NCRIC GROUP INC - SB-2/A - 19990312 - CONFLICT_OF_INTEREST
POTENTIAL CONFLICTS OF INTEREST BETWEEN STOCKHOLDERS AND POLICYHOLDERS
NCRIC, A Mutual Holding Company is a mutual insurance holding company
which is operated for the benefit of its members. The members of NCRIC, A Mutual
Holding Company are policyholders of NCRIC, Inc. The interests of the
policyholders may conflict with the interests of stockholders of NCRIC Group.
The number of non-policyholders on NCRIC's various boards of directors is
limited, and there is a risk that if the interests of policyholders and
stockholders conflict, the interests of the policyholders will prevail to the
detriment of the stockholders.
NEED FOR FUND TRANSFERS FROM NCRIC, INC.
As a holding company without significant operations of its own, NCRIC
Group's ability to meet its ongoing obligations in the future will depend upon
the receipt of sufficient funds from NCRIC, Inc. and its other subsidiaries in
the form of dividends, interest payments, loans, repayment of the ESOP and stock
award plan loans, expense reimbursement and tax payments. District of Columbia
law regulates the payment of dividends by NCRIC , Inc. to NCRIC Group.
16
ABSENCE OF OTHER MUTUAL INSURANCE HOLDING COMPANIES
Although there are numerous thrift institutions that are controlled by a
mutual holding company and have public stockholders , NCRIC knows of only one
insurance company that has a mutual holding company as a parent and has public
stockholders who own a minority of the outstanding shares. As a result, there is
little experience on which to base predictions concerning the responses NCRIC
will receive from its regulators, the marketplace and others.
OUR RETURN ON EQUITY WILL DECREASE IMMEDIATELY FOLLOWING THE SUBSCRIPTION,
COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
Return on equity is a company's net income for a given period divided by
the average balance of the company's stockholder equity during the same period.
This ratio is used by many investors to compare the performance of a particular
insurance company to its peers. NCRIC anticipates that, aside from the
HealthCare Consulting Acquisition, it will take time to prudently deploy the
capital raised in the subscription, community and syndicated community
offerings. Accordingly, NCRIC's equity will significantly increase as a result
of the net proceeds received in the subscription, community and syndicated
community offerings without a proportionate and immediate increase in net
income.
NCRIC GROUP HAS BROAD DISCRETION IN DETERMINING THE USE OF PROCEEDS
NCRIC Group will use the proceeds of the offerings to repay the
HealthCare Consulting Acquisition debt and to make loans to the ESOP and stock
award plans. NCRIC Group will have broad discretion in determining the use of
the balance of the proceeds of the offerings. The manner in which NCRIC Group
will ultimately determine to use the balance of the proceeds is uncertain.
EXPENSES ASSOCIATED WITH THE ESOP, STOCK OPTION PLAN AND STOCK AWARD PLAN
NCRIC may recognize material employee compensation and benefit expenses
relating to the ESOP, the stock award plan and the stock option plan. NCRIC
cannot predict the aggregate amount of these expenses at the present time
because applicable accounting practices require that in some cases these
expenses be measured based on the future fair market value of the shares of
NCRIC Group common stock. This means that:
. in the case of the ESOP, the amount of expense will be measured by the
market value of the shares when they are committed to be released for
allocation to the ESOP participants;
. in the case of the stock award plan, the amount of expense generally
will be measured at the grant date and amortized over the vesting
period except to the extent that the vesting schedule of a stock award
includes particular
17
operating performance conditions in which case the fair market value
will be measured when the conditions are satisfied; and
. in the case of the stock option plan, an expense may be recognized
with respect to options granted to non-employee directors, based upon
the amortization of the initial value of the options over their
vesting period and no expense is recognized on NCRIC Group's financial
statements with respect to options granted to employees.
Expenses for the ESOP and stock award plan have been reflected in the pro forma
financial information under "Pro Forma Data" assuming the $7.00 per share
purchase price represents the fair market value for accounting purposes.
POSSIBLE ADVERSE IMPACT OF BROAD VALUATION RANGE
There is a difference of 480,000 shares between the minimum and the
maximum of the offering range. A person subscribing for a fixed number of shares
of common stock will have a 26% smaller interest in NCRIC Group if 1,840,000
shares are sold than if 1,360,000 shares are sold. If you exercise your
subscription rights or deliver a purchase order in the subscription, community
or syndicated community offerings, you will not receive a refund or have any
right to withdraw your subscription or purchase order if the updated appraisal
estimates a consolidated pro forma market value that is within the estimated
valuation range. Also, you should be aware that, prior to the consummation of
the subscription offering, you will not have available to you information
concerning the final updated appraisal.
DILUTIVE EFFECT OF STOCK OPTION PLAN
NCRIC Group has authorized the granting, on the closing of the
offerings, of options to purchase up to 92,000 shares of common stock to
selected officers and directors of NCRIC Group and NCRIC, A Mutual Holding
Company. If, on the exercise of these options, shares are issued from NCRIC
Group's authorized but unissued common stock, the book value and earnings per
share of stockholders may be diluted, and the trading price of the common stock
may be reduced.
YOU MAY BE UNABLE TO RESELL COMMON STOCK FOR THE PRICE YOU PAID IN THE
SUBSCRIPTION, COMMUNITY OR SYNDICATED COMMUNITY OFFERINGS
We cannot assure you that, following the subscription, community or
syndicated community offerings, the trading price of NCRIC Group's common stock
will be at or above the purchase price. Prior to the subscription, community or
syndicated community offerings there has been no public market for shares of
NCRIC Group's common stock. The price at which the common stock is sold in the
subscription, community or syndicated community offerings may not be indicative
of the market price of the common stock after completion of the subscription,
community or syndicated
18
community offerings. The fluctuations in trading price of NCRIC Group's common
stock may be unrelated to our operating performance and may be influenced by
many factors, including investor perceptions of us and the general economic
conditions of the professional medical liability insurance industry.
THERE IS A RISK THAT AN ACTIVE AND LIQUID TRADING MARKET FOR NCRIC GROUP COMMON
STOCK WILL NOT DEVELOP
We have received conditional approval for quotation of NCRIC Group's
common stock on the Nasdaq SmallCap Market under the symbol "NCRI." There is a
risk, however, that an active trading market for the common stock will not
develop, or, if developed, will not continue. The development of a liquid market
depends on the active participation of willing buyers and sellers, which is not
within the control of NCRIC Group.
WE MAY NOT BE ABLE TO COMPLETE THE SUBSCRIPTION, COMMUNITY OR SYNDICATED
COMMUNITY OFFERINGS WITHIN OUR ANTICIPATED TIME FRAME
NCRIC Group expects to complete the subscription, community and any
syndicated community offerings within the time periods indicated in this
prospectus. Nevertheless, it is possible that adverse market, economic or
regulatory conditions or other factors could delay the completion of the
subscription, community or syndicated community offerings and result in
increased costs or changes in the estimated valuation range.
IF OUR COMPUTER SYSTEMS DO NOT WORK PROPERLY ON OR AFTER JANUARY 1, 2000, OUR
BUSINESS OPERATIONS WILL BE DISRUPTED
Many computer systems and computer programs accommodate only two-digit
fields to represent a given year (for example, "98" represents 1998). The
computer hardware and software automatically understand the two-digit indicator
to be associated with the twentieth century and assign the first two digits as
"19." Therefore, these computer systems are unable to recognize post-twentieth
century dates and to properly accept, process or display information related to
the next century. This could result in system or electronic equipment failures,
or miscalculations causing disruption of our business operations.
We use computer based systems extensively and, based on the reviews
carried out to date, we have determined that we must modify or replace portions
of our software or hardware so that our computers will properly utilize dates
beyond December 31, 1999. There is a risk that year 2000 problems, including the
identification and remediation of all relevant year 2000 problems in a timely
manner, will have a material adverse effect on our operations.
19
YOUR SUBSCRIPTION RIGHTS MAY BE TAXABLE
We have received a letter from RP Financial which states its belief that
the subscription rights granted to policyholders and others to purchase our
common stock have no value. However, RP Financial's view is not binding on the
Internal Revenue Service. If the Internal Revenue Service determines that your
subscription rights have value, then receipt of those rights could result in
taxable income to you. Whether subscription rights have value requires a factual
determination.
20
FORWARD-LOOKING INFORMATION
A number of statements made by NCRIC Group in this document are forward-
looking statements which involve known and unknown risks and uncertainties which
may cause NCRIC Group's actual results to be materially different from
historical results or from the results expressed or implied by the forward-
looking statements. These risks and uncertainties include:
. general economic conditions including changes in interest rates and
the performance of financial markets;
. NCRIC, Inc.'s concentration in a single line of business;
. the impact of managed healthcare;
. uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
. price competition;
. regulatory changes;
. ratings assigned by A.M. Best;
. the availability of bank financing and reinsurance;
. NCRIC, A Mutual Holding Company's holding company structure; and
. uncertainties associated with NCRIC Group's acquisition strategy.
Other factors not currently anticipated by management may also materially and
adversely affect NCRIC Group's results of operations.
21
THE SUBSCRIPTION, COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
The subscription offering
NCRIC Group is offering, at no cost to a subscriber, rights to purchase
shares of common stock in the subscription offering. Shares are being offered to
the following three categories of subscribers:
(1) named insureds under policies of insurance issued by NCRIC, Inc. and
in force as of the close of business on March 15, 1999 and extended
reporting endorsement holders as of March 15, 1999. Extended
reporting endorsement holders are former policyholders who continue
to be insured by NCRIC, Inc. against claims arising during the time
when their policy was in effect.
(2) NCRIC Group's tax-qualified ESOP and stock award plan; and
(3) directors, officers and employees of NCRIC, A Mutual Holding Company
and its subsidiaries.
Pension plans, other employee benefit plans, trusts and other entities
established for the benefit of a subscriber may also purchase shares of common
stock offered to a subscriber.
The amount of common stock that subscribers may purchase will be
determined, in part, by the total number of shares of common stock subscribed
for by all subscribers. If orders for more than 1,840,000 shares are received in
the subscription offering, shares of common stock will be allocated as follows:
. Category One. An aggregate of 1,398,400 shares of common stock, or 76%
of the maximum shares of common stock offered in the subscription and
community offerings, will be allocated among subscribers in category
one. In the event that category one subscribers exercise subscription
rights for more than 1,398,400 shares of common stock, each subscribing
category one subscriber will be entitled first to purchase 100 shares of
common stock . The remaining shares of common stock available to
subscribers in category one will be allocated among the category one
subscribers whose subscriptions remain unsatisfied in the proportion in
which the aggregate number of shares as to which a category one
subscriber's subscription remains unsatisfied bears to the aggregate
number of shares as to which all category one subscribers' subscriptions
remain unsatisfied, but no fractional shares of common stock will be
issued.
22
. Category Two. The ESOP will be entitled to purchase up to 184,000
shares, or 10% of the maximum shares of common stock offered in the
subscription and community offerings, and the stock award plan will be
entitled to purchase up to 92,000 shares or 5% of the maximum shares of
common stock offered in the subscription and community offerings.
. Category Three. Up to 165,600 shares, or 9% of the maximum shares of
common stock offered in the subscription and community offerings, will
be allocated among subscribing directors, officers and employees of
NCRIC, A Mutual Holding Company and its subsidiaries who are not
policyholders of NCRIC, Inc., plus any shares available to category one
subscribers but not purchased by them. In the event of an
oversubscription , shares of common stock will be allocated in the
proportion in which the number of shares subscribed for by each person
in category three bears to the aggregate number of shares subscribed for
by all persons in category three.
COMMUNITY OFFERING
Concurrently with the subscription offering, NCRIC Group is offering
shares of common stock to the general public in the community offering.
Preference in the community offering will be given first to named insureds under
NCRIC, Inc. policies issued after March 15, 1999, then to providers of goods or
services to, and identified by, NCRIC and then to natural persons and trusts of
natural persons, including individual retirement and Keogh retirement accounts,
who reside in the District of Columbia or the states of Virginia and Maryland.
All determinations as to the status of a person as a resident of the District of
Columbia or the states of Virginia and Maryland shall be made by NCRIC Group in
its sole and absolute discretion.
Orders for common stock received from members of the general public in
the community offering will be subject to the availability of shares of common
stock after satisfaction of all subscriptions in the subscription offering. If
1,360,000 or more shares of common stock are subscribed for in the subscription
offering, NCRIC Group, in its sole discretion, will determine whether to accept
orders for common stock in the community offering. If 1,840,000 or more shares
of common stock are subscribed for in the subscription offering, no common stock
will be sold in the community offering.
SYNDICATED COMMUNITY OFFERING
In the sole discretion of NCRIC Group, any shares of common stock not
purchased in the subscription and community offerings may be offered for sale to
the general public in a syndicated community offering through a syndicate of
registered broker-dealers to be formed and managed by Sandler O'Neill acting as
agent of NCRIC Group, to assist NCRIC Group in the sale of the common stock.
NCRIC Group reserves the absolute right to reject orders in the syndicated
community offering, in whole or in part.
23
THE APPRAISAL AND PRICING OF THE COMMON STOCK
The aggregate purchase price of the common stock is based upon RP
Financial's appraisal of NCRIC's value. RP Financial, as part of its financial
advisory business, is engaged regularly in the valuation of assets, securities
and companies in connection with various types of asset and security
transactions, including mergers, acquisitions and private placements, and
valuations for various other purposes and in the determination of adequate
consideration in those transactions. RP Financial will receive a fee from NCRIC,
Inc. of approximately $25,000 for the appraisal.
RP Financial has determined that, based on stock prices as of February
12, 1999 and financial statements through December 31, 1998, the estimated
consolidated pro forma market value of NCRIC Group was between $24.1 million and
$32.5 million. These amounts assumed that the HealthCare Consulting Acquisition
had been completed. Based on the appraisal's valuation, NCRIC Group plans to
issue between 1,360,000 and 1,840,000 shares of the common stock in the
subscription, community and syndicated community offerings having an aggregate
price of between $9,520,000 and $12,880,000.
The appraisal is based on a review of internal estimations, and a
comparison of NCRIC's performance relative to medical professional liability
insurance company averages and a peer group of representative publicly-owned
medical professional liability insurance companies. In preparing the appraisal,
RP Financial assumed that the financial and statistical information provided by
NCRIC was accurate and complete. RP Financial did not independently verify the
financial statements and other information provided by NCRIC or value
independently the assets and liabilities of NCRIC. The appraisal considers NCRIC
as a going concern only and is not an indication of the liquidation value of
NCRIC. The appraisal is not intended, and must not be construed, as a
recommendation of any kind by NCRIC Group, Sandler O'Neill or RP Financial as to
the advisability of purchasing common stock.
Because the appraisal is necessarily based upon estimates and
expectations for the future of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing
common stock will thereafter be able to sell such shares at or above the
purchase price. Copies of the appraisal report of RP Financial setting forth the
method and assumptions for such appraisal are on file and available for
inspection at the principal executive offices of NCRIC Group. Any subsequent
updated appraisal report of RP Financial also will be available for inspection
and will be filed with the Securities and Exchange Commission.
UPDATE OF APPRAISAL PRIOR TO SUBSCRIPTION OFFERING
24
The appraisal will be updated immediately prior to the closing of the
subscription offering. If the value reflected in the updated appraisal is within
the estimated valuation range, the subscription, community or syndicated
community offerings will be consummated. Orders to purchase common stock may not
be withdrawn if the updated appraisal is within the estimated valuation range.
If the value reflected in the updated appraisal is not within the
estimated valuation range, NCRIC Group may either terminate or proceed with the
subscription, community or syndicated community offerings. If NCRIC Group
proceeds with the subscription, community or syndicated community offerings, it
will promptly deliver an updated prospectus describing the updated appraisal to
you and advising you whether or not the purchase price per share has changed.
You will be given the opportunity to confirm or modify your order or rescind
your order. If you do not confirm or modify your order, your funds will be
promptly returned to you, with interest.
IF THE UPDATED ESTIMATED VALUATION OF RP FINANCIAL FALLS WITHIN THE
ESTIMATED VALUATION RANGE, THE FOLLOWING STEPS WILL BE TAKEN:
Subscription offering meets or exceeds maximum. If, upon conclusion of
the subscription offering, the number of shares subscribed for by participants
in the subscription offering is equal to or greater than 1,840,000 shares, then
the subscription offering will be promptly consummated and NCRIC Group will, on
the closing date of the subscription offering, issue shares of common stock to
the subscribing participants in the priorities described above. Any community
offering will be canceled and any funds received from purchasers in a community
offering will be promptly returned to them with interest.
Subscription offering meets or exceeds minimum but does not meet
maximum. If, upon conclusion of the subscription offering, the number of shares
of common stock subscribed for by participants in the subscription offering is
equal to or greater than 1,360,000 shares, but less than 1,840,000 shares, then
NCRIC Group will promptly consummate the subscription offering, in which case
NCRIC Group will on the closing date issue to the participants in the
subscription offering shares of common stock in an amount sufficient to satisfy
subscriptions in full. NCRIC Group may also issue shares to purchasers in the
community offering and syndicated community offering.
Subscription offering does not meet minimum. If, upon conclusion of the
subscription offering, the number of shares of common stock subscribed for by
participants in the subscription offering is less than 1,360,000 shares, NCRIC
Group may accept purchase orders received from purchasers in the community
offering and/or sell shares of common stock to purchasers in the syndicated
community offering so that the aggregate number of shares of common stock sold
in the subscription, community and syndicated community offerings is equal to or
greater than 1,360,000 shares.
25
Subscription, community and syndicated community offerings do not meet
minimum. If the aggregate number of shares of common stock subscribed for or
purchased in the subscription, community and syndicated community offerings is
less than 1,360,000 shares, then NCRIC Group will cancel the subscription,
community and syndicated community offerings and your funds will be returned
promptly to you with interest.
TERMINATION DATES
The expiration dates of the subscription, community and syndicated
community offerings are:
Subscription offering _______________, 1999
Community offering _______________, 1999, or, at
NCRIC Group's option, as early as
_______________, 1999
Syndicated community offering, if any _______________, 1999
Unless extended or cancelled, the subscription, community and syndicated
community offerings will close simultaneously within 60 days after the
expiration date of the last of the subscription, community or syndicated
community offerings. If the offerings have not closed on or before ___________,
1999, NCRIC Group may, within 10 business days after _________, 1999, either
extend the community and/or syndicated community offerings and provide for an
extended closing date for all of the offerings of not later than __________, or
terminate the subscription, community and syndicated community offerings and
return all funds received in connection with the offerings with interest. If
either of the community or syndicated community offerings are extended, NCRIC
Group will promptly give written notice to subscribers and purchasers in each of
the offerings, including a description of the new expiration and closing dates,
at which time you may confirm, modify or rescind your subscription or purchase
order. If your subscription or purchase order is withdrawn, or is not confirmed
or modified, your funds will be returned promptly with interest. If NCRIC Group
returns funds to you, interest paid on any returned funds will be equal to the
interest earned on the funds while they were held by NCRIC Group. If NCRIC Group
does not close any of the offerings, it will be required to charge all expenses
of the offerings against current income.
PURCHASE OF COMMON STOCK BY MANAGEMENT
DIRECTORS AND OFFICERS OF NCRIC, A MUTUAL HOLDING COMPANY AND ITS
SUBSIDIARIES, TOGETHER WITH THEIR ASSOCIATES, PROPOSE TO PURCHASE, IN THE
AGGREGATE, APPROXIMATELY _________ SHARES OF COMMON STOCK IN THE SUBSCRIPTION
OFFERING, WHICH EQUALS ___% OF THE MAXIMUM SHARES OF COMMON STOCK TO BE OFFERED
IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS.
26
BENEFITS TO MANAGEMENT
Full-time employees of NCRIC, Inc. will participate in the ESOP, which
is a form of retirement plan, which will purchase shares in the subscription
offering. Directors, officers and employees of NCRIC, A Mutual Holding Company
and its subsidiaries may participate in a stock award plan, which will purchase
shares in the subscription offering, and a stock option plan. The benefit plans
are intended to provide incentive-based compensation to directors, officers and
employees of NCRIC, A Mutual Holding Company and its subsidiaries.
On March 4, 1999, NCRIC Group's board of directors authorized the
granting of options to purchase up to 92,000 shares of common stock with an
exercise price of $7.00 per share to the following officers and directors of
NCRIC Group and NCRIC, A Mutual Holding Company:
Up to
Name Number of
Shares
R. Ray Pate, Jr. 16,560
Nelson P. Trujillo, M.D. 11,040
Stephen S. Fargis 11,500
Rebecca B. Crunk 9,200
William E. Burgess 9,200
Vincent C. Burke, III 2,300
Thomas Calhoun, M.D. 2,300
Pamela W. Coleman, M.D. 2,300
Charles H. Epps, Jr., M.D. 2,300
Robert A. Fischer, M.D. 2,300
Leonard M. Glassman, M.D. 6,900
Luther W. Gray, Jr., M.D. 2,300
J. Paul McNamara 2,300
Leonard Parver, M.D. 6,900
Raymond Scalettar, M.D. 2,300
David M. Seitzman, M.D. 2,300
---------
Total 92,000
The options will all be exercisable for a period of 10 years from the
date of grant. If more than the minimum but less than the maximum number of
shares are sold in the subscription, community and syndicated community
offerings, then the number of shares subject to options granted to each of the
above-named persons will be prorated so that the total number of shares subject
to options equals 5% of the total number of shares sold in the offerings. Shares
issued on the exercise of options granted under the stock option plan
27
will not be part of the subscription, community or syndicated community
offerings. If the subscription offering does not close, no options to purchase
shares will be granted.
NCRIC Group has not determined the number of shares to be awarded to any
director, officer or employee under the stock award plan.
COMPLIANCE WITH SECURITIES LAWS
NCRIC Group will make reasonable efforts to comply with the securities
laws of the District of Columbia and all states in the United States in which
persons entitled to subscribe for common stock in the subscription offering
reside. However, no person will be offered or allowed to purchase any common
stock in the subscription offering if he or she resides in a foreign country or
in a state of the United States with respect to which any or all of the
following apply:
. compliance with securities laws or other laws would, in the opinion of
NCRIC Group, be onerous or impracticable for reasons of cost or
otherwise;
. a small number of persons otherwise eligible to subscribe for shares
under the subscription offering reside in a particular state or
foreign country; or
. the granting of subscription rights or the offer or sale of shares of
common stock to a person would require NCRIC Group or NCRIC, Inc. or
its employees to register, under the securities laws of the state or
foreign country, as a broker, dealer, salesman or agent or to register
or otherwise qualify its securities for sale in the state or foreign
country.
No payments will be made in lieu of the granting of subscription rights to any
person who is denied subscription rights.
PURCHASES IN THE SUBSCRIPTION, COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
USE OF STOCK ORDER FORMS IN SUBSCRIPTION AND COMMUNITY OFFERINGS
Any person who desires to subscribe for or purchase shares of common
stock in the subscription or community offerings must do so by delivering by
mail to NCRIC Group, Inc., Placement Agent, P.O. Box 220797, Great Neck, NY
11022, or in person at NCRIC Group's principal executive offices located at 1115
30th Street, N.W., Washington, D.C. 20007, a properly executed and completed
stock order form, together with full payment for all shares subscribed for or
purchased. An executed stock order form, once received by NCRIC Group, may not
be modified, amended or rescinded without the consent of NCRIC Group.
28
PAYMENT FOR SHARES IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS
Payment in full for all shares of common stock subscribed for or
purchased in the subscription and community offerings must accompany all
completed stock order forms in order for subscriptions or purchase orders to be
considered complete. Payment for subscribed shares of common stock must be made
by check or money order in U.S. Dollars. All checks or money orders must be made
payable to "NCRIC Group, Inc." No wire transfers will be accepted. Payments will
be placed in an escrow account at Summit Bank. The escrow account will be
administered by the escrow agent, transfer agent and placement agent. Funds
accompanying stock order forms will not be released until the subscription or
community offerings are completed or terminated. The ESOP and the stock award
plan will not be required to pay for their shares at the time they subscribe,
but will be required to pay for their shares at or before the closing.
PAYMENT FOR SHARES IN THE SYNDICATED COMMUNITY OFFERING
If a syndicate of selected dealers is formed to assist in the syndicated
community offering, a purchaser may pay for his or her shares with funds held by
or deposited with a selected dealer. If a stock order form is executed and
forwarded to the selected dealer or if the selected dealer is authorized to
execute the stock order form on behalf of a purchaser, the selected dealer is
required to forward the stock order form and check or money order for the
purchase price to the placement agent for deposit in a segregated account .
Alternatively, selected dealers may solicit indications of interest from their
customers to place orders for shares. Selected dealers must subsequently contact
their customers who indicated an interest and seek their confirmation as to
their intent to purchase. Those indicating an intent to purchase shall execute
stock order forms and forward them to their selected dealer or authorize the
selected dealer to execute the stock order forms. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit the customer's account on the third business day
after the customer has confirmed his or her intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send stock order forms and funds to NCRIC Group for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date, in the event that the alternative
procedure is employed, once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his or
her order.
SUBMISSION OF STOCK ORDER FORMS
If a subscriber or purchaser submits a stock order form in the
subscription, community or syndicated community offerings that
(1) is not received by NCRIC Group,
29
(2) is received after the expiration of the offering in question,
(3) is defectively completed or executed, or
(4) is not accompanied by payment in full for the shares of common stock
subscribed for or purchased,
then the subscription or purchase order will not be honored, and the subscriber
or purchaser will be treated as having failed to return the completed
subscription or purchase order form within the specified time period.
Alternatively, NCRIC Group may, but will not be required to, waive any
irregularity relating to any stock order form or require the submission of a
corrected stock order form or the remittance of full payment for the shares of
common stock subscribed for or purchased by the date NCRIC Group may specify.
NCRIC Group's interpretations of the terms and conditions of the subscription,
community and syndicated community offerings and determinations with respect to
the acceptability of the stock order forms will be final, conclusive and binding
upon all persons, and neither NCRIC Group nor its directors, officers, employees
and agents will be liable to any person in connection with any interpretation or
determination. Photocopies and facsimile copies of stock order forms will not be
accepted.
ESCROW AGREEMENT
The escrow agent, transfer agent, placement agent and NCRIC Group have
entered into an escrow agreement to permit the escrow agent to hold funds
received from subscribers and purchasers in escrow until the closing or
termination of the subscription, community and syndicated community offerings.
Funds will only be released from escrow if at least the minimum number of shares
are sold in the offerings. If the offerings do not close, subscribers and
purchasers will have their funds returned to them in full, with interest.
NONTRANSFERABILITY OF SUBSCRIPTION RIGHTS
Each subscription right granted in the subscription offering may be
exercised only by the person to whom it is issued and only for his or her own
account or the account of any pension plans, other employee benefit plans,
trusts and other entities established for the benefit of a subscriber.
Each person subscribing for shares of common stock in the subscription
offering is required to represent to NCRIC Group that he or she is purchasing
the shares for his or her own account or the account of any pension plans, other
employee benefit plans, trusts and other entities established for his or her
benefit and that he or she has no agreement or understanding with any other
person for the sale or transfer of shares of common stock. NCRIC Group reserves
the right, upon request, to permit a corporation wholly owned by a
30
subscriber or members of a subscriber's immediate family to purchase shares of
common stock in connection with a subscriber's subscription rights.
PROSPECTUS DELIVERY
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the subscription expiration date in the case of the subscription
offering and the expiration of the community offering or syndicated community
offering in the case of the community offering and syndicated community
offering, in accordance with Rule 15c2-8 under the Securities Exchange Act, no
prospectus will be mailed any later than five days prior to the expiration dates
or hand delivered any later than two days prior to the expiration dates.
Execution of the stock order form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order forms will be distributed only with a prospectus.
DELIVERY OF CERTIFICATES
Certificates representing shares of the common stock will be delivered
to subscribers in the subscription offering and purchasers in the community and
syndicated community offerings, if any, promptly after completion of the
offering in question. Although trading of the common stock may have commenced,
until certificates for the common stock are available and delivered to
subscribers or purchasers, they may not be able to sell their shares of common
stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
MARKETING AND UNDERWRITING ARRANGEMENTS
NCRIC Group has engaged Sandler O'Neill as a marketing advisor in
connection with the subscription, community and syndicated community offerings,
and Sandler O'Neill has agreed to use its best efforts to assist NCRIC Group
with its solicitation of subscriptions and purchase orders for shares of common
stock in the subscription, community and syndicated community offerings. Sandler
O'Neill is not obligated to take or purchase any shares of common stock in the
subscription, community or syndicated community offerings. Sandler O'Neill has
agreed to pay Sandler O'Neill a fee equal to 2.0% of the aggregate purchase
price of common stock sold in the subscription and community offerings. Sandler
O'Neill's fee for the subscription and community offerings will be reduced by
$25,000 as a result of a credit provided for in an advisory services agreement
between NCRIC and Sandler O'Neill entered into in connection with the HealthCare
Consulting Acquisition.
NCRIC Group may enter into selected dealers' agreements with one or more
National Association of Securities Dealers, Inc. member firms in connection with
a syndicated community offering. NCRIC Group will pay a fee to the selected
dealers, any sponsoring dealer's fees, and a management fee to Sandler O'Neill
of 2.0% for shares sold
31
by the National Association of Securities Dealers, Inc. member firm under a
selected dealer's agreement. However, the aggregate fees payable to Sandler
O'Neill for common stock sold under a selected dealer's agreement will not
exceed 2.0% of the aggregate purchase price and the aggregate fees payable to
Sandler O'Neill and the selected and sponsoring dealers will not exceed 7.5% of
the aggregate purchase price of the shares sold under any selected dealer's
agreement.
Fees to Sandler O'Neill and to any other broker-dealer may be deemed to
be underwriting fees and Sandler O'Neill and any broker-dealers may be deemed to
be underwriters. Sandler O'Neill will be reimbursed for legal fees, in an amount
not to exceed $60,000, and for its other reasonable out-of-pocket expenses.
NCRIC Group has agreed to indemnify Sandler O'Neill in connection with some
claims or liabilities, including liabilities under the Securities Act. Assuming
that all shares offered in the subscription and community offerings are sold,
total fees paid to Sandler O'Neill are expected to be $165,400 and $232,600 at
the minimum and the maximum of the offering range. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
In addition, Sandler O'Neill received an advisory fee in the amount of
$50,000 for advisory services provided to NCRIC in connection with the
reorganization. Sandler O'Neill has also provided investment banking services to
NCRIC in connection with the HealthCare Consulting Acquisition, and has received
a fee in the amount of $35,000, $25,000 of which will be credited toward any
fees received by Sandler O'Neill in connection with the offerings.
Directors and executive officers of NCRIC, A Mutual Holding Company and
its subsidiaries may participate in the solicitation of offers to purchase
common stock. Questions from prospective purchasers will be directed to NCRIC
Group's directors or executive officers or to registered representatives of
Sandler O'Neill or any selected dealer. Other employees of NCRIC may participate
in the subscription, community and syndicated community offerings in ministerial
capacities or by providing clerical work in effecting a sales transaction.
Employees of NCRIC who are not executive officers have been instructed not to
solicit offers to purchase common stock or provide advice regarding the purchase
of common stock. NCRIC, A Mutual Holding Company and its subsidiaries will rely
on Rule 3a4-1 under the Securities Exchange Act, and sales of common stock will
be conducted within the requirements of Rule 3a4-1 to permit officers, directors
and employees to participate in the sale of common stock. No officer, director
or employee of NCRIC, A Mutual Holding Company or its subsidiaries will be
compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
32
TAX EFFECTS
Reorganization. On November 30, 1998, National Capital Reciprocal
Insurance Company submitted to the Internal Revenue Service a request for a
private letter ruling concerning the material tax effects of the reorganization.
Based on rulings issued in similar situations, NCRIC, Inc. expects that the
Internal Revenue Service will issue the private letter ruling substantially in
the form requested . The Internal Revenue Service has not taken action on the
Ruling Request Submission . NCRIC, Inc. anticipates receiving a response by
August 31, 1999, but may not receive the response until after that date.
In the ruling request submission, National Capital Reciprocal Insurance
Company requested that the Internal Revenue Service confirm that the
reorganization of National Capital Reciprocal Insurance Company from a mutual to
stock form of corporation constitutes a reorganization within the meaning of
Section 368(a)(1)(E) of the Internal Revenue Code of 1986, and that, for federal
income tax purposes no gain or loss will be recognized by National Capital
Reciprocal Insurance Company or NCRIC, Inc. as a result of the reorganization,
and NCRIC, Inc.'s basis in its assets, holding period for its assets, net
operating loss carryforward, if any, capital loss carryforward, if any, earnings
and profits and accounting methods will not be affected by the reorganization.
Subscription rights. Without undertaking any independent investigation
of state or federal law or the position of the Internal Revenue Service with
respect to the issue, RP Financial believes that the subscription rights do not
have any ascertainable market value, based upon RP Financial's observation that
the subscription rights are available to participants without cost, are legally
nontransferable and of short duration and will afford participants the right
only to purchase shares of common stock at the same price as will be paid by
members of the general public in the community and syndicated community
offerings.
NCRIC Group believes that in the event the Internal Revenue Service were
to nevertheless successfully assert that the subscription rights did have a fair
market value, any gain or income realized by a subscriber in categories one or
three as a result of the receipt of subscription rights having fair market value
must be recognized, whether or not the subscription rights are exercised. If
this occurs, the amount of gain or income recognized by a subscriber in
categories one or three would equal the fair market value of subscription rights
received by the subscriber in categories one or three.
Although not free from doubt, provided the subscription rights are
capital assets in the hands of a policyholder or reporting endorsement holder in
category one and are treated as issued to the category one subscriber by NCRIC
Group, any gain resulting from the receipt of the subscription rights should
constitute a capital gain, and provided the common stock that a subscriber would
have received upon exercise of the lapsed subscription rights would have
constituted a capital asset, the resulting loss upon expiration of any
subscription rights should constitute a capital loss. In the case of a category
three officer or director who receives
33
subscription rights, any gain resulting from the receipt of the subscription
rights should constitute ordinary income although the resulting loss upon
expiration of any subscription rights should still constitute a capital loss.
For purposes of determining gain, it is unclear whether and how the Internal
Revenue Service would attempt to ascribe a fair market value to the subscription
rights or how to determine the number of subscription rights that may be
allocated to each policyholder, extended reporting endorsement holder, officer
or director during the subscription offering.
The above discussion addresses the potential income tax consequences
should the Internal Revenue Service successfully treat category one subscribers
as transferring policyholder rights to NCRIC Group in exchange for subscription
rights which had an ascertainable fair market value and which were issued by
NCRIC Group to the category one subscribers. In the alternative, the Internal
Revenue Service could attempt to assert that, for federal income tax purposes,
NCRIC Group will be treated as issuing subscription rights to NCRIC, Inc. and
that category one subscribers will be treated as transferring policyholder
rights to NCRIC, Inc. in exchange for subscription rights. If the Internal
Revenue Service were to make this assertion concerning the path of subscription
rights and if the Internal Revenue Service were to also successfully assert that
the subscription rights had an ascertainable fair market value, then the
Internal Revenue Service might also assert that NCRIC, Inc. will recognize gain
on its deemed distribution of subscription rights to category one subscribers
and that gain recognized by category one subscribers on the receipt of
subscription rights is taxable as a dividend. Although not free from doubt, the
amount of gain that would be recognized by NCRIC, Inc. on a deemed distribution
of subscription rights, and by category one subscribers on receipt of a deemed
dividend of subscription rights, should equal the fair market value, if any, of
the subscription rights distributed or received by NCRIC , Inc. and the category
one subscribers.
Because of the absence of authority from the courts and the Internal
Revenue Service, Arent Fox Kintner Plotkin & Kahn, PLLC, counsel for NCRIC, is
unable to render an opinion on (1) the tax treatment of the receipt of the
subscription rights or (2) the path of the subscription rights. Category one and
category three subscribers are encouraged to consult with their tax advisors
about the tax consequences of the reorganization and the subscription offering.
The tax opinion. If the ruling request submission is still pending
before the Internal Revenue Service at the closing of the subscription,
community or syndicated community offerings, NCRIC will rely on the tax opinion
of Deloitte & Touche LLP . Deloitte & Touche LLP has opined, on the basis of
facts and assumptions set forth in the tax opinion, that for federal income tax
purposes, the reorganization of National Capital Reciprocal Insurance Company to
a stock form of corporation in a mutual holding company structure will
constitute a reorganization within the meaning of Section 368(a)(1)(E) of the
Internal Revenue Code, and that: (1) no gain or loss will be recognized by
National Capital Reciprocal Insurance Company or NCRIC, Inc. as a result of the
reorganization; and (2)
34
NCRIC, Inc.'s basis in its assets, holding period for its assets, net operating
loss carry forward, if any, capital loss carry forward, if any, earnings and
profits and accounting methods will not be affected by the reorganization.
Deloitte & Touche LLP, in the tax opinion described above, did not express any
opinion on the path of the subscription rights or on the potential tax effects
to NCRIC, Inc. and the subscribers if the Internal Revenue Service asserts that,
for federal income tax purposes, subscribers will be treated as receiving
subscription rights from NCRIC, Inc. and that those subscription rights have an
ascertainable fair market value. Unlike a private letter ruling issued by the
Internal Revenue Service, the tax opinion is not binding on the Internal Revenue
Service and the Internal Revenue Service could disagree with one or more of the
opinions provided in the tax opinion. In the event of disagreement, no assurance
can be given that the opinions provided in the tax opinion would be sustained by
a court if challenged by the Internal Revenue Service.
The federal income tax discussion set forth above does not purport to
consider all aspects of federal income taxation which may be relevant to each
category one subscriber or category three subscriber that may be subject to
special treatment under the Internal Revenue Code, including trusts, individual
retirement accounts, other employee benefit plans, insurance companies, and
category one subscribers and category three subscribers who are employees of an
insurance company or who are not citizens or residents of the United States. Due
to the individual nature of tax consequences, each category one subscriber and
category three subscriber is urged to consult his or her tax and financial
advisor as to the effect of federal income tax consequences on his or her own
particular facts and circumstances, including the receipt and exercise of
subscription rights, and also as to any state, local, foreign or other tax
consequences arising out of the reorganization.
MINIMUM AND MAXIMUM LIMITATIONS ON INDIVIDUAL PURCHASES OF COMMON STOCK
Except for the ESOP and the stock award plan, no purchaser or
subscriber, together with his or her associates, may purchase less than 100 or
more than 35,000 shares of common stock in the subscription, community and
syndicated community offerings. An associate of a subscriber is:
(1) any pension plans, other employee benefit plans, trusts and other
entities established for the benefit of a subscriber;
(2) any immediate family member of a subscriber; and
(3) any corporation which is wholly owned by a subscriber.
For purposes of aggregating total shares that may be held by officers and
trustees, the term "associate" does not include shares awarded under the ESOP or
the stock award plan.
35
Subject to any required regulatory approval and the requirements of
applicable law, NCRIC Group may increase or decrease any of the subscriber
purchase limitations at any time. If the individual purchase limitation is
increased after commencement of the subscription and community offerings, then
NCRIC Group will permit any person who subscribed for the maximum number of
shares of common stock to purchase an additional number of shares, so that he or
she will be permitted to subscribe for the then maximum number of shares
permitted to be subscribed for by him or her, subject to the rights and
preferences of any person who has priority subscription rights. If either the
individual purchase limitation or the number of shares of common stock to be
sold in the subscription, community and syndicated community offerings is
decreased after commencement of the subscription offering, then the order of any
person who subscribed for the maximum number of shares of common stock will be
decreased by the minimum amount necessary so that he or she will be in
compliance with the then maximum number of shares permitted to be subscribed for
by him or her.
Each person purchasing common stock in the offering will be deemed to
confirm that his or her purchase does not conflict with the applicable purchase
limitations. In the event that the purchase limitations are violated by any
person, including any of his or her associates, NCRIC Group will have the right
to purchase from that person at the purchase price all shares acquired by him or
her in excess of any purchase limitation or, if excess shares have been sold ,
to receive the gain from the proceeds received by the person from the sale of
the excess shares. This right of NCRIC Group to purchase the excess shares or
obtain the gain is assignable by NCRIC Group.
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate
number of shares of common stock intended to be purchased by directors and
executive officers of NCRIC Group and NCRIC, A Mutual Holding Company, including
each director's and officer's associates, and by all directors and executive
officers as a group, including all of their associates, and other related
information. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories.
Share Ownership
Expected After
Directors and Officers Offerings
Nelson P. Trujillo, M.D. 14,285
R. Ray Pate, Jr. 21,285
Bruce J. Ammerman, M.D. 5,357
Arthur A. Becker, M.D. 2,000
Vincent C. Burke, III 300
Pamela W. Coleman, M.D. 3,571
Charles H. Epps, Jr., M.D. 1,428
Robert A. Fischer, M.D. 2,000
36
Sheila Hafter-Gray, M.D. 100
Major P. Gladden, M.D. 3,000
Leonard M. Glassman, M.D. 14,285
Luther W. Gray, Jr., M.D. 1,428
Joseph E. Gutierrez, M.D. 2,000
Florie Hirsch, M.D. 3,571
J. Paul McNamara 10,714
Leonard Parver, M.D. 7,142
David W. Patterson, M.D. 1,428
Raymond Scalettar, M.D. 3,571
David M. Seitzman, M.D. 3,571
Joel M. Taubin, M.D. 5,000
Anthony S. Unger, M.D. 3,571
Mervin H. Zimmerman, M.D. 14,285
Stephen S. Fargis 7,142
William E. Burgess 1,428
Rebecca B. Crunk 1,428
Directors and Officers as a Group 133,890
Total number of shares:
(1) Does not include shares that may be allocated to officers and other
employees under the ESOP.
(2) Does not include shares that may be awarded to directors, officers and
other employees under the stock award plan.
(3) Does not include shares that may be purchased by directors, executive
officers and other employees under the stock option plan.
LIMITATIONS ON RESALES
The common stock issued in the subscription, community and syndicated
community offerings will be freely transferable under the Securities Act, but
shares issued to directors and senior officers of NCRIC, A Mutual Holding
Company and its subsidiaries will be subject to resale restrictions under Rule
144 under the Securities Act. Shares of common stock issued to directors and
officers will bear a legend giving appropriate notice of these restrictions and
NCRIC Group will give instructions to the transfer agent for the common stock
with respect to these transfer restrictions.
In addition, under guidelines of the National Association of Securities
Dealers, Inc., members of the National Association of Securities Dealers, Inc.
and their associates are
37
subject to restrictions on the transfer of securities purchased in accordance
with subscription rights and reporting requirements upon purchase of the
securities.
Interpretation, amendment and termination of the subscription, community and
syndicated community offerings
All interpretations of the subscription, community and syndicated
community offerings by NCRIC Group will be final. The subscription, community or
syndicated community offerings may be amended or terminated at any time by the
affirmative vote of two-thirds of the directors of NCRIC Group.
PLACEMENT AGENT
Sandler O'Neill, a registered broker-dealer, has been engaged by NCRIC
Group to assist it in effecting the subscription offering, the community
offering and any syndicated community offering by serving as placement agent.
The placement agent will forward copies of this prospectus and subscription
materials to subscribers or purchasers upon request. In addition, the placement
agent will be available to answer questions from potential subscribers or
purchasers during the subscription offering. Following receipt of stock order
forms from prospective subscribers and purchasers, the placement agent will,
among other things, verify that:
. the submitted checks and money orders are honored;
. the stock order form has been fully and properly completed and signed;
. the subscriber has not previously submitted a subscription; and
. the subscriber is eligible to be a category one or category three
subscriber.
All subscriptions or purchase orders which the placement agent is not able to
verify will be rejected and returned to the prospective subscriber or purchaser,
unless the defect is waived by NCRIC Group.
In addition, the placement agent will receive and hold all funds
submitted by subscribers at an account with Summit Bank, the escrow agent, and,
in cooperation with the escrow agent and the transfer agent, will disburse funds
in the event a refund or other return of funds is required.
38
USE OF PROCEEDS
NCRIC Group estimates that it will receive net proceeds from the
subscription, community and syndicated community offerings of between
approximately $8,520,000 and $11,813,000, which will be used as follows:
. $5.1 million to repay indebtedness which NCRIC Group incurred in
connection with the HealthCare Consulting Acquisition. This includes
repayment of bank debt of $2.2 million and $2.9 million that NCRIC
Group borrowed from NCRIC, Inc.
. a loan to the ESOP in the amount necessary to purchase 10% of the
shares of common stock sold in the subscription, community and
syndicated community offerings. The amount of the ESOP loan may range
from $952,000 to $1,288,000 . NCRIC Group anticipates that the ESOP
loan will have a ten-year term with a floating interest rate equal to
the prime rate as published in The Wall Street Journal from time to
time. The ESOP loan will be repaid principally from NCRIC, Inc.'s
contributions to the ESOP and dividends, if any, on unallocated
shares. NCRIC Group will use the funds received from the ESOP for
general corporate purposes.
. a loan to the stock award plan in the amount necessary to purchase 5%
of the shares of common stock sold in the subscription, community and
syndicated community offerings. The amount of the stock plan loan may
range from $476,000 to $644,000 . NCRIC Group anticipates that the
stock plan loan will have a five-year term with a floating interest
rate equal to the prime rate as published in The Wall Street Journal
from time to time. The stock plan loan will be repaid principally from
NCRIC, Inc.'s contributions to the stock award plan. Upon receipt of
funds from the stock award plan, NCRIC Group will use the funds for
general corporate purposes.
. NCRIC Group will retain the balance of the net proceeds for general
corporate purposes, including the expansion and diversification of
NCRIC's activities. Until used, the funds will be invested primarily
in U.S. Government securities, federal agency securities and other
interest-bearing securities. NCRIC Group also may use a portion of the
net proceeds of the subscription, community and syndicated community
offerings to fund the purchase of a maximum of 92,000 shares of common
stock, in the open market, for use in connection with the stock option
plan.
The amount of proceeds from the sale of common stock in the
subscription, community and syndicated community offerings will depend upon the
total number of shares actually sold, the relative percentages of common stock
sold in the subscription,
39
community and syndicated community offerings and the actual expenses of the
offerings. As a result, the net proceeds from the sale of common stock cannot be
determined until the subscription, community and syndicated community offerings
are completed. Set forth below are the uses of the estimated net proceeds to
NCRIC Group, assuming the sale of common stock at the minimum, midpoint and
maximum.
Amount of Percentage Amount of Percentage Amount of Percentage
Use of Proceeds Proceeds of Proceeds Proceeds of Proceeds Proceeds of Proceeds
(Minimum) (Midpoint) (Maximum)
--------- ---------- ---------
Repayment of HealthCare
Consulting Acquisition Indebtedness.... $5,100,000 59.86% $ 5,100,000 50.16% $ 5,100,000 43.18%
Loan to ESOP.............. 952,000 11.17% 1,120,000 11.02% 1,288,000 10.90%
Loan to stock award plan.. 476,000 5.59% 560,000 5.51% 644,000 5.45%
Balance of proceeds...... 1,992,000 23.38% 3,386,500 33.31% 4,781,000 40.47%
Total.................... $8,520,000 100.00% $10,166,500 100.00% $11,813,000 100.00%
With the exception of the HealthCare Consulting Acquisition, the ESOP
loan, the stock plan loan and the possible acquisition of common stock in
connection with the stock option plan, NCRIC Group currently has no specific
plans, arrangements or understandings regarding the use of the net proceeds from
the subscription, community and syndicated community offerings. In the judgment
of NCRIC Group's board of directors, it is not necessary to utilize any of the
proceeds of the subscription, community and syndicated community offerings to
improve the quality of NCRIC, Inc.'s medical professional liability insurance
product, maintain its competitive pricing structure or ensure the stability and
longevity of NCRIC, Inc.
DIVIDEND POLICY
Declaration of dividends by NCRIC Group's board of directors depends on
a number of factors, including the requirements of applicable law and the
determination by NCRIC Group's board of directors that the net income, capital
and financial condition of NCRIC, industry trends, general economic conditions
and other factors justify the payment of dividends. At present, NCRIC Group has
not determined whether it intends to pay dividends to its stockholders in the
foreseeable future. There can be no assurance that dividends will be paid or, if
paid initially, that they will continue to be paid in the future. In addition,
the payment of dividends by NCRIC Group will depend significantly upon receipt
of dividends from NCRIC, Inc., which are subject to regulatory restrictions.
40
MARKET FOR COMMON STOCK
NCRIC Group's common stock has been conditionally approved for quotation
on the Nasdaq SmallCap Market under the symbol "NCRI." The requirements for
listing include a minimum number of publicly traded shares, a minimum market
capitalization, and a minimum number of market makers and record holders.
Sandler O'Neill has indicated its intention to make a market in the common
stock, and NCRIC Group anticipates that it will satisfy the listing
requirements.
There is no market for NCRIC Group's common stock. The existence of a
public trading market having the desirable depth, liquidity and orderliness will
depend upon the presence in the market of a sufficient number of both willing
buyers and willing sellers at any given time. The presence of a sufficient
number of buyers and sellers at any given time is a factor over which neither
NCRIC Group nor any broker or dealer has control. The absence of an active and
liquid trading market may make it difficult to sell common stock and may have an
adverse effect on the price of the common stock. There can be no assurance that
purchasers will be able to resell their shares of common stock or that
quotations will be available on the Nasdaq SmallCap Market. Purchasers should
consider the potentially illiquid and long-term nature of their investment in
the common stock.
CAPITALIZATION
The following table presents NCRIC Group's pro forma capitalization at
December 31, 1998, assuming that the HealthCare Consulting Acquisition had been
completed on December 31, 1998, and NCRIC Group's pro forma consolidated
capitalization as of that date. The pro forma data set forth below may change
significantly at the time NCRIC Group completes the subscription, community and
syndicated community offerings due to, among other factors, a change in the
valuation or a change in the current estimated expenses of the subscription,
community and syndicated community offerings.
41
At December 31, 1998
Pro Forma Capitalization of NCRIC
Group
Pro Forma Assuming that the Acquisition has
Assuming been completed and assuming the sale of
the
Completion 1,360,000 1,600,000 1,840,000
of the Shares Shares
Acquisition (minimum) Shares (maximum)
(midpoint)
(in thousands)
Borrowed funds(1)...................... $ 2,200 $ $ $
Stockholders' equity(2):
NCRIC Group common stock, $0.01 par
value per share; 10,000,000 shares
authorized; shares to be issued
as shown(3)(4)......................... $ - $ 34 $ 40 $ 46
Additional paid-in capital............. 798 9,584 11,224 12,865
Retained earnings...................... 28,197 28,197 28,197 28,197
Accumulated other comprehensive
income................................ 2,016 2,016 2,016 2,016
Less:
common stock acquired by
ESOP(5)......................... - (952) (1,120) (1,288)
common stock acquired by stock
award plan (6).................. - (476) (560) (644)
Total stockholders' equity............. $31,011 $38,403 $39,797 $41,192
(1) NCRIC Group borrowed $2.2 million from Sequoia National Bank to partially
finance the HealthCare Consulting Acquisition. NCRIC Group intends to repay
this debt out of the proceeds of the subscription, community and syndicated
community offerings.
(2) Pro forma stockholders' equity is not intended to represent the fair market
value of NCRIC Group's common stock, the net fair market value of NCRIC
Group's assets and liabilities or the amounts, if any, that would be
available for distribution to stockholders in the event of liquidation. The
pro forma data may be affected by a change in the
42
number of shares to be sold in the subscription, community and syndicated
community offerings and by other factors.
(3) Includes all shares to be issued by NCRIC Group (a) in the subscription,
community and syndicated community offerings, (b) to NCRIC Holdings, Inc.
and (c) under the HealthCare Consulting Acquisition $300,000 mandatorily
convertible notes. The number of shares of NCRIC Group common stock to be
issued in the subscription, community and syndicated community offerings
may be increased or decreased based on market and financial conditions
prior to completion of the subscription, community and syndicated community
offerings. Assumes estimated subscription, community and syndicated
community offerings expenses of $1,000,000, $1,033,500 and $1,067,000 at
the minimum, midpoint and maximum of the estimated valuation range.
(4) Does not reflect additional shares of NCRIC Group common stock that could
be issued in connection with the stock option plan, under which selected
directors and officers of NCRIC, A Mutual Holding Company and its
subsidiaries will be granted options to purchase an aggregate amount of
NCRIC Group common stock equal to up to 92,000 shares, which is the
equivalent of 5% of the shares of NCRIC Group common stock offered in the
subscription, community and syndicated community offerings.
(5) Assumes purchases by the ESOP of a number of shares of NCRIC Group common
stock equal to 10% of the subscription, community and syndicated community
offerings. The funds used to acquire the ESOP shares will be borrowed from
NCRIC Group. NCRIC Group intends to make contributions to the ESOP
sufficient to service and ultimately retire this debt. Common stock
acquired by the ESOP is reflected as a reduction of stockholders' equity.
As the ESOP debt is repaid, shares will be released and allocated to
participants' accounts, compensation expense will be recognized, and a
corresponding reduction in the charge against stockholders' equity will
occur. Shares designated for allocation to particular accounts will be
recognized as compensation expense.
(6) Assumes purchases by the stock award plan of a number of shares of NCRIC
Group common stock equal to 5% of the subscription, community and
syndicated community offerings. The funds used to acquire the stock award
plan shares will be borrowed from NCRIC Group. NCRIC Group intends to make
contributions to the stock award plan sufficient to service and ultimately
retire this debt. Common stock acquired by the stock award plan is
reflected as a reduction of stockholders' equity. As the stock award plan
debt is repaid, shares will be awarded to participants, and a corresponding
reduction in the charge against stockholders' equity will occur. Share
awards to participants will be recognized as compensation expense.
43
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following financial statements reflect the HealthCare Consulting
Acquisition and the subscription, community and syndicated community offerings.
Pro forma adjustments related to the unaudited pro forma combined statements of
operations for the year ended December 31, 1998 have been prepared assuming that
each of the HealthCare Consulting Acquisition and the subscription, community
and syndicated community offerings, with net proceeds, as adjusted for the ESOP
and stock award plan shares, of $7.1 million at the minimum of the offering
range, were consummated as of January 1, 1998 . The unaudited pro forma combined
balance sheet was prepared assuming that the HealthCare Consulting Acquisition
and the subscription, community and syndicated community offerings were all
consummated on December 31, 1998.
The unaudited pro forma combined financial statements have been prepared
using the purchase method of accounting for the HealthCare Consulting
Acquisition to record the purchase of the stock of HealthCare Consulting, the
interests of HCI Ventures and the assets of Employee Benefits Services.
The historical portion of the unaudited pro forma combined statement of
operations for the year ended December 31, 1998 has been derived from the
historical consolidated statements of operations of NCRIC Group and from the
historical combined statements of income and comprehensive income of the
practice management and financial services of HealthCare Consulting, HCI
Ventures and Employee Benefits Services for the same period. The unaudited pro
forma combined financial statements should be read in conjunction with the
historical financial statements of NCRIC Group, of the practice management and
financial services of HealthCare Consulting, HCI Ventures and Employee Benefits
Services and the other financial information pertaining to NCRIC Group and
HealthCare Consulting, HCI Ventures and Employee Benefits Services included
elsewhere in this prospectus.
The pro forma combined financial statements do not purport to be indicative
of the financial position or operating results which would have been achieved
had the HealthCare Consulting Acquisition and the subscription, community and
syndicated community offerings been consummated as of the dates indicated and
should not be construed as being representative of future financial position or
operating results of NCRIC Group. The pro forma adjustments are based upon
available information and assumptions that NCRIC Group believes are reasonable
under the circumstances.
44
NCRIC Group, Inc.
Unaudited Pro Forma Combined Balance Sheets
December 31, 1998
Stock
Purchase Combined Offering Pro Forma Footnote
NCRIC Acquisition Adjustments Total Adjustments Combined References
----- ----------- ----------- -------- ----------- --------- ----------
(In thousands except per share data)
ASSETS:
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes $ 91,135 $ - $ - $ 91,135 $ - $ 91,135
Preferred stocks 5,213 - - 5,213 - 5,213
Total securities available for sale 96,348 - - 96,348 - 96,348
Investments in management service organizations - 18 - 18 - 18
--------- ------- -------- -------- -------- ---------
Total Investments 96,348 18 - 96,366 - 96,366
========= ======= ======== ======== ======== =========
OTHER ASSETS:
Cash and cash equivalents 6,083 48 (3,007) 3,124 4,892 8,016 (1),(2)
Accounts receivable, net - 708 - 708 - 708
Reinsurance recoverable 24,944 - - 24,944 - 24,944
Deferred federal income taxes 2,742 - (225) 2,517 - 2,517 (3)
Goodwill - - 5,184 5,184 - 5,184 (4)
Other assets 4,209 287 (238) 4,258 - 4,258
--------- ------- -------- -------- -------- ---------
TOTAL ASSETS $ 134,326 $ 1,061 $ 1,714 $ 137,101 $ 4,892 $ 141,993
========= ======= ======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Losses and loss adjustment expenses $ 87,700 $ - $ - $ 87,700 $ - $ 87,700
Retrospective premiums accrued 6,492 - - 6,492 - 6,492
Unearned premiums 3,348 - - 3,348 - 3,348
Deferred income taxes - 225 (225) - - - (3)
Bank debt - - 2,200 2,200 (2,200) - (1),(2)
Long-term liabilities - 90 - 90 - 90
Other liabilities 5,775 185 300 6,260 (300) 5,960 (1),(2)
--------- ------- -------- -------- -------- ---------
TOTAL LIABILITIES 103,315 500 2,275 106,090 (2,500) 103,590
========= ======= ======== ======== ======== =========
STOCKHOLDERS' EQUITY:
Common Stock - 1 (1) - 34 34 (2)
Limited Liability Company capital - 2 (2) - - -
Additional paid-in capital 798 8 (8) 798 8,786 9,584 (2)
Unearned ESOP shares - - - - (952) (952) (2)
Unearned stock award plan shares - - - - (476) (476) (2)
Retained earnings 28,197 550 (550) 28,197 - 28,197 (1)
Accumulated other comprehensive income 2,016 - - 2,016 - 2,016
TOTAL STOCKHOLDERS' EQUITY 31,011 561 (561) 31,011 7,392 38,403
========== ======== ======== ======== ======== =========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 134,326 $ 1,061 $ 1,714 $ 137,101 $ 4,892 $ 141,993
========== ======== ======== ======== ======== =========
(notes follow tables)
NCRIC Group, Inc.
Unaudited Pro Forma Combined Statements of Operations
For the Year Ended December 31, 1998
Reorganization
and Stock
Purchase Combined Offering Pro Forma Footnote
NCRIC Acquisition Adjustments Total Adjustments Combined References
----- ----------- ----------- ----- ----------- -------- ----------
(in thousands )
REVENUES:
Premium income:
Premium written $ 19,214 $ - $ - $ 19,214 $ - $ 19,214
Premiums ceded 4,089 - - 4,089 - 4,089
Change in unearned premiums (2,945) - - (2,945) - (2,945)
Renewal credit dividends to policyholders (1,899) - - (1,899) - (1,899)
Net premiums earned 18,459 - - 18,459 - 18,459
Practice management revenues - 4,916 - 4,916 - 4,916
Net investment income 5,996 59 - 6,055 - 6,055 (5)
Net realized investment gains 159 - - 159 - 159
Other income 435 - - 435 - 435
Total Revenues 25,049 4,975 - 30,024 - 30,024
========= ======= ======== ========= ======= =========
EXPENSES:
Losses and loss adjustment expenses 15,677 - - 15,677 - 15,677
Underwriting expenses 3,858 - - 3,858 35 3,893 (6)
Amortization of goodwill - - 259 259 - 259 (7)
Other expenses 1,888 4,982 (1,139) 5,731 - 5,731 (8)
Total Expenses 21,423 4,982 (880) 25,525 35 25,560
========= ======= ======== ========= ======= =========
INCOME BEFORE INCOME TAXES 3,626 (7) 880 4,499 (35) 4,464
Income tax provision 1,079 (76) 513 1,516 (12) 1,504 (9)
NET INCOME $ 2,547 $ 69 $ 367 $ 2,983 $ (23) $ 2,960
========= ======= ======== ========= ======= =========
Net income per common share $ 0.91 (10)
(notes follow tables)
46
The following notes describe the pro forma adjustments reflected in the
accompanying pro forma combined financial statements:
(1) Purchase adjustment represents cash paid at closing of $2.9 million plus
$107,000, net of prepaid expenses, for HealthCare Consulting Acquisition
expenses. The source of funds for the HealthCare Consulting Acquisition
consideration was as follows (in thousands):
(2) Subscription, community and syndicated community offerings adjustments
represent the net subscription, community and syndicated community
offerings proceeds, as adjusted for the ESOP and stock award plan shares,
of $7.1 million, at the minimum of the offering range less repayment of
the HealthCare Consulting Acquisition bank debt of $2.2 million.
(3) Represents the reclassification of HealthCare Consulting, HCI Ventures and
Employee Benefits Services deferred federal income tax to be consistent
with NCRIC Group's combined financial statements.
(4) Since the HealthCare Consulting Acquisition has been accounted for as a
purchase, the excess of the HealthCare Consulting Acquisition cost over
the fair value of net assets acquired has been recorded as follows (in
thousands):
Purchase price................................... $5,400
Plus acquisition expenses........................ 294
Less estimated fair value of net assets acquired. 510
-------
Goodwill....................................... $5,184
=======
The final allocation of the purchase price will be made April 15, 1999.
Under the terms of the HealthCare Consulting Acquisition purchase
agreements, NCRIC Group could also pay up to an additional $3.1 million if
HealthCare Consulting, HCI Ventures and Employee Benefits Services achieve
earnings targets in 2000, 2001 and 2002. This contingent payment would be
an addition to goodwill and would be amortized over 20 years. This
contingent payment has not been included in the pro forma financial
statements.
(5) No interest earnings on the proceeds of the subscription, community and
syndicated community offerings have been included in these pro forma
statements. If interest were applied at a rate of 5% per annum,
approximating the current commercial paper rate, to the estimated adjusted
net proceeds of $7.1 million, at the minimum of the offering range, less
the $2.2 million bank debt repayment and the $2.9 million initial
HealthCare Consulting Acquisition cash payment, and $294,000 of
acquisition expenses, net investment income would increase by $85,000 for
the year ended December 31, 1998.
47
(6) Reflects the net increase in employee benefit expense resulting from the
ESOP and stock award plan offset by a reduction in the existing 401(k)
profit-sharing plan expense. There is no incremental expense reflected in
the pro forma financial statements for the stock award plan because this
expense has been completely offset by a reduction in NCRIC's existing
management incentive compensation plan. The annual expense from the ESOP
and stock award plan, assuming a per share market value equal to the
purchase price, has been assumed to be $190,000 before being offset by a
reduction of $155,000 in contributions to the existing 401(k)
profit-sharing plan and management incentive compensation plan.
(7) Represents straight-line amortization of $5.2 million of HealthCare
Consulting Acquisition goodwill over a period of 20 years.
(8) Represents a reduction in compensation expense resulting from the
HealthCare Consulting Acquisition. The Combined Financial Statements of
the Practice Management Services of HealthCare Consulting, HCI Ventures
and Employee Benefits Services reflect owners' compensation of $1,589,000
for the year ended December 31, 1998. As a result of the HealthCare
Consulting Acquisition, NCRIC MSO has entered into employment agreements
with each of the former owners of HealthCare Consulting, HCI Ventures and
Employee Benefits Services. The employment agreements reduce the aggregate
compensation of the former owners to $450,000 per year.
(9) To record the income tax effect of the adjustments described in notes (6)
through (8). The Purchase Adjustment income tax provision includes the
following three components: (a) additional income tax on the historical
pre-tax income of HealthCare Consulting, HCI Ventures and Employee
Benefits Services to raise the effective tax rate to 40% to recognize the
change in tax posture of the acquired companies, (b) a tax expense on the
reduction in compensation expense described in note (8) above, and (c) a
tax benefit on deductible goodwill amortization.
(10) Represents the net income of NCRIC Group divided by outstanding shares,
which represent the total number of outstanding shares, assuming an
offering at the minimum of the offering range, excluding the unallocated
ESOP and stock award plan shares. For the year ended December 31, 1998,
3,266,057 shares have been assumed to be outstanding.
48
PRO FORMA DATA
The actual net proceeds from the sale of the NCRIC Group common stock
cannot be determined until the subscription, community and syndicated community
offerings are completed. However, net proceeds are currently estimated to be
between $8.5 million and $11.8 million based upon the following assumptions:
. Sandler O'Neill will receive a fee equal to 2.0% of the aggregate
actual purchase price of all shares of common stock sold in the
subscription and community offerings less a $25,000 credit
relating to the HealthCare Consulting
Acquisition;
. no shares will be sold in the syndicated community offering; and
. subscription, community and syndicated community offerings
expenses, excluding the fees paid to Sandler O'Neill, will be
approximately $835,000.
Pro forma net income of NCRIC Group for the year ended December 31, 1998
assumes goodwill of $5.2 million amortized over 20 years for the HealthCare
Consulting Acquisition. Pro forma net income has been calculated assuming the
shares of NCRIC Group common stock had been sold in the subscription and
community offerings and the HealthCare Consulting Acquisition had been
consummated at January 1, 1998. Pro forma stockholders' equity and tangible
stockholders' equity have been calculated assuming that the offerings and
acquisition had been consummated on December 31, 1998.
The following pro forma information may not be representative of the
financial effects of the transactions described above at the dates on which they
actually occur and should not be taken as indicative of future results of
operations. Pro forma consolidated stockholders' equity represents the
difference between the stated amount of assets and liabilities of NCRIC Group
computed in accordance with generally accepted accounting principles ("GAAP").
The pro forma stockholders' equity is not intended to represent the fair market
value of NCRIC Group's common stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
The following table summarizes pro forma data of NCRIC Group at or for
the year ended December 31, 1998 based on the assumptions set forth above and in
the table and should not be used as a basis for projections of market value of
the NCRIC Group's common stock following the subscription, community and
syndicated community offerings. The table gives effect to the ESOP and stock
award plan as they are described in this prospectus. No effect has been given in
the table to the possible issuance of additional shares of NCRIC Group common
stock in connection with the stock option plan.
49
At or For the Year Ended December 31, 1998
--------------------------------------------
1,360,000 1,600,000 1,840,000
Shares Shares Shares
Sold at $7.00 Sold at $7.00 Sold at $7.00
Per Share Per Share Per Share
(Maximum of (Minimum of (Midpoint of Notes
-----
Range) Range) Range)
----- ----- -----
(In thousands, except per share amounts)
Gross Proceeds............................. $9,520 $ 11,200 $12,880
Less offering expenses and commissions..... (1,000) (1,034) (1,067)
Estimated net proceeds..................... 8,520 10,166 11,813
Less: Common Stock purchased by ESOP.... (952) (1,120) (1,288)
Common Stock purchased by stock
award plan................................. (476) (560) (644)
------- --------- ---------
Estimated net proceeds, as adjusted........ $7,092 $ 8,486 $9,881
======= ========= =========
Net income:
Pro forma combined..................... $2,983 $ 2,983 $2,983 (3)
Pro forma benefit plan adjustment...... (23) (23) (23) (1),(2)
Pro forma net income.................. $2,960 $ 2,960 $2,960
Per share net income:
Pro forma combined..................... $0.92 $ 0.78 $ 0.68
Pro forma benefit plan adjustment...... (0.01) (0.01) (0.01) (1),(2)
------- -------- ---------
Pro forma net income per share........ $0.91 $ 0.77 $ 0.67 (5)
======= ========= =========
Stockholders' equity:
Pro forma combined..................... $31,011 $ 31,011 $31,011 (3)
Estimated net proceeds................. 8,520 10,166 11,813
Acquisition stock issuance............. 300 300 300 (4)
Less: Common Stock acquired by ESOP... (952) (1,120) (1,288) (1)
Common Stock acquired by stock.. (476) (560) (644) (1)
------- --------- ---------
award plan................................. $38,403 $ 39,797 $ 41,192
======= ========= =========
Pro forma stockholders' equity....
Pro forma tangible stockholders' equity.... $33,219 $ 34,613 $ 36,008
======= ========= =========
Stockholders' equity per share:
Pro forma combined..................... $9.58 $ 8.16 $7.09
Estimated net proceeds................. 2.63 2.67 2.71
Acquisition stock issuance............. 0.09 0.08 0.07
Less:Common Stock acquired by ESOP..... (0.29) (0.29) (0.29)
Common Stock acquired by stock
award plan................................. (0.15) (0.15) (0.15)
Pro forma stockholders' equity per
share...................................... $11.86 $ 10.47 $9.43
Pro forma tangible stockholders' equity
per share.................................. $10.26 $ 9.10 $8.25
======= ========= =====
Offering price as a percentage of pro
forma stockholders' equity per share....... 59.02% 66.86% 74.23%
======= ======== =====
Offering price as a percentage of pro
forma tangible stockholders' equity per
share.................................... 68.23% 76.92% 84.85%
======= ======== =====
Offering price to pro forma net income per
share...................................... 7.69x 9.09x 10.45x
======= ======== =====
(1) For purposes of this table, the funds used to acquire the shares of NCRIC
Group common stock purchased by the ESOP and the stock award plan are
assumed to have been loaned to the ESOP and the stock award plan by NCRIC
Group. The amount loaned is reflected as a reduction of stockholders'
equity. NCRIC Group intends to make annual contributions to the ESOP and
to the stock award plan. The annual expense from the ESOP and stock award
plan, assuming a per share market value equal to the purchase price, has
been assumed to be $190,000 before being offset by a reduction of
$155,000 in contributions to the existing 401(k) profit-sharing plan and
management
50
incentive compensation plan. This net additional expense of $35,000
equals after-tax expense of $23,000. The annual net additional expense is
assumed to remain constant across the entire offering range because
management intends to adjust the offsetting expense to maintain this
level of incremental expense. NCRIC Group's total annual payment of the
ESOP and stock award plan loans are based upon the assumptions that (a)
27,200, 32,000 and 36,800 shares at the minimum, midpoint and maximum of
the offering range, respectively, have been committed to be released
during the year ended December 31, 1998 at an average fair value of $7.00
per share and were accounted for as a charge to expense in accordance
with Statement of Position No. 93-6; and (b) only the ESOP and stock
award plan shares committed to be released were considered outstanding
for purposes of the net earnings per share calculations, while no ESOP
and stock award plan shares were considered outstanding for purposes of
the stockholders' equity per share calculations.
(2) No effect has been given to the issuance of additional shares of NCRIC
Group common stock in connection with the stock option plan. NCRIC Group
intends to grant options for its shares at the closing date of the
offerings with an exercise price of $7.00 per share, in an amount equal
to 5% of the subscription, community and syndicated community offerings,
or 68,000, 80,000 and 92,000 shares, respectively, at the minimum,
midpoint and maximum of the offering range. These shares will be acquired
either through open market purchases or from authorized but unissued
shares of NCRIC Group's common stock or treasury stock of NCRIC Group, if
any. NCRIC Group will provide any funds used to purchase the shares in
connection with the stock option plan. The issuance of authorized but
unissued shares of NCRIC Group's common stock on the exercise of options
granted under the stock option plan instead of open market purchases
would dilute the voting interests of existing stockholders.
(3) The pro forma combined net income and stockholders' equity amounts
represent the amounts reported in the historical financial statements of
NCRIC and of the practice management and financial services of HealthCare
Consulting, HCI Ventures and Employee Benefits Services and adjusted to
reflect purchase adjustments.
(4) The HealthCare Consulting Acquisition stock issuance represents the
amount for the 42,857 shares of common stock to be issued on conversion
of the $300,000 in mandatorily convertible notes.
(5) The pro forma financials include no assumption for interest earnings on
the net new investable funds available as the result of the
subscription, community and syndicated community offerings. If interest
at 5% per annum, approximating the current commercial paper rate, had
been assumed to have been earned on the net proceeds, as adjusted, less
the $2.2 million bank debt repayment , the $2.9 million initial
HealthCare Consulting Acquisition cash payment and $294,000 for
51
acquisition expenses, net income would have included an additional
$56,000, $102,000 and $148,000 and net income per share would have been
$0.92, $0.80 and $0.71 at the minimum, midpoint and maximum levels of
the offering range, respectively, for the year ended December 31, 1998.
SELECTED FINANCIAL AND OPERATING DATA
The following table contains financial information which has been
derived from the consolidated financial statements of NCRIC Group. The
consolidated financial statements of NCRIC Group for each of the years in the
three-year period ended December 31, 1998 have been audited by Deloitte & Touche
LLP. The selected consolidated financial data below should be read in
conjunction with the consolidated financial statements and their accompanying
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
Years Ended
December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
----------------------
STATEMENT OF OPERATIONS DATA:
Gross premiums written............................ $ 19,214 $ 17,869 $ 19,017
Net premiums written.............................. $ 21,014 $ 13,935 $ 13,351
Net premiums earned............................... $ 18,459 $ 13,532 $ 13,351
Net investment income............................. 5,996 6,045 5,656
Net realized investment gains..................... 159 90 229
Other income...................................... 435 355 660
--------- --------- --------
Total revenues 25,049 20,022 19,896
========= ========= ========
Losses and LAE.................................... 15,677 15,591 15,236
Other underwriting expenses....................... 3,858 2,918 2,438
Other expenses.................................... 1,888 676 928
-------- --------- --------
Total expenses.......................... 21,423 19,185 18,602
======== ========= ========
Income before income taxes........................ 3,626 837 1,294
Income tax (benefit) provision.................... 1,079 (122) 303
Net income........................................ 2,547 959 991
Other comprehensive income (loss)................. 1,227 1,103 (1,349)
-------- ------- --------
Comprehensive income (loss)....................... $ 3,774 $ 2,062 $ (358)
======== ======= ========
52
BALANCE SHEET DATA:
Invested assets................................... $ 96,348 $ 94,362 $ 91,008
Total assets...................................... 134,326 121,841 116,664
Total liabilities................................. 103,315 94,355 91,240
Total equity...................................... 31,011 27,486 25,424
GAAP UNDERWRITING RATIOS:
Loss and LAE ratio................................ 84.9% 115.2% 114.1%
Underwriting expense ratio........................ 20.9% 21.6% 18.3%
Combined ratio after renewal credits............ 105.8% 136.8% 132.4%
Combined ratio before renewal credits........... 96.0% 118.6% 119.6%
SELECTED STATUTORY DATA:
Loss and LAE ratio................................ 82.5% 99.9% 103.2%
Underwriting expense ratio........................ 15.2% 19.7% 18.4%
Combined ratio.................................... 97.7% 119.6% 121.6%
Policyholders' surplus............................ $24,116 $23,258 $22,365
In calculating GAAP underwriting ratios, renewal credits are considered a
reduction of premium income. In addition, earned premium is used to calculate
the GAAP loss and underwriting expense ratios. For statutory purposes, renewal
credits are not considered a reduction in premium income, and written premiums
are used to calculate the statutory underwriting expense ratio. Due to these
differences in treatment, GAAP combined ratios can differ significantly from
statutory combined ratios. For a discussion of the differences between statutory
and GAAP reporting, see note 9 to the consolidated financial statements.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF NCRIC GROUP SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA AND CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The financial statements and data presented in the prospectus have been
prepared in accordance with generally accepted accounting principles, GAAP,
unless otherwise noted. GAAP differs from statutory accounting practices used by
regulatory authorities in their oversight responsibilities of insurance
companies. See Note 9 to the consolidated financial statements for a
reconciliation of NCRIC's net income and equity between GAAP and statutory
accounting bases. Discussed below are selected key financial concepts:
PREMIUM INCOME. Gross premiums written represent the amounts billed to
policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers and renewal credits in determining net premiums written. Premiums
ceded to reinsurers represent the cost to NCRIC of reducing NCRIC's exposure to
medical professional liability losses by transferring agreed upon insurance
risks to reinsurers through a reinsurance contract or treaty. Renewal credits
are reductions in premium billings to renewing policyholders. Net premiums
written are adjusted by any amount which has been billed but not yet earned
during the period in arriving at earned premiums. For several large groups of
policyholders, NCRIC has insurance programs where the premiums are
retrospectively determined based on losses during the period. Premiums billed
under retrospective programs are recorded as premiums written, while premium
refunds accrued under retrospective programs are recorded as unearned premiums.
Under retrospective programs, premiums earned are premiums written reduced by
premium refunds accrued.
Prior to 1997, NCRIC's policies were written with a January 1 renewal date.
During 1997 and 1998, NCRIC began to stagger policy renewal dates throughout the
year which results in a one-time effect when the policy is staggered. Written
premiums are increased during the periods when policies are being re-issued,
returning to the previous level in the subsequent period. In accordance with
GAAP, premiums are earned ratably over the terms of NCRIC's policies, so this
change in renewal dates has no effect on premiums earned for any period.
The balance sheet item "advance premiums" represents those premiums
collected on policies prior to their renewal dates. Unearned premiums represent
premiums billed but not yet fully earned at the end of the reporting period.
Premiums receivable represent either annual billed premiums or experience-rated
premiums which have not yet been collected.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Loss and LAE reserves are estimates of
future payments for reported and unreported claims and related expenses of
adjudicating claims with respect to insured events that have occurred. The
change in these reserves from year to year is
54
reflected as an increase or decrease to NCRIC's loss and loss adjustment
expenses. Medical professional liability loss and LAE reserves are established
based on an estimate of these future payments as reflected in NCRIC's past
experience with similar cases and historical trends involving claim payment
patterns. Other factors that modify past experience are also considered in
setting the reserves, including court decisions; economic conditions; current
trends in losses; and inflation. Reserving for medical professional liability
claims continues to be a complex and uncertain process, requiring the use of
informed estimates and judgments. Although NCRIC follows a practice of
conservatively estimating its future payments relating to losses incurred, there
can be no assurance that currently established reserves will prove adequate in
light of subsequent actual experience.
NCRIC, in consultation with its independent actuaries, utilizes several
methods in order to estimate loss and LAE reserves by projecting ultimate
losses. By utilizing and comparing the results of these methods, NCRIC is better
able to analyze loss data and establish an appropriate reserve. The loss and LAE
reserves are estimated by management on a monthly basis and reviewed
periodically by NCRIC's independent actuaries. The independent actuarial review
includes an evaluation of the appropriateness of methods used and changes in
methodology if needed, as well as a reflection of updated experience.
The inherent uncertainty in establishing reserves is relatively greater for
companies writing long-tail casualty business like NCRIC. Due to the extended
nature of the claim resolution process of professional liability claims,
established reserve estimates may be adversely impacted by: judicial expansion
of liability standards; expansive interpretations of contracts; inflation
associated with medical claims; and the propensity of individuals to file
claims. Because of the existence of these uncertainties, NCRIC has historically
taken a conservative posture in establishing reserves. NCRIC refines reserve
estimates as experience develops and additional claims are reported or existing
claims are closed; adjustments to losses reserved in prior periods are reflected
in the results of the periods in which the adjustments are made.
