-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1oojHjscbUptDhBbKkRD74gNrByDOAdTqPpxU0JEZ8WjQXoOg/35fV+rWKgFXvy h/Zfa6ke6JbguOFa3nqLwg== 0000950144-99-010397.txt : 19990817 0000950144-99-010397.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950144-99-010397 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RISCORP INC CENTRAL INDEX KEY: 0001003957 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 650335150 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27462 FILM NUMBER: 99692999 BUSINESS ADDRESS: STREET 1: 2 NORTH TAMIAMI TRAIL STREET 2: SUITE 608 CITY: SARASOTA STATE: FL ZIP: 34236 BUSINESS PHONE: 9419512022 MAIL ADDRESS: STREET 1: 1390 MAIN STREET CITY: SARASOTA STATE: FL ZIP: 34236 10-Q 1 RISCORP, INC. 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-27462 RISCORP, INC. ------------- (Exact name of registrant as specified in its charter) FLORIDA 65-0335150 - ------------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Sarasota Tower, Suite 608 2 North Tamiami Trail Sarasota, Florida 34236 - ---------------------------------------- --------------------- (Address of principal executive offices) (Zip Code) (941) 366-5015 ------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Number of shares outstanding of the issuer's Common Stock: Class Outstanding at July 31, 1999 ----- ----------------------------- Class A Common Stock, $.01 par value 14,258,671 Class B Common Stock, $.01 par value 24,334,443 1 2 INDEX
PAGE NO. ------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3 - 4 Consolidated Statements of Operations - For the three months ended June 30, 1999 and 1998 5 Consolidated Statements of Operations - For the six months ended June 30, 1999 and 1998 6 Consolidated Statements of Cash Flows - For the six months ended June 30, 1999 and 1998 7 Consolidated Statements of Comprehensive Loss For the six months ended June 30, 1999 and 1998 8 Notes to Consolidated Condensed Financial Statements 9 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 19 PART II OTHER INFORMATION Item 1. Legal Proceedings 20 - 21 Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 - 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23
2 3 Part I Financial Information Item 1. Financial Statements RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
JUNE 30 DECEMBER 31 1999 1998 ----------- ------------- ASSETS (Unaudited) Investments: Fixed maturities available for sale, at fair value (amortized cost $58,301 in 1999 and $6,666 in 1998) $ 58,262 $ 6,716 Fixed maturities available for sale, at fair value (amortized cost $8,639 in 1999 and $9,047 in 1998)-restricted 8,723 9,264 -------- -------- Total investments 66,985 15,980 Cash and cash equivalents 8,831 6,864 Cash and cash equivalents-restricted 14,995 14,842 Prepaid expenses 4,810 5,171 Deferred income taxes 3,358 3,141 Accounts receivable--other 2,300 7,674 Income taxes recoverable -- 17,277 Property and equipment, net 261 337 Receivable from Zenith 81 49,933 Other assets 582 2,174 -------- -------- Total assets $102,203 $123,393 ======== ========
See accompanying notes to consolidated financial statements. 3 4 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
JUNE 30 DECEMBER 31 1999 1998 ----------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) Liabilities - accrued expenses and other liabilities $ 10,989 $ 27,827 --------- --------- Shareholders' equity: Class A Common Stock, $.01 par value, 100,000,000 shares authorized; 14,371,253 shares issued 143 143 Class B Common Stock, $.01 par value, 100,000,000 shares authorized; 24,334,443 shares issued and outstanding 243 243 Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued and outstanding -- -- Additional paid-in capital 140,688 140,688 Retained deficit (49,889) (45,680) Treasury Class A Common Stock - at cost, 112,582 shares (1) (1) Accumulated Other Comprehensive Income: Net unrealized gains on investments 30 173 --------- --------- Total shareholders' equity 91,214 95,566 --------- --------- Total liabilities and shareholders' equity $ 102,203 $ 123,393 ========= =========
See accompanying notes to consolidated financial statements. 4 5 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) THREE MONTHS ENDED JUNE 30 -------------------------------------------- 1999 1998 ------------ ----------- (Unaudited) (Unaudited) Revenue: Net investment income $ 1,235 $ 2,252 Net realized gains 150 2,805 Other income 124 93 ------------ ------------ Total revenue 1,509 5,150 ------------ ------------ Expenses: Commissions, underwriting, and administrative expenses 3,197 11,352 Interest expense (income) (219) 8 Depreciation and amortization 36 31 ------------ ------------ Total expenses 3,014 11,391 ------------ ------------ Loss from operations (1,505) (6,241) Loss on sale of net assets to Zenith (4,760) -- ------------ ------------ Loss before income taxes (6,265) (6,241) Income tax benefit (2,896) -- ------------ ------------ Net loss $ (3,369) $ (6,241) ============ ============ Per share data: Net loss per common share - basic $ (0.09) $ (0.17) ============ ============ Net loss per common share - diluted $ (0.09) $ (0.17) ============ ============ Weighted average common shares outstanding 37,491,031 36,916,725 ============ ============ Weighted average common and common share equivalents outstanding 37,491,031 36,916,725 ============ ============
See accompanying notes to consolidated financial statements. 5 6 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
SIX MONTHS ENDED JUNE 30 -------------------------------------------- 1999 1998 ------------- ----------- (Unaudited) (Unaudited) Revenue: Net investment income $ 3,034 $ 5,558 Net realized gains 150 4,266 Other income 124 93 Premiums earned -- 25,819 Fee income -- 5,723 ------------ ------------ Total revenue 3,308 41,459 ------------ ------------ Expenses: Commissions, underwriting, and administrative expenses 4,354 26,868 Interest expense 1,222 477 Depreciation and amortization 76 3,100 Losses and loss adjustment expenses -- 24,016 Unallocated loss adjustment expenses -- 2,561 ------------ ------------ Total expenses 5,652 57,022 ------------ ------------ Loss from operations (2,344) (15,563) Loss on sale of net assets to Zenith (4,760) -- ------------ ------------ Loss before income taxes (7,104) (15,563) Income tax benefit (2,896) -- ------------ ------------ Net loss $ (4,208) $ (15,563) ============ ============ Per share data: Net loss per common share - basic (0.11) (0.42) ============ ============ Net loss per common share - diluted (0.11) (0.42) ============ ============ Weighted average common shares outstanding 37,419,156 36,892,420 ============ ============ Weighted average common and common share equivalents outstanding 37,419,156 36,892,420 ============ ============
See accompanying notes to consolidated financial statements. 6 7 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
SIX MONTHS ENDED JUNE 30 ----------------------------------------- 1999 1998 ----------- ----------- (Unaudited) (Unaudited) Net cash provided by (used in) operating activities $ 2,231 $(15,838) --------- -------- Cash flows from investing activities: Purchase of fixed maturities available for sale (327,752) (24,210) Purchase of fixed maturities held to maturity -- (5,569) Proceeds from sale of fixed maturities available for sale 276,489 28,049 Proceeds from maturities of fixed maturities available for sale -- 6,029 Proceeds from maturities of fixed maturities held to maturity -- 5,700 Cash received from Zenith for sale of net assets 51,153 35,000 Purchase of property and equipment -- (777) Cash assets transferred to Zenith -- (29,308) Investments to be transferred to Zenith -- (13,200) --------- -------- Net cash (used in) provided by investing activities (110) 1,714 --------- -------- Cash flows from financing activities: Principal repayments of notes payable -- (245) Decrease in deposit balances payable -- (1,599) Transfer of cash and cash equivalents to restricted (154) (413) --------- -------- Net cash used in financing activities (154) (2,257) --------- -------- Net increase (decrease) in cash and cash equivalents 1,967 (16,381) Cash and cash equivalents, beginning of period 6,864 16,858 --------- -------- Cash and cash equivalents, end of period $ 8,831 $ 477 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,124 $ 479 ========= ======== Income taxes $ 82 $ 3,435 ========= ========
See accompanying notes to consolidated financial statements. 7 8 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands)
SIX MONTHS ENDED JUNE 30 -------------------------------------- 1999 1998 ---------- ---------- (Unaudited) (Unaudited) Net loss $(4,208) $(15,563) ------- -------- Other comprehensive loss, before income taxes: Unrealized losses on securities available for sale: Unrealized holding losses arising during the period (220) (4,063) Income tax benefit related to items of other comprehensive loss (77) (1,422) ------- -------- Other comprehensive loss, net of income taxes (143) (2,641) ------- -------- Total comprehensive loss $(4,351) $(18,204) ======= ========
See accompanying notes to consolidated financial statements. 8 9 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The accompanying consolidated unaudited interim financial statements of RISCORP, Inc. ("RISCORP") and subsidiaries (collectively, the "Company") have been prepared on the basis of generally accepted accounting principles ("GAAP") and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial condition, results of operations, and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts and operations of RISCORP and its subsidiaries. All significant intercompany balances have been eliminated. (2) SALE TO ZENITH INSURANCE COMPANY As previously disclosed, on April 1, 1998, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith Insurance Company ("Zenith") pursuant to the terms of the Asset Purchase Agreement among the parties dated June 17, 1997, as amended (the "Asset Purchase Agreement"). In connection with the sale to Zenith, the Company ceased substantially all of its former business operations, including its insurance operations, effective April 1, 1998. Accordingly, after such date, the Company's operations consisted principally of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. At the present time, RISCORP has no plans to resume any operating activities. On July 7, 1999, the Company and Zenith settled, with certain limited exceptions, the claims arising out of the sale. The Asset Purchase Agreement contemplated a post-closing purchase price adjustment based on the difference between the book value of the assets purchased and the book value of the liabilities assumed as of the closing date. In connection with the determination of the final purchase price, a dispute arose between the parties regarding, among other things, the book value of the assets and liabilities of the business, Zenith's assumption of certain operating liabilities of the business, and each party's indemnification obligations under the Asset Purchase Agreement. The terms of the settlement included, among other things, (i) the disbursement of the $12.8 million in cash that has been held in escrow pursuant to the terms of the Asset Purchase Agreement, with $6 million to be disbursed to Zenith and the balance to be disbursed to RISCORP; (ii) RISCORP's right to seek correction of alleged errors made by the neutral auditor in connection with its determination of certain reinsurance recoverable adjustments contained in the Final Business Balance Sheet; (iii) RISCORP's right to retain any proceeds received from the Florida Department of Labor (the "Florida DOL") in connection with RISCORP's request for a refund of $5.3 million related to deductions for commissions with respect to gross premiums; (iv) RISCORP's right to retain a portion of any additional refunds received from the Florida 9 10 DOL related to deductions for premiums ceded to others; and (v) the mutual release of all other claims and causes of action that each party may have against the other through the date of the Settlement Agreement, except as expressly set forth therein. The parties have also agreed that, with certain limited exceptions, any future claim or controversy between the parties is to be submitted to binding arbitration pursuant to the procedures set forth in the Settlement Agreement. As part of the settlement, the lawsuit filed by Zenith against the Company in the United States District of New York, and the lawsuit filed by the Company against Zenith in the United States District Court for the Middle District of Florida, Tampa Division, have been dismissed with prejudice. At June 30, 1999, the Company recorded an additional net loss of $4.8 million on the sale to Zenith due to the final terms of the Settlement Agreement. In connection with the sale of RISCORP's insurance operations to Zenith on April 1, 1998, RISCORP voluntarily consented to the Florida Insurance Department's request that RISCORP discontinue writing any new or renewal insurance business for an indefinite period of time. (3) ISSUANCE OF ADDITIONAL SHARES OF STOCK In September 1996, RISCORP purchased all of the outstanding stock of Independent Association Administrators, Inc. ("IAA") and Risk Inspection Services and Consulting, Inc. ("RISC") in exchange for $11.5 million, consisting principally of 790,336 shares of RISCORP's Class A Common Stock valued at $10.9 million on the date of acquisition. IAA and RISC are workers' compensation management services companies offering services in Alabama. On the acquisition date, the excess of the purchase price over the fair value of the net assets acquired was $11.4 million and was recorded as goodwill. The remaining unamortized goodwill relating to those acquisitions was $7.8 million at March 31, 1998 (just prior to the transfer of the goodwill to Zenith on April 1, 1998). Due