, if
any. The amount of future cash flow available to Group may be influenced by a
variety of factors, including NCRIC's financial results and DISR regulation.
See "Business--Regulation."
The payment of dividends to Group by NCRIC is subject to limitations
imposed by the District of Columbia Holding Company System Act of 1993 (the "DC
Holding Company Act"). Under the DC Holding Company Act, NCRIC must seek prior
approval from the Commissioner to pay any dividend which, combined with other
dividends made within the preceding 12 months, exceeds the lesser of (A) 10% of
the surplus at the end of the prior year or (B) the prior year's net income
(excluding realized capital gains). Net income for the 2 years preceding such
year is carried forward for purposes of the calculation to the extent not paid
in dividends. The law also requires that an insurer's statutory surplus
following a dividend or other distribution be reasonable in relation to the
insurer's outstanding liabilities and adequate to meet its financial needs. The
District of Columbia permits the payment of dividends only out of unassigned
statutory surplus. Using these criteria, as of the date of Reorganization NCRIC
would have had available approximately $2.0 million of unassigned statutory
surplus available for dividends.
67
<PAGE>
Unless otherwise specified, the following information is as of
September 30, 1998:
NCRIC
LIQUIDITY. The primary sources of NCRIC's liquidity are insurance
premiums, net investment income, recoveries from reinsurers and proceeds from
the maturity or sale of invested assets. Funds are used to pay claims, LAE,
operating expenses, reinsurance premiums and taxes; and to purchase investments.
NCRIC had positive cash flow from operations for both the year ended
December 31, 1996 and December 31, 1997. Cash provided by operating activities
of NCRIC was $1.6 million in 1997 and $5.3 million in 1996. The smaller amount
of cash flow in 1997 compared to 1996 was due to increased Renewal Credits and
additional discounts given to renewing policyholders; and an increase in the
swing-rated deposit premium advanced to the reinsurers. Because of the long-
term nature of both the payment of claims and the settlement of swing-rated
reinsurance premiums due to the reinsurers, cash from operations for a medical
professional liability insurer such as NCRIC can vary substantially from year to
year. NCRIC had negative cash flow from operations of $2.1 million for the year
ended December 31, 1995. The cash flow for the year ended December 31, 1996 was
$7.4 million more than the cash flow for the year ended December 31, 1995 due to
lower reinsurance ceded, partially offset by increased claim settlements for
1996. Cash flow from operations for the nine months ended September 30, 1998
increased $3.3 million to $8.4 million compared to $5.1 million for the nine
months ended September 30, 1997. The increased cash flow was primarily due to
$1.5 million in additional premiums collected and a $1.0 million reduction in
losses and LAE paid.
In addition to the positive cash generated from operations, NCRIC sold its
building in 1997. The $1.2 million net proceeds were invested in the securities
portfolio.
FINANCIAL CONDITION AND CAPITAL RESOURCES. NCRIC invests its positive cash
flow from operations primarily in investment grade, fixed maturity securities.
As of September 30, 1998, the carrying value of NCRIC's securities portfolio was
$103.9 million, compared to a carrying value of $94.4 million at December 31,
1997, $89.6 million at December 31, 1996, and $83.5 million at December 31,
1995. The portfolios were invested as follows:
<TABLE>
<CAPTION>
September 30, December 31,
-------------- --------------------
1998 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
U. S. Government and agencies 29% 30% 22% 37%
Mortgage-backed securities 27 25 35 34
Tax-exempt securities 20 22 22 1
Corporate bonds and preferred
stocks 24 23 21 28
</TABLE>
Over 82% of the portfolio at September 30, 1998 was invested in US
Government/agency securities or has a rating of AAA or AA. See "Business-
Investment Portfolio." For regulatory purposes, 100% of the securities
portfolio is rated "Class 1" for all periods presented, which is the highest
quality rated group as classified by the NAIC.
NCRIC believes that all of its fixed maturity securities are readily
marketable. Investment duration is closely monitored to provide adequate cash
flow to meet operational and maturing liability needs. Asset and liability
modeling, including sensitivity analyses and cash flow testing, are performed on
a regular basis.
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<PAGE>
NCRIC has no corporate debt. On December 8, 1998, Sequoia National Bank
approved a loan to the Company in the amount of $2,200,000 at an annual interest
rate of prime + 3/4 of a percentage point to finance the acquisition of HCI and
HCIV and the assets of EBSI, secured by all of the stock of HCI.
The $2.5 million line of credit available as of December 31, 1997 is
restricted to working capital for claim settlements. The line of credit is
unsecured and renewable annually. NCRIC has not drawn down on this facility.
As of September 30, 1998, NCRIC had no material commitments for capital
expenditures.
The equity of NCRIC was $27.5 million at December 31, 1997, $25.4 million
at December 31, 1996 and $25.8 million at December 31, 1995. The $2.1 million
increase for the year ended December 31, 1997 was due to $959,000 of net income
in 1997, as well as an unrealized appreciation (net of tax) in the investment
portfolio of $1.1 million. The decrease in equity for the year ended December
31, 1996 resulted from $991,000 of net income in 1996, offset by unrealized
investment losses of $1.4 million. The equity of NCRIC at September 30, 1998
was $31.9 million. The $4.4 million increase in equity for the nine months
ended September 30, 1998 was due to $2.5 million in net income and $1.9 million
in unrealized appreciation (net of tax) in the investment portfolio.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The primary effect of inflation on the Company is in estimating reserves
for unpaid losses and LAE for medical professional liability claims in which
there is a long period between reporting and settlement. The rate of inflation
for malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on the Company's results cannot be
conclusively known until claims are ultimately settled. Based on actual results
to date, the Company believes that loss and LAE reserve levels and the Company's
ratemaking process adequately incorporate the effects of inflation.
Interest rate changes expose the Company to a market risk on its investment
portfolio. This market risk is the potential for financial losses due to the
decrease in the value or price of an asset resulting from broad movements in
prices, such as interest rates. In general, the market value of the Company's
fixed maturity portfolio increases or decreases in an inverse relationship with
fluctuation in interest rates. In addition, the Company's net investment income
increases or decreases in a direct relationship with interest rate changes on
monies re-invested from maturing securities and investments of positive cash
flow from operating activities.
YEAR 2000 ISSUES
Many computer systems (hardware) and computer programs (software) were
designed to accommodate only two-digit fields to represent a given year (for
example, "98" represents 1998). The computer hardware and software
automatically understands the two-digit indicator to be associated with the
twentieth century and assigns the first two digits as "19." This design results
in the inability of these computer systems to recognize post-twentieth century
dates and to properly accept, process or display information related to the next
century. If not corrected, this could result in system or electronic equipment
failures, or miscalculations causing disruption of the Company's business
operations.
The Company's overall compliance initiatives have included the assignment
of a task force to provide an assessment of the Company's exposure to the Year
2000 issues. The comprehensive program to address each aspect of the Year 2000
issues has included an assessment of all critical business systems; remediation
or upgrading of critical systems; implementation of modified and updated
systems; testing of both modified and updated systems as well as integrated
systems testing; and contingency planning. The study has included an evaluation
of both the Company's internal hardware and software systems, as well as
exposure from service providers, brokers and other external business partners.
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<PAGE>
The Company has completed an assessment of all of its critical internal
hardware and software systems. Internal computer hardware has been determined
to be Year 2000 compliant based on manufacturers' representations. Software
systems that are not Year 2000 compliant are in the process of being upgraded
through updates supplied by the vendors; being replaced by new systems; or being
brought into compliance through the remediation efforts of certain outside
vendors. Specifically, the Company's computer systems and application software
that relate to policy administration, billing and claims are Year 2000
compliant. Office automation software programs that are not Year 2000 compliant
will be replaced during 1999.
For those systems which are in compliance, the Company has successfully
completed stand-alone testing. During 1999, the Company will complete testing
of those systems which are in the process of being modified. In addition, while
most of the Company's computer hardware, software, telecommunications and
desktop applications operate as stand-alone systems, there is some level of
interdependency among the systems. The Company intends to complete full-scope
integrated systems testing during 1999. The Company has begun to contact its
outside vendors and critical business partners concerning their Year 2000
compliance efforts. This process will also be completed in mid 1999.
The Company estimates that it has incurred internal and external costs
associated with the Year 2000 effort of approximately $36,000 for the year ended
December 31, 1997. (No expenditures were incurred for the years ended December
31, 1996 or December 31, 1995). The Company anticipates incurring internal and
external costs of approximately $15,000 during 1998 and 1999.
Although there can be no assurances, the Company believes that its internal
operations will be sufficiently compliant that the Year 2000 issues should not
cause a material disruption in its business. Despite these efforts, there can
be no guarantee that the systems of other companies on which the Company relies
will be Year 2000 compliant. Any failure associated with this non-compliance
could have a material effect on the Company. While the Company believes that
the Year 2000 issues will not cause an adverse effect on its ability to conduct
its operations, it has begun to explore various contingency plans in order to
complete the most critical aspects of its business operations in the event of
any failures in the remediation efforts.
FEDERAL INCOME TAX MATTERS
For tax years prior to the Stock Offering, the Company filed a consolidated
United States federal income tax return. For tax years after the Stock
Offering, the Company will not file as part of a consolidated United States
federal income tax return with the Mutual Holding Company or Holdings because
the Mutual Holding Company and Holdings will own directly and indirectly less
than 80% of the outstanding shares of Group. Tax years 1995, 1996 and 1997 are
open but not currently under audit.
REGULATORY MATTERS
NAIC Statutory Accounting Codification. The NAIC is currently in the
process of codifying statutory accounting practices, which are the accounting
rules and guidelines prescribed or permitted by the state insurance regulators.
Prescribed statutory accounting practices include state laws, regulations and
NAIC guidelines. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state and company to company. This project is intended to re-examine
current statutory accounting practices and to ensure uniform accounting
treatment from a regulatory standpoint. The accounting mandated by the
codification is expected to apply commencing January 1, 2001, and is likely to
result in changes to current accounting treatments permitted by state
regulators. Any statutory accounting changes mandated as a result of this
codification will not have an effect on the financial statements prepared in
accordance with GAAP, which have been included in this document and filed with
the Securities and Exchange Commission.
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<PAGE>
NAIC IRIS RATIOS. The NAIC Insurance Regulatory Information System
("IRIS") is an early warning system that is primarily intended to be utilized by
the state and District of Columbia insurance department regulators to assist in
their review and oversight of the financial condition and results of operations
of insurance companies operating in their respective states. IRIS is a ratio
analysis system that is administered by the NAIC. The NAIC provides the state
and District of Columbia insurance department regulators with ratio reports for
each insurer within their jurisdiction based on standardized annual financial
statements submitted by the insurers. IRIS identifies 12 ratios to be analyzed
for a property-casualty insurer, and specifies a range of values for each of
these ratios. The ratios address various aspects of each insurer's financial
condition and stability including profitability, liquidity, reserve adequacy and
overall analytical ratios. Departure from the "usual range" of a ratio may
require the submission of an explanation to the state insurance regulator.
Departure from the usual range on four or more ratios may lead to increased
regulatory oversight from the state regulator.
For both 1996 and 1997 the Reciprocal was outside the usual range on the
ratio of estimated current reserve deficiency to surplus. This ratio provides
an estimate of the adequacy of loss reserves maintained based on the change in
net premiums from year to year. This ratio fell outside the usual range for both
years due to a change in the Reciprocal's net premiums written, which takes into
account premiums ceded under the reinsurance program. Due to favorable loss
development, the previously estimated swing rated reinsurance premium due from
prior years was reduced. In addition, the maximum premium rate due under the
reinsurance program was reduced in 1996 and again in 1997. This premium ceded
reduction resulted in an inappropriate indication of inadequate reserves. In
addition, for 1996 the change in net writings (net premiums written) ratio was
out of the usual range of values. This again was due to the reduction in
reinsurance premiums. For all years, the Reciprocal was within or favorably
exceeded the usual range for the remainder of the IRIS ratios.
NAIC RISK-BASED CAPITAL. The NAIC has established a methodology for
assessing the adequacy of each insurer's capital position based on the level of
statutory surplus and an evaluation of the risks in the insurer's product mix
and investment portfolio profile. This risk-based capital ("RBC") formula is
designed to allow state insurance regulators to identify potentially under-
capitalized companies. For property-casualty insurers, the formula takes into
account risks related to the insurer's assets (including risks related to its
investment portfolio) and the insurer's liabilities (including risks related to
the adverse development of coverages underwritten). The RBC rules provide for
different levels of regulatory attention depending on the ratio of the insurer's
total adjusted capital to the "authorized control level" of RBC. For all
periods presented, NCRIC and CML's total adjusted capital levels were
significantly in excess of the authorized control level of RBC. Management
believes that the RBC levels will be significantly in excess of the authorized
control level of RBC as of the closing of the Stock Offering. As a result, the
RBC requirements are not expected to have an impact upon the Company's
operations. Following is a presentation of the total adjusted capital for NCRIC
and CML compared to the authorized control level of RBC:
<TABLE>
<CAPTION>
Authorized Control Level
Risk-based Capital Total Adjusted Capital
-------------------- ----------------------
NCRIC CML NCRIC CML
----- ------------- ----------- ---------
<S> <C> <C> <C> <C>
(in millions)
December 31, 1997 $3.7 $.14 $23.2 $4.9
1996 3.8 .12 22.4 5.3
1995 4.8 .16 21.2 4.6
</TABLE>
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<PAGE>
BUSINESS
BUSINESS OVERVIEW
The Company is a medical professional liability insurance company servicing
healthcare providers in the Mid-Atlantic region. Created by District of
Columbia physicians in 1980 when medical professional liability insurance was
either unavailable or prohibitively expensive, the Company has provided high
quality insurance products to its insureds in the District of Columbia
metropolitan area, a legal jurisdiction which has rejected tort reform and has
the highest cumulative average medical professional liability jury awards of any
jurisdiction in the United States. The Company's success rests, among other
factors, on its ability to successfully litigate claims, reduce its insured's
loss exposure through effective risk management and provide its insureds with
individualized service. Recognizing the value of the Company's insurance
products, 98% of the Company's insureds renewed their policies in 1998. The
Company believes that it successfully managed the medical professional liability
insurance crisis of the early 1980's and has prospered since through a
combination of physician governance and professional management expertise.
Over the past three years, the Company has distributed a customer
satisfaction survey. In 1998, 62% of the Company's insureds responded to the
survey and 92% of those who responded indicated that they were "always pleased"
or "almost always pleased" with the Company's service. Comparable ratings for
1997 and 1996 were 91% and 90% respectively.
According to A.M. Best, in 1997 44% of the direct premiums written for
physician and hospital professional liability insurance in District of Columbia
were written by the Company. The Company's two principal competitors have a
combined market share of 30%. However, the A.M. Best data includes all medical
professional liability insurance sold in the District of Columbia including
insurance purchased by institutions such as hospitals, which the Company does
not insure, but which are insured by its principal competitors. Therefore, the
A.M. Best data does not accurately reflect the Company's market share of the
portions of the District of Columbia medical professional liability market in
which it participates. In addition, during the nine months ended September 30,
1998, the Company generated approximately 10% of its premiums in Maryland,
Virginia and West Virginia. The Company's market share is less than 2% in each
of these markets. As of September 30, 1998, the Company had approximately 1,200
medical professional liability policies outstanding in all of its markets. The
majority of the Company's premiums are generated from individual and small-group
practices, but it also has risk sharing programs with groups of physicians
sponsored by metropolitan Washington, D.C. area hospitals. The Company
primarily markets its products directly to its physician clients. The Company
also markets its products through independent brokers and agents who currently
produce less than 2% of its direct premiums written.
Medical professional liability insurance insures the physician or other
healthcare provider against liabilities arising from the rendering of, or
failure to render, professional medical services. The Company's policies are
written on a claims-made basis and include legal defense against asserted
professional liability claims. In addition to the Company's medical
professional liability insurance operations, the Company has a reinsurance
brokerage operation, an insurance agency, a physicians organization and a
management services organization.
CML, a wholly-owned subsidiary of NCRIC, provides medical professional
liability insurance in Virginia and other jurisdictions. CML was formed in 1989
and started writing policies in Virginia in 1991. Currently, CML is licensed to
write policies in the District of Columbia, Virginia and West Virginia. CML's
policies closely resemble NCRIC's policies except that insureds of CML do not
become members of the Mutual Holding Company.
National Capital Insurance Brokerage, Inc. ("NCIB"), a wholly-owned
subsidiary of NCRIC, was formed in 1984 to serve as the Company's domestic
reinsurance broker. NCIB has retained commission income which would otherwise
have been paid to outside reinsurance brokers. This income has been used by the
Company to offset other operating expenses. NCIB has also played a critical
role in restructuring the Company's reinsurance program to provide effective and
comprehensive reinsurance coverage without reducing the Company's profitability.
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<PAGE>
In 1996, NCIB conducted a thorough analysis of the Company's reinsurance
program. As a result of this review and internal efforts undertaken by the
Company, NCRIC significantly reduced its current and future reinsurance costs.
NCRIC Insurance Agency ("NIA"), a wholly-owned subsidiary of NCRIC,
acquired certain life, health and disability insurance business from Medical
Society Services, Inc. in 1989. In 1992, NIA also began offering property and
casualty products. As an insurance agent, NIA receives commissions for business
it places for sponsored insurance companies. NIA markets insurance products not
underwritten by the Company. This permits the Company's core insureds to obtain
a wider range of insurance products through the Company.
NCRIC Physicians Organization, Inc. ("NCRIC PO"), a wholly-owned subsidiary
of Group, manages a coalition of physicians working with hospitals and ancillary
healthcare providers which contract with managed care payers as an exclusive
healthcare provider network. NCRIC PO began with approximately 600 physicians
in 1994 and currently is the largest physician-governed healthcare provider
network in the Washington, D.C. metropolitan area with 1,800 physicians
(approximately 600 of NCRIC PO's members are insureds of the Company). NCRIC PO
achieved its 1998 growth through alliances with two major area networks which
added 600 new physicians. NCRIC PO has established three fee-for-service
contracts with area payers, has formed alliances with other provider networks
which have added seven additional fee-for-service contracts in 1998 and
continues to work on achieving the goals it set for itself when it was
organized. NCRIC PO has also maintained a PPO contract with NYLCare of the Mid
Atlantic Region which resulted in more than 2,000 patient encounters and
$550,000 in provider billing to NCRIC PO members in 1997.
NCRIC MSO, Inc. ("NCRIC MSO"), a wholly-owned subsidiary of Group, has been
a start-up operation with limited activity. In order to substantially
accelerate NCRIC MSO's entry into the practice management, financial services
and employee benefits markets, the Company has entered into definitive
agreements to complete the Practice Management and Financial Services
Acquisition. See "-- Practice Management and Financial Services Acquisition."
The Company's direct premiums written and net income were $17.9 million and
$959,000, respectively, for the year ended December 31, 1997 and were $18.8
million and $2.5 million, respectively, for the nine months ended September 30,
1998. As of September 30, 1998, the Company had $135.9 million in total assets
and $31.9 million of total equity.
The Company believes it can best leverage its strengths and appeal to
customers by maintaining conservatism in its financial accounts. In line with
this philosophy, as of September 30, 1998, the Company has established, on a
gross basis, $82.3 million in loss reserves. The Company believes that its loss
reserves are adequate to meet future losses. The Company's conservative
estimation of loss reserves is demonstrated by its favorable loss developments
in each year since 1990. These favorable loss developments have contributed
significantly to the Company's reported earnings. (See "Loss and LAE Reserves"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
CURRENT HEALTHCARE ENVIRONMENT
The greatest challenge to physicians in the current healthcare marketplace
is that physician revenues are declining, while the cost of delivery of medical
services is rising. Since the early 1990's, health insurance companies and
other third party payers, including the federal and state governments through
Medicare and Medicaid, have increasingly favored a "managed care" form of
reimbursement. Third party payers believe that managed care plans will result
in lower healthcare costs because the managed care plan, rather than physicians,
manage the delivery of healthcare services. Instead of a traditional fee-for-
service payment structure, managed care generally requires the physician to
provide medical services to potential clients at a significantly reduced
reimbursement rate or for a fixed capitation payment, with the physician bearing
the risk that the actual costs of medical services to individual groups of
patients will exceed the capitation payment.
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An early response to managed care was the decision of national physician
practice management companies ("PPMCs"), local hospital systems and health
management organizations ("HMOs") to acquire numerous independent physician
practices and form one large group under common ownership. Management believes
that many PPMC and HMO acquisitions have failed due to the unwillingness of
physicians to remain employees of practices they no longer controlled.
Unsuccessful corporate restructuring by local hospital systems has resulted in
additional failures. Many local hospital systems are currently attempting to
control losses by divesting themselves of unprofitable physician practices.
The Company believes that acquisitions of physicians' practices across
divergent market places prevented the larger groups from being closely
integrated in any local market (an essential component of a successful medical
practice). In addition, significant administrative fees and other costs were
often imposed on acquired practices which were already facing revenue and
expense constraints prior to being acquired. Finally, PPMCs were often unable
to retain the physicians who had sold their practices. Conflicting goals on how
physician services should be delivered frequently caused physicians to terminate
their employment with the PPMC.
The inability of some PPMCs, local hospital systems and HMOs to operate
profitably does not mean that managed care will not continue to profoundly
affect the practice of medicine. Solo and small group practitioners, in
particular, may have difficulty surviving in the managed care healthcare
environment, unless they can pool their resources to economically obtain the
management expertise and resources necessary to reduce costs and remain
profitable. Medical professional liability insurance costs are among the costs
that physicians will seek to reduce. The Company anticipates that the stronger
bargaining power of a group of physicians will enable these physicians to
negotiate lower premium rates, thus reducing the Company's premium income. The
Company intends to offset potential lower premium income from its traditional
professional medical liability insurance products by providing products and
services that appeal to the larger groups including: (1) creating new risk
sharing structures for larger groups; (2) managing the practices of the larger
groups as one risk versus disparate risks; (3) providing claims and risk
management services independently of its core insurance products on an
"unbundled" basis; and (4) wrapping in managed care errors and omissions
coverage and provider stop-loss excess insurance. The Company has already begun
implementing this strategy by entering into risk sharing arrangements with and
providing risk management services to large groups of physicians sponsored by
metropolitan Washington, D.C. hospitals. The Company does not intend to adopt
the PPMC model of purchasing physician practices.
THE COMPANY'S VISION
The Company intends to become a healthcare financial services organization
which provides individual physicians and groups of physicians with economical
high quality medical professional liability insurance and the practice
management and financial services necessary for them to succeed in the managed
care healthcare environment. Management believes that the Company is well
positioned to accomplish these goals because it has a loyal policyholder base to
build upon and anticipates raising new capital in the Stock Offerings. If
completed, the Practice Management and Financial Services Acquisition (see
"Practice Management and Financial Services Acquisition") will substantially
enhance the Company's ability to provide independent physicians with essential
practice management expertise. The Company will be a well-capitalized physician
financial services organizations in the Mid-Atlantic region.
The ability to cross-sell services and products will be greatly enhanced by
the current direct channels of distribution and the strong retention of clients
by the Company, HCI, HCIV and EBSI. The Company will attempt to sell its
medical professional liability products and services to some of HCI's, HCIV's
and EBSI's approximately 1,200 physician clients (including affiliates) which
will expand the Company's geographic coverage area. In addition, the Practice
Management and Financial Services Acquisition will substantially add to the
Company's ability to provide practice management and employee benefit services
to its approximately 1,200 physician insureds. Together with the approximately
1,200 members of NCRIC PO who are not insured by the Company, on the completion
of the Practice Management and Financial Services Acquisition, the Company will
be providing some products and services to approximately 3,500 physicians.
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<PAGE>
CORE INSURANCE PRODUCTS
The Company underwrites medical professional and office premises liability
policy coverages for physicians, physician medical groups and clinics, managed
care organizations and other providers in the healthcare industry. The Company
currently issues policies on a claims-made basis. Claims-made policies provide
coverage to the policyholder for claims occurring and reported during the period
of coverage. The Company also offers prior acts insurance coverage to new
insureds, subject to the new insureds' meeting the Company's underwriting
criteria. Such coverage extends the effective date of claims-made policies to
designated periods prior to the physician's becoming an insured of the Company.
Insureds are insured continuously while their claims-made policy is in force.
PHYSICIAN AND MEDICAL GROUP LIABILITY. The Company offers separate policy
forms for physicians who are solo practitioners and for those who practice as
part of a medical group or clinic. The policy issued to solo practitioners
includes coverage for professional liability that arises in the medical practice
and also for certain other "premises" liabilities that may arise in the non-
professional operations of the medical practice, such as slip and fall
accidents. The professional liability insurance for solo practitioners and for
medical groups provides protection against the legal liability of the insureds
for such things as injury caused by or as a result of the performance of patient
treatment, failure to treat and failure to diagnose.
POLICY LIMITS. The Company offers limits of insurance up to $5 million per
claim, with up to a $7 million aggregate policy limit for all claims reported
for each calendar year or other 12-month policy period. The most common limit is
$1 million per claim, subject to a $3 million aggregate policy limit. Higher
limits and excess coverage can also be written in conjunction with special
reinsurance arrangements.
REPORTING ENDORSEMENTS. Reporting endorsements are offered for physicians
terminating their policies with the Company. This coverage extends the period
indefinitely for reporting future claims resulting from incidents occurring
while a claims-made policy was in effect. The price of the reporting
endorsement coverage is based on the length of time the insured has been covered
by the Company. The Company provides free reporting endorsement coverage for
insured physicians who die or become disabled so that they cannot practice their
specialty during the coverage period of the policy and those who have been
insured by the Company for at least five consecutive years, attain the age of 55
and retire completely from the practice of medicine.
PRACTICEGUARD. The Company has established a limited defense reimbursement
benefit for proceedings by governmental disciplinary boards. The Company
provides this coverage to its insureds automatically without a surcharge.
PracticeGuard provides legal counsel to defend licensure actions brought by the
District of Columbia or a State Medical Licensing Board, actions involving
medical staff credentialing committees, actions to remove physicians from
participation in a managed care plan and actions to limit participation in
government programs such as Medicare and Medicaid.
MANAGED CARE ORGANIZATION ERRORS AND OMISSIONS. The Company has recently
introduced a policy for managed care organizations that provides coverage for
liability arising from the errors and omissions in managed care operations, for
the vicarious liability of a managed care organization for the acts or omissions
of non-employed physician providers and for liability of directors and officers
of a managed care organization. These policies are issued on a claims-made
basis, and 95% of the risk associated with these policies is reinsured. The
annual aggregate limits of coverage under the current managed care organization
policies issued by the Company are currently $2 million. Through the Company's
reinsurance arrangements, it has the capacity to write managed care organization
policies with aggregate limits of up to $10 million. Managed care organization
policies have not been a significant source of revenue in 1998.
NON-STANDARD PHYSICIAN PROGRAM. The Company also has a non-standard
physician program for physicians who do not meet certain of the Company's
underwriting standards. The Company carefully evaluates the additional risk it
assumes when it insures non-standard physicians. A surcharge is applied to the
premiums of non-
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standard physicians to compensate the Company for the higher level of risk the
Company is assuming. The Company monitors the activities of its non-standard
insureds more closely than those of its standard insureds and attempts to
rehabilitate its non-standard insureds through risk management training. The
non-standard physician program has not been a significant source of revenue
in 1998.
DIRECT PREMIUMS. The following table summarizes the Company's physician
and medical group professional liability direct premiums as of November 16,
1998:
<TABLE>
<CAPTION>
Direct Premiums Percentage of
Group Size Written Total
- -------------------------------------------- ---------------- --------------
(In Thousands)
<S> <C> <C>
Solo practitioner physicians $ 6,759 40.4%
Groups with two physicians 1,022 6.1
Groups with three or more physicians 4,497 26.9
Sponsored Programs, including risk sharing 4,440 26.6
-------- ------
Total $16,718 100%
======== ====
</TABLE>
OCCURRENCE BASIS POLICIES. Until July 1, 1986, the Company issued policies
on an occurrence basis. Occurrence policies provide coverage to the policyholder
for all losses incurred during the policy year regardless of when the claims are
reported. As of September 30, 1998, the Company has loss and LAE reserves in
the amount of $2.3 million in connection with its potential liability under
occurrence policies.
MAINTENANCE AND EXPANSION OF CORE INSURANCE PRODUCTS
The Company's future success rests on its ability to ensure that its core
insurance products continue to meet the needs of existing insureds and other
healthcare providers. Growth and retention of the Company's core insurance
business in a managed care environment will be sought through expanding the
Company's relationship with larger groups of physicians and developing
appropriate risk financing vehicles for larger groups. The key elements of the
Company's strategy to compete effectively and create profitable long-term growth
for its core insurance products are the following:
MAINTAIN ITS STRONG FRANCHISE AND CLOSE RELATIONSHIP WITH THE DISTRICT OF
COLUMBIA METROPOLITAN AREA MEDICAL COMMUNITY. The Reciprocal was founded in
1980 with the strong support of the Medical Society of the District of Columbia
("MSDC") and the District of Columbia's physicians. According to A.M. Best, the
Company has 44% of the direct written premiums generated in the District of
Columbia physician and hospital professional liability market. The A.M. Best
data includes insurance purchased by institutions such as hospitals, which the
Company does not insure, but which are insured by its principal competitors.
Thus, the A.M. Best data does not accurately reflect the Company's share of the
medical professional liability insurance markets in which it participates. The
Company maintains the exclusive endorsement of the MSDC, as well as that of the
Virginia-based Arlington County Medical Society. The Company plans to increase
its direct business activity in its core markets by implementing a joint
marketing plan with MSDC and other metropolitan area medical societies. The
Company has set a target of at least a 95% annual retention rate for its core
insurance business in the future. The Articles of Incorporation of the Mutual
Holding Company and NCRIC require that at least two-thirds of the members of
their respective Boards of Directors be physicians. This direct involvement of
physicians enables the Company to better understand medical practice patterns,
claims, customer needs and other relevant matters. It also strengthens the
Company's ties with the physician community.
ENHANCE INSURANCE PRODUCT OFFERINGS TO INCREASE SALES AND STRENGTHEN TIES
WITH PHYSICIANS. The Company has developed other insurance products in addition
to its core medical professional liability insurance
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offerings. These products include comprehensive premises liability coverage for
medical offices and NCRIC Practice Guard.
NEW PRODUCTS. The Company's current new product initiatives include
expanding its dental professional liability offerings and providing claims and
risk management services independently of its core insurance on an "unbundled"
basis.
EXPAND GEOGRAPHICALLY. The Company intends to leverage off of its strong
franchise in the District of Columbia area and its extensive claims and risk
management expertise to expand into nearby states. It has recently expanded
into Virginia, Maryland and West Virginia and has a license pending in Delaware.
According to A.M. Best, these states produced $275 million in medical
professional liability direct premiums written in 1997 for the industry,
providing strong potential growth opportunities. The Company's current premiums
from these states totaled $2 million in the first nine months of 1998. The
Company is also pursuing potential expansion opportunities in other Mid-Atlantic
states.
GROW THROUGH STRATEGIC ACQUISITIONS. The Company believes that
consolidation will continue in the medical professional liability insurance
industry. This may give rise to opportunities for the Company to make strategic
acquisitions to expand its business, product offerings and geographic scope. As
a result of the Reorganization the Company is better positioned to make such
acquisitions, since it has greater access to capital and can issue stock in
connection with an acquisition. In addition, the Company intends to diversify
into other healthcare-related enterprises through strategic acquisitions such as
the Practice Management and Financial Services Acquisition. The Company has no
current acquisition plans other than the Practice Management and Financial
Services Acquisition. With the Practice Management and Financial Services
Acquisition, the Company will have a relationship with over 1,200 additional
potential insureds in markets it has not previously served. See "Practice
Management and Financial Services Acquisition."
MAINTAIN CONSERVATIVE BALANCE SHEET AND STRONG RATINGS. Management
believes that existing and prospective clients evaluate, among other factors,
the financial strength of the Company in any decision regarding the purchase of
medical liability coverage. NCRIC's financial strength, as well as its
franchise and other operating strengths, have resulted in a current A.M. Best
rating of "A-" ("Excellent").
USE LEGAL AND RISK MANAGEMENT EXPERTISE TO VIGOROUSLY REDUCE LOSS COSTS.
The Company's experience with, commitment to and focus on medical professional
liability insurance for 18 years has allowed it to develop strong knowledge of
the local healthcare and legal environments and to build an extensive database
of medical professional liability claims experience. The Company uses this
expertise to select and price risks, to provide risk management services to
prevent or reduce the severity of certain losses and to aggressively defend
against unjustified claims or excessive settlement demands.
BUILD ON DIRECT DISTRIBUTION BY ADDING SALES FROM BROKER/AGENT CHANNEL.
The Company's traditional direct distribution in the District of Columbia has
held down expenses and provided closer ties to its insureds than is usually
obtained through an intermediary. Direct distribution provided 98% of the
Company's renewal premiums in the first nine months of 1998. Of premiums
received from new insureds, 85% were obtained through direct distribution and
15% through brokers and independent agents. The Company believes it can further
improve new business through greater use of brokers and independent agents, both
in connection with geographic expansion and in marketing to larger healthcare
providers. To this end, the Company intends to develop relationships with
selected brokers who have demonstrated expertise in the medical professional
liability insurance market.
PRACTICE MANAGEMENT SERVICES
NCRIC MSO was established by the Company in 1997 to provide practice
management services to physicians. NCRIC MSO sought to develop a range of
practice management services which would give physicians the management
expertise they needed to conduct their practices without requiring physicians to
relinquish
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<PAGE>
ownership or control of their practices. NCRIC MSO intends to be a physician
partner whom physicians can trust to understand their problems and who has the
foresight to develop services to fit their needs. The Company also believes that
the development of management services will solidify its already strong
relationship with its existing insureds and provide it with additional markets
for its core insurance products.
PRACTICE MANAGEMENT AND FINANCIAL SERVICES ACQUISITION
After a lengthy search for a partner who shared its vision, on December 1,
1997 NCRIC MSO entered into a joint venture with HCI to provide practice
management services to its insureds. Critical to the selection of HCI was HCI's
long history of working with physicians and its advocacy of the independent
success of physicians. HCI had also developed successful Independent Group
Practice models ("IGPs") which fit NCRIC MSO's business plan. IGPs integrate
groups of physicians with shared practice management services and common
information systems, while permitting the physicians to maintain individual
ownership of their practices. The joint venture between NCRIC MSO and HCI began
providing services to the Company's insureds in early 1998.
As the joint venture progressed, the Company began discussions regarding
the Practice Management and Financial Services Acquisition. The Company entered
into definitive agreements to acquire all of the outstanding shares of HCI and
all of the outstanding membership interests of HCI's affiliate, HCIV. The
Company has also agreed to purchase all of the assets of EBSI, an employee
benefits company formed by the three shareholders of HCI. The Practice
Management and Financial Services Acquisition will greatly enhance the Company's
ability to provide practice management, employee benefit services and financial
services to physicians in Washington, D.C. metropolitan area and throughout the
Mid-Atlantic region.
HCI. Since 1978, HCI or its predecessor has provided practice management
services, accounting and tax services and personal financial planning services
to medical and dental practices throughout the Mid-Atlantic region. HCI offers
its clients extensive experience and expertise in practice management, managed-
care contracting, information systems implementation, practice evaluations,
billing and collections, personnel, practice structure and management and market
recognition among key players in the healthcare industry. HCI has offices in
Lynchburg, Virginia; Richmond, Virginia; Fredericksburg, Virginia; Roanoke,
Virginia; and Greensboro, North Carolina. On September 30, 1998, HCI had
approximately 50 employees, of whom 12 served as practice management
consultants.
The following table indicates the sources of HCI's revenues during the past
three calendar years:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
PRACTICE MANAGEMENT 46.1% 46.0% 47.3%
ACCOUNTING AND TAX 32.3% 33.4% 31.9%
PERSONAL FINANCIAL PLANNING 10.3% 11.0% 12.6%
OTHER 11.3% 9.6% 8.2%
---- ---- ----
TOTAL 100% 100% 100%
</TABLE>
HCIV. HCIV provides start-up capital to newly-formed management services
organizations. HCIV owns interests ranging from 5% to 20% in four management
services organizations. Created in 1997, HCIV allows HCI to have an equity
ownership interest in the various management services organizations for whom HCI
provides practice management services. HCIV's income has not been material.
EBSI. EBSI provides employee benefits services, plan design, plan
administration and plan asset accounting to approximately 300 clients in the
Mid-Atlantic region. EBSI also manages documentation and required forms
filings. Over 85% of HCI's physician practice clients who qualify for plan
administration services
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<PAGE>
utilize EBSI as their employee benefit plan administrator. While EBSI initially
provided services only to healthcare businesses, currently over 50% of EBSI's
clients are non-healthcare related. On September 30, 1998, EBSI had
approximately ___ employees.
The following table indicates the sources of EBSI's revenues during the
past three years:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
RETIREMENT PLAN ACCOUNTING
AND ADMINISTRATION 89% 94% 96.5%
SECTION 125 CAFETERIA PLAN
ADMINISTRATION 11% 6% 3.5%
---- ---- ----
TOTAL 100% 100% 100%
</TABLE>
SENIOR EXECUTIVE EXPERIENCE. The three owners of HCI, HCIV and EBSI (all
of whom have agreed to enter into five year employment contracts with HCI to
continue in their current positions following the acquisition) have the
experience indicated in the following table:
<TABLE>
<CAPTION>
Years with HCI, Total Years in
HCIV and EBSI Healthcare Consulting
--------------- ---------------------
<S> <C> <C>
L.E. Shepherd 20 26
William A. Hunter 17 17
Barry S. Pillow 13 19
</TABLE>
HCI, HCIV AND EBSI PURCHASE PRICE. The Practice Management and Financial
Services Acquisition purchase agreements contemplate that the Company will pay
$5.1 million in cash (subject to certain adjustments) and deliver a $300,000
mandatorily convertible note pursuant to which Group will deliver 30,000 shares
of its common stock after the closing of the Stock Offering. The Company would
pay a maximum of an additional $3.1 million if HCI, HCIV and EBSI meet or exceed
earnings targets in 2000, 2001 and 2002.
Sequoia National Bank ("Sequoia") has agreed to make a loan to the Company
in the principal amount of $2.2 million to finance a portion of the Practice
Management and Financial Services Acquisition purchase price. The term of the
loan is 7.5 years, and the interest rate is prime plus 0.75% per annum, with an
additional one-half point being payable on closing. Monthly payments will be
interest only for the first six months and blended payments of interest and
principal thereafter. Sequoia has the option to call the loan at the end of 6
months and 3.5 years of the term. The Company will grant as security for the
loan (i) an assignment of all of the capital stock of HCI and the membership
interests of HCIV and (ii) a blanket lien on all of the acquired assets of EBSI.
There is no penalty for prepayment by the Company. NCRIC will loan to Group the
balance of the purchase price of the Practice Management and Financial Services
Acquisition. The terms of the loan from NCRIC to Group will be the same as the
terms of the Sequoia loan except that the loan from NCRIC to Group will be
unsecured and there will be no obligation to pay a one-half point on closing.
MARKETING AND POLICYHOLDER SERVICES
The Company markets directly to its insureds through eight employees
providing sales solicitation and communications services. The Company markets
directly to solo practitioner physicians and other prospective insureds through
its relationships with medical associations, referrals by existing insureds,
advertisements in medical journals, the presentation of seminars on timely
topics for physicians and direct solicitation to licensed physicians. The
Company attracts new physicians through special rates for medical residents and
discounts for physicians just entering medical practice. In addition, the
Company participates as a sponsor and participant in
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<PAGE>
various medical group and hospital administrators' programs, medical association
and specialty society conventions and similar programs. The Company believes
that this personal, comprehensive approach to marketing is essential to
providing medical professional liability insurance, where special knowledge and
experience are a prerequisite.
In addition to these direct marketing channels, the Company sells its
products through independent brokers and agents who currently produce less than
2% of the Company's direct premiums written in the Company's market areas.
Healthcare institutions frequently prefer brokers over direct solicitation when
they purchase medical professional liability insurance. Therefore, the Company
believes that developing its broker relationships in Virginia, Maryland, West
Virginia and Delaware is important to grow its market share. The Company
selects brokers and agents that it believes have demonstrated growth and
stability in the medical professional liability insurance industry, strong sales
and marketing capabilities, and expertise in selling medical professional
liability insurance. Brokers and agents receive market rate commissions and
other incentives averaging 7% based on the business they produce. The Company
strives to maintain relationships with those brokers and agents who are
committed to promoting the Company's products and are successful in producing
business for the Company.
The Company's medical professional liability program is endorsed by the
MSDC and the Arlington County Medical Association. The Company considers these
endorsements to be helpful in its marketing efforts.
The Company also has a policyholder services department that provides
account information to all insureds and maintains relationships with the small
medical groups and solo practitioners insured by the Company. Each of these
smaller insureds has a designated client service representative who can answer
most inquiries and, in other instances, can provide the insured with immediate
access to the person with expertise in a particular department. For hospitals
and large and mid-size medical groups, the Company has an account manager
assigned to each group who heads a service team comprised of underwriting, risk
management and claims management representatives, each of whom may be contacted
directly by the policyholder for prompt response.
RISK MANAGEMENT
The Company provides risk management services that are designed to reduce
potential loss exposures by informing insureds about methods of implementing
risk reduction measures to improve their medical practices. The risk management
committee assists the risk management department to identify loss trends in the
local as well as national market. The risk management committee is comprised of
physicians representing various medical specialties. Through these efforts, the
Company can identify and present topical loss prevention programs.
The majority of the Company's claims result, in part, from a physician's
failure to adequately communicate or document his or her activities. The
Company addressed these topics as well as others in its 1998 Risk Management
Seminar Educational Program. Seminars such as "Constructing an Operative or
Procedure Note" and "Medicare Documentation Guidelines" highlighted the
documentation needs of physicians. Communication issues were the focal point in
"Communication in the Medical Practice" and "Basic Risk Management Principles."
In addition, the Risk Management Program also advises physicians of medical
topics which give rise to malpractice claims. An example of this was the
Company's seminar on "Chest Pain Diagnosis and Treatment." In 1998, 66% of the
Company's insureds attended risk management seminars, earning continuing medical
education credits.
The Company also produces a quarterly newsletter to present additional
topics of interest to physicians. When immediate dissemination of information is
warranted, a risk management alert is distributed. The Company's risk
management staff are also available for consultation with insureds on an
individual basis to review issues which may arise in the insured's practice.
Risk management services supplement the Company's marketing efforts. The
risk management department conducts physician office visits on both a voluntary
and involuntary basis to review practice procedures and focus on specific areas
in which concerns arise. The Company provides office assessments for physicians
on a voluntary basis, consisting of an on-site visit with review of medical
records and office practices. Feedback is given to the physicians in the form
of suggestions made to reduce risk factors in their office.
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<PAGE>
Risk management reviews are also performed at the request of the
underwriting and claims committees. Once the reviews have been completed, a
report is provided to the requesting committee.
CLAIMS AND LITIGATION EXPERIENCE
The claims department of the Company is responsible for claims
investigation, establishment of appropriate case reserves for loss and LAE,
defense planning and coordination, control of attorneys engaged by the Company
to defend a claim and negotiation of the settlement or other disposition of a
claim. The Company's policies obligate it to provide a defense for its insureds
in any suit involving a medical incident covered by its policy, which is in
addition to the limit of liability under the policy. The cost of this defense
is in addition to any payments made by the Company in connection with the claim.
Medical professional liability claims often involve the evaluation of highly
technical medical issues, severe injuries and conflicting expert opinions. In
almost all cases, the person bringing the claim against the physician is already
represented by legal counsel when the Company learns of the potential claim.
The Company emphasizes early evaluation and aggressive management of
claims. When a claim is reported, claims department professionals complete an
initial evaluation and set the initial reserve. After a full evaluation of the
claim has been completed (which generally occurs within seven months), the
initial reserve may be adjusted. The Company has established different levels
of authority within the claims department for settlement of claims.
As of December 1, 1998, the Company had approximately 280 open cases with
an average of 65 cases being handled by each claims representative. The claims
representatives at the Company are all certified paralegals who have on average
over 11 years of experience with the Company and an average of 12 years of prior
experience handling medical professional liability cases. The Company limits
the number of claims handled by each representative to approximately 70 cases.
Management believes that by limiting the case loads of its claims
representatives, all of its insureds who face claims will receive personalized,
professional service, thus enabling claims to be thoroughly investigated, well-
managed and, if they have merit, quickly resolved.
