FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27462
RISCORP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0335150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1390 Main Street, Sarasota, Florida 34236
(Address of principal executive offices) (Zip Code)
(941) 951-2022
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at July 31, 1996
Class A Common Stock, $.01 par value 11,047,582
Class B Common Stock, $.01 par value 24,325,901
<PAGE>
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
As of June 30, 1996 and December 31, 1995 3-4
Consolidated Condensed Income Statements -
Three months ended June 30, 1996 and 1995 5
Consolidated Condensed Income Statements -
Six months ended June 30, 1996 and 1995 6
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 1996 and 1995 7-8
Notes to Consolidated Condensed Financial Statements 9-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Changes to Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
<TABLE>
Part I Financial Information
Item 1. Financial Statements
RISCORP, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
June 30, 1996 and December 31, 1995
(Dollars in thousands)
<CAPTION>
June 30, December 31
1996 1995
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $169,814 in
1996 and $54,064 in 1995) $ 169,271 $ 53,390
Fixed maturities held to maturity, at
amortized cost (fair value $15,361 in 1996
and $15,763 in 1995) 15,348 15,583
Equity securities, at fair value (cost
$2,846 in 1996 and $389 in 1995) 2,909 392
Total investments 187,528 69,365
Cash and cash equivalents 28,393 23,348
Premiums receivable 112,821 93,748
Accounts and notes receivable 4,959 10,754
Recoverable from Florida Special Disability Trust Fund 52,793 51,836
Reinsurance recoverables 132,847 109,511
Prepaid reinsurance premiums 23,640 21,880
Prepaid managed care fees 13,620 8,616
Accrued reinsurance commissions 11,353 7,549
Deferred income taxes 9,402 11,193
Property and equipment, net 21,576 18,044
Cost in excess of net assets of businesses acquired 18,102 3,688
Other assets 26,051 13,710
Total assets $ 643,085 $ 443,242
<FN>
See accompanying notes to consolidated condensed financial statements.
(Continued)
</TABLE>
<PAGE>
<TABLE>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets, continued
June 30, 1996 and December 31, 1995
(Dollars in thousands)
<CAPTION>
June 30, December 31,
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Liabilities:
Unpaid claim and claim settlement expenses $ 332,420 $ 261,700
Unearned premiums 75,352 64,395
Notes payable of parent company 15,000 42,000
Notes payable of subsidiaries 1,623 5,417
Reinsurance balances payable 4,541 3,731
Accrued expenses and other liabilities 50,677 42,451
Net assets in excess of cost of business acquired 11,012 7,391
Total liabilities 490,625 427,085
Shareholders' equity:
Class A common stock, $.01 par value, 100,000,000
shares authorized: 11,047,582 shares
issued and outstanding 110 --
Class B common stock, $.01 par value, 100,000,000
shares authorized: 24,325,901 shares
issued and outstanding 243 281
Preferred stock, 10,000,000 authorized,
no shares issued and outstanding -- --
Additional paid-in capital 128,381 349
Net unrealized gains on investments (424) 510
Unearned compensation - stock options (72) (215)
Retained earnings 24,222 15,232
Total shareholders' equity 152,460 16,157
Total liabilities and shareholders' equity 643,085 443,242
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
For the Three Months Ended June 30, 1996 and 1995
(Dollars in thousands, except per share data)
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Premiums earned $ 42,121 $ 36,069
Fee income 8,887 5,264
Net investment income 2,883 2,030
Total revenues 53,891 43,363
Expenses:
Claim and claim settlement expenses 26,760 21,595
Commissions, underwriting and administrative expenses 16,262 15,109
Interest expense 522 1,295
Depreciation and amortization 967 443
Total expenses 44,511 38,442
Income before income taxes 9,380 4,921
Income taxes 3,448 1,329
Net income $ 5,932 $ 3,592
Net income per common share $ 0.16 $ 0.12
Weighted average common and common share
equivalents outstanding 37,462,722 30,092,500
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
For the Six Months Ended June 30, 1996 and 1995
(Dollars in thousands, except per share data)
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Premiums earned $ 80,490 $ 67,624
Fee income 15,969 10,149
Net investment income 4,494 4,068
Total revenues 100,953 81,841
Expenses:
Claim and claim settlement expenses 51,126 38,542
Commissions, underwriting and administrative expenses 32,067 26,627
Interest expense 1,598 2,414
Depreciation and amortization 1,947 831
Total expenses 86,738 68,414