to a decrease in the market value of RISCORP's Class A Common Stock, 790,336 additional shares of RISCORP's Class A Common Stock valued at $0.6 million were issued in January 1998 to the former shareholders of IAA. (4) COMMITMENTS AND CONTINGENCIES On or about January 11, 1999, Zenith filed a lawsuit against RISCORP and certain of its subsidiaries in federal court in New York setting forth 14 separate causes of action arising out of the Asset Purchase Agreement and certain ancillary agreements. The complaint sought an unspecified total amount of damages, but the amount of compensatory damages sought was in excess of $30 million, together with an unspecified amount of punitive damages and attorneys' fees. As more fully disclosed in Note 2, on July 7, 1999, the Company and Zenith settled those claims and, in connection therewith, this lawsuit has been dismissed with prejudice by Zenith. On August 20, 1997, the Occupational Safety Association of Alabama Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers' compensation fund, filed a breach of contract and fraud action against the Company and others. The Fund entered into a Loss Portfolio Transfer and Assumption Reinsurance Agreement dated August 26, 1996 and effective September 1, 1996 with RISCORP National Insurance Company ("RNIC"). Under the terms of the agreement, RNIC assumed 100 percent of the outstanding loss reserves (including incurred but not reported losses) as of September 1, 1996. Co-defendant Peter D. Norman ("Norman") was a principal and officer of IAA prior to its 10 11 acquisition by RISCORP in September 1996. The complaint alleges that Norman and IAA breached certain fiduciary duties owed to the Fund in connection with the subject agreement and transfer. The complaint alleges that RISCORP has breached certain provisions of the agreement and owes the Fund monies under the terms of the agreement. The Fund claims, per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund overpaid RNIC by $6 million in the subject transaction. The court has granted RNIC's Motion to Compel Arbitration per the terms and provisions of the agreement. On December 1, 1998, the trial court issued an order prohibiting the American Arbitration Association from administering the arbitration between RNIC and the Fund, and RNIC has appealed the trial court's ruling. The Alabama Supreme Court has stayed the current arbitration. Despite the Alabama Supreme Court's stay, the dispute between the Fund and RNIC is expected to be resolved through arbitration. The other defendants, including IAA, have appealed to the Supreme Court of Alabama the trial court's denial of their motions to compel arbitration. RNIC intends to vigorously defend the Fund's claim. On March 13, 1998, RISCORP Insurance Company ("RIC") and RISCORP Property & Casualty Insurance Company ("RPC") were added as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of Florida, styled Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety Company, a/k/a Aetna Group, et. al. Case No. 97-2240-CIV-MORENO. The plaintiffs purport to bring this action on behalf of themselves and a class consisting of all employers in the State of Florida who purchased or renewed retrospectively rated or adjusted workers' compensation policies in the voluntary market since 1985. The suit was originally filed on July 17, 1997 against approximately 174 workers' compensation insurers as defendants. The complaint was subsequently amended to add the RISCORP defendants. The amended complaint named a total of approximately 161 insurer defendants. The suit claims that the defendant insurance companies violated the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and the Florida Antitrust Act, committed breach of contract and civil conspiracy, and were unjustly enriched by unlawfully adding improper and illegal charges and fees onto retrospectively rated premiums and otherwise charging more for those policies than allowed by law. The suit seeks compensatory and punitive damages, treble damages under the Antitrust and RICO claims, and equitable relief. RIC and RPC moved to dismiss the amended complaint and have also filed certain motions to dismiss the amended complaint filed by various other defendants. On August 26, 1998, the district court issued an order dismissing the entire suit against all defendants on one of the grounds identified in the various motions to dismiss filed by the defendants. The district court indicated that all other grounds and motions to dismiss that were pending at that time were mooted by the dismissal. On September 13, 1998, the plaintiffs filed a Notice of Appeal. On February 9, 1999, the district court issued, sua sponte, an Order of Reconsideration in which the court indicated its desire to vacate the dismissal of the RICO claims and pendant state claims based on a recent decision of the United States Supreme Court. On March 17, 1999, plaintiffs-appellants filed an unopposed motion to remand the action to the district court, citing the Order of Reconsideration. On June 9, 1999, the Eleventh Circuit remanded the case to the district court. Management will resume its vigorous defense of the case once district court proceedings recommence. On July 9, 1999, a shareholder class action lawsuit was filed against the Company, two of its executive officers, and two former executive officers in the United States District Court for the Middle District of Florida. The plaintiff in this action purports to represent the class of shareholders who purchased shares of RISCORP's Class A Common Stock between November 19, 1997 and July 20, 1998. The complaint alleges, among other things, that the financial statements included in the periodic reports filed by RISCORP with the Securities and Exchange Commission during the class period contain false and misleading statements of material fact and omissions, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. These 11 12 allegations principally relate to the difference between the net book value of the Company as reflected on its published financial statements during the class period and the net book value of the assets transferred to Zenith as determined by the neutral auditors and neutral actuaries pursuant to the terms of the Asset Purchase Agreement between the parties. The complaint seeks unspecified compensatory damages. RISCORP believes that these claims are without merit and intends to vigorously defend this suit. The Company, in the ordinary course of business, is party to various lawsuits. Based on information presently available, and in the light of legal and other defenses available to the Company, contingent liabilities arising from such threatened and pending litigation in the ordinary course of business are not presently considered by management to be material. Other than as noted herein, no provision had been made in the accompanying consolidated financial statements for the foregoing matters. Certain of the related legal expenses may be covered under directors and officers' insurance coverage maintained by the Company. (5) RECLASSIFICATIONS For comparative purposes, certain amounts in the accompanying financial statements have been reclassified from amounts previously reported. These reclassifications had no effect on previously reported shareholders' equity or net loss. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements, particularly with respect to Risk Factors, Legal Proceedings, and the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Additional written or oral forward-looking statements may be made by RISCORP, Inc. ("RISCORP") and its subsidiaries (collectively, the "Company") from time to time in filings with the Securities and Exchange Commission or otherwise. Such forward-looking statements are within the meaning of that term in Sections 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements may include, without limitation, projections of revenues, income, losses, cash flows, plans for future operations, financing needs, estimates concerning the effects of litigation or other disputes, as well as assumptions regarding any of the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Many factors could contribute to such differences and include, among others, the actual outcome of pending litigation, the Company's ability to gain approval and receive payment from the Florida Department of Labor for certain refund applications, the Company's ability to receive payment for the alleged errors and understatement of the Final Business Balance Sheet by the Independent Expert, the Company's need for additional capital to meet operating requirements, and other factors mentioned elsewhere in this report. RECENT DEVELOPMENTS ASSET PURCHASE AGREEMENT WITH ZENITH See Part 1, Item 1, Notes to Consolidated Financial Statements, Note 2 for further discussion of the Zenith transaction. LEGAL DEVELOPMENTS See "Part II, Item 1, Legal Proceedings." OVERVIEW GENERAL As discussed more fully in Note 2 to the consolidated financial statements, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith on April 1, 1998. In connection with the sale to Zenith, RISCORP ceased substantially all of its former business operations, including its insurance operations, effective April 1, 1998. Accordingly, after such date, the Company's operations consisted primarily of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. At the present time, RISCORP has no plans to resume any operating activities. 13 14 Since April 1, 1998, the Company has had no employees or insurance operations, and has provided no services to self-insurance funds or other insurance related entities. Because of these significant changes in the operating activities of the Company after April 1, 1998, a comparison of the results of operations for the six months ended June 30, 1999 to the comparable period in 1998 is meaningless. Therefore, the results of operations for the six months ended June 30, 1999 are explained separately without comparison to the comparable prior period. The results of operations for the three months ended June 30, 1999 are explained separately with comparison to the comparable prior period. The results of operations of the Company prior to the April 1, 1998 sale to Zenith are included to comply with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission; however, those results of operations are not indicative of the operations of the Company since April 1, 1998 and are not indicative of the anticipated future operations of the Company. RESULTS OF OPERATIONS During the six months ended June 30, 1999, the Company's primary operating activities were the defense of the Proposed Business Balance Sheet, the investment of the $25 million initial payment received from Zenith on April 2, 1998, the investment of other invested assets retained by the Company, compliance with the provisions of the Asset Purchase Agreement, converting the taxes recoverable to cash, collecting the sale proceeds from Zenith, the investment of the $50.8 million of sale proceeds and interest collected from Zenith on March 26, 1999, efforts to maximize asset recoveries, and the administration of the day-to-day activities of the surviving corporate entities. Compliance with the provisions of the Asset Purchase Agreement included the transfer of all of the assets and liabilities, not retained by the Company, to Zenith, and assisting with the orderly transition of the Company's insurance operations to Zenith. SIX MONTHS ENDED JUNE 30, 1999 An analysis of certain balances contained on the June 30, 1999 consolidated balance sheet is as follows: - At June 30, 1999, the $15 million of restricted cash and cash equivalents consisted of $12.8 million held in escrow in connection with the sale to Zenith, $1.9 million on deposit with various governmental agencies, and $0.3 million pledged to secure a letter of credit. - The $51 million increase in investments in the first six months of 1999 resulted from the collection and subsequent investment of the proceeds from the sale to Zenith and of certain tax refunds. - The decrease in the amount of the receivable from Zenith from December 31, 1998 to June 30, 1999 resulted from the collection of the remaining receivable from the sale to Zenith in March 1999. - The decrease in other assets from December 31, 1998 to June 30, 1999 resulted from the collection of interest due from the sale to Zenith in March 1999. - The $4.8 million of prepaid expenses at June 30, 1999 consisted of $3.7 million of prepaid insurance coverages and $1.1 million of retainers paid to certain professionals and consultants. 14 15 - A summary of the accrued expenses and other liabilities at June 30, 1999 is as follows (in millions): Payable to Zenith $ 6.2 (1) Income taxes payable 1.7 Other accruals and payables 1.2 Accrued legal, accounting, auditing, and actuarial services 1.1 Trade accounts payable 0.5 Other 0.3 ------- Total $ 11.0 =======
