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 March 31, 1997
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) 906-2000
(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 April 30, 1997
Class A Common Stock, $.01 par value 11,743,335
Class B Common Stock, $.01 par value 24,334,443
<PAGE>
<TABLE>
<CAPTION>
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3-4
Consolidated Statements of Income -
For the three months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial 16-25
Condition and Results of Operations
Part II Other Information
Item 1. Legal Proceedings 26
Item 2. Changes to Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
<PAGE>
Part I Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
(in thousands)
March 31, December 31, 1996
1997
Assets (Unaudited)
Investments:
<S> <C> <C>
Fixed maturities available for sale, at fair value (amortized cost $226,240
$204,676 in 1997 and $226,240 in 1996) $ 204,479 $ 228,802
Fixed maturities held to maturity, at amortized cost (fair value $21,568
in 1997 and $22,892 in 1996) 21,879 22,809
Equity securities, at fair value (cost $3,880 in 1997 and $3,380 in 1996) 3,916 4,045
------------ ------------
Total investments 230,274 255,656
Cash and cash equivalents 30,985 26,307
Premiums receivable, net 118,565 122,078
Accounts receivable--other 10,733 11,676
Recoverable from Florida Special Disability Trust Fund, net 49,505 49,505
Reinsurance recoverables 194,469 180,698
Prepaid reinsurance premiums 54,402 49,788
Prepaid managed care fees 30,722 31,958
Accrued reinsurance commissions 23,226 20,419
Deferred income taxes 23,587 22,551
Property and equipment, net 28,400 27,505
Goodwill 21,753 22,648
Other assets 11,345 7,653
----------- ------------
Total assets $ 827,966 $ 828,442
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
(in thousands)
March 31, December 31, 1996
1997
Liabilities and Shareholders' Equity (Unaudited)
Liabilities:
<S> <C> <C>
Losses and loss adjustment expenses $ 480,537 $ 458,239
Unearned premiums 100,323 102,562
Notes payable of parent company 15,000 15,000
Notes payable of subsidiaries 1,244 1,303
Accounts and notes payable--related party -- 1,171
Deposit balances payable 4,991 4,787
Accrued expenses and other liabilities 58,088 74,706
Net assets in excess of cost of business acquired 11,029 11,266
----------- -----------
671,212 669,034
---------- ----------
Class A Common Stock subject to put options -- 2,100
------------- ------------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding: 11,855,917 in 1997 and 1996 120 120
Class B Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding; 1996 and 1997 24,334,443
243 243
Preferred stock, $.01 par value, 10,000,000 shares authorized; 0 shares
issued and outstanding -- --
Additional paid-in capital 139,691 137,813
Net unrealized gains on investments (214) 1,769
Unearned compensation--stock options (374) (546)
Retained earnings 19,388 17,909
Treasury stock - at cost, 112,582 shares (2,100) --
------------ -------------
Total shareholders' equity 156,754 157,308
---------- ----------
Total liabilities and shareholders' equity $ 827,966 $ 828,442
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the three months ended March 31, 1997 and 1996
(in thousands, except share and per share data)
1997 1996
---------------- ----------------
(Unaudited) (Unaudited)
Revenue:
<S> <C> <C>
Premiums earned $ 46,814 $ 38,369
Fee income 5,146 7,082
Net investment income 3,946 1,611
----- -----
Total revenue 55,906 47,062
------ ------
Expenses:
Losses and loss adjustment expenses 32,547 24,366
Unallocated loss adjustment expenses 4,019 2,785
Commissions, underwriting and administrative expenses 14,437 13,021
Interest expense 482 1,077
Depreciation and amortization 1,933 979
----- ------
Total expenses 53,418 42,228
------ ------
Income before income taxes 2,488 4,834
Income taxes 1,009 1,777
Net income $ 1,479 $ 3,057
========= ========
Net income per common share $ 0.04 $ 0.09
========== =========
Weighted average common and common share
equivalents outstanding 37,775,562 32,536,343
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 1997 and
1996
(in thousands)
1997 1996
--------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash (used in) provided by operating activities $ (13,557) $ 21,918
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (2,069) (2,273)
Proceeds from the sale of equipment 23 469
Purchase of fixed maturities--available for sale (8,465) (47,207)
Proceeds from sale of fixed maturities--available for sale 27,297 3,908