Income before income taxes 14,215 13,427
Income taxes 5,225 3,645
Net income $ 8,990 $ 9,782
Net income per common share $ 0.26 $ 0.33
Weighted average common and common share
equivalents outstanding 35,012,634 30,092,500
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Six Months ended June 30, 1996 and 1995
(Dollars in thousands)
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash provided (used) by operating activities $ 8,396 $ (39,817)
Cash flows from investing activities:
Purchase of property and equipment (5,151) (871)
Proceeds from the sale of equipment 381 --
Purchase of fixed maturities - available for sale (115,915) (99)
Proceeds from sale of fixed maturities
- available for sale 29,867 27,272
Proceeds from maturities of fixed maturities
- available for sale 6,060 2,150
Proceeds from maturities of fixed maturities
- held to maturity 1,000 --
Purchase of equity securities (2,456) --
Proceeds from sale of equity securities 25 300
Purchase of RISCORP Insurance Company, net of cash acquired -- 5,885
Purchase of CompSource, Inc. and Insura, Inc.,
net of cash acquired (12,681) --
Purchase of NARM, net of cash acquired 2,716 --
Purchase of Atlas Insurance Company, net of cash acquired (5,370) --
Net cash provided (used) by investing activities (101,524) 34,637
Cash flows from financing activities:
Principal repayments of notes payable (30,797) (27,940)
Proceeds from notes payable -- 41,500
Increase in deposit balances payable 723 434
Unearned compensation - stock options 144 536
Issuance of common stock 128,031 --
Other, net 72 338
Net cash provided by financing activities 98,173 14,868
Net increase in cash and cash equivalents 5,045 9,688
Cash and cash equivalents, beginning of period 23,348 13,747
Cash and cash equivalents, end of period $ 28,393 23,435
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
(Continued)
<PAGE>
<TABLE>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows, continued
For the Six months ended June 30, 1996 and 1995
(Dollars in thousands)
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,104 $ 2,105
Income taxes $ 4,399 $ 1,797
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation
RISCORP, Inc.'s (the "Company" or "RISCORP") consolidated unaudited interim
financial statements have been prepared on the basis of generally accepted
accounting principles ("GAAP") and, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the Company's financial condition, results of
operations and cash flows for the periods presented. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The results of operations for the three and six months
ended June 30, 1996 may not be indicative of the results that may
be expected for the full year ending December 31, 1996. These consolidated
financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited consolidated
financial statements of RISCORP, Inc. and subsidiaries for the year ended
December 31, 1995 contained in the Company's Registration Statement on Form
S-1, which was filed with the Securities and Exchange Commission on
February 28, 1996 (File No. 33-99760).
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have
been eliminated.
(2) Initial Public Offering of Common Stock
On February 29, 1996, the Company issued 7,200,000 shares of common stock
in an initial public offering at a price of $19.00 per share. Net proceeds
after underwriting discounts and commissions totaled approximately $127.9
million. The Company used the proceeds from the offering as follows:
approximately $28.6 million to repay certain debt, approximately $26.0
million bearing interest at a variable rate (either LIBOR or the prime rate
of First Union National Bank of North Carolina, plus an applicable margin)
which as of March 1, 1996 was 8.75% per year, and approximately $2.6 million
bearing interest at the rate of 9.75% per year. Additionally, approximately
$16.4 million was used to complete the acquisition of CompSource, Inc. and
Insura, Inc. ("collectively, "CompSource") and Atlas Insurance Company
("Atlas"), approximately $44.5 million has been used to increase the capital
surplus of the Company's insurance subsidiaries, and the balance will
be used for general corporate purposes, including the funding of statutory
surplus levels of the Company's insurance subsidiaries to fund the future
growth of its business.
In conjunction with the offering of shares by the Company, the majority
shareholder offered shares to the public. The Company did not receive any
proceeds from the sale of shares offered by the majority
shareholder. However, some of the majority shareholder's proceeds from
the offering were used to repay approximately $7.6 million in outstanding
indebtedness to the Company.