Losses and LAE reserve liabilities as stated on the balance sheet are
reported gross before recovery from reinsurers for the portion of the claims
covered under the reinsurance program. Losses and LAE expenses as stated on the
income statement are reported net of reinsurance recoveries.
REINSURANCE. NCRIC manages its exposure to individual claim losses, annual
aggregate losses, and LAE through its reinsurance program. Reinsurance is a
customary practice in the industry. It allows NCRIC to obtain indemnification
against a specified portion of losses associated with insurance policies it has
underwritten by entering into a reinsurance agreement with other insurance
enterprises or reinsurers. NCRIC pays or cedes part of its policyholder premium
to the reinsurers. The reinsurers in return agree to reimburse NCRIC for a
specified portion of any claims covered under the reinsurance contract. While
reinsurance arrangements are designed to limit losses from large exposures and
to permit recovery of a portion of direct losses, reinsurance does not relieve
NCRIC of liability to its insureds.
55
Under one of NCRIC's primary reinsurance contracts, the portion of the
policyholder premium ceded to the reinsurers is "swing rated" or experience
rated on a retrospective basis. This swing rated cession program is subject to a
minimum and maximum premium range to be paid to the reinsurers in the future,
depending upon the extent of losses actually paid by the reinsurers. A deposit
premium is paid by NCRIC during the initial policy year. An additional
liability, "retrospective premiums accrued under reinsurance treaties" is
recorded by NCRIC to represent an estimate of net additional payments to be made
to the reinsurers under the program, based on the level of loss and LAE reserves
recorded. Like loss and LAE reserves, adjustments to prior year ceded premiums
payable to the reinsurers are reflected in the results of the periods in which
the adjustments are made. NCRIC follows a practice of conservatively estimating
its liabilities relating to the swing rated cession program based on historical
loss experience. The swing rated reinsurance premiums are recorded in a manner
consistent with the recording of NCRIC's loss reserves.
NCRIC has historically ceded to its reinsurers over 90% of its exposure to
individual losses in excess of $1 million, known as excess layer coverage.
Excess layer premiums are recorded as current year reinsurance ceded costs.
RECENT INDUSTRY PERFORMANCE. NCRIC's results of operations have
historically been influenced by factors affecting the medical professional
liability industry in general. The operating results of the US medical
professional liability industry have been subject to significant variations over
time due to competition, general economic conditions, judicial trends and
fluctuations in interest rates. According to the August, 1998 Best's Review
published by A. M. Best Company, in recent years, medical professional liability
insurers have successfully stabilized premium rates and maintained profits by
drawing on reserve redundancies from the early 1990's. Over the last several
years, premium rates for the industry were basically flat while claim costs were
beginning to rise. NCRIC continues to monitor these industry trends and consider
them in relation to NCRIC's circumstances when setting rates or establishing
reserves.
CONSOLIDATED NET INCOME AND COMPREHENSIVE INCOME RESULTS--
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net income for NCRIC increased $1.6 million, from $959,000 for the year
ended December 31, 1997 to $2.5 million for the year ended December 31, 1998.
The substantial increase in income for the year was principally due to a $4.7
million increase in net premiums earned before renewal credits, partially offset
by a $2.2 million increase in expenses and by a $1.2 million increase in Federal
income taxes. The increase in net premiums earned is primarily due to a $5.9
million decrease in reinsurance costs and a $1.2 million increase in premiums
earned from other than experience-rated plans, offset by a decrease of $2.4
million in retrospective policyholder premiums under experience-rated plans.
Both the decrease in reinsurance costs and the decrease in premiums due under
retrospective plans are related to favorable loss development. Expenses
increased in 1998 due to costs associated with the reorganization, as well as
expenditures for the beginning of substantive operations of the
56
management services organization. Federal income taxes increased due to
increased income before income taxes.
Comprehensive income was $3.8 million for the year ended December 31, 1998
compared to $2.1 million for the year ended December 31, 1997. Other
comprehensive income consists of unrealized investment gains net of deferred
income taxes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net income for NCRIC was $959,000 for the year ended December 31, 1997,
down 3% from $991,000 for the year ended December 31, 1996. This decline was
largely due to a combination of offsetting factors. Net premiums earned
increased by $181,000, net investment income increased by $389,000 and a change
from a tax expense in 1996 to a tax benefit in 1997 contributed $425,000. More
than offsetting these positives was an increase in losses and LAE of $355,000, a
decrease in other income and realized capital gains of $444,000 and an increase
in underwriting and other expenses of $228,000.
The $181,000 increase in net premiums earned primarily resulted from three
significant factors: (1) increasingly competitive market conditions and
additional risk-sharing with larger insureds led to an additional $1.5 million
in discounts from NCRIC's base rates; (2) higher renewal credits reduced net
premiums earned by $653,000; the renewal credits were granted in anticipation of
a 6% increase in base rates for 1998; and (3) these reductions were more than
offset by a $2.4 million decrease in reinsurance costs, reflecting a reduction
in reinsurers' pricing based on NCRIC's improved loss exposure on recent loss
years as well as favorable development in retrospective premiums accrued under
reinsurance treaties.
Comprehensive income was $2.1 million for the year ended December 31, 1997
compared to a loss of $358,000 for the year ended December 31, 1996.
57
NET PREMIUMS EARNED
Following is a summary of NCRIC's net premiums earned:
Year Ended December 31,
--------------------------------
1998 1997 1996
--------- ------- --------
(in thousands)
Gross premiums written* $ 19,214 $ 17,869 $ 19,017
Change in unearned premiums (2,945) (403) --
--------- --------- ---------
Gross premiums earned before
renewal credits 16,269 17,466 19,017
Reinsurance premiums ceded related to:
-current year (5,623) (5,474) (7,312)
-prior year 9,712 3,620 3,073
--------- --------- ---------
Total reinsurance premiums ceded 4,089 (1,854) (4,239)
--------- --------- ---------
Net premiums earned before
renewal credits 20,358 15,612 14,778
Renewal credits (1,899) (2,080) (1,427)
--------- --------- ---------
Net premiums earned $ 18,459 $ 13,532 $ 13,351
========= ========= =========
*Net premiums written after
renewal credits $ 21,014 $ 13,935 $ 13,351
========= ========= =========
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Gross premiums written increased by $1.3 million, or 8%, from $17.9 million
for the year ended December 31, 1997 to $19.2 million for the year ended
December 31, 1998. Starting in the fourth quarter of 1997 and continuing through
1998, NCRIC began to stagger policy renewal dates. Premiums written increased
$836,000 for the year ended December 31, 1998 and $324,000 for the year ended
December 31, 1997 due to re-writing of policies. There is a one-time effect when
the policy renewal is staggered which increases premiums written in the current
period; premiums written will, all else being equal, return to the previous
level in the subsequent period. While the staggering of the renewal dates
affects premiums written, earned premiums are not affected for either period.
The $19.2 million of gross premiums written for the year
58
ended December 31, 1998 includes $697,000 related to experience-rated programs.
The $17.9 million of gross premiums written for the year ended December 31, 1997
includes $1.6 million related to experience-rated programs.
Gross premiums written adjusted for the staggering of renewal dates and
experience-rated premiums increased $1.7 million, or 11%, from $15.9 million for
the year ended December 31, 1997 to $17.7 million for the year ended December
31, 1998. Approximately $1.4 million of this $1.7 million increase is due to the
6% premium rate increase for 1998; the remainder of the increase results from a
2% policyholder increase to 1,202. Discounts under policyholder programs,
described more fully below in "Year Ended December 31, 1997 Compared to Year
Ended December 31, 1996," increased by $208,000, or 4% for the year ended
December 31, 1998 compared to the year ended December 31, 1997. Gross premiums
written on excess layer coverage increased $322,000 from $1.7 million for the
year ended December 31, 1997 to $2.0 million for the year ended December 31,
1998.
The change in unearned premiums for the period increased by $2.5 million
from $403,000 for the year ended December 31, 1997 to $2.9 million for the year
ended December 31, 1998. This change resulted from a $1.0 million increase in
the unearned portion of the policy premium due to non-January 1 renewal dates,
as well as a $1.5 million increase in retrospectively-determined policyholder
refunds for 1998 due to favorable loss experience.
Gross premiums earned before renewal credits decreased $1.2 million, or 7%,
from $17.5 million for the year ended December 31, 1997 to $16.3 million for the
year ended December 31, 1998. The $1.2 million decrease described above was due
to approximately $1.2 million of additional premiums earned for the year ended
December 31, 1998, offset by a $2.4 million net reduction in premiums earned
under experience-rated programs.
Reinsurance premiums ceded decreased by $5.9 million from $1.9 million for
the year ended December 31, 1997 to a credit of $4.1 million for the year ended
December 31, 1998. Reinsurance premiums are affected by current year premiums
payable to the reinsurers, as well as the retrospective adjustments to accruals
for prior year premiums. Due to favorable loss development of reinsured losses
compared to prior estimates by NCRIC, the swing rated reinsurance premiums
related to prior years were reduced by approximately $9.7 million. This change
in estimate is reflective of the favorable loss development for the 1993 through
1995 loss years.
Current year reinsurance premiums ceded increased by $149,000, or 3%, from
$5.5 million for the year ended December 31, 1997 to $5.6 million for the year
ended December 31, 1998. This increase is due to an increase in the excess layer
coverages purchased by the policyholders, partially offset by a decrease in the
swing rated premium. The reinsurance premium due for excess layer coverage
increased by $268,000 or 16%, from $1.7 million for the year ended December 31,
1997 to $1.9 million for the year ended December 31, 1998, consistent with an
increase in premiums written for the excess layer coverage. In addition, the
premiums related to the swing rated cession program decreased by $119,000, or
3%. The liability
59
"retrospective premiums accrued under reinsurance treaties" decreased from $13.8
million at December 31, 1997 to $6.5 million at December 31, 1998.
Renewal credits decreased $181,000, or 9%, from $2.1 million for the year
ended December 31, 1997 to $1.9 million for the year ended December 31, 1998
reflecting a decrease in the credit rate from 16% to 12.5%, partially offset by
an increasing premium base subject to the discount.
Net premiums earned before renewal credits increased by $4.7 million, or
30%, from $15.6 million for the year ended December 31, 1997 to $20.4 million
for the year ended December 31, 1998. This increase primarily reflects the
change in estimate of reinsurance premiums due under the swing rated program.
Net premiums earned after renewal credits increased similarly by $4.9 million,
or 36%, from $13.5 million for the year ended December 31, 1997 to $18.5 million
for the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Gross premiums written decreased by $1.1 million, or 6%, from $19.0 million
for the year ended December 31, 1996 to $17.9 million for the year ended
December 31, 1997. The decrease in policyholder premiums was more than accounted
for by a $2.1 million increase in discounts granted to policyholders under
various discount and risk-sharing programs offered by NCRIC. The decrease was
offset by an additional $1.3 million of premiums collected in 1997 related to
experience-rated programs. Base premium rates and the number of policyholders
were essentially unchanged. Policyholder renewal rates were 97% in 1997 and 95%
in 1996. Gross premiums written on excess layer coverage decreased $419,000 from
$2.1 million for the year ended December 31, 1996 to $1.7 million for the year
ended December 31, 1997.
Discounts are granted to provide incentives and rewards for policyholders
to minimize loss experience. Policyholders with favorable loss experience or
"claims free" experience, those who participate in risk-management programs and
those who wish to participate in the loss experience of a group under risk
sharing premium plans are granted discounts. The discounts for attending risk-
management programs were first implemented in 1997, and accounted for $843,000
of the $1.5 million increase in discounts for the year. While these programs
reduce net premiums due to the discounts granted, management believes its risk-
management programs are likely to reduce losses in the future.
In addition to the discounts granted, under some retrospective programs,
the policyholders associated with a group may initially pay reduced premiums for
that policy year. NCRIC will subsequently increase these premiums through
additional billings if the group's loss experience warrants. Under other risk
sharing programs, the policyholder group initially pays a premium for the policy
year which may later be partially refunded by NCRIC if losses for the group are
under agreed-upon limits. Consistent with NCRIC's treatment of both losses and
other reinsurance programs, premium refunds or additional billings are reflected
in premiums in the periods in which the adjustments are made. For the year ended
December 31, 1997, approximately $1.6 million of premiums earned under
retrospective programs are subject to
60
adjustment based upon experience. Retrospective premium refunds of $240,000 were
made during 1997 compared to zero in 1996. NCRIC also grants discounts for those
policyholders in some group or part-time practices. The premiums from excess
layer coverage purchased by policyholders decreased primarily due to premium
discounts granted.
The change in unearned premiums for the period increased by $403,000 for
the year ended December 31, 1997 due to the staggering of policy renewal dates
for the first time in 1997. The amount was zero in 1996.
Reinsurance premiums ceded decreased by $2.4 million, or 56%, from $4.2
million for the year ended December 31, 1996 to $1.9 million for the year ended
December 31, 1997. Reinsurance premiums ceded are affected by current year
premiums due to the reinsurers, as well as by retrospective adjustments to prior
year premiums ceded. Due to favorable loss development of reinsured losses
compared to prior estimates by NCRIC, the swing rated reinsurance premiums
related to prior years produced an additional $547,000 benefit, increasing from
$3.1 million for the year ended December 31, 1996 to $3.6 million for the year
ended December 31, 1997.
Current year reinsurance premiums ceded decreased $1.8 million, or 25%,
from $7.3 million for the year ended December 31, 1996 to $5.5 million for the
year ended December 31, 1997. The maximum premium due under the swing rated
program was decreased from 30% of net policyholder premiums, as defined under
the reinsurance treaty, in 1996 to 22.5% in 1997 to reflect NCRIC's favorable
loss experience. Reinsurance coverages were unaffected. The favorable loss
experience produced a reduction in the costs of the swing rated reinsurance
program. Current year ceded premiums decreased by $1.4 million, or 27%, from
$5.2 million in 1996 to $3.8 million in 1997. The reinsurance premium due for
excess layer coverage decreased by $415,000 or 20% for the year ended December
31, 1997 compared to the year ended December 31, 1996 as previously described.
These factors caused a decrease in the cost of NCRIC's reinsurance program in
1997 and 1996. The liability "retrospective premiums accrued under reinsurance
treaties" decreased from $14.8 million at December 31, 1996 to $13.8 million at
December 31, 1997.
Renewal credits increased $653,000, or 46%, from $1.4 million for the year
ended December 31, 1996 to $2.1 million for the year ended December 31, 1997 due
to an increase in the renewal credit percentage from 10% to 16%, partially
offset by a decrease in the premium base. This increase was intended to offset a
6% premium rate increase for 1998 for those qualifying for the renewal credit,
as well as to respond to the competitive pressures in the marketplace. Because
NCRIC accrues renewal credits in the period declared, the renewal credit is
reflected as a reduction in premiums earned in 1997 while the 6% premium rate
increase was not realized until 1998.
Net premiums earned before renewal credits increased by $834,000, or 6%,
from $14.8 million for the year ended December 31, 1996 to $15.6 million for the
year ended December 31, 1997. Net premiums earned after renewal credits
increased by $181,000, or 1%, from $13.4
61
million for the year ended December 31, 1996 to $13.5 million for the year ended
December 31, 1997.
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net investment income decreased by $49,000, or 1%, for the year ended
December 31, 1998 compared to the prior year, due to a decline in yields which
was only partially offset by an increase in invested funds and a decrease in
investment expenses. Net investment income for both years was approximately
$6.0 million. Average invested assets, which includes cash equivalents but
excludes real estate held, increased by $5.6 million, or 6%, from $100.0 million
at December 31, 1997 to $105.6 million at December 31, 1998 due to a change in
unrealized gains and additional invested funds. Positive cash flow and maturing
investments were primarily invested in U. S. Government/Agency and corporate
bonds for both periods. In order to increase yield and to better utilize
NCRIC's positive cash flow position, the duration of the portfolio was increased
from 4.0 years to 5.7 years. The average effective yield was approximately
5.68% for the year ended December 31, 1998 and 6.05% for the year ended December
31, 1997. The tax equivalent yield was approximately 6.24% at December 31,
1998 and 6.69% at December 31, 1997. The decrease in investment yields is
reflective of the market decrease in interest rates in 1998 compared to 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net investment income increased by $389,000, or 7%, from $5.7 million
for the year ended December 31, 1996 to $6.0 million for the year ended December
31, 1997 due to both an increase in the invested assets in the securities
portfolio and an increase in the yield rate. Average invested assets, which
includes cash equivalents but excludes real estate held, increased by $2.5
million, or 3%, from $97.5 million at December 31, 1996 to $100.0 million at
December 31, 1997 due to unrealized gains and additional invested funds.
Positive cash flow and maturing investments were primarily invested in U. S.
Government/Agency and corporate bonds for 1997 and in tax-advantaged securities
for 1996. In 1997, NCRIC sold its building and invested the $1.2 million net
proceeds in fixed maturity securities. In late 1996, in accordance with the
after-tax income optimization program, NCRIC sold approximately $10 million of
existing taxable securities and re-invested the proceeds in tax-advantaged
municipals and preferred stock. The average effective yield was approximately
6.05% for 1997 and 5.80% for 1996. The tax equivalent yield was 6.69% for 1997
and 5.99% for 1996. The increase in investment yields is reflective of the
market increase in interest rates in 1997 over 1996.
62
NET REALIZED INVESTMENT GAINS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net realized investment gains were $159,000 for the year ended
December 31, 1998 and $90,000 for the year ended December 31. 1997. Net
realized gains for both periods were primarily from the sale of corporate bonds.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net realized investment gains were $90,000 for the year ended December
31, 1997 and $229,000 for the year ended December 31, 1996. Net realized gains
for 1997 and 1996 were primarily from the sale of corporate bonds.
OTHER INCOME
Other income includes revenues from insurance brokerage, insurance agency and
physician services; as well as finance and service charge income from NCRIC's
financing of physician premiums.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Other income increased $80,000, or 23%, from $355,000 for the year
ended December 31, 1997 to $435,000 for the year ended December 31, 1998. This
increase in income is primarily due to revenues from the beginning of
substantive operations in 1998 of the management services organization.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Other income decreased $305,000, or 46%, from $660,000 for the year
ended December 31, 1996 to $355,000 for the year ended December 31, 1997. Prior
to 1997 NCRIC provided premium financing to its member physicians. During 1997
NCRIC arranged a premium financing facility to be provided by an independent
party. This caused a $252,000 decrease in finance and service charge income and
an increase in net investment income as a result of improved cash flow. The
remainder of the reduction in other income was due to decreased insurance
brokerage and insurance agency commissions and income.
63
LOSS AND LOSS ADJUSTMENT EXPENSES
INCURRED AND COMBINED RATIO RESULTS
The expense for incurred losses and LAE for each year net of reinsurance can be
summarized as follows. All loss expense amounts incurred are reported net of
reinsurance amounts recoverable.
Year Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Incurred losses and LAE related to:
Current year - losses $ 19,140 $ 19,444 $ 16,775
Prior years - development (3,463) (3,853) (1,539)
-------- -------- --------
Total incurred for the year $ 15,677 $ 15,591 $ 15,236
======== ======== ========
Traditionally, property and casualty insurer results are judged using ratios of
losses and underwriting expenses compared to net premiums earned. Following is
a summary of these ratios for each period:
64
Year Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- -------
Before Renewal Credits:
----------------------
Loss and LAE ratio:
Current year losses 94.0% 124.5% 113.5%
Prior year losses -17.0% -24.6% -10.4%
-------- -------- -------
Total Loss and Lae ratio 77.0% 99.9% 103.1%
Underwriting expense ratio 19.0% 18.7% 16.5%
-------- -------- -------
Combined ratio before
Renewal Credits 96.0% 118.6% 119.6%
======== ======== =======
After Renewal Credits:
---------------------
Loss and LAE ratio:
Current year losses 103.7% 143.7% 125.6%
Prior year losses -18.8% -28.5% -11.5%
-------- -------- -------
Total Loss and Lae ratio 84.9% 115.2% 114.1%
Underwriting expense ratio 20.9% 21.6% 18.3%
-------- -------- -------
Combined ratio after
Renewal Credits 105.8% 136.8% 132.4%
======== ======== =======
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total incurred loss and LAE expense of $15.7 million for year ended
December 31, 1998 represented an increase of $86,000, or 1%, compared to $15.6
million incurred for the year ended December 31, 1997. Although NCRIC has
noticed a higher severity--reported average claim cost--compared to earlier
coverage years, this has been more than offset by a substantially lower
frequency--number of claims. According to the August, 1998 Best's Review, this
increase in severity has also been observed in other medical professional
liability insurers. Consistent with its historical practice, NCRIC has taken a
conservative posture in establishing reserves
65
related to the higher severity indications. NCRIC cannot predict the ultimate
outcome of these uncertainties.
The total incurred losses are broken into two components--incurred
losses related to the current coverage year and development on prior coverage
year losses. Current year incurred losses decreased by $304,000, or 2%, from
$19.4 million for the year ended December 31, 1997 to $19.1 million for the year
ended December 31, 1998 due to the lower frequency of claims previously
described. At the same time, net premiums before renewal credits increased by
30% as also previously described. The loss and LAE ratio reflected these
changes, decreasing from 124.5% for the year ended December 31, 1997 to 94.0%
for the year ended December 31, 1998.
NCRIC experienced favorable development on estimated losses for prior
years' claims for both years. The favorable loss development related to prior
years claims was $3.5 million for the year ended December 31, 1998, and $3.9
million for the year ended December 31, 1997. The total loss and LAE ratio was
reduced by 17 points for the year ended December 31, 1998 and 25 points for the
year ended December 31, 1997, as a result of this favorable development. For
both periods, this favorable development related to the 1993 through 1995 loss
years, substantially reduced losses.
The underwriting expense ratio before renewal credits increased from
18.7% for the year ended December 31, 1997 to 19.0% for the year ended December
31, 1998. This increase is reflective of the 32% increase in underwriting
expenses offset by a 30% increase in net premiums before renewal credits due to
the substantial decrease in reinsurance premiums previously described.
Underwriting expenses increased $940,000 from $2.9 million for the year ended
December 31, 1997 to $3.9 million for the year ended December 31, 1998. See
"Underwriting expenses."
The combined ratio before renewal credits decreased from 118.6% for
the year ended December 31, 1997 to 96.0% for the year ended December 31, 1998.
The 30% increase in net premiums before renewal credits previously described,
combined with stable incurred losses helped to drive the combined ratio to its
lowest level for the 1995 through 1998 period. The GAAP combined ratio before
renewal credits for the year ended December 31, 1998 was 96.0% while the
statutory combined ratio was 97.7%. Likewise, for the year ended December 31,
1997, the GAAP combined ratio before renewal credits was 118.6% compared to the
statutory combined ratio of 119.6%.
The GAAP combined ratio after renewal credits for the year ended
December 31, 1998 of 105.8% improved by 31 points from the combined ratio for
the year ended December 31, 1997 of 136.8% due to a 9% decrease in renewal
credits as well as the net premium changes already described.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total incurred loss and LAE expense of $15.6 million for the year
ended December 31, 1997 represented an increase of $355,000, or 2%, compared to
$15.2 million incurred for the
66
year ended December 31, 1996. The total incurred is broken into two components--
incurred losses related to the current coverage year and development on prior
coverage year losses.
Current year incurred losses increased by $2.7 million, or 16%, from
$16.8 million for the year ended December 31, 1996 to $19.4 million for the year
ended December 31, 1997. This increase was due to a 12% increase in the number
of claims reported or "opened" for 1997 as compared to 1996 and due to
indications of a higher average claim cost relative to earlier coverage years.
The loss and LAE ratio reflected this increase, changing from 113.5% for the
year ended December 31, 1996 to 124.5% for the year ended December 31, 1997.
NCRIC experienced favorable development on expected losses for prior
year claims compared to previous estimates in both 1997 and 1996 based on
updated loss experience for those prior coverage periods. The favorable loss
development related to prior years' claims was $3.9 million for the year ended
December 31, 1997 and $1.5 million for the year ended December 31, 1996. The
1997 favorable development was primarily related to the 1993 through 1995 loss
years. For the year 1996, favorable development primarily related to the 1994
and 1995 loss years. The total loss and LAE ratio was reduced by 25 points for
the year ended December 31, 1997, and 10 points for the year ended December 31,
1996 as a result of this favorable development.
NCRIC believes that its favorable development has resulted for the
most part from the comparatively low number of claims reported for the 1995
through 1996 period, as well as its conservative reserving practice. For 1996,
the favorable development related to the immediately preceding coverage years
was relatively low by historical standards. In addition, this favorable
development was offset by upward adjustment on the claim severities for earlier
years and an upward adjustment for tail coverage issued in 1992.
The underwriting expense ratio before renewal credits increased from
16.5% in 1996 to 18.7% in 1997. The 20% increase in underwriting expenses was
only partially offset by the 6% increase in net premiums before renewal credits.
Underwriting expenses increased $480,000 from $2.4 million for the year ended
December 31, 1996 to $2.9 million for the year ended December 31, 1997. See
"Underwriting Expenses."
The combined ratio before renewal credits decreased from 119.6% for
the year ended December 31, 1996 to 118.6% for the year ended December 31, 1997.
The 2% increase in incurred loss and LAE expense was more than offset by the 6%
increase in net premiums before renewal credits previously described. The GAAP
combined ratio before renewal credits for 1997 was 118.6% while the statutory
combined ratio was 119.6%. Likewise for 1996, the GAAP combined ratio before
renewal credits was 119.6% while the statutory combined ratio was 121.6%.
The GAAP combined ratio for the year ended December 31, 1997 of 136.8%
worsened by 4 points from the combined ratio for the year ended December 31,
1996 of 132.4% primarily due to the 46% increase in renewal credits previously
described.
67
LOSS AND LOSS ADJUSTMENT EXPENSES
LIABILITY
The loss and LAE reserve liabilities for unpaid claims as of each period are as
follows:
Losses in the medical professional liability industry can take up to
eight to ten years, or occasionally more, to fully settle. Actual amounts are
not due from the reinsurers until NCRIC settles a claim.
NCRIC believes that all of its reinsurance recoverables are
collectible. See "Business-Reinsurance" for a discussion of the reinsurance
program.
UNDERWRITING EXPENSES
Salaries and benefits accounted for approximately 20 to 30% of other
underwriting expenses; with professional fees, including legal, auditing and
directors' fees, accounting for approximately another 30% of the underwriting
expenditures. Premium taxes remained level from year to year at approximately
2% of gross premiums written. Starting in 1998, premium taxes related to the
change in unearned premiums due to the staggering of renewal dates have been
treated as deferred acquisition costs. Guaranty fund assessments are based on
industry loss experience, which is not entirely predictable. In 1998, NCRIC
began to accrue future guaranty fund assessments related to the current year
based on recent years' experience. Prior to 1998, guaranty fund assessments
were expensed when paid.
68
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Underwriting expenses increased $940,000, or 32%, from $2.9 million
for the year ended December 31, 1997 to $3.9 million for the year ended December
31, 1998. The increase in expenditures was due to a variety of factors,
including increases in salary and employee relations costs ($423,000); rent
costs ($263,000); and premium taxes ($109,000). Salary and employee relations
costs increased due to the continued upgrading of management positions in
anticipation of the reorganization. Building rent costs have increased due to
the sale of NCRIC's building in 1997. Premium taxes increased due to an
increase in written premiums.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Underwriting expenses increased $480,000, or 20%, from $2.4 million
for the year ended December 31, 1996 to $2.9 million for the year ended December
31, 1997. The increase in expenditures was due primarily to increases in salary
and employee relations costs ($207,000); guaranty fund assessments ($145,000);
and legal and auditing fees ($87,000). The increase in salary and employee
relations costs is attributable to the upgrading of staff and management
positions by NCRIC in marketing, underwriting and accounting. Guaranty fund
assessments increased substantially due to payments in 1997 compared to refunds
received in 1996.
OTHER EXPENSES
Other expenses include expenditures for subsidiary operations which are not
directly related to the issuance of medical professional liability insurance,
including insurance brokerage, insurance agency and physician services; as well
as costs associated with unrelated one-time events like the reorganization.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Other expenses increased $1.2 million, or 179%, from $676,000 for the
year ended December 31, 1997 to $1.9 million for the year ended December 31,
1998. The substantial increase was due to $649,000 of legal, accounting and
professional fees associated with the reorganization; and $378,000 in
expenditures for the management services organization. The management services
organization was established in 1997 to provide physicians with a variety of
administrative support and other services, but did not have substantive
operations until 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Other expenses decreased $252,000, or 27%, from $928,000 for the year
ended December 31, 1996 to $676,000 for the year ended December 31, 1997. This
decrease is
69
reflective of reduced salary and other operating expenditures in both the
insurance brokerage and insurance agency subsidiaries.
FEDERAL INCOME TAXES
The effective tax rate for NCRIC is lower than the federal statutory rate
principally due to nontaxable investment income.
Year Ended December 31,
--------------------------------------------
1998 1997 1996
----------- ----------- -----------
Federal income tax at
statutory rates 34% 34% 34%
Tax exempt income, net (9) (42) (4)
Dividends received, net (2) (8) (6)
Reorganization costs 6 -- --
Other, net 1 1 (1)
----------- ----------- -----------
Federal income tax at
effective rates 30% (15)% 23%
=========== =========== ===========
NCRIC's net deferred tax assets are created by temporary differences that will
result in tax benefits in future years due to the differing treatment of items
for tax and financial statement purposes. The primary difference is the
requirement to discount or reduce loss reserves for tax purposes because of
their long-term nature.
Year Ended December 31,
--------------------------------------------
1998 1997 1996
----------- ----------- -----------
Deferred federal income tax
asset $ 2,742,000 $ 2,793,000 $ 3,495,000
=========== =========== ===========
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Tax expense for the year ended December 31, 1998 was $1.1 million compared
to a $122,000 tax benefit for the year ended December 31, 1997. The Federal
corporate income tax rate of 34% was reduced to an effective tax benefit rate of
15% for the year ended December 31, 1997 due to tax-exempt income and nontaxable
dividends received. The effective rate was 30%
70
for the year ended December 31, 1998. This increase in federal income tax is
reflective of the increased income before income tax for the period.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The tax benefit for the year ended December 31, 1997 was $122,000, compared
to a tax expense of $303,000 for the year ended December 31, 1996. The Federal
corporate income tax rate of 34% was reduced to an effective rate of 23% for
1996 due to tax-exempt income and nontaxable dividends received. The 15% tax
benefit rate for 1997 was achieved primarily due to a 42 point reduction to the
34% Federal tax income tax rate due to the exclusion of tax-exempt income, as
well as an 8 point reduction due to nontaxable dividends received.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
NCRIC GROUP
FINANCIAL CONDITION AND CAPITAL RESOURCES. NCRIC Group is a stock holding
company whose operations and assets primarily consist of its ownership of NCRIC,
Inc. and other subsidiaries. In addition, as a result of the reorganization,
NCRIC Group has greater access to the capital markets. This allows NCRIC Group
to assist its subsidiaries in their efforts to compete effectively and create
long-term growth. As a part of this strategy, NCRIC Group may seek to take
advantage of acquisition opportunities and alternative financing.
On January 4, 1999, Sequoia National Bank approved a loan to NCRIC Group in
the amount of $2,200,000 at an annual interest rate of prime + 3/4 of a
percentage point to finance the acquisition of HealthCare Consulting, Inc. and
HCI Ventures, LLC and the assets of Employee Benefits Services, Inc.. The loan
is secured by all of the stock of HealthCare Consulting, Inc., as well as its
receivables; and an assignment of the membership interests of HCI Ventures, LLC.
In connection with the loan, NCRIC, Inc. is required to covenant to pay
dividends to NCRIC Group, subject to regulatory limits, to service the loan if
the combined cash flow of NCRIC Group and NCRIC MSO is inadequate to service the
loan.
LIQUIDITY. Liquidity is a measure of an entity's ability to secure enough
cash to meet its contractual obligations and operating needs. NCRIC Group's cash
flow from operations will consist of dividends from subsidiaries, if declared
and paid, and other permissible payments from its subsidiaries, offset by fees
paid to NCRIC, Inc., for management services and other expenses. NCRIC Group
intends to rely primarily on this cash flow from NCRIC, Inc. to pay dividends on
its common stock, if any. The amount of future cash flow available to NCRIC
Group may be influenced by a variety of factors, including NCRIC, Inc.'s
financial results and regulation by the District of Columbia Department of
Insurance and Securities Regulation.
The payment of dividends to NCRIC Group by NCRIC, Inc. is subject to
limitations imposed by the District of Columbia Holding Company System Act of
1993. Under the DC Holding Company Act, NCRIC, Inc. must seek prior approval
from the Commissioner to pay any dividend which, combined with other dividends
made within the preceding 12 months,
71
exceeds the lesser of (A) 10% of the surplus at the end of the prior year or (B)
the prior year's net income excluding realized capital gains. Net income,
excluding realized capital gains, for the 2 years preceding the current year is
carried forward for purposes of the calculation to the extent not paid in
dividends. The law also requires that an insurer's statutory surplus following a
dividend or other distribution be reasonable in relation to the insurer's
outstanding liabilities and adequate to meet its financial needs. The District
of Columbia permits the payment of dividends only out of unassigned statutory
surplus. Using these criteria, as of the date of reorganization NCRIC, Inc.
would have had available approximately $2.4 million of unassigned statutory
surplus available for dividends.
SUBSIDIARIES OF NCRIC GROUP
Liquidity. The primary sources of NCRIC subsidiaries' liquidity are
insurance premiums, net investment income, recoveries from reinsurers and
proceeds from the maturity or sale of invested assets. Funds are used to pay
claims, LAE, operating expenses, reinsurance premiums and taxes; and to purchase
investments.
NCRIC subsidiaries had positive cash flow from operations for years
ended December 31, 1998, 1997 and 1996. Cash provided by operating activities
of NCRIC subsidiaries was $3.0 million in 1998, $1.6 million in 1997 and $5.3
million in 1996. The $1.4 million of increased cash flow in 1998 compared to
1997 resulted from $1.1 million of additional premiums collected and a $3.5
million reduction in losses and LAE paid; reduced by $2.8 million of increased
underwriting and other expenses and $700,000 of Federal income taxes paid. The
$3.7 million decrease in cash flow in 1997 compared to 1996 was primarily due to
$2.1 million of additional discounts given to renewing policyholders, a $1.4
million increase in the swing-rated deposit premium advanced to the reinsurers,
and a $653,000 increase in renewal credit dividends to policyholders; net of a
$1.1 million increase in premiums collected. Because of the long-term nature of
both the payment of claims and the settlement of swing-rated reinsurance
premiums due to the reinsurers, cash from operations for a medical professional
liability insurer like NCRIC, Inc. can vary substantially from year to year.
In addition to the positive cash generated from operations, NCRIC,
Inc. sold its building in 1997. The $1.2 million net proceeds were invested in
the securities portfolio.
FINANCIAL CONDITION AND CAPITAL RESOURCES. NCRIC subsidiaries invest
their positive cash flow from operations primarily in investment grade, fixed
maturity securities. As of December 31, 1998, the carrying value of NCRIC
subsidiaries' securities portfolio was
72
$96.3 million, compared to a carrying value of $94.4 million at December 31,
1997, and $89.6 million at December 31, 1996. The portfolios were invested as
follows:
December 31,
---------------------------------
1998 1997 1996
---------------------------------
U.S Government and agencies 25% 30% 22%
Mortgage-backed securities 28 25 35
Tax-exempt securities 21 22 22
Corporation bond and preferred
stocks 26 23 21
Over 76% of the portfolio at December 31, 1998 was invested in US
Government/agency securities or has a rating of AAA or AA. For regulatory
purposes, 99% of the securities portfolio is rated "Class 1" for all periods
presented, which is the highest quality rated group as classified by the NAIC.
NCRIC subsidiaries believe that all of their fixed maturity securities
are readily marketable. Investment duration is closely monitored to provide
adequate cash flow to meet operational and maturing liability needs. Asset and
liability modeling, including sensitivity analyses and cash flow testing, are
performed on a regular basis.
NCRIC subsidiaries have no corporate debt. The $2.5 million line of
credit available as of December 31, 1998 is restricted to working capital for
claim settlements. The line of credit is unsecured and renewable annually.
NCRIC subsidiaries have not drawn down on this facility. As of December 31,
1998, NCRIC subsidiaries have no material commitments for capital expenditures.
NCRIC Group and its subsidiaries are required to pay aggregate salaries in the
amount of $975,000 to six persons under employment agreements.
The equity of NCRIC subsidiaries was $31.0 million at December 31,
1998, $27.5 million at December 31, 1997, and $25.4 million at December 31,
1996. The $3.5 million increase for the year ended December 31, 1998 was due to
$2.5 million of net income and $1.2 million of unrealized appreciation net of
tax in the investment portfolio, net of a $250,000 dividend. The $2.1 million
increase for the year ended December 31, 1997 was due to $959,000 of net income
in 1997, as well as an unrealized appreciation net of tax in the investment
portfolio of $1.1 million. The decrease in equity for the year ended December
31, 1996 resulted from $991,000 of net income in 1996, offset by unrealized
investment losses of $1.4 million.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The primary effect of inflation on NCRIC is in estimating reserves for
unpaid losses and LAE for medical professional liability claims in which there
is a long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed
73
the general rate of inflation. The actual effect of inflation on NCRIC's results
cannot be conclusively known until claims are ultimately settled. Based on
actual results to date, NCRIC believes that loss and LAE reserve levels and
NCRIC's ratemaking process adequately incorporate the effects of inflation.
Interest rate changes expose NCRIC to a market risk on its investment
portfolio. This market risk is the potential for financial losses due to the
decrease in the value or price of an asset resulting from broad movements in
prices, such as interest rates. In general, the market value of NCRIC's fixed
maturity portfolio increases or decreases in an inverse relationship with
fluctuation in interest rates. In addition, NCRIC's net investment income
increases or decreases in a direct relationship with interest rate changes on
monies re-invested from maturing securities and investments of positive cash
flow from operating activities.
YEAR 2000 ISSUES
Many hardware computer systems and software computer programs were
designed to accommodate only two-digit fields to represent a given year; for
example, "98" represents 1998. The computer hardware and software automatically
understands the two-digit indicator to be associated with the twentieth century
and assigns the first two digits as "19." This design results in the inability
of these computer systems to recognize post-twentieth century dates and to
properly accept, process or display information related to the next century. If
not corrected, this could result in system or electronic equipment failures, or
miscalculations causing disruption of NCRIC's business operations.
NCRIC's overall compliance initiatives have included the assignment of
a task force to provide an assessment of NCRIC's exposure to the Year 2000
issues. The comprehensive program to address each aspect of the Year 2000
issues has included an assessment of all critical business systems; remediation
or upgrading of critical systems; implementation of modified and updated
systems; testing of both modified and updated systems as well as integrated
systems testing; and contingency planning. The study has included an evaluation
of both NCRIC's internal hardware and software systems, as well as exposure from
service providers, brokers and other external business partners.
NCRIC has completed an assessment of all of its critical internal
hardware and software systems. Internal computer hardware has been determined
to be Year 2000 compliant based on manufacturers' representations. Software
systems that are not Year 2000 compliant are in the process of being upgraded
through updates supplied by the vendors; being replaced by new systems; or being
brought into compliance through the remediation efforts of outside vendors under
NCRIC's direction. Specifically, NCRIC's computer systems and application
software that relate to policy administration, billing and claims are Year 2000
compliant. Office automation software programs that are not Year 2000 compliant
will be replaced during 1999.
For those systems which are in compliance, NCRIC has successfully
completed stand-alone testing. During 1999, NCRIC will complete testing of
those systems which are in the process of being modified. In addition, while
most of NCRIC's computer hardware, software,
74
telecommunications and desktop applications operate as stand-alone systems,
there is some level of interdependency among the systems. NCRIC intends to
complete full-scope integrated systems testing during 1999. NCRIC has begun to
contact its outside vendors and critical business partners concerning their Year
2000 compliance efforts. This process will be completed in mid 1999.
NCRIC estimates that it has incurred internal and external costs
associated with the Year 2000 effort of approximately $15,000 and $36,000 for
the years ended December 31, 1998 and December 31, 1997. No expenditures were
incurred for the year ended December 31, 1996. NCRIC anticipates incurring
internal and external costs of approximately $15,000 during 1999.
Although there can be no assurances, NCRIC believes that its internal
operations will be sufficiently compliant that the Year 2000 issues should not
cause a material disruption in its business. Despite these efforts, there can
be no guarantee that the systems of other companies on which NCRIC relies will
be Year 2000 compliant. Any failure associated with this non-compliance could
have a material effect on NCRIC. While NCRIC believes that the Year 2000 issues
will not cause an adverse effect on its ability to conduct its operations, it
has begun to explore various contingency plans in order to complete the most
critical aspects of its business operations in the event of any failures in the
remediation efforts.
FEDERAL INCOME TAX MATTERS
For tax years prior to the stock offerings, NCRIC filed a consolidated
United States Federal income tax return. For tax years after the stock
offerings, NCRIC will not file as part of a consolidated United States Federal
income tax return with NCRIC, A Mutual Holding Company or NCRIC Holdings
because NCRIC, A Mutual Holding Company and NCRIC Holdings will own directly and
indirectly less than 80% of the outstanding shares of NCRIC Group. Tax years
1995, 1996 and 1997 are open but not currently under audit.
REGULATORY MATTERS
NAIC STATUTORY ACCOUNTING CODIFICATION. The NAIC is currently in the
process of codifying statutory accounting practices, which are the accounting
rules and guidelines prescribed or permitted by the state insurance regulators.
Prescribed statutory accounting practices include state laws, regulations and
NAIC guidelines. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; permitted statutory accounting
practices may differ from state to state and company to company. This project
is intended to re-examine current statutory accounting practices and to ensure
uniform accounting treatment from a regulatory standpoint. The accounting
mandated by the codification is expected to apply commencing January 1, 2001,
and is likely to result in changes to current accounting treatments permitted by
state regulators. Any statutory accounting changes mandated as a result of this
codification will not have an effect on the financial statements prepared in
accordance with GAAP, which have been included in this document and filed with
the Securities and Exchange Commission.
75
NAIC IRIS RATIOS. The NAIC Insurance Regulatory Information System
or "IRIS," is an early warning system that is primarily intended to be utilized
by the state and District of Columbia insurance department regulators to assist
in their review and oversight of the financial condition and results of
operations of insurance companies operating in their respective jurisdictions.
IRIS is a ratio analysis system that is administered by the NAIC. The NAIC
provides the state and District of Columbia insurance department regulators with
ratio reports for each insurer within their jurisdiction based on standardized
annual financial statements submitted by the insurers. IRIS identifies 12
ratios to be analyzed for a property-casualty insurer, and specifies a range of
values for each of these ratios. The ratios address various aspects of each
insurer's financial condition and stability including profitability, liquidity,
reserve adequacy and overall analytical ratios. Departure from the "usual
range" of a ratio may require the submission of an explanation to the state or
District of Columbia insurance regulator. Departure from the usual range on
four or more ratios may lead to increased regulatory oversight.
For both 1996 and 1997 National Capital Reciprocal was outside the
usual range on the ratio of estimated current reserve deficiency to surplus.
This ratio provides an estimate of the adequacy of loss reserves maintained
based on the change in net premiums from year to year. This ratio fell outside
the usual range for both years due to a change in National Capital Reciprocal's
net premiums written, which takes into account premiums ceded under the
reinsurance program. Due to favorable loss development, the previously
estimated swing rated reinsurance premium due from prior years was reduced. In
addition, the maximum premium rate due under the reinsurance program was reduced
in 1996 and again in 1997. This premium ceded reduction resulted in an
inappropriate indication of inadequate reserves. In addition, for 1996 the
change in net writings or net premiums written, ratio was out of the usual range
of values. This again was due to the reduction in reinsurance premiums.
National Capital Reciprocal was within or favorably exceeded the usual range for
the remainder of the IRIS ratios. The IRIS ratios for 1998 are not yet
available.
NAIC RISK-BASED CAPITAL. The NAIC has established a methodology for
assessing the adequacy of each insurer's capital position based on the level of
statutory surplus and an evaluation of the risks in the insurer's product mix
and investment portfolio profile. This risk-based capital or "RBC" formula is
designed to allow state and District of Columbia insurance regulators to
identify potentially under-capitalized companies. For property-casualty
insurers, the formula takes into account risks related to the insurer's assets--
including risks related to its investment portfolio--and the insurer's
liabilities--including risks related to the adverse development of coverages
underwritten. The RBC rules provide for different levels of regulatory
attention depending on the ratio of the insurer's total adjusted capital to the
"authorized control level" of RBC. For all periods presented, NCRIC's and
Commonwealth Medical Liability Insurance Company's total adjusted capital levels
were significantly in excess of the authorized control level of RBC. Management
believes that the RBC levels will be significantly in excess of the authorized
control level of RBC as of the closing of the stock offerings. As a result, the
RBC requirements are not expected to have an impact upon NCRIC's operations.
Following is a presentation of the total adjusted capital for NCRIC and
Commonwealth Medical Liability Insurance Company compared to the authorized
control level of RBC:
76
Authorized Control Level
Risk-based Capital Total Adjusted Capital
------------------------ -------------------------
NCRIC CML NCRIC CML
------------------------ -------------------------
(in millions)
December 31, 1998 $ 4.5 $ 0.15 $ 24.1 $ 5.0
1997 3.7 0.14 23.2 4.9
1996 3.8 0.12 22.4 5.3
77
BUSINESS
NCRIC Group
NCRIC Group is a holding company which owns NCRIC, Inc., a medical
professional liability insurance company, and NCRIC MSO, Inc., a physician
practice management and financial services company. NCRIC, Inc.'s and NCRIC
MSO's principal operations are in the District of Columbia, Maryland, Virginia
and North Carolina.
Medical professional liability insurance
NCRIC, Inc. is a medical professional liability insurance company
servicing healthcare providers in the District of Columbia and Maryland. NCRIC,
Inc.'s wholly-owned subsidiary, Commonwealth Medical Liability Insurance
Company, sells medical professional liability insurance to healthcare providers
in Virginia, West Virginia and Delaware. Created by District of Columbia
physicians in 1980 when medical professional liability insurance was either
unavailable or prohibitively expensive, NCRIC has provided high quality
insurance products to its insureds in the District of Columbia metropolitan
area, a legal jurisdiction which has rejected tort reform and has the highest
cumulative average medical professional liability jury awards of any
jurisdiction in the United States. NCRIC, Inc's success rests, among other
factors, on its ability to successfully litigate claims, reduce its insured's
loss exposure through effective risk management and provide its insureds with
individualized service. Recognizing the value of NCRIC's insurance products, 98%
of NCRIC's insureds renewed their policies in 1998. NCRIC believes that it
successfully managed the medical professional liability insurance crisis of the
early 1980's and has prospered since through a combination of physician
governance and professional management expertise.
Over the past three years, NCRIC has distributed a customer satisfaction
survey. In 1998, 62% of NCRIC's insureds responded to the survey and 92% of
those who responded indicated that they were "always pleased" or "almost always
pleased" with NCRIC's service. Comparable ratings for 1998 and 1997 were 92% and
91%.
According to A.M. Best, in 1997 44% of the direct premiums written for
physician and hospital professional liability insurance in the District of
Columbia were written by NCRIC. In addition, during the year ended December 31,
1998, NCRIC generated 10% of its premiums in Maryland, Virginia and West
Virginia. NCRIC's market share is less than 2% in each of these markets. As of
December 31, 1998, NCRIC had approximately 1,200 medical professional liability
policies outstanding in all of its markets. The majority of NCRIC's premiums are
generated from individual and small-group practices, but it also has risk
sharing programs with groups of physicians sponsored by metropolitan Washington,
D.C. area hospitals. NCRIC primarily markets its products directly to its
physician clients. NCRIC also markets
78
its products through independent brokers and agents who currently produce less
than 2% of its direct premiums written.
Medical professional liability insurance insures the physician or other
healthcare provider against liabilities arising from the rendering of, or
failure to render, professional medical services. NCRIC's policies are written
on a claims-made basis and include legal defense against asserted professional
liability claims.
Our direct insurance premiums written and net income were $17.9 million
and $959,000 for the year ended December 31, 1997 and were $19.2 million and
$2.5 million for the year ended December 31, 1998. As of December 31, 1998,
NCRIC Group had $134.3 million in total assets and $31.0 million of total
equity.
NCRIC believes it can best leverage its strengths and appeal to
customers by maintaining conservatism in its financial accounts. In line with
this philosophy, as of December 31, 1998, NCRIC has established, on a gross
basis, $87.7 million in loss reserves. NCRIC believes that its loss reserves are
adequate to meet losses. NCRIC's conservative estimation of loss reserves
is demonstrated by its favorable loss developments in each year since 1990.
These favorable loss developments have contributed significantly to NCRIC's
reported earnings.
PRACTICE MANAGEMENT AND FINANCIAL SERVICES
We believe that by developing a practice management and financial
services business we will be able to diversify our operations while solidifying
the already strong relationship NCRIC has with its existing insureds. If we
successfully diversify into practice management and financial services, we will
both increase our profits and provide NCRIC with an additional market for its
core insurance products. NCRIC MSO was established in 1997 as our vehicle to
provide practice management and financial services to physicians. NCRIC MSO's
business strategy is to develop a range of practice management services which
will give physicians the management expertise they need to conduct their
practices without requiring them to relinquish ownership or control of their
practices. NCRIC MSO intends to be a partner whom physicians can rely on to
understand their problems and who has the foresight to develop services to fit
their needs. In order to substantially accelerate its entry into the practice
management, financial services and employee benefits markets, NCRIC MSO acquired
HealthCare Consulting, HCI Ventures and Employee Benefits Services. Since the
acquisition, NCRIC MSO has been doing business as HealthCare Consulting. On
March __, 1999, HealthCare Consulting merged into NCRIC MSO.
OTHER NCRIC GROUP SUBSIDIARIES
79
In addition to our medical professional liability insurance and practice
management and financial services operations, we have a Virginia insurance
subsidiary, a reinsurance brokerage operation, an insurance agency, and a
physicians organization.
Commonwealth Medical Insurance Liability Company, a wholly-owned
subsidiary of NCRIC, Inc., provides medical professional liability insurance in
Virginia and other jurisdictions. Commonwealth Medical Insurance Liability
Company was formed in 1989 and started writing policies in Virginia in 1991.
Currently, Commonwealth Medical Insurance Liability Company is licensed to write
policies in the District of Columbia, Virginia, Delaware and West Virginia.
Commonwealth Medical Insurance Liability Company's policies closely resemble
NCRIC's policies except that insureds of Commonwealth Medical Insurance
Liability Company do not become members of NCRIC, A Mutual Holding Company.
National Capital Insurance Brokerage, Inc., a wholly-owned subsidiary of
NCRIC, Inc., was formed in 1984 to serve as NCRIC's domestic reinsurance broker.
National Capital Insurance Brokerage, Inc. has retained commission income which
would otherwise have been paid to outside reinsurance brokers. This income has
been used by NCRIC to offset other operating expenses. National Capital
Insurance Brokerage, Inc. has also played a critical role in restructuring
NCRIC's reinsurance program to provide effective and comprehensive reinsurance
coverage without reducing NCRIC's profitability. In 1996, National Capital
Insurance Brokerage, Inc. conducted a thorough analysis of NCRIC's reinsurance
program. As a result of this review and internal efforts undertaken by NCRIC,
NCRIC significantly reduced its current and future reinsurance costs.
In 1989, NCRIC Insurance Agency, a wholly-owned subsidiary of NCRIC,
Inc., acquired the life, health and disability insurance businesses of Medical
Society Services, Inc. In 1992, NCRIC Insurance Agency also began offering
property and casualty products. NCRIC Insurance Agency offers its products in
the same markets as NCRIC. As an insurance agent, NCRIC Insurance Agency
receives commissions for business it places for sponsored insurance companies.
NCRIC Insurance Agency markets insurance products not underwritten by NCRIC.
This permits NCRIC's core insureds to obtain a wider range of insurance products
through NCRIC. NCRIC Insurance Agency's success to date has been modest.
NCRIC Physicians Organization, Inc., a wholly-owned subsidiary of NCRIC
MSO, manages a coalition of physicians working with hospitals and ancillary
healthcare providers which contract with managed care payers as an exclusive
healthcare provider network. NCRIC Physicians Organization began with
approximately 600 physicians in 1994 and currently is, we believe, the only
physician-governed healthcare provider network in the Washington, D.C.
metropolitan area, with 1,800 physicians. Approximately 600 of NCRIC Physicians
Organization's members are insureds of NCRIC. NCRIC Physicians Organization
achieved its 1998 growth through alliances with two major area networks,
Suburban Hospital
80
PHO and Dimensions Health Network, which added 600 new physicians. NCRIC
Physicians Organization has established two fee-for-service contracts with area
payers, has formed alliances with other provider networks which have added seven
additional fee-for-service contracts in 1998 and continues to work on achieving
the goals it set for itself when it was organized. NCRIC Physicians Organization
has also maintained a PPO contract with NYLCare of the Mid Atlantic Region which
resulted in more than 2,000 patient encounters and $550,000 in provider billing
to NCRIC Physicians Organization members in 1997.
CURRENT HEALTHCARE ENVIRONMENT
The greatest challenge to physicians in the current healthcare
marketplace is that physician revenues are declining, while the cost of delivery
of medical services is rising. Since the early 1990's, health insurance
companies and other third party payers, including the federal and state
governments through Medicare and Medicaid, have increasingly favored a "managed
care" form of reimbursement. Third party payers believe that managed care plans
will result in lower healthcare costs because the managed care plan, rather than
physicians, manage the delivery of healthcare services. Instead of a traditional
fee-for-service payment structure, managed care generally requires the physician
to provide medical services to potential clients at a significantly reduced
reimbursement rate or for a fixed capitation payment, with the physician bearing
the risk that the actual costs of medical services to individual groups of
patients will exceed the capitation payment.
An early response to managed care was the decision of national physician
practice management companies ("PPMCs"), local hospital systems and health
management organizations ("HMOs") to acquire numerous independent physician
practices and form one large group under common ownership. Management believes
that many PPMC and HMO acquisitions have failed due to the unwillingness of
physicians to remain employees of practices they no longer controlled.
Unsuccessful corporate restructuring by local hospital systems has resulted in
additional failures. Many local hospital systems are currently attempting to
control losses by divesting themselves of unprofitable physician practices.
We believe that acquisitions of physicians' practices across divergent
market places prevented the larger groups from being closely integrated in any
local market, an essential component of a successful medical practice. In
addition, significant administrative fees and other costs were often imposed on
acquired practices which were already facing revenue and expense constraints
prior to being acquired. Conflicting goals on how physician services should be
delivered frequently caused physicians to terminate their employment with the
PPMC.
Despite the inability of some PPMCs, local hospital systems and HMOs to
operate profitably , managed care will continue to profoundly affect the
practice of medicine. Solo and small group practitioners, in particular, may
have difficulty surviving in the managed care healthcare environment, unless
they can pool their resources to economically obtain the management expertise
and resources necessary to reduce costs and remain profitable. Medical
81
professional liability insurance costs are among the costs that physicians will
seek to reduce. We anticipate that the stronger bargaining power of a group of
physicians will enable these physicians to negotiate lower premium rates, thus
reducing NCRIC's premium income. NCRIC intends to offset potential lower premium
income from its traditional professional medical liability insurance products by
providing products and services that appeal to the larger groups including:
. creating new risk sharing structures for larger groups;
. managing the risks of the larger groups as one risk versus
separate risks;
. providing claims and risk management services independently of
its core insurance products on a fee basis; and
. offering insurance-related products for managed care exposure.
We have already begun implementing this strategy by entering into risk sharing
arrangements with and providing risk management services to large groups of
physicians sponsored by metropolitan Washington, D.C. hospitals. We wish to
assist independent physicians to remain independent and financially successful.
We do not intend to adopt the PPMC model of purchasing physician practices.
OUR VISION
We intend to become a healthcare financial services organization which
provides individual physicians and groups of physicians with economical high
quality medical professional liability insurance and the practice management and
financial services necessary for them to succeed in the managed care healthcare
environment. We believe that we are well positioned to accomplish these goals
because we have a loyal policyholder base to build upon and anticipate raising
new capital in the subscription, community and syndicated community offerings.
The HealthCare Consulting Acquisition substantially enhances our ability to
provide independent physicians with essential practice management expertise.
The current direct channels of distribution and the strong retention of
clients by NCRIC and HealthCare Consulting will assist us in cross-selling our
expanded range of services and products. NCRIC will sell its medical
professional liability products and services to some of HealthCare Consulting's
approximately 1,100 physician clients (including affiliates) which will expand
NCRIC's geographic coverage area. Since the HealthCare Consulting Acquisition
closed on January 4, 1999, NCRIC has sold 8 medical malpractice insurance
policies to clients of HealthCare Consulting and has provided quotes for an
additional 33 policies. The HealthCare Consulting Acquisition will also permit
NCRIC to provide practice management and employee benefit services to its
approximately 1,200 physician
82
insureds. Together with the approximately 1,200 members of NCRIC Physicians
Organization who are not insured by NCRIC since the completion of the HealthCare
Consulting Acquisition, we provide products and services to approximately 3,000
physicians.
CORE INSURANCE PRODUCTS
NCRIC underwrites medical professional and office premises liability
policy coverages for physicians, physician medical groups and clinics, managed
care organizations and other providers in the healthcare industry. NCRIC
currently issues policies on a claims-made basis. Claims-made policies provide
coverage to the policyholder for claims occurring and reported during the
period of coverage. NCRIC also offers prior acts insurance coverage to new
insureds, subject to the new insureds' meeting NCRIC's underwriting criteria.
This coverage extends the effective date of claims-made policies to designated
periods prior to the physician's becoming an insured of NCRIC. Insureds are
insured continuously while their claims-made policy is in force.
Physician and medical group liability. NCRIC offers separate policy
forms for physicians who are solo practitioners and for those who practice as
part of a medical group or clinic. The policy issued to solo practitioners
includes coverage for professional liability that arises in the medical practice
and also for a number of "premises" liabilities that may arise in the
non-professional operations of the medical practice, like slip and fall
accidents. The professional liability insurance for solo practitioners and for
medical groups provides protection against the legal liability of the insureds
for injury caused by or as a result of the performance of patient treatment,
failure to treat and failure to diagnose and related types of malpractice.
Policy limits. NCRIC offers limits of insurance up to $5 million per
claim, with up to a $7 million aggregate policy limit for all claims reported
for each calendar year or other 12-month policy period. The most common limit is
$1 million per claim, subject to a $3 million aggregate policy limit. Higher
limits and excess coverage can also be written in conjunction with special
reinsurance arrangements.
Reporting endorsements. Reporting endorsements are offered for
physicians terminating their policies with NCRIC. This coverage extends the
period indefinitely for reporting future claims resulting from incidents
occurring while a claims-made policy was in effect. The price of the reporting
endorsement coverage is based on the length of time the insured has been covered
by NCRIC. NCRIC provides free reporting endorsement coverage for insured
physicians who die or become disabled so that they cannot practice their
specialty during the coverage period of the policy and those who have been
insured by NCRIC for at least five consecutive years, attain the age of 55 and
retire completely from the practice of medicine.
PracticeGuard. NCRIC has established a limited defense reimbursement
benefit for proceedings by governmental disciplinary boards. NCRIC provides this
coverage to its
83
insureds automatically without a surcharge. PracticeGuard provides legal counsel
to defend licensure actions brought by the District of Columbia or a State
Medical Licensing Board, actions involving medical staff credentialing
committees, actions to remove physicians from participation in a managed care
plan and actions to limit participation in government programs like Medicare and
Medicaid.
Managed care organization errors and omissions. NCRIC has recently
introduced a policy for managed care organizations that provides coverage for
liability arising from the errors and omissions in managed care operations, for
the vicarious liability of a managed care organization for the acts or omissions
of non-employed physician providers and for liability of directors and officers
of a managed care organization. These policies are issued on a claims-made
basis. The annual aggregate limits of coverage under the current managed care
organization policies issued by NCRIC are currently $2 million. Through NCRIC's
reinsurance arrangements, it has the capacity to write managed care organization
policies with aggregate limits of up to $10 million. Managed care organization
policies were not a significant source of revenue in 1998.
Program for physicians who do not meet usual underwriting standards.
NCRIC also has a program for physicians who do not meet some of NCRIC's usual
underwriting standards. NCRIC carefully evaluates the additional risk it assumes
when it insures these physicians. A surcharge is applied to the premiums of
these physicians to compensate NCRIC for the higher level of risk NCRIC is
assuming. NCRIC monitors the activities of these insureds more closely than
those of its other insureds and attempts to rehabilitate these insureds through
risk management training. This program was not a significant source of revenue
in 1998.
Direct premiums. The following table summarizes NCRIC's physician and
medical group professional liability direct annual premiums under policies in
effect as of November 16, 1998.
Direct Premiums Percentage of
Group Size Written Total
------------------------------------------- ------------------- --------------------
(In Thousands)
Solo practitioner physicians....................... $ 7,685 40.6%
Groups with two physicians......................... 1,162 6.1%
Groups with three or more physicians............... 5,113 27.0%
Sponsored Programs, including risk sharing......... 4,986 26.3%
======== =====
Total $18,946 100.0%
======= ======
Occurrence basis policies. Until July 1, 1986, NCRIC issued policies on
an occurrence basis. Occurrence policies provide coverage to the policyholder
for all losses
84
incurred during the policy year regardless of when the claims are reported. As
of December 31, 1998, NCRIC has loss and LAE reserves in the amount of $7.7
million in connection with its potential liability under occurrence policies.
MAINTENANCE AND EXPANSION OF CORE INSURANCE PRODUCTS
NCRIC's future success rests on its ability to ensure that its core
insurance products continue to meet the needs of existing insureds and other
healthcare providers. Growth and retention of NCRIC's core insurance business in
a managed care environment will be sought through expanding NCRIC's relationship
with larger groups of physicians and developing appropriate risk financing
vehicles for larger groups. The key elements of NCRIC's strategy to compete
effectively and create profitable long-term growth for its core insurance
products are the following:
Maintain its strong franchise or close relationship with the District of
Columbia metropolitan area medical community. National Capital Reciprocal
Insurance Company was founded in 1980 with the strong support of the Medical
Society of the District of Columbia and the District of Columbia's physicians.
NCRIC maintains the exclusive endorsement of the Medical Society of the District
of Columbia, as well as that of the Virginia-based Arlington County Medical
Society. NCRIC plans to increase its direct business activity in its core
markets by implementing a joint marketing plan with Medical Society of the
District of Columbia and other metropolitan area medical societies. NCRIC has
set a target of at least a 95% annual retention rate for its core insurance
business in the future. The Articles of Incorporation of NCRIC, A Mutual Holding
Company and NCRIC, Inc. require that at least two-thirds of the members of their
respective boards of directors be physicians. This direct involvement of
physicians enables NCRIC to better understand medical practice patterns, claims,
customer needs and other relevant matters. It also strengthens NCRIC's ties with
the physician community.
Enhance insurance product offerings to increase sales and strengthen
ties with physicians. NCRIC has developed other insurance products in addition
to its core medical professional liability insurance offerings. These products
include comprehensive premises liability coverage for medical offices and NCRIC
Practice Guard.
New products. NCRIC's current new product initiatives include expanding
its dental professional liability offerings and providing claims and risk
management services independently of its core insurance on an "unbundled" basis.
Dental professional liability insurance policies will insure the dentist against
liabilities arising from the rendering of, or failure to render, professional
dental services. Policies will also include coverage for a dentist's office and
equipment such as slip and fall cases. NCRIC's goal is to provide dentists with
comprehensive insurance coverage for their practices. NCRIC's dental policies
will be offered through direct selling by NCRIC and through brokers and agents.
85
Expand geographically. NCRIC intends to leverage off of its strong
franchise in the District of Columbia area and its extensive claims and risk
management expertise to expand into nearby states. It has recently expanded into
Virginia, Maryland, Delaware and West Virginia. According to A.M. Best, these
states produced $275 million in medical professional liability direct premiums
written in 1997 for the industry, providing strong potential growth
opportunities. NCRIC's premiums from these states equaled 10% of its total
premiums in 1998. NCRIC is also pursuing potential expansion opportunities in
other Mid-Atlantic states.
Grow through strategic acquisitions. NCRIC believes that consolidation
will continue in the medical professional liability insurance industry. This may
give rise to opportunities for NCRIC to make strategic acquisitions to expand
its business, product offerings and geographic scope. As a result of the
reorganization, NCRIC is better positioned to make acquisitions, since it has
greater access to capital and can issue stock in connection with an acquisition.
In addition, NCRIC intends to diversify into other healthcare-related
enterprises through strategic acquisitions like the HealthCare Consulting
Acquisition. NCRIC has no current acquisition plans.
Maintain conservative balance sheet and strong ratings. Management
believes that existing and prospective clients evaluate, among other factors,
the financial strength of NCRIC in any decision regarding the purchase of
medical liability coverage.
Use legal and risk management expertise to vigorously reduce loss costs.
NCRIC's experience with, commitment to and focus on medical professional
liability insurance for 18 years has allowed it to develop strong knowledge of
the local healthcare and legal environments and to build an extensive database
of medical professional liability claims experience. NCRIC uses this expertise
to select and price risks, to provide risk management services to prevent or
reduce the severity of losses and to aggressively defend against unjustified
claims or excessive settlement demands.
Build on direct distribution by adding sales from broker/agent channel.
NCRIC's traditional direct distribution in the District of Columbia has held
down expenses and provided closer ties to its insureds than is usually obtained
through an intermediary. Direct distribution provided 98% of NCRIC's renewal
premiums in 1998. Of premiums received from new insureds, 85% were obtained
through direct distribution and 15% through brokers and independent agents.
NCRIC believes it can further improve new business through greater use of
brokers and independent agents, both in connection with geographic expansion and
in marketing to larger healthcare providers. To this end, NCRIC intends to
develop relationships with selected brokers who have demonstrated expertise in
the medical professional liability insurance market.
HEALTHCARE CONSULTING ACQUISITION
86
After a lengthy search for a partner who shared its vision, on December
1, 1997 NCRIC MSO entered into a joint venture with HealthCare Consulting to
provide practice management services to its insureds. Critical to the selection
of HealthCare Consulting was its long history of working with physicians and its
advocacy of the independent success of physicians. HealthCare Consulting had
also developed successful independent group practice models which fit NCRIC
MSO's business plan. Independent Group Practice models integrate groups of
physicians with shared practice management services and common information
systems, while permitting the physicians to maintain individual ownership of
their practices. The joint venture between NCRIC MSO and HealthCare Consulting
began providing services to NCRIC's insureds in early 1998.
As the joint venture progressed, NCRIC began discussions regarding the
HealthCare Consulting Acquisition. On January 4, 1999, NCRIC Group acquired all
of the outstanding shares of HealthCare Consulting and all of the outstanding
membership interests of HealthCare Consulting's affiliate, HCI Ventures. NCRIC
Group also purchased all of the assets of Employee Benefits Services, an
employee benefits company formed by the three shareholders of HealthCare
Consulting. NCRIC Group assumed all of the liabilities of HealthCare Consulting,
HCI Ventures and those relating to the assets of Employee Benefits Services.
HealthCare Consulting has been merged into NCRIC MSO, and HCI Ventures has
become a wholly-owned subsidiary of NCRIC MSO. The HealthCare Consulting
Acquisition will greatly enhance NCRIC's ability to provide practice management,
employee benefit services and financial services to physicians in Washington,
D.C. metropolitan area and throughout the Mid-Atlantic region.
HealthCare Consulting. Since 1978, HealthCare Consulting or its
predecessor has provided practice management services, accounting and tax
services and personal financial planning services to medical and dental
practices throughout the Mid-Atlantic region. HealthCare Consulting offers its
clients extensive experience and expertise in:
. practice management;
. managed-care contracting;
. information systems implementation;
. practice evaluations;
. billing and collections;
. personnel;
. practice structure; and
87
. management and market recognition among key players in the
healthcare industry.
HealthCare Consulting has offices in Lynchburg, Virginia; Richmond, Virginia;
Fredericksburg, Virginia; and Greensboro, North Carolina and Washington, D.C. On
January 4, 1999, HealthCare Consulting had approximately 50 employees, of whom
12 served as practice management consultants.
The following table indicates the sources of HealthCare Consulting's
revenues during the past three calendar years:
1998 1997 1996
---- ---- ----
Practice Management 48.9% 46.1% 46.0%
Accounting and Tax 32.1% 32.4% 30.6%
Personal Financial Planning 13.2% 10.3% 11.0%
Other 5.8% 11.2% 12.4%
------ ------ ------
Total 100% 100% 100%
====== ====== ======
HCI VENTURES. HCI Ventures provides start-up capital to newly-formed
management services organizations. HCI Ventures owns interests ranging from 5%
to 20% in four management services organizations: Middle Fork MSO, L.L.C.;
Central Virginia MSO, L.L.C.; Southwest Virginia MSO, L.L.C.; and Mid-Atlantic
MSO-FBG, L.L.C. Created in 1997, HCI Ventures allows HealthCare Consulting to
have an equity ownership interest in the various management services
organizations for whom HealthCare Consulting provides practice management
services. HCI Ventures' income has not been material.
EMPLOYEE BENEFITS SERVICES. Employee Benefits Services provides employee
benefits services, plan design, plan administration and plan asset accounting to
approximately 300 clients in the Mid-Atlantic region. Employee Benefits Services
also manages documentation and required forms filings. Over 85% of HealthCare
Consulting's physician practice clients who qualify for plan administration
services utilize Employee Benefits Services as their employee benefit plan
administrator. While Employee Benefits Services initially provided services only
to healthcare businesses, currently over 50% of its clients are non-healthcare
related. On January 4, 1999, Employee Benefits Services had nine employees.
The following table indicates the sources of Employee Benefits Services'
revenues during the past three years:
88
1998 1997 1996
---- ---- ----
Retirement Plan Accounting and
Administration 90% 89% 94%
Employee Benefit 10% 11% 6%
Total 100% 100% 100%
Senior executive experience. The former three owners of HealthCare
Consulting, HCI Ventures and Employee Benefits Services, all of whom have
entered into five-year employment contracts with HealthCare Consulting to
continue in their current positions , have the experience indicated in the
following table:
Years with Acquired Total Years in
Companies Healthcare Consulting
L.E. Shepherd 20 26
William A. Hunter 17 17
Barry S. Pillow 13 19
HEALTHCARE CONSULTING, HCI VENTURES AND EMPLOYEE BENEFITS SERVICES
PURCHASE PRICE. In accordance with the HealthCare Consulting Acquisition
purchase agreements , NCRIC Group paid $5.1 million in cash, subject to
adjustments, and delivered three mandatorily convertible notes in the aggregate
principal amount of $300,000. On the completion of the subscription offering the
notes will automatically convert into 42,857 shares of NCRIC Group's common
stock. NCRIC Group will pay an additional $3.1 million if HealthCare Consulting,
HCI Ventures and Employee Benefits Services achieve earnings targets in 2000,
2001 and 2002.
Sequoia National Bank ("Sequoia") loaned to NCRIC Group $2.2 million to
finance a portion of the HealthCare Consulting Acquisition purchase price. The
term of the loan is 7.5 years, and the interest rate is prime plus 0.75% per
annum, with an additional one-half point being payable on closing. Monthly
payments are interest only for the first six months and blended payments of
interest and principal thereafter. Sequoia has the option to call the loan at
the end of 6 months and 3.5 years of the term. NCRIC Group granted as security
for the loan (1) an assignment of all of the capital stock of HealthCare
Consulting and the membership interests of HCI Ventures and (2) a blanket lien
on all of the receivables of HealthCare Consulting and Employee Benefits
Services. There is no penalty for prepayment by NCRIC Group. NCRIC, Inc. loaned
to NCRIC Group the balance of the purchase price of the HealthCare Consulting
Acquisition that was payable at closing. The
89
terms of the loan from NCRIC, Inc. to NCRIC Group are the same as the terms of
the Sequoia loan except that the loan from NCRIC, Inc. to NCRIC Group is
unsecured and there was no obligation to pay a one-half point on closing.
NCRIC Group, NCRIC MSO, HealthCare Consulting, HCI Ventures, and L.E.
Shepherd, Jr., William A. Hunter, Jr. and Barry S. Pillow (collectively, the
"Executives") entered into an operating agreement dated January 4, 1999. The
Executives are entitled to manage the operations of HealthCare Consulting, HCI
Ventures and Employee Benefits Services, subject to the board of directors'
approval of specified transactions and of provisions in the operating agreement
which provide for minimum earnings targets. The term of the operating agreement
expires December 31, 2003.
The Executives' employment agreements provide that each Executive will
not compete with NCRIC, NCRIC MSO, HealthCare Consulting or HCI Ventures for a
period of two years after the termination of his employment with HealthCare
Consulting and HCI Ventures.
THE REORGANIZATION
On April 20, 1998, the board of governors of National Capital Reciprocal
Insurance Company adopted the plan of reorganization, which authorized the
reorganization. The Commissioner of Insurance and Securities held a public
hearing on the reorganization on September 9 and 10, 1998. The plan of
reorganization was approved by National Capital Reciprocal Insurance Company's
members on September 16, 1998. The Commissioner of Insurance and Securities
approved the plan of reorganization on November 25, 1998, and the plan of
reorganization became effective on December 31, 1998.
The reorganization authorized National Capital Reciprocal Insurance
Company to form NCRIC, A Mutual Holding Company as a mutual insurance holding
company and to convert into NCRIC, Inc., a stock medical professional liability
insurance company. Through a series of stock transfers effected in connection
with the reorganization, NCRIC, A Mutual Holding Company owns all of the
outstanding shares of NCRIC Holdings, Inc., which owns all of the outstanding
shares of NCRIC Group, which owns all of the outstanding shares of NCRIC, Inc.
and NCRIC MSO. District of Columbia law provides that NCRIC, A Mutual Holding
Company must at all times own, directly or indirectly, a majority of the
outstanding voting stock of NCRIC, Inc.
In his order approving the reorganization, the Commissioner of Insurance
and Securities imposed various conditions including the following:
. At least two-thirds of the members of the boards of directors of
NCRIC, A Mutual Holding Company and NCRIC, Inc. must at all times
be policyholders of NCRIC.
90
. NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC
Group and NCRIC are prohibited from pledging assets having an
aggregate value in excess of 49% of the equity of NCRIC, based on
the most recent financial statements prepared and calculated in
accordance with statutory accounting principles, without the
prior approval of the Commissioner of Insurance and Securities.
. NCRIC Group must first utilize funds raised from capital sources,
if needed in the best judgment of the board of directors of
NCRIC, A Mutual Holding Company, to improve the quality of NCRIC,
Inc.'s medical professional liability insurance product, maintain
its competitive pricing structure and ensure the stability and
longevity of NCRIC, Inc.
. The Department of Insurance and Securities Regulation retains
regulatory authority over NCRIC Group, NCRIC Holdings, Inc. and
any other intermediate holding companies that may in the future
be inserted between NCRIC, A Mutual Holding Company and NCRIC.
. NCRIC may not, without approval of the Commissioner of Insurance
and Securities, by way of an acquisition or investment in a
subsidiary, or otherwise, diversify out of the healthcare and
insurance fields.
. In the event that NCRIC Group makes an initial public
offering, the terms of the proposed offering must be submitted to
the Department of Insurance and Securities Regulation for its
prior approval in the form of an order from the Commissioner of
Insurance and Securities. On January 27, 1999, the Commissioner
of Insurance and Securities issued an order approving the
subscription, community and syndicated community offerings
subject to NCRIC Group's registration statement being declared
effective by the Securities and Exchange Commission.
REASONS FOR THE REORGANIZATION
As a reciprocal insurance company, National Capital Reciprocal Insurance
Company had no ability to issue shares of capital stock and consequently had no
access to market sources of equity capital and limited ability to increase its
surplus and fund future growth while maintaining the financial strength
necessary to assure policyholders that their obligations would be met. In view
of the changing climate affecting the practice of medicine, physicians require
assistance in addition to insurance. The reorganization enables NCRIC to raise
funds to use in providing the additional assistance.
91
REGULATION OF NCRIC, A MUTUAL HOLDING COMPANY AFTER THE REORGANIZATION
NCRIC, A Mutual Holding Company, as a mutual insurance holding company
organized in the district of columbia, is subject to regulation at a level
substantially equal to that of a District of Columbia domestic insurance
company. The Commissioner of Insurance and Securities retains jurisdiction over
NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC Group and NCRIC to
assure that policyholders' interests are protected.
CONVERSION OF NCRIC, A MUTUAL HOLDING COMPANY TO THE STOCK FORM OF ORGANIZATION
District of Columbia law provides that NCRIC, A Mutual Holding Company
may fully demutualize, which is a conversion from a mutual holding company form
of organization to a stock form of organization. There is a risk that such a
transaction will never occur, and the Board of Directors has no current
intention or plan to undertake such a transaction. Under District of Columbia
law, if such a transaction occurs, eligible policyholders would receive the
right to subscribe for additional shares of the new stock holding company that
would be formed in the full demutualization. By order dated January 27, 1999,
the Commissioner of Insurance and Securities stated that in a full
demutualization, each share of common stock outstanding and held by persons
other than NCRIC, A Mutual Holding Company would be converted automatically into
shares of common stock of the new stock holding company. Specifically, the
number of shares that each stockholder would receive would be determined under
an exchange ratio that ensures that after the transaction, the percentage of the
to-be outstanding shares of the new stock holding company received by a
stockholder in exchange for his or her common stock equals the percentage of the
outstanding shares of common stock owned by the stockholder immediately prior to
the full demutualization. To date, the Commissioner of Insurance and Securities
has not issued regulations regarding the conversion of a District of Columbia
mutual holding company to stock form, and there is a risk that any regulations
will not be effective when NCRIC, A Mutual Holding Company may wish to undertake
a full demutualization. Moreover, there is a risk as to what form any
regulations may take and what conditions the Commissioner of Insurance and
Securities may impose on a full demutualization of NCRIC, A Mutual Holding
Company.
Under legislation recently approved by the Council of the District of
Columbia, prior to the implementation of a proposed full demutualization, a
tender offer for more than 50% of the outstanding shares of the corporation is
prohibited unless approved by the Commissioner of Insurance and Securities.
92
GOVERNANCE OF NCRIC
An order of the District of Columbia Commissioner of Insurance and
Securities requires that at least two-thirds of the members of NCRIC, A Mutual
Holding Company's board of directors be NCRIC policyholders. Currently, there
are three non-policyholders on NCRIC, A Mutual Holding Company's 18-member board
of directors. In addition, 7 of 10 members of NCRIC Group's and NCRIC Holdings'
boards of directors and 6 of 8 members of NCRIC, Inc.'s board of directors are
currently policyholders of NCRIC, Inc.