The Company retains locally-based attorneys specializing in medical
professional liability defense to defend claims. The Company also obtains the
services of medical experts who are leaders in their specialties and who bring
integrity, credibility and expertise to the litigation process.
The Company's claims committee is composed of eight physicians from various
specialties including anesthesiology, general surgery and neurosurgery,
obstetrics, internal medicine and radiology. The claims committee meets monthly
to provide evaluation and guidance on claims. The multi-specialty approach of
these physicians adds a unique perspective to the claims handling process in
that there is an opportunity to obtain the opinions of several different
specialists meeting to share their expertise and experience in the area of
liability evaluation and general peer review. This service is invaluable to the
claims representatives and insureds as it provides in-depth analysis of claims.
Federal law requires that any claim payment, regardless of amount, be
reported to a national practitioner data bank which can be accessed by various
state licensing and disciplinary boards, hospitals, other healthcare entities
and professional societies. Thus, the physician is often placed in a difficult
position of knowing that a settlement may result in the initiation of a
disciplinary proceeding or some other impediment to the physician's ability to
practice. The claims department staff must be able to fully evaluate
considerations of settlement or trial and to communicate effectively the
Company's recommendation to its insured. The Company may make such
investigation and, with the written consent of the named insured, such
settlement of any claim or suit as it deems expedient. In the event the named
insured and the Company fail to agree that such claim or suit should be settled,
either party may request a review and decision by a peer review panel selected
in accordance with established Company procedures.
District of Columbia Superior Court rules impact NCRIC's claims handling,
particularly in the area of claims handling expenses. The discovery period,
during which the plaintiff's case must be discerned and, in conjunction with an
attorney, the defense developed, generally takes place over a six- to eight-
month period of
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<PAGE>
intense activity, which increases claims handling expenses. The court-imposed
mediation process has not proven to successfully resolve NCRIC's cases in part
because the volunteer mediators are frequently plaintiffs' attorneys. Trials are
being set about one to one and a half years from the date of service of the
complaint. Despite obstacles presented by the legal environment, management
believes its aggressive claims handling procedures effectively assist the
Company to reduce losses and obtain favorable results.
Proactive approaches to reducing the Company's exposure and improving its
favorable results include the annual claims/legal seminar at which defense
attorneys retained by the Company are present for coordination, discussion and
presentations on all aspects of claims handling.
Trial results from the 34-month period from January 1996 through October
1998 reveal that of the 65 cases tried, 49 (or 75%) were won by the Company, 10
trials resulted in verdicts for the plaintiff, 5 ended in hung juries, and one
was settled. Trial results from the 12-month period from October 1997 through
October 1998 reveal that of the 23 cases tried, 18 (or 78%) were won by the
Company, three trials resulted in verdicts for the plaintiff, and two ended in
mistrials or hung juries.
UNDERWRITING
NCRIC's underwriting committee consists of 12 physicians, all of whom are
insureds of the Company. Members of the committee are not employees of the
Company, but receive compensation for their services on the committee. In
addition to the underwriting committee, the Company has an underwriting
department consisting of three underwriters and two technical and administrative
assistants. The Company's underwriting department is responsible for the
evaluation of applicants for medical professional liability insurance, the
issuance of policies and the establishment and implementation of underwriting
standards for all of the medical professional liability coverages underwritten
by the Company. The Company believes that this combination of medical
professionals and insurance industry professionals gives the Company a
competitive advantage in underwriting services. The physicians on the
underwriting committee are able to assist the underwriting department's
insurance professionals by applying their medical knowledge to better assess
risk.
The Company's underwriting department is responsible for the evaluation of
applicants for medical professional liability coverage, the issuance of policies
and the establishment and implementation of underwriting standards for all of
the coverages underwritten by the Company. The underwriting department provides
information to the underwriting committee to assist the physicians on the
committee in making their decisions.
The Company follows what it believes to be consistent and conservative
procedures with respect to the issuance of all physician professional liability
policies. Each applicant or member of an applicant medical group is required to
complete a detailed application that provides a personal and professional
history, the type and nature of the applicant's professional practice, certain
information relating to specific practice procedures, hospital and professional
affiliations and a complete history of any prior claims and incidents. The
Company performs its own independent verification of these matters and conducts
an investigation to determine if there are any lawsuits that may not have been
disclosed in the application.
The Company performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or changing or unusual practice characteristics is developed
through renewal applications, claims and risk management reports. Each year, the
Company also sends current practice questionnaires to all of its insured
physicians. These questionnaires request information similar to that submitted
in connection with the physician's original application for insurance, and are
designed to detect any changes in the specialty or practice characteristics of
the physician that may require a higher or lower premium rate or possible non-
renewal of insurance.
The underwriting department submits all recommendations for premium
surcharges or non-renewal to the underwriting committee for a final decision.
Physicians have the right to seek reconsideration of surcharges by NCRIC's Board
of Directors, although to date, every request for reconsideration has resulted
in the underwriting committee's decision being upheld. As insureds are often
more comfortable discussing claims and practice issues
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<PAGE>
with their peers, the Company has found that physician interchange with the
committee is a strength of the Company.
RATES
The Company establishes, through its management and independent actuaries,
rates and rating classifications for its physician and medical group insureds
based on the loss and LAE experience it has developed over the past 18 years and
the loss and LAE experience for the entire medical professional liability
market. The Company has various rating classifications based on practice
location, medical specialty and other factors. The Company utilizes various
discounts, including discounts for part-time practice, physicians just entering
medical practice, claim-free insureds and risk management participation.
Certain discounts are designed to encourage lower risk physicians to insure with
the Company. Total discounts granted to a policyholder cannot exceed 25% of
such policyholder's premium. Effective rates equal the Company's base rate,
less any discounts and Renewal Credits provided to the insured. The Company
utilizes national data in developing rates for managed care, since the data for
managed care organization errors and omissions liability is extremely limited,
as tort exposures for these organizations are only recently beginning to
develop.
The Company's base rates increased 6% in 1998, were unchanged in 1997 and
increased 5.6% in 1996. The Company raised its rates in 1998 because of an
increase in the average severity of claims. The Company established its rates
based on its previous loss experience, loss expense adjustments, anticipated
policyholder discounts and the Company's fixed and variable expenses.
Since 1993, the Reciprocal has authorized renewal premium dividend credits
("Renewal Credits") to insureds who renew their policies. Renewal Credits are a
premium credit on the renewal policy's premium. Renewal Credits stabilize
policyholder premiums and improve NCRIC's competitive position relative to other
insurers by encouraging policyholder renewals. For accounting purposes, Renewal
Credits are accrued for the period declared as a reduction of premium income.
NCRIC's insureds are not automatically entitled to Renewal Credits and only
renewing insureds receive Renewal Credits. The Reciprocal has in the past, and
NCRIC will in the future, consider general insurance market conditions as well
as the previous years' loss and loss adjustment expenses in determining whether
or not to authorize Renewal Credits and the amounts of any Renewal Credits.
Since 1993, the Reciprocal authorized Renewal Credits in the following amounts:
<TABLE>
<CAPTION>
Percentage of Earned
Year Amount Renewal Premiums
------ ---------- ---------------------
<S> <C> <C>
1997 $2,245,918 16%
1996 1,452,308 10%
1995 1,560,907 10%
1994 1,806,450 10%
1993 1,829,078 10%
</TABLE>
RISK SHARING ARRANGEMENTS
Since the Company's inception, it has maintained good relationships with
various hospitals in the Washington, D.C. metropolitan area which has led to the
creation of integrated risk sharing programs for groups of physicians practicing
at these hospitals. Risk sharing programs for large physician groups reduce the
premiums of group members if the group experiences favorable loss experience and
its members comply with risk management protocols. These risk management
programs involve an initial premium credit and an annual premium adjustment
following a retrospective review of the loss experience of the physician group.
Should the group's loss experience be unfavorable, the Company will require
additional premium payments to offset the unfavorable losses. Another type of
risk sharing program offered by the Company requires that initial funding of the
premium credit be held by the Company to pay losses. In this type of program,
the Company receives its full gross premium (less applicable credits, otherwise
granted) and pays losses from the premium credit being held; thereafter, any
remaining funds are returned should a retrospective review show favorable loss
experience.
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<PAGE>
Through the establishment of effective and proactive risk management
protocols, these risk sharing programs help lower the risk associated with
medical care provided by the hospital's attending physicians. The programs help
to reduce the severity and the incidence of medical professional liability
claims. They also establish a stable, reliable and cost-effective source of
professional liability coverage for physicians of the program.
LOSS AND LAE RESERVES
The determination of loss and LAE reserves involves projection of ultimate
losses through an actuarial analysis of the claims history of the Company and
other medical professional liability insurers, subject to adjustments deemed
appropriate by the Company due to changing circumstances. Included in its claims
history are losses and LAE paid by the Company in prior periods, and case
reserves for losses and LAE developed by the Company's Claims Department as
claims are reported and investigated. Actuaries rely primarily on such
historical loss experience in determining reserve levels on the assumption that
historical loss experience provides a good indication of future loss experience
despite the uncertainties in loss trends and the delays in reporting and
settling claims. As additional information becomes available, the estimates
reflected in earlier loss reserves may be revised. Any increase (or decrease) in
the amount of reserves, including reserves for insured events of prior years,
would have an adverse (or beneficial) effect on the Company's results of
operations for the period in which the adjustments are made.
The uncertainties inherent in estimating ultimate losses on the basis of
past experience have grown significantly in recent years principally as a result
of judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves in
the casualty insurance business is even greater for companies writing long-tail
casualty insurance, such as medical professional liability insurance, even on a
claims-made basis. This is due primarily to the longer time that typically
elapses between the covered incident and the resolution of the claim.
The Company's independent actuaries review the Company's reserves for
losses and LAE periodically and prepare semi-annual reports that include a
recommended level of reserves. The Company considers this recommendation as well
as other factors, such as loss retention levels and anticipated or estimated
changes in frequency and severity of claims, in establishing the amount of its
reserves for losses and LAE. The Company continually refines reserve estimates
as experience develops and claims are settled. The Company reflects adjustments
to reserves in the results of the periods in which such adjustments are made.
Medical professional liability insurance is a line of business for which the
initial loss and LAE estimates may change significantly as a result of events
occurring long after the reporting of the claim. For example, loss and LAE
estimates may prove to be inadequate because of sudden severe inflation or
adverse judicial or legislative decisions.
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Activity in the liability for unpaid losses and LAE is summarized as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------- ----------------------------
1998 1997 1997 1996 1995
--------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, Beginning of period $75,136 $71,206 $71,206 $72,033 $80,590
Less reinsurance recoverable 17,077 14,679 14,679 16,182 21,925
------- ------- ------- ------- -------
NET BALANCE 58,059 56,527 56,527 55,851 58,665
------- ------- ------- ------- -------
Incurred related to:
Current year 12,653 14,816 19,444 16,775 16,094
Prior years (832) (3,122) (3,853) (1,539) (4,805)
------- ------- ------- ------- -------
Total incurred 11,821 11,694 15,591 15,236 11,289
------- ------- ------- ------- -------
Paid related to:
Current year 1,502 1,320 1,867 2,145 1,448
Prior years 6,648 7,870 12,192 12,415 12,655
------- ------- ------- ------- -------
Total paid 8,150 9,190 14,059 14,560 14,103
------- ------- ------- ------- -------
NET BALANCE 61,730 59,031 58,059 56,527 55,851
Plus reinsurance recoverable 20,600 12,793 17,077 14,679 16,182
------- ------- ------- ------- -------
BALANCE, End of period $82,330 $71,824 $75,136 $71,206 $72,033
======= ======= ======= ======= =======
</TABLE>
The amounts shown above are presented in conformity with generally accepted
accounting principles, and the amounts on the following chart are presented on a
statutory reporting basis. The difference in the net reserves shown in each
table is due to differences in classification of reported liability balances
between the two reporting bases.
The following table reflects the development of reserves for unpaid losses
and LAE for the years indicated, at the end of that year and each subsequent
year. The first line shows the reserves, net of reinsurance recoverable, as
originally reported at the end of the stated year. Each calendar year-end
reserve includes the estimated unpaid liabilities for that coverage year and for
all prior coverage years. The section under the caption "Cumulative Liability
Paid Through End of Year" shows the cumulative amounts paid through each
subsequent year on those claims for which reserves were carried as of each
specific year end. The section under the caption "Re-estimated Liability" shows
the original recorded reserve as adjusted as of the end of each subsequent year
to reflect the cumulative amounts paid and any other facts and circumstances
discovered during each year. The line "Redundancy (deficiency)" sets forth the
difference between the latest reestimated liability and the liability as
originally established.
The table reflects the effects of all changes in amounts of prior periods.
For example, if a loss determined in 1995 to be $100,000 was first reserved in
1987 at $150,000, the $50,000 favorable loss development (original estimate
minus actual loss) would be included in the cumulative redundancy in each of the
years 1987 through 1996 shown below. This table presents development data by
calendar year and does not relate the data to the year in which the claim was
reported or the incident actually occurred. Conditions and trends that have
affected the development of these reserves in the past will not necessarily
recur in the future.
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<PAGE>
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid Losses and LAE....... $23,410 $24,463 $26,098 $32,151 $49,178 $54,783 $53,181 $49,247 $46,248 $46,922
Cumulative Liability Paid Through End
of Year:
One year later..................... 7,539 8,977 6,836 12,561 8,110 11,556 14,424 12,917 14,002 13,076
Two years later.................... 14,603 13,130 16,479 18,552 16,358 23,952 25,181 24,118 23,612
Three years later.................. 17,285 17,143 19,949 21,605 23,002 30,999 31,651 30,586
Four years later................... 19,534 19,188 22,191 25,891 26,878 34,900 35,160
Five years later................... 20,430 20,603 25,307 28,387 29,148 36,738
Six years later.................... 21,157 23,234 26,335 29,115 29,681
Seven years later.................. 22,674 24,242 27,057 29,595
Eight years later.................. 23,612 24,632 27,252
Nine years later................... 23,720 24,829
Ten years later.................... 23,910
Re-estimated Liability:
One year later..................... 27,034 25,020 27,326 35,942 43,124 47,009 45,674 45,234 45,347 43,506
Two years later.................... 23,837 22,967 30,014 29,123 35,855 41,689 42,343 45,591 39,737
Three years later.................. 23,412 24,599 26,603 28,085 32,879 39,524 43,898 41,139
Four years later................... 24,101 23,348 26,135 30,692 31,807 41,270 42,239
Five years later................... 23,181 23,493 27,898 30,136 32,224 41,415
Six years later.................... 23,081 25,368 27,602 30,311 32,964
Seven years later.................. 24,389 25,016 27,997 30,999
Eight years later.................. 24,163 25,541 28,493
Nine years later................... 24,350 26,025
Ten years later.................... 24,871
Redundancy (deficiency)................. (1,461) (1,562) (2,395) 1,152 16,214 13,368 10,942 8,108 6,511 3,416
</TABLE>
General office premises liability incurred losses have been less than 1% of
medical professional liability incurred losses in the last five years. The
Company does not have reserves for pollution claims as the Company's policies
exclude liability for pollution. NCRIC has never been presented with a
pollution claim brought against it or its insureds.
REINSURANCE
The Company follows customary industry practice by reinsuring a portion of
its risks and paying a reinsurance premium based upon the premiums received on
all policies subject to such reinsurance. Reinsurance is purchased to reduce
net liability on individual risks and to provide protection against large
losses. The Company has full underwriting authority for professional liability
policies including premises liability issued to physicians, surgeons, dentists
and professional corporations and partnerships. The reinsurance program
automatically assumes those risks insured by the Company in excess of the
Company's retention, quota share participation and up to the maximum policy
limit offered.
Although reinsurance does not legally discharge the Company from its
primary liability for the full amount of the policies issued, it does make the
reinsurer liable to the Company to the extent of risk ceded.
The Company's current reinsurance program contains three separate
reinsurance treaties. The first treaty reinsures the Company for losses excess
of $500,000 per claim, subject to an inner aggregate deductible of 5% of Gross
Net Earned Premium Income ("GNEPI"), up to $1,000,000 (the "Swing Rated
Treaty"). GNEPI is gross premium earned less reinsurance premiums, discounts
and Renewal Credits. The reinsurance premium for the Swing Rated Treaty is
swing rated with a minimum premium of 4% of GNEPI and a maximum premium of 22.5%
of GNEPI, subject to incurred losses. The Company pays a deposit premium equal
to 14% of GNEPI that is ultimately adjusted to actual losses subject to the
minimum and maximum premium. The inner aggregate deductible requires the
Company to pay losses within the reinsurance layer until the inner aggregate
deductible is satisfied. The Company cedes 96% of its risks to the Swing Rated
Treaty and retains 4% of the risks. Following are the reinsurance premium terms
for the Swing Rated Treaty for calendar years 1998, 1997, 1996 and 1995.
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<TABLE>
<CAPTION>
Percentage of GNEPI
--------------------------
1998 1997 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Deposit Premium 14.0% 14.0% 14.0% 14.0%
Maximum Premium 22.5% 22.5% 30.0% 40.0%
Minimum Premium 4.0% 4.0% 4.0% 4.0%
Inter-Aggregate Deductible 5.0% 5.0% 10.0% 10.0%
</TABLE>
The Company has recorded, based on management's best estimate, its maximum
premium expense under the terms of the Swing Rated Treaty in the current and the
preceding two treaty years and will adjust the liability and expense as losses
develop in subsequent years.
The second treaty covers losses up to $1,000,000 in excess of $1,000,000
per claim (the "$1,000,000 Excess Layer Treaty"). The Company cedes 91% of its
risks to the $1,000,000 Excess Layer Treaty program and retains 9% of the risks.
The premium for the $1,000,000 Excess Layer Treaty is 91% of the premium
collected from insureds for this coverage. The Company receives a ceding
commission from the reinsurers to cover the cost associated with issuing this
coverage to its insureds.
The third treaty covers losses up to $3,000,000 in excess of $2,000,000 per
claim (the "$2,000,000 Excess Layer Treaty"). The Company cedes 100% of its
risks to the $2,000,000 Excess Layer Treaty program and retains none of the
risks. The premium for the $2,000,000 Excess Layer Treaty is 100% of the
premium collected from insureds for this coverage. The Company receives a
ceding commission from the reinsurers to cover the cost associated with issuing
this coverage to its insureds.
Ceding commissions, which are 15% of gross ceded reinsurance premiums in
the $1,000,000 Excess Layer Treaty and $2,000,000 Excess Layer Treaty, are
deducted from other underwriting expenses. Ceding commissions were $223,000,
$235,000 and $236,000 in 1997, 1996 and 1995, respectively.
Ninety percent of CML's risks are reinsured by NCRIC. CML's risks are in
turn 90% reinsured by the Company's reinsurance treaties.
Additionally, the Company's reinsurance program protects the Company from
paying multiple retentions for claims arising out of one event. The Company
will only pay one $500,000 retention regardless of the number of original
policies or claimants involved. The Company also has protection against losses
in excess of its existing reinsurance. Following is a table that summarizes the
structure of the Company's current reinsurance program:
<TABLE>
<CAPTION>
TOTAL AMOUNT OF INDIVIDUAL LOSS (1) MAXIMUM AMOUNT PAID BY(2):
Company Reinsurer
------------ --------------
<S> <C> <C>
0 - 500,000 100% 0
500,000 - 1,000,000 4% 96%
1,000,000 - 2,000,000 9% 91%
2,000,000 - 5,000,000 0 100%
</TABLE>
(1) Assuming no self-insured retention or deductible is applicable.
(2) The Company is responsible to the policyholder for the "Total Amount of
Individual Loss." The "Maximum Amount Paid By" the reinsurer represents
the percentage of the claim for which the Company has recourse against
reinsurers pursuant to its reinsurance treaties and agreements.
The Company provides limits in excess of $5,000,000 in conjunction with
facultative reinsurance programs.
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<PAGE>
The Company determines the amount and scope of reinsurance coverage to
purchase each year based upon its evaluation of the risks accepted,
consultations with reinsurance representatives and a review of market
conditions, including the availability and pricing of reinsurance. The
Company's reinsurance treaties are placed with non-affiliated reinsurers for
three-year terms with annual renegotiations. The Company's current three-year
treaty expires January 1, 2000.
The reinsurance program is placed with a number of individual reinsurance
companies and Lloyds' syndicates to mitigate the concentrations of reinsurance
credit risk. Most of the reinsurers are London companies or Lloyds' syndicates;
there is a small percentage placed with a domestic reinsurer. The Company
relies on its wholly-owned brokerage firm, National Capital Brokerage, Inc.,
Willis Faber North America and a London-based intermediary to assist it in the
analysis of the credit quality of its reinsurers. The Company also requires
reinsurers that are not authorized to do business in the District of Columbia to
post an evergreen letter of credit to secure reinsurance recoverable on paid
losses.
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 1997 by reinsurer:
<TABLE>
<CAPTION>
REINSURER REINSURANCE
RECOVERABLE
--------------
(in thousands)
<S> <C>
Certain underwriters at Lloyd's of London $10,092
Hannover Reinsurance 1,039
CNA Reinsurance of London Limited 1,960
Unionamerica Insurance 1,595
Terra Nova Insurance Company 514
5 other reinsurers 1,877
-------
Total $17,077
=======
</TABLE>
The effect of reinsurance on premiums written and earned for the nine
months ended September 30, 1998 and 1997 and the years ended 1997, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
Written Earned Written Earned Written Earned Written Earned Written Earned
- ------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct $18,753 $12,206 $17,666 $13,906 $17,869 $17,466 $19,017 $19,017 $19,506 $19,506
Ceded 2,849 3,724 (1,808) (2,000) (1,854) (1,854) (4,239) (4,239) (9,561) (9,561)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net $21,602 $15,930 $15,858 $11,906 $16,015 $15,612 $14,778 $14,778 $ 9,945 $ 9,945
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company analyzes the credit quality of its reinsurers and relies on its
brokers and intermediaries to assist it in such analysis. To date, the Company
has not experienced any material difficulties in collecting reinsurance
recoverable. There is a risk, however, that the Company's reinsurers may be
unable to meet their obligations in the future.
In 1997, the Company introduced an Errors and Omissions policy for certain
managed care organizations and a Provider Stop Loss coverage for health care
providers accepting financial risk associated with providing health care
services on a fixed or capitated reimbursement rate. The Company's limited
knowledge regarding both of these exposures led the Company to structure a
reinsurance program unique to these exposures. The Company does not have
underwriting authority and only retains 5% of the premiums and losses under each
of these policies.
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<PAGE>
Individual risks are submitted to the reinsurer for underwriting and pricing.
The Company receives a ceding commission of 15%.
The Company intends to accept higher levels of risk as it learns the
characteristics of these risk exposures and begins to generate profitable
revenue volume.
INVESTMENT PORTFOLIO
Investment income is an important component of the operating results of the
Company. Investments of the Company are made by investment managers and
internal management under policies established and supervised by the Investment
Committee of the Board of Directors of NCRIC (the "Investment Committee").
NCRIC's current investment policy has placed primary emphasis on investment
grade, fixed maturity securities and seeks to maximize after-tax yields and
minimize credit risk of the portfolio. In 1996, the Reciprocal conducted a
DYCARR analysis of its investment portfolio. DYCARR is a proprietary financial
model of Prime Advisors, Inc. designed specifically for property and casualty
insurance companies to maximize after-tax investment income while simultaneously
managing interest rate risk. DYCARR measures the amount and probability of
operational cash flow stress and defines maturity schedules which will produce
the selected confidence level that all resulting negative operating cash flows
will be covered by maturing assets. The new schedule of maturities increased
the portfolio's duration from a target of 4.8 years to 5.3 years with a +/- 0.5-
year band. In addition, DYCARR estimates the amount of income gained (or lost)
from changes in the selected confidence level and identifies the impact each
variable has on negative operating cash flows. As a result of the 1996 DYCARR
analysis, 25% of the Reciprocal's investment portfolio was shifted to tax-
advantaged securities such as municipals and preferred stocks. NCRIC now
conducts a DYCARR analysis annually.
The Company currently uses Brown Brothers Harriman & Co. and Prime
Advisors, Inc. as outside investment managers for fixed income maturity
securities. The Company also uses Brown Brothers Harriman as an outside
investment manager for equity securities (preferred stocks).
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<PAGE>
The following table sets forth the fair value and the amortized cost of
the investment portfolio of the Company at the dates indicated.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
As of September 30, 1998
U.S. Government and agencies $29,276 $1,576 $ -- $ 30,852
Corporate 18,849 750 (60) 19,539
Tax-exempt obligations 19,367 1,186 (1) 20,552
Mortgage-backed securities 27,126 614 (71) 27,669
------- ------ ----- --------
94,618 4,126 (132) 98,612
Preferred Stocks 5,235 116 (78) 5,273
------- ------ ----- --------
Total $99,853 $4,242 $(210) $103,885
====== ===== ========
As of December 31, 1997
U.S. Government and agencies $28,293 $ 115 $ (7) $ 28,401
Corporate 16,168 394 (28) 16,534
Tax-exempt obligations 20,811 383 (11) 21,183
Mortgage-backed securities 23,683 241 (6) 23,918
------- ------ ----- --------
88,955 1,133 (52) 90,036
Preferred stocks 4,208 136 (18) 4,326
------- ------ ----- --------
Total $93,163 $1,269 $ (70) $ 94,362
======= ====== ===== ========
As of December 31, 1996
U.S. Government and agencies $20,182 $ 29 $(429) $ 19,782
Corporate 13,371 70 (53) 13,388
Tax-exempt obligations 20,116 18 (7) 20,127
Mortgage-backed securities 31,513 -- (80) 31,433
------- ------ ----- --------
85,182 117 (569) 84,730
Preferred stocks 4,877 27 (48) 4,856
------- ------ ----- --------
Total $90,059 $ 144 $(617) $ 89,586
======= ====== ===== ========
As of December 31, 1995
U.S. Government and agencies $30,070 $1,085 $ (19) $ 31,136
Corporate 18,367 629 (140) 18,856
Tax-exempt obligations 753 8 -- 761
Mortgage-backed securities 27,860 230 (193) 27,897
------- ------ ----- --------
77,050 1,952 (352) 78,650
Preferred stocks 4,832 27 (54) 4,805
------- ------ ----- --------
Total $81,882 $1,979 $(406) $ 83,455
======= ====== ===== ========
</TABLE>
The Company's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. The Company's
investment policy provides that all security purchases be limited to rated
securities or unrated securities approved by management on the recommendation of
the Investment Advisor. As of September 30, 1998, the Company held 43 mortgage-
related securities with an average quality of
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<PAGE>
Agency/AAA and an average yield-to-maturity of approximately 6.30%.
Approximately 60% of the mortgage-related securities are FNMA Pass-Thru
Securities. The Company does not have any interest only or principal only FNMA
Pass-Thru Securities.
The following table sets forth certain information concerning the
maturities of fixed maturity securities in the Company's investment portfolio as
of September 30, 1998, by contractual maturity. Actual maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMORTIZED COST FAIR VALUE FAIR VALUE
-------------- ---------- --------------
(in thousands)
<S> <C> <C> <C>
Due in one year or less $ 5,122 $ 5,154 5%
Due after one year through five years 10,483 10,819 10%
Due after five years through ten years 20,138 21,208 20%
Due after ten years 31,749 33,762 33%
------- -------- ---
67,492 70,943 68%
Preferred stocks 5,235 5,273 5%
Mortgage-backed securities 27,126 27,669 27%
------- -------- ---
Total $99,853 $103,885 100%
======= ======== ===
</TABLE>
Proceeds from bond maturities and redemptions of fixed maturity investments
during the years 1997, 1996 and 1995 were $35,475,000, $59,577,000 and
$131,979,000. Gross gains of $300,000, $451,000 and $1,853,000 and gross losses
of $210,000, $221,000 and $150,000 were realized on bond redemptions during
1997, 1996 and 1995.
The average effective maturity and the average modified duration of the
securities in the Company's fixed maturity portfolio as of September 30, 1998,
was 14.2 years and 5.7 years.
COMPETITION
The physician medical professional liability insurance market in the
District of Columbia is highly competitive. The Company competes principally
with two commercial companies, CNA Insurance Group, Inc. and American
International Group, Inc. Each of these companies is actively engaged in
soliciting insureds in the Company's markets. According to A.M. Best, the
Company has 44% of the District of Columbia physician and hospital professional
liability market and these two companies have a combined market share of 30%.
However, the A.M. Best data includes all medical professional liability
insurance sold in the District of Columbia including insurance purchased by
institutions such as hospitals, which the Company does not insure, but which are
insured by its principal competitors. Thus, the A.M. Best data does not
accurately reflect the Company's share of the medical professional liability
insurance markets in which it participates. Several medical professional
liability insureds in the Company's markets (including its two principal
competitors) offer products at lower premium rates than the Company. A.M. Best
calculates that at least 25 other companies offer some type of medical
professional liability insurance in each of the Company's markets, and more
companies may enter the Company's markets in the future. In addition, the
Company believes that the number of healthcare entities that insure their
affiliated physicians through self-insurance may increase.
In addition, as the Company expands into new states, it may face strong
competition from carriers that are closely focused on narrow geographic markets.
The Company expects to encounter such competition from doctor-owned insurance
companies and commercial companies in other states as it carries out its
expansion plans in Maryland, Virginia, West Virginia and, in the future,
Delaware. Many of the Company's current and potential competitors have greater
financial resources than the Company and may seek to acquire market share by
decreasing pricing for their products below prevailing market rates, thereby
reducing profitability. The Company believes that the principal competitive
factors, in addition to pricing, include financial stability and A.M. Best
ratings, breadth and flexibility of coverage, and the quality and level of
services provided. The Company believes that its principal
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<PAGE>
strengths are its claims management and underwriting expertise, its ability to
successfully litigate claims, reduce its insured's loss exposure through
effective risk management and provide its insureds with individualized service.
In addition, the Company believes that it derives competitive advantage from its
18-year presence in the metropolitan Washington, D.C. medical professional
liability market and its commitment to its District of Columbia physicians.
REGULATION
The Mutual Holding Company and NCRIC are domiciled in the District of
Columbia, and Commonwealth Medical Liability Insurance Company ("CML") is
domiciled in Virginia. Therefore, the laws and regulations of these
jurisdictions, including the tort liability laws and the laws relating to
medical professional liability exposures and reports, have the most significant
impact on the operations of the Company.
HOLDING COMPANY REGULATION. A mutual insurance holding company is subject
to regulation at a level substantially equal to that of a District of Columbia
domestic insurance company. The Commissioner has jurisdiction over an
intermediate holding company, such as Group. In addition, District of Columbia
law provides that the assets of the Mutual Holding Company are available to
satisfy claims of the Company's policyholders in the event that the Commissioner
initiates a liquidation proceeding.
As part of a holding company system, the Mutual Holding Company, NCRIC
Holdings, Group and NCRIC are subject to the DC Holding Company System Act of
1933 (D.C. Law 10-44) (the "DC Holding Company Act"). NCRIC, as the parent of
CML, is also subject to Title 38 of the Virginia Code which includes in Chapter
13 provisions regarding insurance holding companies (together with the DC
Holding Company Act, the "Holding Company Acts"). The Holding Company Acts
require the Mutual Holding Company to file information periodically with the
DISR and Virginia regulatory authorities, including information relating to its
capital structure, ownership, financial condition and general business
operations. Certain transactions between an insurance company and its
affiliates, including sales, loans or investments, are deemed "material" and
require prior approval by the District of Columbia or Virginia insurance
regulators, as applicable. In the District of Columbia, transactions with
affiliates involving loans, sales, purchases, exchanges, extensions of credit,
investments, guarantees or other contingent obligations, which within any 12-
month period aggregate at least 3% of the insurance company's admitted assets or
25% of its surplus, whichever is greater, require prior approval. Prior approval
is also required for all management agreements, service contracts and cost-
sharing arrangements between affiliates. Certain reinsurance agreements or
modifications also require prior approval.
The Holding Company Acts also provide that the acquisition or change of
"control" of a domestic insurance company or of any person or entity that
controls such an insurance company cannot be consummated without prior
regulatory approval. The Holding Company Acts also effectively restrict the
Company from consummating certain reorganizations or mergers without prior
regulatory approval.
Shares of the capital stock of Group which carry the right to cast a
majority of the votes entitled to be cast by all of the outstanding voting
shares of Group are required by District of Columbia law to be owned, directly
or indirectly, by the Mutual Holding Company.
REGULATION OF DIVIDENDS FROM INSURANCE SUBSIDIARIES. The DC Holding
Company Act limits the ability of NCRIC to pay dividends. Without prior notice
to and approval of the Commissioner, NCRIC may not declare or pay an
extraordinary dividend, which is defined as any dividend or distribution of cash
or other property whose fair market value, together with other dividends or
distributions made, within the preceding 12 months exceeds the lesser of 10% of
NCRIC's surplus as of the preceding December 31, or NCRIC's statutory net income
(excluding realized capital gains), for the 12-month period ending the preceding
December 31, but does not include pro rata distributions of any class of NCRIC's
own securities. In calculating net income under the test, NCRIC may carry
forward net income (excluding realized capital gains) from the previous two
calendar years that has not been paid out as dividends. District of Columbia
law gives the Commissioner broad discretion to disapprove dividends even if the
dividends are within the above-described limits. Based on this limitation and
1997 results, NCRIC would have been able to pay approximately $2 million in
dividends to Group in 1998 under the stated formula. NCRIC has the ability to
loan funds to Group with the approval of the Commissioner. CML's dividend
restrictions are similar to
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<PAGE>
NCRIC's. Based on its 1997 results, under Virginia insurance law, CML would be
able to pay approximately $300,000 in dividends to NCRIC.
INSURANCE COMPANY REGULATION. The Company is subject to the insurance laws
and regulations in each state in which it is licensed to do business. The
Company is currently licensed in three states and the District of Columbia and
has filed a submission for a license in an additional state. The extent of
regulation varies by state, but such regulation usually includes: (1) regulating
premium rates and policy forms; (2) setting minimum capital and surplus
requirements; (3) regulating guaranty fund assessments; (4) licensing companies
and agents; (5) approving accounting methods and methods of setting statutory
loss and expense reserves; (6) setting requirements for and limiting the types
and amounts of investments; (7) establishing requirements for the filing of
annual statements and other financial reports; (8) conducting periodic statutory
examinations of the affairs of insurance companies; (9) approving proposed
changes of control; and (10) limiting the amounts of dividends that may be paid
without prior regulatory approval. Such regulation and supervision are primarily
for the benefit and protection of policyholders and not for the benefit of
investors.
GUARANTY FUND LAWS. Each of the jurisdictions in which the Company does
business has guaranty fund laws under which insurers doing business in such
jurisdictions can be assessed on the basis of premiums written by the insurer in
that jurisdiction in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers. The
Company makes accruals for its portion of assessments related to such
insolvencies considered to be probable of assessment by the guaranty
associations. In the District of Columbia, insurance companies are assessed in
three categories: automobile, workers' compensation and all other. An
insurance company licensed to do business in the District of Columbia is only
liable to pay an assessment if another insurance company within its category
becomes insolvent. The Company is in the "all other" category. On November 27,
1998, the Superior Court of the District of Columbia declared Capital Casualty
Insurance Company, a District of Columbia insurance company ("Capital
Casualty"), insolvent and ordered its liquidation. Capital Casualty insures
taxi drivers in the District of Columbia which puts it in the automobile
category. As a result of Capital Casualty's insolvency, the Board of Directors
of the District of Columbia Guaranty Association authorized an assessment of
$1,000,000 from insurance companies in the automobile category. The Company is
not within the automobile category and therefore will not be subject to the
assessment.
EXAMINATION OF INSURANCE COMPANIES. Every insurance company is subject to
a periodic financial examination under the authority of the insurance
commissioner of its jurisdiction of domicile. Any other state interested in
participating in a periodic examination may do so. The last completed periodic
financial examination of the Reciprocal, based on December 31, 1996 financial
statements, was completed on October 29, 1997, and a draft report was issued on
November 20, 1998. The draft report positively assessed the Company's financial
stability and operating procedures. The last periodic financial examination of
CML, based on December 31, 1995 financial statements, was issued on May 1, 1996.
While the assessment of CML's financial stability was positive, the Virginia
regulators raised certain issues in connection with CML's administrative
procedures which have now been corrected.
APPROVAL OF RATES AND POLICIES. The District of Columbia and Virginia
require the Company to submit rates to regulators on a file and use basis.
Under a file and use system, an insurer is permitted to bring new rates and
policies into effect on filing them with the appropriate regulator, subject to
the right of the regulator to object within a fixed period of days. In
Maryland, rates must be submitted to regulators 60 days prior to their
effectiveness. In each of the District of Columbia, Maryland and Virginia,
rating plans, policies and endorsements must be submitted to the regulators 30
days prior to their effectiveness. If such items are not filed correctly, the
possibility exists that the Company may be unable to implement desired rates,
policies, endorsements, forms or manuals if such items are not approved by an
insurance commissioner.
MEDICAL PROFESSIONAL LIABILITY REPORTS. NCRIC and CML principally write
medical professional liability insurance, and additional requirements are placed
upon them to report detailed information with regard to settlements or judgments
against their insureds. In addition, the Company is required to report to the
DISR or state regulatory agencies or the National Practitioners Data Bank
payments, claims closed without payments and actions
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<PAGE>
by the Company, such as terminations or surcharges, with respect to its
insureds. Penalties may attach if the Company fails to report to either the
state agency or the National Practitioners Data Bank.
A.M. BEST RATINGS
In 1997, A.M. Best, which rates insurance companies based on factors of
concern to policyholders, rated NCRIC "A- (Excellent)." This is the fourth
highest rating of the 15 ratings that A.M. Best assigns. NCRIC received its
initial rating of "B" in 1988, was upgraded to "B+" in 1989, to "B++" in 1996
and was upgraded to "A-" in 1997.
A.M. Best publications indicate that the "A-" rating is assigned to those
companies that in A.M. Best's opinion have a strong ability to meet their
obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity; its book of business; the adequacy and
soundness of its reinsurance; the quality and estimated market value of its
assets; the adequacy of its reserves and surplus; its capital structure; the
experience and competence of its management; and its market presence. There is
a risk, however, that A.M. Best may reduce NCRIC's current rating in the future.
EMPLOYEES
As of September 30, 1998, the Company employed approximately 29 persons.
None of the Company's employees is covered by a collective bargaining agreement.
The Company believes that its relations with its employees are good.
LITIGATION
NCRIC is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. The Company vigorously
defends these actions, unless a reasonable settlement appears appropriate. The
Company believes that adverse results, if any, in the actions currently pending
should not have a material adverse effect on the Company's consolidated
financial condition.
PROPERTIES
The Company's principal business operations are conducted from its leased
executive offices which consist of approximately 18,156 square feet located at
1115 30th Street, N.W., Washington, D.C. 20007. The term of the lease is for
ten years, commencing April 15, 1998 and expiring April 30, 2008. Annual rental
is $421,476 with 2% annual increases for the first five years of the term. In
the sixth year of the term, rent shall increase by $2.00 per rentable square
foot and shall remain at that level for the balance of the term. The Company
has the option to renew the lease for one additional term of five years. The
Company believes that its office space is adequate for its present needs.
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<PAGE>
THE REORGANIZATION
DESCRIPTION OF THE REORGANIZATION
On April 20, 1998, the Board of Governors of the Reciprocal adopted the
Plan, which authorized the Reciprocal to effect the Reorganization. The
Commissioner held a public hearing on the Reorganization on September 9 and 10,
1998. The Plan was approved by the Reciprocal's policyholders on September 16,
1998. The Commissioner approved the Plan on November 25, 1998, and the Plan
became effective on ___________, 1998.
Pursuant to the Reorganization, the Reciprocal formed the Mutual Holding
Company as a mutual insurance holding company and the Reciprocal was converted
into NCRIC, a stock medical professional liability insurance company. Through a
series of stock transfers effected in connection with the Reorganization, the
Mutual Holding Company owns all of the outstanding shares of NCRIC Holdings,
which owns all of the outstanding shares of Group, which owns all of the
outstanding shares of NCRIC. District of Columbia law provides that the Mutual
Holding Company must at all times own, directly or indirectly, a majority of the
outstanding voting stock of NCRIC.
In his Decision and Order approving the Reorganization, the Commissioner
imposed various conditions including the following:
. At least two-thirds of the members of the Boards of Directors of the
Mutual Holding Company and NCRIC must at all times be policyholders of
NCRIC.
. The Mutual Holding Company, NCRIC Holdings, NCRIC Group and NCRIC are
prohibited from pledging assets having an aggregate value in excess of
49% of the equity of NCRIC (based on the most recent financial
statements prepared and calculated in accordance with statutory
accounting principles) without the approval of the Commissioner.
. Group must first utilize funds raised from capital sources, if needed in
the best judgment of Group's Board of Directors, to improve the quality
of NCRIC's medical professional liability insurance product, maintain
its competitive pricing structure and ensure the stability and longevity
of NCRIC.
. NCRIC may not, without authority of the Commissioner, by way of an
acquisition or investment in a subsidiary, or otherwise, diversify out
of the healthcare and insurance fields.
REASONS FOR THE REORGANIZATION
As a reciprocal insurance company, the Reciprocal had no ability to issue
shares of capital stock and consequently had no access to market sources of
equity capital and limited ability to increase its surplus and fund future
growth while maintaining the financial strength necessary to assure
policyholders that their obligations would be met. In view of the changing
climate affecting the practice of medicine, physicians require assistance in
addition to insurance. The Reorganization enables the Company to raise funds to
use in providing such assistance. See "Business -- Practice Management and
Financial Services Acquisition" and "Use of Proceeds."
REGULATION OF THE MUTUAL HOLDING COMPANY AFTER THE REORGANIZATION
The Mutual Holding Company, as a mutual insurance holding company organized
in the District of Columbia, is subject to regulation at a level substantially
equal to that of a District of Columbia domestic insurance company. The
Commissioner retains jurisdiction over the Mutual Holding Company, NCRIC
Holdings, Group and NCRIC to assure that policyholders' interests are protected.
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MANAGEMENT
BOARD OF DIRECTORS OF THE MUTUAL HOLDING COMPANY
The Mutual Holding Company is managed by its Board of Directors, which is
composed of 18 directors, 15 of whom must be members of the Mutual Holding
Company. The Board is divided into three classes. Drs. Ammerman, Coleman,
Gutierrez, Hafter-Gray, Unger and Mr. Burke will stand for election at the
annual meeting of members to be held in 1999. Drs. Becker, Gladden, Gray,
Patterson, Zimmerman and Mr. McNamara will stand for election at the annual
meeting of stockholders to be held in 2000. Drs. Trujillo, Calhoun, Fischer,
Hirsch, Taubin, and Mr. Pate will stand for election at the annual meeting of
stockholders to be held in 2001.
The Mutual Holding Company's Board of Directors has established an
Executive Committee consisting of six directors which will be chaired by
Dr. Trujillo. The Executive Committee exercises the power and authority of the
Directors in all matters that do not require action by the entire Board.
BOARD OF DIRECTORS OF GROUP
The business of Group is managed under the direction of its Board of
Directors. The Board of Directors is composed of ten directors. The Board is
divided into three classes. Dr. Coleman and Messrs. McNamara and Burke will
stand for election at the annual meeting of stockholders to be held in 1999.