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, continued
(Unaudited)
(3) Acquisitions and Joint Ventures
Joint Venture Arrangement with Blue Cross and Blue Shield of Illinois. In
January, 1996, the Company entered into a joint venture arrangement with
Blue Cross and Blue Shield of Illinois ("BCBSI") to establish Third Coast
Holding Company ("Third Coast"). Third Coast then formed an Illinois domestic
stock insurance company (the "Insurance Company") to underwrite and sell
managed care workers' compensation insurance in Illinois, as well as a
third-party administrator corporation (the "Administrator") to provide
administrative services to the Insurance Company. Essentially, the
Administrator will act as the third-party service provider to the Insurance
Company and the Company will manage the Administrator. Under the terms of
the agreement, both BCBSI and the Company each hold 50% of the outstanding
common stock of Third Coast. On March 29, 1996, BCBSI contributed $10
million to capitalize the operations of Third Coast. The Company was not
required to contribute capital to the venture. However,
the Company is contributing the use of its expertise, systems, and
intellectual property to enable the Insurance Company to underwrite and
sell managed care workers' compensation insurance throughout
Illinois and to enable the Administrator to provide third-party
administration services to the Insurance Company. As a result of the initial
contribution by BCBSI on March 29, the Company recorded an
investment in Third Coast Holding and corresponding net assets in excess of
cost of business acquired of $5 million. In addition, BCBSI has agreed to
initially loan the Insurance Company up to $10 million. To
maintain sufficient capitalization levels, BCBSI has agreed to provide
additional surplus loans to the Insurance Company in a maximum aggregate of
$20 million, if certain other conditions are met.
Acquisition of CompSource. In March, 1996, the Company purchased all of the
stock of CompSource, Inc. and Insura, Inc. (collectively, "CompSource") in
exchange for approximately $11.9 million in cash and 112,582 of shares of
the Company's Class A Common Stock. CompSource is a workers' compensation
management services company offering its services in North Carolina. Cost
in excess of net assets of businesses acquired of approximately $12.5
million was recorded as a result of this acquisition.
Acquisition of Atlas. In March, 1996, the Company completed its acquisition
of Atlas Insurance Company ("Atlas") for approximately $5 million in cash.
Atlas has insurance licenses in 19 states. In addition, the acquisition
gives the Company excess and surplus lines licenses in 5 additional states.
Cost in excess of net assets of business acquired of approximately $2.1
million was recorded as a result of this acquisition. Following the
acquisition, Atlas was renamed RISCORP National Insurance Company ("RNIC").
Acquistion of NARM. On June 15, 1996, RNIC acquired the assets and
liabilites of the National Alliance for Risk Management ("NARM"), a North
Carolina workers' compensation self-insurance fund with approximately $53
million of standard premiums in-force. The acquisition was accomplished by
means of a loss portfolio transfer reinsurance agreement. NARM's assets and
liabilities totaled approximately $44.0 million and $43.1 million,
respectively, at the date of acquisition. Net assets in excess of cost of
business acquired of approximately $.9 million was recorded as a result of
this transaction.
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, continued
(Unaudited)
(4) Contingencies
On April 2, 1996, the Company and three key executives were named as
defendants in a purported class action filed in the United States District
Court for the Southern District of Florida. The suit claims the
Company violated the Racketeer Influenced and Corrupt Organizations Act
("RICO"), breached fiduciary duties and was negligent in the Company's
non-cash acquisition of Commerce Mutual Insurance Company ("CMIC") in 1995.
The suit seeks compensatory and punitive damages and equitable relief and
treble damages for the RICO counts. The named plaintiffs, Vero Cricket
Shop, Inc., Vero Cricket Shop Too, Inc. and Falls Company of Longboat Key,
Inc., claim to be former policyholders of CMIC and claim to represent others
similarly situated. The Company has moved to dismiss the complaint and to
strike the punitive damage claims. The Company believes this lawsuit is
without merit and intends to vigorously defend this action; however, there
can be no assurance that it will prevail in the litigation.