MARKETING AND POLICYHOLDER SERVICES
NCRIC markets directly to its insureds through eight employees providing
sales solicitation and communications services. NCRIC markets directly to solo
practitioner physicians and other prospective insureds through its relationships
with medical associations, referrals by existing insureds, advertisements in
medical journals, the presentation of seminars on timely topics for physicians
and direct solicitation to licensed physicians. NCRIC attracts new physicians
through special rates for medical residents and discounts for physicians just
entering medical practice. In addition, NCRIC participates as a sponsor and
participant in various medical group and hospital administrators' programs,
medical association and specialty society conventions and similar programs.
NCRIC believes that this personal, comprehensive approach to marketing is
essential to providing medical professional liability insurance, where special
knowledge and experience are a prerequisite.
In addition to these direct marketing channels, NCRIC sells its products
through independent brokers and agents who currently produce less than 2% of
NCRIC's direct premiums written in NCRIC's market areas. Healthcare institutions
frequently prefer brokers over direct solicitation when they purchase medical
professional liability insurance. Therefore, NCRIC believes that developing its
broker relationships in Virginia, Maryland, West Virginia and Delaware is
important to grow its market share. NCRIC selects brokers and agents that it
believes have demonstrated growth and stability in the medical professional
liability insurance industry, strong sales and marketing capabilities, and
expertise in selling medical professional liability insurance. Brokers and
agents receive market rate commissions and other incentives averaging 7% based
on the business they produce. NCRIC strives to maintain relationships with those
brokers and agents who are committed to promoting NCRIC's products and are
successful in producing business for NCRIC.
NCRIC also has a policyholder services department that provides account
information to all insureds and maintains relationships with the small medical
groups and solo practitioners insured by NCRIC. Each of these smaller insureds
has a designated client service representative who can answer most inquiries
and, in other instances, can provide the insured with immediate access to the
person with expertise in a particular department. For hospitals and large and
mid-size medical groups, NCRIC has an account manager assigned to each group who
heads a service team comprised of underwriting, risk management and claims
management
93
representatives, each of whom may be contacted directly by the policyholder for
prompt response.
RISK MANAGEMENT
NCRIC provides risk management services that are designed to reduce
potential loss exposures by informing insureds about methods of implementing
risk reduction measures to improve their medical practices. The risk management
committee assists the risk management department to identify loss trends in the
local as well as national market. The risk management committee is comprised of
physicians representing various medical specialties. Through these efforts,
NCRIC can identify and present topical loss prevention programs.
The majority of NCRIC's claims result, in part, from a physician's
failure to adequately communicate or document his or her activities. NCRIC
addressed these topics as well as others in its 1998 Risk Management Seminar
Educational Program. Seminars on "Constructing an Operative or Procedure Note"
and "Medicare Documentation Guidelines" highlighted the documentation needs of
physicians. Communication issues were the focal point in "Communication in the
Medical Practice" and "Basic Risk Management Principles." In addition, the Risk
Management Program also advises physicians of medical topics which give rise to
malpractice claims. An example of this was NCRIC's seminar on "Chest Pain
Diagnosis and Treatment." In 1998, 66% of NCRIC's insureds attended risk
management seminars, earning continuing medical education credits.
NCRIC also produces a quarterly newsletter to present additional topics
of interest to physicians. When immediate dissemination of information is
warranted, a risk management alert is distributed. NCRIC's risk management staff
are also available for consultation with insureds on an individual basis to
review issues which may arise in the insured's practice.
Risk management services supplement NCRIC's marketing efforts. The risk
management department conducts physician office visits on both a voluntary and
involuntary basis to review practice procedures and focus on specific areas in
which concerns arise. NCRIC provides office assessments for physicians on a
voluntary basis, consisting of an on-site visit with review of medical records
and office practices. Feedback is given to the physicians in the form of
suggestions made to reduce risk factors in their office.
Risk management reviews are also performed at the request of the
underwriting and claims committees. Once the reviews have been completed, a
report is provided to the requesting committee.
NCRIC intends to begin offering its risk management services
independently of its core insurance products. Healthcare providers, such as
hospitals and large clinics, who self insure will be able to purchase risk
management services directly from NCRIC. The risk
94
management services will be offered through direct marketing efforts and by
agents and brokers to their larger self-insured accounts.
CLAIMS AND LITIGATION EXPERIENCE
The claims department of NCRIC is responsible for claims investigation,
establishment of appropriate case reserves for loss and LAE, defense planning
and coordination, control of attorneys engaged by NCRIC to defend a claim and
negotiation of the settlement or other disposition of a claim. NCRIC's policies
obligate it to provide a defense for its insureds in any suit involving a
medical incident covered by its policy, which is in addition to the limit of
liability under the policy. The cost of this defense is in addition to any
payments made by NCRIC in connection with the claim. Medical professional
liability claims often involve the evaluation of highly technical medical
issues, severe injuries and conflicting expert opinions. In almost all cases,
the person bringing the claim against the physician is already represented by
legal counsel when NCRIC learns of the potential claim.
NCRIC emphasizes early evaluation and aggressive management of claims.
When a claim is reported, claims department professionals complete an initial
evaluation and set the initial reserve. After a full evaluation of the claim has
been completed, which generally occurs within seven months, the initial reserve
may be adjusted. NCRIC has established different levels of authority within the
claims department for settlement of claims.
As of December 1, 1998, NCRIC had approximately 280 open cases with an
average of 65 cases being handled by each claims representative. The claims
representatives at NCRIC are all certified paralegals who have on average over
11 years of experience with NCRIC and an average of 12 years of prior experience
handling medical professional liability cases. NCRIC limits the number of claims
handled by each representative to approximately 70 cases. Management believes
that by limiting the case loads of its claims representatives, all of its
insureds who face claims will receive personalized, professional service, thus
enabling claims to be thoroughly investigated, well-managed and, if they have
merit, quickly resolved.
NCRIC retains locally-based attorneys specializing in medical
professional liability defense to defend claims. NCRIC also obtains the services
of medical experts who are leaders in their specialties and who bring integrity,
credibility and expertise to the litigation process.
NCRIC's claims committee is composed of eight physicians from various
specialties including anesthesiology, general surgery and neurosurgery,
obstetrics, internal medicine and radiology. The claims committee meets monthly
to provide evaluation and guidance on claims. The multi-specialty approach of
these physicians adds a unique perspective to the claims handling process in
that there is an opportunity to obtain the opinions of several different
specialists meeting to share their expertise and experience in the area of
liability evaluation and general peer review. This service is invaluable to the
claims representatives and insureds as it provides in-depth analysis of claims.
95
Federal law requires that any claim payment, regardless of amount, be
reported to a national practitioner data bank which can be accessed by various
state licensing and disciplinary boards, hospitals, other healthcare entities
and professional societies. Thus, the physician is often placed in a difficult
position of knowing that a settlement may result in the initiation of a
disciplinary proceeding or some other impediment to the physician's ability to
practice. The claims department staff must be able to fully evaluate
considerations of settlement or trial and to communicate effectively NCRIC's
recommendation to its insured. NCRIC may investigate a claim and, with the
written consent of the named insured, settle any claim or suit as it deems
expedient. In the event the named insured and NCRIC fail to agree that a claim
or suit should be settled, either party may request a review and decision by a
peer review panel selected in accordance with established NCRIC procedures.
District of Columbia Superior Court rules impact NCRIC's claims
handling, particularly in the area of claims handling expenses. The discovery
period, during which the plaintiff's case must be discerned and, in conjunction
with an attorney, the defense developed, generally takes place over a six- to
eight-month period of intense activity, which increases claims handling
expenses. The court-imposed mediation process has not proven to successfully
resolve NCRIC's cases in part because the volunteer mediators are frequently
plaintiffs' attorneys. Trials are being set about one to one and a half years
from the date of service of the complaint. Despite obstacles presented by the
legal environment, management believes its aggressive claims handling procedures
effectively assist NCRIC to reduce losses and obtain favorable results.
Proactive approaches to reducing NCRIC's exposure and improving its
favorable results include the annual claims/legal seminar at which defense
attorneys retained by NCRIC are present for coordination, discussion and
presentations on all aspects of claims handling.
Trial results from the 36-month period from January 1996 through
December 1998 reveal that of the 70 cases tried, 53, or 76%, were won by NCRIC,
11 trials resulted in verdicts for the plaintiff, 5 ended in hung juries, and
one was settled. Trial results for 1998 reveal that of the 21 cases tried, 18,
or 86%, were won by NCRIC, one trial resulted in a verdict for the plaintiff,
and two ended in mistrials or hung juries.
UNDERWRITING
NCRIC's underwriting committee consists of 12 physicians, all of whom
are insureds of NCRIC. Members of the committee are not employees of NCRIC, but
receive compensation for their services on the committee. In addition to the
underwriting committee, NCRIC has an underwriting department consisting of three
underwriters and two technical and administrative assistants. NCRIC believes
that this combination of medical professionals and insurance industry
professionals gives NCRIC a competitive advantage in underwriting services. The
physicians on the underwriting committee are able to assist the underwriting
department's insurance professionals by applying their medical knowledge to
better assess risk.
96
NCRIC's underwriting department is responsible for the evaluation of
applicants for medical professional liability coverage, the issuance of policies
and the establishment and implementation of underwriting standards for all of
the coverages underwritten by NCRIC. The underwriting department provides
information to the underwriting committee to assist the physicians on the
committee in making their decisions.
NCRIC follows what it believes to be consistent and conservative
procedures with respect to the issuance of all physician professional liability
policies. Each applicant or member of an applicant medical group is required to
complete a detailed application that provides a personal and professional
history, the type and nature of the applicant's professional practice,
information relating to specific practice procedures, hospital and professional
affiliations and a complete history of any prior claims and incidents. NCRIC
performs its own independent verification of these matters and conducts an
investigation to determine if there are any lawsuits that may not have been
disclosed in the application.
NCRIC performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or changing or unusual practice characteristics is developed
through renewal applications, claims and risk management reports. Each year,
NCRIC also sends current practice questionnaires to all of its insured
physicians. These questionnaires request information similar to that submitted
in connection with the physician's original application for insurance, and are
designed to detect any changes in the specialty or practice characteristics of
the physician that may require a higher or lower premium rate or possible
non-renewal of insurance.
The underwriting department submits all recommendations for premium
surcharges or non-renewal to the underwriting committee for a final decision.
Physicians have the right to seek reconsideration of surcharges by NCRIC's board
of directors, although to date, every request for reconsideration has resulted
in the underwriting committee's decision being upheld. As insureds are often
more comfortable discussing claims and practice issues with their peers, NCRIC
has found that physician interchange with the committee is a strength of NCRIC.
RATES
NCRIC establishes, through its management and independent actuaries,
rates and rating classifications for its physician and medical group insureds
based on the loss and LAE experience it has developed over the past 18 years and
the loss and LAE experience for the entire medical professional liability
market. NCRIC has various rating classifications based on practice location,
medical specialty and other factors. NCRIC utilizes various discounts, including
discounts for part-time practice, physicians just entering medical practice,
claim-free insureds and risk management participation. Most discounts are
designed to encourage lower risk physicians to insure with NCRIC. Total
discounts granted to a policyholder cannot exceed 25% of the policyholder's
premium. Effective rates equal NCRIC's base rate, less any discounts and renewal
credits provided to the insured. NCRIC utilizes national data in
97
developing rates for managed care, since the data for managed care organization
errors and omissions liability is extremely limited, as tort exposures for these
organizations are only recently beginning to develop.
NCRIC's base rates increased 6% in 1998, were unchanged in 1997 and
increased 5.6% in 1996. NCRIC raised its rates in 1998 because of an increase in
the average severity of claims. NCRIC established its rates based on its
previous loss experience, loss expense adjustments, anticipated policyholder
discounts and NCRIC's fixed and variable expenses.
Since 1993, National Capital Reciprocal Insurance Company has authorized
renewal premium dividend credits to insureds who renew their policies. Renewal
credits are a premium credit on the renewal policy's premium. Renewal credits
stabilize policyholder premiums and improve NCRIC's competitive position
relative to other insurers by encouraging policyholder renewals. For accounting
purposes, renewal credits are accrued for the period declared as a reduction of
premium income. NCRIC's insureds are not automatically entitled to renewal
credits and only renewing insureds receive renewal credits. National Capital
Reciprocal Insurance Company has in the past, and NCRIC will in the future,
consider general insurance market conditions as well as the previous years' loss
and loss adjustment expenses in determining whether or not to authorize renewal
credits and the amounts of any renewal credits. Since 1993, National Capital
Reciprocal Insurance Company authorized renewal credits in the following
amounts:
Actual renewal credits issued by NCRIC will generally be lower than
declared renewal credits because some policyholders do not renew their policies
each year and, as a result, do not receive renewal credits. In 1997, the actual
renewal credits issued to policyholders exceeded renewal credits declared
because NCRIC began to stagger policy renewal dates in 1997.
RISK SHARING ARRANGEMENTS
Since its inception, NCRIC has maintained good relationships with
various hospitals in the Washington, D.C. metropolitan area which has led to the
creation of integrated risk sharing
98
programs for groups of physicians practicing at these hospitals. By entering
into a risk sharing arrangement, physicians practicing at a hospital will pay
lower individual premiums if the physicians in their hospital group, taken as a
whole with risk management protocols. Under a risk sharing arrangement,
physicians receive an initial premium reduction or credit. At the end of the
calendar year covered by the premium, a review of the actual loss experience of
the physician group is completed. Should the group's loss experience be
unfavorable, NCRIC will require additional premium payments to offset the
unfavorable losses.
Another type of risk sharing arrangement offered by NCRIC involves the
initial funding of a portion of a premium being held by NCRIC to pay losses. In
this type of arrangement, NCRIC receives its full gross premium, less applicable
credits otherwise granted, and pays losses from the amount being held;
thereafter, any remaining funds are returned to the insured should a review of
actual loss experience show favorable loss experience.
Risk sharing arrangements help lower NCRIC's risk associated with
medical care provided by the hospital's attending physicians. The arrangements
also establish a cost-effective source of professional liability coverage for
physicians participating in the program.
LOSS AND LAE RESERVES
The determination of loss and LAE reserves involves projection of
ultimate losses through an actuarial analysis of the claims history of NCRIC and
other medical professional liability insurers, subject to adjustments deemed
appropriate by NCRIC due to changing circumstances. Included in its claims
history are losses and LAE paid by NCRIC in prior periods, and case reserves for
losses and LAE developed by NCRIC's Claims Department as claims are reported and
investigated. Actuaries rely primarily on historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss trends and the delays in reporting and settling claims. As additional
information becomes available, the estimates reflected in earlier loss reserves
may be revised. Any increase or decrease in the amount of reserves, including
reserves for insured events of prior years, would have a corresponding adverse
or beneficial effect on NCRIC's results of operations for the period in which
the adjustments are made.
The uncertainties inherent in estimating ultimate losses on the basis of
past experience have grown significantly in recent years principally as a result
of judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves in
the casualty insurance business is even greater for companies writing long-tail
casualty insurance,
99
like medical professional liability insurance, even on a claims-made basis. This
is due primarily to the longer time that typically elapses between the covered
incident and the resolution of the claim.
NCRIC's independent actuaries review NCRIC's reserves for losses and LAE
periodically and prepare semi-annual reports that include a recommended level of
reserves. NCRIC considers this recommendation as well as other factors, like
loss retention levels and anticipated or estimated changes in frequency and
severity of claims, in establishing the amount of its reserves for losses and
LAE. NCRIC continually refines reserve estimates as experience develops and
claims are settled. Medical professional liability insurance is a line of
business for which the initial loss and LAE estimates may change significantly
as a result of events occurring long after the reporting of the claim. For
example, loss and LAE estimates may prove to be inadequate because of sudden
severe inflation or adverse judicial or legislative decisions.
100
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------- ------ -------
(in thousands)
BALANCE, Beginning of period $75,136 $71,206 $72,033
Less reinsurance recoverable on
unpaid claims 17,077 14,679 16,182
------- ------- -------
NET BALANCE 58,059 56,527 55,851
------- ------- -------
Incurred related to:
Current year 19,140 19,444 16,775
------- ------- -------
Prior years (3,463) (3,853) (1,539)
------- ------- -------
Total incurred 15,677 15,591 15,236
------- ------- -------
Paid related to:
Current year 1,247 1,867 2,145
------- ------- -------
Prior years 9,335 12,192 12,415
------- ------- -------
Total paid 10,582 14,059 14,560
------- ------- -------
NET BALANCE 63,154 58,059 56,527
------- ------- -------
Plus reinsurance recoverable on
unpaid claims 24,546 17,077 14,679
------- ------- -------
BALANCE, End of period $87,700 $75,136 $71,206
======= ======= =======
The amounts shown above are presented in conformity with generally accepted
accounting principles, and the amounts on the chart located on the next page are
presented on a statutory reporting basis. The difference in the net reserves
shown in each table is due to differences in classification of reported
liability balances between the two reporting bases.
The following table reflects the development of reserves for unpaid
losses and LAE for the years indicated, at the end of that year and each
subsequent year. The first line shows the reserves, net of reinsurance
recoverable, as originally reported at the end of the stated year. Each calendar
year-end reserve includes the estimated unpaid liabilities for that coverage
year and for all prior coverage years. The section under the caption "Cumulative
Liability Paid Through End of Year" shows the cumulative amounts paid through
each subsequent year on those claims for which reserves were carried as of each
specific year end. The section under the caption "Re-estimated Liability" shows
the original recorded reserve as adjusted as of the end of each
101
subsequent year to reflect the cumulative amounts paid and any other facts and
circumstances discovered during each year. The line "Redundancy (deficiency)"
sets forth the difference between the latest re-estimated liability and the
liability as originally established.
The table reflects the effects of all changes in amounts of prior
periods. For example, if a loss determined in 1995 to be $100,000 was first
reserved in 1988 at $150,000, the $50,000 favorable loss development, being the
original estimate minus the actual loss, would be included in the cumulative
redundancy in each of the years 1988 through 1997 shown below. This table
presents development data by calendar year and does not relate the data to the
year in which the claim was reported or the incident actually occurred.
Conditions and trends that have affected the development of these reserves in
the past will not necessarily recur in the future.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for Unpaid $24,463 $26,098 $32,151 $49,178 $54,783 $55,826 $55,747 $52,748 $53,422 $54,955
Losses and LAE
Cumulative Liability Paid
Through End of Year:
One year later. 8,977 6,836 12,561 8,110 11,556 14,424 12,917 14,002 13,076 9,335
Two years later 13,130 16,479 18,552 16,358 23,952 25,181 24,118 23,612 20,065
Three years later 17,143 19,949 21,605 23,002 30,999 31,651 30,586 28,062
Four years later 19,188 22,191 25,891 26,878 34,900 35,160 32,305
Five years later 20,803 25,307 28,387 29,148 36,738 36,069
Six years later 23,234 26,335 29,115 29,681 37,495
Seven years later 24,242 27,057 29,595 30,418
Eight years later 24,632 27,252 29,939
Nine years later 24,829 27,597
Ten years later 25,173
Re-estimated Liability:
One year later 25,020 27,326 35,942 43,124 47,009 48,459 49,319 49,316 47,313 51,492
Two years later 22,967 30,014 29,123 35,855 41,689 43,830 48,000 41,408 45,496
Three years later 24,599 26,603 28,085 32,879 39,524 44,856 41,998 41,709
Four years later 23,348 26,135 30,692 31,807 41,270 42,600 42,597
Five years later 23,493 27,898 30,136 32,224 41,415 43,732
Six years later 25,368 27,602 30,311 32,964 42,834
Seven years later 25,016 27,997 30,999 34,591
Eight years later 25,541 28,493 31,461
Nine years later 26,025 29,010
Ten years later 26,475
Redundancy (deficiency) (2,012) (2,912) 690 14,587 11,949 12,094 13,150 11,039 7,926 3,463
General office premises liability incurred losses have been less than 1%
of medical professional liability incurred losses in the last five years. NCRIC
does not have reserves for pollution claims as NCRIC's policies exclude
liability for pollution. NCRIC has never been presented with a pollution claim
brought against it or its insureds.
REINSURANCE
NCRIC follows customary industry practice by reinsuring a portion of its
risks and paying a reinsurance premium based upon the premiums received on all
policies subject to reinsurance. By reducing NCRIC's potential liability on
individual risks , reinsurance protects NCRIC against large losses. NCRIC has
full underwriting authority for professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
102
professional corporations and partnerships. The reinsurance program cedes to the
reinsurers up to the maximum reinsurance policy limit (1) those risks insured by
NCRIC in excess of NCRIC's retention -- an amount of exposure retained by NCRIC
and (2) quota share participation -- a percentage of exposure retained by NCRIC.
Although reinsurance does not discharge NCRIC from its primary liability
for the full amount of its insurance policies , it contractually obligates the
reinsurer to pay successful claims against NCRIC to the extent of risk ceded.
NCRIC's current reinsurance program consists of three separate reinsurance
treaties:
(1) SWING RATED TREATY. NCRIC's first treaty is a swing rated treaty
which reinsures NCRIC for losses in excess of $500,000 per claim, subject to an
inner aggregate deductible of 5% of Gross Net Earned Premium Income ("GNEPI"),
up to $1,000,000. GNEPI is NCRIC's gross premium earned less reinsurance
premiums, discounts and renewal credits. The ultimate reinsurance premium is
subject to incurred losses and ranges between a minimum premium of 4% of GNEPI
and a maximum premium of 22.5% of GNEPI. The inner aggregate deductible means
that NCRIC must pay losses within the reinsurance layer until the inner
aggregate deductible is satisfied. NCRIC pays a deposit premium equal to 14% of
GNEPI that is ultimately increased or decreased based on actual losses, subject
to the minimum and maximum premium. Following are the reinsurance premium terms
for the swing rated treaty for calendar years 1999, 1998, 1997, 1996 and 1995.
NCRIC has recorded, based on management's best estimate, its maximum
premium expense under the terms of the swing rated treaty in the current and the
preceding treaty years and will adjust the liability and expense as losses
develop in subsequent years.
(2) FIRST EXCESS LAYER TREATY. This treaty covers losses up to
$1,000,000 in excess of $1,000,000 per claim. NCRIC cedes 91% of its risks to
the $1,000,000 excess layer treaty program and retains 9% of the risks. The
premium payable by NCRIC for the $1,000,000 excess layer treaty is 91% of the
premium collected from insureds for this coverage. NCRIC receives a ceding
commission from the reinsurers to cover the cost associated with issuing this
coverage to its insureds.
103
(3) Second excess layer treaty. This treaty covers losses up to
$3,000,000 in excess of $2,000,000 per claim. NCRIC cedes 100% of its risks to
the $2,000,000 excess layer treaty program and retains none of the risks. The
premium for the $2,000,000 excess layer treaty is 100% of the premium collected
from insureds for this coverage. NCRIC receives a ceding commission from the
reinsurers to cover the cost associated with issuing this coverage to its
insureds.
Ceding commissions, which are 15% of gross ceded reinsurance premiums in
the $1,000,000 excess layer treaty and $2,000,000 excess layer treaty, are
deducted from other underwriting expenses. Ceding commissions were $300,000,
$223,000 and $235,000 in 1998, 1997 and 1996.
Ninety percent of Commonwealth Medical Insurance Liability Company's
risks are reinsured by NCRIC. Commonwealth Medical Insurance Liability Company's
risks are in turn reinsured by NCRIC's reinsurance treaties.
Additionally, NCRIC's reinsurance program protects NCRIC from paying
multiple retentions for claims arising out of one event. NCRIC will only pay one
$500,000 retention regardless of the number of original policies or claimants
involved. NCRIC also has protection against losses in excess of its existing
reinsurance. Following is a table that summarizes the structure of NCRIC's
current reinsurance program:
TOTAL AMOUNT OF INDIVIDUAL LOSS Company Reinsurers
------- ----------
$0 - $500,000 100% 0
$500,000 - $1,000,000 4% 96%
$1,000,000 - $2,000,000 9% 91%
$2,000,000 - $5,000,000 0 100%
The table does not reflect the effect of the inner aggregate deductible.
NCRIC may provide policy limits in excess of $5,000,000 which are
reinsured through facultative reinsurance programs. Facultative reinsurance
programs are reinsurance programs which are specifically designed for a
particular risk not covered by NCRIC's existing reinsurance arrangements. NCRIC
currently has facultative reinsurance in connection with a group of physicians
who desire policy limits greater than $5,000,000.
NCRIC determines the amount and scope of reinsurance coverage to
purchase each year based upon its evaluation of the risks accepted,
consultations with reinsurance consultants and a review of market conditions,
including the availability and pricing of reinsurance. NCRIC's reinsurance
treaties are placed with non-affiliated reinsurers for three-year terms with
annual renegotiations. NCRIC's current three-year treaty expires January 1,
2000.
104
The reinsurance program is placed with a number of individual
reinsurance companies and Lloyds' syndicates to mitigate the concentrations of
reinsurance credit risk. Most of the reinsurers are London companies or Lloyds'
syndicates; there is a small percentage placed with a domestic reinsurer. NCRIC
relies on its wholly-owned brokerage firm, National Capital Brokerage, Inc.,
Willis Faber North America and a London-based intermediary to assist it in the
analysis of the credit quality of its reinsurers. NCRIC also requires reinsurers
that are not authorized to do business in the District of Columbia to post a
letter of credit to secure reinsurance recoverable on paid losses.
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 1998 by reinsurer:
Reinsurer Reinsurance
Recoverable
-----------
(in thousands)
Lloyd's of London syndicates $14,098
========== =====
Hannover Reinsurance 2,147
====
CNA Reinsurance of London Limited 2,908
=====
Unionamerica Insurance 2,785
=====
Zurich Reinsurance 1,410
================== ====
5 other reinsurers 1,596
========
Total $24,944
========
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1998, 1997 and 1996 is as follows:
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------- ------------------------------
Written Earned Written Earned Written Earned
(in thousands)
Direct $19,214 $16,270 $17,869 $17,466 $19,017 $19,017
======= ========
Ceded 3,699 4,089 (1,854) (1,854) (4,239) (4,239)
----=== ======== --------- --------- --------- --------
Net $22,913 $20,359 $16,015 $15,612 $14,778 $14,778
======= ========= ========= ========= ========
In 1997, NCRIC introduced an errors and omissions policy for managed
care organizations and a provider stop loss coverage for health care providers
accepting financial risk associated with providing health care services on a
fixed or capitated reimbursement rate.
105
NCRIC's limited knowledge regarding both of these exposures led NCRIC to
structure a reinsurance program unique to these exposures. NCRIC does not have
underwriting authority and only retains 5% of the premiums and losses under each
of these policies. Individual risks are submitted to the reinsurer for
underwriting and pricing. NCRIC receives a ceding commission of 15% in
connection with provider stop loss coverage but does not receive ceding
commissions in connection with errors and omissions policies. NCRIC intends to
accept higher levels of risk as it learns the characteristics of these risk
exposures and begins to generate profitable revenue volume.
INVESTMENT PORTFOLIO
Investment income is an important component of the operating results of
NCRIC. Investments of NCRIC are made by investment managers and internal
management under policies established and supervised by the Investment Committee
of the board of directors of NCRIC, Inc. NCRIC's current investment policy has
placed primary emphasis on investment grade, fixed maturity securities and seeks
to maximize after-tax yields and minimize credit risk of the portfolio. However,
NCRIC's investment guidelines which set the parameters for NCRIC's investment
policy permit NCRIC to invest up to 10% of its investments in tax-advantaged
preferred stocks. Currently, NCRIC's investments in equity securities consist
exclusively of investments in preferred stock. NCRIC, Inc.'s investment
committee is currently considering investing up to 10% of its investment assets
in common stocks, which will require an amendment to NCRIC's investment
guidelines.
Since 1996, NCRIC has conducted a DYCARR analysis of its investment
portfolio on an annual basis. DYCARR is a proprietary financial model of Prime
Advisors, Inc. designed specifically for property and casualty insurance
companies to maximize after-tax investment income while simultaneously managing
interest rate risk. DYCARR measures the amount and probability of operational
cash flow stress and defines maturity schedules which will produce the selected
confidence level that all resulting negative operating cash flows will be
covered by maturing assets. The new schedule of maturities increased the
portfolio's duration from a target of 4.8 years to 5.7 years with a +/- 0.5-year
band. In addition, DYCARR estimates the amount of income gained or lost from
changes in the selected confidence level and identifies the impact each variable
has on negative operating cash flows. As a result of the 1996 DYCARR analysis,
25% of National Capital Reciprocal Insurance Company's investment portfolio was
shifted to tax-advantaged securities like municipals and preferred stocks. NCRIC
now conducts a DYCARR analysis annually.
NCRIC currently uses Brown Brothers Harriman and Prime Advisors as
outside investment managers for fixed income maturity securities. NCRIC also
uses Brown Brothers Harriman as an outside investment manager for equity
securities.
The following table sets forth the fair value and the amortized cost of
the investment portfolio of NCRIC at the dates indicated.
106
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
As of December 31, 1998 (in thousands)
U.S. Government and agencies $23,728 $1,032 $(16) $24,744
Corporate 18,823 704 (40) 19,487
Tax-exempt obligations 19,329 1,045 - 20,374
Mortgage-backed securities 26,218 381 (69) 26,530
88,098 3,162 (125) 91,135
Preferred Stocks 5,195 88 (70) 5,213
Total $93,293 $3,250 $(195) $96,348
========= ====== ====== ======
As of December 31, 1997
U.S. Government and agencies $28,293 $115 $(7) $28,401
Corporate 16,168 394 (28) 16,534
Tax-exempt obligations 20,811 383 (11) 21,183
Mortgage-backed securities 23,683 241 (6) 23,918
--------- ------ ------ -------
88,955 1,133 (52) 90,036
Preferred stocks 4,208 136 (18) 4,326
--------- ------ ------ -------
Total $93,163 $1,269 $(70) $94,362
========= ====== ====== =======
As of December 31, 1996
U.S. Government and agencies $20,182 $29 $(429) $19,782
Corporate 13,371 70 (53) 13,388
Tax-exempt obligations 20,116 18 (7) 20,127
Mortgage-backed securities 31,513 - (80) 31,433
--------- ------ ------ -------
85,182 117 (569) 84,730
Preferred stocks 4,877 27 (48) 4,856
--------- ------ ------ -------
Total $90,059 $144 $(617) $89,586
========= ====== ====== =======
NCRIC's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. NCRIC's investment
policy provides that all security purchases be limited to rated securities or
unrated securities approved by management on the recommendation of NCRIC's
investment advisor. As of December 31, 1998, NCRIC held 50 mortgage-related
securities most of which had a quality of Agency/AAA . Collectively, NCRIC's
mortgage-related securities had an average yield-to-maturity of approximately
6.41%. Approximately 46% of the mortgage-related securities are pass-thru
securities. NCRIC does not have any interest only or principal only pass-thru
securities.
107
The following table sets forth information concerning the maturities of
fixed maturity securities in NCRIC's investment portfolio as of December 31,
1998, by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
December 31, 1998
-----------------
Amortized Percentage of
--------- -------------
Cost Fair Value Fair Value
---- ---------- ----------
(in thousands)
Due in one year or less $ 1,611 $ 1,619 1.7%
Due after one year through five years 9,552 9,767 10.2%
Due after five years through ten years 20,275 21,028 21.8%
Due after ten years 30,442 32,191 33.4%
-------- -------- --------
61,880 64,605 67.1%
Preferred stocks 5,195 5,213 5.4%
Mortgage-backed securities 26,218 26,530 27.5%
-------- -------- --------
Total $ 93,293 $96,348 100.0%
Proceeds from bond maturities and redemptions of available for sale investments
during the years 1998, 1997 and 1996 were $58,811,000, $35,475,000 and
$59,577,000. Gross gains of $521,000, $300,000 and $451,000 and gross losses of
$362,000, $210,000 and $221,000 were realized on available for sale investment
redemptions during 1998, 1997 and 1996.
The average effective maturity and the average modified duration of the
securities in NCRIC's fixed maturity portfolio as of December 31, 1998, was
13.56 years and 5.75 years.
COMPETITION
The physician medical professional liability insurance market in the
District of Columbia is highly competitive. Competition is based on many
factors, including the following:
. perceived financial strength of the insurer;
. A.M. Best ratings;
. premiums charged;
108
. dividend policy;
. policy terms and conditions; and
. service, reputation and experience.
NCRIC competes principally with two commercial companies, CNA Insurance Group,
Inc. and American International Group, Inc. Each of these companies is actively
engaged in soliciting insureds in NCRIC's markets. According to A.M. Best, NCRIC
has 44% of the District of Columbia physician and hospital professional
liability market and these two companies have a combined market share of 30%.
However, the A.M. Best data includes all medical professional liability
insurance sold in the District of Columbia including insurance purchased by
institutions like hospitals, which NCRIC does not insure, but which are insured
by its principal competitors. Thus, the A.M. Best data does not accurately
reflect NCRIC's share of the medical professional liability insurance markets in
which it participates. Several medical professional liability insurers in
NCRIC's markets, including its two principal competitors, offer products at
lower premium rates than NCRIC. A.M. Best calculates that at least 25 other
companies offer some type of medical professional liability insurance in each of
NCRIC's markets, and more companies may enter NCRIC's markets in the future. In
addition, NCRIC believes that the number of healthcare entities that insure
their affiliated physicians through self-insurance may increase.
In addition, as NCRIC expands into new states, it may face strong
competition from carriers that are closely focused on narrow geographic markets.
In particular, NCRIC expects to encounter strong competition from
well-established insurance companies as it carries out its expansion plans in
Maryland, Virginia, West Virginia and, in the future, Delaware. Many of NCRIC's
current and potential competitors have greater financial resources than NCRIC
and may seek to acquire market share by decreasing pricing for their products
below prevailing market rates, thereby reducing profitability. NCRIC believes
that its principal strengths are:
. its claims management and underwriting expertise;
. its ability to successfully litigate claims;
. its risk management; and
. its individualized service.
In addition, NCRIC believes that it derives competitive advantage from its
18-year presence in the metropolitan Washington, D.C. medical professional
liability market and its commitment to District of Columbia physicians.
109
REGULATION
NCRIC, A Mutual Holding Company and NCRIC, Inc. are domiciled in the
District of Columbia, and Commonwealth Medical Liability Insurance Company is
domiciled in Virginia. Therefore, the laws and regulations of these
jurisdictions, including the tort liability laws and the laws relating to
medical professional liability exposures and reports, have the most significant
impact on the operations of NCRIC.
HOLDING COMPANY REGULATION. A mutual insurance holding company is
subject to regulation at a level substantially equal to that of a District of
Columbia domestic insurance company. The Commissioner of Insurance and
Securities has jurisdiction over an intermediate holding company, like NCRIC
Group. In addition, District of Columbia law provides that the assets of NCRIC,
A Mutual Holding Company are available to satisfy claims of NCRIC's
policyholders in the event that the Commissioner of Insurance and Securities
initiates a liquidation proceeding.
As part of a holding company system, NCRIC, A Mutual Holding Company,
NCRIC Holdings, Inc., NCRIC Group and NCRIC, Inc. are subject to the DC Holding
Company System Act of 1933 (D.C. Law 10-44) (the "DC Holding Company Act").
NCRIC, Inc., as the parent of Commonwealth Medical Insurance Liability Company,
is also subject to Title 38 of the Virginia Code which includes in Chapter 13
provisions regarding insurance holding companies (together with the DC Holding
Company Act, the "Holding Company Acts"). The Holding Company Acts require
NCRIC, A Mutual Holding Company to file information periodically with the
Department of Insurance and Securities Regulation and Virginia regulatory
authorities, including information relating to its capital structure, ownership,
financial condition and general business operations. Some transactions between
an insurance company and its affiliates, including sales, loans or investments
that are deemed "material" require prior approval by the District of Columbia or
Virginia insurance regulators, as applicable. In the District of Columbia,
transactions by an insurance company with affiliates involving loans, sales,
purchases, exchanges, extensions of credit, investments, guarantees or other
contingent obligations, which within any 12-month period aggregate at least 3%
of the insurance company's admitted assets or 25% of its surplus, whichever is
greater, require prior approval. Prior approval is also required for all
management agreements, service contracts and cost-sharing arrangements between
an insurance company and its affiliates. Some reinsurance agreements or
modifications also require prior approval.
The Holding Company Acts also provide that the acquisition or change of
"control" of a domestic insurance company or of any person or entity that
controls an insurance company cannot be consummated without prior regulatory
approval. The Holding Company Acts also effectively restrict NCRIC from
consummating significant reorganizations or mergers regulatory approval.
110
Regulation of dividends from insurance subsidiaries. The DC Holding
Company Act limits the ability of NCRIC, Inc. to pay dividends. Without prior
notice to and approval of the Commissioner of Insurance and Securities, NCRIC
may not declare or pay an extraordinary dividend, which is defined as any
dividend or distribution of cash or other property whose fair market value,
together with other dividends or distributions made, within the preceding 12
months exceeds the lesser of (1) 10% of NCRIC's statutory surplus as of the
preceding December 31, or (2) NCRIC's statutory net income excluding realized
capital gains, for the 12-month period ending the preceding December 31, but
does not include pro rata distributions of any class of NCRIC's own securities.
In calculating net income under the test, NCRIC may carry forward net income,
excluding realized capital gains, from the previous two calendar years that has
not been paid out as dividends. District of Columbia law gives the Commissioner
of Insurance and Securities broad discretion to disapprove dividends even if the
dividends are within the above-described limits. Based on this limitation and
1998 results, NCRIC would be able to pay approximately $2.4 million in dividends
to NCRIC Group in 1998 under the stated formula. Commonwealth Medical Insurance
Liability Company's dividend restrictions are similar to NCRIC's. Based on its
1998 results, under Virginia insurance law, Commonwealth Medical Insurance
Liability Company would be able to pay approximately $500,000 in dividends to
NCRIC.
Insurance company regulation. NCRIC, Inc. is subject to the insurance
laws and regulations in each state in which it is licensed to do business. NCRIC
is currently licensed in four states and the District of Columbia. The extent
of regulation varies by jurisdiction, but this regulation usually includes:
. regulating premium rates and policy forms;
. setting minimum capital and surplus requirements;
. regulating guaranty fund assessments;
. licensing companies and agents;
. approving accounting methods and methods of setting statutory loss
and expense reserves;
. setting requirements for and limiting the types and amounts of
investments;
. establishing requirements for the filing of annual statements and
other financial reports;
. conducting periodic statutory examinations of the affairs of
insurance companies;
. approving proposed changes of control; and
111
. limiting the amounts of dividends that may be paid without prior
regulatory approval.
The D.C. Department of Insurance and Securities Regulation and state regulation
and supervision are primarily for the benefit and protection of policyholders
and not for the benefit of investors.
GUARANTY FUND LAWS. Each of the jurisdictions in which NCRIC does
business has guaranty fund laws under which insurers doing business in those
jurisdictions can be assessed on the basis of premiums written by the insurer in
that jurisdiction in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers. NCRIC
makes accruals for its portion of assessments related to any insolvencies
considered to be probable of assessment by the guaranty associations. In the
District of Columbia, insurance companies are assessed in three categories:
automobile, workers' compensation and all other. An insurance company licensed
to do business in the District of Columbia is only liable to pay an assessment
if another insurance company within its category becomes insolvent. NCRIC is in
the "all other" category.
EXAMINATION OF INSURANCE COMPANIES. Every insurance company is subject
to a periodic financial examination under the authority of the insurance
commissioner of its jurisdiction of domicile. Any other jurisdiction interested
in participating in a periodic examination may do so. The last completed
periodic financial examination of National Capital Reciprocal Insurance Company,
based on December 31, 1996 financial statements, was completed on October 29,
1997, and a final report was issued on February 9, 1999. The final report
positively assessed NCRIC's financial stability and operating procedures. The
last periodic financial examination of Commonwealth Medical Insurance Liability
Company, based on December 31, 1995 financial statements, was issued on May 1,
1996. While the assessment of Commonwealth Medical Insurance Liability Company's
financial stability was positive, the Virginia regulators raised a number of
issues in connection with Commonwealth Medical Insurance Liability Company's
administrative procedures which have now been corrected.
APPROVAL OF RATES AND POLICIES. The District of Columbia , Virginia and
Delaware require NCRIC to submit rates to regulators on a file and use basis.
Under a file and use system, an insurer is permitted to bring new rates and
policies into effect on filing them with the appropriate regulator, subject to
the right of the regulator to object within a fixed period of days. In Maryland,
rates must be submitted to regulators 30 days prior to their effectiveness. West
Virginia is also a prior approval jurisdiction. In each of the District of
Columbia, Maryland and Virginia, rating plans, policies and endorsements must be
submitted to the regulators 30 days prior to their effectiveness. If these items
are not filed correctly, the possibility exists that NCRIC may be unable to
implement desired rates, policies, endorsements, forms or manuals if these items
are not approved by an insurance commissioner.
112
Medical professional liability reports. NCRIC principally writes medical
professional liability insurance, and additional requirements are placed upon it
to report detailed information with regard to settlements or judgments against
its insureds. In addition, NCRIC is required to report to the D.C. Department of
Insurance and Securities Regulation or state regulatory agencies or the National
Practitioners Data Bank payments, claims closed without payments and actions by
NCRIC, like terminations or surcharges, with respect to its insureds. Penalties
may attach if NCRIC fails to report to either the Department of Insurance and
Securities Regulation or an applicable state insurance regulator or the National
Practitioners Data Bank.
A.M. BEST RATINGS
In 1997, A.M. Best, which rates insurance companies based on factors of
concern to policyholders, rated NCRIC and Commonwealth Medical Insurance
Liability Company "A-(Excellent)." This is the fourth highest rating of the 15
ratings that A.M. Best assigns. NCRIC received its initial rating of "B" in
1988, was upgraded to "B+" in 1989, to "B++" in 1996 and was upgraded to "A-" in
1997. NCRIC has received written confirmation from A.M. Best that A.M. Best
intends to retain the "A-" ratings of NCRIC, Inc. and Commonwealth Medical
Insurance Liability Company when A.M. Best publishes its next set of
ratings.
A.M. Best's "A-" rating is assigned to those companies that in A.M.
Best's opinion have a strong ability to meet their obligations to policyholders
over a long period of time. In evaluating a company's financial and operating
performance, A.M. Best reviews:
. the company's profitability, leverage and liquidity;
. its book of business;
. the adequacy and soundness of its reinsurance;
. the quality and estimated market value of its assets;
. the adequacy of its reserves and surplus;
. its capital structure;
. the experience and competence of its management; and
. its market presence.
EMPLOYEES
113
As of February 1, 1998, NCRIC employed approximately 150 persons. None
of NCRIC's employees is covered by a collective bargaining agreement. NCRIC
believes that its relations with its employees are good.
Litigation
NCRIC is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. NCRIC vigorously defends these
actions, unless a reasonable settlement appears appropriate. NCRIC believes that
adverse results, if any, in the actions currently pending should not have a
material adverse effect on NCRIC's consolidated financial condition.
Properties
NCRIC's principal business operations are conducted from its leased
executive offices, which consist of approximately 18,156 square feet located at
1115 30th Street, N.W., Washington, D.C. 20007. The term of the lease is for ten
years, commencing April 15, 1998 and expiring April 30, 2008. Annual rental is
$421,476 with 2% annual increases for the first five years of the term. NCRIC's
rent is partially offset by payments from a subtenant equal to $36,816 per year.
In the sixth year of the term, the rent increases by $2.00 per rentable square
foot and remains at that level for the balance of the term. NCRIC has the option
to renew the lease for one additional term of five years. NCRIC believes that
its office space is adequate for its present needs.
114
MANAGEMENT
BOARD OF DIRECTORS OF NCRIC, A MUTUAL HOLDING COMPANY
The board of directors is divided into three classes. Drs. Ammerman,
Coleman, Gutierrez, Hafter-Gray, Unger and Mr. Burke will stand for election at
the annual meeting of members to be held in 1999. Drs. Becker, Gladden, Gray,
Patterson, Zimmerman and Mr. McNamara will stand for election at the annual
meeting of stockholders to be held in 2000. Drs. Trujillo, Calhoun, Fischer,
Hirsch, Taubin, and Mr. Pate will stand for election at the annual meeting of
stockholders to be held in 2001.
NCRIC, A Mutual Holding Company's board of directors has established an
executive committee consisting of six directors which is chaired by Dr.
Trujillo. The executive committee exercises the power and authority of the
directors in all matters that do not require action by the entire board.
BOARD OF DIRECTORS OF NCRIC GROUP
The board of directors is divided into three classes. Dr. Coleman and
Messrs. McNamara and Burke will stand for election at the annual meeting of
stockholders to be held in 1999. Drs. Glassman, Scalettar and Seitzman and Mr.
Pate will stand for election at the annual meeting of stockholders to be held in
2000. Drs. Trujillo and Parver will stand for election at the annual meeting of
stockholders to be held in 2001. Dr. Epps intends to retire from the board of
directors in 2001. NCRIC Group intends to reduce the size of the board of
directors to nine directors at that time.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the current
directors and executive officers of NCRIC Group and NCRIC, A Mutual Holding
Company. Each of the officers of NCRIC Group holds the same position with NCRIC,
Inc.
NAME AGE POSITION
-------------------------------------- --- ---------------------------------------
Nelson P. Trujillo, M.D............... 61 Chair of the Board of NCRIC, A Mutual
Holding Company and NCRIC Group
R. Ray Pate, Jr....................... 39 Director, President and Chief Executive
Officer of NCRIC, A Mutual Holding
Company and NCRIC Group
Bruce J. Ammerman, M.D................ 51 Director of NCRIC, A Mutual Holding
Company
Arthur A. Becker, M.D................. 62 Director of NCRIC, A Mutual Holding
Company
----------------------------------------------------------------------------------------
115
NAME AGE POSITION
-------------------------------------- --- ---------------------------------------
Vincent C. Burke, III................. 47 Director of NCRIC, A Mutual Holding
Company and NCRIC Group
Thomas Calhoun, M.D................... 66 Director and Secretary of NCRIC, A
Mutual Holding Company
Pamela W. Coleman, M.D................ 42 Director of NCRIC, A Mutual Holding
Company and NCRIC Group
Charles H. Epps, Jr., M.D............. 68 Director of NCRIC Group
Robert A. Fischer, M.D................ 66 Vice Chair of the Board of NCRIC, A
Mutual Holding Company
Major P. Gladden, M.D................. 63 Director of NCRIC, A Mutual Holding
Company
Leonard M. Glassman, M.D.............. 52 Director of NCRIC Group
Luther W. Gray, Jr., M.D.............. 58 Director and Assistant Secretary of
NCRIC, A Mutual Holding Company
Joseph E. Gutierrez, M.D.............. 64 Director of NCRIC, A Mutual Holding
Company
Sheila Hafter-Gray, M.D............... 68 Director of NCRIC, A Mutual Holding
Florie Hirsch, M.D.................... 49 Director of NCRIC, A Mutual Holding
Company
J. Paul McNamara...................... 50 Director of NCRIC, A Mutual Holding
Company and NCRIC Group
Leonard Parver, M.D................... 54 Director of NCRIC Group
David W. Patterson, M.D............... 39 Director of NCRIC, A Mutual Holding
Company
Raymond Scalettar, M.D. 70 Director of NCRIC Group
David M. Seitzman, M.D................ 69 Director of NCRIC Group
Joel M. Taubin, M.D................... 57 Director of NCRIC, A Mutual Holding
Company
Anthony S. Unger, M.D................. 43 Director of NCRIC, A Mutual Holding
Company
Mervin H. Zimmerman, M.D.............. 64 Director of NCRIC, A Mutual Holding
Company
Stephen S. Fargis..................... 39 Chief Operating Officer and Senior
Vice President of NCRIC Group and
NCRIC, A Mutual Holding Company
William E. Burgess.................... 43 Senior Vice President (Claims and Risk
Management) and Secretary of NCRIC
Group and NCRIC, A Mutual Holding
Company
----------------------------------------------------------------------------------------
116
NAME AGE POSITION
-------------------------------------- --- ---------------------------------------
Rebecca B. Crunk...................... 47 Chief Financial Officer and Senior Vice
President of NCRIC Group and NCRIC, A
Mutual Holding Company
NCRIC Group's board of directors has established an Audit Committee. The
Audit Committee recommends the firm to be appointed as independent accountants
to audit financial statements, reviews the scope and results of the audit with
the independent accountants, reviews with management and the independent
accountants NCRIC's year-end audit and considers the adequacy of NCRIC's
internal accounting controls. The Audit Committee consists of Drs. Seitzman and
Coleman and Mr. Burke.
The positions listed above commenced upon the reorganization. Set forth
below with respect to each of the directors and executive officers of NCRIC, A
Mutual Holding Company and NCRIC Group is a description of the director's or
officer's business experience, principal occupation and employment during at
least the last five years.
Nelson P. Trujillo, M.D. was a Governor and Chair of the Board of National
Capital Reciprocal Insurance Company from 1980 until the reorganization. Dr.
Trujillo is currently President of Metropolitan Gastroenterology Group where he
is a physician.
R. Ray Pate, Jr. was the Treasurer of National Capital Reciprocal Insurance
Company and President and Chief Executive Officer of National Capital
Underwriters, Inc. from 1996 until the reorganization. From 1993 to 1995, Mr.
Pate was Vice President, Hospital Division of FPIC, Inc., a medical professional
liability insurance company.
Bruce J. Ammerman, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1986 until the reorganization. Dr. Ammerman is a
neurological surgeon with Washington Neurosurgical Associates.
Arthur A. Becker, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1982 until the reorganization. Dr. Becker is President of
the Obstetrical and Gynecological Group, P.A. where he practices as an
obstetrician/gynecologist. He is a former Chair of the Medical Economics and Ob-
Gyn Peer Review Committees of the Medical Society of the District of Columbia.
Vincent C. Burke, III has been a partner with the firm of Furey, Doolan &
Abell, LLP since June 1, 1998. From April 1992 to May 1998, he was counsel to
the law firm of Reed Smith Shaw & McClay. Mr. Burke's practice is in the areas
of corporate, business, real estate and closely-held businesses. He practices in
the District of Columbia and Maryland.
Thomas Calhoun, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1980 until the reorganization. Dr. Calhoun is also a
consultant for Birch &
117
Davis Associates, Inc., specializing in the utilization and quality review of
Veterans Administration hospitals. He is a member of the Expert Peer Review
Panel (Surgery) whose responsibility is to review surgical cases for utilization
and quality assurance. He is a past President of the medical staff at Providence
Hospital and the Washington Academy of Surgery and is a past Regional Medical
Director of the Delmarva Professional Organization.
Pamela W. Coleman, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1989 until the reorganization. Dr. Coleman is a urologist
in private practice.
Charles H. Epps, Jr., M.D. was the Chair of the board of directors of
National Capital Underwriters, Inc. from 1980 until the reorganization. Dr. Epps
is also a director of National Capital Insurance Brokerage, Ltd. and
Commonwealth Medical Liability Insurance Company. Currently, he is Special
Assistant to the President for Health Affairs and Professor Emeritus,
Orthopaedic Surgery at Howard University. Dr. Epps is past Vice President for
Health Affairs and Dean Emeritus of Howard University College of Medicine. He
has served as a delegate to the American Medical Association House of Delegates
and a member of the AMA Council on Ethical and Judicial Affairs. In addition, he
has been President of the American Orthopaedic Association, a Governor of the
American College of Surgeons and a member of the American Board of Orthopaedic
Surgery.
Robert A. Fischer, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1980 until the reorganization. Dr. Fischer is a clinical
physician and part owner of Washington Internal Medicine Group. He was Vice
Chair of the NCRIC Board of Governors and a member of the Executive Committee of
the NCRIC Board of Governors. He is also a member of the Board of Directors of
NCRIC MSO, Inc. Dr. Fischer is a past member of the Executive Board of Medical
Society of the District of Columbia and a past member of the Board of Trustees
of Blue Cross/Blue Shield of the National Capital Area. He is a past member of
the Executive Committee of the George Washington University Hospital and Chair
of the Clinical Faculty Advisory Committee to the Chair of the Department of
Medicine, George Washington University School of Health Sciences.
Major P. Gladden, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1982 until the reorganization. Dr. Gladden is an
orthopedic surgeon and Chief of Ortho pedics at DC General Hospital.
Leonard M. Glassman, M.D. was a Director of National Capital
Underwriters, Inc. from 1993 until the reorganization. Dr. Glassman is a
physician with Washington Radiology Associates, P.C. He is a past member of the
Finance Committee of the Medical Society of the District of Columbia and has
been Chief of Radiology of Columbia Hospital for Women Medical Center since
1984.
118
Luther W. Gray, Jr., M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1984 until the reorganization. He was a member of the
executive committee of the board and is Chair of the Underwriting Committee. Dr.
Gray is a physician and general surgeon with Luther W. Gray, Jr., M.D., P.C. and
is Chair of the Department of Surgery at Sibley Memorial Hospital.
Joseph E. Gutierrez, M.D. was a Governor of National Capital Reciprocal
Insurance Company from November 1995 until the reorganization. Dr. Gutierrez is
the President of Joseph E. Gutierrez, M.D., P.C., where he is a general and
vascular surgeon. He is the President-Elect of the Medical Society of the
District of Columbia and serves on the Medical Society of the District of
Columbia board of directors. He serves as delegate to the AMA House of Delegates
and is chair of the District of Columbia Delegation. In addition, Dr. Gutierrez
serves on the Board of Columbia Hospital for Women Medical Center where he is
Secretary of the board and chairs the Performance Improvement Committee.
Sheila Hafter-Gray, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1981 until the reorganization. Dr. Hafter-Gray is a
physician in private practice and is a Trustee of the American Academy of
Psychoanalysis and Clinical Professor of Psychiatry at the Uniformed Services
University of the Health Sciences in Bethesda, Maryland. Dr. Hafter-Gray
recently retired as a member of the Commission on Mental Health of the Superior
Court of the District of Columbia.
Florie Hirsch, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1987 until the reorganization. Dr. Hirsch is an
obstetrician/gynecologist with Florie Hirsch, M.D., P.C.
J. Paul McNamara has been President and Chief Operating Officer of
Sequoia National Bank/Sequoia BancShares, Inc. since 1988. From 1976 to 1988,
Mr. McNamara was employed by the National Bank of Washington in several senior
management positions.
Leonard Parver, M.D. is the Chair of the Board of NCRIC MSO, Inc. and
has practiced medicine in Washington, D.C. for the past 22 years. Dr. Parver
served previously on the board of directors of NCRIC Physicians Organization.
David W. Patterson, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1992 until the reorganization. Dr. Patterson is a
physician with Drs. Arling & Patterson, P.C.
Raymond Scalettar, M.D. was a Vice Chair of the board of directors of
National Capital Underwriters, Inc. from 1980 until the reorganization. He has
also been Chair of National Capital Insurance Brokerage, Inc. since its
inception. He is affiliated with and is a founder of the Washington Internal
Medicine Group, a Health Policy Consultant, a past trustee
119
and Chair of the Board of the AMA, and past Commissioner and Senior Consultant
to the Joint Commission on Accreditation of Healthcare Organizations.
David M. Seitzman, M.D. was a member of the board of directors of
National Capital Underwriters, Inc. from 1980 until the reorganization. Dr.
Seitzman is now retired from the practice of medicine. He has served on the
boards of Blue Cross and Blue Shield of the National Capital Area, the Medical
Society of the District of Columbia and National Capital Underwriters, Inc., and
has served as President and co-founder of the Center for Ambulatory Surgery,
Inc. Since 1993, Dr. Seitzman has served as a director of 59 Wall Street Fund,
Inc. Dr. Seitzman is also a director of Brown Brothers Harriman, one of NCRIC's
investment advisors.
Joel M. Taubin, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1994 until the reorganization. Dr. Taubin is a physician
with Joel M. Taubin, M.D., P.C.
Anthony S. Unger, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1997 until the reorganization. Dr. Unger is a physician.
Dr. Unger serves on the board of directors of NCRIC, A Mutual Holding Company
under an agreement between NCRIC and the Medical Society for the District of
Columbia.
Mervin H. Zimmerman, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1995 until the reorganization. Dr. Zimmerman is an
ophthalmologist with Mervin H. Zimmerman, M.D., F.A.C.S., P.C. and is a member
of the American Board of Ophthalmology and the American College of
Surgeons.
Stephen S. Fargis was Senior Vice President (Business Development) of
National Capital Reciprocal Insurance Company from November 1995 until the
reorganization. He is also Chief Operating Officer of NCRIC, Inc. From 1990 to
1995, he was Vice President of The Virginia Insurance Reciprocal.
William E. Burgess was Senior Vice President (Claims and Risk
Management) of National Capital Reciprocal Insurance Company from August 1997
until the reorganization. From April 1997 to August 1997, he was Vice President
(Claims, Risk Management) of NCRIC, and from 1993 to April 1997, he was Vice
President (Claims, Risk Management and Underwriting) of NCRIC.
Rebecca B. Crunk was Chief Financial Officer of National Capital
Reciprocal Insurance Company from April 1998 until the reorganization. Ms. Crunk
is a certified public accountant and is a member of the American Institute of
Certified Public Accountants. From 1995 to 1998, she was Vice President,
Treasurer and Controller of ReliaStar United Services Life Insurance Company .
From 1985 to 1995, she was Senior Vice President and Controller of United
Services Life Insurance Company.
120
COMPENSATION OF DIRECTORS
NCRIC Group will pay cash compensation to each of its non-employee
directors, other than the Chair, of $25,000 per year and will pay its Chair
$30,000 per year. Directors who are officers or employees of NCRIC Group receive
no compensation for serving as directors. All directors are reimbursed for
out-of-pocket expenses incurred in connection with attendance at any meeting of
any of NCRIC Group's boards of directors or any committee of any board of
directors.
MANAGEMENT COMPENSATION
The following summary compensation table sets forth information
concerning compensation for 1998 for services rendered in all capacities awarded
or paid by NCRIC, or prior to the reorganization, by the attorney-in-fact of
National Capital Reciprocal Insurance Company to its Chief Executive Officer,
the other named executive officers whose total salary and bonus equaled or
exceeded $100,000 during the year ended December 31, 1998 and Ms.
Crunk whose employment by NCRIC commenced in April 1998:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
All Other
Name and Principal Position Salary Bonus(1) Compensation(2)
--------------------------- ------ -------- ---------------
R. Ray Pate, Jr. ......................... $240,010 $75,000 $17,432
======== ======= =======
President and Chief Executive
Officer and Director
Stephen F. Fargis......................... 151,440 37,500 14,716
======== ======= =======
Chief Operating Officer
Rebecca B. Crunk.......................... 84,135 31,250 406
======== ======= ===
Chief Financial Officer
William E. Burgess........................ 109,981 27,500 11,082
======== ======= ======
Senior Vice President
(1) Bonus consists of payments made pursuant to a board of
directors-approved management incentive compensation plan. Incentive
awards are determined based on NCRIC's meeting various performance
targets set by the board of directors. The incentive awards
were earned for 1998 and paid in January 1999.
(2) Other compensation consists of, in the case of Mr. Pate, a contribution
of $14,400 by National Capital Reciprocal Insurance Company to Mr.
Pate's Section 401(k) profit sharing plan account and a $3,032 premium
payment for individual and group term life insurance policies; in the
case of Mr. Fargis a $14,386 contribution by National
121
Capital Reciprocal Insurance Company to Mr. Fargis' Section 401(k)
profit sharing plan account and a $330 premium payment for a group term
life insurance policy; in the case of Mr. Burgess a $10,654 contribution
by National Capital Reciprocal Insurance Company to Mr. Burgess' Section
401(k) profit sharing plan account and a $428 premium payment for a
group term life insurance policy; and in the case of Ms. Crunk, a
premium payment for a group term life insurance policy.
EMPLOYMENT AGREEMENTS
R. Ray Pate, Jr. serves as the President and Chief Executive Officer of
NCRIC under an employment agreement dated October 1, 1997 among National Capital
Reciprocal Insurance Company, National Capital Underwriters, Inc. and Mr. Pate.
Mr. Pate's employment agreement became the obligation of NCRIC, Inc. upon the
merger of National Capital Underwriters, Inc. into NCRIC, Inc. in connection
with the reorganization. Under the terms of his employment agreement, Mr. Pate
is entitled to basic compensation of $240,000 per year and is reimbursed for all
reasonable and proper business expenses incurred by him in the performance of
his duties. The terms of the employment agreement also provide that Mr. Pate is
entitled to:
. participate in any retirement and/or pension plans or health and
medical insurance plans offered to NCRIC, Inc.'s senior
executives;
. receive an automobile allowance of $700 per month; and
. be covered by both term life insurance and disability insurance.
The term of the employment agreement is five years commencing October
1, 1997. NCRIC may terminate the employment agreement for cause or without
cause, at any time. Any dispute as to whether NCRIC, Inc. had cause will be
determined by arbitration. If NCRIC, Inc. terminates Mr. Pate's employment
agreement without cause, Mr. Pate is entitled to receive, as severance pay, an
amount equal to two years' basic compensation at the base compensation in effect
on the date of the termination. The Commissioner of Insurance and Securities'
order approving the reorganization required Mr. Pate's employment agreement to
be amended to eliminate, for a two-year period, a provision which deemed a
change of control to be a termination without cause. Mr. Pate may voluntarily
terminate his employment with NCRIC provided that he gives NCRIC twelve months'
prior notice of his voluntary termination or pays NCRIC, Inc. liquidated damages
equal to the amount of twelve months' basic compensation.
National Capital Underwriters, Inc. also entered into an employment
agreement commencing December 1, 1997 with Stephen S. Fargis on substantially
similar terms except that Mr. Fargis' employment agreement terminates November
30, 2000, provides for basic compensation of $150,000 per year and enables him
to voluntarily terminate his employment
122
on three months' prior notice. Mr. Fargis' employment agreement also became the
obligation of NCRIC, Inc. upon the merger of National Capital Underwriters, Inc.
into NCRIC, Inc. in connection with the reorganization.
NCRIC, Inc. has also entered into an employment agreement commencing
January 1, 1999 with Rebecca B. Crunk on substantially similar terms to Mr.
Pate's, except that Ms. Crunk's agreement terminates December 31, 2001, provides
for basic compensation of $135,000 per year and enables her to voluntarily
terminate her employment on three months' prior notice.
EMPLOYEE STOCK OWNERSHIP PLAN
NCRIC Group has established an ESOP for eligible employees of NCRIC,
Inc., subject to the completion of the subscription offering. Employees age 21
or older who have worked for NCRIC, Inc. or its predecessor, National Capital
Reciprocal Insurance Company, for a period of one year and have been credited
with 1,000 or more hours of service during the year are eligible to participate.
At NCRIC Group's option, employees of other affiliates of NCRIC Group may be
entitled to participate in the ESOP. As part of the subscription offering, the
ESOP intends to borrow funds from NCRIC Group and to use those funds to purchase
a number of shares equal to 10% of the shares sold in the subscription,
community and syndicated community offerings. Shares purchased by the ESOP will
be held in a suspense account for allocation among participants as the loan is
repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportional to the repayment of the principal of the ESOP loan
will be allocated among ESOP participants on the basis of compensation in the
year of allocation. For purposes of vesting and eligibility, participants in the
ESOP will receive credit for service prior to the effective date of the ESOP. A
participant will vest in increments of 20% per year of credited service and will
be fully vested in his or her account balance after five years of credited
service. A participant who terminates employment for reasons other than death,
retirement or disability prior to five years of credited service will forfeit
the nonvested portion of his or her benefits under the ESOP. Benefits will be
payable in the form of common stock upon death, retirement, disability or
separation from service. Contributions by NCRIC Group to the ESOP are
discretionary, subject to the loan terms and tax law limits, and, therefore,
benefits payable under the ESOP cannot be estimated.
On February 25, 1999, NCRIC Group established an administrative board
to administer the ESOP. The ESOP trustees, Mr. Pate and Dr. Trujillo, must vote
all allocated shares held in the ESOP in accordance with the instructions of
participating employees. Under the ESOP, nondirected shares, and shares held in
the suspense account, will be voted in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock so long as the vote is in accordance with the provisions of the
Employee Retirement Income Security Act.
STOCK OPTION PLAN
123
NCRIC Group has established a stock option plan for directors and
officers of NCRIC, A Mutual Holding Company and its subsidiaries , subject to
the completion of the subscription offering. Common stock in an aggregate amount
equal to 5% of the shares of common stock offered in the subscription, community
and syndicated community offerings, may be acquired by those officers, directors
and employees upon the exercise of the options granted under the stock option
plan. It is anticipated that the stock to be transferred in connection with the
exercise of the option may be newly issued by NCRIC Group or may be acquired by
NCRIC Group through purchase on the open market.
The options have terms of 10 years and an option price per share equal
to the fair market value of the shares on the date of grant of the stock
options. The options will become first exercisable at a rate of 33-1/3% at the
end of each 12 months of service with NCRIC Group or its subsidiaries after the
date of grant, subject to early exercisability in the event of death or
disability. Options which have been granted but have not yet been exercised will
become immediately exercisable upon a change of control of NCRIC Group; for this
purpose, a full demutualization will not be treated as a change of control.
Options granted under the stock option plan would be adjusted for capital
changes like stock splits and stock dividends.
The stock option plan will be administered by a committee of
non-employee members of NCRIC Group's board of directors. Options granted under
the stock option plan to employees may be treated as "incentive" stock options
which offer beneficial tax treatment to the employee but no tax deduction to
NCRIC except in the event of the sale of the stock acquired on the exercise of
an option within a time period of one year from the date of exercise or two
years from the date of the grant of the option. Non-qualified stock options
under the stock option plan may be granted to non-employee directors. In the
event an option recipient terminates his or her employment or service as an
employee or director, the options would terminate during specified periods.
STOCK AWARD PLAN
NCRIC Group has also established a stock award plan for directors,
officers and employees of NCRIC, A Mutual Holding Company and its subsidiaries
under which directors, officers and employees would be awarded common stock. The
plan is subject to the completion of the subscription offering. Shares of common
stock to be awarded under the program will be purchased in the subscription,
community and syndicated community offerings by a trust established by NCRIC
Group for this purpose. NCRIC Group will loan to the trust the funds necessary
to purchase a number of shares equal to 5% of the shares sold in the
subscription, community and syndicated community offerings. NCRIC Group
anticipates that the loan to the trust will be repaid by periodic cash
contributions to be made to the trust by NCRIC Group. The trust will award
shares of common stock to participants in a manner designed to encourage
participants' continued service.
124
AWARDS WILL BE NONTRANSFERABLE. The shares which are subject to an award
from the trust will vest and be earned by the recipient at a rate of 20% of the
shares awarded at the end of each full 12 months of service after the date of
grant of the award. Any common stock acquired under the stock award plan will
represent unearned compensation and, accordingly, will be reflected on NCRIC
Group's financial statements as a reduction to stockholders' equity. As shares
of common stock awarded under the stock award plan vest, NCRIC Group will
recognize a proportionate amount of compensation expense with a corresponding
reduction in the charge to stockholders' equity. Awards would be adjusted for
capital changes like stock dividends and stock splits.
EXPENSES ASSOCIATED WITH ESOP, STOCK OPTION PLAN AND STOCK AWARD PLAN
NCRIC may recognize material amounts of compensation expense associated
with stock issued to employees and directors under the ESOP, stock option plan
and stock award plan. NCRIC generally cannot predict the aggregate amount of
this compensation expense because GAAP sometimes requires that compensation
expense be measured based on the fair market value of the shares of common stock
on the date the expense is recognized. NCRIC intends to record compensation
expense as follows:
. For shares committed-to-be-released from the ESOP suspense
account and allocated to the accounts of the ESOP participants as
the result of payments made to reduce the ESOP loan, the
compensation charge will be based upon the then-current fair
values of the shares.
. For shares awarded to employees under the stock option plan,
NCRIC intends to account for compensation cost using the
intrinsic value based method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, compensation will be measured as the difference, if
any, between the fair market value of the shares and the option
strike price at the time both measurement date factors, i.e., the
number of shares and the strike price, are known. Generally,
NCRIC expects to grant fixed awards where both measurement date
factors are known on the date of grant. Moreover, NCRIC
expects the option strike price to equal the fair market value on
the date of grant. Compensation cost measured in this fashion, if
any, will be recognized over the employees' applicable service
periods. NCRIC may also make variable awards where the
measurement date factors will not be known until some time after
the date of grant. As required by GAAP, NCRIC will disclose pro
forma information regarding net income and earnings per share as
though NCRIC had used the fair value method of accounting for
employee stock options defined in Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123").
. For shares awarded to non-employee directors under the stock
option plan, NCRIC intends to account for compensation cost using
the fair value method of accounting for stock options defined in
SFAS No. 123.
125
. For shares awarded under the stock award plan, NCRIC intends to
measure compensation cost based upon the fair values of the
shares on the date of award except in the case of awards which
involve a performance condition, in which case the cost may have
to be measured by reference to the fair values of the shares
on the date they vest under the plan. Compensation cost measured
in this fashion will be recognized over the applicable service
periods.
These expenses have been reflected in the pro forma information under
"Pro Forma Data" assuming that the purchase price ($7.00 per share) represents
the fair market value for accounting purposes. Under some circumstances,
however, actual expenses will be based on the fair market value of the common
stock at future dates, which may be higher or lower than the purchase price.
REDUCTION IN 401(k) AND MANAGEMENT INCENTIVE COMPENSATION PLAN CONTRIBUTIONS
It is anticipated that the discretionary employer contribution which has
historically been made by National Capital Reciprocal Insurance Company to its
tax-qualified Section 401(k) profit-sharing plan in the approximate amount of 9%
of covered payroll will be reduced to an amount equivalent to approximately 3%
of NCRIC, Inc.'s covered payroll so as to reduce the net contribution
requirements associated with the establishment of the ESOP. Expenses associated
with the stock award plan will be completely offset by a reduction in NCRIC's
contributions to its existing management incentive compensation plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
NCRIC Group's articles of incorporation provide that no past, present or
future director of NCRIC Group shall be liable to NCRIC Group or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
. for breach of the director's duty of loyalty to the corporation
or its stockholders;
. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law;
. for a transaction from which the director derives an improper
personal benefit; and
. to the extent that Section 29-342 of the District of Columbia
Code may apply.
This provision does not prevent stockholders from obtaining injunctive or other
equitable relief against directors. NCRIC Group's bylaws require it to indemnify
the past, present and future members of its board of directors and duly
appointed committees and its officers, and
126
their executors, administrators, or other legal representatives, to the fullest
extent permitted by law, as now in effect and as these laws may be amended in
the future. NCRIC Group shall advance expenses incurred by indemnified
individuals as a result of any proceeding against them as to which they are
entitled to be indemnified. NCRIC, A Mutual Holding Company, NCRIC Holdings,
Inc. and NCRIC, Inc. have similar provisions in their articles of incorporation
and bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors or officers, NCRIC has been advised that in
the opinion of the Securities and Exchange Commission, this indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
At present, there is no pending material litigation or proceeding
involving any director, officer, employee or agent of NCRIC where
indemnification will be required or permitted.
AGREEMENTS
ADMINISTRATIVE SERVICES AGREEMENT
NCRIC Group has entered into an administrative services agreement with
some of its subsidiaries and parents. Under the agreement, any affiliate of
NCRIC, except HealthCare Consulting and HCI Ventures (the "Service Provider"),
may provide to any other affiliate administrative and clerical services,
financial and accounting services, computer services, support services and
assistance in the acquisition of furniture and equipment. The Service Provider
is paid a quarterly service fee by each affiliate receiving services, in
arrears, equal to the costs and expenses it incurred in providing services to
the affiliate during the preceding quarter. The administrative services
agreement may be terminated by all parties by written agreement or by any
affiliate, with respect to itself, on sixty days' prior written notice to the
other affiliates.
TAX SHARING AGREEMENT
NCRIC Group and its subsidiaries, which pay federal income tax as a
consolidated group, have entered into a tax sharing agreement. The tax sharing
agreement provides for the allocation of NCRIC Group's consolidated income tax
liability to each member of NCRIC Group. Consolidated tax liability is allocated
among group members as if each group member had filed a separate tax
return.
LOAN FOR HEALTHCARE CONSULTING ACQUISITION
Sequoia National Bank loaned $2.2 million to NCRIC Group to partially
finance the HealthCare Consulting Acquisition. J. Paul McNamara is a Director of
NCRIC, A Mutual Holding Company and NCRIC Group and is President of Sequoia
National Bank.
127
OWNERSHIP OF COMMON STOCK
Immediately prior to the subscription, community and syndicated
community offerings, there are 1,000 issued and outstanding shares of NCRIC
Group's common stock, all of which are owned by NCRIC Holdings, Inc. Other than
these shares, as of the date of this prospectus, no shares of common stock were
beneficially owned by any person, including any director or officer of
NCRIC.
Upon completion of the subscription, community and syndicated community
offerings, NCRIC Holdings' 1,000 issued and outstanding shares of NCRIC Group's
common stock will be canceled and approximately 59% of NCRIC Group's outstanding
common stock will be issued to NCRIC Holdings, Inc. and approximately 40% of
NCRIC Group's outstanding common stock will be issued to subscribers or
purchasers in the subscription, community and syndicated community offerings.
DESCRIPTION OF COMMON STOCK
GENERAL
The following description does not purport to be complete and is
qualified in its entirety by reference to NCRIC Group's articles of
incorporation, a copy of which is filed as an exhibit to the registration
statement of which this prospectus is a part.
COMMON STOCK
NCRIC Group is authorized to issue 10,000,000 shares of common stock,
par value $.01 per share. Each share of common stock entitles its holder to one
vote per share on all matters upon which stockholders are entitled to vote,
including election of directors, mergers, sales of assets, dissolution and
amendments to the articles of incorporation. Because holders of common stock do
not have cumulative voting rights, the holder of a majority of the shares of
common stock can elect all of the members of the board of directors standing for
election. Subject to preferences of any preferred stock that may be issued in
the future, the holders of common stock are entitled to receive dividends as may
be declared by the board of directors. Each holder of shares of NCRIC Group's
common stock is entitled to receive pro rata all of the assets of NCRIC Group
available for distribution its stockholders. There are no redemption or sinking
fund provisions applicable to common stock. All outstanding shares of common
stock are fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Registrar and
Transfer Company.
128
LEGAL OPINIONS
The validity of the shares of common stock will be passed upon for NCRIC
by Arent Fox Kintner Plotkin & Kahn, PLLC and for the placement agent by Luse
Lehman Gorman Pomerenk & Schick, P.C.
EXPERTS
The consolidated financial statements of NCRIC as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
and the Combined Financial Statements of the Management and Services of
HealthCare Consulting, HCI Ventures and Employee Benefit Services, Inc. as of
December 31, 1998 and 1997 and for each of the two years in the period ended
December 31, 1998 included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and have been so included in reliance upon the reports of Deloitte & Touche LLP
given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
NCRIC has filed with the Securities and Exchange Commission, a
registration statement on Form SB-2 under the Securities Act with respect to the
common stock . As permitted by the rules and regulations of the Securities and
Exchange Commission, this prospectus omits some of the information contained in
the registration statement. For further information with respect to NCRIC and
the common stock, reference is made to the registration statement including its
exhibits and schedules . Statements contained in this prospectus regarding the
contents of any agreement or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance
reference is made to the copy of the agreement filed as an exhibit to the
registration statement, each statement being qualified in all respects by the
reference to the agreement. The registration statement, including its exhibits
and schedules , may be inspected at the public reference facilities maintained
by the Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549; Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661; and Seven World Trade Center, New York, New
York 10048; and copies of all or any part of the registration statement may be
obtained from these offices upon payment of the prescribed fees. The public may
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains an Internet site, http://www.sec.gov, that
contains information regarding registrants who file electronically with the
Securities and Exchange Commission.
As a result of the subscription, community and syndicated community
offerings, NCRIC will be subject to the informational requirements of the
Securities Exchange
129
Act. So long as NCRIC is subject to the periodic reporting requirements of the
Securities Exchange Act, it will continue to furnish the reports and other
information required thereby to the Securities and Exchange Commission. NCRIC
intends to furnish to holders of common stock annual reports containing, among
other information, consolidated financial statements audited by an independent
public accounting firm and quarterly reports containing unaudited condensed
consolidated financial information for the first three quarters of each fiscal
year. NCRIC also intends to furnish any other reports as it may determine or as
may be required by law.
NCRIC, Inc. is domiciled in the District of Columbia. As a result, it is
subject to the laws and regulations of the District of Columbia applicable to
insurance companies and files financial reports and other information with the
Department of Insurance and Securities Regulation. NCRIC has submitted a Form A
Statement Regarding the reorganization of a District of Columbia Insurer
("Statement of Reorganization") which contains the information required by
National Capital Reciprocal Insurance Company Insurance Company Conversion Act
of 1998, D.C. Act 12-301, as enacted by the Council of the District of Columbia.
These publicly available financial reports, the Statement of Reorganization, and
other information can be inspected and copies can be made at the office of the
Department of Insurance and Securities Regulation, 810 First Street, N.E., Room
701, Washington, D.C. 20002.
130
NCRIC GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996 F-3
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997, and 1996 F-7
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT F-18
COMBINED FINANCIAL STATEMENTS AS OF AND FOR
THE YEARS ENDED DECEMBER 31, 1998 AND 1997:
Balance Sheets F-19
Statements of Income and Comprehensive Income F-20
Statements of Owners' Equity F-21
Statements of Cash Flows F-22
Notes to Financial Statements F-23
INDEPENDENT AUDITORS' REPORT
To the Board of Governors of
NCRIC Group, Inc. and Subsidiaries
Washington, D.C.
We have audited the accompanying consolidated balance sheets of NCRIC Group,
Inc. and Subsidiaries (the Company) as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998,
1997, and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of NCRIC Group, Inc. and Subsidiaries
as of December 31, 1998 and 1997, and the results of their operations, and their
cash flows for the years ended December 31, 1998, 1997, and 1996, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 4, 1999
Washington, D.C.
F-1
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
ASSETS 1998 1997
SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE:
Bonds and U.S. Treasury Notes $ 91,135 $ 90,036
Preferred stocks 5,213 4,326
--------- ---------
Total securities available for sale 96,348 94,362
OTHER ASSETS:
Cash and cash equivalents 6,083 4,065
Reinsurance recoverable 24,944 17,077
Deferred federal income taxes 2,742 2,793
Other assets 4,209 3,544
--------- ---------
TOTAL ASSETS $ 134,326 $ 121,841
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Loss $ 60,127 $ 53,661
Loss adjustment expenses 27,573 21,475
--------- ---------
Total losses and loss adjustment expenses 87,700 75,136
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 6,492 13,762
Unearned premiums 3,348 403
Other liabilities 5,775 5,054
--------- ---------
TOTAL LIABILITIES 103,315 94,355
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 8)
STOCKHOLDER'S EQUITY:
Common stock $.01 par value - 10,000,000 shares
authorized; 1,000 shares issued and outstanding - -
Additional paid in capital 798 797
Accumulated other comprehensive income 2,016 789
Retained earnings 28,197 25,900
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 31,011 27,486
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 134,326 $ 121,841
========= =========
See notes to consolidated financial statements.