Drs. Glassman, Scalettar and Seitzman and Mr. Pate will stand for election at
the annual meeting of stockholders to be held in 2000. Drs. Trujillo and Parver
will stand for election at the annual meeting of stockholders to be held in
2001. Dr. Epps intends to retire from the Board of Directors in 2001. Group
intends to reduce the size of the Board of Directors to nine directors at that
time.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the current
directors and executive officers of Group and the Mutual Holding Company. Each
of the officers of Group holds the same position with NCRIC.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ------------------------------------------------------
<S> <C> <C>
Nelson P. Trujillo, M.D..... 60 Chairman of the Board of the Mutual Holding
Company and Group
R. Ray Pate, Jr............. 38 Director, President and Chief Executive Officer of
the Mutual Holding Company and Group
Bruce J. Ammerman, M.D...... 50 Director of the Mutual Holding Company
Arthur A. Becker, M.D....... 61 Director of the Mutual Holding Company
Vincent C. Burke, III....... 47 Director of the Mutual Holding Company and Group
Thomas Calhoun, M.D......... 65 Director and Secretary of the Mutual Holding
Company
Pamela W. Coleman, M.D...... 42 Director of the Mutual Holding Company and Group
Charles H. Epps, Jr., M.D... 68 Director of Group
Robert A. Fischer, M.D...... 65 Vice Chairman of the Board of the Mutual Holding
Company
Major P. Gladden, M.D....... 62 Director of the Mutual Holding Company
Leonard M. Glassman, M.D.... 52 Director of Group
Luther W. Gray, Jr., M.D.... 58 Director and Assistant Secretary of the Mutual
Holding Company
Joseph E. Gutierrez, M.D.... 63 Director of the Mutual Holding Company
Sheila Hafter-Gray, M.D..... 67 Director of the Mutual Holding Company
</TABLE>
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<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ------------------------------------------------------
<S> <C> <C>
Florie Hirsch, M.D.......... 49 Director of the Mutual Holding Company
J. Paul McNamara............ 50 Director of the Mutual Holding Company and Group
Leonard Parver, M.D......... 54 Director of Group
David W. Patterson, M.D..... 39 Director of the Mutual Holding Company
Raymond Scalettar, M.D...... 69 Director of Group
David M. Seitzman, M.D...... 69 Director of Group
Joel M. Taubin, M.D......... 57 Director of the Mutual Holding Company
Anthony S. Unger, M.D....... 43 Director of the Mutual Holding Company
Mervin H. Zimmerman, M.D.... 63 Director of the Mutual Holding Company
Stephen S. Fargis........... 39 Chief Operating Officer and Senior Vice President of
Group and the Mutual Holding Company
William E. Burgess.......... 43 Senior Vice President (Claims and Risk Management)
and Secretary of Group and the Mutual Holding
Company
Rebecca B. Crunk............ 47 Chief Financial Officer and Senior Vice President of
Group and the Mutual Holding Company
</TABLE>
AUDIT COMMITTEE
Group's Board of Directors has also established an Audit Committee. The
Audit Committee recommends the firm to be appointed as independent accountants
to audit financial statements, reviews the scope and results of the audit with
the independent accountants, reviews with management and the independent
accountants the Company's year-end audit and considers the adequacy of the
Company's internal accounting controls. The Audit Committee consists of Messrs.
Pate, Burke and McNamara and Drs. Coleman, Seitzman and Zimmerman.
The positions listed above commenced upon the Reorganization. Set forth
below with respect to each of the directors and executive officers of the Mutual
Holding Company and Group is a description of such individual's business
experience, principal occupation and employment during at least the last five
years.
NELSON P. TRUJILLO, M.D. was a Governor and Chairman of the Board of the
Reciprocal from 1980 until the Reorganization. Dr. Trujillo is currently
President of Metropolitan Gastroenterology Group where he is a physician.
R. RAY PATE, JR. was the Treasurer of the Reciprocal and President and
Chief Executive Officer of NCUI from 1996 until the Reorganization. From 1993
to 1995, Mr. Pate was Vice President, Hospital Division of FPIC, Inc., a medical
professional liability insurance company.
BRUCE J. AMMERMAN, M.D. was a Governor of the Reciprocal from 1986 until
the Reorganization. Dr. Ammerman is a neurological surgeon with Washington
Neurosurgical Associates.
ARTHUR A. BECKER, M.D. was a Governor of the Reciprocal from 1982 until the
Reorganization. Dr. Becker is an obstetrician/gynecologist with Obstetrical and
Gynecological Group, P.A.
VINCENT C. BURKE, III has been a partner with the firm of Furey, Doolan &
Abell, LLP since June 1, 1998. From April 1992 to May 1998, he was counsel to
the law firm of Reed Smith Shaw & McClay. Mr. Burke's practice is in the areas
of corporate, business, real estate and closely-held businesses. He practices
in the District of Columbia and Maryland.
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THOMAS CALHOUN, M.D. was a Governor of the Reciprocal from 1980 until the
Reorganization. Dr. Calhoun is a general surgeon in private practice. He is
also a consultant for Birch & Davis Associates, Inc., specializing in the
utilization and quality review of Veterans Administration hospitals. He is a
member of the Expert Peer Review Panel (Surgery) whose responsibility is to
review surgical cases for utilization and quality assurance.
PAMELA W. COLEMAN, M.D. was a Governor of the Reciprocal from 1989 until
the Reorganization. Dr. Coleman is a urologist in private practice.
CHARLES H. EPPS, JR., M.D. was the Chairman of the Board of Directors of
NCUI from 1980 until the Reorganization. Dr. Epps is a physician with Howard
University and Howard University Physicians, Inc.
ROBERT A. FISCHER, M.D. was a Governor of the Reciprocal from 1980 until
the Reorganization. Dr. Fischer is a clinical physician and part owner of
Washington Internal Medicine Group.
MAJOR P. GLADDEN, M.D. was a Governor of the Reciprocal from 1982 until the
Reorganization. Dr. Gladden is an orthopedic surgeon and Chief of Orthopedics
at DC General Hospital.
LEONARD M. GLASSMAN, M.D. was a Director of NCUI from 1993 until the
Reorganization. Dr. Glassman is a physician with Washington Radiology
Associates, P.C.
LUTHER W. GRAY, JR., M.D. was a Governor of the Reciprocal from 1984 until
the Reorganization. Dr. Gray is a physician and general surgeon with Luther W.
Gray, Jr., M.D., P.C.
JOSEPH E. GUTIERREZ, M.D. was a Governor of the Reciprocal from November
1995 until the Reorganization. Dr. Gutierrez is the President of Joseph E.
Gutierrez, M.D., P.C., where he is a general and vascular surgeon.
SHEILA HAFTER-GRAY, M.D. was a Governor of the Reciprocal from 1981 until
the Reorganization. Dr. Hafter-Gray is a physician in private practice and is a
member of the Commission on Mental Health of the Superior Court of the District
of Columbia.
FLORIE HIRSCH, M.D. was a Governor of the Reciprocal from 1987 until the
Reorganization. Dr. Hirsch is an obstetrician/gynecologist with Florie Hirsch,
M.D., P.C.
J. PAUL MCNAMARA has been President of Sequoia National Bank/Sequoia
BancShares, Inc. since 1988.
LEONARD PARVER, M.D. is the Chairman of the Board of NCRIC MSO.
DAVID W. PATTERSON, M.D. was a Governor of the Reciprocal from 1992 until
the Reorganization. Dr. Patterson is a physician with Drs. Arling & Patterson,
P.C.
RAYMOND SCALETTAR, M.D. was a Vice Chair of the Board of Directors of NCUI
from 1980 until the Reorganization. He has also been Chair of NCIB since its
inception. He is affiliated with and is a founder of the Washington Internal
Medicine Group, a Health Policy Consultant, a past trustee and Chair of the
Board of the AMA, and past Commissioner and Senior Consultant to the Joint
Commission on Accreditation of Healthcare Organizations.
DAVID M. SEITZMAN, M.D. was a member of the Board of Directors of NCUI from
1980 until the Reorganization. Dr. Seitzman is retired from the practice of
medicine.
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<PAGE>
JOEL M. TAUBIN, M.D. was a Governor of the Reciprocal from 1994 until the
Reorganization. Dr. Taubin is a physician with Joel M. Taubin, M.D., P.C.
ANTHONY S. UNGER, M.D. was a Governor of the Reciprocal from 1997 until the
Reorganization. Dr. Unger is a physician. Dr. Unger serves pursuant to an
agreement between the Company and the Medical Society for the District of
Columbia.
MERVIN H. ZIMMERMAN, M.D. was a Governor of the Reciprocal from 1995 until
the Reorganization. Dr Zimmerman is an ophthalmologist with Mervin H. Zimmerman,
M.D., F.A.C.S., P.C.
STEPHEN S. FARGIS was Senior Vice President (Business Development) of the
Reciprocal from November 1995 until the Reorganization. He is also Chief
Operating Officer of subsidiaries of Group. From 1990 to 1995, he was Vice
President of The Virginia Insurance Reciprocal.
WILLIAM E. BURGESS was Senior Vice President (Claims and Risk Management)
of the Reciprocal from August 1997 until the Reorganization. From April 1997 to
August 1997, he was Vice President (Claims, Risk Management) of the Company, and
from 1993 to April 1997, he was Vice President (Claims, Risk Management and
Underwriting) of the Company.
REBECCA B. CRUNK was Chief Financial Officer of the Reciprocal from April
1998 until the Reorganization. From 1995 to 1998, she was Vice President,
Treasurer and Controller of ReliaStar United Services Life Insurance Company and
was Vice President, Treasurer and Controller of Bankers Security Life Insurance
Society, a subsidiary of ReliaStar United Services Life Insurance Company. From
1985 to 1995, she was Senior Vice President and Controller of United Services
Life Insurance Company.
COMPENSATION OF DIRECTORS
It is currently contemplated that Group will pay each of its non-employee
directors, other than the Chairman, $25,000 per year and will pay its Chairman
$30,000 per year. Directors who are officers or employees of the Company
receive no compensation for serving as directors. All directors are reimbursed
for out-of-pocket expenses incurred in connection with attendance at any meeting
of any of the Company's boards of directors or any committee of any board of
directors.
MANAGEMENT COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation for services rendered in all capacities awarded or paid
by the Company (including compensation paid by the attorney-in-fact of the
Reciprocal prior to the Reorganization) to its Chief Executive Officer and the
other named executive officers whose total salary and bonus equaled or exceeded
$100,000 during the year ended December 31, 1997 for the periods indicated:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- --------------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
R. Ray Pate, Jr. 1997 $215,016 $53,333 $8,400 $67,729
President and Chief Executive 1996 200,000 50,000 8,400
Officer and Director
Stephen F. Fargis 1997 114,587 23,000 8,400
Chief Operating Officer 1996 107,094 18,629 8,400
William E. Burgess 1997 109,646 22,000 5,250
Senior Vice President 1996 108,192 18,934 5,135
1995 109,229 4,000
</TABLE>
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<PAGE>
EMPLOYMENT AGREEMENTS
R. Ray Pate, Jr. serves as the President and Chief Executive Officer of the
Company pursuant to an employment agreement dated October 1, 1997 between the
Reciprocal, National Capital Underwriters, Inc. ("NCUI") and Mr. Pate.
Mr. Pate's employment agreement became the obligation of NCRIC upon the merger
of NCUI with and into NCRIC in connection with the Reorganization. Under the
terms of his employment agreement, Mr. Pate is entitled to basic compensation of
$240,000 per year and is reimbursed for all reasonable and proper business
expenses incurred by him in the performance of his duties. The terms of the
employment agreement also provide that Mr. Pate is entitled to: (1) participate
in any retirement and/or pension plans or health and medical insurance plans
offered to NCRIC's senior executives, (2) receive an automobile allowance of
$700 per month, and (3) be covered by both term life insurance and disability
insurance. The term of the employment agreement is five years commencing
October 1, 1997. The Company may terminate the employment agreement for cause
or without cause, at any time. Any dispute as to whether NCRIC had cause will
be determined by arbitration. If NCRIC terminates Mr. Pate's employment
agreement without cause, Mr. Pate is entitled to receive, as severance pay, an
amount equal to two years' basic compensation at the base compensation in effect
on the date of the termination. The Commissioner's Decision and Order approving
the Reorganization required Mr. Pate's employment agreement to be amended to
eliminate a provision which deemed a change of control to be a termination
without cause. Mr. Pate may voluntarily terminate his employment with the
Company provided that he gives the Company twelve months' prior notice of such
termination or pays NCRIC liquidated damages equal to the amount of twelve
months' basic compensation.
NCUI has also entered into an employment agreement commencing December 1,
1997 with Stephen S. Fargis on substantially similar terms except that Mr.
Fargis' employment agreement: (1) terminates November 30, 2000, (2) provides for
basic compensation of $150,000 per year, and (3) enables him to voluntarily
terminate his employment on three months' prior notice. Mr. Fargis' employment
agreement also became the obligation of NCRIC upon the merger of NCUI with and
into NCRIC in connection with the Reorganization.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Group has established an ESOP for eligible employees of NCRIC effective
________ 1998, subject to the completion of the Stock Offering. Employees age
21 or older who have worked for NCRIC for a period of one year and have been
credited with 1,000 or more hours of service during the year are eligible to
participate. As part of the Stock Offering, the ESOP intends to borrow funds
from Group and use those funds to purchase a number of shares equal to 10% of
the shares sold in the Stock Offering. Collateral for the loan will be common
stock purchased by the ESOP. The loan will be repaid principally from Group's
discretionary contributions to the ESOP and dividends, if any, on unallocated
shares. It is anticipated that the interest rate for the loan will be a
floating rate equal to the prime interest rate published in The Wall Street
Journal from time to time. Shares purchased by the ESOP will be held in a
suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in an
amount proportional to the repayment of the principal of the ESOP loan will be
allocated among ESOP participants on the basis of compensation in the year of
allocation. For purposes of vesting and eligibility, participants in the ESOP
will receive credit for service prior to the effective date of the ESOP. A
participant will vest in increments of 20% per year of credited service and will
be fully vested in his or her account balance after five years of credited
service. A participant who terminates employment for reasons other than death,
retirement or disability prior to five years of credited service will forfeit
the nonvested portion of his or her benefits under the ESOP. Benefits will be
payable in the form of common stock and cash upon death, retirement, disability
or separation from service. Alternatively, a participant may request that the
benefits be paid entirely in the form of common stock. Contributions by Group to
the ESOP are discretionary, subject to the loan terms and tax law limits, and,
therefore, benefits payable under the ESOP cannot be estimated.
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In connection with the establishment of the ESOP, Group will establish a
committee of non-employee directors to administer the ESOP. Group will either
appoint some non-employee directors or an independent financial institution to
serve as trustee of the ESOP. The ESOP committee may instruct the trustee
regarding investment of any funds contributed to the ESOP which are not used to
repay the loan from Group. The ESOP trustee, subject to its fiduciary duty,
must vote all allocated shares held in the ESOP in accordance with the
instructions of participating employees. Under the ESOP, nondirected shares, and
shares held in the suspense account, will be voted in a manner calculated to
most accurately reflect the instructions it has received from participants
regarding the allocated stock so long as such vote is in accordance with the
provisions of the Employee Retirement Income Security Act, as amended ("ERISA").
STOCK OPTION PLAN
Group has established a Stock Option Plan for officers, directors and
employees of the Mutual Holding Company and its subsidiaries pursuant to which
common stock in an aggregate amount up to 64,400 shares (which is the equivalent
of 5% of the shares of common stock offered in the Stock Offering) may be
acquired by such officers, directors and employees upon the exercise of the
stock options granted under the Stock Option Plan. It is anticipated that the
stock to be transferred in connection with the exercise of the option may be
newly issued by Group for such purpose or may be acquired by Group through
purchase on the open market.
It is anticipated that options would be granted for terms of 10 years (in the
case of incentive options) or 10 years and one day (in the case of non-qualified
options), and at an option price per share equal to the fair market value of the
shares on the date of grant of the stock options. Options will become first
exercisable at a rate of 33-1/3% at the end of each 12 months of service with
Group or its subsidiaries after the date of grant, subject to early
exercisability in the event of death or disability. Options granted under the
Stock Option Plan would be adjusted for capital changes such as stock splits and
stock dividends.
The Stock Option Plan will be administered by a committee of non-employee
members of Group's Board of Directors. Options granted under the Stock Option
Plan to employees may be treated as "incentive" stock options which offer
beneficial tax treatment to the employee but no tax deduction to the Company
except in the event of the sale of the stock acquired pursuant to the option
within a time period of one year from the date of exercise or two years from the
date of the grant of the option. Non-qualified stock options may also be
granted under the Stock Option Plan, and will be granted to the non-employee
directors who receive grants of stock options. In the event an option recipient
terminates his or her employment or service as an employee or director, the
options would terminate during specified periods.
STOCK AWARD PLAN
Group has also established a Stock Award Plan for directors, officers and
employees of the Mutual Holding Company and its subsidiaries pursuant to which
such directors, officers and employees would be awarded common stock. Shares of
common stock to be awarded under the program will be purchased pursuant to the
Stock Offering by a trust established by Group for such purpose. Group will
advance to the trust the funds necessary to purchase at $10.00 per share the
aggregate amount of common stock to be awarded under the Stock Award Plan,
consisting of up to 64,400 shares (which is the equivalent of 5% of the shares
of common stock offered in the Stock Offering). Group anticipates that such
advance to the trust will be repaid by periodic cash contributions to be made to
the trust by Group. The trust will award shares of common stock to participants
in a manner designed to encourage participants' continued service.
Awards will be nontransferable. The shares which are subject to an award
from the trust will vest and be earned by the recipient at a rate of 20% of the
shares awarded at the end of each full 12 months of service after the date of
grant of the award. Any common stock acquired under the Stock Award Plan will
represent unearned compensation and, accordingly, will be reflected on Group's
financial statements as a reduction to stockholders' equity. As shares of common
stock awarded under the Stock Award Plan vest, Group will recognize a
proportionate
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amount of compensation expense with a corresponding reduction in the charge to
stockholders' equity. If the vesting schedule relates solely to the performance
of a specified number of years of service, the charge will be based upon the
original value of the shares on the date of grant from the trust. If the vesting
schedule includes performance criteria, the charge may reflect the value of the
shares on the date vesting occurs. Awards would be adjusted for capital changes
such as stock dividends and stock splits.
EXPENSES ASSOCIATED WITH ESOP, STOCK OPTION PLAN AND STOCK AWARD PLAN
The Company may recognize material amounts of compensation expense associated
with stock issued to employees and directors under an ESOP, Stock Option Plan
and Stock Award Plan. The Company generally cannot predict the aggregate amount
of such compensation expense because generally accepted accounting principles
require, under certain circumstances, that compensation expense be measured
based on the fair market value of the shares of common stock on the date the
expense is recognized. The Company intends to record compensation expense as
follows:
. For shares committed-to-be-released from the ESOP suspense account and
allocated to the accounts of the ESOP participants as the result of
payments made to reduce the ESOP loan, the compensation charge will be
based upon the then-current fair values of such shares.
. For shares awarded to employees under the Stock Option Plan, the Company
intends to account for compensation cost using the intrinsic value based
method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, compensation will
be measured as the difference, if any, between the fair market value of
the value of the shares and the option strike price at the time both
measurement date factors, i.e., the number of shares and the strike price,
are known. Generally, the Company expects to grant fixed awards where both
measurement date factors are known on the date of grant. Moreover, the
Company expects the option strike price to equal the fair market value on
the date of grant. Compensation cost measured in this fashion, if any,
will be recognized over the employees' applicable service periods. The
Company may also make variable awards where the measurement date factors
will not be known until some time after the date of grant. As required by
generally accepted accounting principles, the Company will disclose pro
forma information regarding net income and earnings per share as though
the Company had used fair value method of accounting for employee stock
options defined in Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123").
. For shares awarded to non-employee directors under the Stock Option Plan,
the Company intends to account for compensation cost using the fair value
method of accounting for stock options defined in SFAS No. 123.
. For shares awarded under the Stock Award Plan, the Company intends to
measure compensation cost based upon the fair values of such shares on the
date of award except in the case of awards which involve a performance
condition, in which case the cost may have to be measured by reference to
the fair values of such shares on the date they vest under the plan.
Compensation cost measured in this fashion will be recognized over the
applicable service periods.
These expenses have been reflected in the pro forma information under "Pro
Forma Data" assuming that the Purchase Price ($10.00 per share) represents the
fair market value for accounting purposes. Under some circumstances, however,
actual expenses will be based on the fair market value of the common stock at
future dates, which may be higher or lower than the Purchase Price.
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REDUCTION IN 401(K) CONTRIBUTIONS
It is anticipated that the discretionary employer contribution which has
historically been made by Group to its tax-qualified Section 401(k) profit-
sharing plan in the approximate amount of 9% of covered payroll will be reduced
to an amount equivalent to approximately 3% of covered payroll so as to reduce
the net contribution requirements associated with the establishment of the ESOP.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Group's articles of incorporation provide that no past, present or future
director of Group shall be liable to Group or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1) for
breach of the director's duty of loyalty to the corporation or its stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (3) for a transaction from which
the director derives an improper personal benefit; and (4) to the extent that
Section 29-342 of the District of Columbia Code may apply. This provision does
not prevent stockholders from obtaining injunctive or other equitable relief
against directors. Group's bylaws require it to indemnify the past, present and
future members of its Board of Directors and duly appointed committees and its
officers (and their executors, administrators, or other legal representatives)
to the fullest extent permitted by law, as now in effect and as such law may be
amended. Group shall advance expenses incurred by indemnified individuals as a
result of any proceeding against them as to which they are entitled to be
indemnified. The Mutual Holding Company, NCRIC Holdings and NCRIC have similar
provisions in their articles of incorporation and bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors or officers, the Company has been advised that in
the opinion of the Securities and Exchange Commission (the "Commission"), such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
At present, there is no pending material litigation or proceeding involving
any director, officer, employee or agent of the Company where indemnification
will be required or permitted.
CERTAIN AGREEMENTS
ADMINISTRATIVE SERVICES AGREEMENT
Group has entered into an administrative services agreement with all of its
subsidiaries and parents. Pursuant to the agreement, any affiliate of the
Company (the "Service Provider") may provide to any other affiliate
administrative and clerical services, financial and accounting services,
computer services, support services and assistance in the acquisition of
furniture and equipment. The Service Provider is paid a quarterly service fee
by each affiliate receiving services, in arrears, equal to the costs and
expenses it incurred in providing services to such affiliate during the
preceding quarter. The administrative services agreement may be terminated by
all parties by written agreement or by any affiliate, with respect to itself, on
sixty days' prior written notice to the other affiliates.
TAX SHARING AGREEMENT
NCRIC Group and its subsidiaries, which pay federal income tax as a
consolidated group, have entered into a tax sharing agreement. The tax sharing
agreement provides for the allocation of Group's consolidated income tax
liability to each member of Group. Consolidated tax liability is allocated
among group members as if each group member had filed a separate tax return.
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LOANS FOR PRACTICE MANAGEMENT AND FINANCIAL SERVICES ACQUISITION
Sequoia National Bank has agreed to loan $2.2 million to Group to partially
finance the Practice Management and Financial Services Acquisition. J. Paul
McNamara is a Director of the Mutual Holding Company and Group and is President
of Sequoia National Bank. The balance of the purchase price will be financed by
a loan from NCRIC to Group until completion of the Stock Offering.
OWNERSHIP OF COMMON STOCK
Immediately prior to the Stock Offering, there will be 1,000 issued and
outstanding shares of Group's common stock, all of which will be owned by NCRIC
Holdings. Other than such shares, as of the date of this Prospectus, no shares
of common stock were beneficially owned by any person, including any director or
officer of the Company.
Upon completion of the Stock Offering, NCRIC Holdings' 1,000 issued and
outstanding shares of Group's common stock will be canceled and approximately
60% of Group's common stock will be issued to NCRIC Holdings and 40% of Group's
common stock will be issued to subscribers in the Stock Offering.
DESCRIPTION OF COMMON STOCK
GENERAL
The following description does not purport to be complete and is qualified
in its entirety by reference to Group's articles of incorporation, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
Group is authorized to issue 10,000,000 shares of common stock, par value
$.01 per share. Each share of common stock entitles its holder to one vote per
share on all matters upon which stockholders are entitled to vote (including
election of directors, mergers, sales of assets, dissolution and amendments to
the articles of incorporation). Because holders of common stock do not have
cumulative voting rights, the holder of a majority of the shares of common stock
can elect all of the members of the Board of Directors standing for election.
Subject to preferences of any Preferred Stock that may be issued in the future,
the holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors. Group's ability to pay dividends is limited
under D.C. law. Each holder of shares of Group's common stock is entitled to
receive pro rata all of the assets of Group available for distribution its
stockholders. There are no redemption or sinking fund provisions applicable to
common stock. All outstanding shares of common stock are fully paid and non-
assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is _________________
__________________.
LEGAL OPINIONS
The validity of the shares of common stock offered hereby will be passed
upon for the Company by Arent Fox Kintner Plotkin & Kahn, PLLC and for the
Subscription Agent by Luse Lehman Gorman Pomerenk & Schick, P.C.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 and the Combined Financial Statements of the Management Services of
HealthCare Consulting, Inc., HCI Ventures, LLC and Employee Benefit Services,
Inc. as of
104
<PAGE>
December 31, 1997 and for the year then ended included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, appearing herein, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
SB-2 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to common stock offered hereby. As permitted by the
rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and common stock offered hereby, reference is hereby
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus regarding the contents of any
agreement or other document filed as an exhibit to the Registration Statement
are not necessarily complete, and in each instance reference is made to the copy
of such agreement filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549; Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661; and Seven World Trade Center,
New York, New York 10048; and copies of all or any part thereof may be obtained
from such offices upon payment of the prescribed fees. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains an Internet site
(http://www.sec.gov) that contains information regarding registrants who file
electronically with the Commission.
As a result of the Stock Offering, the Company will be subject to the
informational requirements of the Exchange Act. So long as the Company is
subject to the periodic reporting requirements of the Exchange Act, it will
continue to furnish the reports and other information required thereby to the
Commission. The Company intends to furnish to holders of common stock annual
reports containing, among other information, consolidated financial statements
audited by an independent public accounting firm and quarterly reports
containing unaudited condensed consolidated financial information for the first
three quarters of each fiscal year. The Company also intends to furnish such
other reports as it may determine or as may be required by law.
The Company is domiciled in the District of Columbia. As such, it is
subject to the laws and regulations of the District of Columbia applicable to
insurance companies and, in accordance therewith, files financial reports and
other information with the DISR. The Company has submitted a Form A Statement
Regarding the Reorganization of a District of Columbia Insurer ("Statement of
Reorganization") which contains the information required by the Reciprocal
Insurance Company Conversion Act of 1998, D.C. Act 12-301, as enacted by the
Council of the District of Columbia. Such publicly available financial reports,
the Statement of Reorganization, and other information can be inspected and
copies can be made at the office of the DISR, 810 First Street, N.E., Room 701,
Washington, D.C. 20002.
105
<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
<TABLE>
<CAPTION>
<S> <C>
Cede............................................. To transfer to an insurer or a reinsurer all or a part of
the insurance or reinsurance written by an insurance or
reinsurance entity.
Earned premiums.................................. The portion of net written premiums applicable to the
expired period of policies.
Errors and omissions coverage.................... Errors and omissions liability insurance.
Gross net earned premium income.................. Gross premium earned less discounts excluding
Renewal Credits.
Gross premiums................................... Total premiums for insurance written.
Incurred losses.................................. The sum of losses paid plus the change in the
estimated liability for claims which have been reported
but which have not been settled.
Loss adjustment expenses......................... The expenses of settling claims, including legal and
other fees and the general expenses of administering
the claims adjustment process.
Loss and LAE..................................... The ratio of incurred losses and loss adjustment
expenses to earned premiums.
Managed care errors and omissions coverage....... A policy covering the managed care entity and all
individual employees from injury arising from an
administrative act.
Net premiums..................................... Gross premiums written less premiums ceded to
reinsurers.
Provider stop loss coverage...................... A policy for a physician or healthcare organization that
has accepted capitated financial risk from a third party
payor for the provision of healthcare services. The
policy reimburses the physician/organization for
catastrophic losses in excess of the amount contracted
for between physician/organization and the payor.
Coinsurance and a deductible normally apply.
Reinsurance...................................... A procedure whereby an insurer remits or cedes a
portion of the premiums to another insurer or reinsurer
as payment to that insurer or reinsurer for assuming a
portion of the related risk.
Statutory accounting principles.................. Recording transactions and preparing financial
statements in accordance with the rules and procedures
prescribed or permitted by statute or regulatory
authorities, generally reflecting a liquidating, rather
than a going concern, concept of accounting. The
principal differences between statutory accounting
practices ("SAP") and generally accepted accounting
principles ("GAAP") for property and casualty
insurance companies, are: (a) under SAP, certain
</TABLE>
106
<PAGE>
<TABLE>
<S> <C>
assets that are not admitted assets are eliminated from
the balance sheet; (b) under SAP, policy acquisition
costs are expensed as incurred, while under GAAP,
they are deferred and amortized over the term of the
policies; (c) under SAP, no provision is made for
deferred income taxes; (d) under SAP, certain reserves
are recognized that are not recognized under GAAP;
and (e) under SAP, fixed income securities (bonds,
redeemable preferred stocks and mortgage-backed
securities) are carried at cost, while under GAAP, they
are carried at market value.
Statutory surplus.......................... The sum remaining after all liabilities are subtracted
from all assets, applying statutory accounting
practices. This sum is regarded as financial protection
to policyholders in the event an insurance company
suffers unexpected or catastrophic losses.
Underwriting............................... The process whereby an insurer reviews applications
submitted for insurance coverage and determines
whether it will accept all or part of the coverage being
requested and what the applicable premiums should
be. Underwriting also includes an ongoing review of
existing policies and their pricing.
Underwriting expenses...................... The aggregate of policy acquisition costs and the
portion of administrative, general and other expenses
attributable to underwriting operations.
</TABLE>
107
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
NATIONAL CAPITAL RECIPROCAL INSURANCE COMPANY AND
SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT F-1
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the Nine Month Periods
Ended September 30, 1998 and 1997 (Unaudited) and the Years
Ended December 31, 1997, 1996, and 1995 F-3
Consolidated Statements of Equity for the Nine Month Period
Ended September 30, 1998 (Unaudited) and the Years Ended
December 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended September 30, 1998 and 1997 (Unaudited) and the Years
Ended December 31, 1997, 1996, and 1995 F-5
Notes to Consolidated Financial Statements for the Nine Month Periods
Ended September 30, 1998 and 1997 (Unaudited) and the Years Ended
December 31, 1997, 1996, and 1995 F-6
THE MANAGEMENT SERVICES OF HEALTHCARE CONSULTING, INC., HCI VENTURES, LLC,
AND EMPLOYEE BENEFITS SERVICES, INC.
INDEPENDENT AUDITORS' REPORT F-17
Combined Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997 F-18
Combined Statements of Income and Comprehensive Income for the Nine Months
Ended September 30, 1998 (Unaudited) and the Year
Ended December 31, 1997 F-19
Combined Statements of Owners' Equity for the Nine Months
Ended September 30, 1998 (Unaudited) and the Year Ended
December 31, 1997 F-20
Combined Statements of Cash Flows for the Nine Months
Ended September 30, 1998 (Unaudited) and the Year
Ended December 31, 1997 F-21
Notes to Combined Financial Statements for the Nine Months
Ended September 30, 1998 (Unaudited) and the Year Ended
December 31, 1997 F-22
</TABLE>
108
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Governors of
National Capital Reciprocal Insurance Company
Washington, D.C.
We have audited the accompanying consolidated balance sheets of National Capital
Reciprocal Insurance Company and its subsidiaries (the Company) as of December
31, 1997 and 1996, and the related consolidated statements of operations,
equity, and cash flows for the years ended December 31, 1997, 1996, and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of National Capital Reciprocal
Insurance Company and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996, and 1995, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
March 6, 1998 (except for Notes 10 and 11, as to which
the date is December 21, 1998)
Washington, DC
F-1
<PAGE>
NATIONAL CAPITAL RECIPROCAL INSURANCE COMPANY AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 (UNAUDITED),
AND DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 --------------------------------
(Unaudited) 1997 1996
<S> <C> <C> <C>
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes $ 98,612 $ 90,036 $ 84,730
Preferred stocks 5,273 4,326 4,856
-------- -------- --------
Total securities available for sale 103,885 94,362 89,586
Real estate, net of accumulated depreciation of
$454 in 1996 - - 1,422
-------- -------- --------
Total investments 103,885 94,362 91,008
OTHER ASSETS:
Cash and cash equivalents 5,159 4,065 5,016
Accrued investment income 1,176 1,317 1,111
Reinsurance receivable from reinsurers 3 255 44
Reinsurance recoverable 20,600 17,077 14,679
Federal income taxes recoverable - 89 432
Deferred federal income taxes 2,630 2,793 3,495
Premiums receivable 1,081 1,263 417
Property and equipment, net of accumulated
depreciation of $716 in September 30,
1998 (unaudited), $339 in December 31,
1997, and $184 in December 31, 1996 1,079 509 205
Deferred policy acquisition costs 110 - -
Other assets 127 111 257
-------- -------- --------
TOTAL ASSETS $135,850 $121,841 $116,664
======== ======== ========
LIABILITIES AND EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 62,045 $ 53,661 $ 51,035
Loss adjustment expenses 20,285 21,475 20,171
-------- -------- --------
Total losses and loss adjustment expenses 82,330 75,136 71,206
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 7,721 13,762 14,804
Renewal credit dividends to policyholders 1,266 2,092 1,486
Advance premiums 4 487 913
Unearned premiums 6,950 403 -
Federal income taxes payable 1,759 - -
Accounts payable and accrued expenses 1,715 1,135 755
Other liabilities 2,225 1,340 2,076
-------- -------- --------
TOTAL LIABILITIES 103,970 94,355 91,240
COMMITMENTS AND CONTINGENCIES (Note 8)
EQUITY:
NCRIC Physician Organization members' contributions 797 797 797
Accumulated other comprehensive income (losses) 2,661 789 (314)
Retained earnings 28,422 25,900 24,941
-------- -------- --------
TOTAL EQUITY 31,880 27,486 25,424
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $135,850 $121,841 $116,664
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
NATIONAL CAPITAL RECIPROCAL INSURANCE COMPANY AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
--------------------
1998 1997 DECEMBER 31,
(UNAUDITED) -----------------------------
1997 1996 1995
<S> <C> <C> <C> <C> <C>
REVENUES:
Premium income:
Premiums written $18,753 $17,666 $17,869 $19,017 $19,506
Premiums ceded 3,724 (2,000) (1,854) (4,239) (9,561)
Change in unearned premiums (6,547) (3,760) (403) - -
Renewal credit dividends to policyholders (1,417) (1,537) (2,080) (1,427) (1,583)
------- ------- ------- ------- -------
Net premiums earned 14,513 10,369 13,532 13,351 8,362
------- ------- ------- ------- -------
Investment income 4,853 4,961 6,585 6,207 5,985
Investment expenses (388) (372) (540) (551) (403)
------- ------- ------- ------- -------
Net investment income 4,465 4,589 6,045 5,656 5,582
------- ------- ------- ------- -------
Net realized investment gains 128 96 90 229 1,703
Other income 323 270 355 660 635
------- ------- ------- ------- -------
Total revenues 19,429 15,324 20,022 19,896 16,282
------- ------- ------- ------- -------
EXPENSES:
Losses and loss adjustment expenses 11,821 11,694 15,591 15,236 11,289
Underwriting expenses 2,740 2,486 2,918 2,438 2,483
Other 1,377 428 676 928 1,707
------- ------- ------- ------- -------
Total expenses 15,938 14,608 19,185 18,602 15,479
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,491 716 837 1,294 803
------- ------- ------- ------- -------
INCOME TAX (BENEFIT) PROVISION:
Current 1,768 (70) (255) 102 196
Deferred (799) 7 133 201 (92)
------- ------- ------- ------- -------
Total income tax (benefit) provision 969 (63) (122) 303 104
------- ------- ------- ------- -------
NET INCOME 2,522 779 959 991 699
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) on
investments during the period 2,964 1,437 1,762 (1,817) 8,195
(Taxes) or benefit associated with
unrealized holding gains or losses (1,008) (489) (599) 620 (2,786)
Less: reclassification adjustment
for gains included in net income (128) (96) (90) (229) (1,703)
Taxes associated with reclassification
adjustment 44 33 30 77 579
------- ------- ------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS) 1,872 885 1,103 (1,349) 4,285
------- ------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ 4,394 $ 1,664 $ 2,062 $ (358) $ 4,984
======= ======= ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
NATIONAL CAPITAL RECIPROCAL INSURANCE COMPANY AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NCRIC ACCUMULATED
PHYSICIANS OTHER
ORGANIZATION COMPREHENSIVE
MEMBERS' INCOME RETAINED TOTAL
CONTRIBUTIONS (LOSSES) EARNINGS EQUITY
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $693 $(3,250) $23,251 $20,694
NCRIC Physician organization
members' contributions 104 - - 104
Net unrealized investment
gains, net of deferred taxes - 4,285 - 4,285
Net income - - 699 699
------------- ------------- ------------- -------
BALANCE, DECEMBER 31, 1995 797 1,035 23,950 25,782
Net unrealized investment losses,
net of deferred income taxes - (1,349) - (1,349)
Net income - - 991 991
------------- ------------- ------------- -------
BALANCE, DECEMBER 31, 1996 797 (314) 24,941 25,424
Net unrealized investment gains,
net of deferred income taxes - 1,103 - 1,103
Net income - - 959 959
------------- ------------- ------------- -------
BALANCE, DECEMBER 31, 1997 797 789 25,900 27,486
Net unrealized investment gains, net of
deferred income taxes (unaudited) - 1,872 - 1,872
Net income (unaudited) - - 2,522 2,522
------------- ------------- ------------- -------
BALANCE, SEPTEMBER 30, 1998
(UNAUDITED) $797 $ 2,661 $28,422 $31,880
============= ============= ============= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NATIONAL CAPITAL RECIPROCAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
--------------------------------- ------------------------------------
1998 1997 1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,522 $ 779 $ 959 $ 991 $ 699
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (128) (96) (90) (229) (1,703)
Amortization and depreciation 168 197 486 809 40
Loss on sale of building - - 197 - -
Deferred federal income taxes (799) 7 133 201 (92)
Changes in assets and liabilities:
Reinsurance recoverable (3,271) 1,895 (2,609) 1,588 7,595
Other assets 198 (533) (562) (924) 1,080
Losses and loss adjustment expenses 7,194 618 3,930 (827) (8,557)
Retrospective premiums accrued under
reinsurance treaties (6,041) (187) (1,043) 2,776 558
Unearned premiums 6,547 3,760 403 - -
Other liabilities 2,003 (1,372) (176) 952 (1,746)
-------- -------- -------- -------- ---------
Net cash flows from operating 8,393 5,068 1,628 5,337 (2,126)
activities -------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (53,801) (44,781) (64,363) (72,427) (128,686)
Sales, maturities and redemptions of investments 47,240 47,188 61,122 63,971 131,979
Purchases of property and equipment (738) (486) (516) - (27)
Proceeds from sale of building - - 1,178 - -
-------- -------- -------- -------- ---------
Net cash flows from investing (7,299) 1,921 (2,579) (8,456) 3,266
activities -------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
NCRIC Physicians Organization
members' contributions - - - - 104
-------- -------- -------- -------- ---------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 1,094 6,989 (951) (3,119) 1,244
-------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,065 5,016 5,016 8,135 6,891
-------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, $ 5,159 $ 12,005 $ 4,065 $ 5,016 $ 8,135
======== ======== ======== ======== =========
END OF PERIOD
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ - $ - $ - $ 645 $ -
======== ======== ======== ======== =========
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
NATIONAL CAPITAL RECIPROCAL INSURANCE COMPANY AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- ------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting - National Capital Reciprocal Insurance
Company (NCRIC) was established in 1980 as a reciprocal, or interinsurance
exchange, with assistance from the Medical Society of the District of
Columbia (the Medical Society). Together with its subsidiaries, NCRIC
provides comprehensive professional liability and office premises liability
insurance under nonassessable policies to physicians having their principal
practice in the District of Columbia, Maryland, or Virginia. A majority of
NCRIC's business is written in the District of Columbia. As a reciprocal,
NCRIC is an unincorporated association controlled by its members who are
policyholders. The members act through a designated attorney-in-fact,
National Capital Underwriters, Inc. (NCUI) to exchange contracts among
themselves.
NCRIC has issued policies on both an occurrence and a claims-made basis.
However, subsequent to June 1, 1986, substantially all policies were issued
on the claims-made basis. Occurrence-basis policies provide coverage to the
policyholder for all losses incurred during the policy year regardless of
when the related claims are reported. Claims-made basis policies provide
coverage to the policyholder for covered claims reported during the current
policy year provided the related losses were incurred while claims-made basis
policies were in effect.
Tail coverage is offered for doctors terminating their membership in NCRIC.
This coverage extends the reporting period ad infinitum in which to report
future claims resulting from incidents occurring while a claims-made policy
was in effect. Beginning in 1988, NCRIC began to issue prior acts insurance
coverage, subject to underwriting criteria for new members. Such coverage
extends the effective date of claims-made policies to designated periods
prior to membership in NCRIC.
Principles of Consolidation - The consolidated financial statements include
the accounts of NCRIC and its subsidiaries (the Company). All significant
intercompany transactions have been eliminated in consolidation. The Company
includes the following entities:
. National Capital Reciprocal Insurance Company
. Commonwealth Medical Liability Insurance Company
. National Capital Underwriters, Inc.
. National Capital Insurance Brokerage, Ltd.
. NCRIC Insurance Agency, Inc.
F-6
<PAGE>
. NCRIC Physicians Organization, Inc.
. NCRIC MSO, Inc.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which differ from statutory
accounting practices prescribed or permitted for insurance companies by
regulatory authorities.
Interim Financial Information - The unaudited consolidated statements in the
nine month periods ended September 30, 1998 and 1997, and related disclosures
in these notes include all adjustments, consisting of normal recurring
accruals, which in the opinion of management are necessary in order to make
the financial statements not misleading.
Cash Equivalents - For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity of three
months or less to be cash equivalents.
Investments - The Company has classified its investments as available for
sale and has reported them at fair value, with unrealized gains and losses
excluded from earnings and reported, net of deferred taxes, as a component of
equity and other comprehensive income. Realized gains and losses are
determined using the specific identification method.
Property and Equipment - Fixed assets are recorded at cost. Depreciation is
recorded using the straightline method over estimated useful lives of 31.5
years for real estate and generally three to five years for other fixed
assets.
Liabilities for Losses and Loss Adjustment Expenses - Liabilities for losses
and loss adjustment expenses are established on the basis of reported losses
and a provision for losses incurred but not reported and related loss
adjustment expenses. These amounts are based on the estimates of management
and are subject to risks and uncertainties. As facts become known,
adjustments to these estimates are reflected in earnings. The Company
protects itself from excessive losses by reinsuring certain levels of risk in
various areas of exposure with reinsurers. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss and loss
adjustment expense reserve associated with the reinsured policy.
Recognition of Premiums Revenue - Premiums are earned pro rata over the terms
of the policies. Advance premiums at September 30, 1998 and 1997
(unaudited), represent premiums received prior to September 30 for policies
effective in the succeeding policy year. During 1997 the Company began to
stagger the effective dates of premium renewals, which resulted in unearned
premium income for premiums collected prior to year-end but unearned until
the following year.
Income Taxes - The Company uses the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recognized
for tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
Reclassifications - In order to conform to the current presentation, certain
prior year balances, relating to losses and loss adjustment expenses,
retrospective premiums accrued under reinsurance treaties, and other items
have been reclassified.
F-7
<PAGE>
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant accounts subject to management estimates are
reinsurance recoverable and liabilities for losses and loss adjustment
expenses.
2. INVESTMENTS
The following tables show the amortized cost and fair value of investments
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
As of September 30, 1998 (Unaudited) COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and agencies $29,276 $1,576 $ - $ 30,852
Corporate 18,849 750 (60) 19,539
Tax-exempt obligations 19,367 1,186 (1) 20,552
Mortgage-backed securities 27,126 614 (71) 27,669
------- ------ ----- --------
94,618 4,126 (132) 98,612
Preferred stocks 5,235 116 (78) 5,273
------- ------ ----- --------
Total $99,853 $4,242 $(210) $103,885
======= ====== ===== ========
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
As of December 31, 1997 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and agencies $28,293 $ 115 $ (7) $28,401
Corporate 16,168 394 (28) 16,534
Tax-exempt obligations 20,811 383 (11) 21,183
Mortgage-backed securities 23,683 241 (6) 23,918
------- ------ ----- -------
88,955 1,133 (52) 90,036
Preferred stocks 4,208 136 (18) 4,326
------- ------ ---- -------
Total $93,163 $1,269 $ (70) $94,362
======= ====== ==== =======
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
As of December 31, 1996 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and agencies $20,182 $ 29 $(429) $19,782
Corporate 13,371 70 (53) 13,388
Tax-exempt obligations 20,116 18 (7) 20,127
Mortgage-backed securities 31,513 - (80) 31,433
------- ---- ----- -------
85,182 117 (569) 84,730
Preferred stocks 4,877 27 (48) 4,856
------- ---- ----- -------
Total $90,059 $144 $(617) $89,586
======= ==== ===== =======
</TABLE>
The amortized cost and fair value of debt securities and preferred stocks at
September 30, 1998 (unaudited) and December 31, 1997, are shown by maturity.