The State of Florida operates a Special Disability Trust Fund (the "SDTF")
that reimburses Florida employers and carriers for excess workers'
compensation benefits paid to employees when an employee is injured on the
job and the injury to the physically disabled worker merges with, aggravates,
or accelerates a pre-existing impairment. As of June 30, 1996, the Company has
recorded a receivable from the SDTF of $52.8 million. Actual recoveries from
the SDTF during the three and six months ended June 30, 1996 were $0 and
$684,000, respectively. The SDTF is managed by the State of Florida and is
funded through assessments against insurers and self-insurers providing
workers' compensation coverage in Florida. The SDTF's assessment formula
has historically yielded sufficient revenues for annual reimbursement
payments and for costs associated with administering the SDTF. The SDTF has
not pre-funded its claims liability and no reserves currently exist. Under
Florida sunset laws applicable to some state sponsored funds, the SDTF was
scheduled to expire on November 4, 1996, unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature this
year, the SDTF was re-created and is not scheduled for further review under
the Florida sunset laws until the year 2000. The Florida legislature
may, however, review the SDTF earlier and no assurance can be made with
regard to the legislature's possible actions. Moreover, it is not possible
to predict how the SDTF will operate, if at all, in the future. Changes in
the SDTF operations which decrease the availability of recoveries from the
SDTF or increase the SDTF assessments payable by the Company, or the
discontinuation of the SDTF, could have a material adverse effect on the
Company's business, financial condition or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements,
particularly with respect to the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Additional written or oral forward-looking statements may be made
by the Company from time to time, in filings with the Securities and Exchange
Commission or otherwise. Such forward-looking statements are within the
meaning of that term in Sections 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such statements may include, but not be limited to,
projections of revenues, income, losses, cash flows, capital expenditures,
plans for future operations, financing needs or plans, plans
relating to products or services of the Company, estimates concerning the
effects of litigation or other disputes, as well as assumptions to any
of the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted. Future events and actual results could
differ materially from those set forth in or underlying the forward-looking
statements. Many factors could contribute to such differences and include,
among others, the ability of the Company to execute its growth strategy, to
obtain necessary regulatory approvals, to win acceptance in local markets,
to expand its network of independent insurance agencies, to complete
acquisitions and to effectively manage any such growth; the impact on the
Company of current and future federal and state regulation of health care
reform legislation, including changes in the availability of recoveries from
the SDTF; the Company's limited operating history, and direct loss and claims
experience; the impact of ratings received by the Company from various rating
services or the absence of such ratings; the Company's need for additional
capital to meet state regulatory requirements and the ability of the
Company to generate sufficient capital in a timely fashion, the failure of
the SDTF to pay the Company's reimbursement requests, discontinuation of the
SDTF, the possible negative impact on the Company of the termination of quota
share or excess of loss reinsurance agreements or the failure of such
reinsurers to meet their obligations under such agreements (see "Overview"
for information concerning reinsurance); the highly competitive nature of
the managed care workers' compensation insurance market; the limited nature
of the Company's line of insurance products; the negative impact on the
Company if Florida was to permit competition based on price in workers'
compensation insurance; general economic conditions in Florida or the
United States generally; the Company's ability to continue and expand its
relationships with independent insurance agencies which market its products;
as well as other factors described in the Company's Prospectus under the
heading "Risk Factors" included in the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on
February 28, 1996 (File No. 33-99760).
Overview
The Company provides managed care workers' compensation products and services
designed to lower the overall costs of workers' compensation claims. The
Company was founded in 1988 as the management entity for a Florida
commercial self-insurance fund (the "Predecessor Fund") which the
Company helped organize. Prior to January 1, 1995, the Company's business
primarily consisted of fee-based managed care workers' compensation services
provided to the Predecessor Fund, which was converted into an assessable
mutual company in 1993. On January 1, 1995, the assessable mutual company
was converted into a stock insurance company, renamed RISCORP Insurance
Company ("RIC"), and concurrently acquired by the Company. As a result of
the acquisition, the revenues of the Company are now primarily derived from
premiums earned from its managed care workers' compensation products.
<PAGE>
In conjunction with the acquisition of RIC, the Company entered into a 50%
quota share reinsurance agreement with American Re-Insurance Company ("Am
Re"). The quota share reinsurance agreement provides for the Company to cede
50% of its direct workers' compensation premiums written and losses incurred
on and after January 1, 1995 to Am Re. Am Re pays a ceding commission to the
Company based on the Company's loss ratio, subject to certain adjustments
and limits.
Since January 1, 1995, the Company's revenues have consisted of premiums earned
from risk-bearing operations, fee income representing service fees from managed
funds, and net investment income. Premiums earned during a period are the
direct premiums earned by the Company on in-force policies. Fee income
represents the amount the Company receives for managing group self-insurance
funds and administrative fees collected from self-insureds to cover claims
services provided. Net investment income represents earnings on the
Company's investment portfolio, less investment expenses.
Since January 1, 1995, the Company's expenses have consisted of claim and claim
settlement expenses, commissions, underwriting and administrative expenses.