F-2
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
1998 1997 1996
REVENUES:
Premium income:
Premiums written $ 19,214 $ 17,869 $ 19,017
Premiums ceded 4,089 (1,854) (4,239)
Change in unearned premiums (2,945) (403) -
Renewal credit dividends to policyholders (1,899) (2,080) (1,427)
--------- --------- ---------
Net premiums earned 18,459 13,532 13,351
--------- --------- ---------
Investment income 6,360 6,585 6,207
Investment expenses (364) (540) (551)
--------- --------- ---------
Net investment income 5,996 6,045 5,656
--------- --------- ---------
Net realized investment gains 159 90 229
Other income 435 355 660
--------- --------- ---------
Total revenues 25,049 20,022 19,896
--------- --------- ---------
EXPENSES:
Losses and loss adjustment expenses 15,677 15,591 15,236
Underwriting expenses 3,858 2,918 2,438
Other 1,888 676 928
--------- --------- ---------
Total expenses 21,423 19,185 18,602
--------- --------- ---------
INCOME BEFORE INCOME TAXES 3,626 837 1,294
--------- --------- ---------
INCOME TAX (BENEFIT) PROVISION:
Current 1,658 (255) 102
Deferred (579) 133 201
--------- --------- ---------
Total income tax (benefit) provision 1,079 (122) 303
--------- --------- ---------
NET INCOME $ 2,547 $ 959 $ 991
========= ========= =========
See notes to consolidated financial statements.
F-3
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
1998 1997 1996
NET INCOME $2,547 $ 959 $ 991
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) on
investments during the period 2,016 1,762 (1,817)
(Taxes) or benefit associated with
unrealized holding gains or losses (684) (599) 620
Less: reclassification adjustment
for gains included in net income (159) (90) (229)
Taxes associated with reclassification
adjustment 54 30 77
--------- --------- --------
OTHER COMPREHENSIVE INCOME (LOSS) 1,227 1,103 (1,349)
--------- --------- --------
COMPREHENSIVE INCOME (LOSS) $3,774 $2,062 $ (358)
========= ========= ========
See notes to consolidated financial statements.
F-4
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
ACCUMULATED
OTHER
Additional COMPREHENSIVE TOTAL
COMMON PAID IN INCOME RETAINED STOCKHOLDER'S
STOCK CAPITAL (LOSSES) EARNINGS EQUITY
BALANCE, JANUARY 1, 1996 $ - $ 797 $ 1,035 $ 23,950 $ 25,782
Net unrealized investment losses,
net of deferred income taxes - - (1,349) - (1,349)
Net income - - - 991 991
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1996 - 797 (314) 24,941 25,424
Net unrealized investment gains,
net of deferred income taxes - - 1,103 - 1,103
Net income - - - 959 959
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1997 - 797 789 25,900 27,486
Capital contribution from
NCRIC Holdings, Inc. - 1 - - 1
Cash dividend to stockholder - - - (250) (250)
Net unrealized investment gains,
net of deferred income taxes - - 1,227 - 1,227
Net income - - - 2,547 2,547
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1998 - $ 798 $ 2,016 $ 28,197 $ 31,011
====== ======= ======= ======== ========
See notes to consolidated financial statements.
F-5
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,547 $ 959 $ 991
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (159) (90) (229)
Amortization and depreciation 235 486 809
Loss on sale of building - 197 -
Deferred federal income taxes (579) 133 201
Changes in assets and liabilities:
Reinsurance recoverable (7,867) (2,398) 1,504
Other assets (252) (773) (840)
Losses and loss adjustment expenses 12,565 3,930 (827)
Retrospective premiums accrued under
reinsurance treaties (7,270) (1,043) 2,776
Unearned premiums 2,945 403 -
Other liabilities 838 (176) 952
-------- -------- --------
Net cash flows from operating activities 3,003 1,628 5,337
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (58,781) (64,363) (72,427)
Sales, maturities and redemptions of investments 58,811 61,122 63,971
Purchases of property and equipment (766) (516) -
Proceeds from sale of building - 1,178 -
-------- -------- --------
Net cash flows from investing activities (736) (2,579) (8,456)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1 - -
Dividends paid (250) - -
-------- -------- --------
(249) - -
-------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 2,018 (951) (3,119)
-------- -------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,065 5,016 8,135
-------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,083 $ 4,065 $ 5,016
======== ======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 700 $ - $ 645
======== ======== ========
See notes to consolidated financial statements.
F-6
NCRIC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting On April 20, 1998, the Board of
Governors of National Capital Reciprocal Insurance Company adopted a plan of
reorganization which authorized the formation of NCRIC, A Mutual Holding
Company (Mutual Holding Company) and to convert into NCRIC, Inc. (NCRIC), a
stock medical professional liability insurance company. The reorganization
became effective on December 31, 1998.
Through a series of stock transfers effected in connection with the
reorganization, Mutual Holding Company owns all of the outstanding shares of
NCRIC Holdings, Inc., which owns all of the outstanding shares of NCRIC
Group, Inc. (Company), which owns all of the outstanding shares of NCRIC.
District of Columbia law provides that Mutual Holding Company must at all
times own, directly or indirectly, a majority of the outstanding voting stock
of NCRIC.
The reorganization separated the contract rights and membership interests of
the policyholders so that their contract rights remain with NCRIC while their
membership interests are in the Mutual Holding Company. Each policyholder of
a policy that was in force as of December 31, 1998, and who was a member of
National Capital Reciprocal Insurance Company, pursuant to the
reorganization, became a member of the Mutual Holding Company.
The accompanying financial statements present the consolidated financial
position and results of operations of NCRIC Group, Inc. and subsidiaries and
their predecessors.
Together with its subsidiaries, the Company provides comprehensive
professional liability and office premises liability insurance under
nonassessable policies to physicians having their principal practice in the
District of Columbia, Maryland or Virginia. A majority of the Company's
business is written in the District of Columbia.
The Company has issued policies on both an occurrence and a claims-made
basis. However, subsequent to June 1, 1986, substantially all policies were
issued on the claims-made basis. Occurrence-basis policies provide coverage
to the policyholder for all losses incurred during the policy year regardless
of when the related claims are reported. Claims-made basis policies provide
coverage to the policyholder for covered claims reported during the current
policy year provided the related losses were incurred while claims-made basis
policies were in effect.
Tail coverage is offered for doctors terminating their insurance policies.
This coverage extends the reporting period ad infinitum in which to report
future claims resulting from incidents occurring while a claims-made policy
was in effect. Beginning in 1988, prior acts insurance coverage was first
issued, subject to underwriting criteria for new insureds. Such coverage
extends the effective date of claims-made policies to designated periods
prior to initial coverage.
F-7
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company. All significant intercompany transactions have
been eliminated in the consolidation. The Company includes the following
entities:
. NCRIC Group, Inc.
. NCRIC, Inc.
. Commonwealth Medical Liability Insurance Company
. National Capital Insurance Brokerage, Ltd.
. NCRIC Insurance Agency, Inc.
. NCRIC Physicians Organization, Inc.
. NCRIC MSO, Inc.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which differ from statutory
accounting practices prescribed or permitted for insurance companies by
regulatory authorities.
Cash Equivalents - For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity of three
months or less to be cash equivalents.
Investments - The Company has classified its investments as available for
sale and has reported them at fair value, with unrealized gains and losses
excluded from earnings and reported, net of deferred taxes, as a component of
equity and other comprehensive income. Realized gains and losses are
determined using the specific identification method.
Property and Equipment - Fixed assets are recorded at cost and reported as a
component of other assets. Depreciation is recorded using the straight-line
method over estimated useful lives of three to five years. The balance of
fixed assets at December 31, 1998 and 1997 of $1,010,000 and $509,000,
respectively, are net of accumulated depreciation of $766,000 and $339,000.
Liabilities for Losses and Loss Adjustment Expenses - Liabilities for losses
and loss adjustment expenses are established on the basis of reported losses
and a provision for losses incurred but not reported and related loss
adjustment expenses. These amounts are based on the estimates of management
and are subject to risks and uncertainties. As facts become known,
adjustments to these estimates are reflected in earnings. The Company
protects itself from excessive losses by reinsuring certain levels of risk in
various areas of exposure with reinsurers. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss and loss
adjustment expense reserve associated with the reinsured policy.
Recognition of Premiums Revenue - Premiums are earned pro rata over the terms
of the policies. During 1997 the Company began to stagger the effective
dates of premium renewals, which resulted in unearned premium income for
premiums collected prior to year-end but unearned until the following year.
Policyholder dividend credits are accrued as reductions to premium income in
the year declared.
Income Taxes - The Company uses the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recognized
for tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
F-8
Reclassifications - In order to conform to the current presentation, certain
prior year balances, relating to losses and loss adjustment expenses,
retrospective premiums accrued under reinsurance treaties, and other items
have been reclassified.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant accounts subject to management estimates are
reinsurance recoverable, liabilities for losses and loss adjustment expenses,
and retrospective premiums accrued under reinsurance treaties.
2. INVESTMENTS
The following tables show the amortized cost and fair value of investments
(in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
As of December 31, 1998
U.S. Government and agencies $23,728 $1,032 $ (16) $24,744
Corporate 18,823 704 (40) 19,487
Tax-exempt obligations 19,329 1,045 - 20,374
Mortgage-backed securities 26,218 381 (69) 26,530
------- ------ ----- -------
88,098 3,162 (125) 91,135
Preferred stocks 5,195 88 (70) 5,213
------- ------ ----- -------
Total $93,293 $3,250 $(195) $96,348
======= ====== ===== =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
As of December 31, 1997
U.S. Government and agencies $28,293 $ 115 $ (7) $28,401
Corporate 16,168 394 (28) 16,534
Tax-exempt obligations 20,811 383 (11) 21,183
Mortgage-backed securities 23,683 241 (6) 23,918
------- ------ ---- -------
88,955 1,133 (52) 90,036
Preferred stocks 4,208 136 (18) 4,326
------- ------ ---- -------
Total $93,163 $1,269 $(70) $94,362
======= ====== ==== =======
F-9
The amortized cost and fair value of debt securities and preferred stocks at
December 31, 1998 and 1997, are shown by maturity. Actual maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
IN THOUSANDS
-----------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- ---------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ 1,611 $ 1,619 $ 5,971 $ 6,054
Due after one year through five years 9,552 9,767 17,027 16,976
Due after five years through ten years 20,275 21,028 12,962 13,184
Due after ten years 30,442 32,191 29,312 29,904
------- ------- ------- -------
61,880 64,605 65,272 66,118
Preferred stocks 5,195 5,213 4,208 4,326
Mortgage-backed securities 26,218 26,530 23,683 23,918
------- ------- ------- -------
Total $93,293 $96,348 $93,163 $94,362
======= ======= ======= =======
Proceeds from bond maturities and redemptions of fixed maturity investments
during the years ended December 31, 1998, 1997 and 1996, were $58,811,000,
$35,475,000, and $59,577,000, respectively. Gross gains of $521,000,
$300,000, and $451,000, and gross losses of $362,000, $210,000, and $221,000,
were realized on bond redemptions during years December 31, 1998, 1997, and
1996, respectively.
3. LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses represent an
estimate of the ultimate net cost of all losses that are unpaid at the
balance sheet date, and are based on the loss and loss adjustment expense
factors inherent in the Company's experience and expectations. Estimation
factors used by the Company reflect current case-basis estimates
(supplemented by industry statistical data) and give effect to estimates of
trends in claim severity and frequency. These estimates are continually
reviewed, and adjustments, reflected in current operations are made thereto
as deemed necessary.
Although the Company believes the liabilities for losses and loss adjustment
expenses are reasonable and adequate for the circumstances, it is possible
that the Company's actual incurred losses and loss adjustment expenses will
not conform to the assumptions inherent in the determination of the
liabilities. Accordingly, the ultimate settlement of losses and the related
loss adjustment expenses may vary from the amounts included in the financial
statements.
F-10
Activity in the liabilities for losses and loss adjustment expenses is
summarized as follows (in thousands):
1998 1997 1996
BALANCE, Beginning
of period $75,136 $71,206 $72,033
Less reinsurance recoverable
on unpaid claims 17,077 14,679 16,182
------- ------- -------
NET BALANCE 58,059 56,527 55,851
------- ------- -------
Incurred related to:
Current year 19,140 19,444 16,775
Prior years (3,463) (3,853) (1,539)
------- ------- -------
Total incurred 15,677 15,591 15,236
------- ------- -------
Paid related to:
Current year 1,247 1,867 2,145
Prior years 9,335 12,192 12,415
------- ------- -------
Total paid 10,582 14,059 14,560
------- ------- -------
NET BALANCE 63,154 58,059 56,527
Plus reinsurance recoverable
on unpaid claims 24,546 17,077 14,679
------- ------- -------
BALANCE, End of period $87,700 $75,136 $71,206
======= ======= =======
4. RENEWAL CREDIT DIVIDENDS TO POLICYHOLDERS
In 1998, 1997, and 1996, the Company declared renewal credit dividends to its
policyholders, which are payable in the form of a premium credit on the
succeeding year's policy premiums. The Company accrues policyholders'
dividend credits in the year declared as a reduction of premium income.
5. REINSURANCE AGREEMENTS
The Company has reinsurance agreements that allow the Company to write
policies with higher coverage limits than it is individually capable or
desirous of retaining by reinsuring the amount in excess thereof. The
Company has both excess of loss treaties and quota share treaties.
F-11
The Company is contingently liable in the event the reinsurers are unable to
meet their obligations under these contracts. There were unused letters of
credit executed by reinsurers in favor of the Company of $166,000, $169,000,
and $2,852,000 at December 31, 1998, 1997, and 1996, respectively. Such
letters of credits are issued as security against ceded losses recoverable in
the future.
The effect of reinsurance on premiums written and earned for the periods
ended are as follows (in thousands):
DECEMBER 31,
1998 1997 1996
----------------------- ------------------------ ------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
Direct $19,214 $16,270 $17,869 $17,466 $19,017 $19,017
Ceded
Current year (6,013) (5,623) (5,474) (5,474) (7,312) (7,312)
Prior 9,712 9,712 3,620 3,620 3,073 3,073
year ------- ------- ------- ------- -------
Total ceded 3,699 4,089 (1,854) (1,854) (4,239) (4,239)
------- ------- ------- ------- ------- -------
Net $22,913 $20,359 $16,015 $16,015 $14,778 $14,778
======= ======= ======= ======= ======= =======
6. TRANSACTIONS WITH AFFILIATES
Prior to the reorganization, National Capital Underwriters, Inc. (NCUI) was
the designated attorney-in-fact for each policyholder physician under an
Application for Membership/Power of Attorney, which each physician signed
when applying for insurance coverage. Pursuant to the reorganization, NCUI
was merged into NCRIC. Duties and responsibilities at NCUI are detailed in
an attorney-in-fact agreement. Under such agreement, NCUI managed NCRIC and
performed all operating functions. NCUI was reimbursed by NCRIC for all
expenses incurred in this capacity, limited to 18% of net billed premiums.
Payments made to NCUI based on budgeted expenses were subject to
retrospective adjustment with amounts in excess of allowable expenses
returnable to NCRIC after the end of NCUI's fiscal year. Such payments
totaled $2,728,000 (15.3% of net billed premiums), and $2,657,000 (14.5% of
net billed premiums), for the years ended December 31, 1997 and 1996,
respectively.
Effective June 30, 1997, NCRIC purchased 100% of NCUI's issued and
outstanding stock, and NCUI was consolidated on the effective date.
7. INCOME TAXES
The Company files a consolidated Federal income tax return.
Deferred federal income tax is created by temporary differences that will
result in net taxable amounts in future years due to the differing treatment
of certain items for tax and financial statement purposes.
F-12
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of
the following (in thousands):
Federal income tax expense differs from that calculated using established
corporate rates primarily due to nontaxable investment income as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------- ---------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
Federal income tax
at statutory rates $1,233 34% $ 285 34% $ 440 34%
Tax-exempt income (321) (9) (355) (42) (47) (4)
Dividends received (69) (2) (66) (8) (74) (6)
Reorganization costs 221 6 - - - -
Other 15 1 14 1 (16) (1)
------ --- ----- ---- ----- ---
Federal income tax
at effective rates $1,079 30% $(122) (15)% $ 303 23%
====== === ===== ==== ===== ===
F-13
8. SALE OF BUILDING AND COMMITMENTS
On November 7, 1997, NCRIC sold its office building to an unrelated party.
The transaction resulted in a loss of $197,000, which was recognized in 1997.
According to the terms of a post-sale lease between the new owner and NCRIC,
NCRIC remained in the office space until the end of April 1998.
NCRIC entered into an operating lease for new office space located in
Washington, D.C., effective on April 15, 1998. The lease terms are for 10
years with a monthly base rent of $35,000 and a 2.0% "annual escalator." As
of December 31, 1998, future minimum commitments under this noncancelable
lease, which began on April 15, 1998, are as follows (in thousands):
Rent expense during the year ended December 31, 1998 was $301,000.
On December 22, 1997, NCRIC entered into a line-of-credit agreement with a
bank for $2,500,000. This line of credit is unsecured and is renewable
annually. As of December 31, 1998, NCRIC had not drawn down on this
facility.
NCRIC was required to establish a letter of credit to secure an appellate
bond for a case which is in the District of Columbia appellate process. As
of December 31, 1998 the letter of credit totaled $1.65 million.
9. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The effects on these GAAP financial statements of the differences between the
statutory basis of accounting prescribed or permitted by the District of
Columbia Department of Insurance and Securities Regulation (DISR) and GAAP
are summarized below (in thousands):
DECEMBER 31,
--------------------------------------------
1998 1997 1996
POLICYHOLDERS' SURPLUS -
STATUTORY BASIS $24,116 $23,258 $22,365
Effects of fair valuation of investments 2,016 789 (314)
Effects of deferred taxes 3,781 3,202 3,335
Effects of nonadmitted assets and other 1,098 237 38
------- ------- -------
STOCKHOLDER'S EQUITY - GAAP BASIS $31,011 $27,486 $25,424
======= ======= =======
NET INCOME - STATUTORY BASIS $ 2,577 $ 1,726 $ 814
Effects of deferred taxes 579 (133) (201)
Effects of consolidation versus equity
method of accounting for subsidiaries (609) (634) 378
------- ------- -------
NET INCOME - GAAP BASIS $ 2,547 $ 959 $ 991
======= ======= =======
F-14
As of December 31, 1998, 1997 and 1996, statutory capital for NCRIC was
sufficient to satisfy regulatory requirements. Each insurance company is
restricted under the applicable Insurance Code as to the amount of dividends
it may pay without regulatory consent.
During 1997, NCRIC received permission from DISR to account for certain
receivable balances due, pursuant to an executed retrospective rating plan
agreement, as direct accrued retrospective premiums receivable. The balance
was established in accordance with the NAIC Annual Statement instructions
manual, which requires 10% of the balance to be included as nonadmitted.
This permitted practice had a positive $900,000 monetary effect on the
statutory surplus for the year ended December 31, 1997.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (Codification). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be
established by individual state laws and permitted practices. The Company
has not finalized the quantification of the effects of the Codification on
its statutory financial statements.
10. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, during 1998. Prior financial statements have
been restated to conform to the requirements of this Standard. Accumulated
Other Comprehensive Income balances represent net unrealized investment
gains or losses net of deferred income taxes.
11. REPORTABLE SEGMENT INFORMATION
The Company has two reportable segments: Insurance and practice management
and financial services. The insurance segment provides medical professional
liability and other insurance. The practice management and financial
services segment provides practice management and financial services to
physicians. The Company expects the acquisitions of HealthCare Consulting,
Inc., HCI Ventures, LLC and Employee Benefit Services (see Note 12) to
expand the practice management and financial services business segment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
The Company's reportable segments are strategic business units that offer
different products and services, and therefore are managed separately.
F-15
Selected financial data is presented below for each business segment for the
year ended December 31:
1998 1997 1996
(IN THOUSANDS)
INSURANCE
Revenues from external customers $ 18,806 $ 13,884 $ 14,008
Net investment income 5,996 6,044 5,652
Net realized investment gains 159 90 229
Depreciation and amortization 209 366 626
Segment profit (loss) before taxes 4,316 1,150 1,766
Segment assets 133,780 121,854 116,389
Segment liabilities 102,748 94,350 91,011
Expenditures for segment assets 540 516 -
PRACTICE MANAGEMENT AND FINANCIAL SERVICES
Revenues from external customers $ 88 $ 3 $ 3
Net investment income - 1 4
Net realized investment gains - - -
Depreciation and amortization 26 120 183
Segment profit (loss) before taxes (690) (313) (472)
Segment assets 439 47 299
Segment liabilities 281 65 254
Expenditures for segment assets 226 - -
TOTAL
Revenues from external customers $ 18,894 $ 13,887 $14,011
Net investment income 5,996 6,045 5,656
Net realized investment gains 159 90 229
Depreciation and amortization 235 486 809
Segment profit (loss) before taxes 3,626 837 1,294
Segment assets 134,219 121,901 116,688
Segment liabilities 103,029 94,415 91,265
Expenditures for segment assets 766 516 -
F-16
The following are reconciliations of reportable segment assets and
liabilities to the Company's consolidated totals (in thousands):
DECEMBER 31,
1998 1997
Assets:
Total assets for reportable segments $ 134,219 $ 121,901
Elimination of intersegment receivables (218) (60)
Elimination of affiliate receivables (443) -
Other unallocated amounts 768 -
--------- ---------
Consolidated total $ 134,326 $ 121,841
========= =========
Liabilities:
Total liabilities for reportable segments $ 103,029 $ 94,415
Elimination of intersegment payables (218) (60)
Other liabilities 504 -
--------- --------
Consolidated total $ 103,315 $ 94,355
========= ========
12. SUBSEQUENT EVENTS
On January 4, 1999, the Company acquired all of the outstanding shares of
HealthCare Consulting, Inc., all of the outstanding interests of HCI
Ventures, LLC, and all the assets of Employee Benefit Services, Inc. for
$5.1 million in cash and mandatorily convertible notes in the aggregate
principal amount of $300,000. Under terms of the purchase agreement, an
additional $3.1 million could be paid in cash if the acquired companies
achieve earnings targets in 2000, 2001 and 2002. These companies provide
practice management, employee benefit services and financial services to
physicians throughout the Mid-Atlantic region.
The acquisition will be accounted for using the purchase method. Goodwill
will be amortized over 20 years on a straight-line basis. The contingent
payment would be an addition to goodwill and would be amortized over 20
years.
In connection with the acquisition, the Company borrowed $2.2 million from
Sequoia National Bank to finance a portion of the purchase price. The term
of the loan is 7.5 years and the interest rate is prime plus 0.75% per
annum, with an additional one-half point being payable at closing. Monthly
payments will be interest only for the first six months and blended payments
of interest and principal thereafter. Sequoia has the option to call the
loan at the end of 6 months and 3.5 years of the term. Security for the loan
consists of an assignment of the capital stock of HealthCare Consulting and
a blanket lien of all of the receivables of HealthCare Consulting and
Employee Benefit Services. There is no penalty for prepayment of the loan.
The President of Sequoia National Bank serves on the Company's Board of
Directors.
The following pro forma information presents the results of operations as
though the acquisition had occurred at January 1, 1998 (in thousands):
NCRIC ACQUIRED PRO FORMA
Group COMPANIES COMBINED
Revenue $25,049 $ 4,975 $30,024
Net Income 2,547 436 2,983
* * * * *
F-17
INDEPENDENT AUDITORS' REPORT
To the Owners of
HealthCare Consulting, Inc., HCI
Ventures, LLC, and Employee
Benefits Services, Inc.
Lynchburg, Virginia
We have audited the accompanying combined balance sheets of the management
services of HealthCare Consulting, Inc. (HCI), HCI Ventures, LLC (HCIV), and
Employee Benefits Services, Inc. (EBSI) (collectively, the Companies) as of
December 31, 1998 and 1997, and the related combined statements of income and
comprehensive income, owners' equity, and cash flows for the years then ended.
These combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying combined financial statements were prepared to present the
financial position, results of operations and cash flows of HCI, HCIV, and EBSI
that relate to the delivery of professional practice management services to
physicians and dentists and to the administration of retirement and other
employee benefits plans. Because they exclude HCIV's investment in Cornerstone
Capital Management, LLC, such financial statements are not intended to be a
complete presentation of the financial position, results of operations and cash
flows of the Companies.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the management services of the
Companies as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
January 22, 1999
F-18
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
----------------------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 48,070 $ 97,273
Accounts receivable (net of allowance for
doubtful accounts of $135,000 and $130,000) 703,499 859,354
Other receivables 4,529 10,487
---------- ----------
Total current assets 756,098 967,114
PROPERTY AND EQUIPMENT - Net 209,801 219,822
ADVANCES TO AFFILIATES - 173,088
INVESTMENTS IN MANAGEMENT SERVICE
ORGANIZATIONS 17,750 22,246
OTHER ASSETS 77,423 69,727
---------- ----------
TOTAL ASSETS $1,061,072 $1,451,997
========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 86,071 $ 160,210
Obligations under line of credit - 239,000
Notes payable to owners 99,000 -
Deferred income taxes 225,000 304,000
---------- ----------
Total current liabilities 410,071 703,210
LONG-TERM LIABILITY 90,000 90,000
---------- ----------
Total liabilities 500,071 793,210
---------- ----------
OWNERS' EQUITY:
Common stock (HCI) ($1 par value - 1,500 shares
authorized, issued 377 and 344) 377 344
Common stock (EBSI) ($1 par value - 1,500 shares
authorized, issued 377 and 353) 377 353
Limited liability company capital (HCIV) 2,388 20,502
Additional paid-in capital (HCI) 8,319 4,491
Retained earnings 549,740 633,297
Less treasury stock (200 shares at cost) (200) (200)
---------- ----------
Total owners' equity 561,001 658,787
---------- ----------
TOTAL LIABILITIES AND OWNERS' EQUITY $1,061,072 $1,451,997
========== ==========
See notes to combined financial statements.
F-19
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------------------------------------
1998 1997
REVENUES $4,916,209 $3,927,524
---------- ----------
COSTS AND EXPENSES:
Administrative and consulting salaries 1,992,337 1,616,960
Owners' compensation 1,589,000 983,805
Rent 182,534 143,897
Office supplies 115,018 94,201
Travel 90,670 80,009
Telephone 81,521 70,905
Other administrative expenses 921,967 750,002
---------- ----------
Total costs and expenses 4,973,047 3,739,779
---------- ----------
OPERATING (LOSS) INCOME (56,838) 187,745
---------- ----------
Interest and dividend income 59,227 69,180
Interest expense (9,061) (13,476)
---------- ----------
Other income - net 50,166 55,704
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (6,672) 243,449
INCOME TAX BENEFIT (PROVISION) 76,000 (74,000)
---------- ----------
NET INCOME AND COMPREHENSIVE INCOME $ 69,328 $ 169,449
========== ==========
See notes to combined financial statements.
F-20
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED STATEMENTS OF OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------------------------------------------
LIMITED
LIABILITY ADDITIONAL
COMPANY PAID-IN
COMMON STOCK (HCI) COMMON STOCK (EBSI) CAPITAL CAPITAL RETAINED
-------------------- -------------------
SHARES AMOUNT SHARES AMOUNT (HCIV) (HCI) EARNINGS
BALANCE, JANUARY 1, 1997 337 $337 353 $353 $ - $4,491 $ 463,848
Sale of common stock 7 7 - - - - -
Capital contributions - - - - 20,758 - -
Distributions to owners - - - - (256) - -
Net income - - - - - - 169,449
--- ---- ----- ----- -------- ------- ---------
BALANCE, DECEMBER 31, 1997 344 344 353 353 20,502 4,491 633,297
Sale of common stock 33 33 24 24 - - -
Capital contributions - - - - - 3,828 -
Distributions to owners - - - - (18,114) - (152,885)
Net income - - - - - - 69,328
--- ---- ----- ----- -------- ------- ---------
BALANCE, DECEMBER 31, 1998 377 $377 377 $377 $ 2,388 $8,319 $ 549,740
=== ==== ===== ===== ======== ======= =========
TOTAL
TREASURY OWNERS'
STOCK EQUITY
BALANCE, JANUARY 1, 1997 $(200) $ 468,829
Sale of common stock - 7
Capital contributions - 20,758
Distributions to owners - (256)
Net income - 169,449
------- ---------
BALANCE, DECEMBER 31, 1997 (200) 658,787
Sale of common stock - 57
Capital contributions - 3,828
Distributions to owners - (170,999)
Net income - 69,328
------- ---------
BALANCE, DECEMBER 31, 1998 $(200) $ 561,001
======= =========
See notes to combined financial statements.
F-21
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFIT SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
---------------------------------------------------------------------------------------------------
1998 1997
OPERATING ACTIVITIES:
Net income $ 69,328 $ 169,449
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 85,014 58,779
Deferred income taxes (76,000) 74,000
Changes in assets and liabilities:
Accounts receivable, net 155,855 (208,956)
Accounts payable and accrued liabilities (74,139) 59,749
Other assets (10,696) 267
---------- ---------
Net cash provided by operating activities 149,362 153,288
---------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (74,993) (100,281)
Repayment of advances from affiliates and notes receivable 182,620 8,412
Investment in management service organizations - (22,246)
Sale of portion of interest in management service organization 4,750 -
---------- ---------
Net cash provided by (used in) investing activities 112,377 (114,115)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 57 7
Loans from owners 99,000 -
Partnership capital contributions - 20,758
Distributions to owners (170,999) (256)
Repayments of borrowings under line of credit (239,000) (11,000)
---------- ---------
Net cash (used in) provided by
financing activities (310,942) 9,509
---------- ---------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (49,203) 48,682
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 97,273 48,591
---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 48,070 $ 97,273
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 9,061 $ 13,476
========== =========
See notes to combined financial statements.
F-22
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting - HealthCare Consulting, Inc. (HCI), HCI
Ventures, LLC (HCIV), and Employee Benefits Services, Inc. (EBSI)
(collectively, the Companies) are engaged in the businesses of providing (i)
practice management services, accounting and tax services, and personal
financial planning services to medical and dental practices and (ii)
retirement planning services and administration to medical and dental
practices and certain other businesses throughout the Mid-Atlantic Region.
HCI was formed in 1978 as Professional Consultants, Inc. and changed its name
to HCI in 1992. HCIV was formed in 1997 to own equity interests in certain
management service organizations for which HCI provides services. EBSI was
formed in 1989 to provide administrative services to retirement and other
benefit plans.
The combined financial statements reflect the accounts and activities of HCI
and EBSI, and the investments in management service organizations by HCIV.
They exclude accounts and activities related to HCIV's investment in
Cornerstone Capital Management, LLC (Cornerstone). Combined financial
statements are presented based on the common ownership and management of the
entities. Significant transactions between the entities have been
eliminated.
On January 4, 1999, the Companies' assets, exclusive of HCIV's investment in
Cornerstone, were sold to NCRIC Group, Inc. (NCRIC). The Companies now
operate as a wholly-owned subsidiary of NCRIC. The accompanying combined
financial statements do not reflect the effects of any adjustments arising
from this transaction.
Cash and Cash Equivalents - For purposes of reporting cash flows, the
Companies consider short-term investments purchased with an initial maturity
of three months or less to be cash equivalents.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is recorded using the straight-line method over estimated useful
lives of 10 years for furniture and fixtures and generally three to five
years for other fixed assets.
Investments in Management Service Organizations - Investments in management
service organizations represent equity interests ranging from five percent to
20 percent and are carried at cost.
Intangible Assets - Goodwill of $55,000, arising from HCI's acquisition of a
professional services consulting firm in 1997, is amortized on a straight-
line basis over twenty years. Goodwill is included in other assets and is
shown net of accumulated amortization of $3,667 and $917 as of December 31,
1998 and 1997.
Revenue Recognition - Revenue is recognized as services are performed under
terms of management and other contracts. Revenue is generally billed in the
month following the performance of related services.
F-23
Income Taxes - HCI uses the asset and liability method of accounting for
income taxes. Under this method, deferred income taxes are recognized for
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. HCI
files its income tax returns on a modified cash basis. HCIV is treated as a
flow-through entity for tax purposes and, as such, no provision for income
taxes has been recorded for its operations. EBSI has elected to be taxed
under Subchapter S of the Internal Revenue Code and is, therefore, also
treated as a flow-through entity for tax purposes.
New Accounting Standard - The Companies have adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, and have presented statements of income and
comprehensive income for the years ended December 31, 1998 and 1997. As the
Companies have not engaged in transactions resulting in other comprehensive
income, the adoption of this statement did not have a material effect on the
financial statements.
Impairment of Long-Lived Assets - The Companies review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. During the years ended
December 31, 1998 and 1997, the Companies did not find it necessary to record
a provision for impairment of such assets.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Companies to concentrations of credit risk are principally
accounts receivable. The Companies perform credit evaluations and generally
do not require collateral to support receivables.
Litigation - The Companies are subject to claims arising in the normal course
of its business. Management does not believe that any such claims or
assessments will have a material effect on the Companies' financial position,
results of operations or cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
DECEMBER 31,
1998 1997
Computer and other equipment $ 656,089 $ 588,115
Furniture, fixtures, and leasehold improvements 120,046 113,027
--------- ---------
776,135 701,142
Less accumulated depreciation
and amortization (566,334) (481,320)
--------- ---------
Property and equipment - net $ 209,801 $ 219,822
========= =========
Included in property and equipment are approximately $370,000 of fully
depreciated assets.
F-24
3. OBLIGATIONS UNDER LINE OF CREDIT
Indebtedness at December 31, 1997, is attributable to a $250,000 bank credit
facility which is collateralized by HCI's receivables. Interest charged on
the outstanding balance is equal to the bank's prime rate plus 1% per annum.
The weighted average interest rate charged on the credit facility was 8.97%
for the year ended December 31, 1997. The facility was paid in full in
December, 1998.
4. COMMITMENTS AND CONTINGENCIES
Leases - The Companies have entered into operating leases for office space
and equipment. Future minimum lease payments under noncancelable operating
leases at December 31, 1998, are as follows:
The above future lease payments contain related party rents of approximately
$60,000 for the years ending December 31, 1999 and 2000 (see Note 6).
Employment Agreements - HCI has entered into employment agreements with its
owners and certain other key employees. These agreements include covenants
not to compete and, in one case, will provide the employee with severance
pay based on his final 12-month's compensation. The Companies' estimated
obligation for such severance of $90,000 is reflected as a long-term
liability as of December 31, 1998 and 1997.
5. INCOME TAXES
Deferred tax assets and liabilities are comprised principally of the
following components:
DECEMBER 31,
1998 1997
Deferred tax liabilities:
Receivables $243,000 $311,000
Depreciation 26,000 27,000
-------- --------
Total deferred tax liabilities 269,000 338,000
-------- --------
Deferred tax assets:
Accounts payable and accrued liabilities (16,000) (7,000)
Accrued severance (35,000) (35,000)
Net operating loss carryforwards (1,000) (3,000)
-------- --------
Total deferred tax assets (52,000) (45,000)
-------- --------
Net deferred tax liability $217,000 $293,000
======== ========
F-25
The deferred tax assets and liabilities have been classified in the
accompanying balance sheets as follows:
DECEMBER 31,
1998 1997
Current liabilities $225,000 $304,000
Other assets (8,000) (11,000)
-------- --------
$217,000 $293,000
======== ========
The income tax benefit (provision) consists of the following:
YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
Federal:
Current $ - $ -
Deferred 71,000 (69,000)
------- --------
71,000 (69,000)
------- --------
State:
Current - -
Deferred 5,000 (5,000)
------- --------
5,000 (5,000)
------- --------
$76,000 $(74,000)
======= ========
The Companies' effective income tax rate is comprised principally of the
statutory Federal income tax rate of 34% plus state income taxes, net of
Federal benefit, applied to HCI's operating results.
6. RELATED PARTY TRANSACTIONS
The total revenues reported in the combined statements of income and
comprehensive income for the years ended December 31, 1998 and 1997, include
approximately $197,000 and $80,000 earned by HCI from management service
organizations in which HCIV has an equity investment.
Advances to affiliates as of December 31, 1997 include working capital
advances to Cornerstone Capital Management, LLC, an investment management
company that was 75% owned by HCIV, and other working capital advances to
management service organizations in which HCIV has an equity investment. All
such working capital advances had been repaid as of December 31, 1998.
HCI rents an office building from a partnership whose partners are HCI
owners. For this property, HCI paid approximately $62,000 in rent for each
of the years ended December 31, 1998 and 1997.
During 1998, NCRIC MSO, a subsidiary of NCRIC, paid HCI approximately
$150,000 for services performed by HCI.
F-26
Included in other receivables as of December 31, 1998 are $3,828 of owners'
capital contributions.
As of December 31, 1998, HCI owed an aggregate of $99,000 to its owners under
the terms of notes payable. Such notes bear interest at 6.35% and are
payable on April 30, 1999.
7. EMPLOYEE BENEFIT PLANS
The Companies sponsor a defined contribution money purchase pension plan.
Employees who are 21 years or older and have 2 years of service are eligible
for participation in the plan. Under the plan, the Companies contribute 5%
of each participant's total annual compensation. All contributions are 100%
vested. The contributions for the years ended December 31, 1998 and 1997
were approximately $92,000 and $128,000, respectively.
The Companies also sponsor a defined contribution 401(k) profit-sharing plan.
Employees who are 21 years or older and have one year of service are eligible
for participation in the plan. Employees may elect to contribute 1-15% of
total compensation. All contributions are 100% vested. The Companies are
not required to make matching contributions to the plan, but may make
discretionary contributions. Total contributions to the plan by the
Companies for the years ended December 31, 1998 and 1997, were approximately
$66,000 and $79,000, respectively.
* * * * * *
F-27
1,840,000 Shares
NCRIC Group, Inc.
(Holding company for
NCRIC, Inc. and NCRIC
MSO, Inc.)
COMMON STOCK
PROSPECTUS
March __, 1999
Sandler O'Neill & Partners, L.P.
[LOGO]
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
prospectus in connection with these offerings, and, if given or made, the other
information or representation must not be relied upon as having been authorized
by NCRIC Group, Inc. or Sandler O'Neill & Partners, L.P. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making the offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation in the jurisdiction. Neither the delivery of
this prospectus nor any sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of NCRIC Group, Inc.
since any of the dates as of which information is furnished herein or since the
date hereof.
Until ______________, 1999 or 25 days after commencement of the syndicated
community offering, if any, whichever is later, all dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 9.1 of NCRIC Group's articles of incorporation provides that
NCRIC Group shall indemnify its directors and officers to the fullest extent
permitted under NCRIC Group's bylaws and the law of the District of Columbia.
Article VII of NCRIC Group's bylaws provides that NCRIC Group shall indemnify
its directors and officers to the fullest extent permitted by law, as now in
effect and as the law may be amended in the future.
Section 29-304(16) of the D.C. Code authorizes indemnifications of
directors and officers against expenses actually and necessarily incurred in
connection with the defense of an action, except in relation to matters as to
which an officer or director is adjudged to be liable for negligence or
misconduct in the performance of duty. This indemnification is not exclusive of
other rights under any bylaw agreement, vote of stockholders or otherwise.
NCRIC maintains directors' and officers' liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses of NCRIC Group in connection
with the issuance and distribution of the shares being registered. ALL expenses
are estimated (based on a maximum offering) except for the SEC registration fee.
SEC Registration Fee........................................ $ 3,581
National Association of Securities Dealers, Inc. Fees....... 10,800
Premium for Directors and Officers Offering Insurance....... 2,000
Printing Expenses........................................... 37,000
Accounting Fees and Expenses................................ 350,000
Legal Fees and Expenses..................................... 250,000
Appraisal Fees and Expenses................................. 25,000
Blue Sky Fees and Expenses.................................. 15,000
Underwriter Fees............................................ 232,600
Underwriter Counsel Fees.................................... 60,000
Transfer Agent's Fees and Expenses.......................... 4,000
Miscellaneous............................................... 77,019
----------
Total............................................... $1,067,000
==========
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
As part of the reorganization, on December 31, 1998, NCRIC Group issued
1,000 shares of common stock to NCRIC Holdings without registration under the
Securities Act. NCRIC Group issued the shares in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving any public offering.
Pursuant to the HealthCare Consulting Acquisition on January 4, 1999, NCRIC
Group delivered three mandatorily convertible notes in the aggregate principal
amount of $300,000 to the former stockholders of HealthCare Consulting, Inc. On
the completion of the subscription offering, the notes will automatically
convert into 42,857 shares of NCRIC Group's common stock. NCRIC Group issued the
notes and will issue the shares in reliance on Section 4(2) of the Securities
Act as a transaction by an issuer not involving any public offering. The former
stockholders acknowledged that they acquired the notes and will acquire the
shares for investment and not with a view to distribution.
ITEM 27. EXHIBITS
Exhibit No. Description
----------- -----------
1.1***.............. Engagement Letter
1.2**............... Sales Agency Agreement for syndicated community of
fering
2.1***.............. Plan of Reorganization
2.2*................ Purchase Agreement Relating to HealthCare
Consulting and HCI Ventures
2.3*................ Purchase Agreement Relating to Employee Benefits
Services
3.1***.............. Articles of Incorporation of NCRIC Group
3.2***.............. Bylaws of NCRIC Group
5.1**............... Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC
10.1***............. Lease
10.2***............. Amendment to Lease
10.3*............... Stock Option Plan
10.4*............... Employee Stock Ownership Plan
10.5*............... Stock Award Plan
10.6***............. Employment Agreement between National Capital
Underwriters, Inc. and R. Ray Pate, Jr.
10.7*............... Amendment to Employment Agreement between NCRIC,
INC. and R. Ray Pate, Jr.
II-2
Exhibit No. Description
----------- -----------
10.8***............. Employment Agreement between National Capital
Underwriters, Inc. and Stephen S. Fargis
10.9**.............. Employment Agreement between NCRIC, Inc. and
Rebecca B. Crunk
10.10*.............. Employment Agreement between NCRIC MSO, Inc. and
L.E. Shepherd, Jr. ("Shepherd")
10.11*.............. Employment Agreement between NCRIC MSO, Inc. and
William A. Hunter, Jr. ("Hunter")
10.12*.............. Employment Agreement between NCRIC MSO, Inc. and
Barry S. Pillow ("Pillow")
10.13**............. Administrative Services Agreement
10.14**............. Tax Sharing Agreement
10.15*.............. Operating Agreement among NCRIC Group, NCRIC MSO,
Inc., HealthCare Consulting, HCI Ventures,
Shepherd, Hunter and Pillow
21.1**.............. Subsidiaries
23.1**.............. Consent of Arent Fox Kintner Plotkin & Kahn, PLLC
(included in Exhibit 5.1)
23.2*............... Consent of Deloitte & Touche LLP
23.3*............... Consent of RP Financial regarding Initial Valuation
Report and Updated Valuation Report
23.4**.............. Consent of RP Financial regarding Final Valuation
Report
24.1***............. Power of Attorney
27.1*............... Financial Data Schedule for 1997
27.2*............... Financial Data Schedule for nine months ended
September 30, 1998
27.3*............... Financial Data Schedule for 1998
II-3
Exhibit No. Description
----------- -----------
99.1*............... Initial Valuation Report prepared by RP Financial
99.2*............... Updated Valuation Report of RP Financial
99.3**.............. Final Valuation Report prepared by RP Financial
99.4*............... Letter on Subscription Rights prepared by RP
Financial
99.5*............... Agreement - Power of Attorney
99.6*............... Opinion letter of Deloitte & Touche LLP
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
ITEM 28. UNDERTAKINGS.
(a) The Registrant undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
. To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
. To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or ITS most recent post-effective
amendment ) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement; and
. To include any additional or changed material
information with respect to the plan of distribution.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement
relating to the securities offered, and the offering of
securities at that time shall be deemed to be the initial
bona fide offering.
II-4
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The Registrant undertakes to provide to any underwriters at the
closing certificates in THE denominations and registered in THE names
as required by the underwriters to permit prompt delivery to each
purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant under the provisions described
under Item 24 above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Act and
is,therefore, unenforceable. In the event that a claim for
indemnification against these liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by the director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether the indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of the issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this amendment to be signed
on its behalf by the undersigned, in Washington, D.C. on March 12, 1999.
NCRIC GROUP, INC.
By: /s/ R. Ray Pate, Jr.
------------------------------
R. Ray Pate, Jr.
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act, this amendment
has been signed by the following persons in the capacities and on the dates
stated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Nelson P. Trujillo, M.D. Chair of the Board March 12, 1999
------------------------------
Nelson P. Trujillo, M.D. of Directors
/s/ R. Ray Pate, Jr. President, Chief Executive March 12, 1999
-----------------------------
R. Ray Pate, Jr. Officer and Director
(Principal Executive
Officer)
/s/ Rebecca B. Crunk Chief Financial Officer March 12, 1999
-----------------------------
Rebecca B. Crunk (Principal Financial and
Accounting Officer)
/s/ Vincent C. Burke, III Director March 12, 1999
-----------------------------
Vincent C. Burke, III
Director March , 1999
-----------------------------
Pamela W. Coleman
II-6
/s/ Charles H. Epps, Jr., M.D. Director March 12, 1999
--------------------------------
Charles H. Epps, Jr., M.D.
/s/ Leonard M. Glassman, M.D. Director March 12, 1999
-------------------------------
Leonard M. Glassman, M.D.
/s/ J. Paul McNamara Director March 12, 1999
-----------------------------
J. Paul McNamara
/s/ Leonard Parver, M.D. Director March 12, 1999
-----------------------------
Leonard Parver, M.D.
/s/ Raymond Scalettar, M.D. Director March 12, 1999
-----------------------------
Raymond Scalettar, M.D.
/s/ David M. Seitzman, M.D. Director March 12, 1999
-----------------------------
David M. Seitzman, M.D.
II-7
EXHIBIT INDEX
Exhibit No. Description
1.1***.............................. Engagement Letter
1.2**............................... Sales Agency Agreement for syndicated
community offering
2.1***.............................. Plan of Reorganization
2.2*................................ Purchase Agreement Relating to Healthcare
Consulting and HCI Ventures
2.3*................................ Purchase Agreement Relating to Employee
Benefits Services
3.1***.............................. Articles of Incorporation of NCRIC Group
3.2***.............................. Bylaws of NCRIC Group
5.1**............................... Opinion of Arent Fox Kintner Plotkin &
Kahn, PLLC
10.1***............................. Lease
10.2***............................. Amendment to Lease
10.3*............................... Stock Option Plan
10.4*............................... Employee Stock Ownership Plan
10.5*............................... Stock Award Plan
10.6***............................. Employment Agreement Between National
Capital Underwriters, Inc. and R. Ray
Pate, Jr.
10.7*............................... Amendment to Employment Agreement
between NCRIC, Inc. and R. Ray Pate, Jr.
10.8***............................. Employment Agreement Between National
Capital Underwriters, Inc. and Stephen S.
Fargis
10.9**.............................. Employment Agreement Between NCRIC, Inc.
and Rebecca B. Crunk
10.10*.............................. Employment Agreement Between NCRIC
MSO, Inc. and L.E. Shepherd, Jr.
("Shepherd")
10.11*.............................. Employment Agreement Between NCRIC
MSO, Inc. and William A. Hunter, Jr.
("Hunter")
10.12*.............................. Employment Agreement Between NCRIC
MSO, Inc. and Barry S. Pillow ("Pillow")
10.13**............................. Administrative Services Agreement
Exhibit No. Description
10.14**............................. Tax Sharing Agreement
10.15*.............................. Operating Agreement among NCRIC Group,
NCRIC MSO, Inc., Healthcare Consulting,
HCI Ventures, Shepherd, Hunter and Pillow
21.1**.............................. Subsidiaries
23.1**.............................. Consent of Arent Fox Kintner Plotkin &
Kahn, PLLC (included in Exhibit 5.1)
23.2*............................... Consent of Deloitte & Touche LLP
23.3*............................... Consent of RP Financial Regarding Initial
Valuation Report and Updated Valuation
Report
23.4**.............................. Consent of RP Financial Regarding Final
Valuation Report
24.1***............................. Power of Attorney
27.1*............................... Financial Data Schedule for 1997
27.2*............................... Financial Data Schedule for nine months
ended September 30, 1998
27.3*............................... Financial Data Schedule for 1998
99.1*............................... Initial Valuation Report Prepared by RP
Financial
99.2*............................... Updated Valuation Report of RP Financial
99.3**.............................. Final Valuation Report Prepared by RP
Financial
99.4*............................... Letter on Subscription Rights Prepared by
RP Financial
99.5*............................... Agreement - Power of Attorney
99.6*............................... Opinion Letter of Deloitte & Touche LLP
* FILED HEREWITH.
** TO BE FILED BY AMENDMENT.
*** PREVIOUSLY FILED.
EXHIBIT 2.2
CONFORMED COPY
NCRIC GROUP, INC.
AND
L.E. SHEPHERD, JR., WILLIAM A. HUNTER, JR. AND BARRY S. PILLOW
PURCHASE AGREEMENT
HCI AND HCIV
DECEMBER 20, 1998
TABLE OF CONTENTS
Section 1 Purchase and Sale of Stock and Interests ................... 1
Section 2 Purchase Price; Contingent Consideration ................... 1
Section 3 Sellers' Representations and Warranties .................... 6
Section 4 Buyer's Representations and Warranties ..................... 19
Section 5 Additional Obligations of Sellers .......................... 21
Section 6 Additional Obligations of Buyer ............................ 23
Section 7 Conditions to Buyer's Obligation to Close .................. 24
Section 8 Conditions to Sellers' Obligation to Close ................. 26
Section 9 Closing .................................................... 28
Section 10 Survival of Representations and Warranties; Indemnification. 28
Section 11 Arbitration ................................................ 30
Section 12 Post Closing Covenants of Buyer ............................ 31
Section 13 Miscellaneous .............................................. 34
Section 14 Default .................................................... 36
Section 15 Termination ................................................ 37
Section 16 Non-Solicitation ........................................... 38
Section 17 Confidentiality ............................................ 40
EXHIBITS
A Mandatory Convertible Note
B Operating Agreement
C Employment Agreement of L.E. Shepherd, Jr.
D Employment Agreement of William A. Hunter, Jr.
E Employment Agreement of Barry S. Pillow
F Opinion of Sellers' Counsel
G Opinion of Buyer's Counsel
SCHEDULES
2(b) Proportions for Contingent Consideration
3(a) Extensions
3(e) Financial Statements
3(f) Liabilities and Obligations Not Disclosed in the Financial Statements
3(h) Certain Events After September 30, 1998
3(k) Income Tax Returns
3(l) List of Certain Contracts
3(m) Leases
3(n) Directors and Officers; Banks
3(q) Litigation and Similar Matters
3(r) List of Licenses
3(u) List of Trademarks and Service Marks
3(x) Certain Contributions
3(z) List of Insurance
7(e) Persons to Furnish No Obligation Statements
7(k) Commitment Letter
PURCHASE AGREEMENT
This Agreement is entered into as of December 20, 1998, by and among NCRIC
Group, Inc., a District of Columbia corporation ("Buyer"), and L.E. Shepherd,
Jr., William A. Hunter, Jr. and Barry S. Pillow ("Sellers").
WHEREAS, Sellers are the owners of all of the issued and outstanding common
stock ("Stock") of HealthCare Consulting, Inc., a Virginia corporation ("HCI");
WHEREAS, Sellers are the owners of all the membership interests ("Interests") in
HCI Ventures, LLC, a Virginia limited liability company ("HCIV");
WHEREAS, Employee Benefits Services, Inc. ("EBSI) and Buyer are today entering
into an agreement for the sale of all of EBSI's assets to Buyer (the "EBSI
Agreement"); and
WHEREAS, Buyer desires to purchase the Stock and the Interests and Sellers
desire to sell the Stock and the Interests, on the terms and conditions set
forth below;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
Section 1. Purchase and Sale of Stock and Interests
At the closing of the purchase and sale contemplated by this Agreement
("Closing"), Sellers shall sell, assign, transfer and deliver to Buyer, and
Buyer shall purchase and accept from Sellers, the Stock and the Interests.
(a) Initial Purchase Price. The purchase price for the Stock and Interests and
the assets of EBSI, payable by Buyer without regard to contingent consideration
("Initial Purchase Price"), shall be $5,400,000, payable to Sellers and EBSI as
follows:
(1) $5,100,000 by certified checks drawn on the account of Buyer delivered at
the Closing made payable to Sellers and EBSI in the following amounts: (I) L. E.
Shepherd, Jr. - $1,299,638.99, (ii) William A. Hunter, Jr., -$1,299,638.99,
(iii) Barry S. Pillow -$1,000,722.02 and (iv) EBSI -$1,500,000 (the "Closing
Checks"); and
(2) $300,000 by three (3) mandatorily convertible notes in the form of the
attached Exhibit A payable to each of Sellers delivered at the Closing (the
"Convertible Notes").
The Initial Purchase Price shall be allocated as follows:
STOCK INTERESTS ASSETS
L.E. Shepherd, Jr. $1,298,638.99 $1,000 ----
William A. Hunter, 1,298,638.99 1,000 ----
Jr.
Barry S. Pillow 999,722.02 1,000 ----
EBSI ----- ----- $1,500,000
(b) Contingent Consideration. As further consideration for the Stock, on or
before each date listed in Column I below, Buyer shall pay Sellers an amount,
relating to the year indicated in Column II, by certified checks drawn on the
account of Buyer in the amount indicated in Column III, subject to the maximum
payment listed in Column IV:
-2-
COLUMN I COLUMN II COLUMN III COLUMN IV
March 31, 2001 Calendar Year 10.33 times the $1,550,000
2000 aggregate
Adjusted Earnings
of HCI, HCIV and
the assets of
EBSI in excess of
$550,000
March 31, 2002 Calendar Year 8.86 times the $1,550,000
2001 aggregate
Adjusted Earnings
of HCI, HCIV and
assets of EBSI in
excess of $700,000
For purposes of this Section 2(b), Adjusted Earnings of HCI, HCIV and the assets
of EBSI shall be defined as set forth in the operating agreement attached as
Exhibit B. Notwithstanding the foregoing, (i) if Adjusted Earnings for 2000
exceed $550,000 but are less than $700,000 (the difference between $700,000 and
such Adjusted Earnings being the "Shortfall") and Adjusted Earnings for 2001
exceed $700,000, then (x) a "Make-Up Payment" of 10.33 times the excess of
Adjusted Earnings for 2001 over $700,000 shall be payable to Sellers by Buyer on
or before March 31, 2002, with the Make-Up Payment limited to a maximum equal to
10.33 times the Shortfall and (y) to the extent that the Adjusted Earnings for
2001 exceed the sum of $700,000 plus the Shortfall, the excess shall be
multiplied by 8.86 and the product obtained shall be payable to Sellers by Buyer
as an additional payment on or before March 31, 2002, subject to a maximum for
such additional payment of $1,550,000, (ii) if Adjusted Earnings for 2001 exceed
$700,000 but are less than the sum of $875,000 and the Shortfall, then on or
before March 31, 2003 Buyer shall pay Sellers 8.86 times Adjusted Earnings for
2002 in excess of $875,000,
-3-
subject to a maximum payment of the amount obtained by adding any Make-Up
Payment to $1,550,000 and subtracting from such sum the amount paid under
Section 2(b)(i)(y), and (iii) in no event shall the payments under this Section
2(b) exceed a total of $3,100,000. Any disagreements concerning calculations
under this Section 2(b) shall be resolved pursuant to arbitration under Section
11. It is further agreed that if Sellers propose any action concerning the
prospects or operations of HCI and HCIV that is approved by HCI's Board of
Directors and assert that such action makes a change in this Section 2(b)
appropriate, Buyer shall negotiate reasonably and in good faith concerning such
a change. Sellers' right to receive payments under this Section 2(b) shall be
nonassignable, except by the laws of descent and distribution. Payments are due
to Sellers under this Section 2(b) whether or not Sellers are employees of
Buyer, HCI or HCIV pursuant to the Employment Agreements (as defined below). Any
payments owed to Sellers under this Section 2(b) shall be allocated among them
according to the proportions listed in the attached Schedule 2(b).
Notwithstanding the proportions set forth in Schedule 2(b), in the event (I) any
Seller is terminated as an employee of Buyer and its affiliates under any of the
Employment Agreements as a result of such Seller's permanent physical or mental
impairment or death and (2) Buyer is obligated to make a payment to Sellers
under this Section 2(b), then Sellers shall reallocate among themselves the
aggregate amount payable to them as follows: (A) if a payment is due as a result
of any calculations which include the Adjusted Earnings for the year in which
such Seller was so terminated, then the payment otherwise due such Seller using
the proportions set forth in Schedule 2(b) (the "Normal Allocation") shall be
reduced and be equal to the product of the Normal Allocation times a fraction of
which the numerator is the number of days in the year before the
-4-
effective date of such Seller's employment termination and the denominator is
365, with the balance of the Normal Allocation being reallocated to the
remaining Sellers according to their respective proportions set forth in
Schedule 2(b); and (B) if a payment is due as a result of any calculations which
do not include the Adjusted Earnings for the year in which such Seller was
terminated, then such Seller shall not receive his Normal Allocation but instead
the Normal Allocation shall be reallocated to the remaining Sellers according to
their respective proportions set forth in Schedule 2(b).
(c) Litigation Set-Off. If, after the Closing, Buyer or any of its
subsidiaries pays any amount (the "Litigation Amount") in connection with
Marshall v. Obstetrics & Gynecology Ltd. of Radford and HealthCare Consulting,
Inc.. Civil Action No. 97-0835 (the "Marshall Litigation"), in the United
States District Court for the Western District of Virginia, Roanoke Division,
the next amounts payable under Section 2 (b) shall be reduced, at Buyer's
election, in the respective proportions set forth in Schedule 2(b), until the
Litigation Amount is completely offset. Such offset shall not limit or waive any
other right or remedy of Buyer and its subsidiaries, including but not limited
to, the amount due under Section 10(b); provided that the sum of the offsets and
payments to Buyer and its subsidiaries in connection with the Marshall
Litigation shall not exceed the Litigation Amount.
(d) Sale of Portion of Businesses. If, prior to December 31, 2002, a
significant portion of the combined assets of HCI, HCIV and EBSI are sold or
otherwise disposed of by Buyer or NCRIC MSO, Inc. to a party not affiliated with
Buyer, Buyer and Sellers shall negotiate in good faith concerning appropriate
amendments to the amounts set forth in Section 2(b) so that Sellers have a
reasonable opportunity to receive any remaining payments under Section 2(b)
based on the Adjusted Earnings of the remaining assets. If Buyer and Sellers
-5-
are unable to agree on such adjustments within 30 days after such sale or other
disposition, such adjustments shall be determined pursuant to arbitration under
Section 11.
Section 3. Sellers' Representations and Warranties
Sellers, jointly and severally, represent and warrant to Buyer as follows:
(a) Corporation and Limited Liability Company. HCI is a corporation duly
organized, validly existing and in good standing under the laws of Virginia, has
the corporate power to own all of its assets and to carry on its business as
presently conducted and is duly qualified to do business as a foreign
corporation in every jurisdiction where such qualification is required for the
conduct of HCI's business as being presently conducted., except for the District
of Colombia. All corporate actions required of HCI with respect to the conduct
of its business as being presently conducted have been taken; and all reports
and returns required to be filed by HCI and HCIV with the jurisdictions in which
they are organized or qualified to do business have been filed, except to the
extent extensions for filing have been lawfully taken and identified on Schedule
3(a). HCI is not a shareholder of, and does not have any equity investments in,
or control of, any corporation, partnership or other entity. HCIV is a limited
liability company duly organized, validly existing and in good standing under
the laws of Virginia, has the power to own all of its assets and to carry on its
business as presently conducted and is duly qualified to do business in every
jurisdiction where such qualification is required for the conduct of HCIV's
business as presently being conducted. HCIV is not a shareholder of, and does
not have an equity interest in, or control of, any corporation, other than
Middle Fork MS0, L.L.C., Central Virginia MS0, L.L.C. ("CAMS"), Southwest
Virginia MS0, L.L.C. and Mid-Atlantic MS0-FBG, L.L.C.
-6-
(b) Validity of Agreement. This Agreement and each of the exhibits (other than
opinions) attached thereto (the "Transaction Documents"), when executed and
delivered, constitute the valid and binding obligation of Sellers, enforceable
in accordance with its terms, subject to laws of general application affecting
creditors' rights and general principles of equity.
(c) Capital Structure. There are 1,500 shares of common stock of HCI
authorized (par value $1.00 per share), 277 of which are issued and outstanding.
The amounts of shares of common stock owned by each Seller are accurately set
forth in Schedule 2(b). There are no outstanding rights, warrants, convertible
securities or other agreements requiring or contemplating the issuance of any
shares by HCI. All of the outstanding shares of HCI are duly issued, fully paid
and nonassessable. None of the outstanding shares of HCI were issued in
violation of any preemptive rights of any stockholders of HCI. Sellers own all
of the outstanding shares of HCI and all of the outstanding interests of HCIV.
(d) Title to and Transfer of Stock and Interests. Sellers own the Stock and
Interests beneficially and of record, free and clear of all liens, restrictions,
encumbrances, charges and adverse claims. Sellers have the full power, capacity
and authority validly to sell, assign, transfer and deliver the Stock and
Interests to Buyer and the transfer pursuant to this Agreement will vest in
Buyer good and marketable title to the Stock and Interests, free and clear of
all liens, restrictions, encumbrances, charges and adverse claims. There are no
agreements with respect to the voting or transfer of any shares of HCI or
interests of HCIV or otherwise relating to HCI or HCIV (other than the operating
agreement attached as Exhibit B).
(e) Financial Statements. Attached as Schedule 3(e) are HCI's, HCIV's and
EBSI's (i)
-7-
combined balance sheets as of December 31, 1997 and June 30, 1998 and combined
statements of income, retained earnings and changes in financial position for
the two years ended December 31, 1997 and the six months ended June 30, 1998,
together with the related unqualified opinion of Deloitte & Touche LLP, and (ii)
the unaudited combined balance sheet as of September 30, 1998 and combined
statement of income for the nine months then ended. The information included in
Schedule 3(e) is referred to as the "Financial Statements." The Financial
Statements fairly present the financial position of HCI, HCIV and EBSI on the
above dates, and the results of the operations and changes in financial position
of HCI, HCIV and EBSI for the periods covered, all in conformity with generally
accepted accounting principles applied on a consistent basis.
(f) Undisclosed Liabilities. Except for liabilities and obligations disclosed
in the Financial Statements or described in Schedule 3(f) or trade accounts
payable arising in the ordinary course of business consistent with past practice
or in connection with Marshall Litigation, HCI and HCIV did not have on
September 30, 1998 any liabilities or obligations in excess of $50,000 of any
nature, whether absolute, accrued, contingent or otherwise (including, but not
limited to, liability for federal, state or local income, withholding,
unemployment, FICA, excise, property, franchise, sales, use, gross receipts or
other taxes, whether due or to become due, and liability for accumulated
vacation time, promised bonus money, unfunded pension or profit-sharing plan
liabilities or other compensation benefits).
(g) No Distribution or Share or Interest Acquisition. Since September 30,
1998, there has been no declaration or payment of any dividend or other
distribution by HCI or HCIV in respect of, or any direct or indirect retirement,
redemption, purchase or other acquisition of, any shares of HCI or interests of
HCIV; provided that on or before December 31, 1998
-8-
HCI may distribute cash to its shareholders in such amounts that do not reduce
HCI's, HCIV's and EBSI's combined net worth, calculated in accordance with
generally accepted accounting principles consistently applied, below $561,000.
(h) Conduct of Business. Except as specifically disclosed in Schedule 3(h)
since September 30, 1998, HCI and HCIV have not:
(1) incurred or agreed to incur any substantial obligations or liabilities of
any nature, whether absolute, accrued, contingent or otherwise, except current
liabilities incurred in the ordinary course of business pursuant to the business
practices followed prior to September 30, 1998;
(2) borrowed, or agreed to borrow, any funds in excess of $100,000;
(3) mortgaged, pledged or subjected to lien, charge or any other encumbrance
any assets, tangible or intangible, or agreed to do so;
(4) sold or transferred, or agreed to sell or transfer, any of its assets other
than in connection with the transfer by HCIV of a 5% membership interest in CAMS
to Jim Giuliano);
-9-
(5) suffered any material adverse change in HCI's or HCIV's condition
(financial or otherwise), assets, liabilities, business or prospects, or any
damage from fire (whether or not covered by insurance);
(6) entered into any transaction other than in the ordinary course of business;
(7) made, or agreed to make, any increase in the salaries, wages or benefits
payable or to become payable, to any employee;
(8) made, or agreed to make, any accrual or arrangement for or payment of a
bonus;
(9) directly or indirectly paid or made a commitment to pay any severance or
termination pay to any officer or employee;
(10) through negotiations or otherwise, made or continued any commitment or
incurred any liability to any labor union;
(11) made or permitted any amendment or termination of any lease or contract,
agreement or license to which it is a party;
(12) introduced any new method of accounting in respect of its business; or
(13) made any capital expenditures in excess of $50,000 or entered into
commitments therefor.
(i) Title to Properties. Except for leased furniture, fixtures and equipment,
HCI and HCIV have good and marketable title to all of their properties,
including without limitation all automobiles, trucks, furnishings, fixtures and
equipment, and all tools used in the maintenance, operation and repair of their
equipment, free and clear of all liens or encumbrances, security interests and
adverse claims, except for liens for property taxes not yet due and payable.
(j) Properties. All leasehold improvements and equipment currently used by HCI
and
-10-
HCIV are in good condition, reasonable wear and tear excepted. Sellers do not
know of any pending or threatened change of any ordinance, regulation or zoning
or other law that would, if adopted, prevent HCI or HCIV from using their leased
premises or any of their leasehold improvements and equipment, in their current
condition, in the operation of their business, and there is no pending or
threatened condemnation of any such property.
(k) Taxes. HCI and HCIV have duly and on a timely basis filed all required
federal, state and local income, withholding, unemployment, FICA, excise,
property, franchise, gross receipts, and other tax returns, and have paid all
taxes due. The provision for taxes in the Financial Statements is sufficient for
the payment of all taxes, for the periods reported therein and all periods prior
thereto. All potential liabilities for taxes are provided for in the Financial
Statements for the periods reported therein and any prior periods. The Internal
Revenue Service has not examined any federal income tax returns of HCI or HCIV.
No revenue authority has notified HCI or HCIV that it is examining any tax
return filed by HCI or HCIV. There are no outstanding waivers which would extend
the period of limitations on the assessment or collection of any tax liabilities
of HCI or HCIV. HCI and HCIV have not filed a consent under Section 341(f) of
the Internal Revenue Code. HCI is a not "collapsible corporation," as defined in
Section 341(b) of the Internal Revenue Code. True copies of HCI's or HCIV's
federal, state and local income tax returns for the three years ended on
December 31, 1997 are attached as Schedule 3(k).
(l) Contracts. Except as set forth in Schedule 3(1), neither HCI nor HCIV is a
party to, and none of its assets are subject to:
(1) any employment contract or arrangement, written or oral, with any of its
officers or directors, or with any of its employees, consultants, advisors or
agents, other than
-11-
arrangements terminable at will;
(2) any pension, profit-sharing, bonus, deferred compensation, retirement,
stock option, stock purchase, hospitalization insurance or other benefit plan in
effect with respect to employees or others ("Plan");
(3) any contract or arrangement restricting the freedom to compete in any line
of business, or with any individual or entity, or in any area of the world;
(4) any contract with a labor union, or any agreement that contains any
severance or termination pay liabilities;
(5) any power of attorney in favor of any other individual or entity, for any
purpose.
(6) any joint venture contract or arrangement, or any other agreement involving
a sharing of profits;
(7) any lease of personal property;
(8) any contract providing for the purchase of equipment, materials, supplies
or other personal property or any real property;
(9) any license or franchise agreement, either as licensor or licensee, or as
franchiser or franchisee; or
(10) any other agreement or instrument creating any obligations in the amount of
$50,000 or more of HCI or HCIV after the Closing.
(m) Leases. Schedule 3(m) includes true and complete copies of all leases for
the real estate to which HCI or HCIV is a party ("Leases"). The Leases are
unmodified and in full force and effect. The tenants under the Leases have not
entered into any sublease, concession, license or other agreement relating to
the subject premises. All rent and other payments due under the Leases have been
paid.
-12-
(n) Directors, Officers and Banks. Schedule 3(n) sets forth the names of all
directors and officers of HCI, and all banks in which HCI or HCIV have accounts
or safe deposit boxes (with the names of the persons who are authorized to draw
thereon or have access thereto).
(o) Prepayment of Indebtedness. All indebtedness of HCI or HCIV for borrowed
money may be prepaid at any time without penalty.
(p) No Breach of Law or Contract. The execution, delivery and performance of
this Agreement and each of the Transaction Documents, by Sellers do not (1)
breach any statute, law or regulation of any governmental authority or conflict
with or result in a breach of or default under any of the provisions of HCI's
articles of incorporation or bylaws or the governing instruments of HCIV or any
order, writ, injunction or decree to which Sellers, HCI or HCIV is a party, or
by which Sellers, HCI or HCIV or their assets are or may be bound, or (2)
conflict with or result in a breach of or default under any agreement or other
instrument to which Sellers, HCI or HCIV is a party, or by which Sellers, HCI or
HCIV or their assets are or may be bound.
(q) No Litigation or Adverse Events. Except for the Marshall Litigation and as
set forth in Schedule 3(q), there are no investigations known to Sellers, nor
any actions, suits, proceedings or claims pending or threatened in writing
against or, to the knowledge of Sellers, affecting HCI or HCIV or their
properties or business, nor has any such investigation, action, suit, proceeding
or claim been pending during the twelve-month period preceding the date of this
Agreement, and Sellers do not know of any reasonable basis or grounds for any
such investigation, action, suit, proceeding or claim. Neither HCI nor HCIV is
operating under or subject to, or in default with respect to, any order, writ,
-13-
injunction or decree of any court or federal, state, municipal or other
governmental department, commission, board, agency or instrumentality.
(r) Compliance with Laws. In connection with the conduct of their business,
HCI and HCIV have complied, in all material respects, with all applicable
material laws, ordinances, rules and regulations, and none of the Sellers, HCI
or HCIV has been informed of an alleged violation of such laws, ordinances,
rules or regulations. HCI or HCIV hold, directly or indirectly, all licenses,
permits and franchises ("licenses") from appropriate governmental authorities,
which licenses are listed in Schedule 3(r), necessary to permit their business
to be conducted in accordance with all applicable requirements.
(s) Governmental Approvals. Neither Sellers nor HCI or HCIV is required to
submit any notice, report or other filing with any governmental authority, and
no approval or authorization of any governmental authority is required in
connection with the execution, delivery or performance of this Agreement or the
Transaction Documents or the transactions contemplated by this Agreement or the
Transaction Documents.
(t) No Defaults in Contracts. HCI and HCIV are not in default in obligations
under any lease or agreement to which HCI or HCIV is a party, and, to the
knowledge of Sellers, no event exists which, with notice or passage of time,
would become such an event of default. All such leases and agreements are in
full force and effect.
(u) Intellectual Property. HCI and HCIV have the right to use, free and clear
of claims or rights of others, all trademarks and service marks which they use
in connection with their business, all of which are listed on Schedule 3(u). HCI
and HCIV have not licensed or otherwise granted to any person or entity any
right or interest in any such trademarks or service marks. In order to conduct
their business, HCI and HCIV do not require rights
-14-
under any patents. No person has asserted or currently maintains any claim and,
to Sellers' knowledge, no person has a valid basis for claiming, that HCI's or
HCIV's business violates or has violated any patent, noncompetition,
confidentiality, trademark, service mark, copyright or other right.
(v) Health Care Regulation. To Sellers' knowledge, HCI is currently operating
in compliance, and has previously operated in compliance, with all applicable
Health Care Laws (defined below). Neither HCI nor its officers, directors,
employees and contractors is currently being, or has been, charged or, to
Seller's knowledge, investigated or implicated, or has received notice of the
commencement of any civil or criminal investigation, civil action, indictment,
debarment, suspension, exclusion, or other sanction proceeding pursuant to any
Health Care Law. To Sellers' knowledge, HCI does not have any liability for any
overpayment, duplicate payments, refunds, discounts or adjustments due to
Medicare, Medicaid, CHAMPUS, TRICARE, Blue Cross, Blue Shield, hospital or
health care provider, or any other health care reimbursement program or third-
party payor. The term "Health Care Laws" means all federal, state, and local
laws, statutes, rules, regulations, government directives, manuals and program
bulletins pertaining to the regulation of providers of health care items and
services. Health Care Laws shall include, but shall not be limited to, the
following: Title XVIII of the Social Security Act, 42 U.S.C. (S)(S) 1395-1395ccc
(the Medicare statute); Title XIX of the Social Security Act, 42 U.S.C. (S)(S)
1396-1396v (the Medicaid statute); the Medicare Anti-Kickback Statute, 42 U.S.C.
(S) 1320a-7b(b); the Civil False Claims Act, 31 U.S.C. (S)(S) 3729-3731 (as
amended); the Program Fraud Civil Remedies Act, 31 U.S.C. (S)(S) 3801-3812 ; the
federal Anti-Kickback Act, 41 U.S.C. (S)(S)51-58; the Civil Monetary Penalties
Law, 42 U.S.C. (S) 1320a-7a; the
-15-
provisions of 42 U.S.C. (S)(S) 1320a-7 and 1320a-7b; Federal Health Care
Offenses, 18 U.S.C. (S)(S) 24, 669, 982, 1035, 1345, 1347, 1518, 1956, and 3486;
and any other laws, statutes, regulations, government directives, manuals, and
program bulletins applicable to CHAMPUS, TRICARE, or any veterans' health care
program.
(w) Year 2000 Compliance. HCI (1) has initiated a reasonable review and
assessment of all areas of its business and operations (including those affected
by suppliers and vendors) that could be adversely affected by the "Year 2000
Problem" (that is, the risk that computer applications used by HCI, its
suppliers, third-party payors and vendors, may be unable to recognize and
perform properly date-sensitive functions involving dates subsequent to December
31, 1999), and (2) is using reasonable efforts so that its computer applications
will on a timely basis be able to perform properly date-sensitive functions for
all dates subsequent to December 31, 1999.
(x) ERISA and Employee Matters. To Sellers' knowledge, HCI and HCIV are in
compliance with the Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations thereunder ("ERISA"),
HCI and HCIV do not maintain or contribute to any "pension plan" (as defined in
ERISA) which is subject to Title IV of ERISA. All employee pension benefit
plans, as described in Section 3(2) of ERISA, which are intended to constitute
qualified retirement plans under Section 401(a) of the Internal Revenue Code do
in fact so qualify under Section 401(a) of the Internal Revenue Code. No
prohibited transaction, as defined in Section 4975(c) of the Internal Revenue
Code has occurred with respect to any employee pension benefit plan maintained
by HCI or HCIV. Any Plan which requires funding is fully funded, except for
contributions, set forth on Schedule 3(x), for the current or prior plan years
for which the
-16-
contribution due date has not yet occurred.
(y) Labor Relations. There is (1) no unfair labor practice complaint pending
or, threatened in writing against HCI or HCIV before the National Labor
Relations Board or other governmental or regulatory authority, and no grievance
or arbitration proceeding arising out of or under any collective bargaining
agreement is so pending or threatened in writing against HCI or HCIV and, to
Sellers' knowledge, no reasonable basis for an unfair labor practice finding
against HCI, HCIV and Sellers, (2) to the knowledge of Sellers, no effort by a
labor union to become recognized as the collective bargaining agent of HCI's or
HCIV's employees and (3) no labor trouble (for example, strikes, labor stoppages
or other acts involving groups of employees) involving HCI or HCIV known to
Sellers, nor any dispute, grievance, controversy or strike pending against HCI
or HCIV.
(z) Insurance. HCI and HCIV maintain the insurance described on the attached
Schedule 3(z) and such insurance is in full force and effect.
(aa) Guaranties. Neither HCI nor HCIV is a guarantor or otherwise liable for
any obligation to any other individual or entity, except in connection with
endorsement of checks and other instruments in the ordinary course of business.
(bb) Books and Records. The books of account and other financial records of HCI
and HCIV are true, complete and correct, and accurately reflect the assets and
liabilities of HCI and HCIV in all material respects. The minute books and other
records of HCI and HCIV contain accurate records of all meetings and accurately
reflect all material actions of the shareholders and directors and any
committees of the Board of Directors of HCI and members of HCIV.
(cc) Disclosure. No representation or warranty of Sellers in this Agreement, or
any
-17-
written information, statement or certificate furnished by or on behalf of
Sellers to Buyer pursuant to this Agreement or in connection with the
transactions contemplated hereby, contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein not misleading. All copies of contracts and other documents
delivered by Sellers in connection with the transactions contemplated hereby are
complete and accurate, and have not been amended or modified by any oral
agreements.
(dd) Brokers' Fees. No broker or finder has, as a representative of a Seller,
been employed by a Seller in connection with this Agreement or the transactions
contemplated by this Agreement.
(ee) Entire Business. Except for the activities of EBSI, a Virginia
corporation, Cornerstone Capital Management LLC, and Cornerstone Ventures, LLC,
Sellers are not engaged, directly or indirectly, in the consulting or management
services business other than through HCI, and NCRIC MSO, Inc., a Delaware
corporation and Sellers do not own (other than through HCI or HCIV), directly or
indirectly, any rights or other assets relating in any manner to such business,
including without limitation rights as franchisor or franchisee, other than
through investments in publicly held companies.
(ff) Cornerstone. HCIV has transferred its investment in Cornerstone Capital
Management LLC to Sellers and Sellers have paid to HCIV $3,000. At or prior to
the Closing, the amount that was owed by Cornerstone Capital Management LLC to
HCIV will be repaid.
(gg) Securities Law Considerations. Sellers are knowledgeable about the
business of Buyer and have such knowledge of such business and of financial
affairs as is necessary
-18-
to enable them to evaluate the risks attendant to such business and has used
financial, legal, tax and other advisors in connection with the transactions
contemplated by this Agreement; and has been furnished all information
concerning Buyer which Sellers and their legal, tax and other advisors have
considered necessary to make a proper evaluation of the transactions
contemplated by this Agreement.