(1) Based on the Settlement Agreement, as more fully discussed in Note 2 to the consolidated financial statements. The Company's operating results for the six months ended June 30, 1999 resulted in a net loss of $4.2 million. The $3 million of net investment income for the six months ended June 30, 1999 consisted of $1.3 million of interest income on the receivable from Zenith, $0.2 million of interest income on the $12.8 million balance in escrow, and $1.5 million of investment portfolio income. Operating expenses for the six months ended June 30, 1999 totaled $5.7 million and consisted of the following: - The $4.4 million of commissions, underwriting, and administrative expenses consisted of $0.6 million of management expenses, $0.7 million of accounting and auditing expenses, $1.6 million of legal expenses, $0.6 million of recurring operating expenses such as rent, telephone, insurance, and similar costs, and $0.9 million of other expenses. - The $1.2 million of interest expense consisted principally of the interest paid in March 1999 on the settlement of a class action lawsuit. - Depreciation and amortization expense was $76,000. The Company transferred all assets subject to amortization to Zenith in connection with the sale and retained $0.4 million of fixed assets (consisting principally of computer equipment) that are being depreciated over three years. As of June 30, 1999, the Company recorded an additional net loss of $4.8 million on the sale to Zenith due to the final terms of the Settlement Agreement, as discussed more fully in Note 2 to the consolidated financial statements. The weighted average common and common share equivalents outstanding for the six months ended June 30, 1999 was 37,419,156 as compared to 36,892,420 for the six months ended June 30, 1998. This includes, for each period presented, the vested portion only, as of the end of such period, of shares issued in April 1998 under a Restricted Stock Award Agreement between RISCORP and Phoenix Management Company, Ltd. 15 16 THREE MONTHS ENDED JUNE 30, 1999 AND 1998 The Company's operating results for the three months ended June 30, 1999 and 1998 resulted in a net loss of $3.4 million and $6.2 million, respectively. The components of net investment income for the three months ended June 30, 1999 and 1998 are summarized as follows (in millions):
1999 1998 ----- ------ Interest income on the Zenith sale proceeds $ 0.1 $ 1.6 Interest income on the balance in escrow 0.1 0.1 Other investment income 1.0 0.6 ----- ----- Total $ 1.2 $ 2.3 ===== =====
The components of commissions, underwriting, and administrative expenses for the three months ended June 30, 1999 and 1998 are summarized as follows (in millions):
1999 1998 ----- ----- Management expenses $ 0.3 $ 0.4 Accounting and auditing expenses 0.4 0.3 Transition expenses incurred as a result of the sale to Zenith 0.1 0.3 Legal expenses 1.3 0.3 Recurring operating expenses (rent, telephone, insurance, and similar costs) 0.4 1.0 Other expenses 0.7 0.8 Significant non-recurring expenses discussed below -- 8.3 ----- ------ Total $ 3.2 $ 11.4 ===== ======
Interest expense (income) for the three months ended June 30, 1999 and 1998 was $(0.2) million and $8,255, respectively. The 1999 interest item is net of $0.3 million reimbursed to the Company by RISCORP's majority shareholder for interest previously paid by the Company on the shareholder's behalf. Operating expenses for the three months ended June 30, 1998 included three significant non-recurring expenses that arose due to the sale to Zenith, namely, $3.2 million of severance payments to certain of the Company's former executives and employees, $4.1 million for the issuance of RISCORP stock to Phoenix Management Company, Ltd. in accordance with a Restricted Stock Award Agreement, and $1 million of adjustments to the Proposed Business Balance Sheet. As of June 30, 1999, the Company recorded an additional net loss of $4.8 million on the sale to Zenith due to the terms of the Settlement Agreement, as discussed more fully in Note 2 to the consolidated financial statements. Depreciation and amortization expense was $36,000 and $31,000 for the three months ended June 30, 1999 and 1998, respectively. The Company transferred all assets subject to amortization to Zenith in 16 17 connection with the sale and retained $0.4 million of fixed assets (consisting principally of computer equipment) that is being depreciated over three years. The weighted average common and common share equivalents outstanding for the three months ended June 30, 1999 was 37,491,031 as compared to 36,916,725 for the three months ended June 30, 1998. This includes, for each period presented, the vested portion only, as of the end of such period, of shares issued in April 1998 under a Restricted Stock Award Agreement between RISCORP and Phoenix Management Company, Ltd. THREE MONTHS ENDED MARCH 31, 1998 The discussion that follows relates to the operations and operating philosophy of the Company's activities that existed prior to April 1, 1998 and addresses the operating results for the three months ended March 31, 1998. Prior to 1996, the Company's at-risk operations were focused in Florida. During 1996, the Company acquired RNIC and its 19 state licenses and assumed business from several self insurance funds outside of Florida which allowed the Company to diversify its at-risk operations. The majority of the Company's premiums were written in Florida, a regulated pricing state where premiums for guaranteed cost products were based on state-approved rates. However, prior to the sale to Zenith, the Company also offered policies that were subject to premium reductions on high deductible plans, participating dividend plans, or other loss sensitive plans. Pricing for those plans tended to be more competitively based, and the Company experienced increased competition during 1997 and 1998 in pricing those plans. In June 1997, the Company implemented a strategic plan to consolidate several of its field offices and announced its intention to close all field offices, except Charlotte, North Carolina, and Birmingham, Alabama, by the end of 1997, and to cease writing new business in certain states, including Oklahoma, Virginia, Missouri, Mississippi, Louisiana, and Kansas. The estimated impact of the decision to discontinue writing business in those states was a reduction of $16 million in direct premiums written. The Company attempted to lower claims costs by applying managed care techniques and programs to workers' compensation claims, particularly by providing prompt medical intervention, integrating claims management and customer service, directing care of injured employees through a managed care provider network, and availing itself of potential recoveries under subrogation and other programs. Part of the Company's claims management philosophy was to seek recoveries for claims that were reinsured or that could be subrogated or submitted for reimbursement under various states' recovery programs. As a result, the Company's losses and loss adjustment expenses were offset by estimated recoveries from reinsurers under specific excess of loss and quota share reinsurance agreements, subrogation from third parties, and state "second disability" funds, including the Florida Special Disability Trust Fund ("SDTF"). 17 18 The direct, assumed, ceded, and net earned premiums for the first quarter of 1998 are summarized as follows (in thousands): Direct premiums earned $ 48,416 Assumed premiums earned 79 Premiums ceded to reinsurers (22,676) --------- Net premiums earned $ 25,819 ========
There were no direct, assumed, ceded, or net earned premiums after the April 1, 1998 sale to Zenith. At March 31, 1998, there were 18,145 policies in force. Fee income for the first three months of 1998 was $5.7 million. After April 1, 1998, the Company ceased generating fee income when those activities were transferred to Zenith. Net realized gains during the first quarter of 1998 were $1.5 million, consisting principally of the $1.3 million gain on the sale of an interest in a joint venture. Net investment income for the three months ended March 31, 1998 was $3.3 million, consisting entirely of earnings from the investment portfolio, excluding realized gains and losses. For the three months ended March 31, 1998, the loss ratio was 93 percent, losses and loss adjustment expenses were $24 million, unallocated loss adjustment expenses were $2.6 million, commissions, underwriting, and administrative expenses were $15.5 million, interest expense was $0.5 million, and depreciation and amortization expense was $3.1 million. The weighted average common and common share equivalents outstanding for the three months ended March 31, 1998 was 36,868,114. LIQUIDITY AND CAPITAL RESOURCES The Company historically met its cash requirements and financed its growth through cash flows generated from operations and borrowings. The Company's primary sources of cash flow from operations were premiums and investment income, and its cash requirements consisted principally of payment of losses and loss adjustment expenses, support of its operating activities, including various reinsurance agreements and managed care programs and services, capital surplus needs for the insurance subsidiaries, and other general and administrative expenses. RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith on April 1, 1998. In connection with that sale to Zenith, the Company ceased substantially all of its former business operations and, accordingly, after April 1, 1998, the Company's primary source of cash flows has been generated from investment income. The Company's future cash requirements are expected to be satisfied through investment income and the liquidation of investments. Cash flows from operations for the six months ended June 30, 1999 and 1998 was $2.2 million and ($15.8) million, respectively. The change from 1998 to 1999 was due primarily to the sale to Zenith and the cessation of substantially all the Company's former business operations. 18 19 The Company has projected cash flows through December 1999 and believes it has sufficient liquidity and capital resources to support its operations. As of June 30, 1999 and 1998, RISCORP's insurance subsidiaries had combined statutory capital and surplus of $129.8 million and $151.9 million, respectively. The individual capital and surplus of each of RISCORP's insurance subsidiaries exceeded the minimum statutory capital and surplus required by their respective state of domicile. The National Association of Insurance Commissioners has adopted risk-based capital standards to determine the capital requirements of an insurance carrier based on the risks inherent in its operations. The standards, which have not yet been adopted in Florida, require the computation of a risk-based capital amount that is then compared to a carrier's actual total adjusted capital. The computation involves applying factors to various financial data to address four primary risks: asset risk, insurance underwriting risk, credit risk, and off-balance sheet risk. Those standards provide for regulatory intervention when the percentage of total adjusted capital to authorized control level risk-based capital is below certain levels. At December 31, 1998, RISCORP's insurance subsidiaries' statutory surplus was in excess of any risk-based capital action level requirements. YEAR 2000 The term "Year 2000 issue" is a general term used to describe various problems that may result from the improper processing of date and date-sensitive calculations by computers and other machinery as the Year 2000 is approached and reached. These problems may arise from hardware and software unable to distinguish dates in the "2000's" from dates in the "1900's" and from other sources, such as the use of special codes and conventions that make use of a date field. Effective April 1, 1998, RISCORP ceased substantially all of its former business operations, including its core insurance and managerial services operations. RISCORP's computer systems and proprietary computer software, including the policy issue and management system and the claims systems, were included in the assets sold to Zenith pursuant to the Asset Purchase Agreement. Effective April 1, 1998, the Company entered into a computer outsourcing agreement. Under the terms of that agreement, the vendor is to provide the Company with computer configuration, software installation, network configuration and maintenance, telecommunication coordination, computer maintenance, and other computer-related services. The agreement is for a period of 36 months. Due to the cessation of its operations, RISCORP does not believe it has any material third-party relationships that present significant Year 2000 risks. The Company has requested confirmation from the financial institutions with which it maintains accounts that such institutions are Year 2000 compliant. Based on its limited operations, the Company believes its most reasonable likely worst case scenario Year 2000 problem would be a temporary inability to access its accounts with financial institutions if such institutions' systems are not Year 2000 compliant. Because the Company does not expect that the Year 2000 will have a material adverse effect on the Company, it has determined that it is unnecessary to develop a contingency plan. 19 20 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On or about January 11, 1999, Zenith filed a lawsuit against RISCORP and certain of its subsidiaries in federal court in New York setting forth 14 separate causes of action arising out of the Asset Purchase Agreement and certain ancillary agreements. The complaint sought an unspecified total amount of damages, but the amount of compensatory damages sought was in excess of $30 million, together with an unspecified amount of punitive damages and attorneys' fees. As more fully disclosed in Note 2 of the consolidated financial statements, on July 7, 1999, the Company and Zenith settled those claims and, in connection therewith, this lawsuit has been dismissed with prejudice by Zenith. On August 20, 1997, the Occupational Safety Association of Alabama Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers' compensation fund, filed a breach of contract and fraud action against the Company and others. The Fund entered into a Loss Portfolio Transfer and Assumption Reinsurance Agreement dated August 26, 1996 and effective September 1, 1996 with RNIC. Under the terms of the agreement, RNIC assumed 100 percent of the outstanding loss reserves (including incurred but not reported losses) as of September 1, 1996. Co-defendant Peter D. Norman ("Norman") was a principal and officer of IAA prior to its acquisition by RISCORP in September 1996. The complaint alleges that Norman and IAA breached certain fiduciary