Actual maturities will differ from contractual maturities because borrowers
may have the right to prepay obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
IN THOUSANDS
---------------------------------------------------------------------
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------------------- --------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 5,122 $ 5,154 $ 5,971 $ 6,054
Due after one year through five years 10,483 10,819 17,027 16,976
Due after five years through ten years 20,138 21,208 12,962 13,184
Due after ten years 31,749 33,762 29,312 29,904
------- -------- ------- -------
67,492 70,943 65,272 66,118
Preferred stocks 5,235 5,273 4,208 4,326
Mortgage-backed securities 27,126 27,669 23,683 23,918
------- -------- ------- -------
Total $99,853 $103,885 $93,163 $94,362
======= ======== ======= =======
</TABLE>
Proceeds from bond maturities and redemptions of fixed maturity investments
during the nine month period ended September 30, 1998 (unaudited), and during
the years ended December 31, 1997 and 1996, were $47,240,000, $35,475,000,
and $59,577,000, respectively. Gross gains of $572,000, $300,000, $451,000,
and $1,853,000 and gross losses of $327,000, $210,000, $221,000, and $150,000
were realized on bond redemptions during the nine month period ended
September 30, 1998 (unaudited), and during years December 31, 1997, 1996, and
1995, respectively.
F-9
<PAGE>
3. LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses represent an
estimate of the ultimate net cost of all losses that are unpaid at the
balance sheet date, and is based on the loss and loss adjustment expense
factors inherent in the Company's experience and expectations. Estimation
factors used by the Company reflect current case-basis estimates
(supplemented by industry statistical data) and give effect to estimates of
trends in claim severity and frequency. These estimates are continually
reviewed, and adjustments, reflected in current operations are made thereto
as deemed necessary.
Although the Company believes the liabilities for losses and loss adjustment
expenses are reasonable and adequate for the circumstances, it is possible
that the Company's actual incurred losses and loss adjustment expenses will
not conform to the assumptions inherent in the determination of the
liabilities. Accordingly, the ultimate settlement of losses and the related
loss adjustment expenses may vary from the amounts included in the financial
statements.
Activity in the liabilities for losses and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------------- ---------------------------------------------
1998 1997 1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE, Beginning
of period $75,136 $71,206 $71,206 $72,033 $80,590
Less reinsurance
recoverable 17,077 14,679 14,679 16,182 21,925
------- ------- ------- ------- -------
NET BALANCE 58,059 56,527 56,527 55,851 58,665
------- ------- ------- ------- -------
Incurred related to:
Current year 12,653 14,816 19,444 16,775 16,094
Prior years (832) (3,122) (3,853) (1,539) (4,805)
------- ------- ------- ------- -------
Total incurred 11,821 11,694 15,591 15,236 11,289
------- ------- ------- ------- -------
Paid related to:
Current year 1,502 1,320 1,867 2,145 1,448
Prior years 6,648 7,870 12,192 12,415 12,655
------- ------- ------- ------- -------
Total paid 8,150 9,190 14,059 14,560 14,103
------- ------- ------- ------- -------
NET BALANCE 61,730 59,031 58,059 56,527 55,851
Plus reinsurance
recoverable 20,600 12,793 17,077 14,679 16,182
------- ------- ------- ------- -------
BALANCE, End of period $82,330 $71,824 $75,136 $71,206 $72,033
======= ======= ======= ======= =======
</TABLE>
F-10
<PAGE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses decreased as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------
1998 1997 1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Decrease in loss provision $ 832 $3,122 $3,853 $1,539 $4,805
</TABLE>
4. RENEWAL CREDIT DIVIDENDS TO POLICYHOLDERS
In 1998, 1997, and 1996, the Company declared renewal credit dividends to its
policyholders, which are payable in the form of a premium credit on the
succeeding year's policy premiums. The Company accrued policyholders'
dividend credits in the period declared as a reduction of premium income.
5. REINSURANCE AGREEMENTS
The Company has reinsurance agreements that allow the Company to write
policies with higher coverage limits than it is individually capable or
desirous of retaining by reinsuring the amount in excess thereof. The
Company has both excess of loss treaties and quota share treaties.
The Company is contingently liable in the event the reinsurers are unable to
meet their obligations under these contracts. There were unused letters of
credit executed by reinsurers in favor of the Company of $169,000, $169,000,
and $2,852,000 at September 30, 1998 (unaudited) and December 31, 1997, 1996,
respectively. Such letters of credits are issued as security against ceded
losses recoverable in the future.
The effect of reinsurance on premiums written and earned for the periods
ended are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
(Unaudited) (UNAUDITED)
---------------------- ---------------------
Written EARNED WRITTEN EARNED
<S> <C> <C> <C> <C>
Direct $18,753 $12,206 $17,666 $13,906
Ceded 2,849 3,724 (1,808) (2,000)
------- ------- ------- -------
Net $21,602 $15,930 $15,858 $11,906
======= ======= ======= =======
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
<S> <C> <C> <C> <C> <C> <C>
Direct $17,869 $17,466 $19,017 $19,017 $19,506 $19,506
Ceded (1,854) (1,854) (4,239) (4,239) (9,561) (9,561)
-------------- -------------- -------------- -------------- -------------- --------------
Net $16,015 $15,612 $14,778 $14,778 $ 9,945 $ 9,945
============== ============== ============== ============== ============== ==============
</TABLE>
Ceded premiums for the period ended September 30, 1998 include a credit of
$8,356,000 (unaudited) relating to retrospective premiums previously accrued
under reinsurance treaties. The credit is a result of loss development
associated with claims made in prior periods.
6. OTHER TRANSACTIONS WITH AFFILIATES
NCUI is the designated attorney-in-fact for each policyholder physician under
an Application for Membership/Power of Attorney, which each physician signs
when applying for insurance coverage with NCRIC. Duties and responsibilities
at NCUI are detailed in a management agreement. Under such agreement, NCUI
manages NCRIC and performs all operating functions. NCUI is reimbursed by
NCRIC for all expenses incurred in this capacity, limited to 18% of net
billed premiums. Payments made to NCUI based on budgeted expenses are
subject to retrospective adjustment with amounts in excess of allowable
expenses returnable to NCRIC after the end of NCUI's fiscal year. Such
payments totaled $2,728,000 (15.3% of net billed premiums), $2,657,000 (14.5%
of net billed premiums), and $2,444,000 (12.9% of net billed premiums), for
the years ended December 31, 1997, 1996, and 1995, respectively.
Effective June 30, 1997, NCRIC purchased 100% of NCUI's issued and
outstanding stock, and NCUI is consolidated from that time on.
7. INCOME TAXES
The Company files a consolidated Federal income tax return.
Deferred federal income tax is created by temporary differences that will
result in net taxable amounts in future years due to the differing treatment
of certain items for tax and financial statement purposes.
F-12
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of
the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 ---------------------------
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
Deferred tax assets:
Unearned premiums $ 684 $ 271 $ 273
Discounted losses reserves 3,088 2,482 2,715
Fair valuation of investments - - 160
Depreciation and amortization 69 71 -
Minimum tax credit carryforward - 213 188
Other 160 165 172
------- ------ ------
4,001 3,202 3,508
------- ------ ------
Deferred tax liabilities:
Fair valuation of investments (1,371) (409) -
Depreciation and amortization - - (13)
------- ------ ------
(1,371) (409) (13)
------- ------ ------
Net deferred tax assets $ 2,630 $2,793 $3,495
======= ====== ======
</TABLE>
Federal income tax expense differs from that calculated using established
corporate rates primarily due to nontaxable investment income as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD ENDED SEPTEMBER 30,
---------------------------------------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
------------------------- ------------------------
% OF PRETAX % OF PRETAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Federal income tax
at statutory rates $1,187 34 % $ 243 34 %
Tax-exempt income, net (248) (7) (274) (38)
Dividend received, net (51) (1) (48) (7)
Reorganization costs, net 128 4
Other, net (47) (2) 16 2
------ --- ----- ---
Federal income tax
at effective rates $ 969 28 % $ (63) (9)%
====== === ===== ===
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996 1995
------------------------ --------------------------- -----------------------
% OF PRETAX % OF PRETAX % OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Federal income tax $ 285 34 % $ 440 34 % $ 273 34 %
at statutory rates
Tax-exempt income, net (355) (42) (47) (4) (105) (13)
Dividend received, net (66) (8) (74) (6) (70) (9)
Other, net 14 1 (16) (1) 6 1
----- ---- ----- --- ----- ---
Federal income tax
at effective rates $(122) (15)% $ 303 23 % $ 104 13 %
===== ==== ===== === ===== ===
</TABLE>
8. SALE OF BUILDING AND COMMITMENTS
On November 7, 1997, NCRIC sold its office building to an unrelated party.
The transaction resulted in a loss of $197,000, which was recognized in 1997.
According to the terms of a post-sale lease between the new owner and NCRIC,
NCRIC remained in the office space until the end of April 1998.
NCRIC entered into an operating lease for new office space located in
Washington, D.C., effective on April 15, 1998. The lease terms are for 10
years with a monthly base rent of $35,000 and a 2.0% "annual escalator." As
of September 30, 1998, future minimum commitments under this noncancelable
lease, which began on April 15, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 105
1999 427
2000 436
2001 444
2002 453
Thereafter 2,569
------
Total $4,434
======
</TABLE>
Rent expense during the nine months ended September 30, 1998 (unaudited) was
$190,000.
On December 22, 1997, NCRIC entered into a line-of-credit agreement with a
bank for $2,500,000. This line of credit is unsecured and is renewable
annually. As of September 30, 1998, NCRIC had not drawn down on this
facility.
F-14
<PAGE>
9. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The effects on these GAAP financial statements of the differences between the
statutory basis of accounting prescribed or permitted by the District of
Columbia Department of Insurance and Securities Regulation (DISR) and GAAP
are summarized below (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 ------------------------------------------
(UNAUDITED) 1997 1996 1995
<S> <C> <C> <C> <C>
POLICYHOLDERS' SURPLUS -
STATUTORY BASIS $24,836 $23,258 $22,365 $21,177
Effects of fair valuation of investments 2,661 789 (314) 1,035
Effects of deferred taxes 4,001 3,202 3,335 3,536
Effects of nonadmitted assets and other 382 237 38 34
------- ------- ------- -------
EQUITY - GAAP BASIS $31,880 $27,486 $25,424 $25,782
======= ======= ======= =======
NET INCOME - STATUTORY BASIS $ 1,996 1,726 814 1,484
Effects of deferred taxes 799 (133) (201) 92
Effects of consolidation versus equity
method of accounting for subsidiaries (273) (634) 378 (877)
------- ------- ------- -------
NET INCOME - GAAP BASIS $ 2,522 $ 959 $ 991 $ 699
======= ======= ======= =======
</TABLE>
As of September 30, 1998 (unaudited), December 31, 1997 and 1996, statutory
capital for NCRIC was sufficient to satisfy regulatory requirements. Each
insurance company is restricted under the applicable Insurance Code as to the
amount of dividends it may pay without regulatory consent.
During 1997, NCRIC received permission from DISR to account for certain
receivable balances due, pursuant to an executed retrospective rating plan
agreement, as direct accrued retrospective premiums receivable. The balance
was established in accordance with the NAIC Annual Statement instructions
manual, which requires 10% of the balance to be included as nonadmitted.
This permitted practice had a positive $900,000 monetary effect on the
statutory surplus for the year ended December 31, 1997.
10. SUBSEQUENT EVENTS
On April 20, 1998, the Board adopted a plan to reorganize into a stock
insurance company with a mutual insurance holding company parent (the
Reorganization). Pursuant to the Reorganization to be effective December 31,
1998, the Company will form a mutual insurance holding company, which is
called NCRIC, A Mutual Holding Company. The Company will continue its
corporate existence as a stock insurance company (the "Reorganized Stock
Company") by adopting Articles of Incorporation which will authorize the
issuance of capital stock, and which will change the Company's name to NCRIC,
Inc.
F-15
<PAGE>
Through a series of share transfers, two newly formed intermediate stock
holding companies, named NCRIC Holdings, Inc. ("NCRIC Holdings") and NCRIC
Group, Inc. ("NCRIC Group" and, together with NCRIC Holdings, the
"Intermediate Stock Holding Companies") will be inserted between the Mutual
Holding Company and the Reorganized Stock Company. After the Reorganization,
the Mutual Holding Company will directly own the Company, as converted, all
in accordance with District of Columbia law, including the Reciprocal
Insurance Company Conversion Act of 1998, D.C. Act 12-301, as enacted by the
Council of the District of Columbia.
The Reorganization will separate the contract rights and membership interests
of the policyholders so that their contract rights will remain with the
Reorganized Stock Company, while their membership interests will be in the
Mutual Holding Company. Each policyholder of a policy that is in force as of
the effective time and who is a member of the Company, pursuant to the
Reorganization, will become a member of the Mutual Holding Company, which
will result in such member's membership interests in the Company being
replaced by a membership interest in the Mutual Holding Company.
The membership interests in the Mutual Holding Company will include the right
to vote at annual or special meetings of the Mutual Holding Company. Holders
of membership interests in the Mutual Holding Company generally will not
receive dividends or other distributions attributable to their membership
interests in the Mutual Holding Company. If any distributions were ever
made, in the event of the voluntary dissolution of the Mutual Holding Company
or otherwise, the approval of DISR would be required.
On December 20, 1998, NCRIC entered into a definitive agreement to acquire
the management services businesses of HealthCare Consulting, Inc., HCI
Ventures, LLC, and Employee Benefit Services, Inc.
11. COMPREHENSIVE INCOME
NCRIC adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, during 1998. Prior financial statements have been
restated to conform to the requirements of this Standard. Accumulated Other
Comprehensive Income balances represent net unrealized investment gains or
losses net of deferred income taxes.
* * * * *
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
Healthcare Consulting, Inc., HCI
Ventures, LLC, and Employee
Benefits Services, Inc. (EBSI)
Lynchburg, Virginia
We have audited the accompanying combined balance sheets of the management
services of Healthcare Consulting, Inc. (HCI), HCI Ventures, LLC (HCIV), and
Employee Benefits Services, Inc. (EBSI) (collectively, the Companies) as of
December 31, 1997, and the related combined statements of income and
comprehensive income, owners' equity, and cash flows for the year then ended.
These combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined 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 audit provides a reasonable basis for our
opinion.
The accompanying combined financial statements were prepared to present the
financial position, results of operations and cash flows of HCI, HCIV, and EBSI
that relate to the delivery of professional practice management services to
physicians and dentists and to the administration of retirement and other
employee benefit plans. Because they exclude HCIV's investment in Cornerstone
Capital Management, LLC, such financial statements are not intended to be a
complete presentation of the financial position, results of operations and cash
flows of the Companies.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the management services of the
Companies as of December 31, 1997, and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
December 4, 1998 (except for Note 1 paragraph 3, as to which
the date is December 21, 1998)
Washington, DC
F-17
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 207,135 $ 97,273
Accounts receivable (net of allowance for
doubtful accounts of $135,000 and $130,000) 998,675 859,354
Notes receivable 50,295 10,487
---------- ----------
Total current assets 1,256,105 967,114
PROPERTY AND EQUIPMENT - Net 262,918 219,822
ADVANCES TO AFFILIATES 90,190 173,088
INVESTMENTS IN MANAGEMENT SERVICE
ORGANIZATIONS 22,246 22,246
OTHER ASSETS 66,463 69,727
---------- ----------
TOTAL ASSETS $1,697,922 $1,451,997
========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 607,191 $ 160,210
Obligations under line of credit - 239,000
Income taxes payable 25,000 -
Deferred income taxes 280,000 304,000
---------- ----------
Total current liabilities 912,191 703,210
LONG-TERM LIABILITY 90,000 90,000
---------- ----------
Total liabilities 1,002,191 793,210
---------- ----------
OWNERS' EQUITY:
Common stock (HCI) ($1 par value - 1,500 shares
authorized, issued 377 and 344) 377 344
Common stock (EBSI) ($1 par value - 1,500 shares
authorized, issued 377 and 353) 377 353
Limited liability company capital (HCIV) 20,502 20,502
Additional paid-in capital (HCI) 4,491 4,491
Retained earnings 670,184 633,297
Less treasury stock (200 shares at cost) (200) (200)
---------- ----------
Total owners' equity 695,731 658,787
---------- ----------
TOTAL LIABILITIES AND OWNERS' EQUITY $1,697,922 $1,451,997
========== ==========
</TABLE>
See notes to combined financial statements.
F-18
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
REVENUES $3,479,793 $3,927,524
---------- ----------
COSTS AND EXPENSES:
Administrative and consulting salaries 1,482,839 1,616,960
Owners' compensation 927,048 983,805
Rent 140,246 143,897
Office supplies 87,968 94,201
Travel 98,884 80,009
Telephone 73,079 70,905
Other administrative expenses 621,086 750,002
---------- ----------
Total costs and expenses 3,431,150 3,739,779
---------- ----------
OPERATING INCOME 48,643 187,745
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 31,093 69,180
Interest expense (8,849) (13,476)
---------- ----------
Other income - net 22,244 55,704
---------- ----------
INCOME BEFORE INCOME TAXES 70,887 243,449
INCOME TAX PROVISION 4,000 74,000
---------- ----------
NET INCOME AND COMPREHENSIVE INCOME $ 66,887 $ 169,449
========== ==========
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OWNERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
LIMITED
LIABILITY ADDITIONAL
COMMON STOCK (HCI) COMMON STOCK (EBSI) COMPANY PAID-IN TOTAL
------------------ ------------------- CAPITAL CAPITAL RETAINED TREASURY OWNERS'
SHARES AMOUNT SHARES AMOUNT (HCIV) (HCI) EARNINGS STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 337 $337 353 $353 $ - $4,491 $463,848 $(200) $468,829
Sale of common stock 7 7 - - - - - - 7
Capital contributions - - - - 20,758 - - - 20,758
Distributions to owners - - - - (256) - - - (256)
Net income - - - - - - 169,449 - 169,449
----- ------ ------- ------- ------- -------- -------- ------ --------
BALANCE, DECEMBER 31, 1997 344 344 353 353 20,502 4,491 633,297 (200) 658,787
Sale of common stock (Unaudited) 33 33 24 24 - - - - 57
Distributions to owners (Unaudited) - - - - - - (30,000) - (30,000)
Net income (Unaudited) - - - - - - 66,887 - 66,887
----- ------ ------- ------- ------- -------- -------- ------ --------
BALANCE, SEPTEMBER 30, 1998
(Unaudited) 377 $377 377 $377 $20,502 $4,491 $670,184 $(200) $695,731
===== ====== ======= ======= ======= ======== ======== ====== ========
</TABLE>
See notes to combined financial statements.
F-20
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 66,887 $ 169,449
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 56,875 58,779
Deferred income taxes (21,000) 74,000
Changes in assets and liabilities:
Accounts receivable, net (139,321) (208,956)
Accounts payable and accrued liabilities 446,981 59,749
Income taxes payable 25,000 -
Other assets 264 267
--------- ---------
Net cash provided by operating activities 435,686 153,288
--------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (99,971) (100,281)
Repayment of advances from affiliates 43,090 8,412
Investment in management service organizations - (22,246)
--------- ---------
Net cash used in investing activities (56,881) (114,115)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 57 7
Limited liability company capital contributions - 20,758
Distributions to owners (30,000) (256)
Repayments of borrowings under line of credit (239,000) (11,000)
--------- ---------
Net cash (used in) provided by
financing activities (268,943) 9,509
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 109,862 48,682
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 97,273 48,591
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 207,135 $ 97,273
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 8,849 $ 13,476
========= =========
</TABLE>
See notes to combined financial statements.
F-21
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting - Healthcare Consulting, Inc. (HCI), HCI
Ventures, LLC (HCIV), and Employee Benefits Services, Inc. (EBSI)
(collectively, the Companies) are engaged in the businesses of providing
practice management services, accounting and tax services, personal financial
planning services to medical and dental practices and retirement planning
services and administration to medical and dental practices and certain other
businesses throughout the Mid-Atlantic Region. HCI was formed in 1978 as
Professional Consultants, Inc. and changed its name to HCI in 1992. HCIV was
formed in 1997 to own equity interests in certain management service
organizations for which HCI provides services. EBSI was formed in 1989 to
provide administrative services to retirement and other benefit plans.
The combined financial statements reflect the accounts and activities of HCI
and EBSI, and the investments in management service organizations by HCIV.
They exclude accounts and activities related to HCIV's investment in
Cornerstone Capital Management, LLC (Cornerstone). Combined financial
statements are presented based on the common ownership and management of the
entities. Significant transactions between the entities have been
eliminated.
On December 20, 1998, the owners of HCI, HCIV, and EBSI entered into a
definitive agreement to sell the Companies' assets, exclusive of HCIV's
investment in Cornerstone, to National Capital Reciprocal Insurance Company.
The accompanying combined financial statements do not reflect the effects of
any adjustments arising from such a transaction.
Cash and Cash Equivalents - For purposes of reporting cash flows, the
Companies consider short-term investments purchased with an initial maturity
of three months or less to be cash equivalents.
Property and Equipment - Fixed assets are recorded at cost. Depreciation is
recorded using the straight-line method over estimated useful lives of 10
years for furniture and fixtures and generally three to five years for other
fixed assets.
Investments in Management Service Organizations - Investments in management
service organizations represent equity interests ranging from five percent to
20 percent and are carried at cost.
Intangible Assets - Goodwill of $55,000, arising from HCI's acquisition of a
small professional services consulting firm in 1997, is amortized on a
straight-line basis over twenty years. Goodwill is included in other assets
and is shown net of accumulated amortization of $917 as of December 31, 1997.
Revenue Recognition - Revenue is recognized as services are performed under
terms of management and other contracts. Revenue is generally billed in the
month following the performance of related services.
F-22
<PAGE>
Income Taxes - HCI uses the asset and liability method of accounting for
income taxes. Under this method, deferred income taxes are recognized for
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. HCI
files its income tax returns on a modified cash basis. HCIV is treated as a
flow-through entity for tax purposes and, as such, no provision for income
taxes has been recorded for its operations. EBSI has elected to be taxed
under Subchapter S of the Internal Revenue Code and is, therefore, also
treated as a flow-through entity for tax purposes.
New Accounting Standards - For the nine months ended September 30, 1998, the
Companies adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, and have presented
statements of income and comprehensive income for all periods presented. As
the Companies have not engaged in transactions resulting in other
comprehensive income, the adoption of this statement did not have a material
effect on the financial statements.
Impairment of Long-Lived Assets - The Companies review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. During the year ended
December 31, 1997, the Companies did not find it necessary to record a
provision for impairment of such assets.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Companies to concentrations of credit risk are principally
accounts and notes receivable. The Companies perform credit evaluations and
generally do not require collateral to support receivables.
Litigation - The Companies are subject to claims arising in the normal course
of its business. Management does not believe that any such claims or
assessments will have a material effect on the Companies' financial position,
results of operations or cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997, are summarized as follows:
<TABLE>
<S> <C>
Computer equipment $ 187,859
Other equipment 400,256
Furniture, fixtures, and leasehold improvements 113,027
---------
701,142
Less: Accumulated depreciation
and amortization (481,320)
---------
Property and equipment - net $ 219,822
=========
</TABLE>
Included in property and equipment are approximately $350,000 of fully
depreciated assets.
F-23
<PAGE>
3. OBLIGATIONS UNDER LINE OF CREDIT
Indebtedness at December 31, 1997, is attributable to a $250,000 bank credit
facility which matures on March 1, 1999, and is collateralized by HCI's
receivables. Interest charged on the outstanding balance is equal to the
bank's prime rate plus 1% per annum. The weighted average interest rate
charged on the credit facility was 8.97% for the year ended December 31,
1997.
4. COMMITMENTS AND CONTINGENCIES
Leases - The Companies have entered into operating leases for office space
and equipment. The future minimum lease payments under noncancelable
operating leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
OFFICE OFFICE
SPACE EQUIPMENT TOTAL
<S> <C> <C> <C>
1998 $192,000 $ 4,000 $196,000
1999 179,000 3,000 182,000
2000 161,000 3,000 164,000
2001 93,000 1,000 94,000
2002 67,000 1,000 68,000
2003 16,000 - 16,000
-------- ------- --------
Total minimum lease payments $708,000 $12,000 $720,000
======== ======= ========
</TABLE>
The above future lease payments contain related party rents of approximately
$60,000 for the years ending December 31, 1998 through 2000 (see Note 6).
Employment Agreements - HCI has entered into employment agreements with its
owners and certain other key employees. These agreements include covenants
not to compete and , in one case, will provide the employee with severance
pay based on his final 12-month's compensation. The Companies' estimated
obligation for such severance of $90,000 is reflected as a long-term
liability as of December 31, 1997.
5. INCOME TAXES
Deferred tax assets and liabilities as of December 31, 1997, are comprised
principally of the following components:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax liabilities:
Receivables $311,000
Depreciation 27,000
--------
Total deferred tax liabilities 338,000
--------
Deferred tax assets:
Accounts payable and accrued liabilities (7,000)
Accrued severance (35,000)
Net operating loss carryforwards (3,000)
--------
Total deferred tax assets (45,000)
--------
Net deferred tax liabilitity $293,000
========
</TABLE>
F-24
<PAGE>
The deferred tax assets and liabilities have been classified in the
accompanying December 31, 1997 balance sheet as follows:
<TABLE>
<S> <C>
Current liabilities $304,000
Other assets (11,000)
--------
$293,000
========
</TABLE>
The income tax provision for the year ended December 31, 1997, consists of
the following:
<TABLE>
<S> <C>
Federal:
Current -
Deferred 69,000
-------
69,000
-------
State:
Current -
Deferred 5,000
-------
5,000
-------
$74,000
=======
</TABLE>
The Companies' effective income tax rate is comprised principally of the
statutory Federal income tax rate of 35% plus state income taxes, net of
Federal benefit, applied to HCI's operating results.
6. RELATED PARTY TRANSACTIONS
The total revenues reported in the combined statement of income and
comprehensive income for the year ended December 31, 1997, include
approximately $80,000 earned by HCI from management service organizations in
which HCIV has an equity investment.
Advances to affiliates include working capital advances to Cornerstone
Capital Management, LLC, an investment management company that is 75% owned
by HCIV, and other working capital advances to management service
organizations in which HCIV has an equity investment.
HCI rents an office building from a partnership whose partners are HCI
owners. For this property, HCI paid approximately $62,000 in rent for the
year ended December 31, 1997.
Included in accounts payable and accrued expenses as of September 30, 1998,
is approximately $500,000 of owners' compensation (Unaudited).
7. EMPLOYEE BENEFIT PLANS
The Companies sponsor a defined contribution money purchase pension plan.
Employees who are 21 years or older and have 2 years of service are eligible
for participation in the plan. Under the plan, the Companies contribute 5%
of each participant's total annual compensation. All contributions are 100%
vested. The contributions for the year ended December 31, 1997, were
approximately $128,000.
F-25
<PAGE>
The Companies also sponsor a defined contribution 401(k) profit-sharing plan.
Employees who are 21 years or older and have one year of service are eligible
for participation in the plan. Employees may elect to contribute 1-15% of
total compensation. All contributions are 100% vested. The Companies are
not required to make matching contributions to the plan, but may make
discretionary contributions. Total contributions to the plan by the
Companies for the year ended December 31, 1997, were approximately $79,000.
* * * * * *
F-26
<PAGE>
PART II INFORMATION
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 9.1 of Group's articles of incorporation provides that Group shall
indemnify its directors and officers to the fullest extent permitted under
Group's bylaws and the law of the District of Columbia. Article VII of Group's
bylaws provides that Group shall indemnify its directors and officers to the
fullest extent permitted by law, as now in effect and as such law may be
amended.
Section 29-304(16) of the D.C. Code authorizes indemnifications of
directors and officers against expenses actually and necessarily incurred in
connection with the defense of an action, except in relation to matters as to
which such person is adjudged to be liable for negligence or misconduct in the
performance of duty. Such indemnification is not exclusive of other rights
under any bylaw agreement, vote of stockholders or otherwise.
The Company maintains directors' and officers' liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses of Group in connection with the
issuance and distribution of the shares being registered, other than
underwriting discounts and commissions. All such expenses are estimated except
for the SEC registration fee.
<TABLE>
<S> <C>
SEC Registration Fee........................ $ 3,581
NASD Fees................................... 10,800
Printing Expenses........................... 37,000
Accounting Fees and Expenses................ 175,000
Legal Fees and Expenses..................... 250,000
Appraisal Fees and Expenses................. 25,000
Blue Sky Fees and Expenses.................. 15,000
Underwriter Fees............................ 257,600
Underwriter Counsel Fees.................... 60,000
Transfer Agent's Fees and Expenses.......... 7,000
Miscellaneous............................... 59,000
--------
Total.................................... $899,981
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On December __, 1998, Group issued 1,000 shares of common stock to the
Mutual Holding Company pursuant to the Reorganization without registration under
the Securities Act. Group issued the shares in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving any public offering.
II-1
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.1..................... Engagement Letter
1.2*.................... Sales Agency Agreement for Syndicated Community
Offering
2.1..................... Plan of Reorganization
2.2*.................... Purchase Agreement Relating to HCI and HCIV
2.3*.................... Purchase Agreement Relating to EBSI
3.1..................... Articles of Incorporation of Group
3.2..................... Bylaws of Group
5.1*.................... Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC
10.1.................... Lease
10.2.................... Amendment to Lease
10.3.................... Stock Option Plan
10.4*................... ESOP Documents
10.5*................... Stock Award Plan
10.6.................... Employment Agreement between the Company and R. Ray
Pate, Jr.
10.7*................... Amendment to Employment Agreement between the
Company and R. Ray Pate, Jr.
10.8.................... Employment Agreement between the Company and
Stephen S. Fargis
10.9.................... Administrative Services Agreement
10.10*.................. Tax Sharing Agreement
21.1.................... Subsidiaries
23.1*................... Consent of Arent Fox Kintner Plotkin & Kahn, PLLC
(included in Exhibit 5.1)
23.2.................... Consent of Deloitte & Touche LLP
23.3*................... Consent of RP Financial
24.1.................... Power of Attorney (included on page II-4 of this
Registration Statement)
27.1.................... Financial Data Schedule for 1997
27.2.................... Financial Data Schedule for nine months ended
September 30, 1998
99.1*................... Valuation Report prepared by RP Financial
</TABLE>
__________________________
* To be filed by amendment.
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The Registrant undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any additional or changed material information
with respect to the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The Registrant undertakes to provide to any underwriters at the
closing certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to
each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item 24 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in Washington, D.C. on
December 22, 1998.
NCRIC GROUP, INC.
By: /s/ R. Ray Pate Jr.
-------------------------------------
R. Ray Pate, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints R. Ray Pate, Jr. and Nelson P. Trujillo, M.D.,
and each of them his true and lawful attorney-in-fact and agent with power of
substitution and resubstitution, for him or her, and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form SB-2, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done to comply with the provisions of
the Securities Act and all requirements of the Commission, hereby ratifying and
confirming all that said attorneys-in-fact or either of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this
registration statement has been signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Nelson P. Trujillo, M.D. Chairman of the Board December 22, 1998
- ---------------------------- of Directors
Nelson P. Trujillo, M.D.
/s/ R. Ray Pate, Jr. President, Chief Executive December 22, 1998
- ---------------------------- Officer and Director
R. Ray Pate, Jr. (Principal Executive
Officer)
/s/ Rebecca R. Crunk Chief Financial Officer December 22, 1998
- ---------------------------- (Principal Financial and
Rebecca B. Crunk Accounting Officer)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Vincent C. Burke, III Director December 22, 1998
- --------------------------------
Vincent C. Burke, III
/s/ Pamela W. Coleman, M.D. Director December 22, 1998
- --------------------------------
Pamela W. Coleman, M.D.
/s/ Charles H. Epps, Jr., M.D. Director December 22, 1998
- --------------------------------
Charles H. Epps, Jr., M.D.
/s/ Leonard M. Glassman, M.D. Director December 22, 1998
- --------------------------------
Leonard M. Glassman, M.D.
/s/ J. Paul McNamara Director December 22, 1998
- --------------------------------
J. Paul McNamara
/s/ Leonard Parver, M.D. Director December 22,1998
- --------------------------------
Leonard Parver, M.D.
/s/ Raymond Scalettar, M.D. Director December 22, 1998
- --------------------------------
Raymond Scalettar, M.D.
/s/ David M. Seitzman, M.D. Director December 22, 1998
- --------------------------------
David M. Seitzman, M.D.
</TABLE>
II-5
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.1..................... Engagement Letter
1.2*.................... Sales Agency Agreement for Syndicated Community
Offering
2.1..................... Plan of Reorganization
2.2*.................... Purchase Agreement Relating to HCI and HCIV
2.3*.................... Purchase Agreement Relating to EBSI
3.1..................... Articles of Incorporation of Group
3.2..................... Bylaws of Group
5.1*.................... Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC
10.1.................... Lease
10.2.................... Amendment to Lease
10.3.................... Stock Option Plan
10.4*................... ESOP Documents
10.5*................... Stock Award Plan
10.6.................... Employment Agreement between the Company and R. Ray
Pate, Jr.
10.7*................... Amendment to Employment Agreement between the
Company and R. Ray Pate, Jr.
10.8.................... Employment Agreement between the Company and
Stephen S. Fargis
10.9.................... Administrative Services Agreement
10.10*.................. Tax Sharing Agreement
21.1.................... Subsidiaries
23.1*................... Consent of Arent Fox Kintner Plotkin & Kahn, PLLC
(included in Exhibit 5.1)
23.2.................... Consent of Deloitte & Touche LLP
23.3*................... Consent of RP Financial
24.1.................... Power of Attorney (included on page II-4 of this
Registration Statement)
27.1.................... Financial Data Schedule for 1997
27.2.................... Financial Data Schedule for nine months ended
September 30, 1998
99.1*................... Valuation Report prepared by RP Financial
</TABLE>
__________________________
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
June 11, 1998
Board of Directors
National Capital Reciprocal Insurance Company
2170 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Attention: Mr. Ray Pate
President and Chief Executive Officer
-------------------------------------
Ladies and Gentlemen:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") is pleased to act as
an independent financial advisor to National Capital Reciprocal Insurance
Company ("NCRIC") in connection with NCRIC's proposed reorganization from a
reciprocal insurance company to a stock insurance company (the
"Reorganization"), including the offer and sale of certain shares of the common
stock of either NCRIC Holdings, Inc., NCRIC Group, Inc., any other intermediate
stock holding company formed by NCRIC, or their affiliates (each referred to
herein as the "Holding Company") or NCRIC, to NCRIC's eligible policyholders in
a Subscription Offering, under certain circumstances to members of NCRIC's
community in a Direct Community Offering and, under certain circumstances, to
the general public in a Syndicated Community Offering or a Public Offering
(collectively, the "Offerings"). For purposes of this letter, the term "Actual
Purchase Price" shall mean the price at which the shares of the Holding
Company's or NCRIC's common stock are sold in the applicable Offering. This
letter is to confirm the terms and conditions of our engagement.
ADVISORY SERVICES
- -----------------
Sandler O'Neill will act as a consultant and advisor to NCRIC and the
Holding Company and will work with NCRIC's management, counsel, accountants and
other advisors in connection with the Reorganization and the Offerings. We
anticipate that our services will include the following, each as may be
necessary and as NCRIC may reasonably request:
1. Consulting as to the securities marketing implications of any aspect
of the Plan of Reorganization and related corporate documents;
<PAGE>
National Capital Reciprocal Insurance Company
June 11, 1998
Page 2
2. Reviewing with the Board of Directors any independent appraiser's
appraisal of the common stock;
3. Reviewing all offering documents, including the Prospectus, stock
order forms and related offering materials (it being understood that
preparation and filing of such documents will be the responsibility of
NCRIC and the Holding Company and their counsel);
4. Assisting in the design and implementation of a marketing strategy for
the Offerings;
5. Assisting in obtaining all requisite regulatory approvals;
6. Assisting NCRIC's management in scheduling and preparing for meetings
with potential investors and broker-dealers; and
7. Providing such other general advice and assistance as may be requested
to promote the successful completion of the Reorganization.
SYNDICATED COMMUNITY OFFERING
- -----------------------------
If any shares of the Holding Company's or NCRIC's common stock, as
applicable, remain available after the expiration of the Subscription Offering
and any Direct Community Offering, at the request of NCRIC and subject to the
continued satisfaction of the conditions set forth in the second paragraph under
the caption "Definitive Agreement" below, Sandler O'Neill, if requested by
NCRIC, will seek to form a syndicate of registered dealers to assist in the sale
of such common stock in a Syndicated Community Offering on a best efforts basis,
subject to the terms and conditions set forth in a selected dealers agreement.
Sandler O'Neill will endeavor to limit the aggregate fees to be paid by NCRIC
under any such selected dealers agreement to an amount competitive with gross
underwriting discounts charged at such time for underwritings of comparable
amounts of stock sold at a comparable price per share in a similar market
environment, which shall not exceed 5.5% of the aggregate Actual Purchase Price
of the shares sold under such agreements. Sandler O'Neill will endeavor to
distribute the common stock among dealers in a fashion which best meets the
distribution objectives of NCRIC and the requirements of the Plan of
Reorganization, which may result in limiting the allocation of stock to certain
selected dealers. It is understood that in no event shall Sandler O'Neill be
obligated to act as a selected dealer or to take or purchase any shares of the
Holding Company's common stock.
<PAGE>
National Capital Reciprocal Insurance Company
June 11, 1998
Page 3
PUBLIC OFFERING
- ---------------
In the alternative, if any shares of the Holding Company's or NCRIC's
common stock, as applicable, remain available after the expiration of the
Subscription Offering and any Direct Community Offering, and subject to the
continued satisfaction of the conditions set forth in the second paragraph under
the caption "Definitive Agreement" below, Sandler O'Neill shall have the right
of first refusal to assist in the sale of such common stock to the general
public in a Public Offering on a best efforts basis, or to enter into an
agreement with the Holding Company or NCRIC for a firm commitment Public
Offering. The compensation to be received by Sandler O'Neill in a Public
Offering will be determined by NCRIC and Sandler O'Neill prior to the
commencement of the Public Offering. Any such underwriting agreement shall be
in a form satisfactory to Sandler O'Neill and NCRIC and shall contain customary
representations, warranties, conditions, agreements and indemnities. It is
understood that in no event shall Sandler O'Neill be obligated hereunder to
enter into an underwriting agreement or to take or purchase any shares of the
Holding Company's or NCRIC's common stock.
FEES
- ----
In connection with its Advisory Services hereunder, NCRIC agrees to pay
Sandler O'Neill an advisory fee of $50,000, $12,500 of which is payable on the
date of execution of this letter by the Company and the balance of which shall
be paid in three equal installments payable on the first day of each quarterly
period beginning on July 1, 1998.
If the Offerings are consummated, NCRIC agrees to pay Sandler O'Neill for
its services hereunder the transaction fees set forth below:
1. a fee of two percent (2.0%) of the aggregate Actual Purchase Price of
the shares of common stock sold in the Subscription Offering and in
the Direct Community Offering; and
2. with respect to any shares of the Holding Company's or NCRIC's common
stock sold by an NASD member firm (including Sandler O'Neill) under
any selected dealers agreement in the Syndicated Community Offering,
(a) the sales commission payable to the selected dealer under such
agreement, (b) any sponsoring dealer's fees, and (c) a management fee
to Sandler O'Neill of two percent (2.0%).
<PAGE>
National Capital Reciprocal Insurance Company
June 11, 1998
Page 4
If (i) Sandler O'Neill's engagement hereunder is terminated for any of the
reasons provided for under the second paragraph of the section of this letter
captioned "Definitive Agreement," or (ii) the Reorganization is terminated by
NCRIC, no transaction fees shall be payable by NCRIC to Sandler O'Neill
hereunder; however, NCRIC shall be obligated to pay Sandler O'Neill any unpaid
amount of the Advisory Fee and to reimburse Sandler O'Neill for its reasonable
out-of-pocket expenses incurred in connection with its engagement hereunder,
subject to the limitations set forth under the caption "Costs and Expenses".
All transaction fees payable to Sandler O'Neill hereunder shall be payable
in cash at the time of the closing of the applicable Offering. If any fees are
paid to Sandler O'Neill in connection with the Specific Advisory Services to be
rendered by Sandler O'Neill pursuant to the letter agreement between NCRIC and
Sandler O'Neill dated of even date herewith, $25,000 of such fee shall be
credited against any transaction fees payable to Sandler O'Neill at the time of
the closing of the Offerings.
COSTS AND EXPENSES
- ------------------
In addition to any fees that may be payable to Sandler O'Neill hereunder
and the expenses to be borne by NCRIC pursuant to the following paragraph, NCRIC
agrees to reimburse Sandler O'Neill, upon request made from time to time, for
its reasonable out-of-pocket expenses incurred in connection with its engagement
hereunder, regardless of whether the Reorganization or the Offerings are
consummated, including, without limitation, legal fees and expenses (up to a
maximum amount of $60,000), advertising, promotional, syndication and travel
expenses. The provisions of this paragraph are not intended to apply to or in
any way impair the indemnification provisions of this letter.
As is customary, NCRIC will bear all other expenses incurred in connection
with the Reorganization and the Offerings, including, without limitation, (i)
the cost of obtaining all securities and regulatory approvals, including any
required NASD filing fees; (ii) the cost of printing and distributing the
offering materials; (iii) the costs of blue sky qualification (including fees
and expenses of blue sky counsel) of the shares in the various states; (iv)
listing fees; and (v) all fees and disbursements of NCRIC's and the Holding
Company's counsel, accountants, agents and other advisors. In the event Sandler
O'Neill incurs any such fees and expenses on behalf of NCRIC or the Holding
Company, NCRIC will reimburse Sandler O'Neill for such reasonable fees and
expenses whether or not the Reorganization or the Offerings are consummated.
<PAGE>
National Capital Reciprocal Insurance Company
June 11, 1998
Page 5
DUE DILIGENCE REVIEW
- --------------------
Sandler O'Neill's obligation to perform the services contemplated by this
letter shall be subject to the satisfactory completion of such investigation and
inquiries relating to NCRIC and the Holding Company and their affiliates, and
their respective directors, officers, agents and employees, as Sandler O'Neill
and its counsel in their sole discretion may deem appropriate under the
circumstances. In this regard, NCRIC agrees that, at its expense, it will make
available to Sandler O'Neill all information which Sandler O'Neill requests, and
will allow Sandler O'Neill the opportunity to discuss with NCRIC's and the
Holding Company's management the financial condition, business and operations of
NCRIC and the Holding Company. NCRIC and the Holding Company acknowledge that
Sandler O'Neill will rely upon the accuracy and completeness of all information
received from NCRIC and the Holding Company and their directors, trustees,
officers, employees, agents, independent accountants and counsel.
BLUE SKY MATTERS
- ----------------
NCRIC agrees that if Sandler O'Neill's counsel does not serve as counsel
with respect to blue sky matters in connection with the Offerings, NCRIC will
cause the counsel performing such services to prepare a Blue Sly Memorandum
related to the Offerings including Sandler O'Neill's participation therein and
shall furnish Sandler O'Neill a copy thereof addressed to Sandler O'Neill or
upon which such counsel shall state Sandler O'Neill may rely.
CONFIDENTIALITY
- ---------------
Other than disclosure to other firms made part of any syndicate of selected
dealers or as required by law or regulation, Sandler O'Neill agrees that it will
not disclose any Confidential Information relating to NCRIC obtained in
connection with its engagement hereunder (whether or not the Reorganization or
the Offerings are consummated). As used in this paragraph, the term
"Confidential Information" shall not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by
Sandler O'Neill, (ii) was available to Sandler O'Neill on a non-confidential
basis prior to its disclosure to Sandler O'Neill by NCRIC, or (iii) becomes
available to Sandler O'Neill on a non-confidential basis from a person other
than NCRIC who is not otherwise known to Sandler O'Neill to be bound not to
disclose such information pursuant to a contractual, legal or fiduciary
obligation.