Section 4. Buyer's Representations and Warranties
Buyer represents and warrants to each of Sellers as follows:
(a) Corporate. Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the District of Columbia, has the power to own
all of its assets and to carry on its business as presently conducted and has
all requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement and the Transaction Documents.
(b) Validity of Agreement. This Agreement, and each of the Transaction
Documents, when executed and delivered, constitute the valid and binding
obligation of Buyer, enforceable in accordance with its terms, subject to laws
of general application affecting creditors' rights and general principles of
equity.
(c) No Breach of Law or Contract. The execution, delivery and performance of
this Agreement, and each of the Transaction Documents, by Buyer do not breach
any statute, law, or regulation of any governmental authority or conflict with
or result in a breach of or default under any of the provisions of Buyer's
certificate of incorporation or bylaws or any order, writ, injunction or decree
or any contract, agreement, instrument or other document to which Buyer is a
party or by which it or its property is otherwise bound.
(d) Brokers' Fees. Except for Sandler, O'Neill & Partners, L.P., (which shall
be
-19-
compensated solely by Buyer) no broker or finder has, as a representative of
Buyer, been employed by Buyer in connection with this Agreement or the
transactions contemplated by this Agreement.
(e) Authority. The execution, delivery and performance of this Agreement and
the Transaction Documents and the consummation of the transactions contemplated
herein and therein by Buyer have been duly authorized by all necessary corporate
action.
(f) Securities Law Considerations (1) Buyer is knowledgeable about the
business of HCI, HCIV and the assets of EBSI and has such knowledge of such
business and of financial affairs as is necessary to enable it to evaluate the
risks attendant to such business and has used financial, legal, tax and other
advisors in connection with the transactions contemplated by this Agreement;
and has been furnished all information concerning HCI, HCIV and the assets of
EBSI which Buyer and Buyer's legal, tax and other advisors have considered
necessary to make a proper evaluation of the transactions contemplated by this
Agreement.
(2) The Stock and Interests are being acquired for investment for Buyer's own
account with no present intention of reselling or otherwise disposing of any
portion of the Stock or Interests except in conformance with applicable law.
Buyer acknowledges that the reliance of Sellers upon exemptions from
registration under the Securities Laws is predicated upon such investment
intent.
(3) The Convertible Notes and all securities of Buyer into which the
Convertible Notes may be converted have been and will be offered and sold
pursuant to either valid exemptions from registration under the Securities Laws
or in compliance with the registration requirements of the Securities Laws.
-20-
(g) Approvals. Buyer has obtained all regulatory and other approvals, if any,
needed to consummate the transactions contemplated in this Agreement and the
Transactional Documents.
(h) Assets of EBSI. At the Closing, Buyer shall cause all of the assets of
EBSI which are being purchased by Buyer under the EBSI Agreement (the "EBSI
Assets") to be transferred completely to HCI.
Section 5. Additional Obligations of Sellers
At or before the Closing, Sellers shall cause or accomplish the following:
(a) Conduct of Business. Sellers shall cause HCI and HCIV to conduct their
business only in the ordinary course and to enter into no contract or other
transaction other than in the ordinary course, without the prior written consent
of Buyer, which shall not be unreasonably withheld or delayed. Sellers shall
cause HCI and HCIV not to enter into any material contract without in all such
cases the prior written consent of Buyer, which shall not be unreasonably
withheld or delayed.
(b) Mergers, etc. Without Buyer's prior written consent, HCI and HCIV will not
merge or consolidate with any other entity, sell or lease a substantial portion
of its assets, acquire all or substantially all of the stock or business or
assets of any other individual or entity, liquidate, dissolve or agree to do any
of the foregoing.
(c) Conditions Precedent. Sellers shall use reasonable efforts to take all
actions necessary to satisfy prior to or at the Closing all of the conditions to
the obligations of Buyer set forth in Section 7.
(d) Access. Between the date of this Agreement and the Closing, Sellers shall
cause HCI and HCIV to afford to Buyer and its representatives full access,
during reasonable
-21-
business hours, to all assets, properties, books, records, leases, agreements
and commitments of HCI and HCIV and furnish representatives of Buyer during such
period with all information concerning their affairs and their value, as Buyer
may reasonably request.
(e) Termination of Agreements. At or before the Closing, the following
agreements shall be terminated: (1) Stock Option Agreement, dated January 1,
1992, among J.E. Joines, Jr., L.E. Shepherd, Jr., William A. Hunter, Jr., Barry
S. Pillow and Professional Consultants, Inc.; (2) Stock Purchase Agreement,
dated January 1, 1992, among J.E. Joines, Jr., L.E. Shepherd, Jr., William A.
Hunter, Jr., Barry S. Pillow and Professional Consultants, Inc.; (3) Employment
agreement, dated June 3, 1992, between Professional Consultants, Inc. and L.E.
Shepherd, Jr.; (4) Employment agreement, dated June 3, 1992, between
Professional Consultants, Inc. and William A. Hunter, Jr.; and (5) Employment
agreement, dated June 3, 1992, between Professional Consultants, Inc. and Barry
S. Pillow.
(f) Amendment of Governing Instruments. Without Buyer's prior written consent,
Sellers shall cause HCI not to amend its articles of incorporation or bylaws and
HCIV not to amend its governing instruments.
(g) New Employment Agreements. At the Closing, Sellers shall enter employment
agreements with Buyer, the forms of which are attached as Exhibits C, D and E.
(h) Operating Agreement. At the Closing, Sellers shall enter, and cause HCI
and HCIV to enter, into the operating agreement with Buyer, in the form attached
as Exhibit B (the "Operating Agreement").
(i) Net Worth. Sellers shall cause the combined net worth (calculated in
accordance
-22-
with generally accepted accounting principles consistently applied) of HCI, HCIV
and EBSI to be at least $561,000 at the date of the Closing.
(j) Indebtedness. Sellers shall cause HCI and HCIV to have no indebtedness for
borrowed money on the date of the Closing; provided that this prohibition shall
not apply to trade accounts payable incurred in the ordinary course of business
and indebtedness pursuant to a line or credit in an amount not to exceed
$100,000.
Section 6. Additional Obligations of Buyer
At or before the Closing, Buyer shall accomplish the following:
-23-
(a) Employment Agreements. Buyer shall cause NCRIC MSO, Inc. to enter into
employment agreements with Sellers, the forms of which are attached as Exhibit
C, D and E (the "Employment Agreements").
(b) Conditions Precedent. Buyer shall use reasonable efforts to take all
actions necessary to satisfy prior to or at the Closing all of the conditions to
the obligations of Sellers set forth in Section 8.
(c) Note. At the Closing, Buyer shall deliver to Sellers the Convertible Notes
executed by Buyer.
(d) Assets of EBSI. Buyer shall cause the assets of EBSI which are being
purchased by Buyer under the EBSI Agreement to be transferred completely to HCI.
Section 7. Conditions to Buyer's Obligation to Close
The obligation of Buyer to close hereunder shall be subject to the satisfaction
of the following conditions prior to or at the Closing, unless waived by Buyer
in writing:
(a) Representations and Warranties True at Closing. The representations and
warranties made by Sellers in this Agreement (and every statement delivered by
Sellers in connection herewith) shall be true in all material respects on and as
of the Closing with the same effect as though such representations and
warranties (and statements) had been made or given on and as of the Closing, and
Sellers shall have executed and delivered to Buyer a certificate, dated the date
of the Closing, to the foregoing effect.
(b) Compliance with Agreement. Sellers shall have performed and complied with
all their obligations under this Agreement which are to be performed or complied
with by them prior to or at the Closing, and Sellers shall have executed and
delivered to Buyer a certificate, dated the date of the Closing, to the
foregoing effect.
-24-
(c) Resignations. Buyer shall have received written resignations, effective as
of the Closing, of the directors and officers of HCI, except to the extent that
Buyer advises Sellers to the contrary.
(d) Releases. Buyer shall have received Sellers' general release of all claims
and rights which they may have against HCI or HCIV.
(e) Officer and Employee Statements. Buyer shall have received signed
statements from Sellers stating that HCI and HCIV are not obligated to the
officers and employees listed on Schedule 7(e), except for compensation, expense
reimbursement and employee benefit payments, all incurred in the ordinary course
of business.
(f) Stock Certificates. Buyer shall have received certificates representing
the Stock, duly endorsed, in form satisfactory to Buyer.
(g) Books and Records. Buyer shall have received unlimited access to all of
HCI's and HCIV's records, books, papers, leases and agreements, including
without limitation accounting books and records, minute books, stock certificate
books, stock ledgers, articles of incorporation, bylaws and a list of all
employees of HCI and HCIV and their current compensation levels.
(h) Employment Agreements. Buyer shall have received from Sellers the executed
Employment Agreements.
(i) Opinion of Counsel. Buyer shall have received from Mezzullo & McCandlish,
a Professional Corporation, counsel for Sellers, an opinion dated the date of
the Closing, addressed to Buyer, the form of which is attached as Exhibit F.
(j) Material Adverse Change. Since September 30, 1998, HCI and HCIV shall not
have suffered a material adverse change in their condition (financial or
otherwise), assets,
-25-
liabilities, business or prospects.
(k) Financing. The Closing under the commitment attached as Schedule 7(k)
shall have occurred.
(l) Inter-Company Loans. On the date of the Closing, except for the lease
dated January 1, 1994, as amended effective January 1, 1998, and further amended
as of the date hereof between HJS Building Partnership and HCI, there shall be
no indebtedness or obligation of HCI or HCIV to Sellers and entities they own or
control and no indebtedness or obligation of Sellers and entities they own or
control to HCI or HCIV.
(m) EBSI. The closing under this Agreement shall take place simultaneously
with the closing under the EBSI Agreement.
(n) Litigation Affecting Closing. No judicial or governmental order or decree
shall have been issued or entered which would be violated by the consummation of
the transactions contemplated in this Agreement
(o) Approvals. All material approvals required under any applicable law,
statute, ordinance, regulation, order or rule to carry out the transactions
contemplated by this Agreement shall have been obtained.
Section 8. Conditions to Sellers' Obligation to Close
The obligation of Sellers to close hereunder shall be subject to the
satisfaction of the following conditions prior to or at the Closing, unless
waived by Sellers in writing:
-26-
(a) Representations and Warranties True at Closing. The representations and
warranties made by Buyer in this Agreement shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made or given on and as of the Closing,
and an officer of Buyer shall have executed and delivered to Sellers a
certificate, dated the date of the Closing, to the foregoing effect.
(b) Compliance with Agreement. Buyer shall have performed and complied with
all its obligations under this Agreement which are to be performed or complied
with by it prior to or at the Closing, and an officer of Buyer shall have
executed and delivered to Sellers a certificate, dated the date of the Closing,
to the foregoing effect.
(c) Opinion of Counsel. Sellers shall have received from Arent Fox Kintner
Plotkin & Kahn, PLLC, counsel for Buyer, an opinion dated the date of the
Closing, addressed to Sellers, the form of which is attached as Exhibit G.
(d) Employment Agreements, etc. Sellers shall have received from Buyer,
executed Employment Agreements and the executed Operating Agreement.
(e) Incumbency Certificate. Sellers shall have received a certificate of the
Secretary of the Buyer dated the date of Closing certifying to the incumbency of
the officers of Buyer signing for it and as to the authenticity of their
signatures.
(f) Litigation Affecting Closing. No judicial or governmental order or decree
shall have been issued or entered which would be violated by the consummation of
the transactions contemplated in this Agreement.
(g) Deliveries. Seller and EBSI, as the case may be, shall have received from
Buyer (1) the Closing Checks and (2) the fully executed Convertible Notes.
(h) Approvals. All material approvals required under any applicable law,
statute,
-27-
ordinance, regulation, order or rule to carry out the transactions contemplated
by this Agreement shall have been obtained.
Section 9. Closing
(a) Closing. The closing (the "Closing") shall be held at 10:00 a.m. at the
offices of Arent Fox Kintner Plotkin & Kahn, PLLC, 1050 Connecticut Avenue,
N.W., Washington, D.C. 20036-5339, on January 4, 1998, or at such other place,
date, or time as may be fixed by mutual agreement of the parties (the "Closing
Date").
(b) Further Assurances. After the Closing, Sellers, at the request of Buyer,
shall furnish, execute and deliver such documents, instruments, certificates,
notices or other assurances as Buyer shall reasonably request as necessary or
desirable to effect complete consummation of this Agreement. Sellers shall pay
all expenses incurred by them in connection with such actions.
Section 10. Survival of Representations and Warranties; Indemnification
(a) Survival. Notwithstanding any investigation conducted by any party, the
representations and warranties made in Sections 3 and 4 of this Agreement shall
survive until the second anniversary of the Closing Date, except that the
representations and warranties made under Sections 3(k) and 4(f)(2) and (3)
shall survive without time limitation. All covenants which by their nature are
to be performed after the Closing Date shall survive the Closing.
(b) Indemnification of Buyer. (1) Sellers, jointly and severally, agree to
indemnify and hold harmless Buyer against and in respect of (i) any Loss
(defined below) resulting from any misrepresentation, breach of warranty or
nonfulfillment of any covenant or agreement on the part of Sellers under this
Agreement or from any misrepresentation or omission in
-28-
any document delivered to Buyer in connection with this Agreement, and (ii) any
Loss resulting from the Marshall Litigation and the matters described in
Schedule 3(q). The term "Loss" means any loss or damage incurred by HCI, HCIV or
Buyer and the costs of all actions, suits, proceedings, demands, assessments,
judgments and expenses (including reasonable attorneys' fees) incident thereto.
"Loss" shall not include any decrease in the value of the Stock or Interests
owned by Buyer or its successors or assigns.
(2) Notwithstanding any other provisions of this Agreement, neither Buyer nor
HCI or HCIV shall be entitled to make any claim against Sellers for any Loss
arising in connection with any alleged misrepresentation or breach of warranty
unless notice of such claim shall have been given to Sellers in accordance with
Section 13(g) below on or prior to the survivability expiration date for a given
representation or warranty as set forth in Section 10(a) above.
(3) Notwithstanding any other provision of this Agreement, Sellers shall not be
liable to indemnify Buyer, HCI or HCIV for claims as to Losses until the
aggregate amount of such Losses exceeds $37,500 (the "Indemnification
Threshold"), except for claims based on Sections 3(g), 3(k) and 3(q) for which
there shall be no requirement that the Indemnification Threshold be met. Once
Buyer, HCI and HCIV have incurred Losses that are subject to the
Indemnifications Threshold totaling the amount of the Indemnification Threshold,
Sellers shall be liable to indemnify such parties only for Losses in excess of
the Indemnification Threshold.
(4) Notwithstanding any other provision of this Agreement, the aggregate
indemnification liability for each of Sellers under this Section 10 shall not
exceed the sum of the cash and, in the case of shares of common stock of Buyer
issued pursuant to the
-29-
Convertible Note, the aggregate "Conversion Price" thereof, actually received by
such Seller pursuant to Section 2(a) (1) and (2) of this Agreement.
(5) No indemnification shall be required under this Section 10 with respect to
any Loss (i) to the extent any such Loss is reimbursed to Buyer, HCI or HCIV by
insurance or any other third-party, or (ii) to the extent of any net tax savings
(taking into account the tax affect of any indemnification payment received by
Buyer) realized by Buyer, HCI or HCIV with respect thereto.
(c) Indemnification of Sellers. Buyer agrees to indemnify and hold harmless
Sellers against and in respect of (1) any loss, damage, claim, cost and expense,
of any nature whatsoever (including without limitation reasonable attorneys'
fees) resulting from any misrepresentation, breach of warranty or nonfulfillment
of any covenant or agreement on the part of Buyer under this Agreement or
guaranties by Sellers to NationsBank relating to indebtedness of HCI not to
exceed $100,000, and (2) all actions, suits, proceedings, demands, assessments,
judgments, costs and expenses (including reasonable attorneys' fees) incident to
the foregoing.
Section 11. Arbitration
(a) In the event the parties are unable to resolve a controversy under this
Agreement, the parties agree to submit the matter to binding arbitration under
the rules of the American Arbitration Association, but not using the American
Arbitration Association, unless the parties mutually agree to do so. One arbiter
shall be chosen by Buyer and one by Sellers before commencement of arbitration.
The two arbiters shall choose a third arbiter. The decision of the first two
arbiters shall be final and binding upon both parties; however, if those
arbiters fail to agree, the third arbiter shall participate and the decision of
the majority
-30-
shall be final and binding. The parties expressly covenant and agree to be bound
by the decisions of the arbiters and accept any decision by a majority of the
arbiters as a final determination of the matter in dispute. In connection with
the foregoing, the parties hereby waive any right to an appeal or to commence
any de novo action with respect to the final determination. All arbiters chosen
pursuant to this Section 11(a) shall have substantial experience in the
healthcare management field and shall have demonstrated knowledge concerning the
types of issues involved.
(b) Each party shall bear its own expenses, including legal, accounting and
expert fees, in connection with the arbitration except that Buyer and Sellers
shall each pay 50% of the expenses of the arbiters.
(c) Any such arbitration shall take place in Washington, D.C., unless some
other location is mutually agreed upon by the parties.
Section 12. Post Closing Covenants of Buyer
(a) Plans. Buyer shall not reduce the aggregate benefits under HCI's Plans
(defined in Section 3(l)(2)) until January 1, 2003.
(b) Corporate Existence. Buyer shall maintain, and cause each of HCI and HCIV
to maintain, their respective corporate or limited liability company existence
in good standing until January 1, 2003; provided that HCI may be merged into
NCRIC MSO, Inc. and sales and other dispositions may take place as provided in
Section 10 of the Operating Agreement.
(c) Business Continuation. Buyer shall continue, and cause HCI and HCIV to
continue, to operate the businesses of HCI and HCIV pursuant to the Operating
Agreement.
(d) Merger or Sale of Assets. Buyer shall not enter into any merger,
consolidation or
-31-
share exchange with any other business entity with respect to the Stock or
Interests, or sell, lease, assignment, or otherwise dispose of all or any
significant component of the assets of HCI (including but not limited to the
EBSI Assets) or HCIV, or permit HCI or HCIV to do any of the foregoing until
January 1, 2003. For purposes of this Agreement, the sale or transfer of 50% or
more of the ownership of HCI or HCIV shall be deemed a sale or transfer.
Notwithstanding the foregoing, this Section 12(d) shall not be operative (i) if
the payments described in Section 10 of the Operating Agreement are promptly and
punctually made to Sellers, or (ii) in connection with an acquisition of HCI or
HCIV or both by NCRIC MSO, Inc.
(e) Marshall Litigation. Buyer shall permit, and shall cause HCI and HCIV to
permit, Sellers to have reasonable control over the Marshall Litigation,
including with respect to decisions to continue litigation and settle at
Sellers' cost; provided that Sellers shall consult periodically with Buyer
concerning the Marshall Litigation. The Marshall Litigation shall not be settled
without the prior written approval of Sellers. In the event that Buyer or any of
its affiliates receive any proceeds from the Marshall Litigation by settlement,
judgment or otherwise all such proceeds shall be the property of Sellers and
Buyer shall cause the immeditate payment thereof to Sellers.
(f) Convertible Notes. (i) Buyer shall cause all securities of Buyer into
which the Convertible Notes may be converted to be offered and sold to each of
Sellers pursuant to either valid exemptions for registration requirements under
the Securities Laws or in compliance with the registration requirements of the
Securities Laws. Buyer shall not be under any obligation to register such
securities,
(ii) Buyer shall cause all securities of Buyer into which the Convertible
Notes may
-32-
be converted to be exactly the same class and type of Common Stock (including in
terms of all rights and preferences) of Buyer that is being sold in the initial
public offering of Buyer.
(g) Rule 144 Requirements. (i) After the earliest of (A) the closing of the
sale of securities of Buyer pursuant to a Registration Statement (as defined
below), (B) the registration by Buyer of a class of securities under Section 12
of the Exchange Act (as defined below), or (C) the issuance by Buyer of an
offering circular pursuant to Regulation A under Securities Act (as defined
below), Buyer agrees to:
(1) comply with the requirements of Rule 144(c) under the Securities Act
with respect to current public information about Buyer;
(2) use its best efforts to file with Securities and Exchange Commission
(the "Commission") in a timely manner all reports and other documents required
of Buyer under the Exchange Act (at any time Buyer has become subject to such
reporting requirements); and
(3) furnish to any of Sellers upon request (i) a written statement by Buyer
as to its compliance with the requirements of said Rule 144(c), and the
reporting requirements of the Exchange Act (at any time after Buyer has become
subject to such reporting requirements), (ii) a copy of the most recent annual
or quarterly report of Buyer, and (iii) such other reports and documents of
Buyer as each such Seller may reasonable request to avail himself of any similar
rule or regulation of the Commission allowing it to sell any such securities
without registration.
(ii) "Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar Federal statute, and the rules and regulations of the Commission
issued under
-33-
such Act, as they each may, from time to time, be in effect. "Registration
Statement" means a registration statement filed by Buyer with the Commission for
a public offering and sale of securities of Buyer (other than a registration
statement on Form S-8 or Form S-4, or their successors, or any other form for a
limited purpose (not including any issuance of securities of the Buyer for cash
consideration), or any registration statement covering only securities proposed
to be issued in exchange for securities or assets of another corporation).
"Securities Act" means the Securities Act of 1933, as amended, or any similar
Federal statute, and the rules and regulations of the Commission issued under
such Act, as they each may, from time to time, be in effect.
Section 13. Miscellaneous
(a) Governing Law. This Agreement shall be governed by the substantive laws of
the District of Columbia without regard to the conflicts of law provisions
thereof.
(b) Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter hereof.
(c) Amendment. This Agreement may be amended only in a writing signed by all
of the parties.
(d) Waiver. No waiver shall be effective against a party unless it is in
writing signed by that party.
(e) Counterparts. This 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.
(f) Successors and Assigns. This Agreement shall inure to the benefit of and
be
-34-
binding upon the parties hereto, their heirs and successors and permitted
assigns. Neither this Agreement nor any of the parties' rights hereunder shall
be assignable by any party hereto without the prior written consent of the other
parties hereto; provided that (I) prior to Closing this Agreement may be
assigned by Buyer only to NCRIC MSO, Inc., a Delaware corporation, in Buyer's
sole discretion and without the consent of Sellers and (2) the payments under
Section 2(b) may be assigned to the extent provided therein, in Sellers' sole
discretion and without the consent of Buyer. If Buyer assigns this Agreement to
NCRIC MSO, Inc., Buyer shall remain liable for its obligations under this
Agreement and each of the Transaction Documents, and the representations and
warranties under Section 4 above shall be deemed to have been made by both Buyer
and NCRIC MSO, Inc. with respect to each of such companies.
(g) Notices. Any notice or other communication required or permitted to be
given hereunder shall be deemed to have been properly given if mailed by
certified mail, postage prepaid, addressed as follows (or to such other
addresses as the parties may specify by due notice to the others):
Buyer: NCRIC Group, Inc.
1115 30th Street, N.W.
Washington, D.C. 20007
Attn: R. Ray Pate, Jr.
Sellers: L. E. Shepherd, Jr.
William A. Hunter, Jr.
1928 Thomson Drive
Lynchburg, VA 24501-1068
Barry S. Pillow
628 Green Valley Rd.
Suite 210
Greensboro, NC 27408
-35-
(h) Expenses. Subject to Section 11(b), each party shall bear his or its own
expenses in connection with this Agreement and the transactions contemplated by
this Agreement; provided that HCI shall bear $40,000 of the cost of the audit of
HCI, HCIV and EBSI as of June 30, 1998, performed by Deloitte & Touche LLP and
the balance shall be borne by Buyer and that HCI shall bear one-half the cost of
the audit of HCI, HCIV and EBSI as of December 31, 1998 and the balance shall be
borne by Buyer.
(i) Headings. The headings in this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
(j) Separability. The invalidity or unenforceability of any provision of this
Agreement shall not impair the validity or enforceability of any other
provision.
Section 14. Default
(a) If, for any reason, other than the termination of this Agreement pursuant
to Section 15(a) below or the failure of Sellers to comply with their
obligations under this Agreement, Buyer shall fail or refuse to purchase the
Stock or Interests or to consummate the transactions described in this
Agreement, when obligated to do so under this Agreement, prior to or on the
Closing Date, such failure or refusal shall constitute a default by Buyer under
this Agreement, and without limiting any right of Sellers to pursue any and all
available remedies for such default, Buyer shall pay to Seller the total sum of
$75,000 in compensation for the time and transactional fees and expenses
incurred.
(b) If, for any reason, other than the termination of this Agreement, pursuant
to Section 15(a) below, or the failure of Buyer to comply with its obligations
under this Agreement, Sellers shall fail or refuse to sell the Stock or
Interests or to consummate the transactions
-36-
described in this Agreement, when obligated to do so under this Agreement, prior
to or on the Closing Date, such failure or refusal shall constitute a default by
Sellers under this Agreement, and without limiting any rights of Buyer to pursue
any and all available remedies for such default, Sellers shall pay to Buyer the
total sum of $75,000 in compensation for the time and transactional fees and
expenses incurred.
Section 15. Termination. This Agreement may be terminated only:
(a) By consent of all parties at any time prior to the Closing Date;
(b) By either Buyer or Sellers if the Closing has not occurred by January 31,
1999 for a reason other than the failure of the terminating parties to comply
with its or their obligations under this Agreement.
Termination pursuant to this Section 15 shall be effective by written notice.
Upon receipt of notice of termination pursuant to this Section 15, this
Agreement shall become void except as stated below and the parties shall have no
liability for any such termination, except for any payment required under
Section 14. The rights to terminate set forth in this Section 15 shall not
affect the right of any party to this Agreement to pursue any and all available
remedies for any default under this Agreement. Termination of this Agreement
for any reason shall not release Buyer from its obligations under Sections 16
and 17 below.
Section 16. Non-Solicitation.
(a) Buyer hereby acknowledges that certain proprietary and confidential
information to be disclosed to Buyer in connection with the transactions
contemplated by this Agreement, including but not limited to information
relating to the clients of HCI, HCIV and EBSI, is of substantial and critical
value to the business of such companies and to Sellers. Accordingly, Buyer
hereby covenants if this Agreement is terminated for any reason other
-37-
than failure of Sellers to comply with their obligations hereunder and Closing
does not occur, then from the date on which this Agreement is executed by Buyer
and continuing until the second anniversary of the aforementioned termination,
Buyer and its subsidiaries and affiliates will not, directly or indirectly: (a)
solicit or accept business from any person or entity that is a client of HCI,
HCIV or EBSI at any time during the year prior to the date of this Agreement,
except for any client for which Buyer or NCRIC MSO, Inc. was doing business
before the date of this Agreement and can so demonstrate by written evidence; or
(b) solicit or hire any person who was employed by HCI, HCIV or EBSI or was a
party to an agreement to provide services to HCI, HCIV or EBSI as an independent
contractor (other than persons working in the District of Columbia) as of the
date of this Agreement. Buyer acknowledges and agrees that the restrictions
contained in this Section 16(a) are reasonable in light of the unique
circumstances of the contemplated transactions, and that any violation of this
Section 16(a) would cause serious and irreparable harm to HCI, HCIV, EBSI and
the Sellers, incapable of being measured in monetary damages. Accordingly, Buyer
agrees that in the event of any breach or threatened breach of this Section
16(a), HCI, HCIV, EBSI and Sellers shall be entitled to an injunction or
restraining order, without limitation or waiver of any other right or remedy,
including but not limited to, the amount due under Section 14 above.
(b) Sellers hereby acknowledge that certain proprietary and confidential
information to be disclosed to Sellers in connection with the transactions
contemplated by this Agreement, including but not limited to information
relating to the clients of Buyer and its affiliate, is of substantial and
critical value to the business of Buyer and its affiliates. Accordingly, Sellers
hereby covenant if this Agreement is terminated for any reason other
-38-
than failure of Buyer to comply with its obligations hereunder and Closing does
not occur, then from the date on which this Agreement is executed by Sellers and
continuing until the second anniversary of the aforementioned termination,
Sellers will not, directly or indirectly: (i) solicit or accept business from
any person or entity that is a client of NCRIC MSO, Inc. at any time during the
year prior to the date of this Agreement, except for any client for which HCI,
HCIV or EBSI was doing business before the date of this Agreement and can so
demonstrate by written evidence; or (ii) solicit or hire any person who was
employed by NCRIC MSO, Inc. or was a party to an agreement to provide services
to NCRIC MSO, Inc. as an independent contractor as of the date of this
Agreement. Sellers acknowledge and agree that the restrictions contained in this
Section 16(b) are reasonable in light of the unique circumstances of the
contemplated transactions, and that any violation of this Section 16(b) would
cause serious and irreparable harm to Buyer, incapable of being measured in
monetary damages. Accordingly, Sellers agree that in the event of any breach or
threatened breach of this Section 16(b), Buyer shall be entitled to an
injunction or restraining order without limitation or waiver of any other right
or remedy including, but not limited to, the amount due under Section 14 above.
Section 17. Confidentiality.
(a) Buyer hereby acknowledges that certain proprietary and confidential
information has been and will be disclosed to Buyer in connection with the
transactions contemplated by this Agreement, including but not limited to
information related to the clients of HCI, HCIV and EBSI, which is of
substantial and critical value to the business of HCI, HCIV and EBSI and to
Sellers. Accordingly, Buyer hereby covenants that if this Agreement is
terminated for any reason other than the failure of Sellers to comply with their
obligations hereunder
-39-
and the Closing does not occur, Buyer shall not at any time (a) use, (b)
disclose or divulge to any person or entity, or (c) permit anyone to use any of
the aforementioned proprietary and confidential information. Buyer acknowledges
and agrees that the restrictions contained in this Section 17(a) are reasonable
in light of the circumstances of the contemplated transactions, and that any
violation of this Section 17(a) would cause serious irreparable harm to HCI,
HCIV, EBSI and Sellers incapable of being measured in monetary damages.
Accordingly, Buyer agrees that in the event of any breach or threatened breach
of this Section 17, HCI, HCIV, EBSI and Sellers, shall each be entitled to an
injunction or restraining order, without limitation or waiver of any other right
or remedy, including but not limited to, the amount due under Section 14 above.
(b) Sellers hereby acknowledge that certain proprietary and confidential
information has been and will be disclosed to Sellers in connection with the
transactions contemplated by this Agreement, including but not limited to
information related to the clients of NCRIC MSO, Inc., which is of substantial
and critical value to the business of Buyer and its subsidiaries. Accordingly,
Sellers hereby covenant that if this Agreement is terminated for any reason
other than the failure of Buyer to comply with its obligations hereunder and the
Closing does not occur, Sellers shall not at any time (a) use, (b) disclose or
divulge to any person or entity, or (c) permit anyone to use any of the
aforementioned proprietary and confidential information. Sellers acknowledge and
agree that the restrictions contained in this Section 17(b) are reasonable in
light of the circumstances of the contemplated transactions, and that any
violation of this Section 17(b) would cause serious irreparable harm to Buyer
and its subsidiaries incapable of being measured in monetary damages.
Accordingly, Buyer agrees that in the event of any breach or threatened breach
of this
-40-
Section 17(b), Buyer and its subsidiaries shall each be entitled to an
injunction or restraining order, without limitation or waiver of any other right
or remedy including, but not limited to, the amount due under Section 14 above.
-41-
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
NCRIC GROUP, INC.
By: /s/ R. Ray Pate, Jr.
------------------------------------
R. Ray Pate, Jr., President
/s/ L.E. Shepherd, Jr.
---------------------------------------
L.E. Shepherd, Jr.
/s/ William A. Hunter, Jr.
---------------------------------------
William A. Hunter, Jr.
/s/ B. S. Pillow
---------------------------------------
Barry S. Pillow
-42-
LIST OF EXHIBITS
A Mandatory Convertible Note
B Operating Agreement
C Employment Agreement of L.E. Shepherd, Jr.
D Employment Agreement of William A. Hunter, Jr.
E Employment Agreement of Barry S. Pillow
F Opinion of Sellers' Counsel
G Opinion of Buyer's Counsel
EXHIBIT 2.3
CONFORMED COPY
NCRIC GROUP, INC.
AND
EMPLOYEE BENEFIT SERVICES, INC.
PURCHASE AGREEMENT
EBSI
DECEMBER 20, 1998
TABLE OF CONTENTS
Section 1 Purchase and Sale of Assets.................................. 1
Section 2 Purchase Price............................................... 1
Section 3 EBSI's Representations and Warranties........................ 1
Section 4 Buyer's Representations and Warranties....................... 11
Section 5 Additional Obligations of EBSI............................... 12
Section 6 Additional Obligations of Buyer.............................. 13
Section 7 Conditions to EBSI's Obligation to Close..................... 13
Section 8 Conditions to EBSI's Obligation to Close..................... 15
Section 9 Closing and Post-Closing Obligations......................... 16
Section 10 Survival of Representations and Warranties; Indemnification.. 16
Section 11 Arbitration.................................................. 18
Section 12 Miscellaneous................................................ 19
Section 13 Default...................................................... 21
Section 14 Termination.................................................. 22
EXHIBITS
A Opinion of EBSI's Counsel
B Opinion of Buyer's Counsel
SCHEDULES
2(c) Share Ownership
3(f) Liabilities and Obligations Not Disclosed in the Financial Statements
3(h) Certain Events After September 30, 1998
3(k) Income Tax Returns
3(l) List of Certain Contracts
3(m) Leases
3(n) Directors and Officers; Banks
3(q) Litigation and Similar Matters
3(r) List of Licenses
3(u) List of Trademarks and Service Marks
3(w) Contributions
3(y) List of Insurance
PURCHASE AGREEMENT
This Agreement is entered into as of December 20, 1998, by and between
NCRIC Group, Inc., a District of Columbia corporation ("Buyer"), and Employee
Benefit Services, Inc., a Virginia corporation ("EBSI").
WHEREAS, Buyer desires to purchase all of the tangible and intangible
assets of EBSI (the "Assets"), subject to its liabilities, and EBSI desire to
sell the Assets, subject to its liabilities, on the terms and conditions set
forth below; and
WHEREAS, the stockholders of EBSI are today entering into a Purchase
Agreement with Buyer (the "Other Agreement");
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
Section 1. Purchase and Sale of Assets
At the closing of the purchase and sale contemplated by this Agreement
("Closing"), EBSI shall sell, assign, transfer and deliver to Buyer, and Buyer
shall purchase and accept from EBSI, the Assets, subject to its liabilities.
Section 2. Purchase Price
The purchase price payable by Buyer at the Closing is set forth in Section
2 of the Other Agreement.
Section 3. EBSI's Representations and Warranties
EBSI severally, represents, warrants and agrees as follows:
(a) Corporation. EBSI is a corporation duly organized, validly existing
and in good standing under the laws of Virginia, has the corporate power to own
all of its assets and to carry on its business as presently conducted and is
duly qualified to do business as a foreign corporation in every jurisdiction
where such qualification is required for the conduct of EBSI's business as being
presently conducted. All corporate actions required of EBSI with respect to the
conduct of its business as being presented conducted have been taken; all
reports and returns required to be filed by EBSI with the jurisdictions in
which they are organized or qualified to do business have been filed. EBSI is
not a shareholder of, and does not have any equity investments in, or control
of, any corporation, partnership or other entity. EBSI has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement.
(b) Validity of Agreement. This Agreement constitutes the valid and
binding obligation of EBSI, enforceable in accordance with its terms, subject to
laws of general application affecting creditors' rights and general principles
of equity.
(c) Capital Structure. There are 1,500 shares of common stock of EBSI
authorized (par value $1.00 per share), 277 of which are issued and outstanding.
The amounts of shares of common stock owned by EBSI's stockholders are
accurately set forth in Schedule 2(c). There are no outstanding rights,
warrants, convertible securities or other agreements requiring or contemplating
the issuance of any shares by EBSI. All of the outstanding shares of EBSI are
duly issued, fully paid and nonassessable. None of the outstanding shares of
EBSI were issued in violation of any preemptive rights of any stockholders of
EBSI.
(d) Title to and Transfer of Assets. EBSI owns the Assets beneficially and
of record, free and clear of all liens, restrictions, encumbrances, charges and
adverse claims. EBSI has the full
-2-
power, capacity and authority validly to sell, assign, transfer and deliver the
Assets to Buyer and the transfer pursuant to this Agreement will vest in Buyer
good and marketable title to the Assets, free and clear of all liens,
restrictions, encumbrances, charges and adverse claims. There are no agreements
with respect to the voting or transfer of any shares of EBSI or otherwise
relating to EBSI (other than Exhibit B to the Other Agreement).
(e) Intentionally Omitted.
(f) Undisclosed Liabilities. Except for liabilities and obligations
disclosed in the Financial Statements (as defined in the Other Agreement) or
described in Schedule 3(f) or trade accounts, payable, EBSI did not have on
September 30, 1998 any liabilities or obligations in excess of $50,000 of any
nature, whether absolute, accrued, contingent or otherwise (including, but not
limited to, liability for federal, state or local income, withholding,
unemployment, FICA, excise, property, franchise, sales, use, gross receipts or
other taxes, whether due or to become due, and liability for accumulated
vacation time, promised bonus money, unfunded pension or profit-sharing plan
liabilities or other compensation benefits).
(g) Intentionally Omitted.
(h) Conduct of Business. Except as specifically disclosed in Schedule
3(h), since September 30, 1998, EBSI has not:
(1) incurred or agreed to incur any substantial obligations or
liabilities of any nature, whether absolute, accrued, contingent or otherwise,
except current liabilities incurred in the ordinary course of business pursuant
to the business practices followed prior to September 30, 1998;
(2) borrowed, or agreed to borrow, any funds;
-3-
(3) mortgaged, pledged or subjected to lien, charge or any other
encumbrance any assets, tangible or intangible, or agreed to do so;
(4) sold or transferred, or agreed to sell or transfer, any of its
assets;
(5) suffered any adverse change in EBSI's condition (financial or
otherwise), assets, liabilities, business or prospects, or any damage from fire
(whether or not covered by insurance);
(6) entered into any transaction other than in the ordinary course of
business;
(7) made, or agreed to make, any increase in the salaries, wages or
benefits payable or to become payable, to any employee;
(8) made, or agreed to make, any accrual or arrangement for or
payment of a bonus;
(9) directly or indirectly paid or made a commitment to pay any
severance or termination pay to any officer or employee;
(10) through negotiations or otherwise, made or continued any
commitment or incurred any liability to any labor union;
(11) made or permitted any amendment or termination of any lease or
contract, agreement or license to which it is a party;
(12) introduced any new method of accounting in respect of its
business; or
(13) made any capital expenditures in excess of $50,000 or entered
into commitments therefor.
(i) Title to Certain Properties. Except for leased, furniture, fixtures
and equipment, EBSI has good and marketable title to its automobiles, trucks,
furnishings, fixtures and equipment and all
-4-
tools used in the maintenance, operation and repair of its equipment, free and
clear of all liens or encumbrances, security interests and adverse claims,
except for liens for property taxes not yet due and payable.
(j) Properties. All leasehold improvements and equipment currently used by
EBSI are in good condition, reasonable wear and tear excepted. EBSI does do not
know of any pending or threatened change of any ordinance, regulation or zoning
or other law that would, if adopted, prevent EBSI from using its leased premises
or any of its leasehold improvements and equipment, in their current condition,
in the operation of its business, and there is no pending or threatened
condemnation of any such property.
(k) Taxes. EBSI has duly and on a timely basis filed all required federal,
state and local income, withholding, unemployment, FICA, excise, property,
franchise, gross receipts, and other tax returns, and has paid all taxes due.
The provision for taxes in the Financial Statements is sufficient for the
payment of all taxes, for the periods reported therein and all periods prior
thereto. All potential liabilities for taxes are provided for in the Financial
Statements for the periods reported therein and any prior periods. The Internal
Revenue Service has not examined any federal income tax returns of EBSI. No
revenue authority has notified EBSI that it is examining any tax return filed by
EBSI. There are no outstanding waivers which would extend the period of
limitations on the assessment or collection of any tax liabilities of EBSI.
EBSI has not filed a consent under Section 341(f) of the Internal Revenue Code.
EBSI is a not "collapsible corporation," as defined in Section 341(b) of the
Internal Revenue Code. True copies of EBSI's federal, state and local income
tax returns for the three years ended on December 31, 1997 are attached as
Schedule 3(k).
-5-
(l) Contracts. Except as set forth in Schedule 3(1), EBSI is not is a
party to, and none of its assets are subject to:
(1) any employment contract or arrangement, written or oral, with any
of its officers or directors, or with any of its employees, consultants,
advisors or agents, other than arrangements terminable at will;
(2) any pension, profit-sharing, bonus, deferred compensation,
retirement, stock option, stock purchase, hospitalization insurance or other
benefit plan in effect with respect to employees or others ("Plan");
(3) any contract or arrangement restricting the freedom to compete in
any line of business, or with any individual or entity, or in any area of the
world;
(4) any contract with a labor union, or any agreement that contains
any severance or termination pay liabilities;
(5) any power of attorney in favor of any other individual or entity,
for any purpose.
(6) any joint venture contract or arrangement, or any other agreement
involving a sharing of profits;
(7) any lease of personal property;
(8) any contract providing for the purchase of equipment, materials,
supplies or other personal property or any real property;
(9) any license or franchise agreement, either as licensor or
licensee, or as franchiser or franchisee; or
-6-
(10) any other agreement or instrument creating any obligations in the
amount of $50,000 or more of EBSI after the Closing.
(m) Leases. Schedule 3(m) includes true and complete copies of all leases
for the real estate to which EBSI is a party ("Leases"). The Leases are
unmodified and in full force and effect. The tenants under the Leases have not
entered into any sublease, concession, license or other agreement relating to
the subject premises. All rent and other payments due under the Leases have
been paid.
(n) Directors, Officers and Banks. Schedule 3(n) sets forth the names of
all directors and officers of EBSI, and all banks in which EBSI has accounts or
safe deposit boxes (with the names of the persons who are authorized to draw
thereon or have access thereto).
(o) Prepayment of Indebtedness. All indebtedness of EBSI for borrowed
money may be prepaid at any time without penalty..
(p) No Breach of Law or Contract. The execution, delivery and performance
of this Agreement by EBSI do not (1) breach any statute or regulation of any
governmental authority or conflict with or result in a breach of or default
under any of the provisions of EBSI's articles of incorporation or bylaws or any
order, writ, injunction or decree to which EBSI is a party, or by which or EBSI
or its assets is or may be bound, or (2) conflict with or result in a breach of
or default under any agreement or other instrument to which EBSI is a party, or
by which EBSI or its assets are or may be bound.
(q) No Litigation or Adverse Events. Except as set forth in Schedule 3(q),
there are no investigations known to EBSI, nor any actions, suits, proceedings
or claims pending or threatened in writing against or affecting EBSI or its
properties or business, nor has any such investigation,
-7-
action, suit, proceeding or claim been pending during the twelve-month period
preceding the date of this Agreement, and EBSI does not know of any basis or
grounds for any such investigation, action, suit, proceeding or claim. EBSI is
not operating under or subject to, or in default with respect to, any order,
writ, injunction or decree of any court or federal, state, municipal or other
governmental department, commission, board, agency or instrumentality.
(r) Compliance with Laws. In connection with the conduct of its business,
EBSI has complied, in all material respects, with all applicable laws,
ordinances, rules and regulations, and EBSI has not been informed of an alleged
violation of such laws, ordinances, rules or regulations. EBSI holds, directly
or indirectly, all licenses, permits and franchises ("licenses") from
appropriate governmental authorities, which licenses are listed in Schedule
3(r), necessary to permit its business to be conducted in accordance with all
applicable requirements.
(s) Governmental Approvals. EBSI is not required to submit any notice,
report or other filing with any governmental authority, and no approval or
authorization of any governmental authority is required in connection with the
execution, delivery or performance of this Agreement or the transactions
contemplated by this Agreement.
(t) No Defaults in Contracts. EBSI is not in default in obligations under
any lease or agreement to which it is a party, and, to the knowledge of EBSI,
no event exists which, with notice or passage of time, would become such an
event of default. All such leases and agreements are in full force and effect.
(u) Intellectual Property. EBSI has the right to use, free and clear of
claims or rights of others, all trademarks and service marks which it uses in
connection with its business, all of which are listed on Schedule 3(u). EBSI
has not licensed or otherwise granted to any person or entity any
-8-
right or interest in any such trademarks or service marks. In order to conduct
its business, EBSI does not require rights under any patents. No person has
asserted or currently maintains any claim and, to EBSI's knowledge, no person
has a valid basis for claiming, that EBSI's business violates or has violated
any patent, noncompetition, confidentiality, trademark, service mark, copyright
or other right.
(v) Year 2000 Compliance. EBSI (1) has initiated a reasonable review and
assessment of all areas of its business and operations (including those affected
by suppliers and vendors) that could be adversely affected by the "Year 2000
Problem" (that is, the risk that computer applications used by EBSI, its
suppliers, third-party payors and vendors, may be unable to recognize and
perform properly date-sensitive functions involving dates subsequent to December
31, 1999), and (2) is using reasonable efforts so that its computer applications
will on a timely basis be able to perform properly date-sensitive functions for
all dates subsequent to December 31, 1999.
(w) ERISA and Employee Matters. To EBSI's knowledge, EBSI is in compliance
with the Employee Retirement Income Security Act of 1974, as amended, including
the regulations and published interpretations thereunder ("ERISA"). EBSI does
not maintain or contribute to any "pension plan" (as defined in ERISA) which is
subject to Title IV of ERISA. All employee pension benefit plans, as described
in Section 3(2) of ERISA, which are intended to constitute qualified retirement
plans under Section 401(a) of the Internal Revenue Code do in fact so qualify
under Section 401(a) of the Internal Revenue Code. No prohibited transaction,
as defined in Section 4975(c) of the Internal Revenue Code, has occurred with
respect to any employee pension benefit plan maintained by EBSI. Any Plan which
requires funding is fully funded, except for contributions,
-9-
set forth in Schedule 3(w), for the current or prior plan years for which the
contribution due date has not yet occurred.
(x) Labor Relations. There is (1) no unfair labor practice complaint
pending or threatened in writing against EBSI before the National Labor
Relations Board or other governmental or regulatory authority, and no grievance
or arbitration proceeding arising out of or under any collective bargaining
agreement is so pending or threatened in writing against EBSI and, to EBSI's
knowledge, no reasonable basis for an unfair labor practice finding against
EBSI, (2) to the knowledge of EBSI no effort by a labor union to become
recognized as the collective bargaining agent of EBSI's employees and (3) no
labor trouble (for example, strikes, labor stoppages or other acts involving
groups of employees) involving EBSI known to EBSI, nor any dispute, grievance,
controversy or strike pending against EBSI.
(y) Insurance. EBSI maintains the insurance described on the attached
Schedule 3(y) and such insurance is in full force and effect.
(z) Guaranties. EBSI is not a guarantor or otherwise liable for any
obligation to any other individual or entity, except in connection with
endorsement of checks and other instruments in the ordinary course of business.
(aa) Books and Records. The books of account and other financial records
of EBSI are true, complete and correct, and accurately reflect the assets and
liabilities of EBSI. The minute books and other records of EBSI contain
accurate records of all meetings and accurately reflect all material actions of
the shareholders and directors and any committees of the Board of Directors of
EBSI.
-10-
(bb) Disclosure. No representation or warranty of EBSI in this Agreement,
or any written information, statement or certificate furnished by or on behalf
of EBSI to Buyer pursuant to this Agreement or in connection with the
transactions contemplated hereby, contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein not misleading. All copies of contracts and other documents
delivered by EBSI in connection with the transactions contemplated hereby are
complete and accurate, and have not been amended or modified by any oral
agreements.
(cc) Brokers' Fees. No broker or finder has, as a representative of EBSI,
been employed by EBSI in connection with this Agreement or the transactions
contemplated by this Agreement.
Section 4. Buyer's Representations and Warranties
Buyer represents and warrants to EBSI as follows:
(a) Corporate. Buyer is a corporation duly organized, validly existing and
in good standing under the laws of the District of Columbia and has the power to
own all of its assets and to carry on its business as presently conducted and
has all requisite corporate power and authority to execute, deliver and perform
its obligations under this Agreement.
(b) Validity of Agreement. This Agreement constitutes the valid and
binding obligation of Buyer, enforceable in accordance with its terms, subject
to laws of general application affecting creditors' rights and general
principles of equity.
(c) No Breach of Law or Contract. The execution, delivery and performance
of this Agreement by Buyer do not breach any statute, law, or regulation of any
governmental authority or conflict with or result in a breach of or default
under any of the provisions of Buyer's certificate of incorporation or bylaws or
any order, writ, injunction or decree, or any contract, agreement,
-11-
instrument or other document to which Buyer is a party or by which it or its
property is otherwise bound.
(d) Brokers' Fees. Except for Sandler, O'Neill & Partners, L.P., no broker
or finder has, as a representative of Buyer, been employed by Buyer in
connection with this Agreement or the transactions contemplated by this
Agreement.
(e) Authority. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein by Buyer have been
duly authorized by all necessary corporate action.
(f) Approvals. Buyer has obtained all regulatory and other approvals, if
any, needed to consummate the transactions contemplated in this Agreement.
(g) Transfer of Assets. At the Closing, Buyer shall cause all of the
Assets to be transferred to HealthCare Consulting, Inc.
Section 5. Additional Obligations of EBSI
At or before the Closing, EBSI shall cause or accomplish the following:
(a) Conduct of Business. EBSI shall conduct its business only in the
ordinary course and to enter into no contract or other transaction other than in
the ordinary course, without the prior written consent of Buyer, which shall not
be unreasonably withheld or delayed. EBSI shall not enter into any material
contract without in all such cases the prior written consent of Buyer, which
shall not be unreasonably withheld or delayed.
(b) Mergers, etc. Without Buyer's prior written consent, EBSI will not
merge or consolidate with any other entity, sell or lease a substantial portion
of its assets, acquire all or
-12-
substantially all of the stock or business or assets of any other individual or
entity, liquidate, dissolve or agree to do any of the foregoing.
(c) Conditions Precedent. EBSI shall use reasonable efforts to take all
actions necessary to satisfy prior to or at the Closing all of the conditions to
the obligations of Buyer set forth in Section 7.
(d) Access. Between the date of this Agreement and the Closing, EBSI shall
afford to Buyer and its representatives full access, during reasonable business
hours, to all assets, properties, books, records, leases, agreements and
commitments of EBSI and furnish representatives of Buyer during such period with
all information concerning their affairs and their value, as Buyer may
reasonably request.
(e) Amendment of Governing Instruments. Without Buyer's prior written
consent, EBSI shall not amend its articles of incorporation or bylaws.
(f) Indebtedness. EBSI shall have no indebtedness for money borrowed on
the date of the Closing; provided that this prohibition shall not apply to trade
accounts payable incurred in the ordinary course of business.
Section 6. Additional Obligations of Buyer
At or before the Closing, Buyer shall accomplish the following:
(a) Conditions Precedent. Buyer shall use reasonable efforts to take all
actions necessary to satisfy prior to or at the Closing all of the conditions to
the obligations of EBSI set forth in Section 8.
Section 7. Conditions to Buyer's Obligation to Close
-13-
The obligation of Buyer to close hereunder shall be subject to the
satisfaction of the following conditions prior to or at the Closing, unless
waived by Buyer:
(a) Representations and Warranties True at Closing. The representations
and warranties made by EBSI in this Agreement (and every statement delivered by
EBSI in connection herewith) shall be true in all material respects on and as of
the Closing with the same effect as though such representations and warranties
(and statements) had been made or given on and as of the Closing, and the
stockholders of EBSI shall have executed and delivered to Buyer a certificate,
dated the date of the Closing, to the foregoing effect.
(b) Compliance with Agreement. EBSI shall have performed and complied with
all of its obligations under this Agreement which are to be performed or
complied with by it prior to or at the Closing, and the stockholders of EBSI
shall have executed and delivered to Buyer a certificate, dated the date of the
Closing, to the foregoing effect.
(c) Instruments. Buyer shall have received bills of sale, assignments and
other instruments of transfer, in form satisfactory to Buyer.
(d) Books and Records. Buyer shall have received unlimited access to all
of EBSI's records, books, papers, leases and agreements, including without
limitation accounting books and records, minute books, stock certificate books,
stock ledgers, articles of incorporation, bylaws and a list of all employees of
EBSI and their current compensation levels.
(e) Opinion of Counsel. Buyer shall have received from Mezzullo &
McCandlish, a Professional Corporation, counsel for EBSI, an opinion dated the
date of the Closing, addressed to Buyer, the form of which is attached as
Exhibit A.
-14-
(f) Material Adverse Change. Since September 30, 1998, EBSI shall not have
suffered a material adverse change in its condition (financial or otherwise),
assets, liabilities, business or prospects.
(g) Inter-Company Loans. On the date of the Closing, there shall be no
indebtedness or obligation of EBSI to its stockholders and entities they own or
control and no indebtedness or obligation of such stockholders and entities to
EBSI.
(h) HCI and HCIV. The closing under this Agreement shall take place
simultaneously with the closing under the Other Agreement.
(i) Litigation Affecting Closing. No judicial or governmental order or
decree shall have been issued or entered which would be violated by the
consummation of the transactions contemplated in this Agreement.
Section 8. Conditions to EBSI's Obligation to Close
The obligation of EBSI to close hereunder shall be subject to the
satisfaction of the following conditions prior to or at the Closing, unless
waived by EBSI:
(a) Representations and Warranties True at Closing. The representations
and warranties made by Buyer in this Agreement shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made or given on and as of the Closing,
and an officer of Buyer shall have executed and delivered to EBSI a certificate,
dated the date of the Closing, to the foregoing effect.
(b) Compliance with Agreement. Buyer shall have performed and complied
with all its obligations under this Agreement which are to be performed or
complied with by it prior to or at the
-15-
Closing, and an officer of Buyer shall have executed and delivered to EBSI a
certificate, dated the date of the Closing, to the foregoing effect.
(c) Opinion of Counsel. EBSI shall have received from Arent Fox Kintner
Plotkin & Kahn, PLLC, counsel for Buyer, an opinion dated the date of the
Closing, addressed to EBSI, the form of which is attached as Exhibit C.
(d) Litigation Affecting Closing. No judicial or government order or
decree shall have been issued or entered which would be violated by the
consummation of the transactions contemplated in this Agreement.
Section 9. Closing and Post-Closing Obligations
(a) Closing. The Closing shall be held at 11:00 a.m. at the offices of
Arent Fox Kintner Plotkin & Kahn, PLLC, 1050 Connecticut Avenue, N.W.,
Washington, D.C. 20036-5339, on January 4, 1999, or at such other place, date,
or time as may be fixed by mutual agreement of the parties (the "Closing Date").
(b) Further Assurances. After the Closing, EBSI, at the request of Buyer,
shall furnish, execute and deliver such documents, instruments, certificates,
notices or other assurances as Buyer shall reasonably request as necessary or
desirable to effect complete consummation of this Agreement. EBSI shall pay all
expenses incurred by it in connection with such actions.
(c) Dissolution. As soon as practicable after the Closing, EBSI shall be
dissolved and liquidated.
Section 10. Survival of Representations and Warranties; Indemnification
(a) Survival. Notwithstanding any investigation conducted by any party,
the representations and warranties made in Sections 3 and 4 of this Agreement
shall survive until the
-16-
second anniversary of the Closing Date, except that the representations and
warranties made under Section 3(k) shall survive without time limitation. All
covenants which by their nature are to be performed after the Closing Date shall
survive the Closing.
(b) Indemnification of Buyer. (1) EBSI agrees to indemnify and hold
harmless Buyer against and in respect of (i) any Loss (defined below) resulting
from any misrepresentation, breach of warranty or nonfulfillment of any covenant
or agreement on the part of EBSI under this Agreement or from any
misrepresentation or omission in any document delivered to Buyer in connection
with this Agreement, and (ii) any Loss resulting from the matters described in
Schedule 3(q). The term "Loss" means any loss damage, claim, cost and expense,
of any nature whatsoever (including without limitation reasonable attorneys'
fees) incurred by EBSI or Buyer and the costs of all actions, suits,
proceedings, demands, assessments, judgments and expenses (including reasonable
attorneys' fees) incident thereto.
(2) Notwithstanding any other provisions of this Agreement, Buyer shall not
be entitled to make any claim against EBSI for any Loss arising in connection
with any alleged misrepresentation or breach of warranty unless notice of such
claim shall have been given to EBSI in accordance with Section 12(g) below on or
prior to the survivability expiration date for a given representation or
warranty as set forth in Section 10(a) above.
(3) Notwithstanding any other provision of this Agreement, EBSI shall not
be liable to indemnify Buyer for claims as to losses until the aggregate amount
of such Losses exceeds $37,500 (the "Indemnification Threshold"), except for
claims based on Sections 3(k) and 3(q) for which there shall be no requirement
that the Indemnification Threshold be met. Once Buyer has incurred Losses
-17-
totaling the amount of the Indemnification Threshold, EBSI shall be liable to
indemnify Buyer only for the amount of Losses in excess of the Indemnification
Threshold.
(4) Notwithstanding any other provision of this Agreement, the aggregate
indemnification liability for EBSI under this Section 10 shall not exceed
$1,500,000 .
(5) No indemnification shall be required under this Section 10 with respect
to any Loss (i) to the extent any such Loss is reimbursed to Buyer by insurance
or any third-party, or (ii) to the extent of any net tax savings (taking into
account the tax affect of any indemnification payment received by Buyer)
realized by Buyer with respect thereto.
(c) Indemnification of EBSI. Buyer agrees to indemnify and hold harmless
EBSI against and in respect of (1) any loss, damage, claim, cost and expense of
any nature whatsoever (including, without limitation, reasonable attorneys'
fees) resulting from any misrepresentation, breach of warranty or nonfulfillment
of any covenant or agreement on the part of Buyer under this Agreement, and (2)
all actions, suits, proceedings, demands, assessments, judgments, costs and
expenses (including reasonable attorneys' fees) incident to the foregoing.
Section 11. Arbitration
(a) In the event the parties are unable to resolve a controversy under this
Agreement, the parties agree to submit the matter to binding arbitration under
the rules of the American Arbitration Association, but not using the American
Arbitration Association, unless the parties mutually agree to do so. One arbiter
shall be chosen by Buyer and one by EBSI before commencement of arbitration. The
two arbiters shall choose a third arbiter. The decision of the first two
arbiters shall be final and binding upon both parties; however, if those
arbiters fail to agree, the third arbiter shall participate and the decision of
the majority shall be final and binding. The parties expressly
-18-
covenant and agree to be bound by the decisions of the arbiters and accept any
decision by a majority of the arbiters as a final determination of the matter in
dispute. In connection with the foregoing, the parties hereby waive any right to
an appeal or to commence any de novo action with respect to the final
determination. All arbiters chosen pursuant to this Section 11(a) shall have
substantial experience in the healthcare field and shall have demonstrated
knowledge concerning the types of issues involved.
(b) Each party shall bear its own expenses, including legal, accounting and
expert fees in connection with the arbitration except that Buyer and EBSI shall
each pay 50% of the expenses of the arbiters.
(c) Any such arbitration shall take place in Washington, D.C., unless some
other location is mutually agreed upon by the parties
.
Section 12. Miscellaneous
(a) Governing Law. This Agreement shall be governed by the substantive
laws of the District of Columbia without regard to the conflicts of law
provisions thereof..
(b) Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter hereof.
(c) Amendment. This Agreement may be amended only in a writing signed by
all of the parties.
(d) Waiver. No waiver shall be effective against a party unless it is in
writing signed by that party.
-19-
(e) Counterparts. This 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.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto, their heirs and successors and permitted
assigns. Neither this Agreement nor any of the parties' rights hereunder shall
be assignable by any party hereto without the prior written consent of the other
parties hereto; provided that, prior to the Closing, this Agreement may be
assigned by Buyer to NCRIC MSO, Inc., a Delaware corporation, in Buyer's sole
discretion and without the consent of EBSI. If Buyer assigns this Agreement to
NCRIC MSO, Inc., Buyer shall remain liable for its obligations under this
Agreement and the representations and warranties under Section 4 above shall be
deemed to have been made by both Buyer and NCRIC MSO, Inc. with respect to each
of such companies.
(g) Notices. Any notice or other communication required or permitted to be
given hereunder shall be deemed to have been properly given if mailed by
certified mail, postage prepaid, addressed as follows (or to such other
addresses as the parties may specify by due notice to the others):
Buyer: NCRIC GROUP, INC.
1115 30th Street, N.W.
Washington, D.C. 20007
Attn: R. Ray Pate, Jr.
EBSI: Employee Benefit Services, Inc.
1928 Thompson Drive
Lynchburg, VA 24501-1068
-20-
(h) Expenses. Each party shall bear his or its own expenses in connection
with this Agreement and the transactions contemplated by this Agreement;
provided that EBSI shall bear one-half of the cost of the audit of EBSI, as of
June 30, 1998, performed by Deloitte & Touche LLP and the other half shall be
borne by Buyer.
(i) Headings. The headings in this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
(j) Separability. The invalidity or un enforceability of any provision of
this Agreement shall not impair the validity or enforceability of any other
provision.
Section 13. Default
(a) If, for any reason, other than the termination of this Agreement
pursuant to Section 14(a) below or the failure of EBSI to comply with its
obligations under this Agreement, Buyer shall fail or refuse to purchase the
Assets or to consummate the transactions described in this Agreement, when
obligated to do so under this Agreement, prior to or on the Closing Date, such
failure or refusal shall constitute a default by Buyer under this Agreement, and
without limiting any right of Sellers to pursue any and all available remedies
for such default, Buyer shall pay to Seller the total sum of $75,000 in
compensation for the time and transactional fees and expenses incurred.
(b) If, for any reason, other than the termination of this Agreement,
pursuant to Section 14(a) below, or the failure of Buyer to comply with its
obligations under this Agreement, EBSI shall fail or refuse to sell the Assets
or to consummate the transactions described in this Agreement, when obligated to
do so under this Agreement, prior to or on the Closing Date, such failure or
refusal shall constitute a default by EBSI under this Agreement, and without
limiting any rights of Buyer to
-21-
pursue any and all available remedies for such default, EBSI shall pay to Buyer
the sum of $75,000 in compensation for the time and transactional fees and
expenses incurred.
Section 14. Termination . This Agreement may be terminated only:
(a) By consent of both parties at any time prior to the Closing Date;
(b) By either Buyer or EBSI if the Closing has not occurred by January 31,
1999 for a reason other than the failure of the terminating party to comply with
its obligations under this Agreement.
Termination pursuant to this Section 14 shall be effective by written
notice. Upon receipt of notice of termination pursuant to this Section 14, this
Agreement shall become void except as stated below and the parties shall have no
liability for any such termination, except for any payment required under
Section 13. The rights to terminate set forth in this Section 14 shall not
affect the right of any party to this Agreement to pursue any and all available
remedies for any default under this Agreement.
-22-
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
NCRIC GROUP, INC.
By: /s/ R. Ray Pate, Jr.
-------------------------------
R. Ray Pate, Jr., President
EMPLOYEE BENEFIT SERVICES, INC.
By: /s/ L.E. Shepherd, Jr.
-------------------------------
L.E. Shepherd, Jr.
By: /s/ William A. Hunter, Jr.
-------------------------------
William A. Hunter, Jr.
By: /s/ B.S. Pillow
-------------------------------
Barry S. Pillow
-23-
EXHIBIT A
OPINION OF EBSI'S COUNSEL
1. EBSI is a corporation duly organized, validly existing and in good
standing under the laws of Virginia, with corporate power to own all of its
assets and to carry on its business as presently conducted.
2. EBSI is duly qualified to do business as a foreign corporation in
every jurisdiction where such qualification is required for the conduct of
EBSI's business as presently being conducted, except where the failure to so
qualify does not materially affect EBSI.
3. Counsel has not received any written notice from any governmental
authority that EBSI is in violation of any applicable law in the conduct of its
business.
4. To counsel's knowledge, there is no action, suit, proceeding, claim or
investigation pending or threatened against or affecting EBSI or its properties
or business.
5. EBSI has the authority to execute and deliver the Agreement and to
perform the transactions contemplated by the Agreement. The Agreement and the
instruments delivered by EBSI pursuant thereto are the legal, valid and binding
obligations of EBSI, enforceable against EBSI in accordance with their terms,
subject to general principles of equity and laws of bankruptcy and insolvency
and similar laws relating to creditors' rights generally.
6. The execution, delivery and performance of the Agreement by EBSI, and
the consummation of the transactions contemplated by the Agreement, do not (a)
breach any statute, law or regulation of any governmental authority or conflict
with or result in a breach of or default under EBSI's articles of incorporation
or bylaws or, to counsel's knowledge, any order, writ, injunction or decree to
which EBSI is a party, or by which EBSI or its assets are bound, or (b) to
counsel's knowledge, conflict with or result in a breach or default under any
agreement or other instrument to which EBSI is a party, or by which EBSI or its
assets are bound.
EXHIBIT B
OPINION OF BUYER'S COUNSEL
(a) Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the District of Columbia, has the power to own all of
its assets and to carry on its business as presently conducted and has all
requisite corporate power and authority to execute, deliver and perform its
obligations under the Agreement.
(b) The Agreement constitutes the valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, subject to general
principles of equity and laws of bankruptcy and insolvency and similar laws
relating to creditors' rights generally.
(c) The execution, delivery and performance of the Agreement by Buyer do
not breach any statute, law or regulation of any governmental authority or
conflict with or result in a breach of or default under any of the provisions of
Buyer's or NCRIC MSO Inc.'s articles of incorporation or bylaws or, to counsel's
knowledge, any order, writ, injunction or decree or any agreement or other
instrument to which Buyer or NCRIC MSO, Inc. is a party or by which they or
their property is bound.
(d) The execution, delivery and performance of the Agreement and the
consummation of the transactions contemplated therein by Buyer or NCRIC MSO,
Inc. have been duly authorized by all necessary corporate action.
(e) Buyer has obtained all regulatory approvals, if any, needed to
consummate the transactions contemplated in the Agreement.
EXHIBIT 10.3
NCRIC GROUP, INC.
STOCK OPTION PLAN
1. Purpose
This Stock Option Plan (the "Plan") for NCRIC Group, Inc., a District of
Columbia stock holding corporation (the "Company"), and its parents and
subsidiaries is intended to provide incentive (i) to persons who are designated
by the Board as key employees of the Company, its parents and its subsidiaries
(collectively "Key Employees") and (ii) to members of the Board and the boards
of directors of the Company's parents and subsidiaries by providing those
persons with opportunities to purchase shares of the Company's Common Stock
under (a) incentive stock options ("Incentive Stock Options") as such term is
defined under Section 422 of the Internal Revenue Code of 1986, as amended, and
(b) other stock options.
2. Definitions
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Board" shall mean the Company's board of directors.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Compensation Committee.
(d) "Common Stock" shall mean the common stock of the Company.
(e) "Fair Market Value" per share as of a particular date shall mean (i)
the closing sales price per share of Common Stock on the principal national
securities exchange, if any, on which the shares of Common Stock shall then be
listed for the last preceding date on which there was a sale of such Common
Stock on such exchange, or (ii) if the shares of Common Stock are not then
listed on a national securities exchange, the last sales price per share of
Common Stock entered on a national inter-dealer quotation system for the last
preceding date on which there was a sale of such Common Stock on such national
inter-dealer quotation system, or (iii) if no closing or last sales price per
share of Common Stock is entered on a national inter-dealer quotation system,
the average of the closing bid and asked prices for the shares of Common Stock
in the over-the-counter market for the last preceding date on which there was a
quotation for such Common Stock in such market, or (iv) if no price can be
determined under the preceding alternatives, then the price per share as most
recently determined by the Board, which shall make such determinations of value
at least once annually.
(f) "Incentive Stock Option" means one or more Options to purchase Common
Stock which, at the time such Options are granted under this Plan or any other
such plan of the Company, qualify as incentive stock options under Section 422
of the Code.
(g) "Key Employees" shall mean all full-time employees of the Company, its
parents and its subsidiaries who are designated as key employees by the Board.
(h) "Plan" shall mean this Stock Option Plan established by the Company.
(i) "Option" shall mean any option issued under this Plan.
(j) "Optionee" shall mean any person to whom an Option is granted under
this Plan.
(k) "Ten Percent Shareholder" shall mean an Optionee who, at the time an
Option is granted, owns directly or indirectly (within the meaning of Section
425(d) of the Code) stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company or a subsidiary thereof.
(l) "Termination of Employment" shall mean termination of employment with
the Company and all of its parents and its subsidiaries or, in the case of a
director, the cessation of such director's position on the Board and the boards
of directors of the Company's parents and subsidiaries. The Committee may in
its discretion determine whether any leave of absence constitutes a Termination
of Employment for purposes of this Plan and the impact, if any, of any such
leave of absence on Options made under this Plan. The Committee shall have the
right to determine whether the termination of an Optionee's employment is a
dismissal for cause and the date of termination in such case, which date the
Committee may retroactively deem to be the date of the action that is cause for
dismissal. Such determinations of the Committee shall be final, binding and
conclusive.
3. General Administration
(a) Subject to the provisions of (b) below, this Plan shall be
administered by the Committee.
(b) The Committee shall have the authority (i) to exercise all of the
powers granted to it under this Plan, (ii) to construe, interpret and implement
this Plan and any Option Agreements executed pursuant to Section 7 below, (iii)
to prescribe, amend and rescind rules and regulations relating to this Plan,
including rules governing the Committee's own operations, (iv) to make all
determinations necessary or advisable in administering this Plan, (v) to correct
any defect, supply any omission and reconcile any inconsistency in this Plan,
and (vi) to amend this Plan to reflect changes in applicable law. The Committee
shall make recommendations to the Board regarding the issuance of Options
hereunder and the terms thereof. The Board shall review the recommendations of
the Committee and, after making any modifications, deletions or additions it
deems appropriate in its sole discretion, shall approve, by a simple majority
vote, any Options which the Board
-2-
determines to be issued pursuant to this Plan. The Board, acting through a
simple majority, retains the exclusive power to issue Options hereunder.
(c) Actions of the Committee shall be taken by the affirmative vote of a
majority of the Committee members. Any action may be taken by an instrument
signed by a majority of the Committee members, including counterpart signatures,
and action so taken shall be fully as effective as if such action had been taken
by a vote at a Committee meeting.
(d) The determination of the Committee on all matters relating to this Plan
or any Option Agreement shall be final, binding and conclusive.
(e) No Committee member shall be liable for any action or determination
made in good faith with respect to this Plan, including any Option.
4. Granting of Options
Options may be granted under this Plan at any time prior to _____________,
2009.
5. Eligibility
(a) Options may be made to such Key Employees and members of the Board
and the boards of directors of the Company's parents and subsidiaries as the
Board shall in its sole discretion select.
(b) At the time of the grant of each Option, the Board shall determine
whether such Option is to be designated an Incentive Stock Option or a non-
incentive Option. The length of the exercise period of Incentive Stock Options
shall be governed by Section 7(d)(2) below; the exercise period of all other
Options will be governed by Section 7(d)(3) below.
(c) An Option designated an Incentive Stock Option can, prior to its
exercise, be changed to a non-incentive Option if the Optionee consents to amend
his Option Agreement to provide that the exercise period of such Option will be
governed by Section 7(d)(3) below.
6. Common Stock
(a) The stock subject to the Options shall be Common Stock.
(b) The total number of shares of Common Stock with respect to which
Options may be granted shall not exceed ________________. Common Stock issued
pursuant to this Plan may be authorized but unissued Common Stock or authorized
and issued Common Stock held in the Company's treasury or acquired by the
Company for the purposes of this Plan. The Committee may direct that any
certificate evidencing Common Stock pursuant to this Plan shall bear a legend
setting forth such restrictions on transferability as may apply to such shares.
-3-
(c) If there is any change in the number of outstanding shares of Common
Stock by reason of a stock dividend or distribution, stock split-up, reverse
stock split, recapitalization, combination or exchange of shares, or by reason
of any merger, consolidation, spinoff or other corporate reorganization in which
the Company is the surviving corporation, the number of shares of Common Stock
available for issuance both in the aggregate and with respect to each
outstanding Option, and the purchase price per share under each outstanding
Option, shall be equitably adjusted by the Committee, whose determination shall
be final, binding and conclusive. In the event of any merger, consolidation or
combination of the Company with or into another corporation (other than a
merger, consolidation or combination in which the Company is the surviving
corporation and which does not result in any reclassification or other change in
the number of outstanding shares of Common Stock), each Optionee shall have the
right thereafter and during the term of each such Option to receive upon
exercise (subject to the provisions of the Option Agreement) of such Option, for
each share of Common Stock as to which the Option shall be exercised, the kind
and amount of shares of the surviving or new corporation, cash, securities,
evidence of indebtedness, other property or any combination thereof which would
have been received upon such merger, consolidation or combination by the holder
of one share of Common Stock immediately prior to such merger, consolidation or
combination.
(d) If any outstanding Option for any reason expires or is terminated
without having been exercised in full, the Common Stock allocable to the
unexercised portion of such Option shall (unless this Plan shall have been
terminated) become available for subsequent grants of Options.
7. Terms and Conditions of Options
Each Option granted shall be evidenced by an Option Agreement in such form
as the Committee may from time to time approve. By accepting an Option, an
Optionee thereby agrees that the Option shall be subject to the provisions of
the applicable Option Agreement. Options shall comply with and be subject to
the following terms and conditions:
(a) Option Price. Each Option shall state the Option Price, which for
Options that are Incentive Stock Options shall be not less than 100% of the Fair
Market Value of the shares of Common Stock on the date of grant of the Option;
provided, however, that in the case of an Incentive Stock Option granted to a
Ten Percent Shareholder, the Option Price shall not be less than 110% of such
Fair Market Value. The Option Price for Options that are not Incentive Stock
Options shall not be less than 100% of the Fair Market Value of the shares of
Common Stock on the date of grant of the Option. The date on which the Board
adopts a resolution expressly granting an Option shall be considered the day on
which such Option is granted.
(b) Value of Common Stock. Options may be granted to any Optionee for
Common Stock of any value, provided that the aggregate Fair Market Value
(determined at the time the Option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for
-4-
the first time by the Optionee during any calendar year (under all the plans of
the Company and its subsidiaries) shall not exceed $100,000.
(c) Medium and Time of Payment. The Option Price shall be paid in full, at
the time of exercise, in cash or, with the Committee's approval, in Common Stock
held by the Optionee for at least six months having a Fair Market Value in the
aggregate equal to such Option Price or in a combination of cash and such
shares.
(d) Term and Exercise of Options.
(1) Unless the applicable Option Agreement otherwise provides, each
Option shall become vested and first exercisable in the following
installments:
Number of Years Elapsed Percentage First
From Date of Grant Exercisable During Year
-------------------------- -----------------------
Less than one year 0%
One year 33 1/3%
Two years 33 1/3%
Three years 33 1/3%
(2) Incentive Stock Options shall be exercisable over the exercise
period specified in the Option Agreement, but in no event shall such period
exceed ten years from the date of the grant of each such Incentive Stock
Option; provided, however, that in the case of an Incentive Stock Option
granted to a Ten Percent Shareholder, the exercise period shall not exceed
five years from the date of grant of such Option. The exercise period
shall be subject to earlier termination as provided in Section 7(e) below.
An Incentive Stock Option may be exercised, as to any or all full shares of
Common Stock as to which the Incentive Stock Option has become exercisable,
by giving written notice of such exercise to the Committee.
(3) Options which have not been designated as Incentive Stock Options
shall be exercisable over a period of up to ten years.
(e) Termination of Employment; Death.
(1) If an Optionee's employment terminates or if a director=s status
terminates, in either case, for any reason other than dismissal for cause
or voluntary termination, as determined in the Committee's sole discretion,
any outstanding Option shall be exercisable on the following terms: (i)
exercise may be made only to the extent that the Optionee was entitled to
exercise the Option on the effective date of the employment termination or
cessation of service as a director, as the case may be; and (ii) exercise
must occur prior to the earlier of (x) 5:00 p.m. (Eastern Time) on the 90th
day after employment or status as a director terminates or, in respect of
death or disability, on the 180th day thereafter, and (y)
-5-
the expiration date of the Option. Any such exercise of an Option following
an Optionee's death or adjudication of mental incapacity shall be made only
by the Optionee's executor or administrator or other duly appointed
representative, as the case may be, reasonably acceptable to the Committee,
unless the Optionee's will specifically disposes of such Option, in which
case such exercise shall be made only by the recipient of such specific
disposition. If an Optionee's legal representative or the recipient of a
specific disposition under the Optionee's will is entitled to exercise any
Option pursuant to the preceding sentence, such representative or recipient
shall be bound by the provisions of this Plan and the applicable Option
Agreement which would have applied to the Optionee.
(2) Except to the extent otherwise provided in paragraphs (1) and (3)
of this Section 7(e) or in the applicable Option Agreement, any portion of
an Option not theretofore exercised shall terminate upon the Optionee's
Termination of Employment for any reason or without reason (including
death).
(3) The Committee may, in the applicable Option Agreement, waive or
modify the application of any of the foregoing provisions of this Section
7, even though such waiver or modification may cause the Options granted
under such Option Agreement to fail to qualify as Incentive Stock Options.
(f) Nontransferability of Options. Unless otherwise provided by the Board,
Options shall not be transferable other than by will or by the laws of descent
and distribution, and Options may be exercised, during the lifetime of the
Optionee, only by the Optionee or the Optionee's legal representative.
(g) Rights as a Shareholder. An Optionee or a transferee of an Option
shall have no rights as a shareholder with respect to any Common Stock covered
by his Option until the date of the issuance of a stock certificate to him for
such shares. No adjustments shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 6(c) above.
(h) Other Provisions. The Option Agreements authorized under this Plan
shall contain such other provisions, including the imposition of restrictions
upon the exercise of an Option, as the Committee shall deem advisable, including
provisions with respect to compliance with federal and applicable state
securities laws.
8. Agreement by Optionee Regarding Withholding Taxes
No later than the date of exercise of any Option, the Optionee will pay to
the Company or make arrangements satisfactory to the Committee regarding payment
of any federal, state or local taxes of any kind required by law to be withheld
upon the exercise of such Option. The Optionee
-6-
may, with the Committee's prior approval, make such payment in whole or in part
by surrendering Common Stock to the Company, valued at its Fair Market Value on
the date of surrender.
9. Term of Plan
Options may be granted from time to time within a period of 10 years from
the date on which this Plan is adopted by the Board, provided that no Options
granted shall become exercisable unless and until this Plan shall have been duly
approved by the holder of a majority of the Common Stock.
10. Restrictions
(a) If the Committee shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any Option, the issuance or purchase of Common
Stock or other rights thereunder, or the taking of any other action thereunder
(each such action being hereinafter referred to as a "Plan Action"), then such
Plan Action shall not be taken, in whole or in part, unless and until such
Consent shall have been effected or obtained to the Committee's full
satisfaction.