Claim and claim settlement expenses include reserves for future payments for
medical care and rehabilitation costs; indemnity payments for lost wages and
third party claim settlement expense such as independent medical examinations,
surveillance costs, and legal expenses; and staff and related expenses incurred
to administer and settle claims. Claim and claim settlement expenses are offset
by estimated recoveries from reinsurers under specific excess of loss and quota
share reinsurance agreement, the SDTF, and subrogation from third parties.
Commissions, underwriting and administrative expenses consist of agent
commissions, premium taxes which include SDTF assessments, state guaranty
fund assessments, and underwriting and marketing expenses. These expenses
are partially offset by ceding commissions received under the Company's
quota share reinsurance agreement. Administrative expenses include the
costs of providing executive, administrative, and support services to the
Company's subsidiaries and affiliates.
Results of Operations
Three months ended June 30, 1996 Compared to three months ended June 30, 1995
Direct premiums earned increased to $77.7 million for the three months ended
June 30, 1996 from $71.5 million for the same period in 1995, a net increase
of $6.2 million. The increase was primarily due to an increase in the number
of in-force policies from 21,024 as of June 30, 1995 to 22,418 as of June 30,
1996. Premiums assumed increased primarily due to commencement of a new
reinsurance contract for expansion into other states. Premiums ceded to
reinsurers increased to $37.6 million from $36.5 million, primarily as a
result of the growth in premium volume. The following table shows direct,
assumed, ceded, and net earned premiums for the three months ended
June 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three months ended
June 30,
1996 1995
(in thousands)
<S> <C> <C>
Direct premiums earned. . . . . . . . . . . . . . . . $ 77,657 $ 71,501
Assumed premiums earned . . . . . . . . . . . . . . . 2,104 1,052
Premiums ceded to reinsurers . . . . . . . . . . . . . .(37,640) (36,484)
Net premiums earned . . . . . . . . . . . . . . . . . $ 42,121 $ 36,069
</TABLE>
Fee income for the three months ended June 30, 1996 was $8.9 million compared
to $5.3 million for the same period in 1995, a net increase of $3.6 million.
The increase is reflective of growth in fees generated by the growth in
existing managed funds and the management of new insurance operations.
<PAGE>
Net investment income for the three months ended June 30, 1996, was $2.9
million compared to $2.0 million for the same period in 1995, a net increase
of $0.9 million. The increase was attributable to income from the investment
of proceeds from the Company's initial public offering partially offset
by a slight decrease in the investment yields over the period.
Claim and claim settlement expenses for the three months ended June 30, 1996
were $26.8 million compared to $21.6 million for the same period in 1995, a
net increase of $5.2 million. The increase was caused primarily by growth in
premium volume.
Commissions, underwriting and administrative expenses for the three months
ended June 30, 1996 were $16.3 million compared to $15.1 million for the
same period in 1995, a net increase of $1.2 million. The increase
was caused primarily by growth in the Company's operations, including $1.0
million expended on new employees. Overall growth in operations resulted in
increases in agents' commissions, premium taxes, contract
services, office occupancy, and other miscellaneous expenses. The Company's
total employees increased from approximately 650 as of June 30, 1995 to 840
at June 30, 1996.
Interest expense for the three months ended June 30, 1996 was $.5 million
compared to $1.3 million for the same period in 1995. The decrease is due
primarily to the repayment of a portion of outstanding borrowings
with proceeds from the initial public offering.
Depreciation and amortization expenses for the three months ended June 30, 1996
were $1.0 million compared to $0.4 million for the same period in 1995, a net
increase of $0.6 million. The increase was caused primarily by accelerated
amortization of loan fees due to the payoff of borrowings, amortization of
goodwill related to acquisitions, and additions to property and equipment
during 1995 and 1996.
The effective tax rate for the three months ended June 30, 1996 was 36.8%
compared to 27.0% for the same period in 1995. The increase resulted from
a decrease in tax exempt income and the 1995 earnings of RISCORP of North
Carolina which were non-taxed as an S-Corporation prior to its inclusion
into the consolidated group.
The weighted average common shares outstanding for the three months ending
June 30, 1996 was 37,462,722 versus 30,092,500 for the three months ending
June 30, 1995. The increase is due to the issuance of 7.2 million shares of
Class A common stock in conjunction with the initial public offering in
February 1996, and the issuance of 112,582 shares of Class A common stock
to acquire CompSource.