duties owed to the Fund in connection with the subject agreement and transfer. The complaint alleges that RISCORP has breached certain provisions of the agreement and owes the Fund monies under the terms of the agreement. The Fund claims, per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund overpaid RNIC by $6 million in the subject transaction. The court has granted RNIC's Motion to Compel Arbitration per the terms and provisions of the agreement. On December 1, 1998, the trial court issued an order prohibiting the American Arbitration Association from administering the arbitration between RNIC and the fund, and RNIC has appealed the trial court's ruling. The Alabama Supreme Court has stayed the current arbitration. Despite the Alabama Supreme Court's stay, the dispute between the Fund and RNIC is expected to be resolved through arbitration. The other defendants, including IAA, have appealed to the Supreme Court of Alabama the trial court's denial of their motions to compel arbitration. RNIC intends to vigorously defend the Fund's claim. On March 13, 1998, RIC and RPC were added as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of Florida, styled Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety Company, a/k/a Aetna Group, et. al. Case No. 97-2240-CIV-MORENO. The plaintiffs purport to bring this action on behalf of themselves and a class consisting of all employers in the State of Florida who purchased or renewed retrospectively rated or adjusted workers' compensation policies in the voluntary market since 1985. The suit was originally filed on July 17, 1997 against approximately 174 workers' compensation insurers as defendants. The complaint was subsequently amended to add the RISCORP defendants. The amended complaint named a total of approximately 161 insurer defendants. The suit claims that the defendant insurance companies violated the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and the Florida Antitrust Act, committed breach of contract and civil conspiracy, and were unjustly enriched by unlawfully adding improper and illegal charges and fees onto retrospectively rated premiums and otherwise charging more for those policies than allowed by law. The suit seeks compensatory and punitive damages, treble damages under the Antitrust and RICO claims, and equitable relief. RIC and RPC moved to dismiss the amended complaint and have also filed certain motions to dismiss the amended complaint filed by various other defendants. 20 21 On August 26, 1998, the district court issued an order dismissing the entire suit against all defendants on one of the grounds identified in the various motions to dismiss filed by the defendants. The district court indicated that all other grounds and motions to dismiss that were pending at that time were mooted by the dismissal. On September 13, 1998, the plaintiffs filed a Notice of Appeal. On February 9, 1999, the district court issued, sua sponte, an Order of Reconsideration in which the court indicated its desire to vacate the dismissal of the RICO claims and pendant state claims based on a recent decision of the United States Supreme Court. On March 17, 1999, plaintiffs-appellants filed an unopposed motion to remand the action to the district court, citing the Order of Reconsideration. On June 9, 1999, the Eleventh Circuit remanded the case to the district court. Management will resume its vigorous defense of the case once district court proceedings recommence. On July 9, 1999, a shareholder class action lawsuit was filed against the Company, two of its executive officers, and two former executive officers in the United States District Court for the Middle District of Florida. The plaintiff in this action purports to represent the class of shareholders who purchased shares of RISCORP's Class A Common Stock between November 19, 1997 and July 20, 1998. The complaint alleges, among other things, that the financial statements included in the periodic reports filed by RISCORP with the Securities and Exchange Commission during the class period contain false and misleading statements of material fact and omissions, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. These allegations principally relate to the difference between the net book value of the Company as reflected on its published financial statements during the class period and the net book value of the assets transferred to Zenith as determined by the neutral auditors and neutral actuaries pursuant to the terms of the Asset Purchase Agreement between the parties. The complaint seeks unspecified compensatory damages. RISCORP believes that these claims are without merit and intends to vigorously defend this suit. The Company, in the ordinary course of business, is party to various lawsuits. Based on information presently available, and in the light of legal and other defenses available to the Company, contingent liabilities arising from such threatened and pending litigation in the ordinary course of business are not presently considered by management to be material. Other than as noted herein, no provision had been made in the accompanying consolidated financial statements for the foregoing matters. Certain of the related legal expenses may be covered under directors and officers' insurance coverage maintained by the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 14, 1999, the Company held its 1999 Annual Meeting of Shareholders. The shareholders voted upon one proposal, to elect Frederick M. Dawson, Seddon Goode, Jr., George E. Greene III and Walter L. Revell to serve as directors of the Company until the next annual meeting of 21 22 shareholders and until their successors are elected and qualified. Pursuant to the Company's Amended and Restated Articles of Incorporation, holders of Class B Common Stock are entitled to 10 votes per share and the holders of Class A Common Stock are entitled to one vote per share on all matters to be voted on by the shareholders of the Company. There were 24,334,443 Class B votes cast "for" each of the nominees for director, consisting of 100 percent of the outstanding shares of Class B Common Stock. Holders of Class A Common Stock voted their shares as set forth below for each of the nominees:
FOR WITHHELD SHARES VOTES SHARES VOTES Frederick M. Dawson Class A 7,964,703 7,964,703 79,398 79,398 Seldon Goode, Jr. Class A 7,960,788 7,960,788 83,313 83,313 George E. Greene III Class A 7,960,788 7,960,788 83,313 83,313 Walter L. Revell Class A 7,960,788 7,960,788 83,313 83,313
ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.1 Form of Director Indemnity Agreement 10.2 Settlement Agreement with Zenith Insurance Company 11 Statement Re Computation of Per Share Net Loss 27 Financial Data Schedules b) Reports on Form 8-K RISCORP filed a report on Form 8-K on May 14, 1999 with respect to the Shareholder Protection Rights Agreement adopted by RISCORP. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RISCORP, INC. ----------------------------------- (Registrant) By: /s/ Walter E. Riehemann ----------------------------------- Walter E. Riehemann Senior Vice President and Secretary Date: By: /s/ Edward W. Buttner ----------------------------------- Edward W. Buttner IV, CPA Principal Accounting Officer Date: August 16, 1999 23 EX-10.1 2 FORM OF DIRECTOR INDEMNITY AGREEMENT 1 EXHIBIT 10.1 FORM OF INDEMNITY AGREEMENT THIS INDEMNITY AGREEMENT (this "Agreement") is entered into as of the ___ day of ________, 1998, between RISCORP, Inc., a Florida corporation (the "Corporation"), and _____________ ("Indemnitee"). WHEREAS, it is essential to the Corporation to retain and attract as directors and officers the most capable persons available; and WHEREAS, Indemnitee is a director [and officer] of the Corporation and from time to time may also serve at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan, or other entity; and WHEREAS, both the Corporation and Indemnitee recognize the risk of litigation and other claims being asserted against directors and officers of business corporations in today's environment; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability and in order to enhance Indemnitee's continued service to the Corporation and such other entities in an effective manner, the Corporation desires to extend to Indemnitee the contractual rights to indemnification and advancement of expenses as provided herein; NOW, THEREFORE, in consideration of the premises and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions for Purposes of this Agreement. The following terms as used in this Agreement shall have the meanings set forth below. (a) "Change in Control" shall have occurred if, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election of each new Director was approved in advance by a vote of at least a majority of the Directors then still in office who were Directors at the beginning of the period. (b) "Corporation" includes any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. 2 (c) "Director" means an individual who is or was a director of the Corporation or an individual who, while a director of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan, or other entity. A Director is considered to be serving an employee benefit plan at the Corporation's request if his duties to the Corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan. "Director" includes, unless the context requires otherwise, the estate or personal representative of a Director. (d) "Disinterested Director" or "Disinterested Officer" means a Director or Officer, respectively, who at the time of a vote or selection referred to in Section 3(c) or 4(b) is not a Party to the Proceeding. (e) "Expenses" includes all reasonable counsel fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding, including any appeals. (f) "Independent Legal Counsel" shall mean a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither at the time of retention is, nor in the five years preceding the date of such retention has been, retained to represent (i) the Corporation or Indemnitee in any matter material to either such party or (ii) any other Party to the Proceeding giving rise to a claim for indemnification under this Agreement. Notwithstanding the foregoing, the term "Independent Legal Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (g) "Liability" includes the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), or reasonable Expenses actually incurred with respect to a Proceeding. (h) "Officer" means an individual who is or was an officer of the Corporation or an individual who, while an officer of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, -2- 3 partnership, limited liability company, joint venture, trust, employee benefit plan, or other entity. An Officer is considered to be serving an employee benefit plan at the Corporation's request if his duties to the Corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan. "Officer" includes, unless the context requires otherwise, the estate or personal representative of an Officer. (i) "Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a Proceeding. (j) "Proceeding" includes any threatened, pending, or completed action, suit, or other type of proceeding, whether civil, criminal, administrative, arbitrative or investigative and whether formal or informal. (k) "Reviewing Party" shall mean the person or persons making the entitlement determination pursuant to Section 4 of this Agreement, and shall not include a court making any determination under this Agreement or otherwise. 2. Basic Indemnification Arrangement. (a) Obligation to Indemnify; Standard of Conduct. Except as provided in Sections 2(e), 2(f), 2(g) or 6 below, the Corporation shall indemnify Indemnitee in the event Indemnitee is made a Party to a Proceeding because he is or was a Director or Officer against Liability incurred in the Proceeding if: (1) Indemnitee conducted himself in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation; and (2) In the case of any criminal Proceeding, Indemnitee had no reasonable cause to believe such conduct was unlawful. (b) Service with Respect to Employee Benefit Plan. Indemnitee's conduct with respect to an employee benefit plan for a purpose he believed in good faith to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of Section 2(a)(1). (c) Reliance as Safe Harbor. For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's conduct was based primarily on the records or books of account of the Corporation or relevant entity, including financial statements, or on information supplied to Indemnitee by the officers of the Corporation or -3- 4 relevant entity in the course of their duties, or on the advice of legal counsel for the Corporation or relevant entity, or on information or records given or reports made to the Corporation or relevant entity by an independent certified public accountant, or by an appraiser or other expert selected with reasonable care by the Corporation or relevant entity. The provisions of this Section 2(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the relevant standard of conduct set forth in this Agreement. (d) Termination of Proceeding Not Determinative. The termination of a Proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption or be determinative that Indemnitee did not meet the relevant standard of conduct set forth in Section 2(a). (e) Limits on Indemnification. Unless, and then only to the extent that, a court of competent jurisdiction acting pursuant to Section 5 of this Agreement or Section 607.0850(9) of the Florida Business Corporation Act, determines that, in view of the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification, the Corporation shall not indemnify Indemnitee under this Agreement: (1) In connection with a Proceeding by or in the right of the Corporation, except for reasonable Expenses (including an excise tax assessed with respect to an employee benefit plan) and amounts paid in settlement not exceeding, in the judgment of the Board, the estimated expense of litigating the Proceeding to conclusion, actually and reasonably incurred in connection with the defense or settlement of the Proceeding, including any appeal thereof; or (2) In connection with a Proceeding by or in the right of the Corporation with respect to any claim, issue or matter as to which Indemnitee shall have been adjudged liable to the Corporation. (f) Proceeding Brought by Indemnitee. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses hereunder with respect to any Proceeding or claim brought or made by him against the Corporation, other than a Proceeding or claim seeking or defending Indemnitee's right to indemnification or advancement of Expenses pursuant to Section 5 hereof or otherwise. (g) Settlements. Notwithstanding any other provision of this Agreement, the Corporation shall not be liable for any amount paid by Indemnitee in -4- 5 settlement of any Proceeding that is not defended by the Corporation, unless the Corporation has consented to such settlement, which consent shall not be unreasonably withheld. The Corporation shall not be required to obtain the consent of Indemnitee to the settlement of any Proceeding which the Corporation has undertaken to defend if the Corporation assumes full and sole responsibility for such settlement and the settlement grants Indemnitee a complete and unqualified release in respect of the potential Liability. (h) Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement or otherwise to indemnification by the Corporation for some portion of Liability incurred by him, but not the total amount thereof, the Corporation shall indemnify Indemnitee for the portion of such Liability to which he is entitled. (i) Mandatory Indemnification. The Corporation shall indemnify Indemnitee to the extent that he has been successful, on the merits or otherwise, in the defense of any Proceeding to which he was a Party, or in defense of any claim, issue or matter therein, because he is or was a Director or Officer, against reasonable Expenses incurred by him in connection with the Proceeding. 3. Advances for Expenses. (a) Obligations and Requirements. The Corporation shall, before final disposition of a Proceeding, advance funds to pay for or reimburse the reasonable Expenses incurred by Indemnitee as a Party to such Proceeding if Indemnitee delivers to the Corporation Indemnitee's written undertaking (meeting the qualifications set forth below in Section 3(b)) to repay any funds advanced if it is ultimately determined that Indemnitee is not entitled to indemnification under this Agreement, the Florida Business Corporation Act or otherwise. (b) Undertaking. The undertaking required by Section 3(a) above must be an unlimited general obligation of Indemnitee but need not be secured and shall be accepted without reference to Indemnitee's financial ability to make repayment. If Indemnitee seeks to enforce his rights to indemnification in a court pursuant to Section 5, such undertaking to repay shall not be applicable or enforceable unless and until there is a final court determination that he is not entitled to indemnification, as to which all rights of appeal have been exhausted or have expired. (c) Evaluation of Reasonableness of Expenses. Evaluation as to reasonableness of Expenses of Indemnitee in the specific case shall be made in the same manner as the determination that indemnification is permissible, as described in Section 4(b) below, except that if the determination is made -5- 6 by Independent Legal Counsel, evaluation as to reasonableness of Expenses shall be made by those entitled under Section 4(b)(3) to select Independent Legal Counsel. Notwithstanding the foregoing sentence, any Expenses claimed by Indemnitee shall be deemed reasonable if the Reviewing Party fails to make the reasonableness evaluation within fifteen (15) days following the later of (i) the Corporation's receipt of the undertaking required by Section 3(a), or (ii) the Corporation's receipt of invoices for specific Expenses to be reimbursed or advanced. (d) Timing of Payments. Subject to Section 3(c) above, reimbursement or advances for Expenses under this Section 3 shall be made not later than thirty (30) days after the later of (i) the Corporation's receipt of the undertaking required by Section 3(a), or (ii) the Corporation's receipt of invoices for specific Expenses to be reimbursed or advanced. 4. Authorization of and Determination of Entitlement to Indemnification. (a) Entitlement Determination. The Corporation and Indemnitee hereby acknowledge that indemnification of Indemnitee under Section 2 of this Agreement has been pre-authorized by the Corporation as permitted by the Florida Business Corporation Act. Nevertheless, the Corporation shall not indemnify Indemnitee under Section 2 unless a separate determination has been made in the specific case that indemnification of Indemnitee is permissible in the circumstances because he has met the relevant standard of conduct set forth in Section 2(a); provided, however, that (i) no such entitlement decision need be made prior to the advancement of Expenses, and (ii) regardless of the result or absence of any such determination, the Corporation shall make any indemnification mandated by Section 2(i) above. (b) Reviewing Party. The determination referred to in Section 4(a) shall be made, at the election of the Board of Directors, by any of the following Reviewing Parties (unless a Change in Control shall have occurred after Indemnitee first began serving as a Director or Officer, in which case Indemnitee shall be entitled to designate that the determination shall be made by Independent Legal Counsel selected in the manner set forth in Section 4(c) below): (1) By the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors; or (2) By a majority vote of a committee duly designated by the Board of Directors (in which designation directors who do not qualify as Disinterested Directors may participate) consisting solely of two or more Disinterested Directors; or -6- 7 (3) By Independent Legal Counsel: (A) Selected in the manner prescribed in paragraph (1) or (2) of this Section 4(b); or (B) If a quorum of Directors cannot be obtained for purposes of paragraph (1) and the committee cannot be designated under paragraph (2), selected by a majority vote of the full Board of Directors (in which selection directors who do not qualify as Disinterested Directors may participate); or (4) By the shareholders of the Corporation, by a majority vote of a quorum consisting of shareholders who were not Parties to such Proceeding or, if no such quorum is obtainable, by a majority vote of shareholders who were not Parties to such Proceeding. (c) Selection of Counsel after Change in Control. If a Change in Control shall have occurred, Independent Legal Counsel shall be selected by Indemnitee (unless Indemnitee requests that such selection be made in the manner described in Section 4(b)(3)), and Indemnitee shall give written notice to the Corporation advising it of the identity of the Independent Legal Counsel so selected. In either event, Indemnitee or the Corporation, as the case may be, may, within ten (10) days after such written notice of selection has been given, deliver to the Corporation or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that such counsel so selected does not meet the requirements of "Independent Legal Counsel" as defined in Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the counsel so selected may not serve as Independent Legal Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification, no Independent Legal Counsel shall have been selected and not objected to, either the Corporation or Indemnitee may petition the court conducting the Proceeding, or another court of competent jurisdiction, for resolution of any objection which shall have been made by the Corporation or Indemnitee to the other's selection of Independent Legal Counsel and/or for the appointment as Independent Legal Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Legal Counsel under Section 4(b). -7- 8 (d) Cooperation by Indemnitee. Indemnitee shall cooperate with the Reviewing Party with respect to its determination of Indemnitee's entitlement to indemnification, including providing to the Reviewing Party upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Expenses incurred by Indemnitee in so cooperating with the Reviewing Party shall be borne by the Corporation (irrespective of the determination as to Indemnitee's entitlement to indemnification). (e) Other. (i) The Reviewing Party, however chosen, shall make the requested determination as promptly as reasonably practicable after a request for indemnification is presented. (ii) Any determination by Independent Legal Counsel under this Section 4 shall be delivered in the form of a written option to the Board of Directors with a copy to Indemnitee. (iii) The Corporation shall pay any and all reasonable fees and expenses of Independent Legal Counsel incurred by such counsel in connection with acting pursuant to Section 4(b), and the Corporation shall pay all reasonable fees and expenses incident to the procedures of Section 4(d), regardless of the manner in which such Independent Legal Counsel was selected or appointed. (iv) Upon the due commencement of any action to seek court-ordered indemnification pursuant to Section 5 of this Agreement, Independent Legal Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). 5. Court-Ordered Indemnification and Advances for Expenses. (a) Procedure. If Indemnitee is a Party to a Proceeding, he may apply for indemnification or for advances for Expenses to the court conducting the Proceeding or to another court of competent jurisdiction. For purposes of this Agreement, the Corporation hereby consents to personal jurisdiction and venue in any court in which is pending a Proceeding to which Indemnitee is a Party. Regardless of any determination by the Reviewing Party that Indemnitee is not entitled to indemnification or to advancement of Expenses or as to the reasonableness of Expenses, and regardless of any failure by the Reviewing Party to make a determination as to such entitlement or the reasonableness of Expenses, such court's review shall be -8- 9 a de novo review. After receipt of an application and after giving any notice it considers necessary, the court may: (1) Order indemnification or the advance for Expenses if it determines that Indemnitee is entitled to indemnification or to advance for Expenses under this Agreement, the Florida Business Corporation Act or otherwise; or (2) Order indemnification or the advance for Expenses if it determines that, in view of all the relevant circumstances, it is fair and reasonable to indemnify Indemnitee, or to advance Expenses to Indemnitee, regardless of whether Indemnitee has the relevant standard of conduct, complied with the requirements for advancement of Expenses, or been adjudged liable in a Proceeding referred to in Section 2(e) above (in which case any court-ordered indemnification need not be limited to Expenses incurred by Indemnitee, but may include penalties, fines, amounts paid in settlement, judgments and any other amounts ordered by the court to be indemnified or advanced). (b) Payment of Expenses to Seek Court-Ordered Indemnification. If the court determines that Indemnitee is entitled to indemnification or to advance for Expenses, the Corporation shall pay Indemnitee's reasonable Expenses to obtain such court-ordered indemnification or advance for Expenses. 6. Limitations on Indemnification. Regardless of whether Indemnitee has met the relevant standard of conduct set forth in Section 2(a), nothing in this Agreement shall require or permit indemnification of Indemnitee for any Liability or Expenses incurred in a Proceeding in which a judgment or other final adjudication establishes that Indemnitee's actions, or omissions to act, were material to the cause of action so adjudicated and constitute: (a) a violation of criminal law, unless Indemnitee had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; (b) a transaction from which Indemnitee derived an improper personal benefit; (c) in the case of a Director, a circumstance under which the liability provisions of Section 607.0834 of the Florida Business Corporation Act are applicable; or (d) willful misconduct or a conscious disregard for the best interests of the Corporation in a Proceeding by or in the right of the Corporation to -9- 10 procure a judgment in its favor or in a Proceeding by or in the right of a shareholder of the Corporation. 7. Vested Rights; Specific Performance. No amendment to the Articles of Incorporation or Bylaws of the Corporation or any other corporate action shall in any way limit Indemnitee's rights under this Agreement. In any Proceeding brought by or on behalf of Indemnitee to specifically enforce the provisions of this Agreement, the Corporation hereby waives the claim or defense therein that the plaintiff or claimant has an adequate remedy at law, and the Corporation shall not urge in any such Proceeding the claim or defense that such remedy at law exists. The provisions of this Section 7, however, shall not prevent Indemnitee from seeking a remedy at law in connection with any breach of this Agreement. 8. Liability Insurance. To the extent the Corporation maintains an insurance policy or policies providing directors' or officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage provided under such policy or policies in effect for any other Director or Officer of the Corporation, as the case may be. 9. Witness Fees. Nothing in this Agreement shall limit the Corporation's power to pay or reimburse Expenses incurred by Indemnitee in connection with his appearance as a witness in a Proceeding at a time when he has not been made a named defendant or respondent in the Proceeding. 