(b) The term "Consent" as used herein with respect to any Plan Action means
(i) any and all listings, registrations or qualifications in respect thereof
upon any inter-dealer quotation system of a registered national securities
association or any national securities exchange or under any federal, state or
local law, rule or regulation, (ii) any and all written agreements and
representations by the Optionee with respect to the disposition of Common Stock,
or with respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification, or to obtain an exemption from the requirement that any such
listing, qualification or registration be made, and (iii) any and all consents,
clearances and approvals in respect of a Plan Action by any governmental or
other regulatory bodies.
(c) In furtherance of the foregoing, at the time of any exercise of an
Option, the Committee may, if it shall determine it necessary or desirable for
any reason, require the Optionee as a condition to the exercise thereof, to
deliver to the Committee a written representation of the Optionee's present
intention to purchase the Common Stock for investment and not for distribution.
If such representation is required to be delivered, an appropriate legend may be
placed upon each certificate delivered to the Optionee upon his exercise of part
or all of an Option and a stop transfer order may be placed with the transfer
agent. Each such Option shall also be subject to the requirement that, if at
any time the Committee determines, in its discretion, that either (i) the
listing, registration or qualification of Common Stock subject to an Option upon
any securities exchange or inter-dealer quotation system or under any state,
federal or foreign law, or (ii) the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in connection
with, the issue or purchase of Common Stock thereunder, the Option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Committee. The Committee shall not have the power to
require or oblige the Company to register any Common Stock
-7-
subject to an Option and any requirement imposed by the Committee relating to
the registration of Common Stock shall not bind the Company to cause the
registration of such Common Stock.
11. Savings Clause
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422 of the Code. If this Plan or any provision of this Plan shall be
held to be invalid or to fail to meet the requirements of Section 422 of the
Code or the regulations promulgated thereunder, such invalidity or failure shall
not affect the remaining parts of this Plan, but rather it shall be construed
and enforced as if this Plan or the affected provision thereof, as the case may
be, complied in all respects with the requirements of Section 422 of the Code.
12. Nature of Payments
(a) All Options granted shall be in consideration of services performed for
the Company by the Optionee.
(b) All Options granted shall constitute a special incentive payment to the
Optionee and shall not be taken into account in computing the amount of salary
or compensation of the Optionee for the purpose of determining any benefits
under any pension, retirement, profit-sharing, bonus, life insurance or other
benefit plan of the Company or under any agreement between the Company and the
Optionee, unless such plan or agreement specifically otherwise provides.
13. Non-Uniform Determinations
The determinations of the Committee and the Board under this Plan need not
be uniform and may be made selectively among persons who receive, or are
eligible to receive, Options (whether or not such persons are similarly
situated).
14. Other Payments or Options
Nothing contained in this Plan shall be deemed in any way to limit or
restrict the Company from making any option to purchase Common Stock or payment
to any person under any other plan, arrangement or understanding, whether now
existing or hereafter in effect.
15. Section Headings
The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of said sections.
-8-
16. Amendment and Termination
(a) The Board may from time to time suspend, discontinue, revise or amend
this Plan in any respect whatsoever, provided that any amendment that would
materially increase the aggregate number of shares of Common Stock as to which
Options may be granted, materially increase the benefits accruing to
participants under this Plan, or materially modify the requirements as to
eligibility for participation in this Plan shall be subject to the approval of
the holders of a majority of the outstanding Common Stock voting at a meeting of
shareholders at which a quorum is present. In addition, no such amendment shall
materially impair any rights or materially increase any obligations under any
outstanding Option without the consent of the Optionee (or, upon the Optionee's
death or adjudication of mental incapacity, the person having the right to
exercise the Option).
(b) The Board may cancel any outstanding Option and issue a new Option in
substitution therefor. The Board may amend any outstanding Option Agreement,
including any amendment which would: (i) accelerate the time or times at which
the Option becomes unrestricted or may be exercised; (ii) waive or amend any
goals, restrictions or conditions set forth in the Option Agreement; or (iii)
waive or amend the operation of Section 7(e) above with respect to the
termination of the Option upon Termination of Employment. However, any such
cancellation or amendment that materially impairs the rights or materially
increases the obligations of an Optionee under an outstanding Option shall be
made only with the consent of the Optionee (or, upon the Optionee's death or
mental incapacity, the person having the right to exercise the Option).
Adopted by the Board on January 12, 1999, subject to the approval of the
Company's shareholder.
1.32. "Year of Service".................................................... 9
ARTICLE II
ELIGIBILITY................................................................. 9
ARTICLE III
CONTRIBUTIONS............................................................... 10
3.01. Company Contributions................................................ 10
3.02. Form of Company Contributions........................................ 10
3.03 Employee Contributions............................................... 11
ARTICLE IV
ACCOUNTS AND ALLOCATIONS.................................................... 11
4.01. Separate Accounts for Participants................................... 11
4.02. Allocations and Annual Adjustments to Participants' Accounts......... 11
4.03. Elections Regarding Cash Dividends on Common Stock................... 12
4.04. Voting of Company Common Stock....................................... 13
4.05. Diversification Option............................................... 14
4.06. Benefit Limitations.................................................. 15
ARTICLE V
BENEFITS.................................................................... 20
5.01. Retirement Benefits.................................................. 20
5.02. Disability Benefits.................................................. 20
5.03. Death Benefits....................................................... 20
5.04. Benefits Upon Severance from Service................................. 21
5.05. Form of Distributions................................................ 25
5.06. Timing of Distributions.............................................. 27
5.07. Limitations on Distributions......................................... 29
5.08. Amendments to Vesting Provisions of Plan............................. 30
ARTICLE VI
THE TRUST FUND.............................................................. 35
6.01. Contributions Held in Trust.......................................... 35
6.02. No Guarantee of Security Values...................................... 36
6.03. Responsibility of Trustee............................................ 36
6.04. Expenses of this Plan................................................ 37
ARTICLE VII
ADMINISTRATION OF THIS PLAN................................................. 40
7.01. Administrative Board................................................. 40
7.02. Organization of Administrative Board................................. 40
7.03. Meetings of Administrative Board..................................... 40
-ii-
7.04. Powers and Duties of the Administrative Board........................ 41
7.05. Claim Procedure...................................................... 43
7.06. Limitation of Co-Fiduciary Liability................................. 44
7.07. Allocation and Delegation of Fiduciary Duties........................ 44
7.08. Indemnification for Liability........................................ 45
ARTICLE VIII
AMENDMENT AND TERMINATION................................................... 46
8.01. Right of Termination; Exclusive Benefit Rule......................... 46
8.02. Vesting and Allocation of Assets on Termination of Plan.............. 46
8.03. Right to Amend....................................................... 47
8.04. Merger, Consolidation, or Transfer of Assets......................... 47
ARTICLE IX
GENERAL..................................................................... 48
9.01. Forms................................................................ 48
9.02. Assignment........................................................... 48
9.03. Payments to Incompetents............................................. 49
9.04. Payments to Minors................................................... 50
9.05. Inability to Locate Participants or Beneficiaries.................... 50
9.06. Rights of Employees and Company...................................... 50
9.07. Governing Laws....................................................... 51
9.08. Mistake of Fact...................................................... 51
9.09. Headings as Matter of Convenience.................................... 51
9.10. Military Service..................................................... 51
-iii-
NCRIC GROUP, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
INTRODUCTION
The NCRIC Group, Inc., Employee Stock Ownership Plan (the "Plan") was
established by the Board of Directors of NCRIC Group, Inc., a District of
Columbia corporation (the "Sponsor") effective as of ________________ to provide
and encourage the beneficial ownership of common stock of the Sponsor by
eligible employees.
This Plan is designed to invest primarily in common stock of the Sponsor
and is intended to be an "employee stock ownership plan" as defined in Section
4975(e)(7) of the Code.
ARTICLE I
DEFINITIONS
Whenever used herein, the following words and phrases shall have the
meanings hereinafter set forth unless a different meaning is required by the
context. The masculine pronoun shall mean or include the feminine and the
feminine pronoun shall mean or include the masculine whenever the context so
requires.
1.01. "Account" shall mean the record maintained or caused to be
maintained by the Company for each Participant pursuant to Section 4.01 of this
Plan which, as of the applicable date, shall consist of the balance of
contributions made by the Company on his or her behalf to or under this Plan,
adjusted for the share of income or losses, expenses, and appreciation or
depreciation allocable to such contributions and by the amount of any payment,
return, or refund made to or by a Participant or Beneficiary on or before such
applicable date.
1.02. "Administrative Board" shall mean a group of not less than three
(3) members appointed by the Board of Directors with responsibilities and duties
as described in Article VII of this Plan.
1.03. "Affiliated Company" shall mean (i) a member of a controlled group
of corporations of which the Company is a member or an unincorporated trade or
business which is under common control with the Company as determined in
accordance with Section 414(b) or (c) of the Code and regulations issued
thereunder, or (ii) an affiliated service group of which the Company is a
member, within the meaning of Section 414(m) of the Code. For purposes hereof,
a "controlled group of corporations" shall mean a controlled group of
corporations as defined in Section 1563(a) of the Code, determined without
regard to Sections 1563(a)(4) and (e)(3)(C) of the Code, except that, with
respect to the limitations set forth in Section 4.06 of this Plan, the phrase
"more than 50 percent" shall be substituted for the phrase "at least 80 percent"
whenever such percentage appears in Section 1563(a)(1) of the Code.
1.04. "Beneficiary" shall mean the person or persons designated by a
Participant on the form provided by the Company to receive any payment or
payments becoming due under this Plan on or after the Participant's death.
1.05. "Board of Directors" shall mean the Board of Directors of the
Sponsor.
1.06. "Code" shall mean the Internal Revenue Code of 1986, as amended. A
reference to any Section of the Code shall also be deemed to refer to any
successor statutory provision.
1.07. "Company" shall mean NCRIC Group, Inc., a District of Columbia
corporation, NCRIC, Inc. and any other Affiliated Company which may, in the
future, adopt this Plan with the prior approval of the Sponsor.
1.08. "Compensation" shall mean, for any Plan Year, the total of all
remuneration paid to a Participant by the Company during such Plan Year, as
reported on Form W-2 or other federal wage statement as taxable for federal
income tax purposes. Compensation shall include all basic salary,
-2-
overtime pay, commissions, discretionary bonuses, incentive compensation,
amounts contributed by the Company on a Participant's behalf as salary reduction
contributions to any qualified retirement plans maintained by the Company
containing cash or deferred arrangements described in Section 401(k) of the Code
and amounts contributed by the Company to any plans maintained by the Company
pursuant to Section 125 and/or 403(b) of the Code.
Compensation shall not include reimbursement for expenses or special
allowances. In addition, Compensation shall not include remuneration paid by
the Company to an Employee for any portions of the Plan Year during which he is
not a Participant.
In addition, for purposes of determining this Plan's contributions for a
Plan Year and for purposes of applying the nondiscrimination rules under
Sections 401(a)(4), 401(a)(5), and 410(b)(2) of the Code, a Participant's
Compensation for any Plan Year shall not include any amounts in excess of One
Hundred and Fifty Thousand Dollars ($150,000), as adjusted for increases in the
cost of living pursuant to Section 401(a)(17) of the Code.
1.09. "Effective Date" shall mean _________________________.
1.10. "Eligibility Year of Service" shall mean a twelve (12) consecutive
month period, beginning on the Employee's Employment Commencement Date or
Reemployment Commencement Date and subsequent anniversaries of that date, during
which the Employee has completed at least one thousand (1,000) Hours of Service.
1.11. "Employee" shall mean any person who is employed by the Company,
other than any person included in a unit of employees covered by a collective
bargaining agreement between employee representatives and the Company if
retirement benefits were the subject of good faith bargaining between such
employee representative and the Company (unless such collective
-3-
bargaining agreement expressly provides for the inclusion of such persons as
Participants in this Plan), regardless of whether such person is recharacterized
as an employee by any other person or for any other purpose. Leased Employees
shall be considered Employees for purposes of this Plan but shall not be
eligible to participate in this Plan.
1.12. "Employment Commencement Date" shall mean the date when an Employee
first performs or performed an Hour of Service for the Company or an Affiliated
Company.
1.13. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended. A reference to any Section of ERISA shall also be deemed to
refer to any successor statutory provision.
1.14. "Five-Percent Owner" shall mean an individual who (i) owns (or is
considered as owning within the meaning of Section 318 of the Code) more than
five percent (5%) of the outstanding stock of a Company or an Affiliated Company
or stock possessing more than five percent (5%) of the total combined voting
power of all stock of a Company or an Affiliated Company provided such entity is
a corporation, or (ii) owns more than five percent (5%) of the capital or
profits interest in a Company or an Affiliated Company if such entity is not a
corporation.
1.15. "Highly Compensated Employee" shall mean an Employee (i) who at any
time during the current Plan Year or the immediately preceding Plan Year was a
Five-Percent Owner, or (ii) who at any time during the preceding Plan Year
received more than $80,000 in compensation from the Company or any Affiliated
Company. For purposes of this paragraph, the term "compensation" shall mean
"compensation" as defined in Section 414(q)(7) of the Code.
1.16. "Hour of Service" shall be determined on the basis of months worked
for the Company and the Affiliated Companies. An Employee shall be credited
with One Hundred and Ninety (190)
-4-
Hours of Service if such Employee is credited with at least one (1) Hour of
Service during the month. For purposes of determining the one (1) Hour of
Service, the following shall be included:
(i) Performance of Duties. Each hour for which an Employee is directly or
indirectly paid, or entitled to payment, by the Company or an Affiliated Company
for the performance of duties (including hours for which an Employee previously
performed services on behalf of National Capital Reciprocal Insurance Company).
Each such Hour of Service shall be credited to the Eligibility Computation
Period or the Plan Year, as the case may be, in which the duties were performed.
(ii) Back Pay. Each hour for which back pay (irrespective of mitigation of
damages) has been either awarded or agreed to by the Company or an Affiliated
Company. Each such Hour of Service shall be credited to the Eligibility
Computation Period or the Plan Year, as the case may be, to which the agreement
or award for back pay pertains rather than to the Eligibility Computation Period
or Plan Year, as the case may be, in which the award, agreement or payment is
made.
(iii) Non-Working Time Pay. Each hour for which an Employee is
directly or indirectly paid, or entitled to payment, by the Company or an
Affiliated Company on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has terminated)
due to vacation, holiday, illness, incapacity (including disability), lay-off,
jury duty or lease of absence. Each such Hour of Service shall be computed and
credited in accordance with Department of Labor Regulation Section 2530.200b.
(iv) No Duplication. An Employee shall not be credited with any Hour of
Service under both clause (ii) above and clause (i) or (iii) above (as the case
may be) with respect to the same item.
(v) Maternity and Paternity Leave. Solely for purposes of determining
whether an Employee has incurred a One-Year Break in Service, such Employee
shall be credited for up to five
-5-
hundred and one (501) Hours of Service in respect of any period of absence
attributable to a maternity or paternity leave, based upon the number of Hours
of Service which otherwise normally would have been credited to such Employee
but for such absence or, in any case in which this Plan is unable to determine
the number of Hours of Service which would have normally been so credited, then
such Employee shall be credited with eight (8) Hours of Service per day of
absence. Any such Hours of Service attributable to a maternity or paternity
leave shall be credited in the Eligibility Computation Period or the Plan Year,
as the case may be, in which the maternity or paternity absence begins if such
crediting shall prevent the Employee from incurring a One-Year Break in Service
in such Eligibility Computation Period or Plan Year. Otherwise, such Hours of
Service shall be credited in the Eligibility Computation Period or the Plan
Year, as the case may be, following the Eligibility Computation Period or Plan
Year in which the maternity or paternity leave begins. For these purposes, a
maternity or paternity leave of absence shall include any time during which an
Employee is absent from work for any period: (a) by reason of the pregnancy of
the Employee; (b) by reason of the birth of a child of the Employee; (c) by
reason of the placement of a child with the Employee in connection with the
adoption of such child by such individual; or (d) for purposes of caring for
such child for a period beginning immediately following such birth or placement.
1.17. "Leased Employee" shall mean any individual who performs services
for the Company or an Affiliated Company in a capacity other than as a common-
law employee if (i) the services are provided pursuant to one or more agreements
between the Company or an Affiliated Company and one or more leasing
organizations; (ii) the individual has performed such services for the Company
or the Affiliated
-6-
Company on a substantially full-time basis for a period of at least one year;
and (iii) such services performed under the primary direction or control of the
Company or the Affiliated Company on a substantially full-time basis for a
period of at least one year. This paragraph shall be interpreted in accordance
with the provisions of Section 414(n) of the Code and the regulations
thereunder.
1.18. "Participant" shall mean a person included in this Plan as a
Participant in accordance with Article II of this Plan. A Participant shall
cease to be a Participant on the first day of the month following distribution
of the entire amount credited to his Account as provided in Article V of this
Plan.
1.19. "Period of Service" shall mean the period of time beginning on the
Participant's Employment Commencement Date or Reemployment Commencement Date,
and ending on the Participant's Severance from Service Date.
1.20. "Plan" shall mean the NCRIC Group, Inc., Employee Stock Ownership
Plan, as set forth herein and as may be amended from time to time.
1.21. "Plan Year" shall mean the twelve (12) consecutive month period
ending on December 31. However, the first Plan Year shall be a short Plan Year
beginning on the Effective Date and ending on December 31, 1999.
1.22. "Retirement Date" shall mean the later of (i) the date on which the
Participant attains age sixty-five (65) or (ii) the date on which the
Participant completes five (5) Years of Service.
1.23. "Reemployment Commencement Date" shall mean the date on which an
Employee again first performs an Hour of Service for the Company or an
Affiliated Company after his Severance from Service Date.
1.24. "Severance from Service Date" shall mean the earlier of (a) the
date on which the Employee retires, quits, is dismissed or dies, unless the
Employee is reemployed and performs an
-7-
Hour of Service within twelve (12) months of such date or (b) the first
anniversary of the first date of a period in which the Employee is absent from
work for any other reason (such as sickness, disability, leave of absence or
layoff) if the Employee is still absent on such anniversary.
Notwithstanding the foregoing, and solely for the purposes of determining
the date on which an Employee's Severance Period begins, the Severance from
Service Date of a Participant who is absent due to a maternity or paternity
leave shall be the second anniversary of the first date of such absence. The
period between the first and second anniversaries of such an absence shall be
considered neither a Period of Service nor a Severance Period.
For this purpose, a maternity or paternity leave of absence shall have the
same meaning as in Section 1.16 of this Plan (definition of Hour of Service).
An absence shall not be considered a maternity or paternity leave of
absence unless the Employee furnishes to the Trustees such timely information as
the Trustees may reasonably require to establish that the absence form work is
for one of the reasons listed in (a) or (b) above.
1.25. "Severance Period" shall mean the period beginning on the
Employee's Severance from Service Date and ending on his Reemployment
Commencement Date.
1.26. "Sponsor" shall mean NCRIC Group, Inc., a District of Columbia
corporation.
1.27. "Total and Permanent Disability" shall mean a disability which
meets the standard for eligibility for benefits under any long-term disability
plan maintained by the Company at the time the disability is incurred. If no
long term disability plan is then maintained by the Company, Total and Permanent
Disability shall mean a physical and/or mental incapacity which would entitle
the Participant to disability benefits under the federal Social Security
program. The Administrative
-8-
Board's determination as to whether a Participant has suffered a Total and
Permanent Disability shall be binding upon the Participant.
1.28. "Trust Agreement" shall mean an agreement or agreements under which
one or more Trustees accept the appointment by the Sponsor to hold assets of
this Plan in a trust and distribute assets held thereunder.
1.29. "Trustee" shall mean the party or parties, individual or corporate,
named in the Trust Agreement and any duly appointed additional or successor
Trustee or Trustees acting hereunder. The Trustees shall be the "named
fiduciaries" referred to in Section 402(a) of ERISA with respect to the control,
management and disposition of the assets of the Trust.
1.30. "Trust Fund" shall mean the Trust Fund described in Article VI of
this Plan.
1.31. "Valuation Date" shall mean the last day of each Plan Year and any
additional dates designated by the Administrative Board.
1.32. "Year of Service" shall mean a period of twelve (12) months
(whether or not consecutive) occurring within a Participant's Period of Service.
For this purpose, "month" shall mean a full calendar month; provided, however,
that partial months completed by a Participant may be aggregated into a single
month on the basis of thirty (30) days per month.
ARTICLE II
ELIGIBILITY
Each Employee (other than a Leased Employee) who is employed on the
Effective Date and who has attained age twenty-one (21) and completed an
Eligibility Year of Service by such date shall become a Participant in this Plan
on the Effective Date. Each other Employee (other than a Leased Employee) shall
become a Participant in this Plan on the January 1 or July 1 immediately
following
-9-
the date on which the Employee has attained age twenty-one (21) and completed an
Eligibility Year of Service, provided the Employee is employed by a Company on
such January 1 or July 1. Leased Employees shall not be eligible to participate
in this Plan.
Any Participant who is rehired after incurring a Severance Period shall
begin participation in this Plan again effective as of his Reemployment
Commencement Date.
ARTICLE III
CONTRIBUTIONS
3.01. Company Contributions. Each entity which has adopted this Plan
shall make contributions to this Plan in amounts and at times to be determined
in the sole discretion of the Board of Directors.
3.02. Form of Company Contributions.
(a) All contributions made by an entity which has adopted this Plan
shall be in cash or in common stock of the Company or any combination thereof;
provided, however, that if a contribution is in cash, the Trustee shall use such
contribution to purchase common stock of the Company either from the Company or
from others, as soon as is practicable.
(b) If a Company contribution is made in common stock, the value of
the common stock for purposes of determining the amount of common stock to be
contributed, or the price of common stock which is purchased by the Trustee from
the Company, shall be the price quoted for the Company's common stock on the
National Association of Securities Dealers Automated Quotation ("NASDAQ") Stock
or National Market System on the trading day of the contribution or, if
applicable, the closing price of the Company's common stock on the national
exchange on which such common stock is traded on the day of the contribution.
-10-
3.03 Employee Contributions. A Participant shall neither be required
nor permitted to make contributions to this Plan and Trust.
ARTICLE IV
ACCOUNTS AND ALLOCATIONS
4.01. Separate Accounts for Participants.
(a) A separate Account shall be created for each Participant. Such
Account shall be valued at least annually, or more frequently as determined by
the Company, based upon current market values furnished by the Trustee. Each
Participant shall be furnished with a statement, at least annually, setting
forth the value of his Account.
(b) Separate subaccounts shall be maintained reflecting the common
stock acquired with Company contributions.
4.02. Allocations and Annual Adjustments to Participants' Accounts.
(a) Allocations to Participants' Accounts. Subject to the provisions
of Section 4.06(b) of this Plan, all common stock acquired through Company
contributions and (except as otherwise provided in Section 4.03 of this Plan)
all dividends thereon, shall be allocated, as of the close of the Plan Year for
which the Company contribution was made, to the Account of each Participant (i)
who was an Employee on the last day of the Plan Year, or (ii) who terminated
employment with the Company during such Plan Year due to retirement (on or after
his Retirement Date), Total and Permanent Disability, or death. The amount of
such common stock and such dividends thereon allocated to each Participant's
Account shall bear the same proportion to the total amount of such common stock
allocated with respect to such Plan Year as the amount of the Compensation paid
to such Participant while employed during the Plan Year bears to the total
-11-
Compensation paid to all Participants who were entitled to receive an allocation
of such Company contributions during such Plan Year.
(b) Annual Adjustments to Participants' Accounts. Promptly after
preparation of the Trustee's evaluation, as provided in Section 6.03(b) of this
Plan, the Trustee shall adjust the Accounts of all Participants so that the
amount of net income, loss, appreciation or depreciation in the value of the
Trust Fund for the period (hereinafter referred to as the "Evaluation Period")
from the last previous evaluation to the date of such evaluation shall be
credited to or charged against the Participants' Accounts in the ratio that (i)
the balance in the Account of each Participant as of the first day of such
Evaluation Period minus the amount distributed to such Participant during such
Evaluation Period bears to (ii) the balance in all such Participants' Accounts
as of the first day of such Evaluation Period minus the total amounts
distributed to all Participants during such Evaluation Period.
4.03. Elections Regarding Cash Dividends on Common Stock. With respect
to any Plan Year, the Administrative Board shall have the authority to provide
Participants who have attained a fully vested status under this Plan (in
accordance with the provisions of Section 5.04 of this Plan) with the
opportunity to make an annual irrevocable election, prior to the beginning of
such Plan Year, with respect to the treatment of cash dividends on the common
stock of the Company allocated to such Participants' Accounts, less, at the
option of the Company, a proportionate share of the expenses of operating and
maintaining this Plan, including amounts needed to repay any loans incurred
pursuant to Section 6.05 of this Plan. If such an election procedure is
implemented with respect to a Plan Year, each eligible Participant may elect to
have cash dividends on the common stock allocated to his Account paid to him
currently or to have such cash dividends used to purchase
-12-
shares of the common stock of the Company which shall be credited to such
Participant's Account. Cash dividends on unallocated shares held by this Plan
and cash dividends on shares for which no cash distribution election is made,
less a proportionate share of the expenses of operating and maintaining this
Plan, shall (to the extent not applied to the payment of any loans incurred
pursuant to Section 6.05 of this Plan) be used to purchase shares of the common
stock of the Company. Any such shares purchased in respect of cash dividends
paid on unallocated shares shall be credited to the Participants' Accounts in
proportion to their Compensation for the Plan Year.
4.04. Voting of Company Common Stock.
(a) Common stock of the Company held by the Trustee on behalf of
Participants shall be voted by the Trustee at each annual meeting and at each
special meeting of the stockholders of the Company as directed by the
Participants to whose Accounts such stock is credited. Fractional shares may be
combined and voted by the Trustee to the extent possible to reflect the
instructions of Participants credited with such shares.
(b) As to allocated shares of stock, the Company shall cause each
Participant to be provided with a copy of a notice of each such stockholder
meeting and the proxy statement of the Company, together with an appropriate
form for the Participant to indicate his voting instructions. Such form shall
indicate that if instructions are not received by the Trustee with respect to
any allocated shares of stock within three (3) business days of such stockholder
meeting, the Trustee shall vote the uninstructed allocated stock in the same
proportions as the Trustee was instructed to vote with respect to the allocated
shares for which it received instructions. The Trustee shall also vote
unallocated shares of stock held in the suspense account in a manner calculated
to most accurately reflect the instructions it has received from Participants
regarding the allocated shares.
-13-
Each Participant shall also be given similar rights to direct the Trustee as to
the sale of securities pursuant to a tender offer and the exercise of any
conversion privileges, subscription rights or other similar rights arising with
respect to common stock of the Company credited to his Account. The Trustee
shall hold confidential any and all voting or other instructions received from
Participants.
4.05. Diversification Option. Any Participant who has attained age
fifty-five (55) and has ten (10) years of participation in this Plan shall be
eligible to elect to have a portion of his Account treated in accordance with
the following provisions:
(a) For the six (6) Plan Years immediately following the Plan Year in
which the Participant first satisfies the age and participation requirements set
forth above (the "Diversification Period"), the Participant may elect to have an
amount equal to his Eligible Amount treated in accordance with the provisions of
Section 4.05(c) of this Plan. Such election may be made during the first ninety
(90) days of the Plan Year (the "Election Period") and shall be made in writing
on forms provided by the Company.
(b) For purposes of this Section 4.05, the term "Eligible Amount"
shall mean, in the first five (5) years of the Diversification Period, an amount
equal to twenty-five percent (25%) of the value of a Participant's Account, to
the extent such portion exceeds the amount which the Participant had previously
elected to have treated under this Section 4.05. In the sixth year of the
Diversification Period, the Eligible Amount shall be computed by substituting
"fifty percent (50%)" for "twenty-five percent (25%)" in the preceding sentence.
For purposes of determining the Eligible Amount, the Participant's Account shall
be deemed to include any amounts previously transferred to another qualified
retirement plan or distributed to the Participant pursuant to Sections
4.05(c)(ii) and (iii) of this Plan.
-14-
(c) The amount elected by the Participant pursuant to Section 4.05(a)
of this Plan for diversification shall, at the option of the Company, either:
(i) be invested in an investment option selected by the Participant
from among at least three (3) investment options made available by the Trustee
(which options shall be consistent with regulations issued by the Secretary of
the Treasury) within ninety (90) days after the expiration of the Election
Period,
(ii) be transferred, within ninety (90) days after the expiration of
the Election Period, to another qualified retirement plan maintained by the
Company (if any) which provides for participant-directed accounts and provides
at least three (3) investment options, or
(iii) be distributed directly to such Participant within ninety (90)
days after the expiration of the Election Period. Where the value of the
Participant's Account exceeds Five Thousand Dollars ($5,000), any distribution
under this Section 4.05(c)(iii) shall be made only with the consent of the
Participant; provided, however, that if the Participant fails to consent to such
distribution, this Plan's obligations pursuant to this Section 4.05 shall be
deemed fully satisfied.
4.06. Benefit Limitations.
(a) Notwithstanding anything contained herein to the contrary, the
annual additions made to the Participant's Account for any Limitation Year
(which shall be the Plan Year), together with the annual additions on behalf of
the Participant under any other Defined Contribution Plan of the Company during
the Limitation Year shall not exceed the lesser of (i) Thirty Thousand Dollars
($30,000) or, if applicable, any then greater dollar amount allowed under
Section 415 of the Code or (ii) twenty-five percent (25%) of the Participant's
Limitation Year Compensation for such Limitation Year, except that the dollar
limitation shall be automatically increased, as permitted in
-15-
accordance with Section 415(c)(6) of the Code by the lesser of (A) one hundred
percent (100%) of the dollar amount otherwise applicable under Section
415(c)(1)(A) of the Code for the Plan Year or (B) the Participant's share of the
amount of common stock of the Company allocated to his Account under this Plan
for such Plan Year.
Except as provided below, annual additions shall include all Company
contributions and forfeitures allocated to a Participant's account under this
Plan and any other Defined Contribution Plan of the Company plus all employee
contributions to any other Defined Contribution Plan(s), excluding any rollover
contributions, and repayment or restoration of contributions or similar
allocations under any other Defined Contribution Plan(s) of the Company.
Annual additions shall not, however, include (i) any forfeitures of
common stock of the Company allocated to a Participant's Account if such stock
was acquired with the proceeds of an exempt loan (described in Section 6.05 of
this Plan) or (ii) Company contributions deductible under Section 404(a)(9)(B)
of the Code and charged against the Participant's Account.
Company contributions made to a Participant's Account because of an
erroneous forfeiture in a prior Limitation Year or an erroneous failure to
allocate amounts in a prior Limitation Year shall not be considered an annual
addition with respect to the Participant for the Limitation Year in which made
but shall be considered an annual addition for the Limitation Year to which they
relate. If the amount so contributed in the particular Limitation Year takes
into account actual investment gains attributable to the period subsequent to
the year to which the contribution relates, the portion of the total
contribution which consists of such gains shall not be considered as an annual
addition for any Limitation Year.
-16-
(b) If, as a result of the allocation of forfeitures, a reasonable
error in estimating a Participant's Compensation or under such other limited
facts and circumstances as the Commissioner of the Internal Revenue Service may
prescribe, a Participant's annual additions would exceed the limitations of
Section 4.06(a) of this Plan, reductions in annual additions under any other
Defined Contribution Plan(s) of the Company shall be made before reductions in
annual additions under this Plan. Any Company contributions which cannot be
allocated to a Participant's Account by reason of the limitations of this
Section 4.06 shall be allocated to the Accounts of other Participants in
accordance with Section 4.02 of this Plan until the maximum limitations under
this Section 4.06 are reached for all Participants. Any stock which cannot be
allocated to Participants' Accounts in a Plan Year shall be held in an
unallocated suspense account (with income earned thereon) until the Plan Year in
which it is first possible to allocate such stock to Participants' Accounts in
accordance with this Section 4.06.
(c) For Plan Years beginning before January 1, 2000, if a
Participant has at any time been a participant in any Defined Benefit Plan
maintained by the Company, then for any Limitation Year, the sum of the
Participant's Defined Benefit Plan Fraction and his Defined Contribution Plan
Fraction for such Limitation Year shall not exceed one (1.0). If the maximum
limitation of this Section 4.06(c) is exceeded and annual additions on behalf of
a Participant must be reduced, such reduction shall be accomplished in the
manner described in Section 4.06(b) of this Plan and in any other Defined
Contribution Plan of the Company.
(d) For purposes of this Section 4.06, the following definitions
apply:
(1) "Defined Contribution Plan" and "Defined Benefit Plan"
shall have the meanings set forth in Section 415(k) of the Code and the
regulations thereunder.
-17-
(2) "Defined Benefit Plan Fraction" for any Limitation Year
shall mean a fraction:
(i) the numerator of which is the projected annual
benefit of a Participant (the annual benefit to which such Participant would be
entitled under the terms of the Defined Benefit Plan on the assumptions that he
continues employment until his normal retirement age as determined under the
terms of such Defined Benefit Plan, or current age, if older, that his
compensation continues at the same rate as in effect in the Limitation Year
under consideration until the date of his normal retirement date, or current
age, if older, and that all other relevant factors used to determined benefits
under such Defined Benefit Plan remain constant as of the current Limitation
Year for all future Limitation Years) under all Defined Benefit Plans ever
maintained by the Company, determined as of the close of the Limitation Year,
and
(ii) the denominator of which is the lesser of:
(A) the product of one and twenty-five one-
hundredths (1.25) multiplied by the dollar limitation in effect for such
Limitation Year under Section 415(b)(1)(A) of the Code, or
(B) the product of one and four tenths
(1.4) multiplied by the amount which may be taken into account under the
percentage of Limitation Year Compensation limitation in effect for such
Limitation Year under Section 415(b)(1)(B) of the Code with respect to the
Participant under such plans for such Limitation Year.
(3) "Defined Contribution Plan Fraction" shall mean a fraction:
-18-
(i) the numerator of which is the sum of the annual additions
to the Participant's accounts as of the close of the Limitation Year and all
Prior Limitation Years under all Defined Contribution Plans ever maintained by
the Company, and
(ii) the denominator of which is the sum of the lesser of the
following amounts determined for such Limitation Year and for each prior
Limitation Year included in the Participant's service with the Company:
(A) the product of one and twenty-five one hundredths
(1.25) multiplied by the dollar limitation in effect for such Limitation Year
under Section 415(c)(1)(A) of the Code (determined without regard to Section
415(c)(6) of the Code) or
(B) the product of one and four tenths (1.4) multiplied by
the amount which may be taken into account under the percentage of Limitation
Year Compensation limitation in effect for such Limitation Year under Section
415(c)(1)(B) of the Code with respect to the Participant under such plan for the
Limitation Year.
(4) "Limitation Year" shall mean the twelve (12)-consecutive
month period beginning on January 1 and ending on December 31.
(5) "Limitation Year Compensation" shall mean the aggregate of
all wages, salaries and other amounts paid for personal services actually
rendered which are received by an Employee from the Company and all Affiliated
Companies within a Limitation Year, to the extent that such amounts are
includible in his gross income. Limitation Year Compensation shall not include
deferred compensation, stock options and other distributions which receive
special tax benefit. Limitation Year Compensation shall be determined in
accordance with the provisions of Section 415(c)(3) of the Code and the
regulations issued thereunder.
-19-
ARTICLE V
BENEFITS
5.01. Retirement Benefits. A Participant shall have a fully vested right
to his Account upon retirement after reaching his Retirement Date. Benefits to
such Participant shall be paid in the time and manner specified in Sections
5.05, 5.06 and 5.07 of this Plan.
5.02. Disability Benefits. A Participant who incurs a Total and
Permanent Disability while employed by the Company shall become fully vested in
his Account upon becoming disabled. Benefits to such Participant shall be paid
in the time and manner specified in Sections 5.05, 5.06 and 5.07 of this Plan.
5.03. Death Benefits. Upon the death of a Participant while employed by
the Company, his Account shall fully vest, and the total amount of his Account
shall be payable to his designated Beneficiary. Upon the death of a Participant
whose employment with the Company has terminated, but who has not received his
benefits under this Plan, the vested portion of his Account (determined under
Section 5.04 of this Plan) shall be payable to his designated Beneficiary.
Payment of such benefits shall be made in accordance with Sections 5.05, 5.06
and 5.07 of this Plan.
(a) Notwithstanding the designation of any other Beneficiary, the
nonforfeitable accrued benefit of a Participant who dies before beginning to
receive benefits under this Plan shall be paid, in full, to his surviving
spouse, if the Participant has been legally married to such spouse for at least
one year prior to the Participant's death,
(1) unless the surviving spouse consents in writing to the
designation of another Beneficiary, and such consent is witnessed by the
Administrative Board or its designee or a notary public, or
-20-
(2) unless it is established to the satisfaction of the
Administrative Board or its designee that the required consent may not be
obtained because there is no spouse, because the spouse may not be located, or
because of such other circumstances as the Secretary of the Treasury may
prescribe by regulation;
(b) A designation of Beneficiary may, without notice to the
Beneficiary, be changed or revoked by the Participant at any time; provided,
however, that, with respect to a married Participant, a designation of a
Beneficiary to which the Participant's spouse consented pursuant to Section
5.03(a)(1) of this Plan may be revoked, but a new Beneficiary may not be
designated unless either (i) the Participant's spouse consents to the
designation of a new Beneficiary (under the procedure set forth in Section
5.03(a) of this Plan) or (ii) the spouse's original consent expressly allowed
such designation to be changed without the spouse's consent. The designation of
any Beneficiary and any change or revocation thereof shall be made in writing on
forms provided by the Company and shall not be effective unless and until filed
with the Company. If a Participant fails to designate a Beneficiary under this
Plan or if no designated Beneficiary survives the Participant, any amount
payable upon the death of a Participant shall be paid to the Participant's
estate.
5.04. Benefits Upon Severance from Service.
(a) Vested Benefit. A Participant who incurs a Severance from
Service Date prior to his Retirement Date for reasons other than death or Total
and Permanent Disability shall be
-21-
entitled to receive the vested portion of his Account, based on his Years of
Service as of his Severance from Service Date, and determined in accordance with
the following table:
Percentage
Years of Service Vested
---------------- ------
Less than 1 full year 0%
1 full years 20%
2 full years 40%
3 full years 60%
4 full years 80%
5 full years or more 100%
Such benefits shall be paid in accordance with Sections 5.05, 5.06 and 5.07
of this Plan.
(b) Determination of Years of Service. In determining Years of
Service for purposes of this Section 5.04, all Periods of Service shall be taken
into account, except that with respect to a Participant who is reemployed after
incurring a Severance from Service Date, the following Periods of Service may be
disregarded:
(i) Periods of Service occurring prior to a twelve (12)-month
Severance Period shall not be taken into account until the Participant has
completed a Year of Service after such Severance Period.
(ii) In the case of any Participant who has no vested interest in his
Account at his Severance from Service Date, Periods of Service occurring before
his Severance Period shall not be taken into account if the Severance Period
equals or exceeds the greater of (A) sixty (60) consecutive months or (B) the
Participant's Period of Service before such Severance Period.
(iii) Once a Participant has incurred a sixty (60) consecutive month
Severance Period, Periods of Service occurring after such Severance Period shall
not be counted in determining the Participant's vested interest in the amount in
his Account prior to such Severance Period.
-22-
(c) Forfeiture of Non-Vested Amount. Subject to the provisions of
Section 5.04(d) of this Plan, the excess of (i) the amount in the Account of a
Participant whose Severance from Service Date has occurred over (ii) the amount
vested in accordance with the vesting schedule set forth in Section 5.04(a) of
this Plan (hereinafter the "non-vested amount") shall be forfeited on the last
day of the Plan Year during which the Participant's Period of Severance totals
twelve (12) consecutive months; provided, however, that if the Participant is
rehired and performs an Hour of Service before his Period of Severance totals
sixty (60) consecutive months, (i) the forfeited amount shall be recredited to
the Participant's Account, and (ii) the Participant shall continue to earn
future Years of Service for purposes of determining the vested amount in his
Account without regard to his cessation of employment.
The funds needed to recredit such Participant's Account shall be drawn
first from any amounts forfeited by Participants employed by the Company during
the year such recrediting is required. If such forfeitures are not sufficient
to fully restore the forfeited amount to the Participant's Account, the Company
shall make a special contribution earmarked to fund the remainder of the amount
needed.
Subject to the immediately preceding paragraph, any amounts forfeited
pursuant to this Section 5.04(c) shall be allocated among the Accounts of the
other Participants in this Plan during the Plan Year within which such
forfeitures occur, in the same manner as Company contributions for such Plan
Year are allocated under Article IV of this Plan.
(d) Distribution Prior to Full Vesting. In the event that a
distribution is made pursuant to Section 5.04(a) of this Plan to a Participant
who, at the time of such distribution, is not one hundred percent (100%) vested
in his Account, the following rules shall apply:
-23-
(i) When the total vested amount, not exceeding Five Thousand Dollars
($5,000), in the Participant's Account is distributed to such Participant in a
lump-sum following such Participant's Severance from Service Date pursuant to
the terms of Section 5.06(b) of this Plan, the non-vested amount in the
Participant's Account shall be forfeited upon the date of such distribution.
(ii) When the total vested portion of the Participant's Account,
which vested portion exceeds Five Thousand Dollars ($5,000), is distributed to
such Participant following such Participant's Severance from Service Date
pursuant to the Participant's voluntary election to receive such distribution,
the non-vested amount in the Participant's Account shall be forfeited upon the
date of such distribution.
(iii) If a Participant who has received a distribution pursuant to
Section 5.04(d)(i) or (ii) of this Plan is rehired and performs an Hour of
Service before his Period of Severance totals sixty (60) consecutive months and
such Participant repays the amount of his previous distribution within five (5)
years of the date he is rehired, the forfeited amount shall be recredited to
such Participant's Account and the Participant shall continue to earn future
Years of Service for purposes of determining the vested amount in his Account
without regard to his cessation of employment.
(iv) The amount required to be recredited pursuant to Subparagraph
(iii) above shall in no event be less than the non-vested amount in the
Participant's Account at the time of the forfeiture, unadjusted by subsequent
gains or losses.
(v) The funds needed to recredit such Participant's Account shall be
drawn first from any amounts forfeited by Participants employed by the Company
during the Plan Year such recrediting is required. If such forfeitures are not
sufficient to fully restore the forfeited amount to
-24-
the Participant's Account, the Company shall make a special contribution
earmarked to fund the remainder of the amount needed.
(vi) Subject to Section 5.04(d)(v) of this Plan, any amounts
forfeited pursuant to this Section 5.04(d) shall be allocated among the Accounts
of the other Participants in this Plan during the Plan Year within which such
forfeitures occur, in the same manner as Company contributions for such Plan
Year are allocated under Article IV of this Plan.
5.05. Form of Distributions.
(a) In General. Distributions shall be made in whole shares of
Company common stock. The value of any fractional shares of Company common
stock shall be distributed in cash. The above-referenced right to receive
distributions in the form of shares of Company common stock shall be
automatically terminated in the event of the sale or other disposition by the
Trustee of all shares of Company common stock held by the Trust.
Unless the Participant elects otherwise, his benefits under this Plan
shall be paid in substantially equal periodic payments (not less frequently than
annually) over a period not longer than (i) five (5) years or (ii) in the case
of a Participant whose Account exceeds Five Hundred Thousand Dollars ($500,000),
five (5) years plus one (1) additional year (but not more than five (5)
additional years) for each One Hundred Thousand Dollars ($100,000) or fraction
thereof by which such Account exceeds Five Hundred Thousand Dollars ($500,000).
The Five Hundred Thousand Dollar ($500,000) and One Hundred Thousand Dollar
($100,000) amounts shall be adjusted for increases in the cost of living
pursuant to Section 409(o)(2) of the Code.
For purposes of the distribution requirements of this Section 5.05(a),
Company stock acquired with the proceeds of an exempt loan (as described in
Section 6.05 of this Plan) need not be
-25-
considered part of the Participant's Account until the close of the Plan Year in
which such loan is repaid in full.
(b) Eligible Rollover Distributions. Notwithstanding any
provision of this Plan to the contrary that would otherwise limit a
Distributee's election under this Section 5.05(b), with respect to all
distributions made from this Plan, a Distributee may elect, at the time and in
the manner prescribed by the Administrative Board, to have all or any portion of
an Eligible Rollover Distribution paid in a Direct Rollover to an Eligible
Retirement Plan specified by the Distributee.
As used in this Section 5.05(b), the following terms shall have the
following meanings:
(i) "Eligible Rollover Distribution" shall mean any distribution of
all or any portion of the balance to the credit of a Distributee under this
Plan, except that the term "Eligible Rollover Distribution" shall not include
any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the Distributee or the joint lives (or joint life expectancies)
of the Distributee and the Distributee's designated beneficiary, any
distribution that is one of a series of substantially equal periodic payments
(not less frequently than annually) made for a specified period of ten (10)
years or more, any distribution to the extent such distribution is required
under Section 401(a)(9) of the Code, or the portion of any distribution that is
not includible in gross income (determined without regard to the exclusion for
net unrealized appreciation with respect to employer securities).
(ii) "Eligible Retirement Plan" shall mean an individual
retirement account described in Section 408(a) of the Code, an individual
retirement annuity described in Section 408(b) of the Code, an annuity plan
described in Section 403(a) of the Code or a qualified trust described
-26-
in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover
Distribution. In the case of an Eligible Rollover Distribution made to the
surviving spouse of an Employee or former Employee, the term "Eligible
Retirement Plan" shall mean an individual retirement account described in
Section 408(a) of the Code or an individual retirement annuity described in
Section 408(b) of the Code.
(iii) "Distributee" shall mean an Employee or former Employee who
is eligible to elect an Eligible Rollover Distribution under this Section
5.05(b). In addition, the term "Distributee" shall mean the surviving spouse of
an Employee or former Employee, or the spouse or former spouse of an Employee or
former Employee who is an alternate payee under a qualified domestic relations
order (as defined in Section 414(p) of the Code), with regard to the interest of
such surviving spouse, spouse or former spouse under this Plan.
(iv) "Direct Rollover" shall mean a payment by this Plan to the
Eligible Retirement Plan specified by the Distributee.
5.06. Timing of Distributions.
(a) In General. Distribution of the vested portion of Participant's
Account may begin at such time prior to the date specified in Section 5.06(c) of
this Plan as the Administrative Board may determine; provided, however, that
unless the Participant elects otherwise, the distribution of his benefits under
this Plan shall begin no later than one (1) year after the close of (i) the Plan
Year in which the Participant's employment terminates by reason of retirement on
or after his Retirement Date, or by reason of his death or Total and Permanent
Disability, or (ii) one (1) year after the close of the fifth (5th) Plan Year
following the Plan Year in which the Participant otherwise terminates employment
unless the Participant is reemployed by the Company before distribution is
required to
-27-
begin under this clause (ii). The foregoing requirement shall not,
however, require distribution of any portion of a Participant's Account which
consists of Company stock acquired with the proceeds of an exempt loan
(described in Section 6.05 of this Plan) prior to the close of the Plan Year in
which such loan is repaid in full.
(b) Participant Consent to Certain Distributions. Notwithstanding
the foregoing, if the value of the vested portion of a Participant's Account
exceeds Five Thousand Dollars ($5,000) or exceeded Five Thousand Dollars
($5,000) at the time of any prior distribution from this Plan, no distribution
may be made to the Participant prior to the Participant's Retirement Date,
unless the Participant consents in writing to an earlier distribution. Where
the vested portion of a deceased Participant's Account exceeds Five Thousand
Dollars ($5,000) or exceeded Five Thousand Dollars ($5,000) at the time of any
prior distribution from this Plan, any distribution due to the Participant's
surviving spouse under Section 5.03 of this Plan may not be made prior to the
date on which the Participant would have reached his Retirement Date, unless the
spouse consents in writing to an earlier distribution. If the vested portion of
the Participant's Account does not exceed Five Thousand Dollars ($5,000) and did
not exceed Five Thousand Dollars ($5,000) at the time of any prior distribution
from this Plan, the full amount of the vested portion of such Account shall be
distributed in a lump sum as soon as administratively feasible following the
Participant's Severance from Service Date.
(c) Latest Distribution Date. Unless a Participant elects otherwise,
in no event shall distributions commence later than the sixtieth (60th) day
following the close of the Plan Year in which the latest of the following events
occur:
(i) the Participant reaches his Retirement Date;
-28-
(ii) the tenth (10th) anniversary of the date on which the
Participant commenced participation in this Plan; or
(iii) the Participant's employment with the Company terminates.
If the amount of the payment required to commence cannot be determined by
such date, or the Participant cannot be located after reasonable efforts by the
Plan Administrator, a payment retroactive to such date may be made no later than
60 days after the first date, such amount can be determined (or such Participant
is located).
5.07. Limitations on Distributions.
(a) Notwithstanding anything contained herein to the contrary and
in accordance with the provisions of Section 401(a)(9) of the Code, distribution
of retirement benefits to all participants other than Five-Percent Owners shall
begin April 1 of the calendar year following the later of: (i) the calendar year
in which a Participant attains age seventy and one-half (70-1/2), or (ii) the
calendar year in which the Participant retires. Notwithstanding the foregoing,
for a Participant who is a Five-Percent Owner at any time during the five (5)
Plan Year period ending in the calendar year in which the Participant attains
age seventy and one-half (70-1/2), distributions under this Plan shall begin
April 1 of the calendar year following the calendar year in which the
Participant attains age seventy and one-half (70-1/2).
(b) All benefit distributions must be paid over a period of time
which does not exceed the life expectancy of the Participant or the combined
life expectancy of the Participant and his designated Beneficiary. In the event
a Participant dies after distribution of his benefits has begun, but before the
Participant's full benefits have been distributed, the remaining portion of such
benefits shall be distributed at least as rapidly as under the method of
distribution being used as of the date
-29-
of his death. In the event a Participant dies prior to commencement of the
receipt of benefits, the death benefits attributable to such deceased
Participant shall be distributed within five (5) years of the Participant's
death; provided, however, that any portion of the death benefits which is
payable to (or for the benefit of) a designated Beneficiary may be distributed,
commencing within one (1) year of the Participant's death, over the life of such
designated Beneficiary (or over a period not extending beyond the life of such
designated Beneficiary) and further provided that if the designated Beneficiary
is the Participant's surviving spouse, distribution need not begin earlier than
the date on which the Participant would have attained age seventy and one-half
(70-1/2). For purposes of this paragraph, the term "designated Beneficiary"
means any individual designated as a Beneficiary by the Participant.
5.08. Amendments to Vesting Provisions of Plan. Anything to the contrary
in this Plan notwithstanding, the vesting provisions of this Plan shall not be
amended so as to result in the nonforfeitable percentage of the accrued benefit
of any Participant, determined as of the later of the date of adoption or
effectiveness of such amendment, being less than his nonforfeitable percentage
computed under this Plan without regard to such amendment. If an amendment to
this Plan changes any vesting schedule hereunder, each Participant having at
least three (3) Years of Service will be permitted to elect, within a reasonable
period after the adoption of such amendment, to have the nonforfeitable
percentage of his benefits accrued under this Plan computed without regard to
such amendment, unless such Participant's nonforfeitable percentage under this
Plan, as amended, at any time cannot be less than such percentage computed
without regard to such amendment.
-30-
5.09. Top-Heavy Contingency.
(a) Application. The provisions of this Section 5.09 are
included in this Plan pursuant to Section 401(a)(10)(B)(ii) of the Code and
shall become applicable only if this Plan becomes a Top-Heavy Plan (as defined
below) under Section 416(g) of the Code for any Plan Year.
(b) Determination of Top-Heavy Status of Plan. The
determination as to whether this Plan has become a Top-Heavy Plan for any Plan
Year shall be made as of the last day of the immediately preceding Plan Year or,
in the case of the first Plan Year, the last day of such Plan Year (the
"Determination Date"), and this Plan shall be a "Top-Heavy Plan" only if the
aggregate Account balances under this Plan for Key Employees (as defined below)
exceeds sixty percent (60%) of the aggregate Account balances under this Plan
for all Employees and former Employees. For this purpose, the aggregate Account
balances shall be computed and adjusted pursuant to Section 416(g) of the Code
and the regulations issued thereunder.
As used herein, the term "Key Employee" shall mean any Employee or
former Employee who, at any time during the current Plan Year or any of the four
(4) preceding Plan Years, meets the criteria under Section 416(i)(1) of the
Code. A Key Employee shall include the following:
(i) an officer of the Company or an Affiliated Company if such
individual's annual compensation from the Company and all Affiliated Companies
exceeds fifty percent (50%) of the dollar limitation then in effect under
Section 415(b)(1)(A) of the Code;
(ii) an actual or constructive owner (using the attribution rules
of Section 318 of the Code) of both more than a one-half of one percent (1/2%)
interest in the total ownership value of, and of one of the ten (10) largest
percentage ownership interests in value in, the Company or an Affiliated Company
if such individual's compensation from the Company and all Affiliated
-31-
Companies exceeds one hundred percent (100%) of the dollar limitation then in
effect under Section 415(c)(1)(A) of the Code;
(iii) a Five-Percent Owner;
(iv) a "one-percent owner" (as defined in Section 416(i)(1)(B)(ii) of
the Code) of the Company or an Affiliated Company who has annual compensation
from the Company and all Affiliated Companies of more than One Hundred Fifty
Thousand Dollars ($150,000); or
(v) the Beneficiary of any deceased Employee or former Employee
described in clause (i), (ii), (iii) or (iv) above. In the event the
Beneficiary of a deceased Employee or former Employee qualifies as a Key
Employee, any benefits payable to such Beneficiary shall be treated as benefits
paid to a Key Employee.
For purposes of clauses (i), (ii) and (iv) above, the term
"compensation" shall mean compensation as defined in Section 414(q)(7) of the
Code. For purposes of clause (i) above, no more than fifty (50) employees (or,
if lesser, the greater of three (3) employees or ten percent (10%) of all
employees) shall be treated as officers.
The term "Non-Key Employee" shall mean any Employee or former Employee
who is not currently a Key Employee. The term "Non-Key Employee" shall include
former Key Employees, but such former Key Employees shall be excluded entirely
from the calculations to determine whether this Plan is a Top-Heavy Plan.
(c) Consideration of Multiple Plans in Determining Top-Heavy Status
of Plan. All plans of the Company or an Affiliated Company which are included
in a Required Aggregation Group or in a Permissive Aggregation Group (both as
defined below) with this Plan shall be considered together in determining
whether this Plan is a Top-Heavy Plan. Each plan of the
-32-
Company or an Affiliated Company which is required to be included in an
aggregation group (whether required or permissive) shall be treated as a Top-
Heavy Plan if such group is a Top-Heavy Group (as defined below). For this
purpose, a "Required Aggregation Group" shall mean (i) each plan of the Company
or an Affiliated Company in which a Key Employee is a participant plus (ii) each
other plan of the Company or an Affiliated Company which is required to exist in
order for this Plans contained in (i), above, to meet the nondiscrimination
requirements of Section 401(a)(4) or 410 of the Code. A "Permissive Aggregation
Group" shall mean (i) a Required Aggregation Group plus (ii) any other plan or
plans of the Company or an Affiliated Company which are able to separately meet
the nondiscrimination requirements of Sections 401(a)(4) and 410 of the Code but
which the Sponsor elects to include within such group.
An aggregation group (either permissive or required) shall be a "Top-
Heavy Group" only if the sum of (a) the present value of the cumulative accrued
benefits for Key Employees under all defined benefit plans included in such
group and (b) the total of the account balances for Key Employees under all
defined contribution plans included in such group exceeds sixty percent (60%) of
the accrued benefits and account balances determined for all employees and
former employees covered under such plans. For this purpose, account balances
shall be computed and adjusted pursuant to the principles of Section 416(g) of
the Code. In determining the cumulative accrued benefits and account balances
for purposes of this top-heavy test:
(i) the present value of the cumulative accrued benefits of all Key
Employees shall be increased by the aggregate distributions made with respect to
each such individual under this Plan during the previous five (5) years (ending
on the Determination Date). This provision shall also
-33-
apply to distributions under a terminated plan which would have been required to
be included in an aggregation group had this Plan not been terminated;
(ii) the extent to which rollovers and transfers are to be taken into
account shall be determined in accordance with Section 416 of the Code and the
regulations issued thereunder; and
(iii) the account balances and accrued benefits of (a) an individual
who is not currently a Key Employee but who was a Key Employee in a prior year
or (b) an individual who is a Key Employee but who has not performed any
services for the Company or an Affiliated Company at any time during the five
(5)-year period ending on the Determination Date shall be disregarded.
(d) Minimum Benefits. For any Plan Year in which this Plan is a Top-Heavy
Plan, each Participant who is a Non-Key Employee and who is employed by the
Company on the last day of the Plan Year shall receive a minimum allocation of
Company contributions and/or forfeitures to his Account under this Plan which,
when combined with the amount of any other contributions and/or forfeitures
allocated to such Participant's accounts under any other defined contribution
plans maintained by the Company or any Affiliated Company, shall be no less than
the lesser of (i) three percent (3%) of his Limitation Year Compensation for
such Plan Year or (ii) such percentage of his Limitation Year Compensation for
such Plan Year which is equal to the highest percentage of Limitation Year
Compensation which any Key Employee received in the form of Company
contributions and/or forfeitures to his Account in this Plan for such Plan Year.
For any Plan Year in which a Required Aggregation Group of which this
Plan is a member is a Top-Heavy Group, the minimum top-heavy benefit with
respect to each Participant in this Plan (other than Key Employees) who also
participates in any defined benefit plan of the Company or any Affiliated
Company shall be provided solely under this Plan, in lieu of any
-34-
minimum benefit under such defined benefit plan. Each such Participants shall,
if employed on the last day of the Plan Year, receive a minimum allocation of
contributions and/or forfeitures totaling at least five percent (5%) of his
Limitation Year Compensation for such Plan Year.
Any contributions made to a Non-Key Employee's accounts under any
defined contribution plans maintained by the Company or any Affiliated Company
which were made on behalf of such Non-Key Employee pursuant to a cash or
deferred arrangements satisfying the requirements of Section 401(k) of the Code
may not be used to satisfy this minimum allocation requirement.
For purposes of this Section 5.09(d), the term "Limitation Year
Compensation" shall have the same meaning as set forth in Section 4.06(d)(5) of
this Plan; provided, however, that a Participant's Limitation Year Compensation
for any Plan Year shall not include any amounts in excess of One Hundred and
Fifty Thousand Dollars ($150,000), as adjusted for increases in the cost of
living pursuant to Section 401(a)(17) of the Code.
(e) 415 Limit Adjustments. If this Plan is a Top-Heavy Plan for any
Plan Year, the references to a factor of one and twenty-five one-hundredths
(1.25) in Sections 4.06(d)(2)(ii) and 4.06(d)(3)(ii) of this Plan shall be
changed to references to a factor of one (1.0).
ARTICLE VI
THE TRUST FUND
6.01. Contributions Held in Trust. Contributions shall be held in a
Trust Fund maintained by Trustee, pursuant to the terms of the Trust Agreement.
No Employee, Participant, surviving spouse or Beneficiary under this Plan or any
other person shall have any interest in or right to any part of this Plan except
as and to the extent provided by the terms of this Plan.
-35-
6.02. No Guarantee of Security Values. The Company does not guarantee or
represent in any way that the value of Company common stock in which the
Participant has an interest will increase or will not decrease. Each
Participant assumes all risks in connection with any changes in the value of the
Company common stock in which his Account is invested.
6.03. Responsibility of Trustee.
(a) The Sponsor shall enter into a Trust Agreement with a Trustee
to be designated by the Administrative Board, which Trustee shall serve at the
pleasure of the Administrative Board. The Trust Agreement shall provide, among
other things, for a Trust Fund (to be administered by the Trustee) to which all
contributions shall be made and from which all distributions shall be made, and
the Trustee shall have such rights, powers and duties as the Administrative
Board shall from time to time determine. All assets of the Trust Fund shall be
held, invested and reinvested in accordance with the provisions of the Trust
Agreement and this Plan. The Trustee shall be responsible solely for the
safekeeping of the assets of the Trust Fund and shall have no responsibility for
the operation or administration of this Plan, except as expressly provided
herein. The Trustee shall have the authority to make distributions from the
Trust Fund and to pay monies at the direction of the Administrative Board or its
designee and in accordance with the terms of this Plan.
(b) The Trustee shall evaluate the Trust Fund at fair market value
as of the close of business on each Valuation Date. In making such evaluation,
the Trustee shall deduct all charges, expenses and other liabilities, if any,
contingent or otherwise, then chargeable against the Trust Fund, in order to
give effect to income realized and expenses paid or incurred, losses sustained
and unrealized gains or losses constituting appreciation or depreciation in the
value of Trust investments
-36-
since the last previous evaluation. As soon as practicable after such
evaluation, the Trustee shall deliver in writing to the Administrative Board and
to the Board of Directors of the Sponsor an evaluation of the Trust Fund
together with a statement of the amount of net income or loss (including
appreciation or depreciation in the value of Trust investments) since the last
previous evaluation.
6.04. Expenses of this Plan. Neither the principal nor the income of the
Trust Fund shall be used for any purpose whatsoever other than for exclusive
benefit of Participants, retired Participants, surviving spouses, and
Beneficiaries, to meet the necessary expenses of this Plan, or as provided in
Section 9.08 of this Plan. All expenses of this Plan and Trust shall be paid
from the Trust Fund, unless paid directly by the Company in its discretion.
6.05. Exempt Loans.
(a) Terms. The Board of Directors may direct the Trustee to
obtain loans. Any such loan shall meet all requirements necessary to constitute
an "exempt loan" within the meaning of Treasury Regulations Section 54.4975-
7(b)(1)(iii) and shall be used primarily for the benefit of the Participants and
Beneficiaries.
The proceeds of any such loan shall be used, within a reasonable time after
the loan is obtained, only to purchase Company common stock, repay the loan, or
repay any prior loan. Any such loan shall provide for no more than a reasonable
rate of interest, as determined under Treasury Regulations Section 54.4975-
7(b)(7), and must be without recourse against this Plan. The number of years to
maturity under the loan must be definitely ascertainable at all times.
The only assets of this Plan that may be given as collateral for a loan are
shares of Company common stock acquired with the proceeds of the loan and shares
of Company common stock that were used as collateral on a prior loan repaid with
the proceeds of the current loan. Such Company
-37-
common stock so pledged shall be placed in a Suspense Account. No person
entitled to payments under a loan shall have recourse against Trust assets other
than such collateral, contributions that are available under this Plan that meet
obligations under the loan, and earnings attributable to such collateral and the
investment of such contributions. All contributions paid during the Plan Year in
which a loan is made (whether before or after the date the proceeds of the loan
are received), all contributions paid thereafter until the loan has been repaid
in full, and all earnings from investment of such contributions, without regard
to whether any such contributions and earnings have been allocated to
Participants' Accounts, shall be available to meet obligations under the loan,
unless otherwise provided by the Company at the time any such contribution is
made.
Any pledge of Company common stock must provide for the release of shares
so pledged, as provided below, upon the payment of any portion of the loan. For
each Plan Year during the duration of the loan, the number of shares of Company
common stock released from such pledge must equal the number of encumbered
shares held immediately before release for the current Plan Year multiplied by a
fraction, the numerator of which is the amount of principal and interest paid
for the year, and the denominator of which is the sum of the numerator plus the
principal and interest to be paid for all future years. Such future years shall
be determined without taking into account any possible extension or renewal
periods. In the event the interest is variable, the interest to be paid in
future years must be computed by using the interest rate applicable as of the
end of the Plan Year.
(b) Amounts Available for Loan Payments. Payments of principal and
interest on any such loan during a Plan Year shall be made by the Trustee (as
directed by the Administrative Board) only from (1) Company contributions to the
Trust made to meet this Plan's obligation under the loan and from any earnings
attributable to Company common stock held as collateral for a loan
-38-
(both received during or prior to the Plan Year), less such payment in prior
years; (2) the proceeds of a subsequent loan made to repay a prior loan; and (3)
the proceeds of the sale of any Company common stock held as collateral for a
loan. Such contributions and earnings must be accounted for separately by this
Plan until the loan is repaid.
(c) Allocation of Released Stock. Company common stock released by
reason of the payment of principal or interest on a loan, which payment is
attributable to Company contributions or dividends on Company common stock,
shall immediately, upon release, be credited to the Participants' Accounts in
accordance with the principles of Section 4.02(a) of this Plan. Company common
stock released by reason of the payment of principal or interest on a loan,
which payment is attributable to the sale of any Company common stock held as
collateral for such loan, shall immediately, upon release, be credited to the
Participants' Accounts in proportion to the respective opening account balances
of such Accounts as of the first day of the applicable Plan Year.
(d) Company Contributions. The Company intends to contribute to the
Trust, subject to its complete discretion, sufficient amounts to enable the
Trustee to pay principal and interest on any such loans as they are due;
provided, however, that no such contribution shall exceed the limitations in
Section 4.06 of this Plan, or cause the Company to fail to meet its regulatory
capital requirements, if any.
-39-
ARTICLE VII
ADMINISTRATION OF THIS PLAN
7.01. Administrative Board. This Plan shall be administered by an
Administrative Board consisting of at least three (3) members who shall be
appointed from time to time by the Board of Directors and who shall serve at the
pleasure of the Board of Directors. The members of the Administrative Board
shall not receive any compensation for their services. The Administrative Board
may perform any or all duties and exercise any or all powers of the Company
under this Plan unless specifically reserved herein for the Board of Directors.
7.02. Organization of Administrative Board. The Board of Directors shall
appoint the Chairman of the Administrative Board. The members of the
Administrative Board shall appoint a Secretary, who may be, but need not be, a
member of the Administrative Board. The Administrative Board shall have the
power to assign or allocate any of its responsibilities among its members
(except the Chairmanship of the Administrative Board), and to designate one or
more persons (including persons who are not members of the Administrative Board)
to execute or deliver any instruments or make any payments on their behalf.
7.03. Meetings of Administrative Board. The Administrative Board shall
hold meetings upon call by the Chairman or by a majority of the members at such
place or places and at such time or at such intervals as may be stated in the
call, as well as such meetings the place and time of which are fixed in advance
by the Administrative Board. A majority of the members of the Administrative
Board at any time in office shall constitute a quorum for the transaction of
business. All resolutions adopted or other actions taken by the Administrative
Board shall be by the vote of a majority of those present at a meeting or by a
majority of the members of the Administrative Board if no meeting is
-40-
held. Minutes of all meetings shall be made and preserved. No member of the
Administrative Board may vote or take any other action with respect to a matter
pertaining solely to himself.
7.04. Powers and Duties of the Administrative Board. Subject to the
limitations of this Plan, the Administrative Board shall have the powers
necessary to discharge its duties hereunder. Any action on matters within the
discretion of the Administrative Board shall be final and conclusive as to all
interested persons. Any discretionary actions of the Administrative Board with
respect to the administration of this Plan shall be made in a manner which does
not discriminate in favor of stockholders, officers, or Highly Compensated
Employees. The powers and duties of the Administrative Board include, but are
not limited to, the following:
(a) To make all determinations as to the right of any person to a
benefit under this Plan and to issue directions to the Trustee accordingly;
(b) To comply with applicable laws and governmental regulations
relating to this Plan and to provide for the furnishing of such reports to
Participants, the Internal Revenue Service, the Department of Labor and such
other agencies as may be necessary for compliance;
(c) To construe and interpret this Plan, decide all questions of
eligibility and determine the amount, manner and time of payment of any benefits
hereunder;
(d) To prescribe procedures to be followed by Participants or
Beneficiaries filing applications for benefits;
(e) To fix minimum periods of notice where notice is required;
(f) To prepare and distribute, in such manner as the
Administrative Board determines to be appropriate, information explaining this
Plan;
-41-
(g) To receive from the Company and from Participants such
information as shall be necessary for the proper administration of this Plan;
(h) To receive, review and keep on file (as it deems convenient or
proper) reports of the financial condition, and of the receipts and
disbursements, of the Trust Fund;
(i) To cause to be prepared and submitted to the Board of Directors
within a reasonable time after the end of the Plan Year a report or reports
showing the fiscal transactions under this Plan, and under all existing Trust
Agreement(s) for such preceding Plan Year;
(j) To certify to the Trustee such information, records and data
as may be necessary from time to time in the proper administration of this Plan
and in the distribution of benefits in accordance with the provisions of this
Plan;
(k) To select or change the Trustee, record-keeper or investment
advisor;
(l) To provide for the systematic review of the performance of the
Trustee;
(m) To direct the purchase of such policies of fiduciary insurance
and fidelity bonds as it deems appropriate;
(n) To prescribe its own rules of procedure, its decisions pursuant
to which as to any questions shall be binding upon all persons, provided the
provisions of this Plan are not contravened;
(o) To cause to be maintained such books of account, records and
other data as may be necessary or advisable in its judgment for the purpose of
the proper administration of this Plan;
(p) To employ such agents, attorneys, advisors and clerical
assistants as it deems necessary; and
(q) To direct the Trustee concerning all payments that shall be
made out of the Trust Fund pursuant to the provisions of this Plan.
-42-
All rules and decisions of the Administrative Board shall be uniformly and
consistently applied to all persons in similar circumstances. The
Administrative Board shall be entitled to rely upon certificates of the Company
and the Trustee as to information pertinent to any calculation or determination
made pursuant to this Plan.
7.05. Claim Procedure.
(a) A Participant or Beneficiary (hereinafter collectively referred
to as the "Claimant") may file with the Administrative Board a written claim for
benefits and/or rights under this Plan. The Administrative Board or its
delegate, within a reasonable time not to exceed sixty (60) days, unless special
circumstances require an extension of time of not more than an additional sixty
(60) days (in which event the Claimant will be notified of the delay during the
first sixty (60) day period), shall provide adequate notice in writing to any
Claimant whose claim for benefits has been denied, in whole or in part, setting
forth (i) the specific reasons for denial, (ii) specific reference to the
provision(s) of this Plan on which the denial is based, (iii) if applicable, a
description of any additional material or information required to perfect the
claim and an explanation of why such material or information is necessary and
(iv) information as to the steps to be taken in order for the denial of the
claim to be reviewed.
(b) If a claim is denied, the Claimant may file an appeal of the
denied claim for benefits with the Administrative Board or its delegate within
sixty (60) days after notice of denial. The Claimant shall have the right to
review pertinent documents and submit issues and comments in writing to the
Administrative Board, which shall notify the Claimant of its decision on the
appeal of the denied claim. Such decision shall be rendered in writing as soon
as possible after the decision is made, but in no event more than sixty (60)
days after receipt of the appeal, and if the appeal is
-43-
denied, shall include (i) specific reasons for the decision, and (ii) specific
reference to the provision(s) of this Plan on which the decision is based. Such
decision of the Administrative Board shall be final.
Anything to the contrary in the foregoing notwithstanding, the claim
procedure shall comply with all the requirements of Section 503 of ERISA and the
regulations thereunder.
(c) No Claimant shall institute any action or proceeding in any court
of law or equity, state or federal, or before any administrative tribunal, for a
claim for benefits under this Plan, until he has first exhausted the procedures
set forth in this Section 7.05.
7.06. Limitation of Co-Fiduciary Liability. Neither the Company, the
Board of Directors, the Administrative Board (including the individual members
thereof and the Secretary), nor any Employee who is deemed to be a fiduciary
under this Plan shall be liable for a breach of fiduciary responsibility by
another fiduciary under this Plan except as provided in Section 405(a) of ERISA.
7.07. Allocation and Delegation of Fiduciary Duties.
(a) The Administrative Board is hereby designated as the "named
fiduciary" of this Plan within the meaning of Sections 402(a) and 402(c) of
ERISA with respect to the operation and administration of this Plan. The
Trustee is hereby designated as the "named fiduciary" of this Plan within the
meaning of Sections 402(a) and 402(c) of ERISA with respect to the management of
the assets of the Trust.
(b) The Administrative Board may establish procedures for (i) the
allocation of fiduciary responsibilities under this Plan among its members and
(ii) the designation of persons, including Participants hereunder other than
members of the Administrative Board, to carry out fiduciary or other
responsibilities under this Plan. If any fiduciary responsibility is allocated
or if
-44-
any person is designated to carry out any responsibility pursuant to the
last preceding sentence, the other fiduciaries will not be liable for any act or
omission of such person in carrying out such responsibility, except as provided
in Section 405(c)(2) of ERISA.
7.08. Indemnification for Liability. To the extent permitted by law, the
Company shall indemnify and hold harmless any of its officers and employees, any
member of the Board of Directors, any member of the Administrative Board, any
other person or organization (other than the Trustee or any Investment Manager)
acting with respect to this Plan at the request of the Company or the
Administrative Board, and may in its discretion so indemnify the Trustee from
any and all claims, demands, suits or proceedings, for liability, loss, damage,
penalty, or tax (including payment of legal fees and expenses in connection with
defense against same) brought by any Participant, Beneficiary, Employee or any
other person, corporation, governmental agency, or other entity, arising from
any act or failure to act which constitutes or is alleged to constitute a
prohibited transaction or a breach of such individual's fiduciary
responsibilities with respect to this Plan under ERISA or any other law;
provided, however, that such indemnification shall not apply to any willful
misconduct, willful failure to act, or gross negligence.
7.09. Adoption of Plan by Affiliated Companies. Any Affiliated Company,
whether or not presently existing, may, with the approval of the Board of
Directors of the Company, adopt this Plan and Trust by means of appropriate
corporate action of such Affiliated Company and by executing such documents as
the Board of Directors of the Company may require in order for such Affiliated
Company to become a party to the Trust. Any such Affiliated Company which
adopts this Plan and Trust as provided above shall thereafter be included within
the meaning of the term "Company"
-45-
when used in this Plan and Trust, except that the authority to amend or
terminate this Plan shall remain the exclusive responsibility of the Sponsor.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.01. Right of Termination; Exclusive Benefit Rule. While it is the
intention of the Company to continue this Plan, the Board of Directors, or if
the Board of Directors so resolves, the Administrative Board shall, with respect
to all Participants, have the right to terminate this Plan at any time or to
amend this Plan at any time or from time to time; provided, however, that no
such amendment or termination shall be effective which (i) shall contravene any
applicable statute or attempt to transfer any part of the funds held by the
Trustee for purposes other than for the exclusive benefit of Participants or
Beneficiaries or (ii) shall cause or permit any portion of the funds held by the
Trustee under this Plan to revert to or become the property of the Company,
except as provided in Section 9.08 of this Plan.
8.02. Vesting and Allocation of Assets on Termination of Plan.
(a) In the event this Plan is terminated or partially terminated
or upon complete discontinuance of contributions under this Plan (all within the
meaning of Section 411(d)(3) of the Code and Treasury Regulations thereunder),
the rights of all affected Participants accrued under this Plan to the date of
such termination, partial termination or complete discontinuance shall be
nonforfeitable; provided, however, that a Participant's recourse for
satisfaction of such rights shall be limited to assets of this Plan.
-46-
(b) Any distribution after termination of this Plan may be made
at any time, and from time to time, in whole or in part, to the extent that no
discrimination in value results, in cash, in securities or in other assets in
kind as the Company, in its discretion, may determine and so direct the Trustee.
In making any such distribution, any and all determinations, divisions,
appraisals, apportionments and allotments so made shall be final and conclusive.
8.03. Right to Amend. Notwithstanding anything in this Plan to the
contrary, the Board of Directors may adopt any and all modifications of this
Plan which such Board shall deem necessary or appropriate; provided, however,
that no such modification shall make it possible for any part of the funds of
this Plan to be used for, or diverted to, purposes other than for the exclusive
benefit of Participants, retired Participants, or Beneficiaries under this Plan,
except as provided in Section 9.08 of this Plan. No modification or amendment
shall be made which has the effect of decreasing the accrued benefit of any
Participant or of reducing a Participant's vested percentage in such accrued
benefit.
8.04. Merger, Consolidation, or Transfer of Assets. This Plan may not be
merged or consolidated with, nor may its assets or liabilities be transferred
to, any other plan unless each Participant, retired Participant or Beneficiary
under this Plan would, if the resulting plan were then terminated, receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation, or transfer if this Plan had been
terminated.
-47-
ARTICLE IX
GENERAL
9.01. Forms. All consents, elections, applications, designations, etc.,
required or permitted under this Plan must be made on forms prescribed and
furnished by the Company.
9.02. Assignment. Benefits provided under this Plan shall not be subject
to assignment, alienation, transfer, hypothecation, encumbrance, commutation or
anticipation. No right or claim to any of the monies or other assets under this
Plan shall be assignable, nor shall such rights or claims be subject to
garnishment, attachment, execution, or levy of any kind, and any attempt to
assign, transfer, pledge, encumber, commute or anticipate the same will not be
recognized by the Company or the Trustee except to such an extent as may be
required by law. Notwithstanding the above, a Participant's benefits under this
Plan may be offset by any amount the Participant is ordered or required to pay
to this Plan in connection with a judgment or conviction for a crime, civil
judgment or settlement agreement issued or entered into on or after August 5,
1997 and described in Section 401(a)(13)(C) of the Code. Notwithstanding the
above, benefits shall be payable to an individual other than a Participant in
accordance with the applicable requirements of a Qualified Domestic Relations
Order (as defined below) pursuant to the following provisions:
(i) A "Qualified Domestic Relations Order" shall mean a judgment,
decree, or order (including approval of a property settlement agreement) which
relates to the provision of child support, alimony payments, or marital property
rights to a spouse, former spouse, child or other dependent of a Participant,
which creates or recognizes the existence of an alternative payee's right to, or
which assigns to an alternate payee the right to, receive all or a portion of
the benefits payable with respect to a Participant under this Plan, and which
meets the following requirements:
-48-
(a) such order shall specify the name and last known mailing
address (if any) of the Participant and each alternate payee covered by the
order,
(b) such order shall specify the amount or percentage of the
Participant's benefits to be paid by this Plan to each such alternate payee or
the manner in which such amount or percentage is to be determined,
(c) such order shall specify the number of payments or period to
which such order applies,
(d) such order shall specify each plan to which such order
applies,
(e) such order shall not require this Plan to provide any type or
form of benefits or any option not otherwise provided under this Plan,
(f) such order shall not require this Plan to provide increased
benefits (determined on the basis of actuarial value), and
(g) such order shall not require the payment of benefits to an
alternate payee which are required to be paid to another alternate payee under
another order previously determined to be a Qualified Domestic Relations Order.
(ii) The Administrative Board shall determine a set of
nondiscriminatory and reasonable procedures to determine the qualified status of
domestic relations orders and to administer distributions under such qualified
orders in accordance with Section 414(p) of the Code.