In January, 1996, the Company entered into a joint venture arrangement with
BCBSI to underwrite and sell managed care workers' compensation insurance
in Illinois, as well as a third-party administrative services to
the jointly-owned service company. As a result of the initial contribution
of BCBSI on March 29, the Company recorded an investment in the joint venture
and net assets in excess of cost of business acquired of $5 million. In
March 1996, the Company purchased all of the stock of CompSource in exchange
for approximately $11.9 million in cash and 112,582 of shares of the Company's
Class A common stock. CompSource is a workers' compensation management services
company offering its services in North Carolina. Also in March, 1996, the
Company acquired Atlas, headquartered in Kansas City, Missouri for
approximately $5 million in cash. The Atlas acquisition conveys to the
Company various commercial insurance licenses in 19 states, as well as excess
and surplus lines licenses in 5 additional states.
On June 15, 1996, RNIC acquired the assets and liabilites of the NARM, a North
Carolina workers' compensation self-insurance fund with approximately $53
million of standard premiums in-force. The acquisition was accomplished by
means of a loss portfolio transfer reinsurance agreement. NARM's assets and
liabilities totaled approximately $44.0 million and $43.1 million,
respectively, at the date of acquisition. Net assets in excess of cost of
business acquired of approximately $.9 million was recorded as a result of
this transaction.
<PAGE>
Six months ended June 30, 1996 Compared to six months ended June 30, 1995
Direct premiums earned increased to $152.2 million for the six months ended
June 30, 1996 from $133.0 million for the same period in 1995, a net increase
of $19.2 million. The increase was primarily due to an increase in the number
of in-force policies from 21,024 as of June 30, 1995 to 22,418 as of June 30,
1996.
Premiums assumed increased primarily due to commencement of a new reinsurance
contract for expansion into other states. Premiums ceded to reinsurers
increased to $75.3 million from $66.7 million, primarily as a result of
the growth in premium volume. The following table shows direct, assumed,
ceded, and net earned premiums for the three months ended June 30, 1996
and 1995:
<TABLE>
<CAPTION>
Six months ended
June 30,
1996 1995
(in thousands)
<S> <C> <C>
Direct premiums earned . . . . . . . . . . . . . . . . $ 152,228 $ 133,008
Assumed premiums earned . . . . . . . . . . . . . . . . 3,544 1,317
Premiums ceded to reinsurers . . . . . . . . . . . . . . (75,282) (66,701)
Net premiums earned. . . . . . . . . . . . . . . . . . $ 80,490 $ 67,624
</TABLE>
Fee income for the six months ended June 30, 1996 was $16.0 million compared
to $10.1 million for the same period in 1995, a net increase of $5.9
million. The increase is reflective of growth in fees generated by the
growth in existing managed funds and the management of several new insurance
operations.
Net investment income for the six months ended June 30, 1996 was $4.5 million
compared to $4.1 million for the same period in 1995, a net increase of $.4
million. The increase was attributable to income from the investment of
proceeds from the Company's initial public offering partially offset
by a slight decrease in the investment yields over the period.
Claim and claim settlement expenses for the six months ended June 30, 1996 were
$51.1 million compared to $38.5 million for the same period in 1995, a net
increase of $12.6 million. The increase was caused primarily by growth in
premium volume coupled with the effect of a $3.0 million reduction in
reserves in the first quarter of 1995 following from the results of the
Company's claims settlement initiative.
Commissions, underwriting and administrative expenses for the six months ended
June 30, 1996 were $32.1 million compared to $26.6 million for the same period
in 1995, a net increase of $5.5 million. The increase was caused primarily by
growth in the Company's operations, including significant addition of new
employees.
Overall growth in operations resulted in increases in agents' commissions,
premium taxes, contract services, office occupancy, and other miscellaneous
expenses. The Company's total employees increased from approximately 650 as
of June 30, 1995 to 840 at June 30, 1996.
Interest expense for the six months ended June 30, 1996 was $1.6 million
compared to $2.4 million for the same period in 1995. The decrease is due
primarily to the repayment of a portion of outstanding borrowings with
proceeds from the initial public offering.
<PAGE>
Depreciation and amortization expenses for the six months ended June 30, 1996
were $1.9 million compared to $.8 million for the same period in 1995, a net
increase of $1.1 million. The increase was caused primarily by accelerated
amortization of loan fees due to the payoff of borrowings, amortization of
goodwill related to acquisitions, and additions to property and equipment
during 1995 and 1996.