<PAGE>
National Capital Reciprocal Insurance Company
June 11, 1998
Page 6
INDEMNIFICATION
- ---------------
Since Sandler O'Neill will be acting on behalf of NCRIC and the Holding
Company in connection with the Reorganization and the Offerings, the Holding
Company and NCRIC agree to indemnify and hold Sandler O'Neill and its affiliates
and their respective partners, directors, officers, employees, agents and
controlling persons within the meaning of Section 15 of the Securities Act of
1933 or Section 20 of the Securities Exchange Act of 1934 (Sandler O'Neill and
each such person being an "Indemnified Party") harmless from and against any and
all losses, claims, damages and liabilities, joint or several, to which such
Indemnified Party may become subject under applicable federal or state law, or
otherwise, related to or arising out of the Reorganization, the Offerings or the
engagement of Sandler O'Neill pursuant to, or the performance by Sandler O'Neill
of the services contemplated by, this letter, and will reimburse any Indemnified
Party for all expenses (including reasonable legal fees and expenses) as they
are incurred, including expenses incurred in connection with the investigation
of, preparation for or defense of any pending or threatened claim or any action
or proceeding arising therefrom, whether or not such Indemnified Party is a
party; provided, however, that NCRIC and the Holding Company will not be liable
-------- -------
in any such case to the extent that any such loss, claim, damage, liability or
expense (i) arises out of or is based upon any untrue statement of a material
fact or the omission of a material fact required to be stated therein or
necessary to make not misleading any statements contained in any final proxy
statement or prospectus, or any amendment or supplement thereto, made in
reliance on and in conformity with written information furnished to NCRIC by
Sandler O'Neill expressly for use therein, or (ii) is primarily attributable to
the gross negligence, willful misconduct or bad faith of Sandler O'Neill. If
the foregoing indemnification is unavailable for any reason, NCRIC and the
Holding Company agree to contribute to such losses, claims, damages, liabilities
and expenses in the proportion that its financial interest in the Reorganization
and the Offerings bears to that of Sandler O'Neill.
DEFINITIVE AGREEMENT
- --------------------
Sandler O'Neill and NCRIC agree that (a) except as set forth in clause (b),
the foregoing represents the general intention of NCRIC and Sandler O'Neill with
respect to the services to be provided by Sandler O'Neill in connection with the
Reorganization and the Offerings, which will serve as a basis for Sandler
O'Neill commencing activities, and (b) the only legal and binding obligations of
NCRIC, the Holding Company and Sandler O'Neill with respect to the subject
matter hereof shall be (l) NCRIC's obligation to reimburse costs and expenses
pursuant to the section captioned "Costs and Expenses," (2) NCRIC's obligation
to pay the Advisory Services fee as set forth in the section captioned "Fees,"
(3) those set forth under the captions "Confidentiality" and "Indemnification,"
(4) as set forth in a duly negotiated and executed definitive Agency Agreement
to be entered into prior to the commencement of the Subscription Offering and/or
Syndicated Community Offering relating to the services of Sandler O'Neill in
connection with the Offerings, and
<PAGE>
National Capital Reciprocal Insurance Company
June 11, 1998
Page 7
(5) as set forth in a duly negotiated and executed Underwriting Agreement to be
entered into prior to the commencement of any Public Offering. Such Agency
Agreement and Underwriting Agreement shall be in form and content satisfactory
to Sandler O'Neill, NCRIC and the Holding Company and their respective counsel
and shall contain standard indemnification provisions consistent herewith.
Sandler O'Neill's execution of such Agency Agreement shall also be subject
to (i) Sandler O'Neill's satisfaction with its investigation of NCRIC's and the
Holding Company's business, financial condition and results of operations, (ii)
preparation of offering materials that are satisfactory to Sandler O'Neill and
its counsel (iii) compliance with all relevant legal and regulatory requirements
to the reasonable satisfaction of Sandler O'Neill's counsel, (iv) if an
independent appraisal is obtained, agreement that the price established by the
independent appraiser is reasonable, and (v) market conditions at the time of
the proposed offering. Sandler O'Neill may terminate this agreement if such
Agency Agreement is not entered into prior to June 30, 1999.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Catherine A. Lawton
---------------------------
Catherine A. Lawton
Vice President
Accepted and agreed to as of
the date first above written:
National Capital Reciprocal Insurance Company
By: /s/ R. Ray Pate, Jr.
-----------------------
Its: President & CEO
------------------------
<PAGE>
EXHIBIT 2.1
PLAN OF REORGANIZATION
OF
NATIONAL CAPITAL RECIPROCAL INSURANCE COMPANY
Under the Reciprocal Insurance Company Conversion Act of 1998
PREAMBLE
WHEREAS, National Capital Reciprocal Insurance Company (the "Company") is a
District of Columbia reciprocal insurance company;
WHEREAS, the Company proposes to reorganize by forming a mutual insurance
holding company and continuing its corporate existence without interruption as a
stock insurance company subsidiary of two intermediate holding companies that
are subsidiaries of such mutual insurance holding company, all in accordance
with this Plan of Reorganization and the laws of the District of Columbia,
including the Reciprocal Insurance Company Conversion Act of 1998, D.C. Act 12-
301, as enacted by the Council of the District of Columbia (the "RICC Act");
WHEREAS, pursuant to this Plan of Reorganization the Company shall form
S, A Mutual Holding Company, a District of Columbia mutual insurance holding
company (the "Mutual Holding Company"), and the Mutual Holding Company shall
form NCRIC Holdings, Inc. ("NCRIC Holdings") and NCRIC Group, Inc. ("NCRIC
Group"), each of which shall become a District of Columbia intermediate stock
holding company;
WHEREAS, pursuant to this Plan of Reorganization, the Company shall on the
Effective Date (as defined) reorganize into a stock insurance company pursuant
to the provisions of the RICC Act and adopt Articles of Incorporation pursuant
to the RICC Act to, among other things, authorize the issuance of capital stock
and change its name to NCRIC, Inc. (the "Reorganized Stock Company");
WHEREAS, pursuant to this Plan of Reorganization, on the Effective Date,
(i) the Reorganized Stock Company shall issue all of its initially outstanding
shares of capital stock (the "Reorganized Company Shares") to the Mutual Holding
Company, (ii) the Mutual Holding Company shall transfer all of the initially
outstanding Reorganized Company Shares to NCRIC Holdings in exchange for all of
the initially outstanding shares of the capital stock of NCRIC Holdings and
(iii) NCRIC Holdings shall transfer all of the initially outstanding Reorganized
Company Shares to NCRIC Group in exchange for all of the initially outstanding
shares of the capital stock of NCRIC Group;
WHEREAS, in connection with the Reorganization, the Company desires to
realign certain of its subsidiaries under the mutual holding company structure;
<PAGE>
WHEREAS, every Policy (as defined) which is in force on the Effective Date
shall continue as a Policy of the Reorganized Stock Company and all contract
rights of such Policies shall be and remain as they exist at the time of the
Reorganization;
WHEREAS, each Person (as defined) who is a Policyholder (as defined) of a
Policy which is in force at the time of the Reorganization, and who is deemed to
be a Member (as defined) of the Company, shall upon the Reorganization become a
Member (as defined) of the Mutual Holding Company, and his or her Membership
Interests (as defined) in the Company shall at such time become Membership
Interests in the Mutual Holding Company and his or her Membership Interests in
the Company shall at such time be extinguished;
WHEREAS, after the Reorganization, the Mutual Holding Company shall at all
times, directly or indirectly, retain ownership and control of at least a
majority of the outstanding voting shares of NCRIC Holdings, NCRIC Group and the
Reorganized Stock Company;
WHEREAS, the Reorganization is designed to enhance the Company's strategic
and financial flexibility by creating a corporate structure that will
potentially enable it to enter additional businesses and access capital markets
that are presently unavailable to the Company as a reciprocal insurer, which may
thereby facilitate the growth important to the Company's goals of serving
physicians' needs and remaining an effective and competitive insurer in the
future. Access to capital markets includes the potential sale of a portion of
the stock of NCRIC Holdings, NCRIC Group or the Reorganized Stock Company,
provided that the Mutual Holding Company shall at all times thereafter retain
direct or indirect ownership and control of at least a majority of the
outstanding voting shares of NCRIC Holdings, NCRIC Group and the Reorganized
Stock Company;
WHEREAS, all the corporations referred to by name in this Preamble are
organized, or to be organized, under the laws of the District of Columbia;
WHEREAS, the Board of Governors of the Company believes that the
Reorganization is fair and equitable to its Policyholders and that the interests
of Policyholders are fully and properly protected, and at a meeting duly called
and held on April 20, 1998 the Board of Governors approved the Reorganization
and adopted this Plan of Reorganization and authorized and directed the
execution of this Plan of Reorganization in accordance with the requirements of
the RICC Act;
WHEREAS, the Board of Governors of the Company has directed that this Plan
of Reorganization be submitted to the Voting Policyholders (as defined) of the
Company for approval; and
WHEREAS, the Board of Governors of the Company has directed that this Plan
of Reorganization be submitted to the Commissioner of Insurance and Securities
(or successor regulator) for the District of Columbia (the "Commissioner") for
approval;
-2-
<PAGE>
NOW, THEREFORE, this Plan of Reorganization is entered into by the Company.
ARTICLE I
DEFINITIONS
As used in this Plan of Reorganization, the following words or phrases have
the following meanings. The following definitions shall be equally applicable to
both the singular and plural forms of any of the terms herein defined:
"Commissioner" has the meaning specified in the Preamble.
"Company" has the meaning specified in the Preamble.
"Corporation Acts" means the District of Columbia Corporation Acts, Title
29, chapters 1-3, D.C. Code Ann. (1997).
"Corporation Counsel" means the Corporation Counsel of the District of
Columbia.
"Effective Date" has the meaning specified in Section 3.3.
"Initial Public Offering" means an initial public offering for cash of the
common stock of the Reorganized Stock Company or an Intermediate Stock
Holding Company pursuant to a registration statement on the applicable form
under the Securities Act of 1933, as amended, filed with the Securities and
Exchange Commission.
"Intermediate Stock Holding Company" means NCRIC Holdings, NCRIC Group and
such other intermediate holding company that owns, directly or indirectly
through another such intermediate holding company, at least a majority of
the outstanding voting shares of the Company after the Effective Date.
"Member" means, prior to the Effective Date, a Person who, by the records,
and the Rules, Regulations and Bylaws of the Company, is deemed to be a
member of the Company. On and after the Effective Date, "Member" means a
Person who, as provided in Section 2.2 or by the records of the Mutual
Holding Company and by its Articles of Incorporation or Bylaws, is deemed
to be a member of the Mutual Holding Company.
"Membership Interests" means, prior to the Effective Date, the interests of
the Members of the Company, as specified under District of Columbia law and
the Rules, Regulations and Bylaws of the Company. On and after the
Effective Date, "Membership Interests" means the interests of Members of
the Mutual Holding Company, as specified under District of Columbia law and
the Articles of Incorporation or Bylaws of the Mutual Holding Company.
"Mutual Holding Company" has the meaning specified in the Preamble.
-3-
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
NCRIC GROUP, INC.
TO THE COMMISSIONER OF INSURANCE AND SECURITIES AND THE SUPERINTENDENT OF
CORPORATIONS:
R. Ray Pate, Jr., the undersigned natural person, of the age of eighteen years
or more, acting as incorporator of a corporation under the Business Corporation
Act (D.C. Code, 1981 edition, Title 29, Chapter 3), adopts the following
Articles of Incorporation:
ARTICLE I: NAME AND PLACE OF BUSINESS
SECTION 1.1 The name of the corporation is NCRIC Group, Inc. (the
"Corporation"). The principal place of business of the Corporation shall be
in the District of Columbia.
ARTICLE II: PURPOSES AND POWERS
SECTION 2.1 The Corporation has the purposes of acting as a holding company for
insurance and other companies and engaging in any lawful business. The
Corporation has the same powers as an individual to do all things necessary or
convenient to carry out its business and affairs. Additionally, the Corporation
has all other powers afforded a business corporation incorporated pursuant to
District of Columbia law, including the Reciprocal Insurance Company Conversion
Act of 1998, D.C. Act 12-301 (the "RICC Act").
ARTICLE III: COMMENCEMENT
SECTION 3.1 The time of commencement of the existence of the Corporation shall
be the date of filing of these Articles of Incorporation. The minimum amount of
capital that the Corporation must have before commencing business shall be not
less than $1,000.
ARTICLE IV: DURATION
SECTION 4.1 The Corporation shall have perpetual existence unless dissolved as
provided by law.
ARTICLE V: REGISTERED OFFICE AND AGENT
SECTION 5.1 The street address of the initial registered office of the
Corporation is 1115 30th Street, N.W., Washington, D.C. 20007, and the name of
its initial registered agent at such
<PAGE>
address is R. Ray Pate, Jr. The address of R. Ray Pate, Jr., the incorporator,
is 1115 30th Street, N.W., Washington, D.C. 20007.
ARTICLE VI: CAPITAL STOCK
SECTION 6.1 The aggregate number of shares of stock which the Corporation is
authorized to issue is 10,000,000 shares of common stock, par value $.01 per
share. The shareholders of the Corporation shall not have preemptive rights.
ARTICLE VII: BOARD OF DIRECTORS
SECTION 7.1 The powers of the Corporation shall be exercised by the Board of
Directors, and by such officers and agents as the Board of Directors may
authorize. The Board of Directors shall consist of not less than three
directors, with the exact number to be determined from time to time by the
Bylaws or by resolution of the Board of Directors. The directors shall be
divided into three classes as nearly numerically equal as possible, with terms
expiring in successive years. Each director shall, except for the initial
directors, be elected for a three-year term and shall hold office until his or
her successor shall be elected and qualified or until his or her death,
resignation or removal. The term of office of each director shall begin at the
annual meeting at which such director is elected or at the time of election by
the Board of Directors. No decrease in the number of directors shall shorten
the term of any incumbent director.
SECTION 7.2 The initial Board of Directors shall consist of ten directors. The
initial directors and their respective terms shall be:
<TABLE>
<CAPTION>
EXPIRATION OF
NAME ADDRESS INITIAL TERM
---- ------- -------------
<S> <C> <C>
Nelson P. Trujillo, M.D., 2021 K Street, N.W. # T-110 2001
Chair Washington, D.C. 20006
Pamela W. Coleman, M.D. 3619 14th Street, N.W. 1999
Washington, D.C. 20010
Leonard M. Glassman, M.D. 1250 S. Washington Street, #702 2000
Alexandria, VA 22314
Raymond Scalettar, M.D. 730 24th Street, N.W., #7 2000
Washington, D.C. 20006
Leonard Parver, M.D. 1145 19th Street, N.W., #500 2001
Washington, D.C. 20036
David M. Seitzman, M.D. 7117 Nevis Road 2000
Bethesda, MD 20817
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EXPIRATION OF
NAME ADDRESS INITIAL TERM
---- ------- -------------
<S> <C> <C>
Charles H. Epps, Jr., M.D. HUH Tower - #6000 2001
2041 Georgia Avenue, N.W.
Washington, D.C. 20059
R. Ray Pate, Jr. 1115 30th Street, N.W. 2000
Washington, D.C. 20007
J. Paul McNamara 4912 Delray Avenue 1999
Bethesda, MD 20814
Vincent C. Burke, III 1301 K Street, N.W., Suite 1100 1999
East Tower
Washington, D.C. 20005
</TABLE>
SECTION 7.3 The number of directors may be increased or decreased from time to
time by the Board of Directors within the limits fixed by these Articles of
Incorporation; provided, however, that such number may not be increased by more
than three in any one year and any increase shall require the approval of at
least two-thirds of the members of the Board of Directors.
SECTION 7.4 The Board of Directors shall have the power to: (i) adopt Bylaws of
the Corporation and rules and regulations for the transaction of the business of
the Corporation not inconsistent with these Articles of Incorporation or the
laws of the District of Columbia; and (ii) to amend or repeal such Bylaws,
rules, and regulations. The Bylaws shall provide for the officers of the
Corporation and for their election or appointment. The Bylaws shall provide
procedures for the nomination and election of directors. The Board of Directors
may fix reasonable compensation of the directors for their service.
SECTION 7.5 By a two-thirds vote of all the members of the Board of Directors,
the Board of Directors may remove any director from office for cause. The Board
of Directors shall have the power to fill any vacancy on the Board of Directors,
except as provided in the Bylaws. A director shall not otherwise be removed
from office.
SECTION 7.6 A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for breach of the director's duty
of loyalty to the Corporation or its shareholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of the law; (iii) for a transaction from which the director derives an improper
personal benefit; and (iv) to the extent Title 29, section 342, D.C. Code Ann.
(1997) may apply. If the provisions of Title 29 of the D.C. Code are hereafter
amended to authorize the further
3
<PAGE>
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation, in addition to the limitation on personal liability
provided herein, shall be eliminated or limited to the extent of such amendment,
automatically and without any further action, to the maximum extent permitted by
law. Any repeal or modification of this Section 7.6 by the shareholders of the
Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability or any other right or protection of a
director of the Corporation with respect to any facts existing at or prior to
the time of such repeal or modification.
ARTICLE VIII: EXEMPTION FROM CORPORATE DEBTS
SECTION 8.1 The private property of the shareholders, officers, and directors
of the Corporation shall in no case be available to satisfy debts of the
Corporation but shall be exempt therefrom.
ARTICLE IX: INDEMNIFICATION
SECTION 9.1 The Corporation shall indemnify the directors and officers of the
Corporation to the fullest extent permitted under the Bylaws and the laws of the
District of Columbia including the District of Columbia Business Corporation
Act, Title 29, section 304, D.C. Code Ann. (1997) as it may be amended from time
to time. Any repeal or modification of this Section 9.1 shall not adversely
affect any right of indemnification of a director or officer of the Corporation
existing at any time prior to such repeal or modification.
ARTICLE X: AMENDMENT OF ARTICLES
SECTION 10.1 These Articles of Incorporation may be amended at any annual
meeting of the shareholders of the Corporation or at any special meeting called
for that purpose, provided the amendment is filed as hereinafter provided. No
amendment other than such as may be proposed by the Board of Directors shall be
voted upon at any meeting. A written copy of such amendment must be filed with
the Secretary of the Corporation at least thirty days prior to the meeting at
which it is proposed.
Dated this 18th day of November, 1998.
/s/ R. Ray Pate, Jr.
- -------------------------------
R. Ray Pate, Jr.
1115 30th Street, N.W.
Washington, D.C. 20007
4
<PAGE>
District of Columbia } SS
On this 18th day of November, 1998, before me, the undersigned, a Notary
Public in and for said District, personally appeared R. Ray Pate, Jr., being by
me duly sworn, did execute the foregoing instrument and acknowledged the
execution of said instrument to be his voluntary act and deed.
/s/ Jeffrey D. Marsh
- ---------------------------------------------
Notary Public in and for the District of Columbia
My Commission Expires: 7/1/2000
5
<PAGE>
CERTIFICATE OF APPROVAL
The foregoing Articles of Incorporation of NCRIC Group, Inc. having been
submitted to me for examination, and in my capacity as Commissioner of Insurance
and Securities for the District of Columbia having examined them and having
found them to be in accordance with District of Columbia law, are hereby
approved this 30th day of November, 1998.
/s/ Patrick E. Kelly
- -----------------------------------------
Commissioner of Insurance and Securities
for the District of Columbia
6
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
NCRIC GROUP, INC.
ARTICLE I.
OFFICES AND REGISTERED AGENT
Section 1. Principal Office. The Corporation shall maintain its Principal
Office in the District of Columbia.
Section 2. Registered Office. The Corporation shall maintain a Registered
Office at a location in the District of Columbia designated by the Board of
Directors from time to time. In the absence of a contrary designation by the
Board of Directors, the Registered Office of the Corporation shall be located at
its Principal Office.
Section 3. Other Offices. The Corporation may have such other offices
within and without the District of Columbia as the business of the Corporation
may require from time to time. The authority to establish or close such other
offices may be delegated by the Board of Directors to one or more of the
Corporation's officers.
Section 4. Registered Agent. The Corporation shall maintain a Registered
Agent who shall have a business office at the Corporation's Registered Office.
The Registered Agent shall be designated by the Board of Directors from time to
time to serve at its pleasure. In the absence of such designation the Registered
Agent shall be the Corporation's Secretary.
Section 5. The Secretary of the Corporation shall cause the Corporation to
maintain currently all filings in respect of the Registered Office and
Registered Agent with all governmental officials as required by law.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 1. Annual Meetings. The annual meeting of the Corporation's
shareholders shall be held once each calendar year for the purpose of electing
directors and for the transaction of such other business as may properly come
before the meeting. The annual meeting shall be held at the time and place
designated by the Board of Directors from time to time.
Section 2. Special Meetings. Special meetings of the Corporation's
shareholders may be called for any one or more lawful purposes by the
Corporation's President, the Chairman of the Board, the Board of Directors, or
on the written request describing the purpose for which the meeting is to be
held filed by holders of record of not less than twenty percent of the
Corporation's outstanding shares entitled to be cast on any issue to be
considered at the proposed special meeting. Special meetings of the shareholders
shall be held at the Corporation's Registered Office at the time designated in
the notice of the meeting in accordance with Article
<PAGE>
II, Section 3; provided, however, that such meetings called by the Board of
Directors may be held at such places as the Board of Directors may determine.
Section 3. Notice of Meetings, Waiver of Notice. Written notice of all
meetings of shareholders shall be delivered not less than ten nor more than
fifty days before the meeting date, either personally or by mail, to all
shareholders of record entitled to vote at such meeting. The notice shall state
the date, time, and place of the meeting and, in the case of a special meeting,
the purpose or purposes for which such meeting was called. At the written
request, delivered personally or by mail, of the person or persons calling a
special meeting of shareholders, the President or Secretary of the Corporation
shall fix the date and time of the meeting and provide notice thereof to the
shareholders as required above; provided, however, that the date of the meeting
shall in no event be fixed less than ten or more than sixty days from the date
the request was received. Notice of a meeting of shareholders need not be given
to any shareholder who, in person or by proxy, signs a waiver of notice either
before or after the meeting.
Section 4. Quorum. At any meeting of shareholders the presence, in person
or by proxy, of the holders of one-third of the outstanding shares entitled to
vote shall constitute a quorum for the transaction of any business properly
before the meeting.
Section 5. Transaction of Business. Business transacted at an annual
meeting of shareholders may include all such business as may properly come
before the meeting. Business transacted at a special meeting of shareholders
shall be limited to the purposes stated in the notice of the meeting.
Section 6. Shareholders of Record. For the purpose of determining
shareholders entitled to vote at any meeting of shareholders, or entitled to
receive dividends or other distributions, or in connection with any other proper
purpose requiring a determination of shareholders, the Board of Directors shall
by resolution fix a record date for such determination. The date shall be not
more than fifty and not less than ten days prior to the date on which the
activity requiring the determination is to occur.
Section 7. Voting. Except as may otherwise be required by law or the
Corporation's Articles of Incorporation, a person present, in person or by
proxy, at a meeting of shareholders shall be entitled to one vote for each share
of voting stock as to which such person is the shareholder of record.
Section 8. Adjournments. A majority of the voting shares held by
shareholders of record present in person or by proxy at a meeting of
shareholders, whether or not constituting a quorum, may adjourn a meeting.
Section 9. Action Without Meeting. Any action required or permitted to be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth
2
<PAGE>
the action taken, shall be signed by all of the shareholders entitled to vote
with respect to the subject matter thereof.
Section 10. Proxies. At all meetings of shareholders, a shareholder may
vote in person or by proxy. Proxies shall be filed with the Secretary of the
Corporation before or at the time of the meeting.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by the officer, agent, or proxy as the
bylaws of that corporation may prescribe, or, in the absence of such provision,
as the board of directors of the other corporation may determine. Shares held by
an administrator, executor, guardian, or conservator may be voted, either in
person or by proxy, without a transfer of such shares into the name of the
administrator, executor, guardian, or conservator. Shares standing in the name
of a trustee may be voted by the trustee, either in person or by proxy. Shares
standing in the name of a receiver may be voted by the receiver, and shares held
by or under the control of a receiver may be voted by the receiver without the
transfer thereof into the receiver's name if authority to do so is contained in
an appropriate order of the court by which such receiver was appointed. A
shareholder whose shares are pledged shall be entitled to vote such shares until
the shares have been transferred into the name of the pledgee, and thereafter
the pledgee shall be entitled to vote the shares so transferred.
Section 12. Order of Business. The order of business at the annual meeting,
and so far as practicable at all other meetings of shareholders, shall be as
follows:
Proof of not ice of the meeting
Presentation of proxies
Determination of a quorum
Disposition of unapproved minutes
Reports of officers and committees
Election of directors
Unfinished business
New business
Adjournment
ARTICLE III.
BOARD OF DIRECTORS, THEIR ELECTION,
TERMS, AND POWERS
Section 1. Number. There shall be a Board of Directors consisting of ten
members serving staggered three-year terms with three or four members elected
annually.
Section 2. Election. The directors shall be elected by the shareholders at
each annual meeting by a majority vote of the shares represented at said meeting
in person or by proxy. All
3
<PAGE>
nominations for the Board of Directors shall be filed in writing with the
Corporation at least ten days prior to the date of the election. If nominations
are not so filed, the unanimous vote of the shareholders present in person or by
proxy shall be necessary to elect one not so nominated to the Board of
Directors.
Vacancies in the Board of Directors (other than those caused by an increase
in the number of directors), shall be filled by action of the remaining members
of the Board of Directors. Directors so appointed by the existing Board of
Directors shall serve for the duration of the unexpired term of the replaced
director. A majority vote of the remaining members of the Board of Directors may
fill a vacancy, whether or not constituting a quorum.
Section 3. Powers. The Board of Directors shall have general supervision
over the finances of the Corporation and of its operations.
The Board of Directors may fix the number of and elect from among its
members, an Executive Committee, consisting of not less than three members. The
term of the Executive Committee shall run concurrently with the term of the
Board of Directors which elects same. A quorum at any meeting of such Executive
Committee shall consist of a majority of its members. The Executive Committee
shall have full power to act for the Board of Directors during the interim
between the meetings of the Board of Directors, except the power to amend these
Bylaws.
Section 4. Expenses. Members of the Board of Directors and the Executive
Committee may receive, if the Board of Directors shall provide therefor, their
actual expense for attendance at meetings of the Board of Directors or the
Executive Committee.
ARTICLE IV.
OFFICERS, THEIR ELECTION, TERMS, AND POWERS
Section 1. Positions. The officers of the Corporation shall include a
Chairman of the Board, a President, a Treasurer, a Secretary, and such
additional officers as the Board of Directors shall determine.
Section 2. Appointment. All officers shall be appointed by the Board of
Directors to serve at its pleasure. Except as may otherwise be provided by law
or in the Articles of Incorporation, any officer may be removed by the Board of
Directors at any time, with or without cause. Any vacancy, however occurring, in
any office may be filled by the Board of Directors for the unexpired term. One
person may hold two or more offices. Each officer shall exercise the authority
and perform the duties as may be set forth in these Bylaws and any additional
authority and duties as the Board of Directors shall determine from time to
time.
Section 3. Chairman. The Chairman of the Board shall preside at all
meetings of the Board of Directors and shall perform the usual duties incident
to that office.
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Section 4. President. The President shall be the chief executive officer
and shall perform the usual duties incident to that office.
Section 5. Secretary. The Secretary shall keep accurate minutes of all
meetings of the shareholders, of all meetings of the Board of Directors, and of
all meetings of the Executive Committee.
Section 6. Treasurer. The Treasurer shall have general supervision of all
finances, shall maintain the books and records of the Corporation, and shall
perform all other usual duties incident to that office.
Section 7. Compensation. Officers of the Corporation shall receive such
compensation for serving as such as is set by the Board of Directors.
ARTICLE V.
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. Annual and Regular Meetings. The annual meeting of the Board
of Directors shall be held at the Principal Office of the Corporation,
immediately following the adjournment of the annual meeting of the shareholders
of the Corporation. Regular meetings shall be held at the same place and at
such times as may be fixed by the Board of Directors not less frequently than
semiannually. Notice of the regular meetings of the Board of Directors shall be
given each director at least five business days prior thereto.
Section 2. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, and must be called by the Chairman
of the Board upon the written request of a third of the total number of
directors. Notice of special meetings of the Board of Directors, stating the
time, place, and purposes, shall be given each director at least five business
days prior thereto.
Section 3. Quorum. A majority of the total number of directors shall
constitute a quorum, but a lesser number may adjourn to another time. A
majority vote of the quorum present at any meeting shall govern any proceeding
not herein or by law requiring a different vote.
Section 4. Action Without Meeting. Any action required or permitted to be
taken at a meeting of the Board of Directors may be taken without a meeting if a
consent in writing, setting forth the action taken, shall be signed by all of
the directors.
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ARTICLE VI.
NO SHAREHOLDER LIABILITY
A shareholder shall not be liable for the payment of debts, losses, or
expenses of the Corporation.
ARTICLE VII.
INDEMNIFICATION
The Corporation shall indemnify its past, present, and future members of
the Board of Directors and duly appointed committees and its officers (and their
executors, administrators, or other legal representatives), all such persons
being referred to as "Indemnitees," to the fullest extent permitted by law, as
now in effect and as such law may be amended. Such indemnification shall
include, without limitation, the payment of judgments against Indemnitees and of
amounts paid in settlement of claims, suits, or proceedings (including judgments
in favor of the Corporation or amounts paid in settlement to the Corporation);
such indemnification shall also include, without limitation, the payment of
counsel fees and expenses of Indemnitees who are successfully defended, or who
are unsuccessfully defended if the claim, suit, or proceeding does not arise
from the willful misconduct of Indemnitees. Expenses incurred by an Indemnitee
in defending any action, suit, or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit, or proceeding to the
fullest extent permitted by law. Such right of indemnification shall be in
addition to any indemnification to which such officer or director may be
entitled under any agreement, vote of shareholders, or otherwise.
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, committee member, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, trustee, officer, employee, or agent of any corporation, domestic or
foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise, against any liability asserted against such person and incurred in
any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Article.
ARTICLE VIII.
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any officer or
officers or agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors, and such authority may be
general or confined to specific instances.
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Section 3. Checks, Drafts, etc. All checks, drafts or other orders for the
payment of money, issued in the name of the Corporation, shall be signed by the
officer or officers or agent or agents of the Corporation and in such manner as
shall from time to time be determined by resolution of the Board of Directors.
Section 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies, or other depositories as the Board of Directors may
select.
ARTICLE IX.
AMENDMENTS
These Bylaws may be amended by the Board of Directors at any regular or
special meeting thereof by a two-thirds vote of the total number of directors
and may also be amended at a meeting of the shareholders duly called for that
purpose upon the affirmative vote of the holders of a majority of the shares
represented at such meeting, either in person or by proxy, but no such amendment
shall (a) impair the rights of any shareholder, or any third party, under a
contract entered into with the Corporation that was authorized by the provisions
of those Bylaws in force at the time of the execution of such contract or (b)
shorten the duration of a particular director's term. Written notice of all
Bylaw amendments shall be given promptly to all shareholders and to NCRIC, A
Mutual Holding Company.
ARTICLE X.
MISCELLANEOUS
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Corporation shall state upon the face thereof the name of
the person to whom issued, the number of shares, the par value per share and the
fact that the Corporation is organized under the laws of the District of
Columbia. Each certificate shall be signed by the President or a Vice-President
and by the Secretary or an Assistant Secretary. All certificates for shares
shall be consecutively numbered. The name and address of the person to whom the
shares represented thereby are issued, with the number of shares and date of
issuance, shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that in case
of a lost, destroyed, or mutilated certificate a new one may be issued therefor
upon the making of an affidavit by the holder of record of the shares
represented by such certificate setting forth the facts concerning the loss,
theft, or mutilation thereof and upon such bond or indemnity to the Corporation
as the Corporation may prescribe.
Section 2. Transfer of Shares. Subject to the provisions of applicable law
and to any transfer restrictions binding on the Corporation, transfer of shares
of the Corporation shall be made only on the stock transfer books of the
Corporation by the holder of record thereof or by the
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<PAGE>
holder's agent, attorney-in-fact, or other legal representative, who shall
furnish proper evidence of authority to transfer, upon surrender for
cancellation of the certificate for such shares. The person in whose name shares
stand on the stock transfer books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes.
Section 3. Voting of Shares in Other Corporations Owned by the
Corporation. Subject to the specific directions of the Board of Directors, any
share or shares of stock issued by any other corporation and owned or controlled
by the Corporation may be voted at any shareholders' meeting of the other
corporation by the President of the Corporation if the President is present, or
in the President's absence by any Vice-President of the Corporation who may be
present. Whenever, in the judgment of the President, or, in the President's
absence, of any Vice-President, it is desirable for the Corporation to execute a
proxy or give a shareholder's consent in respect to any share or shares of stock
issued by any other corporation and owned or controlled by the Corporation, the
proxy or consent shall be executed in the name of the Corporation by the
President or one of the Vice-Presidents of the Corporation without the necessity
of any authorization by the Board of Directors. Any person or persons designated
in the manner above stated as the proxy or proxies of the Corporation shall have
full right, power, and authority to vote the share or shares of stock issued by
the other corporation.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be
established, and may be altered, by resolution of the Board of Directors from
time to time as the Board of Directors deems advisable.
Section 5. Dividends. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends to shareholders in the manner
and upon the terms and conditions as the Board of Directors deems advisable and
as permitted by law.
Section 6. Seal. The seal of the Corporation shall be circular in form and
shall have inscribed thereon the name of the Corporation, the year of its
organization, and the words "Corporate Seal, District of Columbia."
Section 7. Severability. Any provision of these Bylaws, or any amendment
thereof, that is determined to be in violation of applicable law shall not in
any way render any of the remaining provisions invalid.
Section 8. References to Gender and Number Terms. In construing these
Bylaws, any gender shall be substituted for any other and plural terms shall be
substituted for singular and singular for plural, in any place in which the
context so requires.
Section 9. Headings. The Article and Section headings in these Bylaws are
inserted for convenience only and are not part of these Bylaws.
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Section 10. Inspection of Records by Shareholders. In addition to any
rights provided by law, a shareholder is entitled to inspect and copy, during
regular business hours at the Corporation's principal office, any of the
following records of the Corporation, if such shareholder gives the Corporation
written notice of the shareholder's demand at least five business days before
the date on which such shareholder wishes to inspect and copy:
(a) its Articles of Incorporation and all amendments to them currently in
effect;
(b) its Bylaws and all amendments to them currently in effect;
(c) the minutes of all shareholders' meetings, and records of all action
taken by shareholders without a meeting, for the past three years;
(d) all written communications to shareholders, generally, within the past
three years, including the financial statements furnished for the past three
years;
(e) a list of the names and business addresses of its current directors and
officers;
(f) its most recent Annual Report delivered to the Commissioner of
Insurance and Securities for the District of Columbia; and
(g) all contracts or other written agreements between the Corporation and
any of its shareholders and all contracts or other written agreements between
two or more of the shareholders in the possession of the Corporation.
A shareholder's agent or attorney has the same inspection and copying
rights as the shareholder the agent or attorney represents. The right to copy
records under this Section 10 includes, if reasonable, the right to receive
copies made by photographic, xerographic, or other means. The Corporation may
impose a reasonable charge, covering the costs of labor and material, for copies
of any documents provided to the shareholder. The charge may not exceed the
estimated cost of production or reproduction of the records.
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EXHIBIT 10.1
BERNSTEIN MANAGEMENT CORPORATION
5301 Wisconsin Avenue, N.W., Suite 600, Washington, D.C. 20015
COMMERCIAL LEASE
THIS LEASE AGREEMENT made this 22nd day of December, 1997, by and between
Columbia Realty Venture, a District of Columbia Limited Partnership, hereinafter
- ----------------------- -----------
referred to as "Landlord," and National Capital Reciprocal Insurance Company,
- ----------------------------------------------------------------------------
Inc., a District of Columbia Corporation hereinafter referred to as "Tenant,"
- ----------------------------------------
and Bernstein Management Corporation, hereinafter referred to as "Agent."
WITNESSETH, that for and in consideration of the rent hereafter reserved,
and the covenants contained herein, the parties hereby agree as follows:
1. LEASE PREMISES.
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord for
the term, at the rental and upon the conditions set forth herein, those certain
premises described on EXHIBIT A attached hereto (the "Premises") located at that
certain building known as 1115 30th Streets, NW, Washington, D.C. 20007 (the
---------------------------------------------
"Building"). The Building is part of a project commonly known as Georgetown
Place located at 1105-1115 30th Street, N.W., Washington, D.C., consisting of
the real property described on EXHIBIT A-1 together with the Building and other
improvements thereon, owned by Landlord (collectively the "Property"). The
Premises do not include exterior faces of exterior walls and exterior window
glass; anything beyond the interior face of demising walls; and pipes, ducts,
conduits, wires and fixtures serving other parts of the Building, except for
Tenant-specific pipes, ducts, conduits, wires and fixtures, and measurement will
be based on the GWCAR standard of measurement dated June 13, 1995. Tenant may
use the Common Areas in common with other tenants. The Common Areas include the
Building's common lobbies, corridors, stairways, and elevators, the common
walkways and driveways necessary for access to the Building, the common toilets,
corridors and elevator lobbies of any multi-tenant floor, the parking area for
the Building, off-street loading areas, truck accessways and other facilities
which serve the Building. All use of the Common Areas shall be only upon the
terms reasonably set forth at any time by Landlord.
2. TERM AND POSSESSION.
2.1 Term. The term of this Lease shall be for ten (10) years, commencing
---
on the sooner of occupancy or the 15th day of April, 1998, or such later date as
----- ----
provided herein (the "Commencement Date"), and ending on the 30th day of April,
-----
2008.
- ----
2.2 Possession. Landlord shall reasonably attempt to have Premises ready
for occupancy on the date of commencement. If Landlord should be unable to give
possession of Premises on the date of commencement of the term hereof for any
reason, Landlord shall not be subject to any liability for failure to give
possession on said date. Should tender of possession of the premises be later or
<PAGE>
earlier than the beginning date named, then, and in that event, the term shall
not be adjusted and the ending date of this Lease shall remain as stated in
Section 2.1. Except as provided in 2.3 below, permission is given to the Tenant
to enter into possession of the Premises, or to occupy space other than the
Premises prior to the date specified as the commencement of the term of this
Lease, Tenant covenants and agrees that such occupancy shall be deemed to be
under all the terms, covenants and conditions of the provisions of this Lease,
and that the rent shall commence from and after such date. Notwithstanding the
foregoing, the rent obligation shall commence even if Premises are not ready for
occupation if due to the action, inaction or delay of Tenant, its agents or
employees.
2.3 Early Possession for Tenant Fit-Up. Tenant shall be given access to
the Premises by January 15, 1998 for the purpose of building out the Premises,
----------------
installing special equipment, telephone equipment, etc. Tenant shall indemnify
Landlord for damage to the Building and shall present Landlord with satisfactory
certificates of insurance. If for any reason Tenant has not been given access to
the Premises for the purposes of this section by January 15, 1998, the
Commencement Date shall be postponed by one day for each day of delay, and
furthermore, if Tenant has not been given access to the Premises for the
purposes of this section by February 28, 1998, Tenant may, at its option,
terminate this Lease without further obligation to Landlord.
3. RENT.
3.1 Basic Monthly Rent. Upon Tenant's execution of the Lease, Tenant shall
prepay the first month's rent in an amount equal to one full month of Basic
Monthly Rent. Thereafter, Tenant shall pay to Landlord for the Premises the
Basic Monthly Rent without deduction or demand or set off whatsoever, in advance
on the first day of each calendar month during the term hereof, to and at the
office of Bernstein Management Corporation, 5301 Wisconsin Avenue, N.W., Suite
600, Washington, D.C., 20015, or at such other place as Landlord may from time
to time designate to Tenant in writing. In addition to the Basic Monthly Rent,
Tenant shall pay all Additional Rent, Rental Adjustments and other amounts
payable hereunder provided herein, each without set-off, deduction, offset or
counterclaim. Except as specified elsewhere in this Lease, Additional Rent shall
be paid by Tenant with the next monthly installment of Basic Monthly Rent
falling due. Rent checks shall be made payable to Bernstein Management
Corporation. Should the term of this Lease commence on a day other than the
first of a calendar month, the parties agree that rental for the first month in
which rent is due shall be pro-rated and rent for the remaining months shall be
due and payable on the first of the month as provided above. The Basic Monthly
Rent is payable monthly as follows:
<TABLE>
<CAPTION>
Office Space
Floors 1-3 4th Floor Lower Level Total Basic
16,376 RSF 785 RSF 995 RSF Monthly Rent
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
April 15, 1998 - April 30, 1998 $16,376 $ 605 $ 580 $17,561
May 1, 1998 - April 30, 1999 $32,752 $1,210 $1,161 $35,123
</TABLE>
The Basic Monthly Rent shall increase by two percent (2%)upon May 1st of each
lease year thereafter, except for the beginning of the sixth lease year when the
Basic Monthly Rent of the Office
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Space (Floors 1-3) and Fourth Floor Space shall increase by $2.00 per rentable
square foot as detailed on EXHIBIT A attached.
3.2 Additional Rent.
3.2.1 Tenant shall pay Landlord, as Additional Rent, Tenant's Share (as
hereinafter defined) of any increase in Landlord's Costs (as hereinafter
defined) above the Base Costs (as hereinafter defined).
3.2.2 For purposes of this Lease:
(i) "Tenant's Share" shall consist of Tenant's Separate Services
and Tenant's Pro Rata Share of Landlord's Costs in excess of Base Costs.
(ii) "Tenant's Separate Services" shall mean all Operating
Expenses which are attributable solely to Tenant's use and occupancy of the
Premises, such as the cost of electricity consumed in the Premises as measured
by sub-meters, special janitorial services or other services provided by
Landlord at Tenant's request. Normal electric consumption shall be included in
Base Costs (as hereinafter defined).
(iii) "Tenant's Pro Rata Share" shall mean 16.114%, representing
-------
the ratio that the rentable area of the Premises ( 17,838 square feet) bears to
------
the total rentable area in the Property (110,699 square feet).
(iv) "Landlord's Costs" shall mean Taxes and Assessments and
Operating Expenses.
(v) "Taxes and Assessments" shall mean all taxes and assessments
and governmental charges (including personal property and real estate taxes),
whether federal, state, county or municipal, and whether they be by taxing
districts or authorities presently taxing the Property or by others subsequently
created, and any other taxes and assessments (including franchise taxes)
attributable to the Property or its operation, whether or not directly paid by
Landlord, excluding, however, federal and state taxes on income, unless such
income taxes replace real estate taxes. The Tenant shall be responsible for ad
valorem taxes on its personal property.
(vi) "Operating Expenses" shall mean all of the costs and
expenses incurred in operating and maintaining the Property, as determined by
Landlord in accordance with accounting practices consistently applied, whether
paid to employees of Landlord or independent contractors engaged by Landlord,
and shall include the following costs by way of illustration, but not
limitation: water and sewer charges, insurance premiums, utilities, janitorial
services, labor, including direct labor overhead, air conditioning and heating,
landscaping, elevator maintenance, supplies, costs and upkeep of all parking and
common areas, supply and cleaning of uniforms and work clothes, security of the
Property, fees incurred for the management of the Property including legal,
inspection,
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consultation and accounting fees, and a property management fee equal to the
generally prevailing market rate in arm's length transactions consistent with
the type of occupancy and the services rendered. Operating Expenses shall not
include depreciation of the buildings of which the Premises are a part or
equipment therein, loan payments, executive salaries and any brokerage
commissions but shall include amortization, with reasonable interest, of capital
items which reduce Operating Expenses or are required by governmental authority.
(vii) "Base Costs" shall mean Landlord's Costs incurred for or
attributable to the 1998 calendar year.
-
(viii) Beginning May 1 , 1992, and continuing for each subsequent
-----
calendar year or portion thereof during the Term, Landlord's Costs shall be
passed through to Tenant based on the actual increase over Base Costs.