9.03. Payments to Incompetents. Upon direction from the Company to the
Trustee (i) that a person entitled to receive any benefits under this Plan is
physically or mentally incompetent to receive such benefits and to give a valid
release therefor; (ii) that another person or an institution is then maintaining
or has custody of such Participant or Beneficiary; and (iii) that no guardian,
-49-
committee or other representative of the estate of such Participant or
Beneficiary has been duly appointed, the Trustee may pay such benefits to such
other person or institution, and the release of such other person or institution
shall be a valid and complete discharge for such payment.
9.04. Payments to Minors. In the absence of the appointment of a legal
guardian, any amount payable to a minor may be paid at a rate not exceeding One
Hundred Dollars ($100) a month to such adult or adults as have, in the opinion
of the Company as communicated to the Trustee, assumed the custody or principal
support of such minor.
9.05. Inability to Locate Participants or Beneficiaries. If the Company
is unable, after reasonable effort, to ascertain the identity, whereabouts or
existence of any Participant or Beneficiary to whom a benefit is payable under
this Plan, the benefit otherwise payable to the Participant or Beneficiary shall
be forfeited, anything to the contrary contained elsewhere in this Plan
notwithstanding; provided, however, that any benefits so forfeited shall be
reinstated if a claim is subsequently made by such Participant or Beneficiary or
if proof of death of such person satisfactory to the Company is received by the
Company.
Any benefits lost by reason of escheat under applicable state or District
of Columbia law shall be considered forfeited and shall not be subsequently
reinstated.
Any amounts forfeited under this Section 9.05, other than by reason of
escheat, shall be applied to reduce subsequent Company contributions to this
Plan, and any restorations hereunder shall be made as Company contributions.
9.06. Rights of Employees and Company. Nothing contained in this Plan
shall be deemed to give any Employee or any Participant the right to be retained
in the service of the Company or to interfere with the right of the Company to
discharge any Employee or Participant or change his job,
-50-
position, title, authority, duties or rate of compensation at any time without
regard to the effect which such action will have upon his rights, if any, under
this Plan. Notwithstanding any other provision of this Plan, all payments of the
benefits provided under this Plan shall be made solely out of funds held for
such purpose by the Trustee hereunder, and the Company shall have no liability
for such payments.
9.07. Governing Laws. Except insofar as other federal legislation or
applicable regulation shall govern, the validity and construction of this Plan
and each of its provisions shall be subject to and governed by the laws of the
District of Columbia. In the event of any conflict between provisions of this
Plan and the terms of any contract or policy issued hereunder, the provisions of
this Plan shall control. This Plan is intended to qualify under the Code and to
comply with the provisions of ERISA and regulations thereunder and any other
applicable federal laws and regulations, and the provisions of this Plan shall
be construed to effectuate such intention.
9.08. Mistake of Fact. If all or any portion of a contribution to this
Plan is made by the Company by a mistake of fact, the Company shall be entitled
to receive a return of such contribution, net of any losses attributable
thereto, as soon as possible, but in no event later than one (1) year after the
payment of such contribution.
9.09. Headings as Matter of Convenience. The headings used to describe
the sections of this Plan are used for convenience of reference only and shall
not be deemed to be dispositive or controlling as to questions related to Plan
interpretation.
9.10. Military Service. Notwithstanding any provisions of this Plan to
the contrary, contributions, benefits and service credit with respect to
qualified military service (as defined in Code (S) 414(u)(5)) will be provided
in accordance with Code (S) 414(u).
-51-
IN WITNESS WHEREOF, NCRIC Group, Inc., has caused this Plan to be executed
by its duly authorized representatives this _____ day of ______ 1999.
This Stock Award Plan (this "Plan") for NCRIC Group, Inc., a District of
Columbia stock holding corporation (the "Company"), and its parents and
subsidiaries is intended to provide incentive (i) to persons who are designated
by the Board as key employees (collectively "Key Employees") and (ii) to members
of the boards of directors of the Company and its parents and subsidiaries by
providing those persons with opportunities to receive restricted shares of the
Company's Common Stock which can become nonforfeitable upon performance of
defined service requirements.
2. Definitions
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Award" shall mean the grant of Restricted Stock under this Plan.
(b) "Board" shall mean the Company's board of directors.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Compensation Committee of the Board.
(e) "Common Stock" shall mean the common stock of the Company.
(f) "Fair Market Value" per share as of a particular date shall mean (i)
the closing sales price per share of Common Stock on the principal national
securities exchange, if any, on which the shares of Common Stock shall then be
listed for the last preceding date on which there was a sale of such Common
Stock on such exchange, or (ii) if the shares of Common Stock are not then
listed on a national securities exchange, the last sales price per share of
Common Stock entered on a national inter-dealer quotation system for the last
preceding date on which there was a sale of such Common Stock on such national
inter-dealer quotation system, or (iii) if no closing or last sales price per
share of Common Stock is entered on a national inter-dealer quotation system,
the average of the closing bid and asked prices for the shares of Common Stock
in the over-the-counter market for the last preceding date on which there was a
quotation for such Common Stock in such market, or (iv) if no price can be
determined under the preceding alternatives, then the price per share as most
recently determined by the Board, which shall make such determinations of value
at least once annually.
-1-
(g) "Key Employees" shall mean all full-time employees of the Company or
its parents or subsidiaries who are designated as key employees by the Board.
(h) "Participant" shall mean a Key Employee or member of a board of
directors of the Company or its parent or its subsidiary who is granted an Award
hereunder.
(i) "Plan" shall mean this Stock Award Plan established by the Company.
(j) "Restricted Stock" shall mean shares of the Company's Common Stock
which have been granted subject to a risk of forfeiture pursuant to Section 7.
(k) "Restricted Stock Trust" shall mean the NCRIC Group, Inc. Restricted
Stock Trust established to hold shares of the Company's Common Stock designated
for grant under this Plan.
(l) "Termination of Employment" shall mean termination of employment with
the Company and all of its parents and subsidiaries or, in the case of a
director, the cessation of such director's position on all boards of directors
of the Company and its parents and subsidiaries. The Committee may in its
discretion determine whether any leave of absence constitutes a Termination of
Employment for purposes of this Plan and the impact, if any, of any such leave
of absence on Awards made under this Plan. The Committee shall have the right
to determine whether the termination of a Participant's employment is a
dismissal for cause and the date of termination in such case, which date the
Committee may retroactively deem to be the date of the action that is cause for
dismissal. Such determinations of the Committee shall be final, binding and
conclusive.
3. General Administration
(a) Subject to the provisions of (b) below, this Plan shall be administered
by the Committee.
(b) The Committee shall have the authority (i) to exercise all of the
powers granted to it under this Plan, (ii) to construe, interpret and implement
this Plan and any Restricted Stock Agreements executed pursuant to Section 7
below, (iii) to prescribe, amend and rescind rules and regulations relating to
this Plan, including rules governing the Committee's own operations, (iv) to
make all determinations necessary or advisable in administering this Plan, (v)
to correct any defect, supply any omission and reconcile any inconsistency in
this Plan, and (vi) to amend this Plan to reflect changes in applicable law.
The Committee shall make recommendations to the Board regarding the issuance of
Awards hereunder and the terms thereof. The Board shall review the
recommendations of the Committee and, after making any modifications, deletions
or additions it deems appropriate in its sole discretion, shall approve, by a
simple majority vote, any Awards which the Board determines to be issued
pursuant to this Plan. As such, the Board, acting through a simple majority,
retains the exclusive power to issue Awards hereunder.
-2-
(c) Actions of the Committee shall be taken by the affirmative vote of a
majority of the Committee members. Any action may be taken by an instrument
signed by all of the Committee members, including counterpart signatures, and
action so taken shall be fully as effective as if such action had been taken by
a vote at a Committee meeting.
(d) The determination of the Committee on all matters relating to this Plan
or any Restricted Stock Agreement shall be final, binding and conclusive.
(e) No Committee member shall be liable for any action or determination
made in good faith with respect to this Plan, including any Award.
4. Granting of Awards
Awards may be granted under this Plan at any time prior to December 31,
2008.
5. Eligibility
Awards may be made to such Key Employees and members of a board of
directors of the Company or its parent or its subsidiary as the Board shall in
its sole discretion select.
6. Common Stock
(a) The stock subject to the Awards shall be Common Stock.
(b) The total number of shares of Common Stock with respect to which Awards
may be granted shall not exceed ________________, plus any shares of Common
Stock purchased with dividends paid on any shares held by the Restricted Stock
Trust. Common Stock granted pursuant to this Plan is being purchased in the
initial public offering of shares of the Company. The Committee may direct that
any certificate evidencing Common Stock pursuant to this Plan shall bear a
legend setting forth such restrictions on transferability as may apply to such
shares. In addition, all certificates relating to Awards hereunder shall be
held in the custody of the Restricted Stock Trust until such time as shares of
Common Stock relating to such Award become vested in accordance with the
provisions of the applicable Restricted Stock Agreement.
(c) If there is any change in the number of outstanding shares of Common
Stock by reason of a stock dividend or distribution, stock split-up, reverse
stock split, recapitalization, combination or exchange of shares, or by reason
of any merger, consolidation, spinoff or other corporate reorganization in which
the Company is the surviving corporation, the number of shares of Common Stock
available for issuance both in the aggregate and with respect to each
outstanding Award, shall be equitably adjusted by the Committee, whose
determination shall be final, binding and conclusive. In the event of any
merger, consolidation or combination of the Company with or into another
corporation (other than a merger, consolidation or combination in which the
Company is the surviving corporation and which does not result in any
reclassification or other change in the
-3-
number of outstanding shares of Common Stock), each share of Common Stock as to
which the Award related shall be converted into the kind and amount of shares of
the surviving or new corporation, cash, securities, evidence of indebtedness,
other property or any combination thereof which would have been received upon
such merger, consolidation or combination by the holder of one share of Common
Stock immediately prior to such merger, consolidation or combination and each
Participant shall have the right thereafter to receive upon vesting all or part
of an Award, for each vested share of Common Stock as to which the Award
related, the kind and amount of shares of the surviving or new corporation,
cash, securities, evidence of indebtedness, other property or any combination
thereof which would have been received upon such merger, consolidation or
combination by the holder of one share of Common Stock immediately prior to such
merger, consolidation or combination.
(d) If any Shares relating to an Award are forfeited, the Common Stock
allocable to the forfeited portion of such Award shall (unless this Plan shall
have been terminated) become available for subsequent grants of Awards.
7. Terms and Conditions of Awards
Each Award granted shall be evidenced by a Restricted Stock Agreement in
such form as the Committee may from time to time approve. By accepting an
Award, a Participant thereby agrees that the Award shall be subject to the
provisions of the applicable Restricted Stock Agreement. Awards shall comply
with and be subject to the following terms and conditions:
(a) Time of Transfer. The Common Stock attributable to an Award will be
transferred from the Trust to a Participant at such time as such Award becomes
vested with respect to such Common Shares.
(b) Vesting Provisions. Unless the applicable Restricted Stock Agreement
otherwise provides, each Award shall become vested in the following
installments:
Number of Years Elapsed Applicable Percentage Vested
From Date of Grant ----------------------------
--------------------------
Less than one year 0%
One year 20%
Two years 40%
Three years 60%
Four years 80%
Five years 100%
(c) Termination of Employment; Death.
-4-
(1) If a Participant's employment terminates or if a director's status
as a member of all boards of directors of the Company and its parents and
subsidiaries terminates due to death or total and permanent disability, all
Awards issued to such Participant will vest immediately. If a Participant
incurs a Termination of Employment for any other reason, all nonvested
components of each Award will be forfeited as of the effective date of such
Termination of Employment.
(2) The Committee may, in the applicable Award, waive or modify the
application of any of the foregoing provisions of this Section 7.
(d) Nontransferability of Awards. Awards shall not be transferable other
than by will or by the laws of descent and distribution.
(e) Rights as a Shareholder. A Participant shall have no rights as a
shareholder with respect to any Common Stock covered by his Award until the date
of the issuance of a stock certificate to him for such shares other than voting
rights. Any dividends (ordinary or extraordinary, whether in cash, securities
or other property) or distributions or other rights for which the record date is
after the date of grant of the Award but prior to the date such stock
certificate is issued, shall be held by the Restricted Stock Trust and paid over
to the Participant, if and when the Common Stock to which such dividends,
distributions or other rights relate becomes vested. If such Common Stock is
forfeited, the corresponding dividends, distributions or other rights shall
remain in the Restricted Stock Trust to be used to purchase additional Common
Stock subject to future Awards.
(f) Other Provisions. The Stock Award Agreements authorized under this
Plan shall contain such other provisions, as the Committee shall deem advisable,
including provisions with respect to compliance with federal and applicable
state securities laws.
8. Agreement by Optionee Regarding Withholding Taxes
No later than the date of vesting of any portion of an Award, the
Participant will pay to the Company or make arrangements satisfactory to the
Committee regarding payment of any federal, state or local taxes of any kind
required by law to be withheld upon the transfer of the Common Stock which has
become vested. The Participant may, with the Committee's prior approval, make
such payment in whole or in part by surrendering Common Stock to the Company,
valued at its Fair Market Value on the date of surrender.
9. Term of Plan
Awards may be granted from time to time within a period of 10 years from
the date on which this Plan is adopted by the Board; provided that no Awards
granted shall become vested unless and until this Plan shall have been approved
by the affirmative vote of the holders of a majority of the outstanding Common
Stock.
-5-
10. Restrictions
(a) If the Committee shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any Award, the transfer of Common Stock or
other rights thereunder, or the taking of any other action thereunder (each such
action being hereinafter referred to as a "Plan Action"), then such Plan Action
shall not be taken, in whole or in part, unless and until such Consent shall
have been effected or obtained to the Committee's full satisfaction.
(b) The term "Consent" as used herein with respect to any Plan Action means
(i) any and all listings, registrations or qualifications in respect thereof
upon any inter-dealer quotation system of a registered national securities
association or any national securities exchange or under any federal, state or
local law, rule or regulation, (ii) any and all written agreements and
representations by the Participant with respect to the disposition of Common
Stock, or with respect to any other matter, which the Committee shall deem
necessary or desirable to comply with the terms of any such listing,
registration or qualification, or to obtain an exemption from the requirement
that any such listing, qualification or registration be made, and (iii) any and
all consents, clearances and approvals in respect of a Plan Action by any
governmental or other regulatory bodies.
(c) In furtherance of the foregoing, at the time of the vesting of an
Award, the Committee may, if it shall determine it necessary or desirable for
any reason, require the Participant as a condition to such vesting, to deliver
to the Committee a written representation of the Participant's present intention
to acquire the Common Stock for investment and not for distribution. An
appropriate legend may be placed upon each certificate delivered to the
Participant upon the vesting of an Award and a stop transfer order may be placed
with the transfer agent. Each Award shall also be subject to the requirement
that, if at any time the Committee determines, in its discretion, that either
(i) the listing, registration or qualification of Common Stock subject to an
Award upon any securities exchange or inter-dealer quotation system or under any
state, federal or foreign law, or (ii) the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the issue of Common Stock thereunder, the Award may not vest in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The Committee shall not have the power to require
or oblige the Company to register any Common Stock subject to an Award and any
requirement imposed by the Committee relating to the registration of Common
Stock shall not bind the Company to cause the registration of such Common Stock.
11. Nature of Payments
(a) All Awards granted shall be in consideration of services performed for
the Company by the Participant.
-6-
(b) All Awards granted shall constitute a special incentive payment to the
Participant and shall not be taken into account in computing the amount of
salary or compensation of the Participant for the purpose of determining any
benefits under any pension, retirement, profit-sharing, bonus, life insurance or
other benefit plan of the Company or under any agreement between the Company and
the Participant, unless such plan or agreement specifically otherwise provides.
13. Non-Uniform Determinations
The determinations of the Committee and the Board under this Plan need not
be uniform and may be made selectively among persons who receive, or are
eligible to receive, Awards (whether or not such persons are similarly
situated).
14. Other Payments
Nothing contained in this Plan shall be deemed in any way to limit or
restrict the Company from making any option to purchase Common Stock or payment
to any person under any other plan, arrangement or understanding, whether now
existing or hereafter in effect.
15. Section Headings
The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of said sections.
16. Amendment and Termination
(a) The Board may from time to time suspend, discontinue, revise or amend
this Plan in any respect whatsoever; provided that any amendment that would
materially increase the aggregate number of shares of Common Stock as to which
Awards may be granted, materially increase the benefits accruing to Participants
under this Plan, or materially modify the requirements as to eligibility for
participation in this Plan shall be subject to the approval of the holders of a
majority of the outstanding Common Stock. In addition, no such amendment shall
materially impair any rights or materially increase any obligations under any
outstanding Award without the consent of the Participant (or, upon the
Participant's death or adjudication of mental incapacity, the person having
rights under the Award).
(b) The Committee may cancel any outstanding Award and issue a new Award in
substitution therefor. The Board may amend any outstanding Restricted Stock
Agreement, including any amendment which would: (i) accelerate the time or
times at which the Award becomes vested; (ii) waive or amend any goals,
restrictions or conditions set forth in the Restricted Stock Agreement; or (iii)
waive or amend the operation of Section 7(c) above with respect to the
termination of the Award upon Termination of Employment. However, any such
cancellation or amendment that materially impairs the rights or materially
increases the obligations of a Participant under an
-7-
outstanding Award shall be made only with the consent of the Participant (or,
upon the Participant's death or adjudication of mental incapacity, the person
having the right to the Award).
Adopted by the Board on January 12, 1999, subject to the approval of the
Company's shareholder.
-8-
EXHIBIT 10.7
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment is entered into as of the 31st day of December, 1998, by and
between NCRIC, Inc. and R. Ray Pate, Jr. ("Pate").
Recitals:
A. As of October 1, 1997, National Capital Reciprocal Insurance Company
("NCRIC"), National Capital Underwriters, Inc. ("NCUI") and Pate entered into an
Employment Agreement (the "Employment Agreement");
B. NCRIC, Inc. has succeeded to the assets and liabilities of NCRIC,
pursuant to the District of Columbia Reciprocal Insurance Company Conversion Act
of 1998 ("RICC Act");
C. NCUI has been merged into NCRIC, Inc.; and
D. In connection with the reorganization of NCRIC, pursuant to the RICC
Act, the District of Columbia Commissioner of Insurance and Securities required
this amendment to the Employment Agreement.
NOW, THEREFORE, it is mutually agreed as follows:
1. Section 6.b.(iii) of the Employment Agreement is hereby amended by
inserting after the word "occurs" in the first sentence the phrase "on or after
December 31, 2000."
2. Except as herein amended, all the terms and conditions of the
Employment Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first written above.
NCRIC, INC.
By: /s/ Nelson P. Trujillo, M.D.
---------------------------------------
R. RAY PATE, JR.
/s/ R. Ray Pate, Jr.
-----------------------------------------
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of the 4th day of
January, 1999, by and between NCRIC MSO, Inc. ("Employer") and L.E. Shepherd,
Jr. ("Executive").
RECITALS:
A. Employer, for itself and on behalf of its subsidiaries, HealthCare
Consulting, Inc. ("HCI") and HCI Ventures, LLC ("HCIV"), desires to retain
Executive as HCI's and HCIV's Executive Vice President and Chief Operating
Officer on the terms and conditions hereinafter set forth; and
B. Executive desires to continue employment by HCI and HCIV, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the mutual covenants set
forth herein, the parties hereto agree as follows:
1. EMPLOYMENT.
Employer hereby agrees to cause HCI and HCIV to continue to employ Executive for
a term of five (5) years from the effective date of this Agreement as Executive
Vice President and Chief Operating Officer under the conditions hereinafter
specified. Executive accepts this employment under the conditions hereinafter
specified and agrees to devote his best efforts, energies and abilities to the
service of HCI and HCIV on a full-time basis. After the five-year term, this
Agreement shall automatically expire and be of no further force or effect.
2. DUTIES.
(a) Executive shall serve as Executive Vice President and Chief Operating
Officer of HCI and HCIV and in such other commensurate executive capacities of
HCI and HCIV as he may from time to time be assigned by HCI. Executive shall
perform all of his duties diligently and faithfully. However, it is understood
and agreed that Executive shall not receive compensation beyond that specified
herein.
(b) Executive shall at all times devote his entire working time, attention,
energies, efforts and skills to the business of HCI or HCIV, and shall not,
directly or indirectly, engage in any other business activity, whether or not
for profit, gain or other pecuniary advantages, without the express written
permission of Employer, except with the approval of Employer. Notwithstanding
the foregoing, Executive may serve on the board of directors of any non-
competing company and receive compensation therefor provided he obtains the
advance written approval of Employer, which shall not be unreasonably withheld,
and provided that any such service does not adversely affect his performance of
his duties for Employer. Executive shall not be required to account to Employer
for any compensation he may receive for such approved service on the board of
directors of a non-competing company, and such compensation shall not diminish
in any way the compensation or benefits to which he is entitled under this
Agreement.
3. COMPENSATION.
Executive's compensation shall be determined pursuant to Section 2(ix) of the
Operating Agreement dated of even date herewith among Employer, NCRIC Group.
Inc., HCI, HCI Ventures, LLC, L. E. Shepherd, Jr., William A. Hunter, Jr. and
Barry S. Pillow.
4. BENEFITS.
A. RETIREMENT AND/OR PENSION PLAN(S). Executive shall be entitled to
participate in any retirement and/or pension plan(s) offered to Employer's
senior executives and/or key management Executives as an employee in accordance
with the terms of such plan(s), as they may be modified at Employer's discretion
from time to time.
B. HEALTH AND MEDICAL INSURANCE. Executive shall be entitled to participate
in any health and medical insurance plan(s) offered to Employer's senior
executives and/or key management Executives as an employee in accordance with
the terms of such plan(s), as they may be modified at Employer's discretion from
time to time.
C. PAID SICK LEAVE. Executive shall accrue one (1) day of paid sick leave per
month, up to a maximum of twelve (12) days of paid sick leave at any given time.
All accrued, but unused, paid sick leave shall be forfeited upon termination of
employment.
D. PAID VACATION. Executive shall accrue four weeks of paid vacation during
each calendar year; however, in no event shall Executive use more than three
weeks at any one time. Accrued, but unused, paid vacation in excess of ten days
shall expire on December 31st of the year in which it accrues. No more than ten
days of accrued, but unused, paid vacation may be carried over from one year to
the next. All accrued, but unused, paid vacation is forfeited upon termination
of employment by either party; provided, however, that if Executive provides
advance notice of his intent to terminate his employment in accordance with
paragraph 7 of this Agreement, Employer shall cause HCI to pay him for all of
his accrued, but unused, paid vacation, less standard withholdings and
deductions.
E. LIFE INSURANCE. Employer shall cause HCI to procure a term life insurance
policy in a face amount of no less than twice the amount of Executive's annual
base compensation provided that Executive is insurable at standard rates.
Executive shall be entitled to designate the beneficiary or beneficiaries of
such policy in his sole discretion.
-2-
In the event that Executive is not insurable at standard rates, and desires to
be insured, Executive shall be responsible for payment of any premiums or
amounts charged in excess of the standard rates for such insurance.
F. DISABILITY INSURANCE. Executive shall be entitled to participate in any
disability income insurance policy (both long and short term) offered to
Employer's senior executives and/or any management employees as an employee in
accordance with the terms of such policies, as they may be modified from time to
time. In the event that Executive is not insurable at standard rates, and
desires to be insured, Executive shall be responsible for payment of any
premiums or amounts charged in excess of the standard rates. In the event that
any disability income insurance policy provided by Employer shall require any
waiting or elimination period during which Executive is not entitled to collect
disability income insurance payments even though he is disabled from working,
then during such waiting or elimination period, until the commencement of
payments under the disability income insurance policy, Employer shall pay
Executive a supplemental disability income benefit equal to his regular semi-
monthly salary. If, and when, Executive should begin to receive disability
payments under the terms of Employer's disability income insurance policy then
in force, Employer agrees to supplement said monthly disability payments by
paying to Executive the difference between such sums paid by the disability
insurer and Executive's compensation set forth in Section 3 above for a maximum
period of twelve (12) consecutive months. Following expiration of said twelve
(12) months, the coverage and provisions of Employer's disability income
insurance policy shall constitute the entire wage continuation plan provided in
this Agreement and, except for the payment of the premiums on such policy,
Employer shall have no further liability to Executive for wage continuation. It
is further understood that Executive's employment with Employer shall be
terminated following twelve (12) consecutive months of total disability (i.e.,
being unable to carry out the normal functions and requirements of his position
with Employer) regardless of how and when the aforementioned disability income
payments from Employer's disability income insurance policy may be paid or due
to Executive.
Notwithstanding the foregoing, Executive shall continue to receive all the
benefits that, immediately prior to the date hereof, he was receiving from HCI
and HCIV and, accordingly, Executives hereby foregoes the benefits referred to
in Sections 4.a, 4.b, 4.e and 4.f. and 5.b. At any time during the term of this
Agreement, Executive may elect to accept the benefits described in the
aforementioned Sections in lieu of the benefits described in the first sentence.
Such election shall be effective upon delivery of written notice thereof to
Employer.
-3-
5. EXPENSES.
A. BUSINESS EXPENSES. Employer shall cause HCI to reimburse Executive for
ordinary and reasonable business expenses incurred by him in the discharge of
his duties hereunder, including but not limited to reimbursement for the
business use of Executive's automobile and travel, lodging and entertainment
expenses, provided Executive furnishes appropriate documentation for such
expenses and that said expenses are in accordance with Employer's then
prevailing policies and procedures regarding said expenditures.
B. CONTINUING EDUCATION EXPENSES. Employer shall cause HCI to pay the
ordinary and reasonable costs associated with continuing education classes or
continuing education programs Executive participates in which are related to
Employer's business interests, provided Executive furnishes appropriate
documentation to Employer for such costs and gives the Chief Executive Officer
of Employer reasonable notice of any expenditures for continuing education. All
such expenses in excess of One Thousand Dollars ($1,000) must be approved by
such Chief Executive Officer in advance.
C. EFFECT OF TERMINATION OF EMPLOYMENT. All payment or reimbursement of
expenses authorized by Section 5 hereof shall cease upon Executive's termination
of employment whether or not said termination is for cause.
6. TERMINATION OF EMPLOYMENT BY EMPLOYER.
A. TERMINATION FOR CAUSE. The employment of Executive under this Agreement,
and the term hereof, may be terminated for "cause" by Employer at any time upon
the occurrence of any one or more of the following events:
(i) Executive's fraud, dishonesty, gross negligence or willful misconduct in
the performance of his duties hereunder, including willful failure to perform
such executive duties as may properly be assigned him hereunder;
(ii) Executive's breach of any material provision of this Agreement provided
that Employer has delivered written notice of such breach to Executive
(describing such breach in reasonable detail) and Executive has not caused the
cessation of such breach within ten (10) days after receipt of such notice; or
(iii) Executive's breach of any material provision of the Operating Agreement
entered into simultaneously herewith by Employer, NCRIC Group, Inc., HCI, HCI
Ventures, LLC, L.E. Shepherd, Jr., William A. Hunter, Jr. and Barry S. Pillow
(the "Operating Agreement") provided that Employer has delivered written notice
of such breach to Executive (describing such breach in reasonable detail) and
Executive has not caused the cessation of such breach within ten (10) days after
receipt of such notice.
-4-
Any termination by reason of the foregoing shall not be in limitation of any
right or remedy which Employer may have under this Agreement or otherwise.
Should Executive dispute whether Employer possessed legitimate "cause" in
accordance herewith, then in such event a neutral arbitrator shall be chosen in
accordance with the procedures set forth in paragraph 17 of this Agreement to
decide that issue. If Employer terminates Executive's employment for "cause"
pursuant to this subparagraph 6(a) (and such termination is decided to be
permissible by an arbitrator appointed for that purpose in accordance with the
provisions herein), his right to any compensation, including but not limited to
severance pay, shall cease immediately; provided, however, Executive shall be
paid all salary and benefits accrued to the date of such termination.
B. TERMINATION WITHOUT CAUSE.
(i) Employer may terminate Executive's employment without cause and without
notice at any time.
(ii) If Employer terminates Executive's employment for any reason except for
"cause" as specifically defined in Section 6 a. (i) - (iii) above, such
termination shall be deemed a termination without cause. In the event of such
termination without cause, Employer shall pay Executive in cash on the date of
such termination as a severance payment, an amount equal to the total of (1)
36.1% of the difference between $3,100,000 and the sum of all payments
theretofore made under Section 2 (b) of that certain Purchase Agreement dated
December 20, 1998 among NCRIC Group Inc. ("Group") and L. E. Shepherd, Jr.,
William A. Hunter, Jr., and Barry S. Pillow (the "Purchase Agreement"); provided
that, if the termination takes place after December 31, 2000 and no payment is
due relating to 2000 under such Section 2(b), then such amount of $3,100,000
shall instead be $1,550,000; and (2) all salary and benefits accrued to the date
of such termination. Upon the prompt and punctual payment of the total amount of
the aforementioned severance payment, Executive and Employer agree to execute
and deliver a mutual general release whereby Executive and Employer and
Employer's affiliates agree to release each other from all claims under this
Agreement and the Operating Agreement.
(iii) If a "Change of Duties" in connection with a "Change of Control" occurs,
Employer shall be deemed to have terminated Executive's employment without cause
for the purposes of this Section 6. "Change of Control" shall be deemed to have
occurred if HCI or HCIV merges into, consolidates with, or sells, leases or
otherwise transfers all or a significant portion of the combined assets of HCI,
HCIV and Employee Benefit Services, Inc. ("EBSI") (the assets of EBSI were
acquired by Employer pursuant to that certain Purchase Agreement dated December
20, 1998 between Group and EBSI) to another entity (which for the purpose of
this Agreement shall include the sale or transfer of 50% or more of the
ownership of HCI or HCIV); and "Change of Duties" shall be deemed to have
occurred if a material change in the nature, terms or conditions of Executive's
employment occurs, including but not limited to a material change in his duties,
authority, responsibilities
-5-
or job location. Full demutualization of NCRIC, A Mutual Holding Company, the
ultimate parent of Employer, shall not be deemed to be a Change of Control.
(iv) In the event that Employer breaches any material provision of the Operating
Agreement provided that Executive has delivered written notice of such breach to
Employer (describing such breach in reasonable detail) and Employer has not
caused such breach to be cured within ten (10) days after receipt of such
notice, Employer shall be deemed to have terminated Executive's employment
without cause for purposes of this Section 6.
7. TERMINATION OF EMPLOYMENT BY EXECUTIVE.
If Executive voluntarily terminates his employment without cause at any time
prior to January 1, 2002, Executive shall pay Employer on the date of
termination a cash amount equal to the amount payable to Executive under this
Agreement from the termination date through December 31, 2002, exclusive of
benefits and less standard withholdings and deductions. On or after January 1,
2002, Executive may voluntarily terminate his employment hereunder without cause
by delivering one year's prior written notice thereof to Employer.
Notwithstanding the foregoing, Executive shall be allowed to voluntarily
terminate his employment hereunder for any of the following reasons, which
termination shall not be deemed without cause and in which case the first two
sentences of this Section 7 shall not be operative: (a) Employer or an affiliate
breaches any material provision of the Operating Agreement, provided that
Executive has delivered written notice of such breach to Employer (describing
such breach in reasonable detail) and Employer has not caused such breach to be
cured within ten (10) days after the receipt thereof, (b) Employer breaches any
material provision of this Agreement provided that Executive has delivered
written notice of such breach to Employer (describing such breach in reasonable
detail) and Employer has not caused such breach to be cured within ten (10) days
after the receipt thereof, (c) Group has defaulted on its payment or performance
obligations under Section 2 (b) or 12 of the Purchase Agreement, (d) Employer
has defaulted under any of its payment or performance obligations under any of
those certain Convertible Notes dated the date hereof payable by Group to
Executive, William A. Hunter, Jr., and Barry S. Pillow; and (e) Employer
breaches any material provision of any employment agreements between Employer
and William A. Hunter, Jr. or Barry S. Pillow.
8. PROTECTION OF EMPLOYER
A. CONFIDENTIAL INFORMATION. Executive shall not at any time during or after
his employment with HCI and HCIV directly or indirectly disclose, discuss,
divulge, copy or otherwise suffer confidential information of Employer or a
subsidiary of Employer to be used, except as required by the performance of his
duties hereunder or by law. For the purposes of this Agreement, "confidential
information" shall mean all information disclosed to Executive by Employer or a
subsidiary of Employer or known by him as a consequence of or through his
employment with HCI or HCIV, where such information is not generally known in
the trade or industry, and where such information refers or relates in any
manner
-6-
whatsoever to the business activities, processes, services or products of
Employer or a subsidiary of Employer. Such information includes, but is not
limited to, Employer's or a subsidiary's business and development plans (whether
contemplated, initiated or completed), development sites, business contacts,
customer lists, actuarial tables, loss data, marketing information, policy
forms, contracts, research of any kind, methods of operation, results of
analysis, business forecasts, financial data, costs, revenues and similar
information. Upon termination of this Agreement, Executive shall immediately
return to Employer all of its property, and all copies thereof, including
without limitation all confidential information which has been reduced to
tangible form, in his possession, custody or control.
B. COVENANT NOT TO COMPETE. Executive agrees that he shall not, during his
employment and for a period of two (2) years after the date on which either
Executive gives notice of his intention to terminate his employment or Employer
gives notice to employee, to terminate his employment, directly or indirectly,
either as an officer, director, employee, agent, adviser, consultant, principal,
stockholder, partner, owner or in an other capacity, on his own behalf or
otherwise, in any way (i) engage in, represent, be connected with, or have a
financial interest in, any other insurance company or management services
organization in the healthcare field , or any corporation, firm, association or
other business entity which is, or to the best of Executive's knowledge, is
about to become, engaged in the same or similar business as Employer or which
otherwise competes with or is about to compete with Employer in the District of
Columbia or any states where Employer may operate or are licensed to operate,
(ii) solicit or otherwise attempt to establish, for himself or any other person
or entity, any business relationship with any person or entity which was a
customer of Employer or an affiliate of Employer at any time during the two
years preceding such notice or (iii) solicit for employment or employ any person
who was an employee of a Employer or an affiliate of Employer in the year
preceding such notice. Executive's ownership of not more than one percent (1%)
of the stock of any publicly traded corporation shall not be deemed a violation
of this covenant. Notwithstanding the foregoing, while the restrictions in this
Section 8.b continue, Executive may be employed as an administrator of a medical
practice (i) by only one person or entity that is not a client of HCI or
Employer or (ii) by only one client of HCI or Employer, with the consent of
Employer, which consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, if Executive is terminated for cause under
Section 6.a or if Executive voluntarily terminates his employment under the
first two sentences of Section 7, the restrictions in this Section 8.b shall
continue until the second anniversary of the termination and if Employer
terminates Executive without cause under Section 6.b above and fails to make
timely payment of the severance payment described in Section 6 b(ii) or if
Executive voluntarily resigns his employment hereunder for any of the reasons
set forth in Sections 7(a) through (e), this Section 8.b shall not be operative.
C. REMEDIES AND ACKNOWLEDGMENT OF REASONABLENESS. Executive agrees that the
restrictions imposed upon him by the provisions of this paragraph 8 are fair and
reasonable considering the nature of Employer's and its subsidiaries'
businesses, and are reasonably
-7-
required for the protection of Employer. Executive acknowledges that compliance
with this paragraph 8 is necessary for the protection of the goodwill and other
proprietary interests of Employer, and that, after carefully considering the
extent of the restrictions upon him and the rights and remedies conferred upon
Employer under this Section 8, the same are reasonable in time and territory,
are designed to eliminate competition which otherwise would be unfair to
Employer, do not stifle the inherent skill and experience of Executive, would
not operate as a bar to Executive's sole means of support, are fully required to
protect the legitimate interests of Employer, and do not confer a benefit upon
Employer disproportionate to the detriment to Executive.
Executive further acknowledges and agrees that in the event of a breach of this
paragraph 8, Employer would not have an adequate remedy at law because the
damages flowing from such breach would not be readily susceptible of measurement
in monetary terms and that Employer shall be entitled to injunctive relief and
may obtain a temporary order restraining any threatened breach or future breach
in addition to any other remedies which may be available at law or equity.
Nothing in this paragraph 8 shall be deemed to limit Employer's remedies at law
or in equity for breach of this or any other paragraph of this Agreement.
9. DEATH OR INCAPACITY.
In the event that Executive dies or, due to a permanent physical or mental
impairment as evidenced by the written opinion of a physician duly licensed in
Virginia, becomes unable to perform the essential functions of his position with
or without reasonable accommodation, this Agreement shall be deemed terminated
and Executive or his estate, as the case may be, shall be entitled to no further
salary, compensation or benefits hereunder, except (a) any unpaid salary,
incentive payments and vacation accrued and earned by Executive up to and
including the date of such termination, and (b) any disability, life insurance
or other benefits to which Executive or his estate may be entitled on the date
of such termination in accordance with the terms and conditions of any
applicable benefit plan(s) as set forth in official plan documents.
10. ASSIGNMENT.
This Agreement is a personal service agreement and neither party shall have the
right to assign this Agreement or any rights or obligations hereunder without
the prior written consent of the other party.
11. NOTICES.
All notices required or permitted hereunder shall be in writing and shall be
deemed properly given if delivered personally or sent by certified or registered
mail, postage prepaid, return receipt requested. If mailed to Employer, such
notices shall be addressed to Employer at its principal place of business,
attention: President, or at such other address as Employer
-8-
may hereafter designate in writing to Executive. If mailed to Executive, such
notices shall be addressed to him at his home address last known on the records
of Employer, or at such other address as Executive may hereafter designate in
writing to Employer.
12. SUCCESSORS BOUND.
This Agreement shall bind and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, estates and permitted
successors and assigns.
13. WAIVER.
No provision hereof may be waived, except by a written instrument signed by the
party against whom such waiver is sought to be enforced. The failure of either
party hereto at any time, or from time to time, to require performance by the
other party of such other party's obligation hereunder, shall not deprive that
party of the right to insist upon strict adherence to such obligation at any
subsequent time. Each party hereto agrees that any waiver of its rights arising
out of any breach of this Agreement by the other party shall not be construed as
a waiver of any subsequent breach.
14. AMENDMENT.
No provision hereof may be altered or amended, except by a written instrument
signed by the party against whom such alteration or amendment is sought to be
enforced.
15. CONFIDENTIALITY.
Except as otherwise agreed between the parties and as required by law, each
party agrees to maintain the confidentiality of this Agreement; provided,
however, that either party may disclose provisions of this Agreement to others
for the purpose of protecting or enforcing their respective rights hereunder or
as otherwise required by law.
16. GOVERNING LAW.
The parties agree that this Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
District of Columbia, without regard to the principles of conflicts of laws
thereof.
17. ARBITRATION.
A. In the event the parties are unable to resolve a controversy under this
Agreement, the parties agree to submit the matter to binding arbitration under
the rules of the American Arbitration Association, but not using the American
Arbitration Association, unless the parties mutually agree to do so. One
arbiter shall be chosen by Employer and one by Executive before commencement of
arbitration. The two arbiters shall choose a third
-9-
arbiter. The decision of the first two arbiters shall be final and binding upon
both parties; however, if those arbiters fail to agree, the third arbiter shall
participate and the decision of the majority shall be final and binding. The
parties expressly covenant and agree to be bound by the decision of the arbiters
and accept any decision by a majority of the arbiters as a final determination
of the matter in dispute. In connection with the foregoing, the parties hereby
waive any right to an appeal or to commence a de novo action with respect to the
final determination. All arbiters chosen pursuant to this Section 17 shall have
substantial experience in the healthcare management field and shall have
demonstrated knowledge concerning the types of issues involved.
B. Each party shall bear its own expenses, including legal, accounting and
expert fees, in connection with the arbitration, except that Buyer and Executive
shall each pay fifty percent (50%) of the expenses of the arbiters.
C. Any such arbitration shall take place in the District of Columbia unless
some other location is mutually agreed upon by the parties.
18. SEVERABILITY.
In the event that any provision of this Agreement conflicts with the law under
which this Agreement is to be construed, or if any such provision is held
invalid or unenforceable by a court of competent jurisdiction or an arbitrator,
such provision shall be deleted from this Agreement and the Agreement shall be
construed to give full effect to the remaining provisions thereof.
19. HEADINGS AND CAPTIONS.
The paragraph headings and captions contained in this Agreement are for
convenience only and shall not be construed to define, limit or affect the scope
or meaning of the provisions hereof.
20. ENTIRE AGREEMENT.
This Agreement contains and represents the entire agreement of the parties and
supersedes all prior agreements, representations or understandings, oral or
written, express or implied, with respect to the subject matter hereof. No
representation, promise or inducement concerning the subject matter of this
Agreement has been made by either party hereto to the other that is not embodied
in this Agreement, and neither party shall be bound or liable for any alleged
representation, promise or inducement concerning the subject matter of this
Agreement not specifically set forth herein.
21. EFFECTIVE DATE OF AGREEMENT.
-10-
This Agreement shall take effect only when it has been executed by both parties
but when executed and approved shall be enforceable as of the day and year first
written above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first written above.
Employer:
NCRIC Group, Inc.
By: /s/ R. Ray Pate, Jr.
-----------------------------
Print Name: R. Ray Pate, Jr.
------------------
Title: President
---------------------
Executive:
L.E. Shepherd, Jr.
/s/ L.E. Shepherd, Jr.
--------------------------------
-11-
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of the 4th day of
January, 1999, by and between NCRIC MSO, Inc. ("Employer") and William A.
Hunter, Jr. ("Executive").
RECITALS:
A. Employer, for itself and on behalf of its subsidiaries, HealthCare
Consulting, Inc. ("HCI") and HCI Ventures, LLC ("HCIV"), desires to retain
Executive as HCI's and HCIV's Executive Vice President on the terms and
conditions hereinafter set forth; and
B. Executive desires to continue employment by HCI and HCIV, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the mutual covenants set
forth herein, the parties hereto agree as follows:
1. EMPLOYMENT.
Employer hereby agrees to cause HCI and HCIV to continue to employ Executive for
a term of five (5) years from the effective date of this Agreement as Executive
Vice President under the conditions hereinafter specified. Executive accepts
this employment under the conditions hereinafter specified and agrees to devote
his best efforts, energies and abilities to the service of HCI and HCIV on a
full-time basis. After the five-year term, this Agreement shall automatically
expire and be of no further force or effect.
2. DUTIES.
(a) Executive shall serve as Executive Vice President of HCI and HCIV and in
such other commensurate executive capacities of HCI and HCIV as he may from time
to time be assigned by HCI. Executive shall perform all of his duties
diligently and faithfully. However, it is understood and agreed that Executive
shall not receive compensation beyond that specified herein.
(b) Executive shall at all times devote his entire working time, attention,
energies, efforts and skills to the business of HCI or HCIV, and shall not,
directly or indirectly, engage in any other business activity, whether or not
for profit, gain or other pecuniary advantages, without the express written
permission of Employer, except with the approval of Employer. Notwithstanding
the foregoing, Executive may serve on the board of directors of any non-
competing company and receive compensation therefor provided he obtains the
advance written approval of Employer, which shall not be unreasonably withheld,
and provided that
any such service does not adversely affect his performance of his duties for
Employer. Executive shall not be required to account to Employer for any
compensation he may receive for such approved service on the board of directors
of a non-competing company, and such compensation shall not diminish in any way
the compensation or benefits to which he is entitled under this Agreement.
3. COMPENSATION.
Executive's compensation shall be determined pursuant to Section 2(ix) of the
Operating Agreement dated of even date herewith among Employer, NCRIC Group.
Inc., HCI, HCI Ventures, LLC, L. E. Shepherd, Jr., William A. Hunter, Jr. and
Barry S. Pillow.
4. BENEFITS.
A. RETIREMENT AND/OR PENSION PLAN(S). Executive shall be entitled to
participate in any retirement and/or pension plan(s) offered to Employer's
senior executives and/or key management Executives as an employee in accordance
with the terms of such plan(s), as they may be modified at Employer's discretion
from time to time.
B. HEALTH AND MEDICAL INSURANCE. Executive shall be entitled to participate
in any health and medical insurance plan(s) offered to Employer's senior
executives and/or key management Executives as an employee in accordance with
the terms of such plan(s), as they may be modified at Employer's discretion from
time to time.
C. PAID SICK LEAVE. Executive shall accrue one (1) day of paid sick leave per
month, up to a maximum of twelve (12) days of paid sick leave at any given time.
All accrued, but unused, paid sick leave shall be forfeited upon termination of
employment.
D. PAID VACATION. Executive shall accrue four weeks of paid vacation during
each calendar year; however, in no event shall Executive use more than three
weeks at any one time. Accrued, but unused, paid vacation in excess of ten days
shall expire on December 31st of the year in which it accrues. No more than ten
days of accrued, but unused, paid vacation may be carried over from one year to
the next. All accrued, but unused, paid vacation is forfeited upon termination
of employment by either party; provided, however, that if Executive provides
advance notice of his intent to terminate his employment in accordance with
paragraph 7 of this Agreement, Employer shall cause HCI to pay him for all of
his accrued, but unused, paid vacation, less standard withholdings and
deductions.
E. LIFE INSURANCE. Employer shall cause HCI to procure a term life insurance
policy in a face amount of no less than twice the amount of Executive's annual
base compensation provided that Executive is insurable at standard rates.
Executive shall be entitled to designate the beneficiary or beneficiaries of
such policy in his sole discretion. In the event that Executive is not insurable
at standard rates, and desires to be insured,
-2-
Executive shall be responsible for payment of any premiums or amounts charged in
excess of the standard rates for such insurance.
F. DISABILITY INSURANCE. Executive shall be entitled to participate in any
disability income insurance policy (both long and short term) offered to
Employer's senior executives and/or any management employees as an employee in
accordance with the terms of such policies, as they may be modified from time to
time. In the event that Executive is not insurable at standard rates, and
desires to be insured, Executive shall be responsible for payment of any
premiums or amounts charged in excess of the standard rates. In the event that
any disability income insurance policy provided by Employer shall require any
waiting or elimination period during which Executive is not entitled to collect
disability income insurance payments even though he is disabled from working,
then during such waiting or elimination period, until the commencement of
payments under the disability income insurance policy, Employer shall pay
Executive a supplemental disability income benefit equal to his regular semi-
monthly salary. If, and when, Executive should begin to receive disability
payments under the terms of Employer's disability income insurance policy then
in force, Employer agrees to supplement said monthly disability payments by
paying to Executive the difference between such sums paid by the disability
insurer and Executive's compensation set forth in Section 3 above for a maximum
period of twelve (12) consecutive months. Following expiration of said twelve
(12) months, the coverage and provisions of Employer's disability income
insurance policy shall constitute the entire wage continuation plan provided in
this Agreement and, except for the payment of the premiums on such policy,
Employer shall have no further liability to Executive for wage continuation. It
is further understood that Executive's employment with Employer shall be
terminated following twelve (12) consecutive months of total disability (i.e.,
being unable to carry out the normal functions and requirements of his position
with Employer) regardless of how and when the aforementioned disability income
payments from Employer's disability income insurance policy may be paid or due
to Executive.
Notwithstanding the foregoing, Executive shall continue to receive all the
benefits that, immediately prior to the date hereof, he was receiving from HCI
and HCIV and, accordingly, Executives hereby foregoes the benefits referred to
in Sections 4.a, 4.b, 4.e and 4.f. and 5.b. At any time during the term of this
Agreement, Executive may elect to accept the benefits described in the
aforementioned Sections in lieu of the benefits described in the first sentence.
Such election shall be effective upon delivery of written notice thereof to
Employer.
-3-
5. EXPENSES.
A. BUSINESS EXPENSES. Employer shall cause HCI to reimburse Executive for
ordinary and reasonable business expenses incurred by him in the discharge of
his duties hereunder, including but not limited to reimbursement for the
business use of Executive's automobile and travel, lodging and entertainment
expenses, provided Executive furnishes appropriate documentation for such
expenses and that said expenses are in accordance with Employer's then
prevailing policies and procedures regarding said expenditures.
B. CONTINUING EDUCATION EXPENSES. Employer shall cause HCI to pay the
ordinary and reasonable costs associated with continuing education classes or
continuing education programs Executive participates in which are related to
Employer's business interests, provided Executive furnishes appropriate
documentation to Employer for such costs and gives the Chief Executive Officer
of Employer reasonable notice of any expenditures for continuing education. All
such expenses in excess of One Thousand Dollars ($1,000) must be approved by
such Chief Executive Officer in advance.
C. EFFECT OF TERMINATION OF EMPLOYMENT. All payment or reimbursement of
expenses authorized by Section 5 hereof shall cease upon Executive's termination
of employment whether or not said termination is for cause.
6. TERMINATION OF EMPLOYMENT BY EMPLOYER.
A. TERMINATION FOR CAUSE. The employment of Executive under this Agreement,
and the term hereof, may be terminated for "cause" by Employer at any time upon
the occurrence of any one or more of the following events:
(i) Executive's fraud, dishonesty, gross negligence or willful misconduct in
the performance of his duties hereunder, including willful failure to perform
such executive duties as may properly be assigned him hereunder;
(ii) Executive's breach of any material provision of this Agreement provided
that Employer has delivered written notice of such breach to Executive
(describing such breach in reasonable detail) and Executive has not caused the
cessation of such breach within ten (10) days after receipt of such notice; or
(iii) Executive's breach of any material provision of the Operating
Agreement entered into simultaneously herewith by Employer, NCRIC Group, Inc.,
HCI, HCI Ventures, LLC, L.E. Shepherd, Jr., William A. Hunter, Jr. and Barry S.
Pillow (the "Operating Agreement") provided that Employer has delivered written
notice of such breach to Executive (describing such breach in reasonable detail)
and Executive has not caused the cessation of such breach within ten (10) days
after receipt of such notice.
-4-
Any termination by reason of the foregoing shall not be in limitation of any
right or remedy which Employer may have under this Agreement or otherwise.
Should Executive dispute whether Employer possessed legitimate "cause" in
accordance herewith, then in such event a neutral arbitrator shall be chosen in
accordance with the procedures set forth in paragraph 17 of this Agreement to
decide that issue. If Employer terminates Executive's employment for "cause"
pursuant to this subparagraph 6(a) (and such termination is decided to be
permissible by an arbitrator appointed for that purpose in accordance with the
provisions herein), his right to any compensation, including but not limited to
severance pay, shall cease immediately; provided, however, Executive shall be
paid all salary and benefits accrued to the date of such termination.
B. TERMINATION WITHOUT CAUSE.
(i) Employer may terminate Executive's employment without cause and without
notice at any time.
(ii) If Employer terminates Executive's employment for any reason except for
"cause" as specifically defined in Section 6 a. (i) - (iii) above, such
termination shall be deemed a termination without cause. In the event of such
termination without cause, Employer shall pay Executive in cash on the date of
such termination as a severance payment, an amount equal to the total of (1)
36.1% of the difference between $3,100,000 and the sum of all payments
theretofore made under Section 2 (b) of that certain Purchase Agreement dated
December 20, 1998 among NCRIC Group Inc. ("Group") and L. E. Shepherd, Jr.,
William A. Hunter, Jr., and Barry S. Pillow (the "Purchase Agreement"); provided
that, if the termination takes place after December 31, 2000 and no payment is
due relating to 2000 under such Section 2(b), then such amount of $3,100,000
shall instead be $1,550,000; and (2) all salary and benefits accrued to the date
of such termination. Upon the prompt and punctual payment of the total amount of
the aforementioned severance payment, Executive and Employer agree to execute
and deliver a mutual general release whereby Executive and Employer and
Employer's affiliates agree to release each other from all claims under this
Agreement and the Operating Agreement.
(iii) If a "Change of Duties" in connection with a "Change of Control"
occurs, Employer shall be deemed to have terminated Executive's employment
without cause for the purposes of this Section 6. "Change of Control" shall be
deemed to have occurred if HCI or HCIV merges into, consolidates with, or
sells, leases or otherwise transfers all or a significant portion of the
combined assets of HCI, HCIV and Employee Benefit Services, Inc. ("EBSI") (the
assets of EBSI were acquired by Group pursuant to that certain Purchase
Agreement dated December 20, 1998 between Group and EBSI) to another entity
(which for the purpose of this Agreement shall include the sale or transfer of
50% or more of the ownership of HCI or HCIV); and "Change of Duties" shall be
deemed to have occurred if a material change in the nature, terms or conditions
of Executive's employment occurs, including but not limited to a material change
in his duties, authority, responsibilities or job
-5-
location. Full demutualization of NCRIC, A Mutual Holding Company, the ultimate
parent of Employer, shall not be deemed to be a Change of Control.
(iv) In the event that Employer breaches any material provision of the
Operating Agreement provided that Executive has delivered written notice of such
breach to Employer (describing such breach in reasonable detail) and Employer
has not caused such breach to be cured within ten (10) days after receipt of
such notice, Employer shall be deemed to have terminated Executive's employment
without cause for purposes of this Section 6.
7. TERMINATION OF EMPLOYMENT BY EXECUTIVE.
If Executive voluntarily terminates his employment without cause at any time
prior to January 1, 2002, Executive shall pay Employer on the date of
termination a cash amount equal to the amount payable to Executive under this
Agreement from the termination date through December 31, 2002, exclusive of
benefits and less standard withholdings and deductions. On or after January 1,
2002, Executive may voluntarily terminate his employment hereunder without cause
by delivering one year's prior written notice thereof to Employer.
Notwithstanding the foregoing, Executive shall be allowed to voluntarily
terminate his employment hereunder for any of the following reasons, which
termination shall not be deemed without cause and in which case the first two
sentences of this Section 7 shall not be operative: (a) Employer or an affiliate
breaches any material provision of the Operating Agreement, provided that
Executive has delivered written notice of such breach to Employer (describing
such breach in reasonable detail) and Employer has not caused such breach to be
cured within ten (10) days after the receipt thereof, (b) Employer breaches any
material provision of this Agreement provided that Executive has delivered
written notice of such breach to Employer (describing such breach in reasonable
detail) and Employer has not caused such breach to be cured within ten (10) days
after the receipt thereof, (c) Group has defaulted on its payment or performance
obligations under Section 2 (b) or 12 of the Purchase Agreement, (d) Employer
has defaulted under any of its payment or performance obligations under any of
those certain Convertible Notes dated the date hereof payable by Group to
Executive, L.E. Shepherd, Jr., and Barry S. Pillow; and (e) Employer breaches
any material provision of any employment agreements between Employer and L.E.
Shepherd, Jr. or Barry S. Pillow.
8. PROTECTION OF EMPLOYER
A. CONFIDENTIAL INFORMATION. Executive shall not at any time during or after
his employment with HCI and HCIV directly or indirectly disclose, discuss,
divulge, copy or otherwise suffer confidential information of Employer or a
subsidiary of Employer to be used, except as required by the performance of his
duties hereunder or by law. For the purposes of this Agreement, "confidential
information" shall mean all information disclosed to Executive by Employer or a
subsidiary of Employer or known by him as a consequence of or through his
employment with HCI or HCIV, where such information is not generally known in
the trade or industry, and where such information refers or relates in any
manner
-6-
whatsoever to the business activities, processes, services or products of
Employer or a subsidiary of Employer. Such information includes, but is not
limited to, Employer's or a subsidiary's business and development plans (whether
contemplated, initiated or completed), development sites, business contacts,
customer lists, actuarial tables, loss data, marketing information, policy
forms, contracts, research of any kind, methods of operation, results of
analysis, business forecasts, financial data, costs, revenues and similar
information. Upon termination of this Agreement, Executive shall immediately
return to Employer all of its property, and all copies thereof, including
without limitation all confidential information which has been reduced to
tangible form, in his possession, custody or control.
B. COVENANT NOT TO COMPETE. Executive agrees that he shall not, during his
employment and for a period of two (2) years after the date on which either
Executive gives notice of his intention to terminate his employment or Employer
gives notice to employee, to terminate his employment, directly or indirectly,
either as an officer, director, employee, agent, adviser, consultant, principal,
stockholder, partner, owner or in an other capacity, on his own behalf or
otherwise, in any way (i) engage in, represent, be connected with, or have a
financial interest in, any other insurance company or management services
organization in the healthcare field , or any corporation, firm, association or
other business entity which is, or to the best of Executive's knowledge, is
about to become, engaged in the same or similar business as Employer or which
otherwise competes with or is about to compete with Employer in the District of
Columbia or any states where Employer may operate or are licensed to operate,
(ii) solicit or otherwise attempt to establish, for himself or any other person
or entity, any business relationship with any person or entity which was a
customer of Employer or an affiliate of Employer at any time during the two
years preceding such notice or (iii) solicit for employment or employ any person
who was an employee of a Employer or an affiliate of Employer in the year
preceding such notice. Executive's ownership of not more than one percent (1%)
of the stock of any publicly traded corporation shall not be deemed a violation
of this covenant. Notwithstanding the foregoing, while the restrictions in this
Section 8.b continue, Executive may be employed as an administrator of a medical
practice (i) by only one person or entity that is not a client of HCI or
Employer or (ii) by only one client of HCI or Employer, with the consent of
Employer, which consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, if Executive is terminated for cause under
Section 6.a or if Executive voluntarily terminates his employment under the
first two sentences of Section 7, the restrictions in this Section 8.b shall
continue until the second anniversary of the termination and if Employer
terminates Executive without cause under Section 6.b above and fails to make
timely payment of the severance payment described in Section 6b(ii) or if
Executive voluntarily resigns his employment hereunder for any of the reasons
set forth in Sections 7(a) through (e), this Section 8.b shall not be operative.
C. REMEDIES AND ACKNOWLEDGMENT OF REASONABLENESS. Executive agrees that the
restrictions imposed upon him by the provisions of this paragraph 8 are fair and
reasonable considering the nature of Employer's and its subsidiaries'
businesses, and are reasonably
-7-
required for the protection of Employer. Executive acknowledges that compliance
with this paragraph 8 is necessary for the protection of the goodwill and other
proprietary interests of Employer, and that, after carefully considering the
extent of the restrictions upon him and the rights and remedies conferred upon
Employer under this Section 8, the same are reasonable in time and territory,
are designed to eliminate competition which otherwise would be unfair to
Employer, do not stifle the inherent skill and experience of Executive, would
not operate as a bar to Executive's sole means of support, are fully required to
protect the legitimate interests of Employer, and do not confer a benefit upon
Employer disproportionate to the detriment to Executive.
Executive further acknowledges and agrees that in the event of a breach of this
paragraph 8, Employer would not have an adequate remedy at law because the
damages flowing from such breach would not be readily susceptible of measurement
in monetary terms and that Employer shall be entitled to injunctive relief and
may obtain a temporary order restraining any threatened breach or future breach
in addition to any other remedies which may be available at law or equity.
Nothing in this paragraph 8 shall be deemed to limit Employer's remedies at law
or in equity for breach of this or any other paragraph of this Agreement.
9. DEATH OR INCAPACITY.
In the event that Executive dies or, due to a permanent physical or mental
impairment as evidenced by the written opinion of a physician duly licensed in
Virginia, becomes unable to perform the essential functions of his position with
or without reasonable accommodation, this Agreement shall be deemed terminated
and Executive or his estate, as the case may be, shall be entitled to no further
salary, compensation or benefits hereunder, except (a) any unpaid salary,
incentive payments and vacation accrued and earned by Executive up to and
including the date of such termination, and (b) any disability, life insurance
or other benefits to which Executive or his estate may be entitled on the date
of such termination in accordance with the terms and conditions of any
applicable benefit plan(s) as set forth in official plan documents.
10. ASSIGNMENT.
This Agreement is a personal service agreement and neither party shall have the
right to assign this Agreement or any rights or obligations hereunder without
the prior written consent of the other party.
11. NOTICES.
All notices required or permitted hereunder shall be in writing and shall be
deemed properly given if delivered personally or sent by certified or registered
mail, postage prepaid, return receipt requested. If mailed to Employer, such
notices shall be addressed to Employer at its principal place of business,
attention: President, or at such other address as Employer
-8-
may hereafter designate in writing to Executive. If mailed to Executive, such
notices shall be addressed to him at his home address last known on the records
of Employer, or at such other address as Executive may hereafter designate in
writing to Employer.
12. SUCCESSORS BOUND.
This Agreement shall bind and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, estates and permitted
successors and assigns.
13. WAIVER.
No provision hereof may be waived, except by a written instrument signed by the
party against whom such waiver is sought to be enforced. The failure of either
party hereto at any time, or from time to time, to require performance by the
other party of such other party's obligation hereunder, shall not deprive that
party of the right to insist upon strict adherence to such obligation at any
subsequent time. Each party hereto agrees that any waiver of its rights arising
out of any breach of this Agreement by the other party shall not be construed as
a waiver of any subsequent breach.
14. AMENDMENT.
No provision hereof may be altered or amended, except by a written instrument
signed by the party against whom such alteration or amendment is sought to be
enforced.
15. CONFIDENTIALITY.
Except as otherwise agreed between the parties and as required by law, each
party agrees to maintain the confidentiality of this Agreement; provided,
however, that either party may disclose provisions of this Agreement to others
for the purpose of protecting or enforcing their respective rights hereunder or
as otherwise required by law.
16. GOVERNING LAW.
The parties agree that this Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
District of Columbia, without regard to the principles of conflicts of laws
thereof.
17. ARBITRATION.
A. In the event the parties are unable to resolve a controversy under this
Agreement, the parties agree to submit the matter to binding arbitration under
the rules of the American Arbitration Association, but not using the American
Arbitration Association, unless the parties mutually agree to do so. One
arbiter shall be chosen by Employer and one by Executive before commencement of
arbitration. The two arbiters shall choose a third
-9-
arbiter. The decision of the first two arbiters shall be final and binding upon
both parties; however, if those arbiters fail to agree, the third arbiter shall
participate and the decision of the majority shall be final and binding. The
parties expressly covenant and agree to be bound by the decision of the arbiters
and accept any decision by a majority of the arbiters as a final determination
of the matter in dispute. In connection with the foregoing, the parties hereby
waive any right to an appeal or to commence a de novo action with respect to the
final determination. All arbiters chosen pursuant to this Section 17 shall have
substantial experience in the healthcare management field and shall have
demonstrated knowledge concerning the types of issues involved.
B. Each party shall bear its own expenses, including legal, accounting and
expert fees, in connection with the arbitration, except that Buyer and Executive
shall each pay fifty percent (50%) of the expenses of the arbiters.
C. Any such arbitration shall take place in the District of Columbia unless
some other location is mutually agreed upon by the parties.
18. SEVERABILITY.
In the event that any provision of this Agreement conflicts with the law under
which this Agreement is to be construed, or if any such provision is held
invalid or unenforceable by a court of competent jurisdiction or an arbitrator,
such provision shall be deleted from this Agreement and the Agreement shall be
construed to give full effect to the remaining provisions thereof.
19. HEADINGS AND CAPTIONS.
The paragraph headings and captions contained in this Agreement are for
convenience only and shall not be construed to define, limit or affect the scope
or meaning of the provisions hereof.
20. ENTIRE AGREEMENT.
This Agreement contains and represents the entire agreement of the parties and
supersedes all prior agreements, representations or understandings, oral or
written, express or implied, with respect to the subject matter hereof. No
representation, promise or inducement concerning the subject matter of this
Agreement has been made by either party hereto to the other that is not embodied
in this Agreement, and neither party shall be bound or liable for any alleged
representation, promise or inducement concerning the subject matter of this
Agreement not specifically set forth herein.
-10-
21. EFFECTIVE DATE OF AGREEMENT.
This Agreement shall take effect only when it has been executed by both parties
but when executed and approved shall be enforceable as of the day and year first
written above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first written above.
Employer:
NCRIC Group, Inc.
By: /s/ R. Ray Pate, Jr.
-----------------------------------
Print Name: R. Ray Pate, Jr.
----------------------
Title: President
---------------------------
Executive:
William A. Hunter, Jr.
/s/ William A. Hunter, Jr.
------------------------------------
-11-
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of the 4th day of
January, 1999, by and between NCRIC MSO, Inc. ("Employer") and Barry S. Pillow
("Executive").
RECITALS:
A. Employer, for itself and on behalf of its subsidiaries, HealthCare
Consulting, Inc. ("HCI") and HCI Ventures, LLC ("HCIV"), desires to retain
Executive as HCI's and HCIV's Executive Vice President on the terms and
conditions hereinafter set forth; and
B. Executive desires to continue employment by HCI and HCIV, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the mutual covenants set
forth herein, the parties hereto agree as follows:
1. EMPLOYMENT.
Employer hereby agrees to cause HCI and HCIV to continue to employ Executive for
a term of five (5) years from the effective date of this Agreement as Executive
Vice President under the conditions hereinafter specified. Executive accepts
this employment under the conditions hereinafter specified and agrees to devote
his best efforts, energies and abilities to the service of HCI and HCIV on a
full-time basis. After the five-year term, this Agreement shall automatically
expire and be of no further force or effect.
2. DUTIES.
(a) Executive shall serve as Executive Vice President of HCI and HCIV and in
such other commensurate executive capacities of HCI and HCIV as he may from time
to time be assigned by HCI. Executive shall perform all of his duties
diligently and faithfully. However, it is understood and agreed that Executive
shall not receive compensation beyond that specified herein.
(b) Executive shall at all times devote his entire working time, attention,
energies, efforts and skills to the business of HCI or HCIV, and shall not,
directly or indirectly, engage in any other business activity, whether or not
for profit, gain or other pecuniary advantages, without the express written
permission of Employer, except with the approval of Employer. Notwithstanding
the foregoing, Executive may serve on the board of directors of any non-
competing company and receive compensation therefor provided he obtains the
advance written approval of Employer, which shall not be unreasonably withheld,
and provided that any such service does not adversely affect his performance of
his duties for Employer.
Executive shall not be required to account to Employer for any compensation he
may receive for such approved service on the board of directors of a non-
competing company, and such compensation shall not diminish in any way the
compensation or benefits to which he is entitled under this Agreement.
3. COMPENSATION.
Executive's compensation shall be determined pursuant to Section 2(ix) of the
Operating Agreement dated of even date herewith among Employer, NCRIC Group.
Inc., HCI, HCI Ventures, LLC, L. E. Shepherd, Jr., William A. Hunter, Jr. and
Barry S. Pillow.
4. BENEFITS.
A. RETIREMENT AND/OR PENSION PLAN(S). Executive shall be entitled to
participate in any retirement and/or pension plan(s) offered to Employer's
senior executives and/or key management Executives as an employee in accordance
with the terms of such plan(s), as they may be modified at Employer's discretion
from time to time.
B. HEALTH AND MEDICAL INSURANCE. Executive shall be entitled to participate
in any health and medical insurance plan(s) offered to Employer's senior
executives and/or key management Executives as an employee in accordance with
the terms of such plan(s), as they may be modified at Employer's discretion from
time to time.
C. PAID SICK LEAVE. Executive shall accrue one (1) day of paid sick leave per
month, up to a maximum of twelve (12) days of paid sick leave at any given time.
All accrued, but unused, paid sick leave shall be forfeited upon termination of
employment.
D. PAID VACATION. Executive shall accrue four weeks of paid vacation during
each calendar year; however, in no event shall Executive use more than three
weeks at any one time. Accrued, but unused, paid vacation in excess of ten days
shall expire on December 31st of the year in which it accrues. No more than ten
days of accrued, but unused, paid vacation may be carried over from one year to
the next. All accrued, but unused, paid vacation is forfeited upon termination
of employment by either party; provided, however, that if Executive provides
advance notice of his intent to terminate his employment in accordance with
paragraph 7 of this Agreement, Employer shall cause HCI to pay him for all of
his accrued, but unused, paid vacation, less standard withholdings and
deductions.
E. LIFE INSURANCE. Employer shall cause HCI to procure a term life insurance
policy in a face amount of no less than twice the amount of Executive's annual
base compensation provided that Executive is insurable at standard rates.
Executive shall be entitled to designate the beneficiary or beneficiaries of
such policy in his sole discretion. In the event that Executive is not insurable
at standard rates, and desires to be insured, Executive shall be responsible for
payment of any premiums or amounts charged in excess of the standard rates for
such insurance.
-2-
F. DISABILITY INSURANCE. Executive shall be entitled to participate in any
disability income insurance policy (both long and short term) offered to
Employer's senior executives and/or any management employees as an employee in
accordance with the terms of such policies, as they may be modified from time to
time. In the event that Executive is not insurable at standard rates, and
desires to be insured, Executive shall be responsible for payment of any
premiums or amounts charged in excess of the standard rates. In the event that
any disability income insurance policy provided by Employer shall require any
waiting or elimination period during which Executive is not entitled to collect
disability income insurance payments even though he is disabled from working,
then during such waiting or elimination period, until the commencement of
payments under the disability income insurance policy, Employer shall pay
Executive a supplemental disability income benefit equal to his regular semi-
monthly salary. If, and when, Executive should begin to receive disability
payments under the terms of Employer's disability income insurance policy then
in force, Employer agrees to supplement said monthly disability payments by
paying to Executive the difference between such sums paid by the disability
insurer and Executive's compensation set forth in Section 3 above for a maximum
period of twelve (12) consecutive months. Following expiration of said twelve
(12) months, the coverage and provisions of Employer's disability income
insurance policy shall constitute the entire wage continuation plan provided in
this Agreement and, except for the payment of the premiums on such policy,
Employer shall have no further liability to Executive for wage continuation. It
is further understood that Executive's employment with Employer shall be
terminated following twelve (12) consecutive months of total disability (i.e.,
being unable to carry out the normal functions and requirements of his position
with Employer) regardless of how and when the aforementioned disability income
payments from Employer's disability income insurance policy may be paid or due
to Executive.
Notwithstanding the foregoing, Executive shall continue to receive all the
benefits that, immediately prior to the date hereof, he was receiving from HCI
and HCIV and, accordingly, Executives hereby foregoes the benefits referred to
in Sections 4.a, 4.b, 4.e and 4.f. and 5.b. At any time during the term of this
Agreement, Executive may elect to accept the benefits described in the
aforementioned Sections in lieu of the benefits described in the first sentence.
Such election shall be effective upon delivery of written notice thereof to
Employer.
-3-
5. EXPENSES.
A. BUSINESS EXPENSES. Employer shall cause HCI to reimburse Executive for
ordinary and reasonable business expenses incurred by him in the discharge of
his duties hereunder, including but not limited to reimbursement for the
business use of Executive's automobile and travel, lodging and entertainment
expenses, provided Executive furnishes appropriate documentation for such
expenses and that said expenses are in accordance with Employer's then
prevailing policies and procedures regarding said expenditures.
B. CONTINUING EDUCATION EXPENSES. Employer shall cause HCI to pay the
ordinary and reasonable costs associated with continuing education classes or
continuing education programs Executive participates in which are related to
Employer's business interests, provided Executive furnishes appropriate
documentation to Employer for such costs and gives the Chief Executive Officer
of Employer reasonable notice of any expenditures for continuing education. All
such expenses in excess of One Thousand Dollars ($1,000) must be approved by
such Chief Executive Officer in advance.
C. EFFECT OF TERMINATION OF EMPLOYMENT. All payment or reimbursement of
expenses authorized by Section 5 hereof shall cease upon Executive's termination
of employment whether or not said termination is for cause.
6. TERMINATION OF EMPLOYMENT BY EMPLOYER.
A. TERMINATION FOR CAUSE. The employment of Executive under this Agreement,
and the term hereof, may be terminated for "cause" by Employer at any time upon
the occurrence of any one or more of the following events:
(i) Executive's fraud, dishonesty, gross negligence or willful misconduct in
the performance of his duties hereunder, including willful failure to perform
such executive duties as may properly be assigned him hereunder;
(ii) Executive's breach of any material provision of this Agreement provided
that Employer has delivered written notice of such breach to Executive
(describing such breach in reasonable detail) and Executive has not caused the
cessation of such breach within ten (10) days after receipt of such notice; or
(iii) Executive's breach of any material provision of the Operating Agreement
entered into simultaneously herewith by Employer, NCRIC Group, Inc., HCI, HCI
Ventures, LLC, L.E. Shepherd, Jr., William A. Hunter, Jr. and Barry S. Pillow
(the "Operating Agreement") provided that Employer has delivered written notice
of such breach to Executive (describing such breach in reasonable detail) and
Executive has not caused the cessation of such breach within ten (10) days after
receipt of such notice.
-4-
Any termination by reason of the foregoing shall not be in limitation of any
right or remedy which Employer may have under this Agreement or otherwise.
Should Executive dispute whether Employer possessed legitimate "cause" in
accordance herewith, then in such event a neutral arbitrator shall be chosen in
accordance with the procedures set forth in paragraph 17 of this Agreement to
decide that issue. If Employer terminates Executive's employment for "cause"
pursuant to this subparagraph 6(a) (and such termination is decided to be
permissible by an arbitrator appointed for that purpose in accordance with the
provisions herein), his right to any compensation, including but not limited to
severance pay, shall cease immediately; provided, however, Executive shall be
paid all salary and benefits accrued to the date of such termination.
B. TERMINATION WITHOUT CAUSE.
(i) Employer may terminate Executive's employment without cause and without
notice at any time.
(ii) If Employer terminates Executive's employment for any reason except for
"cause" as specifically defined in Section 6 a. (i) - (iii) above, such
termination shall be deemed a termination without cause. In the event of such
termination without cause, Employer shall pay Executive in cash on the date of
such termination as a severance payment, an amount equal to the total of (1)
27.8% of the difference between $3,100,000 and the sum of all payments
theretofore made under Section 2 (b) of that certain Purchase Agreement dated
December 20, 1998 among NCRIC Group Inc. ("Group") and L. E. Shepherd, Jr.,
William A. Hunter, Jr., and Barry S. Pillow (the "Purchase Agreement"); provided
that, if the termination takes place after December 31, 2000 and no payment is
due relating to 2000 under such Section 2(b), then such amount of $3,100,000
shall instead be $1,550,000; and (2) all salary and benefits accrued to the date
of such termination. Upon the prompt and punctual payment of the total amount of
the aforementioned severance payment, Executive and Employer agree to execute
and deliver a mutual general release whereby Executive and Employer and
Employer's affiliates agree to release each other from all claims under this
Agreement and the Operating Agreement.
(iii) If a "Change of Duties" in connection with a "Change of Control" occurs,
Employer shall be deemed to have terminated Executive's employment without cause
for the purposes of this Section 6. "Change of Control" shall be deemed to have
occurred if HCI or HCIV merges into, consolidates with, or sells, leases or
otherwise transfers all or a significant portion of the combined assets of HCI,
HCIV and Employee Benefit Services, Inc. ("EBSI") (the assets of EBSI were
acquired by Group pursuant to that certain Purchase Agreement dated December 20,
1998 between Group and EBSI) to another entity (which for the purpose of this
Agreement shall include the sale or transfer of 50% or more of the ownership of
HCI or HCIV); and "Change of Duties" shall be deemed to have occurred if a
material change in the nature, terms or conditions of Executive's employment
occurs, including but not limited to a material change in his duties, authority,
responsibilities or job
-5-
location. Full demutualization of NCRIC, A Mutual Holding Company, the ultimate
parent of Employer, shall not be deemed to be a Change of Control.
(iv) In the event that Employer breaches any material provision of the Operating
Agreement provided that Executive has delivered written notice of such breach to
Employer (describing such breach in reasonable detail) and Employer has not
caused such breach to be cured within ten (10) days after receipt of such
notice, Employer shall be deemed to have terminated Executive's employment
without cause for purposes of this Section 6.
7. TERMINATION OF EMPLOYMENT BY EXECUTIVE.
If Executive voluntarily terminates his employment without cause at any time
prior to January 1, 2002, Executive shall pay Employer on the date of
termination a cash amount equal to the amount payable to Executive under this
Agreement from the termination date through December 31, 2002, exclusive of
benefits and less standard withholdings and deductions. On or after January 1,
2002, Executive may voluntarily terminate his employment hereunder without cause
by delivering one year's prior written notice thereof to Employer.
Notwithstanding the foregoing, Executive shall be allowed to voluntarily
terminate his employment hereunder for any of the following reasons, which
termination shall not be deemed without cause and in which case the first two
sentences of this Section 7 shall not be operative: (a) Employer or an affiliate
breaches any material provision of the Operating Agreement, provided that
Executive has delivered written notice of such breach to Employer (describing
such breach in reasonable detail) and Employer has not caused such breach to be
cured within ten (10) days after the receipt thereof, (b) Employer breaches any
material provision of this Agreement provided that Executive has delivered
written notice of such breach to Employer (describing such breach in reasonable
detail) and Employer has not caused such breach to be cured within ten (10) days
after the receipt thereof, (c) Group has defaulted on its payment or performance
obligations under Section 2 (b) or 12 of the Purchase Agreement, (d) Employer
has defaulted under any of its payment or performance obligations under any of
those certain Convertible Notes dated the date hereof payable by Group to
Executive, William A. Hunter, Jr., and L.E. Shepherd, Jr., and (e) Employer
breaches any material provision of any employment agreements between Employer
and William A. Hunter, Jr. or L.E. Shepherd, Jr.
8. PROTECTION OF EMPLOYER
A. CONFIDENTIAL INFORMATION. Executive shall not at any time during or after
his employment with HCI and HCIV directly or indirectly disclose, discuss,
divulge, copy or otherwise suffer confidential information of Employer or a
subsidiary of Employer to be used, except as required by the performance of his
duties hereunder or by law. For the purposes of this Agreement, "confidential
information" shall mean all information disclosed to Executive by Employer or a
subsidiary of Employer or known by him as a consequence of or through his
employment with HCI or HCIV, where such information is not generally known in
the trade or industry, and where such information refers or relates in any
manner
-6-
whatsoever to the business activities, processes, services or products of
Employer or a subsidiary of Employer. Such information includes, but is not
limited to, Employer's or a subsidiary's business and development plans (whether
contemplated, initiated or completed), development sites, business contacts,
customer lists, actuarial tables, loss data, marketing information, policy
forms, contracts, research of any kind, methods of operation, results of
analysis, business forecasts, financial data, costs, revenues and similar
information. Upon termination of this Agreement, Executive shall immediately
return to Employer all of its property, and all copies thereof, including
without limitation all confidential information which has been reduced to
tangible form, in his possession, custody or control.