The effective tax rate for the six months ended June 30, 1996 was 36.8%
compared to 27.1% for the same period in 1995. The increase resulted from
a decrease in tax exempt income and the 1995 earnings of RISCORP of North
Carolina which were non-taxed as an S-Corporation prior to its inclusion
into the consolidated group.
The weighted average common shares outstanding for the six months ended
June 30, 1996 was 35,012,634 versus 30,092,500 for the six months ended
June 30, 1995. The increase is due to the issuance of 7.2 million shares
of Class A common stock in conjunction with the initial public offering in
February, 1996, and the issuance of 112,582 shares of Class A common stock to
acquire CompSource.
Other Information
Due to the purchase of a new aircraft by CMI Aviation, a corporation controlled
by Chairman and CEO William D. Griffin, the montlhy rental amount of $34,000,
on a bare plane basis, was modified to $50,000 per month effective June 1,
1996. Gryphus Development Group ("GDG"), a corporation controlled by Mr.
Griffin, provides all other services related to the aircraft (e.g.,
salaries of the two pilots and the rest of the flight crews, hangar fees,
and other operating costs related to the aircraft). Effective June 1, 1996,
the Company will pay GDG $96,000 per month for these services, which the
Company believes will be GDG's approximate cost. The Company was previously
paying GDG $60,000 per month for these services.
Liquidity and Capital Resources
The Company has historically met its cash requirements and financed its growth
through cash flows generated from operations, loans, and lines of credit. On
February 29, 1996, the Company completed its initial public offering of
common stock which generated net proceeds of $127.9 million. The proceeds were
used to repay certain debt, acquire CompSource and Atlas, increase the capital
surplus of the Company's insurance subsidiaries, and for general corporate
purposes, including the funding of the future growth of its business. The
Company's primary sources of cash flow from operations are premiums and
investment income, while its cash requirements consist primarily of payments
for claims and claim settlement expenses, policy acquisition costs,
capital for insurance subsidiaries' surplus needs, and other general and
administrative expenses.
Cash flow from operations for the six months ended June 30, 1996 was $8.4
million as compared to $(39.8) million for the same period of 1995. The
high level of net cash disbursements from operations in 1995 relates
primarily to the cession of written premiums under reinsurance agreements.
Due to the timing of premium receipts and claim payments particularly in the
initial year of the quota share reinsurance agreement, cessions to
the reinsurer resulted in negative cash flows to the Company. However, as
losses develop and are paid for in future years, this trend is expected to
reverse.
The Company incurred substantial indebtedness in connection with its
reorganization in December 1994 and its acquisition of the stock insurance
company in January 1995. The Company borrowed $41.0 million under
a senior credit facility of $26.0 million agreement (retired in 1996 with
proceeds from stock offering) and a subordinated debt of $15.0 million. In
addition, the Company had borrowed $2.0 million under a $2.0 million
line of credit (also retired in 1996). On December 15, 1995, in conjunction
with the proposed acquisition of CompSource, the Company borrowed $ 1 million
under a term loan agreement and disbursed the proceeds into an escrow account
pursuant to a stock purchase agreement. The Company used a portion of the
proceeds from the Offering to fund the acquisition of CompSource including
payoff of the loan. To service its obligations, the Company currently
receives management fees from its insurance subsidiaries.
<PAGE>
On July 10, 1996, the Company executed a commitment for an unsecured revolving
credit facility totaling $40 million. The term is two years revolving,
converting to a three year term loan at July 31, 1998. The proceeds of any
borrowings are anticipated to be used primarily for acquisitions, support of
operating activities, and funding of future growth of the business.
The Company's principal uses of cash have been to support its operating
activities, including the quota share reinsurance agreement, fund the
acquisition and capital surplus needs of the stock insurance company in
January 1995, and fund the start-up and operations of its various managed
care programs and services. The Company believes its future cash flow
generated by operations, its cash and investment balances, and the net
proceeds from the Offering will be sufficient to fund: continuing
operations at current levels, capital surplus needs of insurance
subsidiaries, principal repayments and debt service on its outstanding
obligations, as well as capital expenditures, both on a short-term basis
(for the next 12 months) and a long-term basis (beyond the next
12 months).