3.2.3 Landlord's Statement. Landlord shall endeavor to give to Tenant on
or before the first (1st) day of April of each year a statement of the increase
in the Additional Rent payable by Tenant hereunder, but failure by Landlord to
give such statement by said date shall not constitute a waiver by Landlord of
its right to require an increase in the Additional Rent. Such statement shall be
in reasonable detail. Upon receipt of the statement Tenant shall pay the total
amount of the increase relating to the period prior to the date of the statement
in full. For the then current year, an amount equal to one hundred five percent
(105%) of any such increase shall be used as an estimate for said current year
and this amount shall be divided into twelve (12) equal monthly installments and
Tenant shall pay to Landlord concurrently with the regular Basic Monthly Rent
payment next due following the receipt of such statement, an amount equal to one
(1) monthly installment multiplied by the number of months from January in the
calendar year which said statement is submitted to the month of such payment,
both months inclusive. Subsequent installments shall be payable concurrently
with the regular Basic Monthly Rent payments for the balance of that calendar
year and shall continue until the next year's statement is rendered. If the next
or any succeeding year results in a greater increase in Landlord's Costs, then
upon receipt of a statement from Landlord, Tenant shall pay a lump sum equal to
such total increase over the Base Costs, less the total of the monthly
installments of estimated increases paid in the previous calendar year for which
comparison is then being made; and the estimated monthly installments to be paid
for the next year, following said comparison year, shall be adjusted to reflect
one hundred five percent (105%) of such increase in the manner set forth above.
If in any year Tenant's Share shall be less than the preceding year, then upon
receipt of Landlord's statement, any other payments in respect of Landlord's
Costs made by Tenant on the monthly installment basis provided above shall be
credited toward the next installment of Basic Monthly Rent falling due and the
estimated monthly installments of Landlord's Costs to be paid shall be adjusted
to reflect such lower Taxes and Assessments and Operating Expenses for the most
recent comparison year, but not less than the Base Costs. Upon termination of
this Lease, any money owed by one party to the other shall be promptly paid.
3.2.4 Pro-Rata Calculation. Should this Lease commence or terminate at any
time other than the first (1st) day of a calendar year, the cost adjustment
referred to in Subsections 3.2.1, 3.2.2 and
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<PAGE>
3.2.3 shall be calculated for the commencement or termination year on a pro rata
basis, based upon the number of calendar days during which Tenant leases the
Demised Premises.
3.2.5 Tenant's Right to Audit. Each statement provided by Landlord
pursuant to this Subsection shall be conclusive and binding upon Tenant unless
forty-five (45) days after receipt of the statement, Tenant shall notify
Landlord that it disputes the correctness of the statement, specifying the
respects in which the statement is claimed to be incorrect. If Landlord and
Tenant are unable to resolve the dispute, Tenant shall then have the right to
request that Landlord provide, at tenant's expense, an audit of its books and
records relating to the statement. Pending determination of the dispute, Tenant
shall pay within ten (10) days from notice any amounts due from Tenant in
accordance with the statement, but such payment shall be without prejudice to
Tenant's position. If Landlord's cost shall have been overstated by more than
ten percent (10%), Landlord shall reimburse Tenant for the reasonable cost of
such audit not to exceed $1,500.
3.2.6 Adjustments to Costs. Notwithstanding any other provisions herein to
the contrary: (i) in the event the Property is not fully occupied during the
year, an adjustment shall be made in computing the Landlord's Costs for such
year so that the costs shall be computed for such year as though the Property
had been fully occupied during such a year; and (ii) the Landlord shall have the
right, in its reasonable judgment (and upon reasonable substantiation of such
allocation to the Tenant), to allocate Landlord's Costs to the Tenant, or to
other tenants of the Property, in a manner which deviates from the exact
Tenant's Pro Rata Share, or those of such other tenants, as may be necessary to
more accurately reflect accountability for unusual or extra costs resulting from
excessive usage, the manner of layout or finishes requiring special maintenance,
or the like. The terms of this Subsection shall be solely for the benefit of the
Landlord and may not be relied upon nor construed for the benefit of the Tenant,
other tenants in the building, or any other person.
3.3 Late Charge. Tenant hereby recognizes and acknowledges that if
rental payments are not received when due, Landlord will suffer damages and
additional expenses thereby and Tenant therefore agrees that ten (10) days after
Tenant's receipt of written notice from Landlord of such late payment, a late
charge equal to five percent (5%) of the Basic Monthly Rent and any additional
rent or payments hereunder may be assessed by Landlord or Agent as additional
rental. Notwithstanding the above, Landlord shall only need to give Tenant
written notice once in any consecutive twelve (12) month period. Furthermore,
Landlord or Agent shall have the right to require that rental payments be made
by certified or cashier's check, in the event Tenant monetarily defaults once in
any twelve-month period.
4. SECURITY DEPOSIT/LETTER OF CREDIT.
4.1 Delivery of Security Deposit. Tenant shall deposit with Landlord,
upon execution hereof, either (i) a Security Deposit equal to two (2) months
rent, equivalent to $70,246.00 or (ii) an irrevocable Letter of Credit in favor
of the Landlord for a similar amount, as security for the faithful performance
of Tenant's obligation hereunder. At the commencement of the fourth (4th) lease
year, provided that this Lease is in full force and effect, and provided that
Tenant is not in default under
5
<PAGE>
the Lease, Landlord shall reduce the Security Deposit/Letter of Credit to an
amount equal to the then one month Basic Monthly Rent plus Additional Rent. This
amount shall be held by Landlord for the duration of the Lease Term. If Tenant
provides a Security Deposit, Landlord shall place said Security Deposit in an
interest bearing account with interest accruing to Tenant. During the Term of
this Lease, Landlord shall also have the right to proceed with any other legal
or equitable remedies available to it.
4.2 Use of Security Deposit. The Security Deposit shall be held by
Landlord as security for the faithful performance and observance by Tenant of
the terms, provisions and conditions of this Lease. If any Event of Default
exists with respect to any provision of this Lease, Landlord may use, apply or
retain all or any portion of the Security Deposit for the payment of any Rent in
Default or for the payment of any other sum to which Landlord may become
entitled under this Lease or by law by reason of Tenant's default or to
compensate Landlord for any direct 1088 or damage which Landlord may suffer
thereby. If Landlord so uses or applies all or any portion of the Security
Deposit, Tenant shall within ten (10) days after written demand therefor,
deposit cash with Landlord in the amount sufficient to restore the Security
Deposit to the full amount of the Security Deposit and Tenant's failure to do 80
shall be a material breach of this Lease. The Security Deposit (or so much
thereof as has not theretofore been applied by Landlord or returned to Tenant),
shall be returned to Tenant within forty-five (45) days after the expiration of
the Term and after Tenant has vacated the Premises.
4.3 Security in Modular Furniture. In order to further secure Tenant's
obligations under this Lease, Tenant hereby grants a security interest in the
Modular Furniture that Tenant shall purchase for its Premises, as part of the
Construction Allowance per Section 7.1 and any and all replacements,
substitutions or proceeds thereof. Upon any default under this Lease, in
addition to any other remedies Landlord may be entitled, but only after
application of the security deposit, Landlord may exercise any rights or
remedies to which it may be entitled under the Uniform Commercial Code with
respect to such Modular Furniture. Upon Landlord's request Tenant shall execute
and deliver to Landlord for filing any and all documents required by Landlord to
protect and perfect Landlord's interest in the Modular Furniture. Tenant shall
not grant any other lien or encumbrance on the Modular Furniture.
5. USE.
The Premises shall be used and occupied by the Tenant only for office use
under the business name of National Capital Reciprocal Insurance Company, Inc.
--------------------------------------------------
5.1 Prohibited Uses. Tenant shall not use, or permit the use of, all or
any part of the Premises for any disorderly, illegal or hazardous purpose and
will not manufacture any commodity therein other than computer software. Tenant
shall not use, or permit the use of, all or any part of the Premises for any
purpose that interferes with the use or enjoyment by other tenants of any
portion of the Building or the Property, nor which, in Landlord's reasonable
opinion, impairs, or might impair, the reputation of the Property. Tenant shall
not use utility services in excess of amounts
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within the normal range of demand for general office use. Tenant shall not
obstruct any of the Common Areas or any portion of the Property outside the
Premises, and shall not place or permit any signs, curtains, blinds, shades,
awnings, aerials or flagpoles, or the like, visible from outside the Premises
which are not approved in writing by Landlord.
5.2 Floor Load; Prevention of Vibration and Noise. Tenant shall not place
a load upon the floor of the Premises exceeding the 100 pounds per square foot
such floor was designed to carry, as determined by Landlord or its structural
engineer. Partitions shall be considered as part of the load. Landlord may
prescribe the weight and position of all safes, files and heavy equipment that
Tenant desires to place in the Premises, so as properly to distribute their
weight. Tenant's business machines and mechanical equipment shall be installed
and maintained so as not to transmit noise or vibration to the Building or the
Property structure or to any other space in the Building. Tenant shall be
responsible for the cost of all structural engineering required to determine
structural load and all acoustical engineering required to address any noise or
vibration caused by Tenant.
6. Services Furnished by Landlord.
Landlord shall furnish services, utilities, facilities and supplies as
shown on the Building Services list attached as Exhibit B. If Landlord furnishes
any additional services at Tenant's request, such services shall be charged at
reasonable rates established by Landlord, which shall be considered additional
rent.
6.1 Repairs and Maintenance. Landlord shall repair and maintain the Common
Areas and structural portions of the Building and the basic plumbing,
electrical, mechanical and heating, ventilating, and air-conditioning systems
therein, including the roof and windows, consistent with similar properties in
the Washington, D.C. metropolitan area. Landlord shall use reasonable efforts to
remove any accumulated snow, ice, refuse and unlawful obstructions.
6.2 Quiet Enjoyment. Upon Tenant's paying the rent and performing its
other obligations, Landlord shall permit Tenant to peacefully and quietly hold
and enjoy Premises, subject to the provisions hereof.
6.3 Insurance. Landlord shall insure the Property, including the Building
at replacement cost (exclusive of foundation and excavation costs) against
damage by fire and standard extended coverage perils, and shall carry public
liability insurance, all in such reasonable amounts with such reasonable
deductibles as would be carried by a prudent owner of a similar building in the
area. Landlord may carry any other forms of insurance as it or its mortgagee may
deem advisable. Tenant shall have no right to any proceeds from such policies.
Landlord shall not carry any insurance on any of Tenant's property, and shall
not be obligated to repair or replace any of it.
6.4 Changes by Landlord. Landlord may at any time make any changes,
additions, improvements, repairs or replacements to the Property, including the
Common Areas, that it considers desirable. In so doing, Landlord may use or
temporarily close any of the Common Areas,
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or permanently change their configuration. Landlord shall use reasonable efforts
to minimize interference with Tenant's normal activities. If these changes
impact Tenant's business, Landlord must obtain Tenant's approval, such approval
not to be unreasonably withheld. Landlord may also discontinue any facilities or
services provided as part of the Common Areas or as common facilities if such
areas or facilities are not described in Building Services in Exhibit B.
6.5 Access to Premises; Utility Suspension. Landlord shall have reasonable
access to the Premises to inspect Tenant's performance hereunder and--subject to
reasonable advance notice--(except in an emergency situation) to perform any
acts required of or permitted to Landlord herein, and may temporarily stop any
service or utility system in conjunction therewith. Landlord shall use
reasonable efforts to minimize interference with Tenant's normal activities, but
no such interference shall constitute constructive eviction or give rise to any
abatement of rent or liability of Landlord to Tenant.
6.6 Failure to Provide Services and Repairs. Landlord shall not be liable
for any failure to perform any act or provide any service required hereunder
unless Tenant shall have given Landlord written notice of such failure, and it
is in Landlord's reasonable control to cure such failure, and such failure
continues for at least thirty days thereafter. Notwithstanding the foregoing, if
any such failure is caused by factors beyond Landlord's reasonable control, then
Landlord shall not be liable to Tenant in any event, and such failure shall not
constitute constructive eviction or give rise to any rental abatement or
reduction. Tenant hereby waives any right to make repairs or provide maintenance
at Landlord's expense under any law or ordinance. If all or a material portion
of the Premises remain untenantable for reasons other than force majeure for a
continuous and uninterrupted period of more than ten (10) business days, rent
shall abate during the period of untenantability.
7. ALTERATIONS.
7.1 Landlord's Construction Allowance. The Premises shall be provided to
Tenant in its "as-is" condition. Landlord shall provide Tenant with a
construction allowance equal to Seventeen Dollars and Fifty Cents ($17.50) per
rentable square foot of Office Space on Floors 1-3 (16,376 rentable square
feet), or a total of Two Hundred Eighty-Six Thousand, Five Hundred Eighty
Dollars ($286,580). Ten Dollars ($10.00) per rentable square foot, or a total of
One Hundred Sixty-Three Thousand, Seven Hundred Sixty Dollars ($163,760) shall
be applied towards the cost of modular furniture which shall be considered as
additional collateral during the Term of the Lease (See Section 4.3). All
architectural/engineering services, permits, and construction management fees
shall be a part of the Construction Allowance. Tenant has the right to retain
its own general contractor and/or subcontractor subject to Section 7.2 below. In
the event Landlord manages the construction, Landlord shall (i) receive a
construction management fee equal to four percent (4%) of the construction costs
and fees; and (ii) competitively bid the work to a minimum of two (2) general
contractors. Tenant shall have the right to select at least one of the general
contractors, which general contractor shall be reasonably acceptable to
Landlord. Landlord and Tenant shall not unduly delay the design and construction
process.
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7.2 Landlord's Consent. Tenant shall not make any alterations, additions,
modifications or improvements to the Premises without the prior written consent
of Landlord, which consent will not be unreasonably withheld, provided that such
alterations, additions, modifications or improvements are not structural or
involve building systems. If Tenant desires to make any such alterations, etc.,
plans for same shall first be submitted to and approved by Landlord, and same
shall be done by Tenant, at its own expense, and Tenant agrees that all such
work shall be done in a good and workmanlike manner (Landlord having the right
to approve all contractors), that the structural integrity of the building shall
not be impaired, that no liens shall attach to the Premises by reason therefor,
and that Tenant will secure all necessary permits pertaining to the
aforementioned alterations, etc. Tenant has no authority or power, express or
implied, to create or cause to be created or to consent to any lien, charge or
encumbrance of any kind against the Premises, the Building, or the Property.
Tenant shall pay before delinquency all costs for work done or caused to be done
by Tenant in the Premises which could result in any lien or encumbrance on
Landlord's interest in the Building or any part thereof, shall keep the title to
the building and every part thereof free and clear of any lien or encumbrance
with respect to such work and shall indemnify and hold harmless Landlord against
any claim, loss, cost, demand or legal or other expense, whether in respect of
any lien or otherwise, arising out of the supply of material, services or labor
for such work. Notwithstanding the foregoing, provided Tenant is not in default,
Tenant shall not be responsible for the removal of any lien arising solely as a
result of Landlord's failure to pay any amounts required to be paid by Landlord
pursuant to Section 7.1. Tenant shall immediately notify Landlord of any such
lien, claim of lien or other action of which it has knowledge and which affects
the title to the building or any part thereof and shall cause the same to be
removed within ten (10) days, failing which Landlord may take such action as
Landlord deems necessary to remove the same and the cost thereof (including
reasonable attorneys' fees) shall be immediately due and payable by Tenant to
Landlord. All alterations, additions, improvements and fixtures (other than
Tenant's Personal Property, provided the same are installed at no cost or
expense to Landlord) which may be made or installed by either party upon the
Premises shall be and remain the property of Landlord and shall remain upon and
be surrendered with the Premises, unless Landlord requests their removal, in
which event Tenant shall remove the same and restore the Premises to its
original condition, taking into account normal wear and tear, at Tenant's sole
cost and expense and Tenant-shall pay the entire cost of such removal to
Landlord upon Tenant's receipt of Landlord's written demand therefor. If Tenant
fails to remove such property and restore the Premises as aforesaid, Landlord
may do so and Tenant shall pay the entire cost thereof to Landlord within ten
(10) days after Tenant's receipt of Landlord's written demand therefore.
7.3 Code Compliance. Tenant shall be responsible for ensuring that the
Premises meet all Americans with Disabilities Act of 1990 requirements, and all
Fire/Life and Safety regulations. Landlord shall have no responsibility for such
modifications, if any.
8. HAZARDOUS SUBSTANCES AND ENVIRONMENTAL ISSUES.
8.1 Hazardous Substances. Tenant (a) shall not use, process, release,
discharge, generate, treat, store or dispose of any Hazardous Substances on the
Premises, in the Building or on the
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Property (other than substances necessary for the proper operation of business
machines (e.g., photocopying machines and printers), and (b) shall prohibit its
employees, licensees, subtenants and third party contractors from using,
processing, releasing, discharging, generating, treating, storing or disposing
of any Hazardous Substances on the Premises, in the Building or on the Property,
in either case in quantities or concentrations or in a manner which would
violate any applicable law, ordinance, rule or regulation or any insurance
policy in force with respect to the Premises, the Building or the Property. In
addition to any other obligation or liability that Tenant may have hereunder or
under applicable law, if Tenant or any of Tenant's employees, licensees,
subtenants or third party contractors uses, processes, releases, discharges,
treats, generates, stores or disposes of any Hazardous Substance on the
Premises, in the Building or on the Property in violation of the terms of this
Lease or applicable law, then Tenant upon discovering same shall immediately
remove such Hazardous Substance from the Premises, the Building, and the
Property in accordance with the requirements of all governmental authorities
having jurisdiction.
8.2 Conservation and Environmental Policies and Programs. Tenant shall
comply with all conservation and environmental protection programs and policies
implemented by Landlord to comply with any mandatory or reasonable voluntary
conservation or environmental protection program or policy promulgated by any
governmental or quasi-governmental authority. Notwithstanding any provision in
this Lease to the contrary, Landlord shall have no liability to Tenant and
Tenant shall not be entitled to any rebate or offset against Rent if Landlord is
unable to provide any of the services provided for in Article 6 because of
Landlord's compliance with any such mandatory program or policy; provided,
however, that such compliance does not render the Premises untenantable as set
forth in Section 6.6.
9. INSURANCE.
9.1 Fire Insurance. Tenant agrees, in addition to the provisions of
Article 8, that it will not do anything that will cause Landlord's insurance
against loss by fire or other hazards, as well as public liability insurance, to
be canceled or that will prevent Landlord from procuring same in acceptable
companies and at standard rates. Tenant will further do everything reasonably
possible and consistent with the conduct of Tenant's business to obtain the
lowest possible rates for insurance on the Premises. If, however, the cost to
Landlord of obtaining insurance on the Premises (or the building in which the
Premises are located) is increased due to the Tenant's occupancy thereof, Tenant
agrees to pay, promptly upon demand, as additional rental, any such increase.
9.2 Tenant's Insurance. During the Term, Tenant shall obtain and
maintain in force at Tenant's sole cost and expense the following insurance:
9.2.1 Casualty Insurance. Fire and Extended Coverage in the form of an
"All Risk of Physical Loss" policy with extended coverage endorsement, including
vandalism, malicious mischief, water damage, sprinkler damage, earthquake and
flood coverage, and any other endorsement required by the holder of any fee or
leasehold mortgage, in an amount equal to full replacement value, at the time of
loss, of Tenant's personal property and trade fixtures located at the
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Premises from time to time. Such amount shall provide for replacement cost and
shall be subject to a deductible amount no greater than that reasonably
acceptable to Landlord. Landlord agrees that a deductible amount of Ten Thousand
Dollars ($10,000) is acceptable to Landlord. Notwithstanding the foregoing,
Tenant shall not be required to carry earthquake or flood insurance unless any
lender holding a mortgage or deed of trust on the Property requires earthquake
or flood insurance or such insurance is generally being required by landlords
leasing space in the Washington, D.C. metropolitan area.
9.2.2 Liability Insurance. Comprehensive General Liability Insurance on an
"occurrence" basis for the benefit of Landlord as an additional insured against
claims for personal injury liability, including (without limitation) bodily
injury, death or property damage liability with a limit of not less than Three
Million Dollars ($3,000,000) in the event of "personal injury" to any number of
persons or of damage to property arising out of any one "occurrence"; any such
insurance may be furnished under an "umbrella" policy with Landlord's prior
written consent, which shall not be unreasonably withheld. The policy shall
insure performance by Tenant of the indemnity provisions of Section 9.5. The
limits of that insurance shall not, however, limit the liability of Tenant under
this Lease.
9.2.3 Worker's Compensation. Worker's compensation insurance (including
employees' liability insurance) in the amount covering all employees of Tenant
employed at or performing services at the Premises, in order to provide the
statutory benefits required by the laws of the District of Columbia.
9.2.4 Business Interruption. Business interruption insurance, providing in
the event of damage or destruction of the Premises an amount sufficient to
sustain Tenant for a period of not less than one year for: (a) the net profit
that would have been realized had the business continued; and (b) such fixed
charges and expenses as must necessarily continue during a total or partial
suspension of business to the extent to which they would have been incurred had
no business interruption occurred, including, but not limited to, interest on
indebtedness, charges under noncancellable contracts, charges for advertising,
legal or other professional services, taxes and rents that may still continue,
trade association dues, insurance premiums and depreciation.
9.3 Insurance Policies and Insurers. All insurance policies required to
be obtained and maintained by Tenant under this Lease shall be issued by
insurance companies authorized to do business in the District of Columbia and
with a rating of at least A+ in A.M. Best's Key Rating Guide and at least "X" in
A.M. Best's Financial Rating Guide, shall be written as primary policies and not
contributing with or excess of any coverage which Landlord may carry, shall
provide that the policy may not be canceled or materially amended or the
coverage thereunder reduced unless Landlord and each other party designated as
an additional insured thereunder shall have received thirty (30) days prior
written notice and shall contain a provision that Landlord and any other parties
in interest shall be entitled to recover under those policies for any covered
loss occasioned to them, notwithstanding any act or omission of Tenant or any
other named insured. Tenant shall furnish to Landlord, prior to the commencement
Date, and within thirty (30) days prior to the expiration of each such policy,
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a certificate of insurance issued by the insurance carrier of each policy of
insurance carried by Tenant pursuant hereto, reflecting the coverages required
by this Article 9, and a copy of each insurance policy. Landlord, its successors
and assigns, and each nominee of Landlord holding any interest in the Premises
shall be designated as an additional insured and as a 1088 payee, as applicable,
under each policy of insurance (other than those for worker's compensation)
maintained by Tenant pursuant to this Article 9. The premiums on any policy
which Tenant is required to carry pursuant to this Article 9 shall be paid when
due. Upon payment of such premiums, reasonable evidence of payment shall be
provided to Landlord. Tenant shall immediately notify Landlord in the event that
any of its insurance carriers cancel or modify any policy of insurance and shall
also notify Landlord at least thirty (30) days prior to changing insurance
carriers or the modification or cancellation of any policy; provided, however,
that the notification hereinabove required shall not relieve Tenant of its
obligation to maintain continuously in effect the types and amounts of insurance
specified in this Article 9. If Tenant fails to provide evidence reasonably
satisfactory to Landlord of Tenant's timely compliance with the requirements of
this Article 9, Landlord shall have the right, after written notice to Tenant,
to place any and all of the insurance coverages set forth above and Tenant
agrees to reimburse Landlord, as Additional Rent, Landlord's cost of such
coverages. From time to time, but in no event more frequently than once in any
twelve month period, Landlord shall have the right to adjust the dollar limits
of coverage set forth in this Article 9 to reflect increases, if any, in the
Consumer Price Index.
9.4 WAIVER OF SUBROGATION.
9.4.1 Release. Subject to the provisions of Subsection 9.4.2, Landlord and
Tenant (on behalf of themselves and their respective agents, employees, third
party contractors, subtenants, licensees, invitees and assignees) each release
the other with respect to and agree that the other shall not be liable for any
business interruption or any loss or damage to property or injury to or death of
persons occurring on the Premises, in the Building, on the Property, or on
adjoining property or in any manner arising out of or connected with Tenant's
use of the Premises, whether or not caused by the negligence or other fault of
Landlord or Tenant or any of their respective agents, employees, third party
contractors, subtenants, licensees, invitees or assignees.
9.4.2 Insurance Coverage. The release and waiver contained in Subsection
9.4.1 shall apply only to the extent that such business interruption, 1088 or
damage to property, or injury to or death of persons is covered by insurance,
regardless of whether such insurance is payable or protects the Landlord or
Tenant or both. Nothing in this Section 9.4 shall be construed to impose any
other or greater liability upon either the Landlord or Tenant then would have
existed in absence of this Subsection.
9.4.3 No Affect. The release and waiver contained in Subsection 9.4.1
shall be in effect only so long as the applicable insurance policies contain a
clause to the effect that such release and waiver will not affect the right of
the insured to recover under such policies. Such clauses shall be obtained by
the parties in policies to be obtained by them whenever possible.
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9.5 Indemnity. Tenant shall indemnify, hold harmless and defend Landlord
from and against any and all claims, demands, causes of action, 1088, liability,
costs or expenses (including, without limitation, reasonable attorneys' fees and
costs) arising out of, connected with or incidental to: Tenant's use and
occupancy of the Premises or the business conducted by Tenant therein; any act
or omission by Tenant or any of Tenant's agents, employees, third party
contractors, subtenants, licensees, invitees or assignees; and any Default by
Tenant under this Lease. Tenant's obligations under this Section 9.5 shall not
apply to claims, demands, causes of action, 1088, liability, costs or expenses
to the extent resulting from the gross negligence or intentional misconduct of
Landlord's agents, employees or third party contractors.
10. PERMITS - COMPLIANCE WITH LAWS.
10.1 Permits. Tenant shall, at its own expense, promptly-obtain from the
appropriate governmental authorities any and all permits, licenses and the like
required to permit Tenant to occupy the Premises and conduct its business for
the purposes herein stated. This requirement shall not relieve the Tenant of its
liability for rent from the commencement date hereinabove set forth. Landlord
will cooperate with reasonable requests of Tenant to obtain permits at Tenant's
sole expense provided Landlord shall have no liability in such regard. Landlord
shall not take any action which would impede Tenant's ability to obtain
certificates of occupancy.
10.2 Compliance with Laws. Tenant shall thereafter promptly comply with
all statutes, laws, ordinances, orders, rules, regulations and requirements of
the Federal, State and local governments and of the Board of Fire Underwriters
applicable to Tenant's use of the Premises, for the correction, prevention and
abatement of nuisances or violations in, upon or connected with the Premises
during the term of this Lease.
11. ASSIGNMENT AND SUBLETTING.
Tenant agrees that it will not transfer, assign, sublet or encumber the
Premises, in whole or in part, without Landlord's prior written consent, which
will be based upon, among other factors, the credit-worthiness, use, and
reputation of assignees or sublessees. Landlord agrees that its consent will not
be unreasonably withheld, and if such consent is given, Tenant shall not be
relieved from any liability under this Lease. Tenant further agrees that if it
intends to assign or sublet the entire Premises, it will first notify Landlord
in writing and Landlord shall have fifteen (15) days to notify Tenant that
Landlord, at its option may accept a surrender of the Premises, in which event
Landlord shall release Tenant from any further liability under this Lease. Any
transfer, assignment, subletting or encumbrance without Landlord's prior written
consent shall be void. If Landlord does not accept a surrender of the Premises,
any rent that Tenant receives in excess of the Rent per Article 3 shall be split
50/50 between Landlord and Tenant.
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12. SUBORDINATION.
Tenant accepts this Lease, and the tenancy created hereunder, subject and
subordinate to any leases, mortgages, deeds of trust, leasehold mortgages or
other security interests now or hereafter a lien upon or affecting the Building
or the Property or any part thereof ("Lienholders"). Tenant shall, at any time
hereafter, on reasonable request, execute any instruments, leases or other
documents that may be required by any mortgage, mortgagee, deed of trust,
trustee or underlying owner or Landlord hereunder to subordinate Tenant's
interest hereunder to the lien of any such mortgage or mortgages, deed or deeds
of trust or underlying lease, and the failure of Tenant to execute any such
instruments, leases or documents shall constitute a default hereunder.
Notwithstanding the foregoing, Landlord shall request that its Lienholders enter
into a nondisturbance and subordination agreement in a form reasonably
acceptable to Tenant and Lienholders within thirty (30) days of the date of this
Lease.
13. ATTORNMENT.
Tenant agrees that upon any termination of Landlord's interest in the
Premises, Tenant will, upon request, attorn to the person or organization then
holding title to the reversion of the Premises (the "Successor'(S)) and to all
subsequent Successors, and shall pay to the Successor all rents and other monies
required to be paid by the Tenant hereunder and perform all of the other terms,
covenants, conditions and obligations contained in this Lease, and Tenant will
execute and deliver to Landlord (and Landlord's mortgagee), confirming same.
14. PROPERTY LOSS OR DAMAGE.
14.1 Landlord's Responsibility. Tenant hereby expressly agrees that
Landlord shall not be responsible in any manner for any damage or injury to the
person or property of Tenant or any other person or business directly or
indirectly caused by (i) dampness or water, whether due to a break or leak in
any part of the roof, heating, or plumbing within the Premises, or in the
building in which the Premises are located; (ii) theft; (iii) fire or other
casualty; (iv) any other cause whatsoever, unless as a result of Landlord's
gross negligence or intentional misconduct.
14.2 Landlord's Liability for Damages. Subject to the provisions of
Section 14.1, Landlord shall not be liable for damage or injury to person or
property of Tenant or of any other person or business unless notice in writing
of any defect (i) which Landlord has under the terms of this Lease the duty to
correct and (ii) which has caused such damage or injury, shall have been given
in sufficient time before the occurrence of such damage or injury reasonably to
have enabled Landlord to correct such defect, and even then only if such damage
or injury is due to Landlord's gross negligence or intentional misconduct.
15. TENANT'S FAILURE TO PERFORM.
In the event that Tenant fails, after fifteen (15) days' written notice
from Landlord, to do any act or make any payment or perform any term or covenant
on Tenant's part required under this Lease
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or otherwise fails to comply herewith, Landlord may (at its option, but without
being required to do so) immediately, or at any time thereafter and without
notice, perform the same on the account that Tenant has failed to do so, and if
Landlord makes any expenditures, or incurs any obligations for the payment of
money in connection therewith, including, but not limited to, attorneys' fees in
instituting prosecuting or defending any action or proceeding, such sums paid or
obligations incurred, with interest at the rate of twelve percent (12%) per
annum and costs, shall be deemed to be additional rent hereunder and shall be
paid by Tenant to Landlord within five (5) days of rendition of any bill or
statement to Tenant therefor. All rights given to Landlord in this Article shall
be in addition to any other right or remedy of Landlord herein contained or
otherwise available.
16. LANDLORD'S RIGHT TO SHOW PREMISES.
Tenant agrees that Landlord may, within the last nine (9) months of the
Lease term, display a "For Lease" or "For Sale" sign on the Premises and show
prospects through the Premises at any reasonable time, with twenty-four (24)
hours' prior notice to allow Tenant to arrange for escorted tours.
17. SURRENDER AT END OF TERM.
Except as otherwise provided, Tenant shall vacate the Premises at the
expiration or other termination of this Lease and shall remove all goods and
effects not belonging to Landlord and shall surrender possession of the Premises
and all fixtures and systems thereof in good repair, reasonable wear, tear and
damage by fire or other unavoidable casualty excepted. If Tenant shall fail to
perform any of the foregoing obligations, Landlord is hereby expressly
authorized to do 80 on Tenant's behalf and at Tenant's sole cost and expense,
and Landlord may sell such articles on the Premises as Landlord in its sole
discretion deems saleable, and may dispose of others in any manner which it
chooses. Tenant shall pay and be liable for any and all costs and expenses
incurred by Landlord hereunder. The proceeds of any such sale shall be applied
toward the expenses thus incurred and Tenant will receive net proceeds if any
and agrees to pay any remaining balance promptly.
18. HOLDING OVER.
If Tenant shall not immediately surrender possession of the Premises at the
termination of this Lease, Tenant shall become a month-to-month Tenant, at twice
the Basic Monthly Rental and Tenant's share of Landlord cost's just prior to
termination of this Lease, said rental to be payable in advance. Notwithstanding
the foregoing, the Landlord shall continue to be entitled to re-take possession
of the Premises immediately upon the expiration of the term hereof, and the
Tenant hereby agrees that all of the obligations of the Tenant and all rights of
the Landlord applicable during the term of this Lease shall be equally
applicable during such period of subsequent occupancy, whether or not a
month-to-month tenancy shall have been created as aforesaid. Tenant further
agrees that it shall be liable for any reasonable damages suffered by Landlord
by reason of Tenant's failure to immediately surrender the Premises.
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19. DESTRUCTION - FIRE OR OTHER CASUALTY.
In case of partial damage to the Premises by fire or other casualty,
insured against by Landlord, Tenant shall give immediate notice thereof to
Landlord, and Landlord, to the extent that insurance proceeds respecting such
damage are subject to and, in fact, are under the control and use of Landlord,
shall thereupon cause such damage to all property owned by Landlord to be
repaired with reasonable speed at the expense of Landlord, due allowance being
made for reasonable delay which may arise by reason of adjustment of loss under
insurance policies on the part of Landlord and/or Tenant, and for reasonable
delay on account of "labor troubles" or any other cause beyond Landlord's
control, and, to the extent that the Premises are rendered actually untenantable
by such damage, the rent shall proportionately abate, unless Tenant cannot
materially conduct business, in which case the Premises shall be deemed
untenantable. In the event (a) the damage shall be so extensive to the whole
Building as to render it uneconomical, in Landlord's opinion, to restore for the
use of Tenant, as specified in Article 5 hereof, or Landlord shall decide not to
repair or rebuild the Building, then Landlord may elect to terminate this Lease
upon written notice to Tenant and this Lease shall expire by lapse of time upon
the third day after such notice is mailed, or (b) damage shall be so extensive
that the entire Premises shall be rendered actually untenantable and Landlord
shall not have caused the Premises to be restored within 180 days following the
occurrence of such damage (the "Restoration Period"), then, provided such damage
was not caused by the gross negligence or intentional act or omission of Tenant
or Tenant's servants, employees, agents, licensees, invitees or visitors, Tenant
may elect to terminate this Lease by written notice to Landlord received by
Landlord within the thirty (30) day period following the expiration of the
Restoration Period, and this Lease shall expire by lapse of time upon the third
day after such notice is timely received by Landlord. Tenant shall thereupon
vacate the Premises and surrender the same to Landlord, but such termination
shall not release Tenant from any liability to Landlord arising from such damage
or from any breach of the obligations imposed on Tenant hereunder.
20. EMINENT DOMAIN.
If the entire Premises shall be substantially taken (either temporarily or
permanently) for public purposes, or in the event Landlord shall convey or lease
the property to any public authority in settlement of a threat or condemnation
or taking, the rent shall be adjusted to the date of such taking or leasing or
conveyance, and this Lease shall thereupon terminate. If only a portion of the
Premises shall be so taken, leased or condemned as a result of such partial
taking, and Tenant is reasonably able to use the remainder of the Premises for
the purposes intended hereunder, then this Lease shall not terminate, but,
effective as of the date of such taking, leasing or condemnation, the rent
hereunder shall be abated in any amount thereof proportionate to the area of the
Premises so taken, leased or condemned. If, following such partial taking,
Tenant shall not be reasonably able to use the remainder of the Premises for the
purposes intended hereunder, then this Lease shall terminate as if the entire
Premises had been taken, leased or condemned. In the event of a taking, lease or
condemnation as described in this Article, whether or not there is a termination
hereunder, Tenant shall have no claim against Landlord other than an adjustment
of rent, to the date of taking
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lease or condemnation, and Tenant shall not be entitled to any portion of any
amount that may be awarded as damages or paid as a result or in settlement of
such proceedings or threat.
21. DEFAULTS - REMEDIES.
21.1 Tenant Defaults. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Tenant:
21.1.1 Vacating. The vacating or abandonment of the Premises by Tenant for
more than sixty (60) days.
21.1.2 Payment. The failure by Tenant to make any payment of rent or any
other payment required to be made by Tenant hereunder, as and when due,
following written notice by Landlord, provided Landlord shall only be required
to provide notice once every twelve months.
21.1.3 Performance. The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Tenant other than described in Subsection 21.1.2 hereinabove, where such failure
shall continue for a period of ten (10) days after written notice thereof from
Landlord to Tenant; provided, however, that if the nature of the Tenant default
cannot be cured in such 10 day period if Tenant commences such cure within said
ten (10) day period and thereafter, diligently prosecutes such cure to
completion, provided that in any event, such default must be cured with sixty
(60) days of notice.
21.1.4 Assignment. The making by Tenant of any general assignment or
general arrangement for the benefit of creditors, filing by or against Tenant of
petition to have Tenant adjudged a bankrupt or a petition for reorganization or
arrangement under any law relating to bankruptcy (unless in the case of a
petition filed against Tenant, the same is dismissed within sixty (60) days),
the appointment of a Trustee or receiver to take possession of substantially all
of the Tenant's assets located in the Premises or the Tenant's interest in this
Lease where possession is not restored to Tenant within thirty (30) days or the
attachment, execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or Tenant's interest in this Lease, where such
seizure is not discharged within thirty (30) days.
21.1.5 Execution or Attachment. Tenant's-interest in this Lease is taken
in execution or in attachment or a writ of execution is issued against Tenant.
21.1.6 Non-Payment of Debts. Tenant or any guarantor of Tenant's
obligations under this Lease generally does not pay its debts as they become due
unless such debts are the subject of a bona fide dispute or admits in writing
its inability to pay its debts.
21.2 Remedies. Upon the occurrence of an event of Default and at any
time thereafter, in addition to any other rights and remedies Landlord may have
under this Lease or at law or in equity, whether or not Tenant abandons the
Premises, Landlord shall have the option, in its sole discretion, to do any one
or more of the following:
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21.2.2 Reletting of Premises. Whether or not this Lease or Tenant's right
of possession is terminated following such event of Default, Landlord may relet
the Premises or any part thereof, alone or together with other premises, for
such term or terms (which may be greater or less than the period which otherwise
would have constituted the balance of the Term) and on such terms and conditions
(which may include concessions of free rent and alterations of the Premises) as
Landlord, in its sole discretion, may determine, but Landlord shall not be
liable for, nor shall Tenant's obligations hereunder be diminished by reason of,
any failure by Landlord to relet the Premises or any failure by Landlord to
collect any rent due upon such reletting; provided, however, that
notwithstanding the foregoing, in the event that Tenant presents one or more
prospective tenants to Landlord, Landlord shall consider in good faith reletting
the Premises or any portion thereof to any such prospective tenants, provided
such tenants are, among other things, of the kind, type, reputation,
creditworthiness and quality typically found in similar buildings.
21.2.2 Damages. Whether or not this Lease or Tenant's right of possession
is terminated following such event of Default, Tenant nevertheless shall remain
liable for:
(a) all Basic Monthly Rent and Additional- Rent (including, without
limitation, all damages sustained by Landlord by reason of the event of Default)
which have become due prior to such event of Default, and all costs, fees and
expenses (including, without limitation, reasonable attorneys' fees, brokerage
fees, and expenses incurred in placing the Premises in condition consistent with
buildings of a similar quality in the Washington, D.C. metropolitan area),
incurred by Landlord in pursuit of its remedies hereunder or in renting the
Premises to others from time to time (all such Basic Monthly Rent, Additional
Rent, damages, costs, fees and expenses are herein called "Termination
Damages"); and
(b) additional damages (herein called "Liquidated Damages", which,
------------------
at the election of Landlord, shall be either:
(i) An amount equal to the Basic Monthly Rent and
Additional Rent that would have become due during the
remainder or the Term, less the amount of rental, if any,
that Landlord receives during such period from others to
whom the Premises is rented (other than any Additional Rent
received by Landlord as a result of any failure of such
other person to perform any of its obligations to Landlord),
in which case such Liquidated Damages shall be computed and
payable in monthly installments, in advance, on the first
day of each calendar month following Tenant's Default and
continuing until the date on which the Term would have
expired but for Tenant's Default. Separate suits or actions
may be brought to collect any such Liquidated Damages for
any month or months, and such separate suits or action shall
not in any manner prejudice the right of Landlord to collect
any Liquidated Damages for any subsequent month or months by
similar proceedings, or Landlord may defer any suits or
actions until after the expiration of the Term; or
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(ii) The amount determined by subtracting (A) the present
value (as of the date of Tenant's default) of the fair
rental value of the Premises for the remainder of the Term
(in determining such fair rental value, the Basic Monthly
Rent and operating cost charges then being paid by tenants
for comparable space in comparable buildings in equally
desirable locations in the Washington, D.C. Metropolitan
area shall be considered), from (B) the present value (as of
the date of the Tenant's default) of all Basic Monthly Rent
and Additional Rent that would have become due during the
remainder of the Term (with such present values being
determined using a discount rate of eight percent (8%) per
annum), which Liquidated Damages shall be payable to
Landlord in one lump sum on demand. For this purpose,
Additional Rent shall be calculated on the basis that
Tenant's Proportionate Share of increases in Operating Costs
would increase at the rate such expenses have generally
increased in Washington, D.C. metropolitan area for
comparable buildings during the preceding five (5) years, as
reasonably determined by Landlord.
21.2.3 Possession of Premises. Whether or not this Lease is terminated by
reason of Tenant's Default, Landlord may immediately or at any time after the
occurrence of an event of Default reenter and take possession of the Premises,
either by summary dispossess proceedings, an action for ejectment or by any
other suitable action or proceeding at law or in equity, and the provisions of
this Article 21 shall operate as a notice to quit. Tenant hereby expressly
waives the right to receive any other notice to quit or of Landlord's intention
to reenter the Premises.
21.2.4 Cumulative Remedies. Each right and remedy of Landlord provided for
in this Lease and each right or remedy now or hereafter existing at law or in
equity or by statute or otherwise shall be cumulative. The exercise or beginning
the exercise of any one or more of the rights or remedies provided for in this
Lease or now or hereafter existing at law or in equity or by statute or
otherwise shall not preclude the simultaneous or later exercise of any or all
other rights or remedies provided for in this Lease or now or hereafter existing
at or in equity or by statute or otherwise.
21.2.5 Eviction of Tenant. Tenant hereby expressly waives any and all
right of redemption granted by or under any present or future law if Tenant is
evicted or dispossessed for any cause or if Landlord obtains possession of the
Premises by reason of the violation by Tenant of any of the covenants or
conditions of this Lease or otherwise. In addition, Tenant hereby expressly
waives any and all rights to bring any action whatsoever against any tenant
taking possession after Tenant has been dispossessed or evicted hereunder or to
make any such tenant a party to any action brought by Tenant against Landlord.
21.3 Landlord Default. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within a reasonable time, but
in no event, sooner than ten (10) days after written notice by Tenant to
Landlord specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of the Landlord's obligation is such that
more than
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ten (10) days is required for performance, then Landlord shall not be in default
if Landlord commences performance within such ten (10) days and thereafter
diligently prosecutes the same to completion.
21.4 Agent's Authority. While BERNSTEIN MANAGEMENT CORPORATION shall be
collecting the rentals due from the Tenant, it is hereby authorized by the
Landlord to expend such sums as may be reasonably necessary in connection with
the enforcement of payment of rental and the securing or possession of the
Premises in case of Tenant's default and to reimburse itself from said rentals
to the extent that may be available therefore. The Landlord agrees to pay
BERNSTEIN MANAGEMENT CORPORATION any of such expenses not 80 reimbursed promptly
upon demand.
22. SEVERAL LIABILITY.
If the Tenant shall be one or more individuals, corporations or other
entities, whether or not operating as a partnership or joint venture, then each
such individual corporation, entity, joint venture or partner shall be deemed to
be both jointly and severely liable for the payment of the entire rent and other
payments specified herein and all other duties and obligations hereunder.
23. ACCEPTANCE OF PREMISES.
Tenant's occupancy of the Premises shall constitute acceptance thereof as
complying with all requirements of Tenant and Landlord with respect to the
condition, order and repair thereof.
24. ESTOPPEL CERTIFICATES.
Tenant agrees at any time and from time to time upon not less than five (5)
days prior notice by Landlord to execute, acknowledge and deliver to Landlord
and/or Landlord's lender or mortgagee a statement in writing certifying that
this Lease is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as modified and stating
the modifications) and the dates to which the rent and other charges have been
paid in advance, if any, and stating whether or not, to the best knowledge of
the signer of such certificate, Landlord is in default in performance of any
covenant, agreement or condition contained in this Lease and, if so, specifying
each such default of which the signer may have knowledge, it being intended that
any such statement delivered hereunder may be relied upon by any third party to
this Lease and such other matters as Landlord may reasonably request.
25. NOTICES.
All notices, demands and requests required under this Lease shall be in
writing. All such notices shall be deemed to have been properly given if sent by
United States registered or certified mail, return receipt requested, postage
prepaid, addressed to the Landlord at:
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Bernstein Management Corporation
5301 Wisconsin Avenue, N.W., Suite 600
Washington, D.C. 20015
and to the Tenant at: Premises. Either party may designate a change of address
by written notice to the other party.