B. COVENANT NOT TO COMPETE. Executive agrees that he shall not, during his
employment and for a period of two (2) years after the date on which either
Executive gives notice of his intention to terminate his employment or Employer
gives notice to employee, to terminate his employment, directly or indirectly,
either as an officer, director, employee, agent, adviser, consultant, principal,
stockholder, partner, owner or in an other capacity, on his own behalf or
otherwise, in any way (i) engage in, represent, be connected with, or have a
financial interest in, any other insurance company or management services
organization in the healthcare field , or any corporation, firm, association or
other business entity which is, or to the best of Executive's knowledge, is
about to become, engaged in the same or similar business as Employer or which
otherwise competes with or is about to compete with Employer in the District of
Columbia or any states where Employer may operate or are licensed to operate,
(ii) solicit or otherwise attempt to establish, for himself or any other person
or entity, any business relationship with any person or entity which was a
customer of Employer or an affiliate of Employer at any time during the two
years preceding such notice or (iii) solicit for employment or employ any person
who was an employee of a Employer or an affiliate of Employer in the year
preceding such notice. Executive's ownership of not more than one percent (1%)
of the stock of any publicly traded corporation shall not be deemed a violation
of this covenant. Notwithstanding the foregoing, while the restrictions in this
Section 8.b continue, Executive may be employed as an administrator of a medical
practice (i) by only one person or entity that is not a client of HCI or
Employer or (ii) by only one client of HCI or Employer, with the consent of
Employer, which consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, if Executive is terminated for cause under
Section 6.a or if Executive voluntarily terminates his employment under the
first two sentences of Section 7, the restrictions in this Section 8.b shall
continue until the second anniversary of the termination and if Employer
terminates Executive without cause under Section 6.b above and fails to make
timely payment of the severance payment described in Section 6 b(ii) or if
Executive voluntarily resigns his employment hereunder for any of the reasons
set forth in Sections 7(a) through (e), this Section 8.b shall not be operative.
C. REMEDIES AND ACKNOWLEDGMENT OF REASONABLENESS. Executive agrees that the
restrictions imposed upon him by the provisions of this paragraph 8 are fair and
reasonable considering the nature of Employer's and its subsidiaries'
businesses, and are reasonably
-7-
required for the protection of Employer. Executive acknowledges that compliance
with this paragraph 8 is necessary for the protection of the goodwill and other
proprietary interests of Employer, and that, after carefully considering the
extent of the restrictions upon him and the rights and remedies conferred upon
Employer under this Section 8, the same are reasonable in time and territory,
are designed to eliminate competition which otherwise would be unfair to
Employer, do not stifle the inherent skill and experience of Executive, would
not operate as a bar to Executive's sole means of support, are fully required to
protect the legitimate interests of Employer, and do not confer a benefit upon
Employer disproportionate to the detriment to Executive.
Executive further acknowledges and agrees that in the event of a breach of this
paragraph 8, Employer would not have an adequate remedy at law because the
damages flowing from such breach would not be readily susceptible of measurement
in monetary terms and that Employer shall be entitled to injunctive relief and
may obtain a temporary order restraining any threatened breach or future breach
in addition to any other remedies which may be available at law or equity.
Nothing in this paragraph 8 shall be deemed to limit Employer's remedies at law
or in equity for breach of this or any other paragraph of this Agreement.
9. DEATH OR INCAPACITY.
In the event that Executive dies or, due to a permanent physical or mental
impairment as evidenced by the written opinion of a physician duly licensed in
Virginia, becomes unable to perform the essential functions of his position with
or without reasonable accommodation, this Agreement shall be deemed terminated
and Executive or his estate, as the case may be, shall be entitled to no further
salary, compensation or benefits hereunder, except (a) any unpaid salary,
incentive payments and vacation accrued and earned by Executive up to and
including the date of such termination, and (b) any disability, life insurance
or other benefits to which Executive or his estate may be entitled on the date
of such termination in accordance with the terms and conditions of any
applicable benefit plan(s) as set forth in official plan documents.
10. ASSIGNMENT.
This Agreement is a personal service agreement and neither party shall have the
right to assign this Agreement or any rights or obligations hereunder without
the prior written consent of the other party.
11. NOTICES.
All notices required or permitted hereunder shall be in writing and shall be
deemed properly given if delivered personally or sent by certified or registered
mail, postage prepaid, return receipt requested. If mailed to Employer, such
notices shall be addressed to Employer at its principal place of business,
attention: President, or at such other address as Employer
-8-
may hereafter designate in writing to Executive. If mailed to Executive, such
notices shall be addressed to him at his home address last known on the records
of Employer, or at such other address as Executive may hereafter designate in
writing to Employer.
12. SUCCESSORS BOUND.
This Agreement shall bind and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, estates and permitted
successors and assigns.
13. WAIVER.
No provision hereof may be waived, except by a written instrument signed by the
party against whom such waiver is sought to be enforced. The failure of either
party hereto at any time, or from time to time, to require performance by the
other party of such other party's obligation hereunder, shall not deprive that
party of the right to insist upon strict adherence to such obligation at any
subsequent time. Each party hereto agrees that any waiver of its rights arising
out of any breach of this Agreement by the other party shall not be construed as
a waiver of any subsequent breach.
14. AMENDMENT.
No provision hereof may be altered or amended, except by a written instrument
signed by the party against whom such alteration or amendment is sought to be
enforced.
15. CONFIDENTIALITY.
Except as otherwise agreed between the parties and as required by law, each
party agrees to maintain the confidentiality of this Agreement; provided,
however, that either party may disclose provisions of this Agreement to others
for the purpose of protecting or enforcing their respective rights hereunder or
as otherwise required by law.
16. GOVERNING LAW.
The parties agree that this Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
District of Columbia, without regard to the principles of conflicts of laws
thereof.
17. ARBITRATION.
A. In the event the parties are unable to resolve a controversy under this
Agreement, the parties agree to submit the matter to binding arbitration under
the rules of the American Arbitration Association, but not using the American
Arbitration Association, unless the parties mutually agree to do so. One arbiter
shall be chosen by Employer and one by Executive before commencement of
arbitration. The two arbiters shall choose a third
-9-
arbiter. The decision of the first two arbiters shall be final and binding upon
both parties; however, if those arbiters fail to agree, the third arbiter shall
participate and the decision of the majority shall be final and binding. The
parties expressly covenant and agree to be bound by the decision of the arbiters
and accept any decision by a majority of the arbiters as a final determination
of the matter in dispute. In connection with the foregoing, the parties hereby
waive any right to an appeal or to commence a de novo action with respect to the
final determination. All arbiters chosen pursuant to this Section 17 shall have
substantial experience in the healthcare management field and shall have
demonstrated knowledge concerning the types of issues involved.
B. Each party shall bear its own expenses, including legal, accounting and
expert fees, in connection with the arbitration, except that Buyer and Executive
shall each pay fifty percent (50%) of the expenses of the arbiters.
C. Any such arbitration shall take place in the District of Columbia unless some
other location is mutually agreed upon by the parties.
18. SEVERABILITY.
In the event that any provision of this Agreement conflicts with the law under
which this Agreement is to be construed, or if any such provision is held
invalid or unenforceable by a court of competent jurisdiction or an arbitrator,
such provision shall be deleted from this Agreement and the Agreement shall be
construed to give full effect to the remaining provisions thereof.
19. HEADINGS AND CAPTIONS.
The paragraph headings and captions contained in this Agreement are for
convenience only and shall not be construed to define, limit or affect the scope
or meaning of the provisions hereof.
20. ENTIRE AGREEMENT.
This Agreement contains and represents the entire agreement of the parties and
supersedes all prior agreements, representations or understandings, oral or
written, express or implied, with respect to the subject matter hereof. No
representation, promise or inducement concerning the subject matter of this
Agreement has been made by either party hereto to the other that is not embodied
in this Agreement, and neither party shall be bound or liable for any alleged
representation, promise or inducement concerning the subject matter of this
Agreement not specifically set forth herein.
-10-
21. EFFECTIVE DATE OF AGREEMENT.
This Agreement shall take effect only when it has been executed by both parties
but when executed and approved shall be enforceable as of the day and year first
written above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first written above.
Employer:
NCRIC Group, Inc.
By: /s/ R. Ray Pate, Jr.
-------------------------------------
Print Name: R. Ray Pate, Jr.
-------------------------
Title: President
-----------------------------
This Operating Agreement (the "Operating Agreement") is entered into as of
January 4, 1999 by and among NCRIC Group, Inc., a District of Columbia
corporation ("NCRIC Group"), NCRIC MSO, Inc., a Delaware corporation ("NCRIC
MSO"), HealthCare Consulting, Inc., a Virginia corporation ("HCI"), HCI
Ventures, LLC, a Virginia limited liability company ("HCIV"), and L.E. Shepherd,
Jr., William A. Hunter, Jr. and Barry S. Pillow (collectively, the
"Executives").
RECITALS:
1. Pursuant to a purchase agreement dated December 20, 1998 among NCRIC Group,
and the Executives (the "Purchase Agreement"), NCRIC Group or NCRIC MSO
purchased from the Executives all of the issued and outstanding common stock of
HCI and all of the outstanding membership interests in HCIV. In addition,
pursuant to a purchase agreement dated that date among Employee Benefit Services
Inc. ("EBSI") and NCRIC Group, NCRIC Group or NCRIC MSO purchased all of the
assets of EBSI (the "EBSI Assets") (the "EBSI" Purchase Agreement"), which
assets were transferred to HCI on the date hereof.
2. NCRIC Group owns all of the issued and outstanding shares of NCRIC MSO.
3. Each of the Executives has entered into an employment agreement with NCRIC
MSO (the "Employment Agreements").
4. Pursuant to the terms of the Purchase Agreement, the Executives are
entitled to receive aggregate contingent consideration (the "Contingent
Consideration") of up to $3,100,000 if HCI, HCIV and the assets of EBSI
(collectively the "Business") achieve certain levels of Adjusted Earnings
(defined below) during calendar years 2000, 2001 and 2002 (the "Earnout
Period").
5. The parties desire to set forth their understanding with respect to (i)
certain accounting principles which will be applied to the calculation of
Adjusted Earnings and (ii) certain management policies which will be in effect
during the Earnout Period.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. ACCOUNTING DETERMINATIONS. For each of the years in the Earnout Period,
the independent auditors who certify NCRIC Group's financial statements shall
determine Adjusted Earnings of the Business, pursuant to the principles set
forth in Section 2.
2. ADJUSTED EARNINGS. Adjusted Earnings shall be equal to the net income
(after tax) of the Business calculated in accordance with generally accepted
accounting principles, provided that:
(i) The following shall not be included in revenue or expenses of the
Business:
(a) extraordinary items (i.e., items not historically found in the Business
and items not customarily found in firms within the fields of business of the
Business, unless approved by the Board of Directors of HCI, which approval shall
not be unreasonably withheld or delayed); and
(b) revenues and expenses of NCRIC Group or any of its subsidiaries (other
than the Business) or affiliates resulting from cross-marketing of NCRIC Group's
insurance and related products to clients of the Business.
(ii) The allowance for bad debts shall be established by the Executives and
audited by NCRIC Group's independent auditors. If there is disagreement by the
Executives or NCRIC Group with the auditors concerning the annual adjustment to
the allowance for bad debts, then the matter shall be submitted to arbitration
pursuant to Section 6.
(iii) Intangibles arising in connection with the transactions contemplated by
the Purchase Agreement shall be amortized over a period of fifteen years.
(Notwithstanding the foregoing, such intangibles shall be amortized over twenty
years in NCRIC Group's financial statements prepared in accordance with
generally accepted accounting principles.)
(iv) If NCRIC Group or NCRIC MSO requests that a new venture (involving
activities different from or similar to activities conducted by the Business) be
undertaken by HCI personnel, NCRIC Group or NCRIC MSO shall compensate such
personnel for the services rendered and the compensation shall be included in
the revenues of the Business. Such new venture shall be subject to approval by
the Executives in writing.
(v) The revenues and expenses of the operations of NCRIC MSO involving office
management software for physicians shall not be included in the revenues or
expenses of the Business; provided that the decision by the Business to render
services in connection therewith and the compensation for services rendered by
HCI personnel in connection with such operations shall be subject to clause (iv)
above; provided, further, that if a NCRIC MSO customer using such software after
the commencement of such use seeks additional management services from the
Business, 15% of the revenues received from the Business for such additional
services shall not be included in the revenues of the Business.
(vi) Revenues generated by the Business from customers of NCRIC Group and its
subsidiaries for services rendered by the Business and related expenses shall be
included in calculating the Adjusted Earnings of the Business; provided that if
a customer using services of the Business seeks to add NCRIC MSO's office
management software, the entire revenues for the software received shall be
included in the revenues of the Business.
(vii) HCIV's share of the net income or loss of management service organizations
in which HCIV has a interest shall be included in Adjusted Earnings; provided
that such net
-2-
loss may not exceed 25% of HCIV's initial cash capital investment in management
service organizations.
(viii) Without the express written approval of the Executives, no common or
administrative expenses of NCRIC Group or its affiliates (other than the
Business) shall be charged to the Business and no corporate overhead shall be
charged to the Business; provided that the cost of audits of the Business, to
the extent of a maximum of $25,000, shall be included in expenses of the
Business if NCRIC Group or NCRIC MSO consults with the Executives concerning the
cost of such audit before selecting the accounting firm (which shall be one of
the "Big Five") to perform the audit. Office costs, requested in writing by the
Executives, not involving computer services incurred in connection with the
Business in the District of Columbia shall be included in the expenses of the
Business. If the Executives do not agree with the allocation, the matter shall
be submitted to arbitration pursuant to Section 6. If the Business borrows from
NCRIC Group or any of its affiliates, interest shall be charged to the Business
at a floating rate equal to the prime rate as reported by the Wall Street
Journal plus 1.5 percentage points per year.
(ix) The aggregate minimum, maximum and fixed amounts of salary, bonuses and
benefits (the "Compensation") payable to the Executives shall be as follows for
the following calendar years:
Year Minimum Amount Maximum Amount
---- -------------- --------------
1999 Fixed at $450,000
2000 $300,000 $450,000
2001 $350,000 $450,000
2002 Fixed at $450,000
2003 Fixed at $450,000
-3-
In 2000 and 2001, the aggregate Compensation of the Executives shall be accrued
at the rate of $450,000 per year. On or before February 15 of 2001 and 2002,
the Executives may elect to decrease the aggregate paid Compensation for the
previous year. If such election is made, the Executives must pay any amount
necessary to implement such decrease to HCI within five business days after the
election is made. It is the intention of the parties that the Executives, in
having the right to make such election, shall have the power to affect the
amount of Adjusted Earnings of the Business for 2000 and 2001, in that the
Adjusted Earnings shall be increased or reduced depending on the amount of
aggregate Compensation paid to the Executives. For purposes hereof,
Compensation shall include the amount of the following items paid to or on
behalf of the Executives: (i) salary, (ii) employee contributions to retirement
plans (not including employer contributions), (iii) premiums for health and
medical insurance policies covering the Executives, and their respective spouses
and dependents, (iv) premiums for term life insurance policies covering the
Executives and payable to beneficiaries other than HCI, (v) premiums for
disability insurance policies covering the Executives and (vi) continuing
education expenses payable for events in which the Executives participate.
Compensation shall not include paid sick leave, paid vacation leave or
reimbursements to the Executives for any business expenses, including but not
limited to reimbursement for the business use of an Executive's automobile, and
travel, lodging and entertainment expenses. If any of the employment agreements
between NCRIC MSO and any of the Executives terminates for any reason prior to
January 1, 2004, the remaining Executive or Executives shall be entitled to
receive the aggregate Compensation set forth in the first sentence of this
Section 2(ix), provided, however, such aggregate Compensation shall be reduced
by the amount of any compensation (salary, bonuses and benefits) paid to any
employee who replaces an Executive. Any such replacement and his related
compensation, shall be approved by the remaining Executive or Executives.
(x) Expenses of the Business shall not include any "Losses" as to which Buyer,
HCI or HCIV, as the case may be, have been fully indemnified by payment thereof
pursuant to Section 10(b) of the Purchase Agreement or Section 10(b) of the EBSI
Purchase Agreement.
3. MANAGEMENT.
A. The Executives shall be entitled to manage the operations of the Business
in accordance with the terms of their Employment Agreements and an annual budget
approved by the Board of Directors of HCI, which may be amended at any time by
such Board (the "Annual Budget"). Unless and until Adjusted Earnings for 1999
or 2000 are less than $210,000:
(i) The Executives shall have full authority to hire and terminate all other
employees of the Business and to determine such other employees' salaries and
compensation packages, subject to Section 12(a) of the Purchase Agreement.
-4-
(ii) After coordination with NCRIC Group and its subsidiaries, the Executives
shall have full authority to determine how the Business is presented to
employees, clients, and potential clients of the Business.
B. The Executives shall handle all accounting (consistent with generally
accepted accounting principles and in compliance with the requirements of the
Securities and Exchange Commission), payroll and business management activities
of the Business. Notwithstanding the foregoing, no Executive or other officer or
employee of the Business shall take any of the following actions without the
prior written approval of the Board of Directors of HCI, which approval shall
not be unreasonably withheld or delayed, subject to the fiduciary obligations of
the members of the Board of Directors:
(i) sell, lease, encumber, lend, exchange or otherwise dispose or transfer
the assets of the Business other than in the usual and regular course of
business;
(ii) incur or agree (whether or not in writing) to incur any expense,
liability or other obligation by or on behalf of HCI or HCIV whether actual or
contingent in excess of $50,000, including, but not limited to, any loan,
guarantee or other agreement which results in indebtedness of the Business;
(iii) enter into any agreement not in the usual and regular course of the
Business;
(iv) organize a subsidiary or acquire an equity or other interest in any
partnership, joint venture or other entity (including further investments in
existing or new management services organizations), or issue any security of HCI
or HCIV;
(v) change HCI's or HCIV's current line of business or enter into an
unrelated line of business or a new venture. If the Executives present the HCI
Board of Directors with a reasonably detailed business plan to engage in a new
venture or line of business in the health care management industry (the "New
Proposed Business") which the Board does not approve, Group shall not, and shall
not permit any of its affiliates (as defined under the rules promulgated under
the Securities Exchange Act of 1934, as amended) to, engage in any business
substantially similar to the New Proposed Business up to the earlier of (i) the
last day that any of the Executives are employed by Group or any of its
affiliates or (ii) 3 years from the date on which the Board disapproved of the
New Proposed Business.
(vi) retain any attorney or accountant to represent or provide service to the
Business, other than in the usual and regular course of business;
(vii) allow total expenditures for the Business to exceed the maximum amount
determined by the Annual Budget (the Executives shall be entitled to exceed
individual line items). Subject to approval by the Board of Directors of HCI,
the Annual Budget may be amended throughout the year on an as needed basis;
(viii) authorize or enter into any arrangement or agreement between HCI or HCIV
and any of its officers, directors, shareholders or affiliates; or
-5-
(ix) agree to do any of the foregoing.
C. NCRIC Group shall cause one person selected by the Executives to be a
member of the Board of Directors of HCI while this Operating Agreement is in
effect. After HCI is merged into NCRIC MSO, NCRIC Group shall cause one person
selected by the Executives to be a member of the Board of Directors of NCRIC MSO
while this Operating Agreement is in effect. A person selected by the
Executives pursuant to this Section 3.C shall be entitled to take all actions
and receive all notices, pursuant to this Operating Agreement, on behalf of all
the Executives. Initially, such person shall be L.E. Shepherd, Jr.
D. Executives shall work with NCRIC Group and its affiliates in establishing a
plan for successors to the Executives.
E. NCRIC Group may cause cash to be paid by the Business to NCRIC Group or an
affiliate as a dividend or distribution or purchase, redemption or other
retirement of or reduction of capital in respect to shares or interests in HCI
or HCIV or any warrant or option for the purchase of any shares of capital
stock or membership interests of HCI or HCIV or as a loan or other transfer of
funds, except in connection with the purchase of services at competitive rates,
only if after any such transaction, the Business has cash in excess of $250,000;
provided that such amount shall be increased each March 31, beginning March 31,
2000, in the same proportion that annual revenues of the Business in such year
have increased from revenues of the Business for 1998.
F. Executives shall have the right to file counterclaims and cross-claims, as
well as any other new actions against any persons or entities, in connection
with the Marshall Litigation (as defined in the Purchase Agreement) on behalf of
HCI and HCV so long as the Executives promptly pay all bills and expenses,
including attorneys' fees and court costs, in connection therewith upon
presentation to HCI or HCIV.
4. TERM. The term of this Operating Agreement shall commence on the date
hereof and continue until December 31, 2003; provided that Sections 1, 2, 5 and
6 shall remain in effect until Adjusted Earnings for 2003 are determined.
5. DISPUTE RESOLUTION. Controversies with respect to the terms and conditions
of this Agreement between the parties hereto shall be resolved within 45 days
by informal meetings and discussions in good faith between appropriate
representatives of the parties.
6. ARBITRATION.
(i) In the event the parties are unable to resolve the controversy pursuant to
Section 5, the parties agree to submit the matter to binding arbitration under
the rules of the American Arbitration Association, but not using the American
Arbitration Association, unless the parties mutually agree to do so. One arbiter
shall be chosen by each of NCRIC Group and the Executives before commencement of
arbitration. The two arbiters shall choose a third arbiter. The decision of the
first two arbiters shall be final and binding upon
-6-
both parties; however, if those arbiters fail to agree, the third arbiter shall
participate and the decision of the majority shall be final and binding. The
parties expressly covenant and agree to be bound by the decisions of the
arbiters and accept any decision by a majority of the arbiters as a final
determination of the matter in dispute. In connection with the foregoing, the
parties hereby waive any right to appeal or to commence any de novo actions with
respect to the final determination. All arbiters chosen pursuant to this Section
6 shall have substantial experience in the healthcare field and shall have
demonstrated knowledge concerning the types of issues involved.
(ii) Each party shall bear its own expenses, including legal, accounting and
expert fees, in connection with the arbitration except that NCRIC Group and the
Executives shall each pay 50% of the expenses of the arbiters.
(iii) Any such arbitration shall take place in Washington, D.C., unless some
other location is mutually agreed upon by the parties.
7. NOTICES. All notices and other communications required or permitted to be
given hereunder shall be in writing and shall be deemed delivered if personally
delivered, mailed by certified mail, postage prepaid, return receipt requested,
or telecopied, addressed to the parties as follows:
The Executives: 1928 Thomson Drive
Lynchburg, VA 24501-1068
Fax: 804-846-7218
Attn: L.E. Shepherd, Jr.
NCRIC MSO,
HCI and HCIV: 1115 30th Street, N.W.
Washington, D.C. 20007
Fax: 202-969-1881
Attn: Stephen S. Fargis
NCRIC Group: 1115 30th Street, N.W.
Washington, D.C. 20007
Fax: 202-969-1881
Attn: R. Ray Pate, Jr.
8. ENTIRE AGREEMENT OF THE PARTIES. This Operating Agreement embodies the
entire agreement of the parties hereto in respect of the subject matter hereof.
9. GOVERNING LAW. This Operating Agreement shall be governed by and construed
in accordance with the substantive laws of the District of Columbia without
regard to the conflicts of laws provisions thereof.
-7-
10. ASSIGNMENT. This Operating Agreement shall be binding upon, and shall
inure to the benefit of, the parties to it, and their respective heirs, legal
representatives, successors and permitted assigns. Neither this Operating
Agreement nor any of the parties' rights hereunder shall be assignable by any
party hereto without the prior written consent of the other parties hereto;
provided that this Operating Agreement may be assigned by NCRIC Group or NCRIC
MSO to an affiliate, without the consent of the Executives, in which case NCRIC
Group, NCRIC MSO, HCI and HCIV shall remain liable for their obligations
hereunder. If all or substantially all of the Business is sold, merged or
otherwise disposed of to a person or entity that is not an affiliate of NCRIC
Group, NCRIC Group shall cause $1,550,000 to be paid at the closing of such
transaction to the Executives, allocated among them as they shall determine;
provided that the sum of such payment and any payments made under Section 2(b)
of the Purchase Agreement may not exceed $3,100,000. Upon the making of such
payment, NCRIC Group, NCRIC MSO, HCI and HCIV shall have no further obligations
under this Operating Agreement. For purposes hereof, the sale of 50% of more of
the ownership of HCI or HCIV shall be deemed a sale or transfer. Full
demutualization of NCRIC, A Mutual Holding Company, the ultimate parent of NCRIC
Group, shall not be deemed to be such a sale, merger or disposition.
11. AMENDMENT. This Operating Agreement may be amended only in a writing
executed by all of the parties to this Operating Agreement.
12. WAIVER OF PROVISIONS. No waiver of any provisions of this Operating
Agreement shall be effective unless it is in a writing executed by that party.
13. HEADINGS. The headings in this Operating Agreement are intended solely for
convenience of reference and shall be given no effect in the construction of
this Operating Agreement.
14. COUNTERPARTS. This Operating Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
15. SEPARABILITY. The invalidity or unenforceability of any provisions of this
Operating Agreement shall not impair the validity or enforceability of any other
provision.
-8-
IN WITNESS WHEREOF, the parties have executed this Operating Agreement as of the
date first written above.
NCRIC GROUP, INC.
By: /s/ R. Ray Pate, Jr.
-----------------------------
Name: R. Ray Pate, Jr.
Title: President
NCRIC MSO, INC.
By: /s/ R. Ray Pate, Jr.
-----------------------------
Name: R. Ray Pate, Jr.
Title: President
HEALTHCARE CONSULTING, INC.
By: /s/ R. Ray Pate, Jr.
-----------------------------
Name: R. Ray Pate, Jr.
Title: President
HCI VENTURES, LLC
By: /s/ R. Ray Pate, Jr.
-----------------------------
Name: R. Ray Pate, Jr.
Title: President and Sole Member
/s/ L.E. Shepherd, Jr.
--------------------------------
L.E. Shepherd, Jr.
/s/ William A. Hunter, Jr.
--------------------------------
William A. Hunter, Jr.
/s/ B.S. Pillow
--------------------------------
Barry S. Pillow
-9-
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of NCRIC Group, Inc. on
Form SB-2 of our reports for NCRIC Group, Inc. and subsidiaries dated
February 4, 1999 and for the Management Services of HealthCare Consulting, Inc.,
HCI Ventures, LLC and Employee Benefits Services, Inc. dated January 22, 1999,
respectively, appearing in the Prospectus which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
and Operating Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
March 12, 1999
Washington, D.C.
Exhibit 23.3
March 12, 1999
Board of Directors
NCRIC Group, Inc.
1115 30th Street, N.W.
Washington, DC 20007
Members of the Board:
We consent to the references to our firm in the Prospectus constituting
part of this Registration Statement of NCRIC Group, Inc. on Form SB-2.
We also consent to the inclusion of, summary of and references to our
Initial Valuation Report and our Updated Valuation Report under the headings
"The Subscription, Community and Syndicated Community Offerings - The appraisal
and pricing of the common stock and - Update of appraisal prior to subscription
offering," and our letter concerning subscription rights under the headings
"Risk Factors - Your subscription rights may be taxable" and "Purchases in the
Subscription, Community and Syndicated Community Offerings - Tax effects."
Sincerely,
RP FINANCIAL, LC.
ARTICLE 7
PERIOD TYPE
YEAR
FISCAL YEAR END
DEC 31 1997
PERIOD START
JAN 01 1997
PERIOD END
DEC 31 1997
DEBT HELD FOR SALE
94,362
DEBT CARRYING VALUE
0
DEBT MARKET VALUE
0
EQUITIES
0
MORTGAGE
0
REAL ESTATE
0
TOTAL INVEST
94,362
CASH
4,065
RECOVER REINSURE
0
DEFERRED ACQUISITION
0
TOTAL ASSETS
121,841
POLICY LOSSES
75,136
UNEARNED PREMIUMS
403
POLICY OTHER
0
POLICY HOLDER FUNDS
0
NOTES PAYABLE
0
PREFERRED MANDATORY
0
PREFERRED
0
COMMON
0
OTHER SE
27,466
TOTAL LIABILITY AND EQUITY
121,841
PREMIUMS
13,532
INVESTMENT INCOME
6,045
INVESTMENT GAINS
90
OTHER INCOME
355
BENEFITS
15,591
UNDERWRITING AMORTIZATION
0
UNDERWRITING OTHER
3,594
INCOME PRETAX
837
INCOME TAX
(122)
INCOME CONTINUING
959
DISCONTINUED
0
EXTRAORDINARY
0
CHANGES
0
NET INCOME
959
EPS PRIMARY
0
EPS DILUTED
0
RESERVE OPEN
56,527
PROVISION CURRENT
19,444
PROVISION PRIOR
(3,853)
PAYMENTS CURRENT
1,867
PAYMENTS PRIOR
12,192
RESERVE CLOSE
58,059
CUMULATIVE DEFICIENCY
0
ARTICLE 7
PERIOD TYPE
9 MOS
FISCAL YEAR END
DEC 31 1998
PERIOD START
JAN 01 1998
PERIOD END
SEP 30 1998
DEBT HELD FOR SALE
103,885
DEBT CARRYING VALUE
0
DEBT MARKET VALUE
0
EQUITIES
0
MORTGAGE
0
REAL ESTATE
0
TOTAL INVEST
103,885
CASH
5,159
RECOVER REINSURE
0
DEFERRED ACQUISITION
0
TOTAL ASSETS
135,850
POLICY LOSSES
82,330
UNEARNED PREMIUMS
6,950
POLICY OTHER
0
POLICY HOLDER FUNDS
0
NOTES PAYABLE
0
PREFERRED MANDATORY
0
PREFERRED
0
COMMON
0
OTHER SE
31,860
TOTAL LIABILITY AND EQUITY
135,850
PREMIUMS
14,513
INVESTMENT INCOME
4,465
INVESTMENT GAINS
128
OTHER INCOME
323
BENEFITS
11,821
UNDERWRITING AMORTIZATION
0
UNDERWRITING OTHER
4,117
INCOME PRETAX
3,491
INCOME TAX
969
INCOME CONTINUING
2,522
DISCONTINUED
0
EXTRAORDINARY
0
CHANGES
0
NET INCOME
2,522
EPS PRIMARY
0
EPS DILUTED
0
RESERVE OPEN
58,059
PROVISION CURRENT
12,653
PROVISION PRIOR
(832)
PAYMENTS CURRENT
1,502
PAYMENTS PRIOR
6,648
RESERVE CLOSE
61,730
CUMULATIVE DEFICIENCY
0
ARTICLE 7
PERIOD TYPE
YEAR
FISCAL YEAR END
DEC 31 1998
PERIOD START
JAN 01 1998
PERIOD END
DEC 31 1998
DEBT HELD FOR SALE
96,348
DEBT CARRYING VALUE
0
DEBT MARKET VALUE
0
EQUITIES
0
MORTGAGE
0
REAL ESTATE
0
TOTAL INVEST
96,348
CASH
6,083
RECOVER REINSURE
0
DEFERRED ACQUISITION
0
TOTAL ASSETS
134,326
POLICY LOSSES
87,700
UNEARNED PREMIUMS
3,348
POLICY OTHER
0
POLICY HOLDER FUNDS
0
NOTES PAYABLE
0
PREFERRED MANDATORY
0
PREFERRED
0
COMMON
0
OTHER SE
31,011
TOTAL LIABILITY AND EQUITY
134,326
PREMIUMS
18,459
INVESTMENT INCOME
5,996
INVESTMENT GAINS
159
OTHER INCOME
435
BENEFITS
15,677
UNDERWRITING AMORTIZATION
0
UNDERWRITING OTHER
5,746
INCOME PRETAX
3,626
INCOME TAX
1,079
INCOME CONTINUING
2,547
DISCONTINUED
0
EXTRAORDINARY
0
CHANGES
0
NET INCOME
2,547
EPS PRIMARY
0
EPS DILUTED
0
RESERVE OPEN
58,059
PROVISION CURRENT
19,140
PROVISION PRIOR
(3,463)
PAYMENTS CURRENT
1,247
PAYMENTS PRIOR
9,335
RESERVE CLOSE
63,154
CUMULATIVE DEFICIENCY
0
EXHIBIT 99.1
PRO FORMA VALUATION REPORT
MUTUAL HOLDING COMPANY
STOCK OFFERING
NCRIC GROUP, INC.
WASHINGTON, DC
DATED AS OF:
DECEMBER 4, 1998
PREPARED BY:
RP FINANCIAL, LC.
1700 NORTH MOORE STREET
SUITE 2210
ARLINGTON, VIRGINIA 22209
RP FINANCIAL, LC.
Financial Services Industry Consultants
December 4, 1998
Board of Directors
NCRIC Group, Inc.
1115 30th Street, N.W.
Washington, DC 20007
Members of the Board:
At your request, we have completed and hereby provide an independent
appraisal ("Appraisal") of the estimated pro forma market value of the
Common Stock which is to be offered in connection with the reorganization
described below. This Appraisal may be relied upon by the Department of
Insurance and Securities Regulation of the District of Columbia (the
"Department") in its review of the reorganization.
Description of Reorganization and Stock Issuance Plan
We understand that the National Capital Reciprocal Insurance Company
(the "Reciprocal") will reorganize into a stock insurance company with a
mutual holding company parent (the "Reorganization"). Pursuant to a Plan of
Reorganization (the "Plan"), the Reciprocal will form a mutual insurance
holding company called NCRIC, A Mutual Holding Company ("Mutual Holding
Company"). The Reciprocal will continue its corporate existence as a stock
insurance company by adopting articles of incorporation which will
authorize the issuance of capital stock. The Reciprocal's name will be
changed to NCRIC, Inc. (the "Company"). All of the initially outstanding
shares of the capital stock of the Company will be issued to the Mutual
Holding Company. Through a series of share transfers, two newly-formed
intermediate stock holding companies, NCRIC Holdings, Inc. ("Holdings") and
NCRIC Group, Inc. ("Group"), will be inserted between the Mutual Holding
Company and NCRIC, Inc. Immediately after the Reorganization, the Mutual
Holding Company will directly own by Holdings, which will directly own
Group, which will directly own NCRIC, Inc. Hereinafter, NCRIC, Inc. and
Group are collectively referred to as NCRIC or the Company unless
specifically noted otherwise.
The reorganization permits NCRIC to issue capital stock as long as the
Mutual Holding Company retains direct or indirect control of at least a
majority of the outstanding shares of NCRIC, Inc. Management has indicated
its intention to raise additional capital through the issuance of common
stock to the public. The number of shares of common stock sold to the
public will equal approximately 40 percent of the shares outstanding, and
the number of shares owned by the Mutual Holding Company following the
offering will be approximately 60 percent of the shares issued in the
offering.
Board of Directors
December 4, 1998
Page 2
It is anticipated that the public shares will be issued to: (1) NCRIC's
insureds and extended reporting endorsement holders as of December 31, 1998; (2)
the ESOP and Stock Award Plan; and (3) directors, officers and employees of the
Mutual Holding Company and its subsidiaries. Any shares that are not sold in the
Subscription offering may be offered in the Community offering. Preference in
the Community Offering will be given to: (1) holders of policies originally
issued after December 31, 1998; (2) providers of goods and services to the
Company; (3) residents of the District of Columbia and the states of Virginia
and Maryland (the "Local Community"); and (4) insureds under policies issued by
Commonwealth Medical Liability Insurance Company, a subsidiary of NCRIC.
Immediately following the offering, the primary assets of Group will be the
capital stock of NCRIC, Inc. and the capital stock of Healthcare Consulting,
Inc. and the net offering proceeds after deducting amounts utilized to fund the
ESOP and Stock Award Plan stock purchases and repay the $5.1 million
indebtedness incurred in connection with currently pending acquisitions.
RP Financial, LC.
RP Financial, LC. ("RP Financial") is a financial consulting firm serving
the financial services industry nationwide that, among other things, specializes
in financial valuations and analyses of business enterprises and securities,
including the pro forma valuation for companies undertaking the demutualization
process including mutual savings institutions and insurance companies. The
background and experience of RP Financial is detailed in Exhibit V-1. We believe
that, except for the fee we will receive for our appraisal, we are independent
of NCRIC and the other parties engaged by the Company to assist in the stock
issuance process.
Valuation Methodology
In preparing our appraisal, we have reviewed the related applications,
including the prospectus as filed with the Securities and Exchange Commission
("SEC") and the Department. We have conducted a financial analysis of the
Company that has included a review of its audited financial information for
fiscal years ended December 31, 1995 through 1997 and unaudited financial and
other information through September 30, 1998 and due diligence related
discussions with the Company's management and directors; Deloitte & Touche, the
Company's independent auditor; Tillinghast-Towers Perrin, the Company's
independent actuary; Arent Fox Kintner Plotkin & Kahn, PLLC, the Company's
counsel in conjunction with the Reorganization and offering; Sandler O'Neill &
Partners, L.P., the financial and marketing advisor in connection with Group's
stock offering; and Luse Lehman Gorman Pomerenk & Schick, P.C., underwriter's
counsel. All conclusions set forth in the Appraisal were reached independently
from such discussions. In addition, where appropriate, we have considered
information based on other available published sources that we believe are
reliable. While we believe the information and data gathered from all these
sources are reliable, we cannot guarantee the accuracy and completeness of such
information.
Board of Directors
December 4, 1998
Page 3
We have investigated the competitive environment within which the Company
operates and have assessed the Company's relative strengths and weaknesses. We
have kept abreast of the changing regulatory and legislative environment for
insurance companies, including those with a similar line of business, and
analyzed the potential impact on the Company and the industry as a whole. We
have analyzed the potential effects of the Reorganization and stock offering on
the Company's operating characteristics and financial performance as they relate
to the pro forma market value. We have reviewed the economy in the Company's
primary market area and have compared the Company's financial performance and
condition with publicly-traded insurance companies sharing similar lines of
business. We have reviewed conditions in the securities markets in general and
in the market for insurance company stocks in particular, including the market
for existing insurance companies and the market for the newly issued stock
offered by demutualized insurance companies. We have also considered the
expected market for Group's public shares. We have excluded from such analyses
insurers subject to announced or rumored acquisition, and/or those institutions
that exhibit other unusual characteristics.
Our Appraisal is based on the Company's representation that the information
contained in the regulatory applications and additional information furnished to
us by the Company, its independent auditors and actuaries, legal counsel and
other authorized agents are truthful, accurate and complete. We did not
independently verify the financial statements and other information provided by
the Company, its independent auditors and actuaries, legal counsel and other
authorized agents nor did we independently value the assets or liabilities of
the Company. The valuation considers the Company only as a going concern and
should not be considered as an indication of the Company's liquidation value.
Our appraised value is predicated on a continuation of the current
operating environment for the Company, the Mutual Holding Company and Group and
for all insurance companies and their holding companies. Changes in the local,
state and national economy, the legislative and regulatory environment for
insurance companies and medical malpractice insurers, the stock market, interest
rates, and other external forces (such as natural disasters or significant world
events) may occur from time to time, often with great unpredictability, and may
materially impact the value of insurers as a whole or NCRIC's value alone. It is
our understanding that there are no current or long-term plans for pursuing a
second step conversion or for selling control of Group or the Company following
the offering. To the extent that such factors can be foreseen, they have been
factored into our analysis.
Pro forma market value is defined as the price at which Group's stock,
immediately upon completion of the offering, would change hands between a
willing buyer and a willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of relevant facts.
Board of Directors
December 4, 1998
Page 4
Valuation Conclusion
It is our opinion that, based on stock prices as of December 4, 1998 and
financial statements through September 30, 1998, the estimated aggregate pro
forma market value of the shares to be issued immediately following the
offering, both shares issued publicly as well as to Holdings, taking into
account the pro forma impact of pending acquisitions and the related dilutive
impact of the 30,000 shares issued to the HCI, HCIV and EBSI shareholders at the
completion of the offering and acquisition, was $28,300,000 at the midpoint,
equal to 2,830,000 shares issued at a per share value of $10.00 for the public
shares. Pursuant to the Company's structure of the offering, which incorporates
a 15 percent offering range around the midpoint value, the offering range
extends from a minimum of $23,800,000 to a maximum of $32,200,000. Based on the
$10.00 per share offering price determined by the Board, this valuation range
equates to an offering range of 2,380,000 shares at the minimum to 3,220,000
shares at the maximum. Taking into account the shares sold in the offering plus
the 30,000 shares issued to the principals of HCI concurrent with the offering,
the market value of all shares would be as follows:
Total Shares Aggregate Market Value(1)
-------------------------------- ----------------------------------------
Shares Shares
Issued Issued
Offering in HCI Total Offering in HCI Total
Shares(1) Deal Shares(2) Shares(1) Deal Shares(2)
------------ ------ ---------- -------------- -------- --------------
Minimum 2,380,000 30,000 2,410,000 $23,800,000 $300,000 $24,100,000
Midpoint 2,800,000 30,000 2,830,000 28,000,000 300,000 28,300,000
Maximum 3,220,000 30,000 3,250,000 32,200,000 300,000 32,500,000
(1) Pursuant to a full stock demutualization.
(2) Based on a $10.00 per share price.
The Board of Directors has established a public offering range such that
the public ownership of Group will constitute a 40 percent ownership interest of
the shares before the 30,000 issued in the acquisitions, with the Mutual Holding
Company owning the majority of the shares. Accordingly, the offering range to
the public of the minority stock will be $9,520,000 at the minimum, $11,200,000
at the midpoint and $12,880,000 at the maximum. The resulting market value of
publicly issued shares, including the 30,000 shares issued to the principals of
HCI, would be as follows:
Board of Directors
December 4, 1998
Page 5
Total Public Shares Market Value of Public Shares
---------------------------- ----------------------------------
Shares Shares
Issued Total Issued Total
MHC Offering in HCI Public Offering in HCI Public
Shares Shares Deal Shares Shares Deal Shares
--------- --------- ------ --------- ----------- -------- -----------
Minimum 1,428,000 952,000 30,000 982,000 $ 9,520,000 $300,000 $ 9,820,000
Midpoint 1,680,000 1,120,000 30,000 1,150,000 11,200,000 300,000 11,500,000
Maximum 1,932,000 1,288,000 30,000 1,318,000 12,880,000 300,000 13,180,000
Limiting Factors and Considerations
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
Common Stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the offering will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof.
RP Financial's valuation was determined based on the financial condition
and operations of the Company as of September 30, 1998, the date of the
financial data included in the prospectus.
RP Financial is not a seller of securities within the meaning of any
federal and state securities laws and any report prepared by RP Financial shall
not be used as an offer or solicitation with respect to the purchase or sale of
any securities. RP Financial maintains a policy which prohibits the company, its
principals or employees from purchasing stock of its client institutions.
The valuation will be updated and such updates will consider, among other
things, any developments or changes in the Company's financial performance and
condition, management policies, and current conditions in the equity markets for
the shares of insurers. These updates may also consider changes in other
external factors which impact value including, but not limited to: various
changes in the legislative and regulatory environment, the stock market and
interest rates. Should any such new developments or changes be material, in our
opinion, to the
Board of Directors
December 4, 1998
Page 6
valuation of the shares, appropriate adjustments to the estimated pro forma
market value will be made. The reasons for any such adjustments will be
explained in the update at the date of the release of the update.
Respectfully submitted,
RP FINANCIAL, LC.
/s/Ronald S. Riggins
--------------------------------
Ronald S. Riggins
President and Managing Director
/s/James P. Hennessey
--------------------------------
James P. Hennessey
Senior Vice President
RP Financial, LC.
TABLE OF CONTENTS
NCRIC GROUP, INC.
WASHINGTON, DC
PAGE
DESCRIPTION NUMBER
----------- ------
CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS
-----------
Introduction 1.1
Strategic Overview 1.3
NCRIC MSO 1.5
Pending Acquisitions 1.5
Reasons for Minority Stock Offering 1.6
Balance Sheet Trends 1.8
Income and Expense Trends 1.14
Claims and Risk Exposure 1.20
Reinsurance 1.21
Subsidiaries 1.23
Year 2000 Compliance 1.25
Legal Proceedings 1.25
CHAPTER TWO MARKET AREA
-----------
Introduction 2.1
Primary Market Area 2.1
CHAPTER THREE PEER GROUP ANALYSIS
-------------
Peer Group Selection 3.1
Financial Condition 3.6
Income and Expense Components 3.9
Analysis of Risk Factors 3.14
Investment Portfolio Composition 3.16
Summary 3.16
RP Financial, LC.
TABLE OF CONTENTS
NCRIC GROUP, INC.
WASHINGTON, DC
(CONTINUED)
PAGE
DESCRIPTION NUMBER
----------- ------
CHAPTER FOUR VALUATION ANALYSIS
------------
Introduction 4.1
RP Financial Approach to the Valuation 4.1
Valuation Analysis 4.2
1. Financial Condition 4.2
2. Profitability, Growth and Viability of Earnings 4.3
3. Risk Assessment 4.4
4. Primary Market and Growth 4.5
5. Dividends 4.5
6. Liquidity of the Shares 4.7
7. Marketing of the Issue 4.7
A. The Public Market 4.8
B. The New Issue Market 4.10
C. Mutual Holding Company Structure 4.13
8. Organization 4.16
9. Regulatory Environment 4.16
Summary of Adjustments 4.16
Valuation Approaches 4.17
Valuation Conclusion 4.23
MHC Offering Range 4.23
RP Financial, LC.
LIST OF TABLES
NCRIC GROUP, INC.
WASHINGTON, DC
TABLE
NUMBER DESCRIPTION PAGE
------ ----------- ----
1.1 Historical Balance Sheets 1.9
1.2 Investment Portfolio Summary 1.11
1.3 Historical Income Statements (% of Average Assets) 1.16
1.4 Historical Income Statements (% of Revenues) 1.17
1.5 Reinsurance Data as of December 31, 1997 1.23
2.1 Summary Demographic Data 2.2
2.2 Labor Force, July 1995 2.3
2.3 Occupations of District of Columbia Residents, 1990 2.4
2.4 Employment in the District of Columbia, 1995 and 2000 (Proj.) 2.5
2.5 Top Ten Business and Institutional Employers 2.5
2.6 September 1998 Unemployment Data 2.6
3.1 Peer Group of Publicly-Traded Insurance Companies 3.3
3.2 Balance Sheet Composition and Growth Rates 3.7
3.3 Income and Expenses as a Percent of Average Assets 3.11
3.4 Income and Expenses as a Percent of Trailing 12 Month Revenues 3.12
3.5 Analysis of Risk Factors 3.15
3.6 Composition of Cash and Investments 3.17
4.1 Comparative Growth Analysis/comparable Institution Analysis 4.6
4.2 Dow Jones Insurance Index and Industrial Index 4.9
4.3 Selected Recent Insurance Company Demutualizations 4.11
4.4 Calculation of Implied Per Share Data 4.14
4.5 Public Market Pricing 4.25
4.6 Public Market Pricing 4.26
RP Financial, LC.
Page 1.1
I. OVERVIEW AND FINANCIAL ANALYSIS
Introduction
National Capital Reciprocal Insurance Company (the "Reciprocal"), organized
in 1980, is a reciprocal insurance company subject to the laws of the District
of Columbia. As a reciprocal insurance company, the Reciprocal is an
unincorporated association with no capital stock issued and is controlled by its
members, i.e., policyholders (also known as insureds). The policyholders act
through a designated attorney-in-fact, National Capital Underwriters, Inc.
("NCUI"), which is a wholly-owned subsidiary of the Reciprocal. The Reciprocal
is licensed to conduct business in the District of Columbia ("the District") and
Maryland. Additionally, through Commonwealth Medical Liability Insurance Company
("CML"), a wholly-owned subsidiary, the Reciprocal also conducts business in
Virginia. CML is also licensed to do business in West Virginia and a license to
do business in Delaware is pending regulatory approval. The Reciprocal is
subject to the laws and regulations of each of the jurisdictions in which it is
licensed to do business. The Reciprocal's primary regulators include the
Department of Insurance and Securities Regulation of the District of Columbia
(the "Department") and the Bureau of Insurance of the Commonwealth of Virginia.
The Reciprocal was formed in 1980 to address rapidly escalating medical
malpractice liability costs, both nationally and regionally. The Reciprocal has
grown and expanded revenue sources, both in terms of the number of insureds as
well as the types of activities. At September 30, 1998, the Reciprocal had total
assets of $135.9 million, liabilities of $104.0 million and total equity of
$31.9 million, equal to 23.47 percent of assets. For the twelve months ended
September 30, 1998, the Reciprocal reported gross revenues of $24.1 million and
net income of $2.7 million, for a return of 2.10 percent of average assets and a
net profit margin of 11.20 percent. The Reciprocal is rated A- (Excellent) by
A.M. Best Company, Inc.
The Reciprocal believes that it maintains (1) the largest market share for
medical malpractice insurance in the District, with a total of 942 insured
physicians, and (2) a relatively strong market share in Maryland, particularly
Montgomery County. The Reciprocal believes that its prominent position is, in
large part, due to the loyalty of insured physicians attributable to
RP Financial, LC.
Page 1.2
high quality personalized service provided, the effectiveness of claims
management procedures (which has resulted in favorable claims results for
insured physicians), and the focus on the local physician marketplace in the
face of a continual change in the composition of out-of-market competitors. Such
loyalty is demonstrated by the high policy retention rate, which approximated 97
percent for the 1998 policy year. The number of the Reciprocal insureds by
jurisdiction, including CML, is reflected below.
Reciprocal Policyholders by Jurisdiction
As of September 30, 1998
Total Policyholders
-------------------
Number % of Total
------ ----------
District of Columbia 942 78.4%
Maryland 169 14.1
Virginia 90 7.5
-- ---
Total Insureds 1,201 100.0%
Note: CML has recently become licensed to sell insurance in West
Virginia but has not issued any policies in this jurisdiction to
date. A license to sell insurance in Delaware is currently
pending.
The Reciprocal will reorganize into a stock insurance company with a mutual
holding company parent (the "Reorganization"), called NCRIC, A Mutual Holding
Company (the "Mutual Holding Company") and will adopt Articles of Incorporation
which will change its name to NCRIC, Inc., and authorize the issuance of capital
stock. Two newly-formed intermediate stock holding companies, NCRIC Holdings,
Inc. ("Holdings") and NCRIC Group, Inc. ("Group") will be created in the
Reorganization between the Mutual Holding Company and NCRIC, Inc., such that the
Mutual Holding Company will directly own Holdings, which will directly own
Group, which will directly own NCRIC, Inc. Hereinafter, Group and its
subsidiaries and their predecessors will be referred to as "NCRIC" or the
"Company". The Mutual Holding Company's initial capitalization will be $250,000.
A chart showing the structure of the Reciprocal's organization is included as
Exhibit I-2.
The Reorganization has been undertaken in order to facilitate the Company's
access to additional capital resources. In this regard, it is anticipated that
NCRIC will undertake an initial
RP Financial, LC.
Page 1.3
public offering ("IPO") of common stock representing not more than 49.9 percent
of its voting common stock, with the Mutual Holding Company indirectly retaining
at least a 50.1 percent controlling interest. It is not anticipated that the
Mutual Holding Company, Holdings or Group will engage in any business activity
other than ownership of their respective subsidiaries at this time.
This valuation analysis is based on NCRIC's financial statements pursuant
to Generally Accepted Accounting Principles ("GAAP"), which is the method of
financial reporting required by the Securities and Exchange Commission ("SEC").
The Company also prepares financial reports in accordance with Statutory
Accounting Practices ("SAP") pursuant to Department regulations. Where
appropriate, we reference the Company's financial data in accordance with SAP.
Strategic Overview
The Company was formed in 1980 to address rapidly escalating professional
liability costs for physicians in the District. Claims-related losses in the
mid-to late-1980s were greater than anticipated, impairing the Company's
earnings. At that time, NCRIC addressed the weakened financial condition by
raising the premium structure and adjudicating claims aggressively.
Commencing in the early 1990s, NCRIC began diversifying operations
modestly, including the formation of an insurance brokerage subsidiary (National
Capital Insurance Brokerage, Ltd., or "NCIB") and acquisition of an insurance
agency subsidiary (NCRIC Insurance Agency, Inc., or "NIA"). The insurance
brokerage subsidiary was formed primarily for the purpose of reducing
reinsurance-related commissions, while the insurance agency was purchased in an
attempt to provide other insurance-related products to physician policyholders,
such as life and health insurance.
Also, NCRIC pursued geographic diversification in response to market
conditions prevailing in the District by expanding into Maryland and, through
the establishment of CML, into Virginia. Reasons for geographic diversification
included: (1) the lack of tort reform in the District, which has resulted in
escalating premiums for policyholders as well as loss and loss
RP Financial, LC.
Page 1.4
adjustment expenses ("LAE") for NCRIC; (2) on-going population and business
shrinkage in the District, which led to a shrinking base of physicians as well;
and (3) the rapid expansion of managed care, which reduced the pool of potential
policyholders (large managed care organizations may be self-insured, operate
captive insurers and/or purchase medical malpractice insurance for employee
physicians on a large-scale basis).
In 1993, the Company repaid subordinated surplus loan debentures, which
were utilized to capitalize NCRIC upon formation, which enabled the
establishment of a discretionary renewal premium dividend credit, which gave
NCRIC a competitive advantage. To assist in customer retention, NCRIC
established the NCRIC Physicians Organization ("NCRIC PO") in 1994, which is a
coalition of physicians working together with hospitals and ancillary providers
to provide a health care structure to assist insured physicians to more
effectively compete against managed care. The NCRIC PO provides the benefits of
a managed care network while leaving health care decisions in the physicians'
hands. To date, success of the NCRIC PO has been limited.
In 1996, under the direction of a new Chief Executive Officer ("CEO") and
the Board of Governors, NCRIC commenced a comprehensive review of operations,
strengths and weaknesses, and external factors impacting the business, with the
objective of charting a course for the future. The strategic plan was designed
to address the significant changes in the health care environment in recent
years and expected trends, particularly those factors related to the emergence
of managed care which negatively impacted the practice of private physicians. In
this regard, physicians found it more difficult to maintain a private practice,
forcing many to join or contractually affiliate with managed care organizations,
healthcare delivery systems or practice management organizations, a trend which
diminished revenues for medical malpractice insurance companies. In addition,
the consolidation has reduced primary medical malpractice insurance premiums
paid by healthcare systems, as larger healthcare systems generally retain more
risk by accepting higher deductibles and self-insured retentions or form their
own captive insurance companies.
In the face of such risks, NCRIC identified opportunities to diversify
revenues, capitalize on the loyalty of insured physicians and the physicians'
desire to remain independent. The goals of NCRIC's business plan are as follows.
RP Financial, LC.
Page 1.5
1. Increase financial strength and stability through strategies
consistent with the needs of health care providers and pursue
opportunities in both insurance and non-insurance ventures.
2. Pursue revenue growth through retention, direct and agent
produced new business and corporate diversification.
3. Provide personal, responsive policyholder services while
developing new innovative tools to meet the changing needs of
health care providers and strategic partners.
4. Create strategies, products and partnerships with
organizations that support health care (hospitals, managed
care organizations, etc.) and diversify into new products and
geographic territories.
5. Improve the Company's working environment through employee
education and development .
6. Continue to expand established role as a corporate leader in
the metropolitan area civic community.
NCRIC MSO
To adjust to the economic pressures described above, physicians with
private practices are seeking organizations that can help them achieve greater
efficiencies and profitability without relinquishing control and ownership of
their practice. Accordingly, in 1997, the Company formed a management services
organization subsidiary, NCRIC MSO, Inc. (the "MSO"), to provide physicians with
the staff, skills, information and technology to enhance management efficiencies
and control physician overhead. The MSO's services are designed to enhance
physician profitability and reduce liability risk, thus reducing loss risk, and
present opportunities to cross-sell other products and services to physicians,
including those not insured by NCRIC.
Pending Acquisitions
Consistent with the strategic plan, the Company has continued to pursue
market and revenue expansion, primarily through acquisitions. NCRIC recently
agreed in principal to acquire Healthcare Consulting, Inc. ("HCI"), a management
services organization based in Lynchburg, Virginia, operating through a number
of offices in Virginia and North Carolina. HCI
RP Financial, LC.
Page 1.6
offers medical practice support services comparable to the NCRIC MSO, but which
are more fully developed as HCI has a longer operating history. Additionally,
the Company will purchase all of the membership interests in HCI Ventures, LLC
("HCIV"), an organization which provides capital to management service
organizations, and the assets of Employee Benefits Services, Inc. ("EBSI"). For
the fiscal year ended December 31, 1997, HCI, HCIV and EBSI had total revenues
of $4.0 million and reported net after-tax income $0.169 million. For the nine
months ended September 30, 1998, total revenues equaled $3.5 million and net
income equaled $67,000. The acquisition of HCI, HCIV and EBSI is projected to
provide the infrastructure to significantly leverage the MSO's practice support
services within existing markets, further broaden the geographic scope of
NCRIC's operations to Virginia and North Carolina and facilitate the ability to
cross-sell medical malpractice insurance to HCI's physician clients.
It is anticipated that the Company will pay $5.1 million in cash and issue
a $300,000 note which is mandatorily convertible to 30,000 Company common shares
after the closing of the Stock Offering. The Company will pay a maximum of an
additional $3.1 million in earnout provisions if HCI, HCIV and EBSI achieve pre-
established earnings targets in 2000, 2001 and 2002. As a result of the
transaction, on a preliminary basis, approximately $4.9 million of intangible
assets are expected to be created, which will be amortized on a straight-line
basis over a 20 year period. The resulting intangible assets may be subject to
subsequent adjustment based on future payments made with respect to the earnout
provisions of the agreement.
Reasons for Minority Stock Offering
The Board believes geographic expansion and diversification of products and
services are keys to NCRIC's ability to survive and prosper in the rapidly
evolving health care environment. Since (1) targeted growth and diversification
requires capital beyond expected earnings retention, (2) access to the capital
markets is very limited as a reciprocal insurance company and (3) the Company
has limited capacity pursuant to subsidiary investment limitations, the Board is
determined to pursue the Reorganization to facilitate the ability to raise
capital through a stock offering. The near-term deployment of the proceeds from
the minority stock offering is described below:
RP Financial, LC.
Page 1.7
. Group intends to use $5.1 million to repay indebtedness incurred in
connection with the Practice Management and Financial Services
Acquisitions.
. A loan to the newly-formed employee stock ownership plan ("ESOP")
to purchase 10 percent of the shares of common stock sold in the
Stock Offering (the "ESOP Loan"), preliminarily ranging from
$952,000 to $1,288,000. It is anticipated that the ESOP Loan will
have a 10-year term with interest payable at the prime rate as
published in The Wall Street Journal on the closing date of the
Stock Offering. The ESOP Loan will be repaid principally from
NCRIC's contributions to the ESOP.
. A loan to the Stock Award Plan in the amount necessary to purchase
5 percent of the shares of common stock sold in the Stock Offering
(the "Stock Plan Loan"). The amount of the Stock Plan Loan may
range from $476,000 to $644,000 based on a sale at the Purchase
Price of 47,600 shares to the Stock Award Plan (at the minimum) and
64,400 shares to the Stock Award Plan (at the maximum). The Company
anticipates that the Stock Plan Loan will have a five-year term
with interest payable at the prime rate as published in The Wall
Street Journal on the closing date of the Stock Offering. The Stock
Plan Loan will be repaid principally from NCRIC's contributions to
the Stock Award Plan.
On a short-term basis, the remaining net proceeds retained by NCRIC Group
will be invested primarily in U.S. government securities, other federal agency
securities and other interest-bearing securities. The net proceeds retained by
NCRIC Group will be available for a variety of corporate purposes, including
additional capital contributions, future acquisitions and for diversification of
business and dividends to stockholders. The Company also may use a portion of
the net proceeds to fund the purchase, through open market purchases, shares of
stock pursuant to the exercise of stock options.
The shares will be offered on a priority basis at the same price in a
subscription offering to members, a community offering and, if necessary, a
syndicated community offering. The subscription rights are also provided to
directors, officers and employees.
RP Financial, LC.
Page 1.8
Balance Sheet Trends
Growth Trends
NCRIC's balance sheet growth has been moderate over the last three
fiscal years, with assets increasing at a more rapid pace over the most recent
nine month period (see Table 1.1 for details). Overall, the Company's total
assets increased 18.6 percent from the end of fiscal 1995 to September 30, 1998,
to equal $135.9 million. The composition of assets has been subject to moderate
change with investment securities ranging from 75 to 80 percent of assets.
Liabilities also reflects modest growth over the most recent three
fiscal years, increasing from $88.7 to $94.4 million between fiscal year end
1995 and 1997. Liabilities increased substantially over the first nine months of
fiscal 1998 to $104.0 million. The composition of liabilities reflects
considerable change since fiscal 1995, particularly as the balance of funds held
for Retrospective Premiums Accrued sharply declined in 1998, while the level of
loss and LAE increased ("Policy Reserves").
The equity balance generally increased since fiscal 1995 but decreased
modestly during 1996, as earnings were more than offset by a negative $1.3
million valuation adjustment on securities classified as available for sale
("AFS"). Subsequently, the combination of retained earnings coupled with a $1.1
million positive adjustment on AFS securities led to an increase in the equity
balance to $27.5 million as of the end of fiscal 1997. Equity increased to $31.9
million as of September 30, 1998 reflecting, in large part, the benefit of
favorable loss development compared to prior estimates.
The moderate balance sheet expansion reflects the local operating
environment. Future growth is expected to be far more dependent upon entering
new markets rather than enhancing market share within the District. The
additional capital generated through the minority stock offering is expected to
further facilitate NCRIC's ability to expand and diversify business lines.
RP Financial, LC
Table 1.1
National Capital Reciprocal Insurance Company and Subsidiaries
Historical Balance Sheets
At December 31, 1995 At December 31, 1996
-------------------- --------------------
% of % of
Amount Assets Amount Assets
------ ------ ------ ------
($000) (%) ($000) (%)
ASSETS
------
INVESTMENTS:
Securities Available for Sale, At Fair Value:
Bonds and U.S. Treasury Notes $ 78,650 68.68% $ 84,730 72.63%
Preferred Stocks 4,805 4.20% 4,856 4.16%
--------- ------- --------- -------
Total Securities Available for Sale $ 83,455 72.88% $ 89,586 76.79%
Real Estate, Net of Accumulated Depreciation of
$454,000 in 1996 and $403,000 in 1995 1,475 1.29% 1,422 1.22%
--------- ------- --------- -------
Total Investments $ 84,930 74.16% $ 91,008 78.01%
OTHER ASSETS:
Cash and Cash Equivalents 8,135 7.10% 5,016 4.30%
Accrued Investment Income 1,018 0.89% 1,111 0.95%
Reinsurance Receivable from Reinsurers 128 0.11% 44 0.04%
Reinsurance Recoverable 16,182 14.13% 14,679 12.58%
Federal Income Taxes Recoverable - 0.00% 432 0.37%
Deferred Federal Income Taxes 2,999 2.62% 3,495 3.00%
Premiums Receivable 152 0.13% 417 0.36%
Property & Equipment, Net of Accum. Depr. Of
$339,000 in 1997, $184,000 in 1996, & $124,000 in 1995 304 0.27% 205 0.18%
Deferred Policy Acquisition Costs - 0.00% - 0.00%
Other Assets 667 0.58% 257 0.22%
--------- ------- --------- -------
TOTAL ASSETS $ 114,516 100.00% $ 116,664 100.00%
========= ====== ========= ======
LIABILITIES & EQUITY
--------------------
LIABILITIES:
Losses and Loss Adjustment Expenses:
Losses $ 56,401 49.25% $ 51,035 43.75%
Loss Adjustment Expenses 15,632 13.65% 20,171 17.29%
--------- ------- --------- -------
Total Losses and Loss Adjustment Expenses $ 72,033 62.90% $ 71,206 61.04%
Other Liabilities:
Retrospective Premium Accrued Under Reinsurance Treaties 12,028 10.50% 14,804 12.69%
Renewal Credit Dividends to Policyholders 1,642 1.43% 1,486 1.27%
Advance Premiums 935 0.82% 913 0.78%
Unearned Premiums - 0.00% - 0.00%
Federal Income Taxes Payable 395 0.34% - 0.00%
Accounts Payable and Accrued Expenses 728 0.64% 755 0.65%
Other Liabilities 973 0.85% 2,076 1.78%
--------- ------- --------- -------
TOTAL LIABILITIES $ 88,734 77.49% $ 91,240 78.21%
EQUITY $ 25,782 22.51% $ 25,424 21.79%
TOTAL LIABILITIES & EQUITY $ 114,516 100.00% $ 116,664 100.00%
========= ======= ========= =======
At December 31, 1997 At September 30, 1998
-------------------- ---------------------
% of % of
Amount Assets Amount Assets
------ ------ ------ ------
($000) (%) ($000) (%)
ASSETS
------
INVESTMENTS:
Securities Available for Sale, At Fair Value:
Bonds and U.S. Treasury Notes $ 90,036 73.90% $ 98,612 72.59%
Preferred Stocks 4,326 3.55% 5,273 3.88%
---------- ------ --------- ------
Total Securities Available for Sale $ 94,362 77.45% $ 103,885 76.47%
Real Estate, Net of Accumulated Depreciation of
$454,000 in 1996 and $403,000 in 1995 - 0.00% - 0.00%
---------- ------ --------- ------
Total Investments $ 94,362 77.45% $ 103,885 76.47%
OTHER ASSETS:
Cash and Cash Equivalents 4,065 3.34% 5,159 3.80%
Accrued Investment Income 1,317 1.08% 1,176 0.87%
Reinsurance Receivable from Reinsurers 255 0.21% 3 0.00%
Reinsurance Recoverable 17,077 14.02% 20,600 15.16%
Federal Income Taxes Recoverable 89 0.07% - 0.00%
Deferred Federal Income Taxes 2,793 2.29% 2,630 1.94%
Premiums Receivable 1,263 1.04% 1,081 0.80%
Property & Equipment, Net of Accum. Depr. Of
$339,000 in 1997, $184,000 in 1996, & $124,000 in 1995 509 0.42% 1,079 0.79%
Deferred Policy Acquisition Costs - 0.00% 110 0.08%
Other Assets 111 0.09% 127 0.09%
---------- ------ --------- ------
TOTAL ASSETS $ 121,841 100.00% $ 135,850 100.00%
========== ====== ========= ======
LIABILITIES & EQUITY
--------------------
LIABILITIES:
Losses and Loss Adjustment Expenses:
Losses $ 53,661 44.04% $ 62,045 45.67%
Loss Adjustment Expenses 21,475 17.63% 20,285 14.93%
---------- ------ --------- ------
Total Losses and Loss Adjustment Expenses $ 75,136 61.67% $ 82,330 60.60%
Other Liabilities:
Retrospective Premium Accrued Under Reinsurance Treaties 13,762 11.30% 7,721 5.68%
Renewal Credit Dividends to Policyholders 2,092 1.72% 1,266 0.93%
Advance Premiums 487 0.40% 4 0.00%
Unearned Premiums 403 0.33% 6,950 5.12%
Federal Income Taxes Payable - 0.00% 1,759 1.29%
Accounts Payable and Accrued Expenses 1,135 0.93% 1,715 1.26%
Other Liabilities 1,340 1.10% 2,225 1.64%
---------- ------ --------- ------
TOTAL LIABILITIES $ 94,355 77.44% $ 103,970 76.53%
EQUITY $ 27,486 22.56% $ 31,880 23.47%
TOTAL LIABILITIES & EQUITY $ 121,841 100.00% $ 135,850 100.00%
========== ====== ========= ======
Source: NCRIC and subsidiaries audited financial statements.
RP Financial, LC.
Page 1.10
Investment Securities
Investment decisions are made by two third party investment managers
retained by NCRIC who comply with policies established and supervised by the
Board of Directors. NCRIC's investment policy is relatively conservative and
has placed primary emphasis on investment grade, fixed maturity securities and
the maximization of after-tax yields. Fixed income securities must be rated "A"
or higher by Moody's or Standard & Poors at the time of purchase and the average
quality of the portfolio must be at least "AA". There is no limitation on the
maturity of any individual investment but no more than 25 percent of the
portfolio may be invested in securities in excess of 15 years. The specific
objectives of the Company's investment policy are as follows:
1. Increasing investment income to reduce the cost of insurance for
policyholders;
2. Funding the claim liabilities of the Company;
3. Protecting equity in order to maintain or increase the stability and
achieve a favorable rating from ratings organization; and
4. Maximizing after-tax investment return.
As of September 30, 1998, NCRIC's investment portfolio totaled $103.9
million, equal to 76.47 percent of assets, and was comprised of $98.6 million of
bonds and $5.3 million of preferred stocks.
Over the last three fiscal years, the structure of the investment
portfolio has changed modestly as the Company emphasized after-tax returns in
formulating the investment strategy, which led to an increased level of tax
advantaged securities. Table 1.2 reflects the composition of the investment
portfolio since December 31, 1995. Currently, all investment securities are
classified as AFS in order to maximize flexibility with respect to portfolio
management.
NCRIC may increase the risk profile of the investment portfolio,
within the constraints imposed by the investment policy, as the current interest
rate environment (a relatively flat yield curve and relatively low interest
rates) may lead to lower investment yields.
RP Financial, LC.
Table 1.2
National Capital Reciprocal Insurance Company
Investment Portfolio Summary
The Company establishes a reinsurance recoverable asset reflecting the
actuarial established value of funds to be recovered from reinsurance treaties
(or contracts) pursuant to SFAS No. 113. As of September 30, 1998, the
reinsurance recoverable assets totaled $20.6 million, equal to 15.2 percent of
total assets. The reinsurance recoverable assets are reviewed at least semi-
annually by both management and the independent actuaries, Tillinghast-Towers
Perrin. Management believes that all of the reinsurance recoverable assets are
collectible in full.
Real Estate
NCRIC sold the building housing the executive and administrative
offices on November 7, 1997, for approximately $1.2 million, recognizing a $0.2
million loss on the sale. NCRIC leased back the former offices through April
1998, at which time it moved into new leased offices.
Upon vacating the former offices, NCRIC moved the executive and
administrative operations into newly renovated office space in Washington, D.C.
The lease term is for ten years with a monthly base rent of $35,123 and a 2
percent annual escalator.
Other Assets
The Company's other assets consist of cash and cash equivalents,
deferred income taxes, premiums receivables, property and equipment, and various
other miscellaneous accruals and assets.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses comprise the largest segment of
NCRIC's liabilities, equal to $82.3 million, or 60.6 percent of assets, as of
September 30, 1998. The loss reserves have been increasing in dollar terms but
decreasing as a percent of assets over the last several years reflecting: (1)
the actual loss development in recent periods has been favorable; and (2)
management's intention to maintain a conservative level of loss reserves.
NCRIC determines the level of the loss and LAE reserves monthly and
the reserve balances are reviewed periodically by the Company's independent
actuary. The reserve
RP Financial, LC
Page 1.13
levels are established based on a projection of the ultimate losses through an
actuarial analysis of the Company's claims history and other professional
liability insurers, subject to adjustments deemed appropriate by management and
the actuaries to account for changing circumstances. Included in the claims
history are losses and LAE paid by the Company in prior periods and case
reserves for anticipated losses and LAE developed by the Company's claims
department as claims are reported and investigated. Since medical malpractice
insurance is a long-tail line of business for which the initial loss and LAE
estimates may be adversely impacted by events occurring long after the reporting
of the claim, such as sudden severe inflation or adverse judicial or legislative
decisions, management has indicated it seeks to establish loss and LAE reserves
pursuant to its conservative guidelines.
Retrospective Premiums Accrued
Retrospective Premiums Accrued equaled $7.7 million, or 5.7 percent of
total assets as of September 30, 1998, and represents management's estimates of
future premiums due under swing rated reinsurance treaties. Management
continually evaluates the adequacy of the reinsurance liabilities.
Other Liabilities
Other liabilities consist of renewal credit dividends to policyholders
and a small amount of other miscellaneous liabilities. The renewal policy
dividend credit is the result of the Company's practice of paying discretionary
dividends to physician policyholders in the form of premium credits. The
Company accrues for such credits on an interim basis and credits the policy at
renewal. As of September 30, 1998, the accrued renewal dividend credit to
policyholders totaled $1.3 million.
Capital
Earnings since the end of fiscal 1995 have led to GAAP equity growth
to $31.9 million, equal to 23.47 percent of assets as of September 30, 1998.
The addition of the offering proceeds will serve to further strengthen NCRIC's
capital position and facilitate implementation of the business plan. As of
September 30, 1998, the Company's capital was all tangible equity. The
acquisitions of HCI, HCIV and EBSI, are anticipated to initially create
approximately $4.9
RP Financial, LC
Page 1.14
million of intangible assets. Additional intangible assets may be potentially
created subject to the earnout provisions of the agreement with the principals
of HCI, HCIV and EBSI.
NCRIC maintains capital surpluses relative to minimum regulatory
requirements. The schedule below sets forth NCRIC's risk-based capital position
as of the end of the last three fiscal years.
Total Adjusted Capital Relative to Authorized Control Level
Statutory Accounting Practices Basis
Authorized Control Level Total
Risk-Based Capital Adjusted Capital
------------------ ----------------
NCRIC CML NCRIC CML
----- --- ----- ---
($Mil) ($Mil) ($Mil) ($Mil)
December 31, 1997 $3.7 $0.14 $23.2 $4.9
December 31, 1996 3.8 0.12 22.4 5.3
December 31, 1995 4.8 0.16 21.2 4.6
Source: Prospectus.
Income and Expense Trends
The Company has reported a generally favorable earnings trend since fiscal
1995, but profitability remains comparatively modest in relation to other
publicly-traded medical malpractice insurers due to a relatively high combined
ratio which has suppressed NCRIC's return on assets ("ROA") and return on equity
("ROE") measures. The favorable earnings trend reflects: (1) the reduced cost
of reinsurance, as more favorable reinsurance treaties have been negotiated
owing, in part, to the Company's favorable claims experience; (2) the favorable
loss development for the years 1993-1995 produced a reduction in the swing rated
premiums, which provided a benefit to earnings of approximately $8.4 million for
the nine months ended September 30, 1998, as compared to $2.3 million for the
nine months ended September 30, 1997; and (3) growth in investment income.
Net income increased from $0.7 million, or 0.59 percent of average assets,
in fiscal 1995, to $0.96 million, or 0.81 percent of average assets, in fiscal
1997, providing for an after-tax profit margin of 4.79 percent. For the twelve
months ended September 30, 1998, with the
RP Financial, LC.
Page 1.15
favorable loss development pertaining to reinsured losses, NCRIC's net income
equaled $2.7 million, or 2.10 percent of average assets, and a profit margin of
11.20 percent. The Company's recent operations reflected as a percent of average
assets and total revenues are included as Table 1.3 and 1.4, respectively.
Premium Income
Net premiums earned have increased substantially since fiscal 1995,
primarily reflecting favorable loss development pertaining to reinsured losses.
In this regard, premiums ceded have diminished and reflect a benefit in fiscal
1998, partially as a result of the renegotiation of NCRIC's reinsurance
treaties. Additionally, favorable loss development for the 1993-95 period was
the principal factor providing for a $3.9 million benefit in the reinsurance
premiums ceded account for the twelve months ended September 30, 1998. At the
same time, gross premiums written have remained relatively consistent since
fiscal 1995, equaling $19.0 million for the twelve months ended September 30,
1998.
During fiscal 1995 and 1996, the renewal credit dividend equaled $1.6
million and $1.4 million, respectively. In fiscal 1997, NCRIC increased its
premium rates for 1998 but provided a renewal credit equal to 16 percent of the
premium for renewing physicians.
The Company anticipates continuing the dividend credit following the
offering. Specifically, management currently anticipates that premium rates
will remain unchanged in fiscal 1999 but that the renewal dividend credit
accrual will be reduced to 10.0 percent (from 12.5 percent in fiscal 1998 and 16
percent in fiscal 1997), effectively increasing the net premiums earned on
renewing policies.
Net Investment Income
Net investment income consists of dividends and interest on invested
assets. Over the last three fiscal years, net investment income increased
marginally due to increased portfolio size, but the profit contribution relative
to average assets remained stable, in part reflecting the shift to tax exempt
securities (the benefit is thus reflected in a lower effective tax rate). Net
investment income is subject to downward pressure given the current interest
rate environment.
Table 1.3
National Capital Reciprocal Insurance Company and Subsidiaries
Historical Income Statements
For the Twelve Months Ended
-------------------------------------------------------------------
December 31, 1995 December 31, 1996 December 31, 1997
--------------------- -------------------- ----------------------
% of Avg. % of Avg. % of Avg.
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
($000) (%) ($000) (%) ($000) (%)
REVENUES:
Premium Income:
Premiums Written $19,506 16.36% $19,017 16.45% $17,869 14.98%
Premiums Ceded (9,561) -8.02% (4,239) -3.67% (1,854) -1.55%
Change in Unearned Premiums - 0.00% - 0.00% (403) -0.34%
Renewal Credit Dividends to Policyholders (1,582) -1.33% (1,427) -1.23% (2,080) -1.74%
------- ------- ------- ------ ------- ------
Net Premiums Earned 8,362 7.01% 13,351 11.55% 13,532 11.35%
Net Investment Income (less investment expenses of
$540,000 in 1997, $551,000 in 1996 & $403,000 in 1995) 5,582 4.68% 5,656 4.89% 6,045 5.07%
Net Realized Investment Gains 1,703 1.43% 229 0.20% 90 0.08%
Other Income 635 0.53% 660 0.57% 355 0.30%
------- ------- ------- ------ ------- ------
Total Revenues 16,282 13.65% 19,896 17.21% 20,022 16.79%
EXPENSES:
Losses and Loss Adjustment Expenses $11,289 9.47% $15,236 13.18% $15,591 13.07%
Other Underwriting and Operating Expenses 4,190 3.51% 3,366 2.91% 3,594 3.01%
------- ------- ------- ------ ------- ------
Total Expenses 15,479 12.98% 18,602 16.09% 19,185 16.09%
------- ------- ------- ------ ------- ------
INCOME BEFORE INCOME TAXES $ 803 0.67% $ 1,294 1.12% $ 837 0.70%
INCOME TAX (BENEFIT) PROVISION:
Current 196 0.16% 102 0.09% (255) -0.21%
Deferred (92) -0.08% 201 0.17% 133 0.11%
------- ------- ------- ------ ------- ------
Total Income Tax (Benefit) Provision 104 0.09% 303 0.26% (122) -0.10%
NET INCOME $ 699 0.59% $ 991 0.86% $ 959 0.80%
======= ======= ======= ====== ======= ======
Expense Ratio 50.11% 25.21% 26.56%
Loss Ratio 135.00% 114.12% 115.22%
------- ------- -------
Combined Ratio 185.11% 139.33% 141.78%
For the
Twelve Months Ended
September 30, 1998
-------------------
% of Avg.
Amount Assets
------ ------
($000) (%)
REVENUES:
Premium Income:
Premiums Written $18,955 14.72%
Premiums Ceded 3,871 3.01%
Change in Unearned Premiums (3,190) -2.48%
Renewal Credit Dividends to Policyholders (1,960) -1.52%
-------- ------
Net Premiums Earned 17,676 13.73%
Net Investment Income (less investment expenses of
$540,000 in 1997, $551,000 in 1996 & $403,000 in 1995) 5,921 4.60%
Net Realized Investment Gains 122 0.09%
Other Income 408 0.32%
-------- ------
Total Revenues 24,127 18.74%
EXPENSES:
Losses and Loss Adjustment Expenses $15,718 12.21%
Other Underwriting and Operating Expenses
Next Section
Previous Section