The Company recorded $52.8 million in accrued recoverables from the SDTF, which
it anticipates will be reimbursed over a number of years. For the six months
ended June 30, 1996, the Company received payments from the SDTF totaling
$684,000. In addition, the Company received payments totaling $514,000 in
July, 1996. Once the SDTF determines that an individual claim is eligible for
reimbursement, the SDTF periodically reimburses the insurer as the insurer
submits reimbursement requests. The Company believes that it will ultimately
collect the entire balance of the SDTF claims and that periodic
reimbursement will be received following its submission of proofs of claim
and reimbursement requests. During its approximate 40 year history, the
SDTF has historically paid reimbursement requests for claims it determined
were eligible for reimbursement. The Company believes that the SDTF will meet
its obligations to pay eligible reimbursement requests, although there can be
no assurance in this regard.
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital standards to determine capital requirements of an
insurance carrier based upon the risks inherent in its
operations. The standards, which have not yet been adopted in Florida,
require the computation of a risk-based capital amount which is compared to
a carrier's actual total adjusted capital. The computation involves applying
factors to various financial data to address four primary risks: asset risk,
insurance underwriting risk, credit risk, and off-balance sheet risk. These
standards provide for regulatory intervention when the percentage of total
adjusted capital to authorized control level risk-based capital is below
certain levels. At December 31, 1995, the Company's insurance subsidiaries'
statutory surplus was in excess of any risk-based capital action level
requirements.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
On April 2, 1996, the Company and three key executives were named as defendants
in a purported class action filed in the United States District Court for the
Southern District of Florida. The suit claims the Company violated RICO,
breached fiduciary duties and was negligent in the Company's non-cash
acquisition of CMIC in 1995. The suit seeks compensatory and punitive
damages and equitable relief and treble damages for the RICO counts. The
named plaintiffs, Vero Cricket Shop, Inc., Vero Cricket Shop Too, Inc. and
Falls Company of Longboat Key, Inc., claim to be former policyholders of
CMIC and claim to represent others similarly situated. The Company has moved
to dismiss the complaint and to strike the punitive damage claims. The
Company believes this lawsuit is without merit and intends to vigorously
defend this action; however, there can be no assurance that it will prevail
in the litigation.
Item 2. Changes to Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedules
b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RISCORP, INC.
(Registrant)
Date: August 13, 1996
/s/Richard A. Halloy
Richard A. Halloy
Senior Vice President,
Chief Financial Officer,
and Director
<TABLE>
EXHIBIT NUMBER 11
RISCORP, Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
For The Three and Six Months Ended June 30, 1996
(Unaudited)
(Dollars in Thousands Except Share and Per Share Amounts)
<CAPTION>
Three Months Ended
June 30, 1996
<S> <C>
Net Income $5,932
Weighted average common and common share
equivalents outstanding:
Average number of common shares outstanding 35,373,483
Common stock equivalents - assumed exercise
of stock options 2,089,239
Weighted average common and
common share equivalents outstanding 37,462,722
Earnings per share $ 0.16
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
<S> <C>
Net Income $8,990
Weighted average common and common
share equivalents outstanding:
Average number of common shares outstanding 32,931,113
Common stock equivalents - assumed
exercise of stock options 2,081,521
Weighted average common and
common share equivalents outstanding 35,012,634
Earnings per share $ 0.26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996<F1><F2><F3>
<DEBT-HELD-FOR-SALE> 169,271
<DEBT-CARRYING-VALUE> 15,348
<DEBT-MARKET-VALUE> 15,361
<EQUITIES> 2,909
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 187,528
<CASH> 28,393
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 643,085
<POLICY-LOSSES> 332,420
<UNEARNED-PREMIUMS> 75,352
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,623
0
0
<COMMON> 353
<OTHER-SE> 152,107
<TOTAL-LIABILITY-AND-EQUITY> 643,085
80,490
<INVESTMENT-INCOME> 4,494
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 15,969
<BENEFITS> 51,126
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 14,215
<INCOME-TAX> 5,225
<INCOME-CONTINUING> 8,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,990
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
<RESERVE-OPEN> 261,700
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 332,420
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Net investment income is reported net of any realized gains and lisses in
the Statement of Income.
<F2>Financial Data Schedule information for the year ending December 31, 1995 is
incorporated by reference herein to Amendment No. 4 to Form S-1
registration statement as filed with the Securities and Exchange Commission
by the Company on February 28, 1996.
<F3>Amounts inapplicable or not disclosed as a separate line on the
Statement of Financial Position or Results of Operations are reported as 0
herein.
</FN>
</TABLE>