10. Security for Indemnification Obligations. The Corporation may at any time and in any manner, at the discretion of the Board of Directors, secure the Corporation's obligations to indemnify or advance Expenses to Indemnitee pursuant to this Agreement. 11. Non-exclusivity, No Duplication of Payments. The rights of Indemnitee hereunder shall be in addition to any other rights with respect to indemnification, advancement of Expenses or otherwise that Indemnitee may have under the Corporation's Articles of Incorporation or Bylaws, the Florida Business Corporation Act or otherwise; provided, however, that the Corporation shall not be liable under this Agreement to make any payment to Indemnitee hereunder to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Articles of Incorporation or Bylaws, or otherwise) of the amounts otherwise payable hereunder. The Corporation's obligation to indemnify or advance expenses hereunder to Indemnitee who is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of any other entity shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other entity. 12. Amendments. To the extent that the provisions of this Agreement are held to be inconsistent with the provisions of the Florida Business Corporation Act (including Section 607.0850(7) thereof), such provisions of such statute shall govern. To the extent that the Florida Business Corporation Act is hereafter amended to permit a Florida -10- 11 business corporation, without the need for shareholder approval, to provide to its directors greater rights to indemnification or advancement of Expenses than those specifically set forth hereinabove, this Agreement shall be deemed amended to require such greater indemnification or more liberal advancement of Expenses to Indemnitee, in each case consistent with the Florida Business Corporation Act as so amended from time to time. Otherwise, no supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the Corporation and Indemnitee. 13. Subrogation. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation effectively to bring suit to enforce such rights. 14. Waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 15. Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors or assigns (including any direct or indirect successor or assign by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation), spouses, heirs, and personal and legal representatives. 16. Applicability of Agreement. This Agreement shall apply retroactively with respect to acts or omissions of Indemnitee occurring since the date that Indemnitee first became a Director or Officer, and this Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a Director or Officer, but only in respect of acts or omissions occurring prior to the termination of Indemnitee's service as a Director or Officer. 17. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal, or unenforceable for any reason whatsoever: (a) the validity, legality, and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that is not itself invalid, illegal, or unenforceable) shall not in any way be affected or impaired thereby; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that is not itself invalid, illegal, or unenforceable) shall be construed so as to give effect to the intent manifested thereby. -11- 12 18. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. 19. Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 20. Inducement. The Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve or continue to serve as a Director and/or Officer, and the Corporation acknowledges that Indemnitee is relying upon this Agreement in serving as a director, officer, employee or agent of the Corporation or, at the request of the Corporation, as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan, or other entity. 21. Notice by the Indemnitee. Indemnitee agrees promptly to notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information, or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee so to notify the Corporation shall not relieve the Corporation of any obligation which it may have to Indemnitee under this Agreement or otherwise. 22. Notices. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed if to the Corporation, to the principal office address of the Corporation, or if to Indemnitee, to the address of Indemnitee last on file with the Corporation, or to such other address as may have been furnished to Indemnitee by the Corporation or to the Corporation by Indemnitee, as the case may be. (signatures on following page) -12- 13 Executed as of the date first above written. RISCORP, INC.: By: -------------------------------- ------------------------ INDEMNITEE: ----------------------------------- -13- EX-10.2 3 SETTLEMENT AGREEMENT WITH ZENITH INSURANCE COMPANY 1 EXHIBIT 10.2 SETTLEMENT AGREEMENT This SETTLEMENT AGREEMENT, dated as of July 7, 1999, is entered into by and among Zenith Insurance Company, a California Corporation ("Zenith"), RISCORP, Inc., a Florida corporation ("RISCORP, Inc."), RISCORP Management Services, Inc., a Florida corporation ("RMS"), 1390 Main Street Services, Inc., a Florida corporation ("1390 Main Street"), RISCORP of Illinois, Inc., an Illinois corporation ("RI"), Independent Association Administrators Incorporated, an Alabama corporation ("IAA"), RISCORP Insurance Services, Inc., a Florida corporation ("RIS"), RISCORP Managed Care Services, Inc. ("RMCS"), a Florida corporation, CompSource, Inc., a North Carolina corporation ("CompSource"), RISCORP Real Estate Holdings, Inc., a Florida corporation ("RRE"), RISCORP Acquisition, Inc., a Florida corporation ("RA"), RISCORP West, Inc., an Oklahoma corporation ("RW"), RISCORP of Florida, Inc., a Florida corporation ("RF"), RISCORP Insurance Company, a Florida corporation ("RIC"), RISCORP Property & Casualty Insurance Company, a Florida corporation ("RP&C"), RISCORP National Insurance Company, a Missouri corporation ("RNIC"), RISCORP Services, Inc., a Florida corporation ("RS"), RISCORP Staffing Solutions Holding Company, a Florida corporation ("RSS Holding"), RISCORP Staffing Solutions, Inc. I, a Florida corporation ("RSSI") and RISCORP Staffing Solutions, Inc. II, a Florida corporation ("RSSII"). RISCORP, Inc., RMS, 1390 Main Street, RI, IAA, RIS, RMCS, CompSource, RRE, RA, RW, RF, RIC, RP&C, RNIC, RS, RSS Holding, RSSI and RSSII are from time to time hereinafter referred to collectively as "RISCORP" or the "RISCORP Companies." 2 WITNESSETH: WHEREAS: A. Zenith and RISCORP are parties to (a) an Asset Purchase Agreement, dated as of June 17, 1997, as subsequently amended on June 26, 1997, July 11, 1997, and March 30, 1998 (the "Asset Purchase Agreement"); (b) an Escrow Agreement with First Union National Bank as Escrow Agent dated April 1, 1998 (the "Escrow Agreement"); (c) a letter agreement dated April 1, 1998 (the "Letter Agreement"); and (d) those documents and instruments listed on Exhibit A hereto (together with the Escrow Agreement and the Letter Agreement, the "Transaction Documents"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Asset Purchase Agreement; B. Pursuant to the Asset Purchase Agreement, on April 1, 1998, Zenith acquired substantially all of RISCORP's assets and assumed certain of RISCORP's liabilities (the "Asset Sale") for a purchase price equal to the amount by which the book value of the Transferred Assets exceeded the book value of the Transferred Liabilities as set forth on a Final Business Balance Sheet to be determined in accordance with the procedures set forth in the Asset Purchase Agreement; C. On April 1, 1998, in connection with the closing of the Asset Sale, Zenith paid RISCORP $35 million to be applied toward the final Purchase Price payable pursuant to the Asset Purchase Agreement, $10 million of which was deposited with the Escrow Agent to be distributed pursuant to the terms of the Asset Purchase Agreement and the Escrow Agreement; 3 D. The Letter Agreement contained certain provisions pursuant to which certain of RISCORP's Assets would be deemed not to be Transferred Assets for purposes of determining the Final Business Balance Sheet and the Purchase Price payable pursuant to the Asset Purchase Agreement. E. On October 16, 1998, RISCORP commenced an action against Zenith in the United States District Court for the Middle District of Florida, Tampa Division, captioned RISCORP, Inc., et al. v. Zenith Insurance Co., Case No. 98-2122-CIV-T-25E (the "Florida Action"), in which RISCORP alleged various claims against Zenith, including claims relating to Zenith's alleged breaches of the Asset Purchase Agreement and the Letter Agreement; F. On January 8, 1999, Zenith commenced an action in the United States District Court for the Southern District of New York, captioned Zenith Insurance Co. v. RISCORP, Inc., et al., Case No. 99 Civ. 0171 (WHP) (the "New York Action"), in which Zenith asserted various claims against RISCORP, including claims relating to RISCORP's alleged breaches of the Asset Purchase Agreement; G. On March 19, 1999, Arthur Andersen LLP ("Arthur Andersen"), acting as Neutral Auditor and Neutral Actuary pursuant to the Asset Purchase Agreement, issued (i) a report containing its determinations of certain issues that Arthur Andersen found to be in dispute between the parties regarding the manner in which certain items should be treated in the preparation of the Final Business Balance Sheet; and (ii) its determination of the Final Business Balance Sheet; H. As a result of the issuance of the Final Business Balance Sheet, (i) on or about March 26, 1999, Zenith wire transferred to RISCORP, Inc. the sum of $50,853,182, and wire 4 transferred to the Escrow Agent the sum of $2,835,723; and (ii) on April 14, 1999, Zenith wire transferred to RISCORP, Inc. the sum of $619,173.32; I. The parties agree that in determining the final Purchase Price to be paid by Zenith in connection with the Asset Sale certain adjustments to the Final Business Balance Sheet are required based on (i) certain provisions of the Letter Agreement; (ii) the value of certain assets identified on Exhibit F-1 included among the Transferred Assets on the Final Business Balance Sheet that in fact were not transferred to Zenith, and (iii) the value of a treasury note acquired by Zenith that was not included among the Transferred Assets on the Final Business Balance Sheet. In addition, certain adjustments to the Final Balance Sheet may be required based on certain errors that were allegedly made by Arthur Anderson in determining the Final Business Balance Sheet; and J. Zenith and RISCORP desire to compromise and settle the claims and all pending and potential litigation between them (except as otherwise expressly provided herein), and they have therefore agreed to enter into this Settlement Agreement to settle and resolve, on the terms specified herein, all such claims and disputes. NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, it is hereby agreed as follows: 1. The Final Business Balance Sheet. Zenith and RISCORP agree not to commence or prosecute any action or proceeding, or to take any other action, that seeks to confirm, modify, vacate, challenge or otherwise review the Final Business Balance Sheet or the Revised Final Business Balance Sheet (as defined herein) except as provided below in this paragraph 1. 5 (a) The parties agree that RISCORP may request that Arthur Andersen review and/or correct any alleged errors made in its determination of the Final Business Balance Sheet with respect to its failure to make appropriate adjustment for certain reinsurance treaties in effect during accident years 1991 through 1993, inclusive, including, without limitation, whether issues relating to Arthur Andersen's adjustment to reinsurance recoverable were in dispute between the parties (the "RISCORP Reinsurance Claims"). (b) Within five business days after the date of this Settlement Agreement, Zenith may make a submission to Arthur Andersen regarding the RISCORP Reinsurance Claims in respect of (i) correspondence from Buttner Hammock & Company to Arthur Andersen dated May 17, 1999; (ii) correspondence from Alston & Bird LLP to Arthur Andersen dated May 24, 1999; and (iii) correspondence from Alston & Bird LLP to Arthur Andersen dated June 4, 1999. Zenith's submission to Arthur Andersen shall be to the effect that the RISCORP Reinsurance Claims were not "in dispute" under Section 2.02(b) of the Asset Purchase Agreement and that Arthur Andersen did not make an error with respect to this issue in the Final Business Balance Sheet. On or before July 27, 1999, RISCORP may make an additional submission to Arthur Andersen addressing the RISCORP Reinsurance Claims or any issues raised in Zenith's submission to Arthur Andersen pursuant to this paragraph 1(b). (c) Zenith and RISCORP agree that, in reviewing the RISCORP Reinsurance Claims, Arthur Andersen may: (i) determine whether such claims were "in dispute" under Section 2.02(b) of the Asset Purchase Agreement; (ii) resolve such claims on the merits by applying the standards for review by the Neutral Auditors and Neutral Actuary under Section 2.02(b) of the Asset 6 Purchase Agreement; and (iii) if appropriate, issue a revised or corrected Final Business Balance Sheet reflecting any resolution of such claims (the "Revised Final Business Balance Sheet"). (d) If Arthur Andersen issues the Revised Final Business Balance Sheet, then (i) RISCORP shall pay to Zenith the amount of the net reduction, if any, in the Net Assets Transferred reflected on the Revised Final Business Balance Sheet; or (ii) Zenith shall pay to RISCORP on behalf of the Sellers the amount of the net increase, if any, in the Net Assets Transferred reflected on the Revised Final Business Balance Sheet. RISCORP or Zenith, as the case may be, shall pay interest on any amounts due under this paragraph 1 at the rate of 6.25% per annum from (and including) April 1, 1998 to (but excluding) the date of payment. Any such payment shall be made within five business days after receipt of the Revised Final Business Balance Sheet by wire transfer of immediately available funds to an account designated by the party entitled to receive such payment. (e) Notwithstanding anything to the contrary in this Settlement Agreement, including, without limitation, the foregoing provisions of this paragraph 1, neither Zenith nor RISCORP has waived any right to commence legal action in any court of competent jurisdiction: (i) to seek correction of alleged errors with respect to the RISCORP Reinsurance Claims that were not corrected by Arthur Andersen in a Revised Final Business Balance Sheet pursuant to this paragraph 1; or (ii) to correct, modify, vacate or set aside any revision of the Final Business Balance Sheet made in the Revised Final Business Balance Sheet. 