Notices, demands and requests which shall be served by registered or
certified mail in the manner aforesaid shall be deemed sufficiently served or
given for all purposes hereunder at the time such notice, demand or request
shall be mailed by United States registered or certified mail as aforesaid in
any Post Office or Branch Post Office regularly maintained by the United States
Government.
26. SEPARABILITY.
If any term or provision of this Lease or the application thereof to any
person or circumstances shall, to any extent, be invalid or unenforceable, the
remainder of this Lease or the application of such term or provision to persons
or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each term and provision of this
Lease shall be valid and enforceable to the fullest extent permitted by law.
27. CAPTIONS.
All headings in this Lease are intended for convenience of reference only
and are not to be deemed or taken as a summary of the provisions to which they
pertain or as construction thereof.
28. SUCCESSORS AND ASSIGNS.
The covenants, conditions and agreements contained in this Lease shall bind
and inure to the benefit of Landlord and Tenant, and their respective heirs,
distributees, executors, administrators, successors and, except as otherwise
provided in this Lease, their assigns.
29. GOVERNING LAW.
This Lease was made in the District of Columbia and shall be governed by
and construed in all respects in accordance with the laws of the District of
Columbia.
30. INCORPORATION OF PRIOR AGREEMENTS.
This Lease contains all agreements of the parties with respect to any
matters contained herein. No prior agreement or understanding pertaining to any
such matter shall be affected. This Lease may be modified only in writing and
signed by the parties in interest at the time of the modification.
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31. CUMULATIVE REMEDY.
No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies at law or in equity.
32. SIGNAGE.
Tenant covenants and agrees that it shall not inscribe, affix, or otherwise
display signs, advertisements or notices in, on, upon, or behind any windows or
on any door, partition or other part of the interior or exterior of the Building
or the Property without the prior written consent of the Landlord. If such
consent is given by Landlord, the cost of same shall be charged to and be paid
by Tenant, and Tenant agrees to pay same promptly and on demand. Any signs which
have been placed without approval may be removed by Landlord at Tenant's
expense.
33. RENEWAL OPTIONS.
Provided that this Lease is in full force and effect and provided that (a)
where this Lease expressly requires that Landlord deliver written notice of a
default, there exists no uncured default by Tenant for which written notice has
been given, and (b) in all other circumstances, Tenant is not in default
hereunder, the Tenant shall be entitled to renew this Lease for one (1)
additional term (this is hereinafter referred to as "Renewal Term" of five (5)
years, commencing on the date on which but for such renewal, the Term would have
expired, and terminating on the fifth (5th) anniversary of such date which
anniversary shall, if this Lease is so renewed, thereafter be the Termination
Date for all purposes of the provisions of the Lease as applicable thereafter),
by and only by giving to the Landlord express written notice of such renewal by
not less than three hundred sixty (360) days before the date on which the
Renewal Term is to commence (in which event the Term shall thereafter mean the
Term as so extended). All terms and conditions of the Lease shall continue in
full force and effect, except that: (1) upon commencement of the Renewal Term,
this Article shall be inapplicable, and (2) the Basic Monthly Rent during the
first year of the Renewal Term shall be the fair market rent for comparable
space in the Georgetown market in Washington, D.C. as reasonably determined by
Landlord.
34. MISCELLANEOUS.
34.1 Gender. As used in this Lease, and where the context requires: (a)
the masculine shall be deemed to include the feminine and neuter and vice versa;
and (b) the singular shall be deemed to include the plural and vice versa.
34.2 Waiver of Jury Trial. Landlord and Tenant do hereby waive trial by
jury in any action, proceeding or counterclaim brought by either of the parties
hereto against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the Premises, and/or any claim of injury or damage, and any
emergency statutory or any other statutory remedy.
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34.3 Attachments to Building. Tenant covenants and agrees that it shall
not attach or place awnings, antennas or other projections to the outside walls
or any exterior portion of the Building or the Property. No curtains, blinds,
shades or screens shall be attached to or hung in, or used in connection with
any window or door of the Premises without the prior written consent of the
Landlord.
34.4 Storage Outside Premises. Tenant further covenants and agrees that it
shall not pile or place or permit to be placed any goods on the sidewalks or
parking lots in the front, rear or sides of the Building or the Property, or to
block said sidewalks, parking lots and loading areas and not to do anything that
directly or indirectly will take away any of the rights of ingress or egress or
of light from any other tenant of the Landlord.
34.5 Rules and Regulations. Tenant shall abide by and observe, and
Landlord shall not arbitrarily enforce, the rules and regulations promulgated by
Landlord for the operation and maintenance of the Building and the Property and
such changes thereto and such additional reasonable rules and regulations that
Landlord promulgates from time to time during the Term, so long as such changes
or additional rules and regulations are not inconsistent with this Lease, do not
restrict the use of the Premises by Tenant for the uses permitted by Article 5
and reasonable notice of the changes or additions is given to Tenant. Such rules
and regulations, together with any such changes and additions, are called the
"Rules and Regulations' in this Lease. The Rules and Regulations in effect on
the date of this Lease are set forth on EXHIBIT C.
34.6 Liability of Landlord. Except for insurance proceeds which Tenant may
be entitled to under this Lease, Tenant agrees to look solely to Landlord's
interest in the Property for the satisfaction of any right or remedy of Tenant
for the collection of a judgment (or other judicial process) requiring the
payment of money by Landlord in the event of any liability by Landlord. Except
as provided above, no other property or assets of Landlord shall be subject to
levy, execution, attachment, or other enforcement procedure for the satisfaction
of Tenant's remedies under or with respect to this Lease, the relationship of
Landlord and Tenant hereunder, or Tenant' 8 use and occupancy of the Premises,
or any other liability of Landlord to Tenant. In no event shall any partner,
shareholder, director, officer, employee or agent of Landlord incur any personal
liability under this Lease and no such liability shall be sought, obtained or
enforced.
34.7 Time of Essence. Time is of the essence of this Lease and each and
every provision hereof.
34.8 Waivers. No failure by Landlord to insist upon the strict performance
of or compliance with any covenant or condition of this Lease or to exercise any
right or remedy consequent upon a breach thereof, and no acceptance of full or
partial Rent during the continuance of any such breach, regardless of any
notation to the contrary accompanying such payment, shall constitute a waiver of
any such breach or of such covenant or condition. No covenant or condition of
this Lease to be performed or complied with by either party, and no breach
thereof, shall be waived, altered or modified except by written instrument
executed by the other party and specifically consenting to the
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particular waiver, alteration or modification. No waiver of any breach shall
affect or alter this Lease, but each and every covenant and condition of this
Lease shall continue in full force and effect with respect to any other then
existing or subsequent breach thereof. Neither reentry by Landlord in accordance
with the provisions of this Lease nor acceptance by Landlord of keys from Tenant
shall be considered an acceptance of a surrender of this Lease and neither of
those events shall relieve Tenant of Tenant's obligations to pay Rent and to
perform and comply with all of the other covenants and conditions of this Lease
to be performed or complied with by Tenant.
34.9 Attorneys' Fees. If legal action is brought in a court of competent
jurisdiction by either party hereto arising out of or concerning this Lease or
the rights of any party hereto, the prevailing party in said action shall be
awarded reasonable attorneys' fees and court costs from the non-prevailing
party.
34.10 Parking. Tenant, Tenant's servants, its agent's invitees, employees
and licensees shall not park or store on, or otherwise utilize any parking or
loading areas on the Property, except as provided in writing by Landlord.
34.11 Waiver of Notice. Tenant waives statutory notice to quit prior to
commencement of an action for summary possession for non-payment of rent.
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IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and sealed
this Lease as of the day and year first above written.
WITNESS OR ATTEST: LANDLORD:
COLUMBIA REALTY VENTURE
/s/ /s/
_________________________ BY: _________________________
TENANT:
NATIONAL CAPITAL RECIPROCAL
INSURANCE COMPANY, INC.
/s/ Jeffrey B. Marsh BY: /s/ R. Ray Pate, Jr.
- ------------------------- -------------------------
Agency Acceptance:
BERNSTEIN MANAGEMENT CORPORATION, AGENT in the above-captioned Lease,
hereby agrees to act as Agent as set forth in the Lease Agreement.
BERNSTEIN MANAGEMENT CORPORATION
/s/ /s/
_________________________ BY: _________________________(SEAL)
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LIST OF EXHIBITS
----------------
Exhibit A: Space Plan
Exhibit A-1: Description of Property
Exhibit B: Building Services
Exhibit C: Rules and Regulations
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment to Lease Agreement (this AMENDMENT) is made as of this
10th day of January, 1998, by and among Columbia Realty Venture, a District of
Columbia limited partnership (LANDLORD), National Capital Reciprocal Insurance
Company, Inc., a District of Columbia corporation (TENANT), and Bernstein
Management Corporation (AGENT).
RECITALS
A. On December 22, 1997, Landlord, Tenant and Agent entered into a
certain lease agreement (the ORIGINAL LEASE) with respect to certain premises
located at 1115 30th Street, N.W., Washington, D.C. 20007.
B. The parties desire to modify the provisions of the Original Lease
relating to the delivery of a letter of credit as a security deposit upon the
terms and conditions set forth in this Agreement.
AGREEMENT
Now, therefore, in consideration of the foregoing, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. AMENDMENT TO SECTION 4. The provisions of Section 4.1 of the Original
-----------------------
Lease are hereby deleted in their entirety and replaced with the following
language:
4.1.1 Tenant shall deposit with Landlord, upon execution of the
Lease, an irrevocable letter of credit in favor of the
Landlord in the original face amount of $105,369, in form and
substance reasonably acceptable to Landlord, as security for
the faithful performance of Tenant's obligations under this
Lease. Such letter of credit, together with any replacements
and proceeds thereof, whether in the form of a letter of
credit, cash, or otherwise is referred to herein as the
SECURITY DEPOSIT.
4.1.2 If Tenant fails to make its first payment of Basic Monthly
Rent and all additional charges then owing (collectively, the
FIRST MONTH RENTAL CHARGES) by the Commencement Date, then
Landlord may draw upon the Security Deposit in the amount of
such First Month Rental Charges. If Tenant timely pays the
First Month Rental Charges to Landlord in immediately
available funds on or prior to the Commencement Date, then
Tenant may elect to substitute for the Security Deposit a
replacement
<PAGE>
irrevocable letter of credit in the original face amount of
not less than $70,246.00, in form and substance satisfactory
to Landlord. Upon receipt of such replacement letter of
credit, Landlord shall return to Tenant the letter of credit
originally delivered by Tenant hereunder. At the commencement
of the fourth (4th) lease year, provided that this Lease is in
full force and effect, and provided that Tenant is not in
default under the Lease, the Security Deposit shall be reduced
to an amount equal to the sum of the then current Basic
Monthly Rent and Additional Rent for one month. In such event,
Tenant shall deliver to Landlord an irrevocable letter of
credit in form and substance reasonably satisfactory to
Landlord in the correct reduced amount, and Landlord shall
return the initial letter of credit to the Tenant upon receipt
of the replacement letter of credit.
4.1.3 Each letter of credit delivered by Tenant pursuant to this
Lease shall provide for multiple drawings by Landlord against
such letter of credit (in an amount not to exceed the
aggregate amount of such letter of credit). In addition, the
letter of credit shall be held by Landlord for the entire
duration of the Lease Term. In the event that any letter of
credit delivered by Tenant hereunder expires by its terms or
otherwise prior to the expiration of the Lease Term, Tenant
shall deliver to Landlord a replacement letter of credit in
form and substance reasonably acceptable to Landlord not later
than thirty (30) days prior to the expiration date of the then
current letter of credit. If Tenant fails to timely deliver a
replacement letter of credit, such event shall constitute a
default hereunder and shall entitle Landlord, without further
notice or demand, to immediately draw upon the letter of
credit then held by Landlord in an amount equal to the face
amount of the letter of credit (as reduced by any prior
draws); provided that such default shall be deemed cured to
the extent Landlord actually draws upon such letter of credit
and receives the proceeds thereof. During the Term of this
Lease, Landlord shall also have the right to proceed with any
other legal or equitable remedies available to it.
2. MISCELLANEOUS.
-------------
a. Ratification. Except as modified by this Amendment, the Original
Lease shall remain in full force and effect and is hereby ratified and confirmed
in all respects.
b. Counterparts. This Amendment may be executed in one or more
counter-parts, each of which shall constitute an original, and all of which
together shall constitute one agreement.
c. Governing Law. This Amendment shall be governed by the laws of
the District of Columbia (without regard to the choice of law rules thereof).
<PAGE>
In witness whereof, Landlord and Tenant have respectively signed and sealed
this Amendment as of the date and year first written above.
WITNESS/ATTEST: LANDLORD:
Columbia Realty Venture
/s/ Katherine Porter Page By: /s/ Joshua B. Bernstein
- --------------------------- --------------------------
Name: Joshua B. Bernstein
Title: General Partner
TENANT:
National Capital Reciprocal Insurance
Company, Inc.
/s/ Jeffrey D. Marsh By: /s/ R. Ray Pate, Jr.
- ---------------------- -----------------------
Name: R. Ray Pate, Jr.
Title: President and CEO
Bernstein Management Corporation, Agent, hereby acknowledges and accepts
the terms set forth in the foregoing Amendment.
AGENT:
/s/ Katherine Porter Page By: /s/ Joshua B. Bernstein
- --------------------------- --------------------------
Name: Joshua B. Bernstein
Title: President
<PAGE>
EXHIBIT 10.3
NCRIC GROUP, INC.
STOCK OPTION PLAN
1. PURPOSE
This Stock Option Plan (the "Plan") for NCRIC Group, Inc., a District of
Columbia stock holding corporation (the "Company"), and its subsidiaries is
intended to provide incentive (i) to persons who are designated by the Board as
key employees (collectively "Key Employees") and (ii) to members of the Board by
providing those persons with opportunities to purchase shares of the Company's
Common Stock under (a) incentive stock options ("Incentive Stock Options") as
such term is defined under Section 422 of the Internal Revenue Code of 1986, as
amended, and (b) other stock options.
2. DEFINITIONS
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Board" shall mean the Company's board of directors.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Compensation Committee.
(d) "Common Stock" shall mean the common stock of the Company.
(e) "Fair Market Value" per share as of a particular date shall mean (i)
the closing sales price per share of Common Stock on the principal national
securities exchange, if any, on which the shares of Common Stock shall then be
listed for the last preceding date on which there was a sale of such Common
Stock on such exchange, or (ii) if the shares of Common Stock are not then
listed on a national securities exchange, the last sales price per share of
Common Stock entered on a national inter-dealer quotation system for the last
preceding date on which there was a sale of such Common Stock on such national
inter-dealer quotation system, or (iii) if no closing or last sales price per
share of Common Stock is entered on a national inter-dealer quotation system,
the average of the closing bid and asked prices for the shares of Common Stock
in the over-the-counter market for the last preceding date on which there was a
quotation for such Common Stock in such market, or (iv) if no price can be
determined under the preceding alternatives, then the price per share as most
recently determined by the Board, which shall make such determinations of value
at least once annually.
(f) "Incentive Stock Option" means one or more Options to purchase Common
Stock which, at the time such Options are granted under this Plan or any other
such plan of the Company, qualify as incentive stock options under Section 422
of the Code.
(g) "Key Employees" shall mean all full-time employees of the Company who
are designated as key employees by the Board.
<PAGE>
(h) "Plan" shall mean this Stock Option Plan established by the Company.
(i) "Option" shall mean any option issued under this Plan.
(j) "Optionee" shall mean any person to whom an Option is granted under
this Plan.
(k) "Ten Percent Shareholder" shall mean an Optionee who, at the time an
Option is granted, owns directly or indirectly (within the meaning of Section
425(d) of the Code) stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company or a subsidiary thereof.
(l) "Termination of Employment" shall mean termination of employment with
the Company and all of its subsidiaries or, in the case of a director, the
cessation of such director's position on the Board. The Committee may in its
discretion determine whether any leave of absence constitutes a Termination of
Employment for purposes of this Plan and the impact, if any, of any such leave
of absence on Options made under this Plan. The Committee shall have the right
to determine whether the termination of an Optionee's employment is a dismissal
for cause and the date of termination in such case, which date the Committee may
retroactively deem to be the date of the action that is cause for dismissal.
Such determinations of the Committee shall be final, binding and conclusive.
3. GENERAL ADMINISTRATION
(a) Subject to the provisions of (b) below, this Plan shall be
administered by the Committee.
(b) The Committee shall have the authority (i) to exercise all of the
powers granted to it under this Plan, (ii) to construe, interpret and implement
this Plan and any Option Agreements executed pursuant to Section 7 below, (iii)
to prescribe, amend and rescind rules and regulations relating to this Plan,
including rules governing the Committee's own operations, (iv) to make all
determinations necessary or advisable in administering this Plan, (v) to correct
any defect, supply any omission and reconcile any inconsistency in this Plan,
and (vi) to amend this Plan to reflect changes in applicable law. The Committee
shall make recommendations to the Board regarding the issuance of Options
hereunder and the terms thereof. The Board shall review the recommendations of
the Committee and, after making any modifications, deletions or additions it
deems appropriate in its sole discretion, shall approve, by a simple majority
vote, any Options which the Board determines to be issued pursuant to this Plan.
The Board, acting through a simple majority, retains the exclusive power to
issue Options hereunder.
(c) Actions of the Committee shall be taken by the affirmative vote of a
majority of the Committee members. Any action may be taken by an instrument
signed by a majority of the Committee members, including counterpart signatures,
and action so taken shall be fully as effective as if such action had been taken
by a vote at a Committee meeting.
(d) The determination of the Committee on all matters relating to this
Plan or any Option Agreement shall be final, binding and conclusive.
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<PAGE>
(e) No Committee member shall be liable for any action or determination
made in good faith with respect to this Plan, including any Option.
4. GRANTING OF OPTIONS
Options may be granted under this Plan at any time prior to _____________,
2008.
5. ELIGIBILITY
(a) Options may be made to such Key Employees and Board members as the
Board shall in its sole discretion select.
(b) At the time of the grant of each Option, the Board shall determine
whether such Option is to be designated an Incentive Stock Option or a non-
incentive Option. The length of the exercise period of Incentive Stock Options
shall be governed by Section 7(d)(2) below; the exercise period of all other
Options will be governed by Section 7(d)(3) below.
(c) An Option designated an Incentive Stock Option can, prior to its
exercise, be changed to a non-incentive Option if the Optionee consents to amend
his Option Agreement to provide that the exercise period of such Option will be
governed by Section 7(d)(3) below.
6. COMMON STOCK
(a) The stock subject to the Options shall be Common Stock.
(b) The total number of shares of Common Stock with respect to which
Options may be granted shall not exceed ________________. Common Stock issued
pursuant to this Plan may be authorized but unissued Common Stock or authorized
and issued Common Stock held in the Company's treasury or acquired by the
Company for the purposes of this Plan. The Committee may direct that any
certificate evidencing Common Stock pursuant to this Plan shall bear a legend
setting forth such restrictions on transferability as may apply to such shares.
(c) If there is any change in the number of outstanding shares of Common
Stock by reason of a stock dividend or distribution, stock split-up, reverse
stock split, recapitalization, combination or exchange of shares, or by reason
of any merger, consolidation, spinoff or other corporate reorganization in which
the Company is the surviving corporation, the number of shares of Common Stock
available for issuance both in the aggregate and with respect to each
outstanding Option, and the purchase price per share under each outstanding
Option, shall be equitably adjusted by the Committee, whose determination shall
be final, binding and conclusive. In the event of any merger, consolidation or
combination of the Company with or into another corporation (other than a
merger, consolidation or combination in which the Company is the surviving
corporation and which does not result in any reclassification or other change in
the number of outstanding shares of Common Stock), each Optionee shall have the
right thereafter and during the term of each such Option to receive upon
exercise (subject to the provisions of the Option Agreement) of such Option, for
each share of Common Stock as to which the Option shall be exercised, the kind
and amount of shares of the surviving or new corporation, cash, securities,
evidence of indebtedness, other property or any combination thereof
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<PAGE>
which would have been received upon such merger, consolidation or combination by
the holder of one share of Common Stock immediately prior to such merger,
consolidation or combination.
(d) If any outstanding Option for any reason expires or is terminated
without having been exercised in full, the Common Stock allocable to the
unexercised portion of such Option shall (unless this Plan shall have been
terminated) become available for subsequent grants of Options.
7. TERMS AND CONDITIONS OF OPTIONS
Each Option granted shall be evidenced by an Option Agreement in such form
as the Committee may from time to time approve. By accepting an Option, an
Optionee thereby agrees that the Option shall be subject to the provisions of
the applicable Option Agreement. Options shall comply with and be subject to
the following terms and conditions:
(a) OPTION PRICE. Each Option shall state the Option Price, which for
Options that are Incentive Stock Options shall be not less than 100% of the Fair
Market Value of the shares of Common Stock on the date of grant of the Option;
provided, however, that in the case of an Incentive Stock Option granted to a
Ten Percent Shareholder, the Option Price shall not be less than 110% of such
Fair Market Value. The Option Price for Options that are not Incentive Stock
Options shall not be less than 100% of the Fair Market Value of the shares of
Common Stock on the date of grant of the Option. The date on which the Board
adopts a resolution expressly granting an Option shall be considered the day on
which such Option is granted.
(b) VALUE OF COMMON STOCK. Options may be granted to any Optionee for
Common Stock of any value, provided that the aggregate Fair Market Value
(determined at the time the Option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by the
Optionee during any calendar year (under all the plans of the Company and its
subsidiaries) shall not exceed $100,000.
(c) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in full, at
the time of exercise, in cash or, with the Committee's approval, in Common Stock
held by the Optionee for at least six months having a Fair Market Value in the
aggregate equal to such Option Price or in a combination of cash and such
shares.
(d) TERM AND EXERCISE OF OPTIONS.
(1) Unless the applicable Option Agreement otherwise provides, each
Option shall become vested and first exercisable in the following
installments:
<TABLE>
<CAPTION>
Number of Years Elapsed Percentage First
From Date of Grant Exercisable During Year
-------------------------- -----------------------
<S> <C>
Less than One year 0%
One year 33 1/3%
Two years 33 1/3%
Three years 33 1/3%
</TABLE>
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<PAGE>
(2) Incentive Stock Options shall be exercisable over the exercise period
specified in the Option Agreement, but in no event shall such period exceed ten
years from the date of the grant of each such Incentive Stock Option; provided,
however, that in the case of an Incentive Stock Option granted to a Ten Percent
Shareholder, the exercise period shall not exceed five years from the date of
grant of such Option. The exercise period shall be subject to earlier
termination as provided in Section 7(e) below. An Incentive Stock Option may be
exercised, as to any or all full shares of Common Stock as to which the
Incentive Stock Option has become exercisable, by giving written notice of such
exercise to the Committee.
(3) Options which have not been designated as Incentive Stock Options
shall be exercisable over a period of up to ten years.
(e) TERMINATION OF EMPLOYMENT; DEATH.
(1) If an Optionee's employment terminates or if a director's status
as a member of the Board terminates, in either case, for any reason other than
dismissal for cause or voluntary termination, as determined in the Committee's
sole discretion, any outstanding Option shall be exercisable on the following
terms: (i) exercise may be made only to the extent that the Optionee was
entitled to exercise the Option on the effective date of the employment
termination or cessation of service as a director, as the case may be; and (ii)
exercise must occur prior to the earlier of (x) 5:00 p.m. (Eastern Time) on the
90th day after employment or status as a director terminates or, in respect of
death or disability, on the 180th day thereafter, and (y) the expiration date of
the Option. Any such exercise of an Option following an Optionee's death or
adjudication of mental incapacity shall be made only by the Optionee's executor
or administrator or other duly appointed representative, as the case may be,
reasonably acceptable to the Committee, unless the Optionee's will specifically
disposes of such Option, in which case such exercise shall be made only by the
recipient of such specific disposition. If an Optionee's legal representative or
the recipient of a specific disposition under the Optionee's will is entitled to
exercise any Option pursuant to the preceding sentence, such representative or
recipient shall be bound by the provisions of this Plan and the applicable
Option Agreement which would have applied to the Optionee.
(2) Except to the extent otherwise provided in paragraphs (1) and (3)
of this Section 7(e) or in the applicable Option Agreement, any portion of an
Option not theretofore exercised shall terminate upon the Optionee's Termination
of Employment for any reason or without reason (including death).
(3) The Committee may, in the applicable Option Agreement, waive or
modify the application of any of the foregoing provisions of this Section 7,
even though such waiver or modification may cause the Options granted under such
Option Agreement to fail to qualify as Incentive Stock Options.
(f) NONTRANSFERABILITY OF OPTIONS. Options shall not be transferable other
than by will or by the laws of descent and distribution, and Options may be
exercised, during the lifetime of the Optionee, only by the Optionee or the
Optionee's legal representative.
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<PAGE>
(g) RIGHTS AS A SHAREHOLDER. An Optionee or a transferee of an Option
shall have no rights as a shareholder with respect to any Common Stock covered
by his Option until the date of the issuance of a stock certificate to him for
such shares. No adjustments shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 6(c) above.
(h) OTHER PROVISIONS. The Option Agreements authorized under this Plan
shall contain such other provisions, including the imposition of restrictions
upon the exercise of an Option, as the Committee shall deem advisable, including
provisions with respect to compliance with federal and applicable state
securities laws.
8. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES
No later than the date of exercise of any Option, the Optionee will pay to
the Company or make arrangements satisfactory to the Committee regarding payment
of any federal, state or local taxes of any kind required by law to be withheld
upon the exercise of such Option. The Optionee may, with the Committee's prior
approval, make such payment in whole or in part by surrendering Common Stock to
the Company, valued at its Fair Market Value on the date of surrender.
9. TERM OF PLAN
Options may be granted from time to time within a period of 10 years from
the date on which this Plan is adopted by the Board, provided that no Options
granted shall become exercisable unless and until this Plan shall have been duly
approved by the holder of a majority of the Common Stock.
10. RESTRICTIONS
(a) If the Committee shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any Option, the issuance or purchase of Common
Stock or other rights thereunder, or the taking of any other action thereunder
(each such action being hereinafter referred to as a "Plan Action"), then such
Plan Action shall not be taken, in whole or in part, unless and until such
Consent shall have been effected or obtained to the Committee's full
satisfaction.
(b) The term "Consent" as used herein with respect to any Plan Action
means (i) any and all listings, registrations or qualifications in respect
thereof upon any inter-dealer quotation system of a registered national
securities association or any national securities exchange or under any federal,
state or local law, rule or regulation, (ii) any and all written agreements and
representations by the Optionee with respect to the disposition of Common Stock,
or with respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification, or to obtain an exemption from the requirement that any such
listing, qualification or registration be made, and (iii) any and all consents,
clearances and approvals in respect of a Plan Action by any governmental or
other regulatory bodies.
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<PAGE>
(c) In furtherance of the foregoing, at the time of any exercise of an
Option, the Committee may, if it shall determine it necessary or desirable for
any reason, require the Optionee as a condition to the exercise thereof, to
deliver to the Committee a written representation of the Optionee's present
intention to purchase the Common Stock for investment and not for distribution.
If such representation is required to be delivered, an appropriate legend may be
placed upon each certificate delivered to the Optionee upon his exercise of part
or all of an Option and a stop transfer order may be placed with the transfer
agent. Each such Option shall also be subject to the requirement that, if at
any time the Committee determines, in its discretion, that either (i) the
listing, registration or qualification of Common Stock subject to an Option upon
any securities exchange or inter-dealer quotation system or under any state,
federal or foreign law, or (ii) the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in connection
with, the issue or purchase of Common Stock thereunder, the Option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Committee. The Committee shall not have the power to
require or oblige the Company to register any Common Stock subject to an Option
and any requirement imposed by the Committee relating to the registration of
Common Stock shall not bind the Company to cause the registration of such Common
Stock.
11. SAVINGS CLAUSE
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422 of the Code. If this Plan or any provision of this Plan shall be
held to be invalid or to fail to meet the requirements of Section 422 of the
Code or the regulations promulgated thereunder, such invalidity or failure shall
not affect the remaining parts of this Plan, but rather it shall be construed
and enforced as if this Plan or the affected provision thereof, as the case may
be, complied in all respects with the requirements of Section 422 of the Code.
12. NATURE OF PAYMENTS
(a) All Options granted shall be in consideration of services performed
for the Company by the Optionee.
(b) All Options granted shall constitute a special incentive payment to
the Optionee and shall not be taken into account in computing the amount of
salary or compensation of the Optionee for the purpose of determining any
benefits under any pension, retirement, profit-sharing, bonus, life insurance or
other benefit plan of the Company or under any agreement between the Company and
the Optionee, unless such plan or agreement specifically otherwise provides.
13. NON-UNIFORM DETERMINATIONS
The determinations of the Committee and the Board under this Plan need not
be uniform and may be made selectively among persons who receive, or are
eligible to receive, Options (whether or not such persons are similarly
situated).
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<PAGE>
14. OTHER PAYMENTS OR OPTIONS
Nothing contained in this Plan shall be deemed in any way to limit or
restrict the Company from making any option to purchase Common Stock or payment
to any person under any other plan, arrangement or understanding, whether now
existing or hereafter in effect.
15. SECTION HEADINGS
The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of said sections.
16. AMENDMENT AND TERMINATION
(a) The Board may from time to time suspend, discontinue, revise or amend
this Plan in any respect whatsoever, provided that any amendment that would
materially increase the aggregate number of shares of Common Stock as to which
Options may be granted, materially increase the benefits accruing to
participants under this Plan, or materially modify the requirements as to
eligibility for participation in this Plan shall be subject to the approval of
the holders of a majority of the outstanding Common Stock voting at a meeting of
shareholders at which a quorum is present. In addition, no such amendment shall
materially impair any rights or materially increase any obligations under any
outstanding Option without the consent of the Optionee (or, upon the Optionee's
death or adjudication of mental incapacity, the person having the right to
exercise the Option).
(b) The Board may cancel any outstanding Option and issue a new Option in
substitution therefor. The Board may amend any outstanding Option Agreement,
including any amendment which would: (i) accelerate the time or times at which
the Option becomes unrestricted or may be exercised; (ii) waive or amend any
goals, restrictions or conditions set forth in the Option Agreement; or (iii)
waive or amend the operation of Section 7(e) above with respect to the
termination of the Option upon Termination of Employment. However, any such
cancellation or amendment that materially impairs the rights or materially
increases the obligations of an Optionee under an outstanding Option shall be
made only with the consent of the Optionee (or, upon the Optionee's death or
mental incapacity, the person having the right to exercise the Option).
Adopted by the Board on ______________, 1998, subject to the approval of the
Company's shareholder.
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<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of the 1st day of
October, 1997, by and between National Capital Reciprocal Insurance Company
("NCRIC"), National Capital Underwriters, Inc. ("Employer") and R. Ray Pate, Jr.
("Pate").
RECITALS:
A. Employer, for itself and on behalf of NCRIC and its subsidiaries,
National Capital Insurance Brokerage, Ltd., and NCRIC Agency, Inc.
(collectively, the "Affiliated Companies"), desires to retain Pate as its
President and Chief Executive Officer on the terms and conditions hereinafter
set forth; and
B. Pate desires to continue such employment, on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
set forth herein, the parties hereto agree as follows:
1. EMPLOYMENT.
Employer hereby agrees to continue to employ Pate for a term of five
(5) years from the effective date of this Agreement as President and Chief
Executive Officer under the conditions hereinafter specified. Pate accepts this
employment under the conditions hereinafter specified and agrees to devote his
best efforts, energies and abilities to the service of Employer on a full-time
basis.
2. DUTIES.
(a) Pate shall serve as President and Chief Executive Officer of Employer
and in such other commensurate executive capacities of Employer and/or any one
or more of the Affiliated Companies as he may from time to time be assigned by
Employer or elected in accordance with direction from the Board of Directors.
Pate shall perform all of his duties diligently and faithfully. However, it is
understood and agreed that Pate shall not receive compensation beyond that
specified herein for services provided to the Affiliated Companies.
(b) Pate shall at all times devote his entire working time, attention,
energies, efforts and skills to the business of Employer, and shall not,
directly or indirectly, engage in any other business activity, whether or not
for profit, gain or other pecuniary advantages, without the express written
permission of Employer. Notwithstanding the foregoing, Pate may serve on the
board of directors of any non-competing company and receive compensation
therefor provided he obtains the advance written approval of Employer, which
shall not be unreasonably withheld, and provided that any such service does not
adversely affect his performance of his duties for Employer. Employer
acknowledges that Pate is serving on the boards of directors of the companies
listed on Exhibit 2B attached hereto and hereby grants its approval to such
service. Pate will not be required to account
<PAGE>
to Employer for any compensation he may receive for such approved service on the
board of directors of a non-competing company, and such compensation shall not
diminish in any way the compensation or benefits to which he is entitled under
this Agreement.
3. COMPENSATION.
Employer shall pay Pate basic compensation of Two Hundred Forty Thousand
Dollars ($240,000) per year, payable in equal semimonthly installments. Any
incentive compensation which may be paid to Pate from time to time shall have no
impact upon Pate's basic compensation.
4. BENEFITS.
A. RETIREMENT AND/OR PENSION PLAN(S). Pate shall be entitled to
participate in any retirement and/or pension plan(s) offered to Employer's
senior executives and/or key management employees as a group in accordance with
the terms of such plan(s), as they may be modified at Employer's discretion from
time to time.
B. AUTOMOBILE ALLOWANCE. Employer shall pay Pate a monthly allowance of
$700 for his use in operating and maintaining an automobile necessary in
connection with the performance of his duties hereunder with any expenses not
covered by said $700 allowance being the sole responsibility of Pate.
C. HEALTH AND MEDICAL INSURANCE. Pate shall be entitled to participate
in any health and medical insurance plan(s) offered to Employer's senior
executives and/or key management employees as a group in accordance with the
terms of such plan(s), as they may be modified at Employer's discretion from
time to time.
D. PAID SICK LEAVE. Pate shall accrue one (1) day of paid sick leave per
month, up to a maximum of twelve (12) days of paid sick leave at any given time.
All accrued, but unused, paid sick leave shall be forfeited upon termination of
employment if said termination shall be for cause.
E. PAID VACATION. Pate shall accrue four weeks of paid vacation during
each calendar year; however, in no event shall Pate use more than three weeks at
anytime. Accrued, but unused, paid vacation in excess of ten days shall expire
on December 31st of the year in which it accrues. No more than ten days of
accrued, but unused, paid vacation may be carried over from one year to the
next. All accrued, but unused, paid vacation is forfeited upon termination of
employment by either party; provided, however, that if Pate provides advance
notice of his intent to terminate his employment in accordance with paragraph 7
of this Agreement, Employer shall pay him for all of his accrued, but unused,
paid vacation, less standard withholdings and deductions.
F. LIFE INSURANCE. Employer shall procure a term life insurance policy
in a face amount of no less than twice the amount of Pate's annual base
compensation provided that Pate is insurable at standard rates. Pate shall be
entitled to designate the beneficiary or beneficiaries of such policy in his
sole discretion. In the event that Pate is not insurable at standard rates, and
desires to be
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<PAGE>
insured, Pate shall be responsible for payment of any premiums or amounts
charged in excess of the standard rates for such insurance.
G. DISABILITY INSURANCE. Employer shall procure a disability income
insurance policy (both long and short term) providing the highest benefits
commercially available, and provided Pate is insurable at standard rates. In
the event that Pate is not insurable at standard rates, and desires to be
insured, Pate shall be responsible for payment of any premiums or amounts
charged in excess of the standard rates. In the event that any disability income
insurance policy provided by Employer shall require any waiting or elimination
period during which Pate is not entitled to collect disability income insurance
payments even though he is disabled from working, then during such waiting or
elimination period, until the commencement of payments under the disability
income insurance policy, Employer shall pay Pate a supplemental disability
income benefit equal to his regular bi-weekly salary. If, and when, Pate should
begin to receive disability payments under the terms of Employer's disability
income insurance policy then in force, Employer agrees to supplement said
monthly disability payments by paying to Pate the difference between such sums
paid by the disability insurer and Pate's compensation set forth in Section 3
above for a maximum period of twelve (12) consecutive months. Following
expiration of said twelve (12) months, the coverage and provisions of Employer's
disability income insurance policy shall constitute the entire wage continuation
plan provided in this Agreement and, except for the payment of the premiums on
such policy, Employer shall have no further liability to Pate for wage
continuation. It is further understood that Pate's employment with Employer
shall be terminated following twelve (12) consecutive months of total disability
(i.e., being unable to carry out the normal functions and requirements of his
position with Employer) regardless of how and when the aforementioned disability
income payments from Employer's disability income insurance policy may be paid
or due to Pate.
5. EXPENSES.
A. BUSINESS EXPENSES. Employer shall reimburse Pate for ordinary,
necessary and reasonable business expenses incurred by him in the discharge of
his duties hereunder, including but not limited to travel, lodging and
entertainment expenses, provided Pate furnishes appropriate documentation for
such expenses and that said expenses are in accordance with the company's then
prevailing policies and procedures regarding said expenditures.
B. CONTINUING EDUCATION EXPENSES. Employer shall pay the ordinary and
necessary costs associated with continuing education classes or continuing
education programs Pate participates in which are related to the company's
business interests, provided Pate furnishes appropriate documentation to
Employer for such costs and gives the Chairman of the Board of Employer
reasonable notice of any expenditures for continuing education. All such
expenses in excess of One Thousand Dollars ($1,000) must be approved by the
Board in advance.
C. COUNTRY CLUB DUES. Employer shall pay the dues for Pate's membership
in one country club or similar institution as well as the Georgetown Club.
Employer shall not pay or reimburse Pate for any non-mandatory costs associated
with such membership, including but not
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<PAGE>
limited to food, beverage and entertainment costs, greens fees, and court fees,
unless Pate is otherwise entitled to reimbursement of such costs pursuant to
paragraph 5(a) of this Agreement.
D. YOUNG PRESIDENTS ORGANIZATION. Should Pate join the Young Presidents
Organization (YPO), Employer shall pay the dues and related membership fees
associated therewith.
E. EFFECT OF TERMINATION OF EMPLOYMENT: All payment or reimbursement of
expenses authorized by Section 5 hereof shall cease upon Pate's termination of
employment regardless of cause for said termination.
6. TERMINATION OF EMPLOYMENT BY EMPLOYER.
A. TERMINATION FOR CAUSE. The employment of Pate under this Agreement,
and the term hereof, may be terminated for "cause" by Employer at any time by
action of the Board upon the occurrence of any one or more of the following
events:
(i) Pate's fraud, dishonesty, gross negligence or willful misconduct in
the performance of his duties hereunder, including willful failure to perform
such duties as may properly be assigned him hereunder; or
(ii) Pate's material breach of any provision of this Agreement.
Any termination by reason of the foregoing shall not be in limitation of
any right or remedy which Employer may have under this Agreement or otherwise.
Should Pate dispute whether Employer possessed legitimate "cause" in
accordance herewith, then in such event a neutral arbitrator shall be chosen in
accordance with the procedures set forth in paragraph 17 of this Agreement to
decide that issue. If Employer terminates Pate's employment for "cause"
pursuant to this subparagraph 6(a) (and such termination is decided to be just
by an arbitrator appointed for that purpose in accordance with the provisions
herein), his right to any compensation, including but not limited to severance
pay, shall cease immediately.
B. TERMINATION WITHOUT CAUSE.
(i) Employer may terminate Pate's employment without cause and without
notice at any time.
(ii) If Employer terminates Pate's employment without cause, and Pate
waives all claims against Employer and the Affiliated Companies relating to or
arising out of his employment or the termination of his employment by executing
a General Release of such claims in a form provided to him by Employer, Pate
shall receive, as severance pay, an amount equal to two (2) years basic
compensation at the basic compensation rate in effect on the date of
termination, exclusive of benefits and less standard withholdings and
deductions. Such amount shall represent agreed-upon liquidated damages for any
loss, cost, expense, or damages suffered as a result of such termination, as
well as consideration for Pate's execution of a General Release of all claims
against Employer and
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<PAGE>
the Affiliated Companies. Employer shall pay such amount to Pate in equal
monthly installments over a two year period commencing on the date of
termination. Any payment pursuant to the preceding sentence shall be in lieu of
any other compensation which might otherwise be due Pate under this Agreement.
(iii) If a "Change of Control" of Employer's business occurs, Employer
shall be deemed to have terminated Pate's employment without cause for the
purposes of this paragraph. "Change of Control" shall be deemed to have
occurred if: (1) Employer merges with or consolidates with, or sells, leases, or
otherwise transfers all or substantially all of its assets to another entity
(which for the purpose of this Agreement shall include the sale or transfer of
fifty percent or more of the ownership of Employer, but only if such sale shall
be made to an entity not affiliated with Employer); and (2) a material change in
the nature, terms or conditions of Pate's employment occurs, including but not
limited to a material change in his duties, authority, responsibilities, or job
location. However, in no event shall it be deemed a "change of control" should
Employer (or NCRIC) elect to change its business form by converting to a stock
company pursuant to a mutual holding company or demutualization law (or similar
act) so long as no material change in the nature, terms or conditions of Pate's
occurs along therewith.
7. TERMINATION OF EMPLOYMENT BY PATE.
Pate may voluntarily terminate his employment with Employer provided that
he gives Employer twelve (12) months prior notice of such termination or pays
Employer liquidated damages equal to the amount of twelve (12) months basic
compensation at the basic compensation rate in effect on the date Pate gives
Employer notice of his intent to terminate his employment. It is agreed that
such liquidated damages are to compensate Employer for injury by reason of
Pate's termination of his employment and not as a penalty, it being impossible
to ascertain or estimate the entire or exact cost, damages or injury that
Employer may sustain by reason of such termination. Pate shall have the right
to terminate his employment hereunder without paying Employer liquidated damages
and without in any way affecting his right to compensation or reimbursement
(including, but not limited to, the right to receive severance payments set
forth in this Agreement), or any other right under this Agreement, if Employer
commits a material breach of the terms and conditions of this Agreement and such
breach is not cured within sixty (60) days of Employer receiving written notice
of such breach from Pate.
8. PROTECTION OF EMPLOYER
A. CONFIDENTIAL INFORMATION. Pate shall not at any time during or after
his employment with Employer directly or indirectly disclose, discuss, divulge,
copy, or otherwise suffer confidential information of Employer or the Affiliated
Companies to be used, except as required by the performance of his duties
hereunder. For the purposes of this Agreement, "confidential information" shall
mean all information disclosed to Pate by Employer or the Affiliated Companies,
or known by him as a consequence of or through his employment with Employer,
where such information is not generally known in the trade or industry, and
where such information refers or relates in any manner whatsoever to the
business activities, processes, services, or products of Employer or the
Affiliated Companies. Such information includes, but is not limited to,
Employer's
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or the Affiliated Companies' business and development plans (whether
contemplated, initiated or completed), development sites, business contacts,
customer lists, actuarial tables, loss data, marketing information, policy
forms, contracts, research of any kind, methods of operation, results of
analysis, business forecasts, financial data, costs, revenues, and similar
information. Upon termination of this Agreement, Pate shall immediately return
to Employer all of its property, and all copies thereof, including without
limitation all confidential information which has been reduced to tangible form,
in his possession, custody, or control.
B. COVENANT NOT TO COMPETE. Pate agrees that he shall not, during his
employment and for a period of one (1) year after the date on which either Pate
gives notice of his intention to terminate his employment or Employer gives
notice to Pate to terminate his employment for cause, directly or indirectly,
either as an officer, director, employee, agent, adviser, consultant, principal,
stockholder, partner, owner, or in an other capacity, on his own behalf or
otherwise, in any way engage in, represent, be connected with, or have a
financial interest in, any other insurance company, or any corporation, firm,
association, or other business entity which is, or to the best of Pate's
knowledge, is about to become, engaged in the same or similar business as
Employer or any of its affiliates or which otherwise competes with or is about
to compete with Employer or any of its affiliates in the District of Columbia or
any states where NCRIC or any of its Affiliated Companies may operate or are
licensed to operate. Pate's ownership of not more than one percent (1%) of the
stock of any publicly traded corporation shall not be deemed a violation of this
covenant. Pate agrees that the restrictions imposed upon him by the provisions
of this paragraph are fair and reasonable considering the nature of Employer's
business, and are reasonably required for the protection of Employer.