2. Disbursements from Escrow. (a) Zenith and RlSCORP agree to cause all funds currently on deposit with the Escrow Agent to be distributed as soon as reasonably practicable, but in no event later than 20 business days after execution of this Settlement Agreement, as follows: 7 (i) Six million dollars ($6,000,000) to Zenith; and (ii) the balance of all principal and interest to RISCORP, Inc. (b) Following the foregoing disbursement of funds, the Escrow Agreement shall be terminated and the parties shall execute such documents or instruments as may be reasonably necessary to evidence such termination. (c) RISCORP acknowledges that Zenith intends to treat the amounts received under this paragraph 2 as reimbursement for unexpected expenses incurred by Zenith in connection with carrying on the Business acquired from RISCORP. 3. Claims for Refunds. The parties agree that RISCORP's claims for refunds made to the Florida Department of Labor and Employment Security, Division of Workers' Compensation Administrative and Field Support Unit will be divided between them as follows: (a) RISCORP, Inc. shall be the sole owner of and is entitled to any refund granted in connection with its request for a refund for Five Million Two Hundred Ninety Two Thousand, One Hundred Eighty-Three Dollars ($5,292,183) related to deductions for commissions against gross premiums (the "Commission Refund"); and (b) Of the approximate balance of Twenty-Seven Million Dollars ($27,000,000) of potential additional refunds related to deduction for premiums ceded to others (the "Reinsurance Refunds"), RISCORP, Inc. shall receive the first Ten Million Dollars ($10,000,000) of any Reinsurance Refunds recovered, and should the Reinsurance Refunds recovery exceed Ten Million Dollars ($10,000,000), RISCORP and Zenith will share equally in any excess proceeds. 8 (c) The fees and expenses incurred in connection with RISCORP's efforts to seek recovery of the Reinsurance Refunds shall be shared by Zenith and RISCORP in the same ratio as the amounts which each ultimately recovers. All such fees and expenses shall initially be borne by RISCORP, which shall be entitled to reimbursement for Zenith's share of such fees and expenses only if Zenith shares in any Reinsurance Refunds. RISCORP shall have the right to direct and control the prosecution of any attempts to recover the Reinsurance Refunds. RISCORP shall not compromise or settle such claims without the prior written approval of Zenith, which approval shall not be unreasonably withheld. At RISCORP's request, Zenith shall jointly prosecute the claims to recovery of the Reinsurance Refunds, but RISCORP shall retain the right to direct and control the prosecution in such event. RISCORP may cease prosecuting such claims at any time in its sole discretion, provided, however, that RISCORP first offers in writing to assign such claims to Zenith without consideration, and Zenith does not accept such assignment within ten business days of receipt of such offer. If Zenith does accept such Assignment, RISCORP shall be dismissed as a party, and Zenith, as assignee of RISCORP, shall be substituted. Zenith shall thereafter bear all fees and expenses incurred in connection with its prosecution of such claim. 4. Release by Zenith. Effective with the execution of this Settlement Agreement, Zenith and its affiliates, subsidiaries, parents, shareholders, agents, employees, attorneys, accountants, representatives, directors, and officers (the "Zenith Releasors") hereby release, acquit and forever discharge RISCORP and its affiliates, subsidiaries, parents, shareholders, agents, employees, attorneys, accountants, representatives, directors and officers (the "RISCORP Releasees") from any and all claims, causes of action, debts, accounts, contracts, torts, demands, judgments, whether at law 9 or in equity, accrued or contingent, known or unknown, discovered or undiscovered, in the past or in the future, which the Zenith Releasors had, have, or may in the future have, of any form or nature, from the beginning of time through and including the date of this Settlement Agreement (collectively, "Zenith Claims"), except for any Zenith Claims that arise from, relate to, or are based on (i) any of the obligations contained within this Settlement Agreement; (ii) the surviving provisions of the Asset Purchase Agreement; and (iii) the surviving provisions of the Transaction Documents. 5. Release by RISCORP. Effective with the execution of this Settlement Agreement, the RISCORP Releasees hereby release, acquit and forever discharge the Zenith Releasors from any and all claims, causes of action, debts, accounts, contracts, torts, demands, judgments, whether at law or in equity, accrued or contingent, known or unknown, discovered or undiscovered, in the past or in the future, which the RISCORP Releasees had, have, or may in the future have, of any form or nature, from the beginning of time through and including the date of this Settlement Agreement (collectively, "RISCORP Claims"), except for any RISCORP Claims that arise from, relate to, or are based on (i) any of the obligations contained within this Settlement Agreement including, without limitation, any claims arising out of or related to any alleged errors made by Arthur Andersen as provided in paragraph 1 hereof; (ii) the surviving provisions of the Asset Purchase Agreement; (iii) the surviving provisions of the Transaction Documents; and (iv) RISCORP's right to seek indemnification from Zenith with respect to Bristol Hotel Management Corporation, et al. v. Aetna Casualty & Surety Company, a/k/a Aetna Group, et al. (the "Bristol Hotel Action"). 6. Covenant Not to Sue or Arbitrate by Zenith. Except as contemplated by paragraphs 1 and 14 hereof, effective with the execution of this Settlement Agreement Zenith and its affiliates, 10 subsidiaries, parents, shareholders, agents, employees, attorneys, accountants, representatives, directors, and officers (the "Zenith Convenantors") hereby covenant not to sue and covenant not to arbitrate against RISCORP and its affiliates, subsidiaries, parents, shareholders, agents, employees, attorneys, accountants, representatives, directors and officers (the "RISCORP Covenantees") as to any and all claims, causes of action, debts, accounts, contracts, torts, demands, and judgments, whether at law or in equity, which the Zenith Covenantors had, have, or may have in the future, of any form or nature, based in whole or in substantial part on facts actually known to the officers or former officers of Zenith identified on Exhibit B attached hereto, or which should have been known to such officers of Zenith after reasonable inquiry, from the beginning of time up to the date of this Settlement Agreement. 7. Covenant Not to Sue or Arbitrate by RISCORP. Except as contemplated by paragraphs 1 and 14 hereof and as to the Bristol Hotel Action, effective with the execution of this Settlement Agreement the RISCORP Covenantees hereby covenant not to sue and covenant not to arbitrate against the Zenith Covenantors as to any and all claims, causes of action, debts, accounts, contracts, torts, demands, and judgments, whether at law or in equity, which the RISCORP Covenantees had, have, or may have in the future, of any form or nature, based in whole or in substantial part on facts actually known to the officers of RISCORP, or which should have been known to the officers of RISCORP after reasonable inquiry, from the beginning of time up to the date of this Settlement Agreement. 8. Dismissal of Florida Action. Within five business days of the execution of this Settlement Agreement, Zenith and RISCORP agree to submit a Stipulation in the form annexed 11 hereto as Exhibit C to the United States District Court for the Middle District of Florida, Tampa Division, for filing in the action captioned RISCORP. Inc., et al. v. Zenith Insurance Co., Case No. 98-2122-CIV-T-25E. 9. Dismissal of New York Action. Within five business days of the execution of this Settlement Agreement, Zenith and RISCORP agree to submit a Stipulation in the form annexed hereto as Exhibit D to the United States District Court for the Southern District of New York for filing in the action captioned Zenith Insurance Co. v. RISCORP, Inc., et al., Case No. 99 Civ. 0171 (WHP). 10. Release of Securities. Zenith agrees promptly to execute upon RISCORP's request letters in substantially the form attached as Exhibit E evidencing Zenith's acknowledgment that it has no right, title or interest in or to certain funds on deposit with various state regulatory agencies and its consent to the release of such funds or securities to RISCORP. Zenith further covenants and agrees that it shall execute any additional documents or instruments as may be reasonably necessary to assist RISCORP in the recovery of such funds. The funds or securities currently on deposit with various state agencies to which Zenith acknowledges RISCORP's full entitlement are set forth on Exhibit F. 11. Assessments. Responsibility for satisfaction of assessments, including those assessments at issue in the Florida Action and the New York Action and those arising in the future, from state insurance departments and other state and federal regulatory agencies will be borne by the parties as follows: (a) The parties have set forth on Exhibit G those assessments currently known to the parties and have identified whether or the extent to which each such assessment is the 12 responsibility of RISCORP or Zenith. Unless otherwise specifically provided on Exhibit G, the parties will each satisfy their respective obligations as reflected on Exhibit G within 15 days of the execution of this Settlement Agreement and shall provide to the other party evidence of such satisfaction. (b) Any other assessment or Tax attributable to the Business for a period prior to April 1, 1998 will be the responsibility of RISCORP. (c) Any other assessment or Tax attributable to the Business for a period on or after April 1, 1998 will be the responsibility of Zenith, regardless of whether the premiums or other amounts used to calculate such assessment or Tax relate to a period before or after April 1, 1998. (d) Any other assessment or Tax attributable to the Business for a period both prior to and following April 1, 1998 shall be prorated between RISCORP and Zenith, respectively, by following the methodology described in paragraphs (b) and (c) above based on the ratio of (i) the number of days in the period prior to April 1, 1998, to (ii) the number of days in the period on and after April 1, 1998 in the period being assessed. 12. Amendment to Asset Purchase Agreement. The parties hereto agree that the Asset Purchase Agreement is hereby amended as follows: (a) The following Sections or Articles of the Asset Purchase Agreement shall have no further force or effect: Sections 3.03, 3.04, 3.05, 3.06, 3.07, 3.09, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 3.15 A, 3.18, 3.19, 3.20, 3.21, 3.22, 4.03, 4.04; Article V; Article VI; Article VII; and Article X. (b) The following Sections of the Asset Purchase Agreement are amended as set forth below: 13 (i) Section 8.01. Section 8.01 of the Asset Purchase Agreement is amended to provide as follows: Section 8.01: Survival of Representations and Warranties. All representations and warranties contained in Sections 3.01, 3.02, 3.08, 3.16, 3.17, 4.01, and 4.02 of the Asset Purchase Agreement shall survive the Closing and shall terminate and expire at the close of business on April 1, 2000. (ii) Section 11.06. Section 11.06 of the Asset Purchase Agreement is hereby amended by deleting subpart (b) thereof in its entirety. (c) To the extent that any provisions of this Settlement Agreement may conflict with any surviving provisions of the Asset Purchase Agreement or the Transaction Documents, the provisions of this Settlement Agreement shall control. 