C. REMEDIES AND ACKNOWLEDGMENT OF REASONABLENESS. Pate acknowledges that
compliance with this paragraph is necessary for the protection of the goodwill
and other proprietary interests of Employer, and that, after carefully
considering the extent of the restrictions upon him and the rights and remedies
conferred upon Employer under this paragraph, the same are reasonable in time
and territory, are designed to eliminate competition which otherwise would be
unfair to Employer, do not stifle the inherent skill and experience of Pate,
would not operate as a bar to Pate's sole means of support, are fully required
to protect the legitimate interests of Employer, and do not confer a benefit
upon Employer disproportionate to the detriment to Pate.
Pate further acknowledges and agrees that in the event of a breach of this
paragraph, Employer would not have an adequate remedy at law because the damages
flowing from such breach would not be readily susceptible of measurement in
monetary terms and that Employer shall be entitled to injunctive relief and may
obtain a temporary order restraining any threatened breach or future breach in
addition to any other remedies which may be available at law or equity. Nothing
in this paragraph shall be deemed to limit Employer's remedies at law or in
equity for breach of this or any other paragraph of this Agreement.
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9. DEATH OR INCAPACITATION.
In the event that Pate dies or, due to a physical or mental impairment,
becomes unable to perform the essential functions of his position with or
without reasonable accommodation, this Agreement shall be deemed terminated and
Pate or his estate, as the case may be, shall be entitled to no further salary,
compensation or benefits hereunder, except (i) any unpaid salary, incentive
payments, and vacation accrued and earned by Pate up to and including the date
of such termination, and (ii) any disability, life insurance, or other benefits
to which Pate or his estate may be entitled on the date of such termination in
accordance with the terms and conditions of any applicable benefit plan(s) as
set forth in official plan documents.
10. ASSIGNMENT.
This Agreement is a personal service agreement and neither party shall have
the right to assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other party. Notwithstanding the
foregoing, if NCRIC changes its form of business or ceases to contract with
Employer, Employer shall assign this Agreement to NCRIC or any successor of
NCRIC. Pursuant to paragraph 21 hereof, NCRIC shall continue to guarantee
payment and performance of all obligations of Employer or Employer's assignee,
unless the parties agree otherwise in writing.
11. NOTICES.
All notices required or permitted hereunder shall be in writing and shall
be deemed properly given if delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested. If mailed to
Employer, such notices shall be addressed in care of National Capital
Underwriters, Inc., at its principal place of business, attention: Chairman of
the Board, or at such other address as Employer may hereafter designate in
writing to Pate. If mailed to Pate, such notices shall be addressed to him at
his home address last known on the records of Employer, or at such other address
as Pate may hereafter designate in writing to Employer.
12. SUCCESSORS BOUND.
This Agreement shall bind and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, estates and permitted
successors and assigns.
13. WAIVER.
No provision hereof may be waived, except by a written instrument signed by
the party against whom such waiver is sought to be enforced. The failure or
waiver of either party hereto at any time, or from time to time, to require
performance by the other party of such other party's obligation hereunder, shall
not deprive that party of the right to insist upon strict adherence to such
obligation at any subsequent time. Each party hereto agrees that any waiver of
its rights arising out of any breach of this Agreement by the other party shall
not be construed as a waiver of any subsequent breach.
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14. AMENDMENT.
No provision hereof may be altered or amended, except by a written
instrument signed by the party against whom such alteration or amendment is
sought to be enforced.
15. CONFIDENTIALITY.
Except as otherwise agreed between the parties, each party agrees to
maintain the confidentiality of this Agreement, provided, however, that either
party may disclose provisions of this Agreement to others for the purpose of
protecting or enforcing their respective rights hereunder.
16. GOVERNING LAW.
The parties agree that this Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
District of Columbia, without regard to the principles of conflict of laws
thereof.
17. ARBITRATION.
Whenever a "dispute" arises between the parties concerning this Agreement
(other than a dispute arising under paragraph 8 hereof) or their employment
relationship, including without limitation the termination thereof, the parties
shall use their best efforts to resolve the "dispute" by mutual agreement. If
such a "dispute" cannot be so resolved, it shall be submitted to final and
binding arbitration to the exclusion of all other avenues of relief. For the
purposes of this paragraph, the term "dispute" means all controversies or claims
relating to terms, conditions or privileges of employment, including without
limitation claims for breach of contract, discrimination, harassment, wrongful
discharge, misrepresentation, defamation, emotional distress or any other
personal injury, but excluding claims for unemployment compensation or worker's
compensation. The dispute shall be submitted to the Washington, D.C. office of
the American Arbitration Association ("AAA") and adjudicated in accordance with
AAA's Rules for Commercial Arbitration then in effect, except that the parties
to such arbitration shall be entitled to engage in pre-hearing discovery, to the
extent permitted by and according to the provisions of the Federal Rules of
Civil Procedure. The decision of the Arbitrator must be in writing and shall be
final and binding on the parties, and judgment may be entered on the
arbitrator's award in any court having jurisdiction thereof. The expenses of
the arbitration shall be borne equally by the parties, and each party shall be
responsible for his or its own costs and attorneys' fees. The Arbitrator shall
be deemed to possess the powers to issue mandatory orders and restraining orders
in connection with such arbitration; provided, however, that nothing in this
paragraph shall be construed so as to deny Employer the right and power to seek
and obtain injunctive relief in a court of equity for any breach or threatened
breach by Pate of any of the provisions contained in paragraph 8 of this
Agreement. This paragraph shall survive the termination of this Agreement.
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18. SEVERABILITY.
In the event that any provision of this Agreement conflicts with the law
under which this Agreement is to be construed, or if any such provision is held
invalid or unenforceable by a court of competent jurisdiction or an arbitrator,
such provision shall be deleted from this Agreement and the Agreement shall be
construed to give full effect to the remaining provisions thereof.
19. HEADINGS AND CAPTIONS.
The paragraph headings and captions contained in this Agreement are for
convenience only and shall not be construed to define, limit or affect the scope
or meaning of the provisions hereof.
20. ENTIRE AGREEMENT.
This Agreement contains and represents the entire agreement of the parties
and supersedes all prior agreements, representations or understandings, oral or
written, express or implied with respect to the subject matter hereof. This
Agreement may not be modified or amended in any way unless in a writing signed
by both Pate and the Chairman of the Board of Employer. No representation,
promise or inducement has been made by either party hereto that is not embodied
in this Agreement, and neither party shall be bound or liable for any alleged
representation, promise, or inducement not specifically set forth herein.
21. GUARANTEE.
Inasmuch as Employer's sole corporate purpose is to serve as NCRIC's
Attorney-in-Fact under a contract without extended duration, NCRIC enters into
this Agreement for the sole purpose of guaranteeing the payment and performance
of all of the obligations of Employer hereunder.
22. EFFECTIVE DATE OF AGREEMENT.
This Agreement shall take effect only when it has been executed by all
parties and approved by the Executive Committee of Employer's Board at a duly
held meeting or by their unanimous written consent, but when executed and
approved shall be enforceable as of October 1, 1997.
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IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the date and year first written above.
Employer:
NATIONAL CAPITAL UNDERWRITERS, INC.
By:/s/Charles H. Epps, M.D.
---------------------------
Charles H. Epps, M.D.
Chairman of the Board
and
By: /s/David M. Seitzman, M.D.
--------------------------
David M. Seitzman, M.D.
Treasurer
PATE:
/s/R. Ray Pate, Jr.
------------------------------
R. Ray Pate, Jr.
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PAYMENT AND PERFORMANCE OF EMPLOYER GUARANTEED:
NATIONAL CAPITAL
RECIPROCAL INSURANCE COMPANY
By: /s/Nelson P. Trujillo, M.D.
------------------------------------
Nelson P. Trujillo, M.D.
Chairman of the Board of Governors
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of the 1st day of
December, 1997, by and between National Capital Reciprocal Insurance Company
("NCRIC"), National Capital Underwriters, Inc. ("Employer") and Stephen S.
Fargis ("Fargis").
RECITALS:
A. Employer, for itself and on behalf of NCRIC and its subsidiaries,
National Capital Insurance Brokerage, Ltd., and NCRIC Agency, Inc.
(collectively, the "Affiliated Companies"), desires to retain Fargis as its
Senior Vice President of Marketing & Underwriting; and
B. Fargis desires to continue such employment, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
set forth herein, the parties hereto agree as follows:
1. EMPLOYMENT.
Employer hereby agrees to continue to employ Fargis for a term of three (3)
years from the effective date of this Agreement as Senior Vice President of
Marketing & Underwriting and to perform such other duties as may be assigned
under the conditions hereinafter specified. Fargis accepts this employment
under the conditions hereinafter specified and agrees to devote his best
efforts, energies, and abilities to the service of Employer on a full-time
basis.
2. DUTIES.
A. Fargis shall serve as Senior Vice President of Marketing & Underwriting
of Employer and in such other commensurate executive capacities of Employer
and/or any one or more of the Affiliated Companies as he may from time to time
be assigned by Employer or elected in accordance with direction from the Board
of Directors. Fargis shall perform all of his duties diligently and faithfully.
However, it is understood and agreed that Fargis shall not receive compensation
beyond that specified herein for services provided to the Affiliated Companies.
B. Fargis shall at all times devote his entire working time, attention,
energies, efforts, and skills to the business of Employer, and shall not,
directly or indirectly, engage in any other business activity, whether or not
for profit, gain, or other pecuniary advantages, without the express written
permission of Employer. Notwithstanding the foregoing, Fargis may serve on the
board of directors of any non-competing company and receive compensation
therefor provided he obtains the advance written approval of Employer, which
shall not be unreasonably withheld, and provided that any such service does not
adversely affect his performance of his duties for Employer. Fargis will not be
required to account to Employer for any compensation he may receive for such
approved service on the board of directors of a non-competing company, and such
compensation shall not diminish in any way the compensation or benefits to which
he is entitled under this Agreement.
<PAGE>
3. COMPENSATION.
Employer shall pay Fargis basic compensation of One Hundred Fifty Thousand
Dollars ($150,000.00) per year, payable in equal bi-weekly installments. Any
incentive compensation which may be paid to Fargis from time to time shall have
no impact upon Fargis' basic compensation.
4. BENEFITS.
A. RETIREMENT AND/OR PENSION PLAN(S). Fargis shall be entitled to
participate in any retirement and/or pension plan(s) offered to Employer's
senior executives and/or key management employees as a group in accordance with
the terms of such plan(s), as they may be modified at Employer's discretion from
time to time.
B. AUTOMOBILE ALLOWANCE. Employer shall pay Fargis a monthly allowance
of $700.00 for his use in operating and maintaining an automobile necessary in
connection with the performance of his duties hereunder with any expenses not
covered by said $700.00 allowance being the sole responsibility of Fargis.
C. HEALTH AND MEDICAL INSURANCE. Fargis shall be entitled to participate
in any health and medical insurance plan(s) offered to Employer's senior
executives and/or key management employees as a group in accordance with the
terms of such plan(s), as they may be modified at Employer's discretion from
time to time.
D. PAID SICK LEAVE. Fargis shall accrue one (1) day of paid sick leave
per month, up to a maximum of twelve (12) days of paid sick leave at any given
time. All accrued, but unused, paid sick leave shall be forfeited upon
termination of employment.
E. PAID VACATION. Fargis shall accrue four weeks of paid vacation during
each calendar year; however, in no event shall Fargis use more than three weeks
at any one time. Accrued, but unused, paid vacation in excess of ten days
shall expire on December 31st of the year in which it accrues. No more than ten
days of accrued, but unused, paid vacation may be carried over from one year to
the next. All accrued, but unused, paid vacation is forfeited upon termination
of employment by either party; provided, however, that if Fargis provides
advance notice of his intent to terminate his employment in accordance with
paragraph 7 of this Agreement, Employer shall pay him for all of his accrued,
but unused, paid vacation, less standard withholdings and deductions.
F. LIFE INSURANCE. Employer shall procure a term life insurance policy
in a face amount of no less than twice the amount of Fargis' annual base
compensation provided that Fargis is insurable at standard rates. Fargis shall
be entitled to designate the beneficiary or beneficiaries of such policy in his
sole discretion. In the event that Fargis is not insurable at standard rates,
and desires to be insured, Fargis shall be responsible for payment of any
premiums or amounts charged in excess of the standard rates for such insurance.
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G. DISABILITY INSURANCE. Fargis shall be entitled to participate in any
disability income insurance policy (both long and short term) offered to
Employer's senior executives and/or key management employees as a group in
accordance with the terms of such policies(s), as they may be modified at
Employer's discretion from time to time. In the event that any disability
income insurance policy provided by Employer shall require any waiting or
elimination period during which Fargis is not entitled to collect disability
income insurance payments even though he is disabled from working, then during
such waiting or elimination period, until the commencement of payments under the
disability income insurance policy, Employer shall pay Fargis a supplemental
disability income benefit equal to his regular bi-weekly salary. If, and when,
Fargis should begin to receive disability payments under the terms of Employer's
disability income insurance policy then in force, Employer agrees to supplement
said monthly disability payments by paying to Fargis the difference between such
sums paid by the disability insurer and Fargis' compensation set forth in
Section 3 above for a maximum period of twelve (12) consecutive months.
Following expiration of said twelve (12) months, the coverage and provisions of
Employer's disability income insurance policy shall constitute the entire wage
continuation plan provided in this Agreement and, except for the payment of the
premiums on such policy, Employer shall have no further liability to Fargis for
wage continuation. It is further understood that Fargis' employment with
Employer shall be terminated following twelve (12) consecutive months of total
disability (i.e., being unable to carry out the normal functions and
requirements of his position with Employer) regardless of how and when the
aforementioned disability income payments from Employer's disability income
insurance policy may be paid or due to Fargis.
5. EXPENSES.
A. BUSINESS EXPENSES. Employer shall reimburse Fargis for ordinary,
necessary, and reasonable business expenses incurred by him in the discharge of
his duties hereunder, including but not limited to travel, lodging and
entertainment expenses, provided Fargis furnishes appropriate documentation for
such expenses and that said expenses are in accordance with the company's then
prevailing policies and procedures regarding said expenditures.
B. CONTINUING EDUCATION EXPENSES. Employer shall pay the ordinary and
necessary costs associated with continuing education classes or continuing
education programs Fargis participates in which are related to the company's
business interests, provided Fargis furnishes appropriate documentation to
Employer for such costs and gives the Chief Executive Officer of Employer
reasonable notice of any expenditures for continuing education. All such
expenses in excess of One Thousand Dollars ($1,000) must be approved by the
Chief Executive Officer in advance.
C. CLUB DUES. Employer shall pay up to Twenty Thousand Dollars ($20,000)
in initiation fees and $2,500 in annual membership dues as reimbursement for
Fargis' membership in one country club. Employer shall not pay or reimburse
Fargis for any non-mandatory costs associated with such membership, including
but not limited to food, beverage and entertainment costs, greens fees, and
court fees, unless Fargis is otherwise entitled to reimbursement of such costs
pursuant to paragraph 5(a) of this Agreement.
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D. PROFESSIONAL DUES. Employer agrees to pay Fargis' annual dues to the
American College of Health Care Executives.
E. EFFECT OF TERMINATION OF EMPLOYMENT: All payment or reimbursement of
expenses authorized by Section 5 hereof shall cease upon Fargis' termination of
employment regardless of cause for said termination.
6. TERMINATION OF EMPLOYMENT BY EMPLOYER.
A. TERMINATION FOR CAUSE. The employment of Fargis under this Agreement,
and the term hereof, may be terminated for "cause" by Employer at any time upon
the occurrence of any one or more of the following events:
(i) Fargis' fraud, dishonesty, gross negligence or willful misconduct in
the performance of his duties hereunder, including willful failure to
perform such duties as may properly be assigned him hereunder; or
(ii) Fargis' material breach of any provision of this Agreement.
Any termination by reason of the foregoing shall not be in limitation of
any right or remedy which Employer may have under this Agreement or otherwise.
Should Fargis dispute whether Employer possessed legitimate "cause" in
accordance herewith, then in such event the procedures set forth in paragraph 17
of this Agreement shall be followed to resolve that issue. If Employer
terminates Fargis' employment for "cause" pursuant to this subparagraph 6(a)
(and such termination is decided to be just by an arbitrator appointed for that
purpose in accordance with the provisions herein), his right to any
compensation, including but not limited to severance pay, shall cease
immediately.
B. TERMINATION WITHOUT CAUSE.
(i) Employer may terminate Fargis' employment without cause and without
notice at any time.
(ii) If Employer terminates Fargis' employment without cause, and Fargis
waives all claims against Employer, the Affiliated Companies, and their
predecessors, successors, assigns, directors, officers, partners, agents,
employees, former employees, heirs, executors, attorneys, and administrators
relating to or arising out of his employment or the termination of his
employment by executing a General Release of such claims in a form provided to
him by Employer, Fargis shall receive, as severance pay, an amount equal to two
(2) years salary at the salary rate in effect on the date of termination,
exclusive of benefits and less standard withholdings and deductions. Such
amount shall represent agreed-upon liquidated damages for any loss, cost,
expense, or damages suffered as a result of such termination, as well as
consideration for Fargis' execution of a General Release of all claims against
Employer and the Affiliated Companies. Employer shall pay such amount to Fargis
in equal monthly installments over a one year period commencing on the date of
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termination. Any payment pursuant to the preceding sentence shall be in lieu of
any other compensation which might otherwise be due Fargis under this Agreement.
(iii) If a "Change of Control" of Employer's business occurs, Employer
shall be deemed to have terminated Fargis' employment without cause for the
purposes of this paragraph. "Change of Control" shall be deemed to have
occurred if: (1) Employer merges with or consolidates with, or sells, leases, or
otherwise transfers all or substantially all of its assets to another entity
(which for the purpose of this Agreement shall include the sale or transfer of
fifty percent or more of the ownership of Employer, but only if such sale shall
be made to an entity not affiliated with Employer); and (2) a material change in
the nature, terms, or conditions of Fargis' employment occurs, including but not
limited to a material change in his duties, authority, responsibilities, or job
location. However, in no event shall it be deemed a "change of control" should
Employer (or NCRIC) elect to change its business form by converting to a stock
company pursuant to a mutual holding company or demutualization law (or similar
act) so long as no material change in the nature, terms, or conditions of
Fargis' employment occurs along therewith.
7. TERMINATION OF EMPLOYMENT BY FARGIS.
Fargis may voluntarily terminate his employment with Employer provided that
he gives Employer three (3) months prior notice of such termination or pays
Employer liquidated damages equal to the amount of three (3) months basic
compensation at the basic compensation rate in effect on the date Fargis gives
Employer notice of his intent to terminate his employment. It is agreed that
such liquidated damages are to compensate Employer for injury by reason of
Fargis' termination of his employment and not as a penalty, it being impossible
to ascertain or estimate the entire or exact cost, damages, or injury that
Employer may sustain by reason of such termination. Fargis shall have the right
to terminate his employment hereunder without paying Employer liquidated damages
and without in any way affecting his right to compensation or reimbursement
(including, but not limited to, the right to receive severance payments set
forth in this Agreement), or any other right under this Agreement, if Employer
commits a material breach of the terms and conditions of this Agreement and such
breach is not cured within sixty (60) days of Employer receiving written notice
of such breach from Fargis.
8. PROTECTION OF EMPLOYER
A. CONFIDENTIAL INFORMATION.
Fargis shall not at any time during or after his employment with Employer
directly or indirectly disclose, discuss, divulge, copy, or otherwise suffer
confidential information of Employer or the Affiliated Companies to be used,
except as required by the performance of his duties hereunder. For the purposes
of this Agreement, "confidential information" shall mean all information
disclosed to Fargis by Employer or the Affiliated Companies, or known by him as
a consequence of or through his employment with Employer, where such information
is not generally known in the trade or industry, and where such information
refers or relates in any manner whatsoever to the business activities,
processes, services or products of Employer or the Affiliated Companies. Such
information includes, but is not limited to, Employer's or the Affiliated
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Companies' business and development plans (whether contemplated, initiated, or
completed), development sites, business contacts, customer lists, actuarial
tables, loss data, marketing information, policy forms, contracts, research of
any kind, methods of operation, results of analysis, business forecasts,
financial data, costs, revenues, and similar information. Upon termination of
this Agreement, Fargis shall immediately return to Employer all of its property,
and all copies thereof, including without limitation all confidential
information which has been reduced to tangible form, in his possession, custody,
or control.
B. COVENANT NOT TO COMPETE.
Fargis agrees that he shall not, during his employment and for a period of
one (1) year after the termination of his employment for any reason, directly or
indirectly, either as an officer, director, employee, agent, adviser,
consultant, principal, stockholder, partner, owner, or in any other capacity, on
his own behalf or otherwise, in any way engage in, represent, be connected with
or have a financial interest in, any other insurance company, or any
corporation, firm, association, or other business entity which is, or to the
best of Fargis' knowledge, is about to become, engaged in the same or similar
business as Employer or any of its Affiliated Companies and which otherwise
competes with or is about to compete with Employer or any of its Affiliated
Companies in the District of Columbia or any states where NCRIC or any of its
Affiliated Companies operate, has plans to operate, or are licensed to operate.
Fargis' ownership of not more than one percent (1%) of the stock of any publicly
traded corporation shall not be deemed a violation of this covenant. Fargis
agrees that the restrictions imposed upon him by the provisions of this
paragraph are fair and reasonable considering the nature of Employer's business,
and are reasonably required for the protection of Employer.
C. REMEDIES AND ACKNOWLEDGMENT OF REASONABLENESS.
Fargis acknowledges that compliance with this paragraph is necessary for
the protection of the goodwill and other proprietary interests of Employer, and
that, after carefully considering the extent of the restrictions upon him and
the rights and remedies conferred upon Employer under this paragraph, the same
are reasonable in time and territory, are designed to eliminate competition
which otherwise would be unfair to Employer, do not stifle the inherent skill
and experience of Fargis, would not operate as a bar to Fargis' sole means of
support, are fully required to protect the legitimate interests of Employer, and
do not confer a benefit upon Employer disproportionate to the detriment to
Fargis.
Fargis further acknowledges and agrees that in the event of a breach of
this paragraph, Employer would not have an adequate remedy at law because the
damages flowing from such breach would not be readily susceptible of measurement
in monetary terms and that Employer shall be entitled to injunctive relief and
may obtain a temporary order restraining against any threatened breach or future
breach in addition to any other remedies that may be available at law or equity.
Nothing in this paragraph shall be deemed to limit Employer's remedies at law or
in equity for breach of this or any other paragraph of this Agreement.
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9. DEATH OR INCAPACITATION.
In the event that Fargis dies or, due to a physical or mental impairment,
becomes unable to perform the essential functions of his position with or
without reasonable accommodation, this Agreement shall be deemed terminated and
Fargis or his estate, as the case may be, shall be entitled to no further
salary, compensation, or benefits hereunder, except (i) any unpaid salary,
incentive payments, and vacation accrued and earned by Fargis up to and
including the date of such termination, and (ii) any disability, life insurance,
or other benefits to which Fargis or his estate may be entitled on the date of
such termination in accordance with the terms and conditions of this Agreement,
including but not limited to paragraph 4(g) hereof, and any applicable benefit
plan(s) as set forth in official plan documents.
10. ASSIGNMENT.
This Agreement is a personal service agreement and neither party shall have
the right to assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other party. Notwithstanding the
foregoing, if NCRIC changes its form of business or ceases to contract with
Employer, Employer shall assign this Agreement to NCRIC or any successor of
NCRIC. Pursuant to paragraph 21 hereof, NCRIC shall continue to guarantee
payment and performance of all obligations of Employer or Employer's assignee,
unless the parties agree otherwise in writing.
11. NOTICES.
All notices required or permitted hereunder shall be in writing and shall
be deemed properly given if delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested. If mailed to
Employer, such notices shall be addressed in care of National Capital
Underwriters, Inc., at its principal place of business, attention: Chief
Executive Officer, or at such other address as Employer may hereafter designate
in writing to Fargis. If mailed to Fargis, such notices shall be addressed to
him at his home address last known on the records of Employer, or at such other
address as Fargis may hereafter designate in writing to Employer.
12. SUCCESSORS BOUND.
This Agreement shall bind and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, estates, and permitted
successors and assigns.
13. WAIVER.
No provision hereof may be waived, except by a written instrument signed by
the party against whom such waiver is sought to be enforced. The failure or
waiver of either party hereto at any time, or from time to time, to require
performance by the other party of such other party's obligation hereunder, shall
not deprive that party of the right to insist upon strict adherence to such
7
<PAGE>
obligation at any subsequent time. Each party hereto agrees that any waiver of
its rights arising out of any breach of this Agreement by the other party shall
not be construed as a waiver of any subsequent breach.
14. AMENDMENT.
No provision hereof may be altered or amended, except by a written
instrument signed by the party against whom such alteration or amendment is
sought to be enforced.
15. CONFIDENTIALITY.
Except as otherwise agreed between the parties, each party agrees to
maintain the confidentiality of this Agreement, provided, however, that either
party may disclose provisions of this Agreement to others for the purpose of
protecting or enforcing their respective rights hereunder.
16. GOVERNING LAW.
The parties agree that this Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
District of Columbia, without regard to the principles of conflict of laws
thereof.
17. ARBITRATION.
(a) Whenever a "dispute" arises between the parties concerning this
Agreement (other than a dispute arising under paragraph 8 hereof) or their
employment relationship, including without limitation the termination thereof,
the parties shall use their best efforts to resolve the "dispute" by mutual
agreement.
(b) If such a "dispute" cannot be so resolved by the parties best efforts,
the parties agree to participate in mediation of the "dispute" with a mediator
designated by the American Arbitration Association ("AAA") or any other mediator
on whom the parties agree. The costs, if any, of the mediator shall be paid by
Employer.
(c) If such a "dispute" cannot be so resolved by mediation, it shall be
submitted to final and binding arbitration to the exclusion of all other avenues
of relief. For the purposes of this paragraph, the term "dispute" means all
controversies or claims relating to terms, conditions, or privileges of
employment, including without limitation claims for breach of contract,
discrimination, harassment, wrongful discharge, misrepresentation, defamation,
emotional distress, or any other personal injury, but excluding claims for
unemployment compensation or worker's compensation. The dispute shall be
submitted to the Washington, D.C. office of the American Arbitration Association
("AAA") and adjudicated in accordance with AAA's National Rules for the
Resolution of Employment Disputes then in effect, except that the parties to
such arbitration shall be entitled to engage in pre-hearing discovery, to the
extent permitted by and according to the provisions of the Federal Rules of
Civil Procedure. The decision of the Arbitrator must be in writing and shall be
final and binding on the parties, and judgment may be entered on the
arbitrator's award in any court
8
<PAGE>
having jurisdiction thereof. In addition to any relief granted by the
arbitrator, the prevailing party shall be entitled to recover reasonable
attorney's fees and costs from the non-prevailing party. The Arbitrator shall be
deemed to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
paragraph shall be construed so as to deny Employer the right and power to seek
and obtain injunctive relief in a court of equity for any breach or threatened
breach by Fargis of any of the provisions contained in paragraph 8 of this
Agreement. This paragraph shall survive the termination of this Agreement.
18. SEVERABILITY.
In the event that any provision of this Agreement conflicts with the law
under which this Agreement is to be construed, or if any such provision is held
invalid or unenforceable by a court of competent jurisdiction or an arbitrator,
such provision shall be deleted from this Agreement and the Agreement shall be
construed to give full effect to the remaining provisions thereof.
19. HEADINGS AND CAPTIONS.
The paragraph headings and captions contained in this Agreement are for
convenience only and shall not be construed to define, limit or affect the scope
or meaning of the provisions hereof.
20. ENTIRE AGREEMENT.
This Agreement contains and represents the entire agreement of the parties
and supersedes all prior agreements, representations, or understandings, oral or
written, express or implied with respect to the subject matter hereof. This
Agreement may not be modified or amended in any way unless in a writing signed
by both Fargis and the Chief Executive Officer of Employer. No representation,
promise or inducement has been made by either party hereto that is not embodied
in this Agreement, and neither party shall be bound or liable for any alleged
representation, promise, or inducement not specifically set forth herein.
21. GUARANTEE.
Inasmuch as Employer's sole corporate purpose is to serve as NCRIC's
Attorney-in-Fact under a contract without extended duration, NCRIC enters into
this Agreement for the sole purpose of guaranteeing the payment and performance
of all of the obligations of Employer hereunder.
22. EFFECTIVE DATE OF AGREEMENT.
This Agreement shall take effect only when it has been executed by all
parties, but when executed and approved shall be enforceable as of December 1,
1997.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the date and year first written above.
EMPLOYER:
NATIONAL CAPITAL UNDERWRITERS, INC.
By: /s/R. Ray Pate, Jr.
---------------------------------
R. Ray Pate, Jr.
Chief Executive Officer
FARGIS:
/s/Stephen S. Fargis
------------------------------------
Stephen S. Fargis
PAYMENT AND PERFORMANCE OF EMPLOYER GUARANTEED:
NATIONAL CAPITAL
RECIPROCAL INSURANCE COMPANY
By: /s/Nelson P. Trujillo, M.D.
--------------------------------
Nelson P. Trujillo, M.D.
Chairman of the Board of Governors
10
<PAGE>
EXHIBIT 10.9
ADMINISTRATIVE SERVICES AGREEMENT
BY AND AMONG
NCRIC, INC.,
NCRIC, A MUTUAL HOLDING COMPANY,
NCRIC HOLDINGS, INC.,
NCRIC GROUP, INC.,
NCRIC MSO, INC.,
COMMONWEALTH MEDICAL LIABILITY INSURANCE COMPANY,
NATIONAL CAPITAL INSURANCE BROKERAGE, LTD.,
NCRIC INSURANCE AGENCY, INC.
AND
NCRIC PHYSICIANS ORGANIZATION, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. Engagement of Service Providers............................... 1
2. Term.......................................................... 1
3. Services...................................................... 2
4. Personnel and Hours........................................... 2
5. Remuneration for Services..................................... 3
6. Financial Records............................................. 3
7. Independent Contractors....................................... 3
8. Limitation of Liability....................................... 3
9. Successors and Assigns........................................ 4
10. No Waiver..................................................... 4
11. Modification.................................................. 4
12. Inclusion of a New Affiliate.................................. 4
13. Applicable Law................................................ 4
14. Entire Agreement.............................................. 4
15. Notice........................................................ 4
16. Not for the Benefit of Third Parties.......................... 5
17. Captions...................................................... 5
</TABLE>
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement ("Agreement") is made and entered as
of the ___ day of __________, 1998, by and among NCRIC, Inc., a stock insurance
company organized under the laws of the District of Columbia ("NCRIC"), NCRIC, A
Mutual Holding Company, a mutual insurance holding company organized under the
laws of the District of Columbia; NCRIC Holdings, Inc., a stock holding company
organized under the laws of the District of Columbia; NCRIC Group, Inc., a stock
holding company organized under the laws of the District of Columbia; NCRIC MSO,
Inc., a corporation organized under the laws of the State of Delaware;
Commonwealth Medical Liability Insurance Company, a stock insurance company
organized under the laws of the Commonwealth of Virginia; National Capital
Insurance Brokerage, Ltd., an insurance brokerage organized under the laws of
the District of Columbia; NCRIC Insurance Agency, Inc., an insurance agency
organized under the laws of the District of Columbia; and NCRIC Physicians
Organization, Inc., a physicians organization organized under the laws of the
District of Columbia (collectively, the "Affiliates").
RECITALS
Each of the Affiliates, in order to efficiently and effectively carry out
its operations, desires to engage one or more of its Affiliates (a "Service
Provider") to provide certain administrative and other services for and on
behalf of such Affiliate on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
undertakings and agreements set forth herein, the parties mutually agree as
follows:
1. ENGAGEMENT OF SERVICE PROVIDERS. Each Affiliate hereby engages each
Service Provider to act as an independent contractor to provide the services set
forth, and to the extent contemplated, in Section 3 below (the "Services") to
such Affiliate. Each Affiliate hereby authorizes each Service Provider to
perform all acts necessary or appropriate to fulfill such engagement, and each
Service Provider hereby accepts such engagement and agrees to perform all acts
necessary or appropriate to fulfill such engagement, all in accordance with the
terms and conditions and subject to the limitations set forth in this Agreement.
2. TERM. This Agreement shall commence as of the date set forth above and
shall remain in effect until terminated by all of the Affiliates pursuant to a
written agreement. Any Affiliate also may terminate this Agreement as it applies
to such Affiliate by giving written notice of such termination to each other
Affiliate at least sixty (60) days prior to the effective date of termination.
Upon termination of this Agreement by an Affiliate with respect to itself, each
Service Provider shall deliver to the terminating Affiliate all records and
information of every kind which relate to the provision of the Service
Provider's services under this Agreement and which are in the possession,
custody or control of the Service Provider. If the terminating Affiliate is a
Service Provider, such Service Provider shall also return to each Affiliate all
records and information of every kind which relate to the provision of the
Service Provider's Services under this Agreement to such Affiliate.
<PAGE>
3. SERVICES. During the term of this Agreement, each Service Provider
shall undertake its best efforts to provide Services to an Affiliate at and upon
the request of such Affiliate, subject to each Service Provider's reasonable
discretion to decline to provide specific Services that may be requested by such
Affiliate. All Services performed under this Agreement shall be performed in
accordance with good business practices and industry customs. The Services which
may be provided include:
(a) Administrative and clerical services, and such personnel as may
be required by an Affiliate for administrative and clerical tasks, to ensure the
smooth and orderly operation of such Affiliate's business;
(b) Financial and accounting services, which may include (i)
recording and payment on behalf of an Affiliate of all employment-related
expenses of such Affiliate, including, but not limited to, payroll, payroll
taxes, employee fringe benefits, income tax withholdings (federal, state and
local), FICA, insurance and other expenses; provided, however, that any
employees of an Affiliate shall remain employees of such Affiliate and shall
not, by reason of the Service Provider's rendering of services in an agency
capacity, become employees of such Service Provider; (ii) the establishment and
maintenance of accounting journals, including cash receipts journals, cash
disbursements journals, general journals, and general ledgers; (iii) accounting
and managerial services which shall include, but not be limited to, maintenance
of purchase records, personnel and employment records and tax records; (iv)
performing all revenue accounting functions including invoicing of all sales,
collection of revenues, credit determinations, accounts receivable accounting
and reporting to an Affiliate; (v) maintaining adequate records and books of
account reflecting all financial transactions; and (vi) performing such other
services incidental to the foregoing as may from time to time be reasonably
requested by an Affiliate;
(c) Support services including access to the Service Provider's word
processing facilities and personnel and the Service Provider's receptionist and
telephone answering service;
(d) Utilization of the Service Provider's computer hardware and
software, including any necessary technical support;
(e) Marketing, claims processing, underwriting and executive
management services; and
(f) Assistance in the acquisition of furniture and equipment
reasonably necessary to an Affiliate's operations.
4. PERSONNEL AND HOURS. The number and hours of service of each Service
Provider's personnel assigned to perform the Services shall be determined by
such Service Provider in its discretion, and such Service Provider shall have
the right reasonably to reduce or increase the number of its personnel providing
the Services from time to time without notice to or consent of an Affiliate.
Such personnel shall be and at all times remain the employees of the Service
Provider.
-2-
<PAGE>
In consultation with an Affiliate, the Service Provider shall define the duties
and responsibilities of personnel provided under this provision. The Service
Provider shall be solely responsible for hiring, training and firing such
personnel and for setting compensation and benefits and all other terms,
conditions and requirements of employment. The Service Provider shall be solely
responsible for all compensation and benefits owed to its personnel who perform
Services hereunder. The Service Provider shall be solely responsible for meeting
any and all legal obligations to such personnel which are imposed upon the
Service Provider as their employer or contractor, as the case may be.
5. REMUNERATION FOR SERVICES. During the term of this Agreement, each
Affiliate will pay to the Service Provider a quarterly service fee (the "Service
Fee"), in arrears, equal to the Service Provider's costs and expenses to provide
Services to such Affiliate in the preceding quarter; such payment shall include,
but not be limited to, reimbursement to the Service Provider of payroll-related
expenses, telephone expenses, postage, office equipment and supplies, overhead,
rent for equipment and office space, expenses associated with computer hardware
and software, and expenses of receptionist and telephone answering services. The
Service Fee will be billed by invoice to each Affiliate stating in reasonable
detail the Services rendered to such Affiliate, fees charged therefor and costs
and expenses incurred. The Service Fee will be due and payable within thirty
(30) days of invoice date.
6. FINANCIAL RECORDS. Each Service Provider shall maintain on a current
basis true, correct and complete books and records of moneys disbursed in
connection with the Service Provider's performance of the Services, and all
matters relating thereto.
7. INDEPENDENT CONTRACTORS. Each Affiliate hereby engages each Service
Provider as an independent contractor and the Service Provider and each
Affiliate is responsible only for its own actions. Neither a Service Provider
nor its employees, subcontractors or agents shall be deemed to be the servants
or employees of any Affiliate. Nothing in this Agreement shall be construed to
create a joint venture, partnership or any other relationship of any nature
which would create any liability or responsibility on the part of any party for
the debts, obligations or liabilities of any other party; provided, however,
that should a Service Provider become liable to any third party by reason of
providing services hereunder, the Affiliate on whose behalf the Services were
provided will (subject to paragraph 8) hold the Service Provider harmless from
and against all damages (including settlements) and expenses (including
attorneys' fees and expenses) incurred by the Service Provider in connection
with the defense of all such debts, obligations or liabilities, including, but
not limited to, defense of all actions, suits and proceedings and prosecution or
defense of any related appeal. Nonetheless, a Service Provider is not authorized
to enter into any contract on behalf of any Affiliate by reason of any term of
this Agreement without the prior written consent of such Affiliate.
8. LIMITATION OF LIABILITY. Except as provided in this Agreement or
otherwise provided by law, Service Providers will incur no liability to any
Affiliate, or to others, in respect of any act or failure to act taken or done
in good faith by the Service Provider in performing its obligations under this
Agreement, and the Affiliate(s) on whose behalf such obligations were performed
will indemnify and hold such Service Provider harmless from and against all
damages (including
-3-
<PAGE>
settlements) and expenses (including attorneys' fees and expenses) incurred by
the Service Provider in connection with the defense of all such acts or failures
to act, including, but not limited to, defense of all actions, suits and
proceedings and prosecution or defense of any related appeal, and all claims or
actions relating to the payroll services rendered by the Service Provider on
behalf of such Affiliate(s). Notwithstanding the foregoing, no Affiliate shall
be liable for, nor shall indemnify the Service Provider for, any act or failure
to act by the Service Provider which is due to the gross negligence or willful
misconduct of the Service Provider.
9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon each Affiliate and the Service Providers, and their
respective successors and assigns.
10. NO WAIVER. No delay or failure by any party in exercising any right
under this Agreement, and no partial or single exercise of that right, shall
constitute a waiver of that or any other right.
11. MODIFICATION. No term or provision of this Agreement may be changed,
modified, terminated or discharged, in whole or in part, except by a writing
which is dated and signed by all parties hereto. No waiver of any of the
provisions or conditions of this Agreement or of any of the rights, powers or
privileges of a party hereto shall be effective or binding unless in writing and
signed by the party claimed to have given or consented to such waiver.
12. INCLUSION OF A NEW AFFILIATE. If a Service Provider or any Affiliate
acquires or organizes another corporation, then such corporation may join in and
become a party to this Agreement by executing the master copy of this Agreement
which shall be maintained at NCRIC's headquarters. It will not be necessary for
each Affiliate to re-execute the Agreement; a new Affiliate may simply execute
the existing Agreement, and such Agreement shall be binding on such new
Affiliate and the Service Providers.
13. APPLICABLE LAW. This Agreement shall be construed in all respects in
accordance with the laws of the District of Columbia (without giving effect to
the principles of conflict of laws thereof).
14. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding of the parties concerning the subject matter hereof and supersedes
all prior and contemporaneous agreements, arrangements and understandings
between the parties concerning such subject matter.
15. NOTICE. Any notice, instrument or communication required or permitted
under this Agreement shall be deemed to have been effectively given and made if
in writing and served either by personal delivery to the party for whom it is
intended, or by being deposited, postage prepaid, registered or certified mail,
return receipt requested, in the United States mail, addressed to the party for
whom it is intended to the following addresses:
-4-
<PAGE>
If to an Affiliate: 1115 30th Street, N.W.
Washington, DC 20007
If to a Service Provider: 1115 30th Street, N.W.
Washington, DC 20007
Either party may change such address by notice given to the other party in
the manner set forth above.
16. NOT FOR THE BENEFIT OF THIRD PARTIES. This Agreement and each and
every provision hereof is for the exclusive benefit of the parties to this
Agreement and not for the benefit of any third party, and under no circumstances
shall the terms hereof be deemed to make a Service Provider or any Affiliate
responsible to any third party for any damages or other liabilities to such
third party.
17. CAPTIONS. The captions in this Agreement are for convenience only and
shall not be considered a part of, or effect the construction or interpretation
of any provision of, this Agreement.
IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers,
have executed this Agreement as of the date first set forth above.
NCRIC, INC.
_______________________________________
President
NCRIC, A MUTUAL HOLDING COMPANY
_______________________________________
Chairman, Board of Directors
NCRIC HOLDINGS, INC.
_______________________________________
President
NCRIC GROUP, INC.
_______________________________________
President
-5-
<PAGE>
NCRIC MSO, INC.
________________________________________
President
COMMONWEALTH MEDICAL LIABILITY
INSURANCE COMPANY
________________________________________
President
NATIONAL CAPITAL INSURANCE
BROKERAGE, LTD.
________________________________________
President
NCRIC INSURANCE AGENCY, INC.
________________________________________
President
NCRIC PHYSICIANS ORGANIZATION, INC.
________________________________________
President
-6-
<PAGE>
Exhibit 21.1
List of Subsidiaries
--------------------
Name State or Other Jurisdiction of Incorporation
- ---- --------------------------------------------
NCRIC, Inc..................... District of Columbia
National Capital Insurance
Brokerage, Ltd................. District of Columbia
NCRIC Insurance Agency, Inc.... District of Columbia
Commonwealth Medical
Liability Insurance Company.... Virginia
NCRIC MSO, Inc................. Delaware
NCRIC Physicians Organization,
Inc............................ District of Columbia
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of NCRIC Group, Inc. on
Form SB-2 of our reports for National Capital Reciprocal Insurance Company and
Subsidiaries dated March 6, 1998 (except for Notes 10 and 11, as to which the
date is December 21, 1998) and for the Management Services of HealthCare
Consulting, Inc., HCI Ventures, LLC, and Employee Benefit Services, Inc. dated
December 4, 1998 (except for Note 1, Paragraph 3 as to which the date is
December 21, 1998), respectively, appearing in the Prospectus which is part of
this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
and Operating Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
December 22, 1998
Washington, D.C.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 103,885
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 103,885
<CASH> 5,159
<RECOVER-REINSURE> 3
<DEFERRED-ACQUISITION> 110
<TOTAL-ASSETS> 135,850
<POLICY-LOSSES> 82,330
<UNEARNED-PREMIUMS> 6,950
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,270
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 31,880
<TOTAL-LIABILITY-AND-EQUITY> 135,850
14,513
<INVESTMENT-INCOME> 4,465
<INVESTMENT-GAINS> 128
<OTHER-INCOME> 323
<BENEFITS> 11,821
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 4,117
<INCOME-PRETAX> 3,491
<INCOME-TAX> 969
<INCOME-CONTINUING> 2,522
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,522
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 58,059
<PROVISION-CURRENT> 12,653
<PROVISION-PRIOR> (832)
<PAYMENTS-CURRENT> 1,502
<PAYMENTS-PRIOR> 6,648
<RESERVE-CLOSE> 61,730
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 94,362
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 94,362
<CASH> 4,065
<RECOVER-REINSURE> 255
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 121,841
<POLICY-LOSSES> 75,136
<UNEARNED-PREMIUMS> 403
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,579
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 27,486
<TOTAL-LIABILITY-AND-EQUITY> 121,841
13,532
<INVESTMENT-INCOME> 6,045
<INVESTMENT-GAINS> 90
<OTHER-INCOME> 355
<BENEFITS> 15,591
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 3,594
<INCOME-PRETAX> 837
<INCOME-TAX> (122)
<INCOME-CONTINUING> 959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 959
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 56,527
<PROVISION-CURRENT> 19,444
<PROVISION-PRIOR> (3,853)
<PAYMENTS-CURRENT> 1,867
<PAYMENTS-PRIOR> 12,192
<RESERVE-CLOSE> 58,059
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