13. Pending Litigation. Attached as Exhibit H is a schedule of pending litigation, along with a designation as to which party shall be responsible for the defense of, and satisfaction of any judgment or settlement arising from, each suit. 14. Voided Checks/Stop Payment Orders. (a) Zenith and RISCORP agree that Zenith shall have 60 days from the date of this Settlement Agreement to submit to RISCORP the following: (i) a Schedule of Unpaid Checks listing checks that were issued by any RISCORP company prior to April 1, 1998 that either (A) were voided by Zenith, or (B) are subject to stop payment orders issued by Zenith; and (ii) copies of canceled checks, reasonable proof of reissuance or other documentation demonstrating Zenith's right to reimbursement for checks listed on the Schedule of Unpaid Checks 14 (collectively, the "Check Documentation"); provided, however, Zenith's right to reimbursement shall be limited to the lesser of (A) the amount actually paid by Zenith in connection with the reissuance of a check listed on the Schedule of Unpaid Checks, or (B) the amount RISCORP carried on its outstanding check list for such check as of April 1, 1998. (b) Within ten business days after RISCORP's receipt of the Check Documentation, RISCORP shall (i) provide Zenith a written schedule listing its objections, if any, to reimbursing Zenith for checks listed on the Schedule of Unpaid Checks, and (ii) reimburse Zenith, by wire transfer to an account designated by Zenith, in an aggregate amount equal to the amount of all checks as to which RISCORP is not objecting to reimbursement. (c) Except for checks for which Check Documentation has been provided to RISCORP within 60 days of the date of this Settlement Agreement, Zenith agrees that it has no right to assert any claim against RISCORP or any RISCORP company for reimbursement of any check that was issued by any RISCORP company prior to April 1, 1998 whether or not such check was included on the Schedule of Unpaid Checks. (d) Any disputes between the parties concerning Zenith's right to reimbursement for unpaid checks that are the subject of this paragraph 14 shall be resolved by arbitration pursuant to paragraph 15 hereof. 15. Submission of Matters to Arbitration. (a) The parties expressly agree that, except as otherwise set forth in paragraph 1 hereof or as to any claim or controversy that is subject to the agreement not to sue or arbitrate as provided in paragraphs 6 or 7 hereof, any claim or controversy arising out of or in connection with (i) the surviving provisions of the Asset Purchase Agreement, (ii) 15 the surviving provisions of the Transaction Documents, (iii) the enforcement or interpretation of this Settlement Agreement, or (iv) any of the obligations contained within this Settlement Agreement, shall be resolved by binding arbitration before the Honorable Clinton A. Curtis, unless he is unavailable or unwilling to serve. In the event the Honorable Clinton A. Curtis is unavailable or unwilling to serve, an arbitrator shall be selected in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Any arbitration pursuant to this Settlement Agreement shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association except as modified by this paragraph 15. The arbitration shall take place in Tampa, Florida. The Honorable Clinton A. Curtis or other arbitrator selected in accordance with this paragraph shall be hereinafter referred to as the "Arbitrator." The decision or award of the Arbitrator shall be final, binding and conclusive. Either party may seek confirmation of any award or decision entered pursuant to this paragraph 15 by any court of competent jurisdiction. (b) The parties expressly waive any right to file a civil action and any right to a jury trial as to any claim or controversy between them, except as to the potential claims described in paragraph 1 above. (c) Except as expressly authorized in this Settlement Agreement, the parties agree that it shall be a breach of this Settlement Agreement for any party hereto to file against any other party any civil action or arbitration proceeding relating to (i) any of the Zenith Claims or RISCORP Claims that are released pursuant to paragraphs 4 and 5 of this Settlement Agreement, (ii) the claims in respect of which the parties have agreed not to sue or arbitrate pursuant to paragraphs 6 and 7 of this Settlement Agreement, (iii) the enforcement or interpretation of this Settlement Agreement, or 16 (iv) any dispute that may arise between the parties relating to the Asset Purchase Agreement, the Transaction Documents, or the transactions contemplated by the Asset Purchase Agreement. In the event of such a breach, the non-breaching party or parties shall be entitled to recover any consequential damages as well as its reasonable attorneys' fees and expenses from the breaching party or parties. (d) As a condition precedent to the submission of any dispute for determination by the Arbitrator, a party shall serve upon the other party to this Settlement Agreement, in the manner provided for notices pursuant to Section 11.03 of the Asset Purchase Agreement, a written statement of the matter in dispute, and thereafter the parties shaft negotiate in good faith to attempt to resolve the matter in dispute for a time period not to exceed ten (10) days (unless the parties mutually agree in writing to extend this time period). (e) Within twenty (20) days following the end of the period of good faith negotiations set forth in the immediately preceding paragraph, any party to this Settlement Agreement who desires to arbitrate a claim shall submit to the other party and to the Arbitrator a demand for arbitration setting forth with reasonable specificity the nature and amount of the claim, and the parties shall follow the following procedures: (i) The party receiving the demand for arbitration shall have ten business days from receipt of the other party's demand to dispute the claim in writing. If the claim is not disputed, the amount claimed in the arbitration demand will be the award of the Arbitrator. 17 (ii) Should the party receiving the claim dispute it, the party asserting the claim shall submit, no later than ten business days after receipt of its adversary's notice of dispute, a position paper, setting forth its position as to why it should prevail on its claim, including any appropriate evidentiary material. (iii) The party disputing the demand for arbitration will have ten business days after its receipt of its adversary's position paper to submit a response, including any appropriate evidentiary material. (iv) The Arbitrator shall issue his award within thirty days of his receipt of the response of the party opposing the claim. (v) For purposes of this paragraph 15, all claims, responses, notices, position papers or other papers of any kind shall be served by facsimile and overnight delivery (next business day) to the persons identified in paragraph 11.03 of the Asset Purchase Agreement and upon the Arbitrator, except that exhibits, appendices, and other lengthy documents need only be served by overnight delivery service. The time for any party to take any action pursuant to this paragraph after receipt of notice or written material shall commence to run from receipt of such notice or written material by overnight delivery service. 18 16. Termination of Letter Agreement and Power of Attorney. The parties expressly agree that the Letter Agreement and the Power of Attorney executed by RISCORP in connection with the closing of the Asset Sale are hereby terminated and shall be of no further force or effect. 17. Further Assurances. On and after execution of this Settlement Agreement, Zenith and RISCORP shall take all reasonably appropriate action and execute any additional documents, instruments or conveyances of any kind which may be reasonably necessary to carry out any of the provisions of this Settlement Agreement or the surviving provisions of the Asset Purchase Agreement and the Transaction Documents. 18. Entire Agreement. This Settlement Agreement contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, written or oral, with respect thereto. 19. Amendments and Waivers. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by each of the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. 20. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns and legal representatives. 19 21. Governing Law. This settlement agreement shall be governed by and construed in accordance with the laws of the State of Florida, without giving effect to the principles of conflicts of laws thereof. 22. No Admission of Liability. Zenith and RISCORP agree (a) that neither this Settlement Agreement nor the fact of settlement are an admission of any liability or wrongdoing whatsoever; (b) that neither this Settlement Agreement nor the fact of settlement shall be used or construed as an admission of any fault, liability or wrongdoing by any person; and (c) that neither this Settlement Agreement, the fact of settlement, the settlement negotiations, nor any related document shall be offered or received in evidence as an admission, concession, presumption or inference against any party in any action or proceeding other than an action or proceeding to enforce this Settlement Agreement. 23. Representations of RISCORP. RISCORP, Inc., RMS, 1390 Main Street, RI, IAA, RIS, RMCS, CompSource, RRE, RA, RW, RF, RIC, RP&C, RNIC, RS, RSS Holding, RSSI and RSSII each represent and warrant that (a) each such entity has the requisite corporate power and authority to execute, deliver and perform its obligations under this Settlement Agreement; (b) the execution and delivery of this Settlement Agreement and the performance of the obligations thereunder have been duly authorized by all necessary corporate action; (c) this Settlement Agreement constitutes the legal, valid and binding obligation of each such entity, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such 20 enforceability is considered in a proceeding in equity or in law); and (d) after giving effect to the transactions contemplated by this Settlement Agreement, the RISCORP Companies, individually and on a consolidated basis, will be solvent, able to pay their debts as they mature, have capital sufficient to carry on their businesses and all businesses in which they are about to engage, and: (i) the assets of the RISCORP Companies, individually and on a consolidated basis, at a fair evaluation, exceed the total liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) of the RISCORP Companies; (ii) current projections which are based on underlying assumptions which provide a reasonable basis for the projections and which reflect the RISCORP Companies' judgment based on present circumstances, the most likely set of conditions and the RISCORP Companies' most likely course of action for the period projected, demonstrate that the RISCORP Companies, individually and on a consolidated basis, will have sufficient cash flow to enable them to pay their debts as they mature or the RISCORP Companies are reasonably satisfied that they will be able to refinance such debt at or prior to maturity on commercial reasonable terms; and (iii) the RISCORP Companies, individually and on a consolidated basis, do not have unreasonably small capital base with which to engage in their anticipated businesses. 21 24. Representations of Zenith. Zenith represents and warrants that (a) it has the requisite corporate power and authority to execute, deliver and perform its obligations under this Settlement Agreement (b) the execution and delivery of this Settlement Agreement and the performance of its obligations thereunder have been duly authorized by all necessary corporate action, and (c) this Settlement Agreement constitutes the legal, valid and binding obligation of Zenith, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or in law). 25. Counterparts. This Settlement Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ZENITH INSURANCE COMPANY By: /s/ Stanley R. Zax ------------------------------------- Name: Stanley R. Zax Title: Chairman and President RISCORP, INC. RISCORP MANAGEMENT SERVICES, INC. 1390 MAIN STREET SERVICES, INC. RISCORP OF ILLINOIS, INC. INDEPENDENT ASSOCIATION ADMINISTRATORS INCORPORATED RISCORP INSURANCE SERVICES, INC. RISCORP MANAGED CARE SERVICES, INC. COMPSOURCE, INC. RISCORP REAL ESTATE HOLDINGS, INC. RISCORP ACQUISITION, INC, RISCORP WEST, INC. RISCORP OF FLORIDA, INC. RISCORP INSURANCE COMPANY RISCORP PROPERTY & CASUALTY INSURANCE COMPANY RISCORP NATIONAL INSURANCE COMPANY RISCORP SERVICES, INC. RISCORP STAFFING SOLUTIONS HOLDING COMPANY RISCORP STAFFING SOLUTIONS, INC. I RISCORP STAFFING SOLUTIONS, INC. II By: /s/ Walter E. Riehemann ------------------------------------- Name: Walter E. Riehemann Title: Vice President EX-11 4 STATEMENT RE COMPUTATION OF PER SHARE NET LOSS 1 EXHIBIT 11 RISCORP, INC. AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE NET LOSS (in thousands, except share and per share amounts)
THREE MONTHS ENDED JUNE 30 --------------------------------------------- 1999 1998 ------------ ------------ (Unaudited) (Unaudited) Net loss $ 3,369 $ 6,241 ============ ============ Weighted average common and common share equivalents outstanding: Average number of common shares outstanding 36,868,114 36,868,114 Restricted stock vested 622,917 48,611 ------------ ------------ Weighted average common shares outstanding - (basic) 37,491,031 36,916,725 ============ ============ Weighted average common and common share equivalents outstanding - (diluted) 37,491,031 36,916,725 ============ ============ Net loss per common share--basic $ (0.09) $ (0.17) ============ ============ Net loss per common share--diluted $ (0.09) $ (0.17) ============ ============
24 2 EXHIBIT 11 RISCORP, INC. AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE NET LOSS (in thousands, except share and per share amounts)
SIX MONTHS ENDED JUNE 30 ------------------------------------ 1999 1998 ------------ ------------ (Unaudited) (Unaudited) Net loss $ 4,208 $ 15,563 ============ ============ Weighted average common and common share equivalents outstanding: Average number of common shares outstanding 36,868,114 36,868,114 Restricted stock vested 551,042 24,306 ------------ ------------ Weighted average common shares outstanding - (basic) 37,419,156 36,892,420 ============ ============ Weighted average common and common share equivalents outstanding - (diluted) 37,419,156 36,892,420 ============ ============ Net loss per common share--basic $ (0.11) $ (0.42) ============ ============ Net loss per common share--diluted $ (0.11) $ (0.42) ============ ============
25 EX-27 5 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1999 JUN-30-1999 8,831 0 0 0 66,985 0 0 0 0 102,203 0 0 0 0 0 0 386 90,828 102,203 0 3,034 0 0 0 0 0 0 150 0 (7,104) 0 0 0 (4,208) (0.11) (0.11) 0 0 0 0 0 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----