Proceeds from maturities of fixed maturities--available for sale 2,452 1,960
Proceeds from maturities of fixed maturities--held to maturity 1,000 --
Purchase of equity securities -- (580)
Purchase of CompSource, Inc. and Insura, Inc., net of cash acquired -- (12,669)
Purchase of Atlas Insurance Company, net of cash acquired -- (4,742)
------------ ----------
Net cash provided by (used in) investing activities 20,238 (61,134)
---------- ---------
Cash flows from financing activities:
Principal repayments of notes payable (59) (30,465)
Increase in deposit balances payable 205 44
Unearned compensation--stock options 173 72
Purchase of treasury stock (2,100) --
Issuance of common stock -- 128,587
Other, net (222) (130)
----------- -----------
Net cash (used in) provided by financing activities (2,003) 98,108
---------- ----------
Net increase in cash and cash equivalents 4,678 58,892
Cash and cash equivalents, beginning of period 26,307 23,348
---------- ----------
Cash and cash equivalents, end of period $ 30,985 $ 82,240
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 462 $ 1,049
=========== ==========
Income taxes $ 3,057 $ --
========== ===========
See accompanying notes to consolidated 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 months ended March 31, 1997 may not be
indicative of the results that may be expected for the full year ending
December 31, 1997. 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, 1996 contained in
the Company's Statement on Form 10K/A, which was filed with the
Securities and Exchange Commission on October 23, 1997.
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 ("IPO") at a price of $19.00 per share. Net
proceeds, after underwriting discounts and commissions, totaled
approximately $127.9 million. The Company used $28.6 million of the
proceeds from the IPO to repay certain debt, including debt of $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 was 8.75 percent as of March 1, 1996, and debt of $2.6
million bearing interest at the rate of 9.75 percent per year.
Additionally, approximately $12.1 million was used to complete the
acquisition of CompSource, Inc. and Insura, Inc. (collectively,
"CompSource"), approximately $5.0 million was used to acquire Atlas
Insurance Company ("Atlas"), approximately $11.5 million was used to
acquire Independent Association Administrators, Inc. ("IAA"),
approximately $68.9 million was used to increase the capital and surplus
of the Company's insurance subsidiaries, and the balance was used for
general corporate purposes. These acquisitions are more fully described
in Note 3.
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>
(3) Acquisitions and Joint Ventures
Joint Venture Arrangement
In January 1996, the Company, through its wholly-owned subsidiary,
RISCORP of Illinois, entered into a joint venture arrangement with Health
Care Service Corporation ("HCSC"), a subsidiary of Blue Cross and Blue
Shield of Illinois, to underwrite and sell managed care workers'
compensation insurance in Illinois. The Company and HCSC each hold 50
percent ownership in the joint venture known as Third Coast Holding
Company ("Third Coast"). The Company contributed the use of its
expertise, insurance systems and intellectual property, while HCSC
contributed cash of $10.0 million. The Company's contributed property in
Third Coast was valued at $10.0 million; however, the Company's cost
basis in the contributed property was $0 and as of December 31, 1996, the
Company recorded its initial investment in Third Coast at $0.
The Company accounts for its 50 percent investment in Third Coast on the
equity basis of accounting, whereby the Company's recorded investment is
adjusted for its proportionate share of earnings or losses of Third
Coast. The Company discontinued the use of the equity method of
accounting for Third Coast in the first quarter of 1997 when the
cumulative losses reduced the Company's investment in Third Coast to $0.
In addition, the Company has not made any financial guarantees relating
to Third Coast and has not made any financial commitments to provide any
future funding to Third Coast. As of March 31, 1997, the unrecorded
losses relating to Third Coast were approximately $391,000.
Acquisition of CompSource
In March 1996, the Company purchased all of the outstanding stock of
CompSource in exchange for approximately $12.1 million in cash and
112,582 shares of the Company's Class A Common Stock valued at $2.1
million on the date of acquisition. CompSource is a workers' compensation
management services company offering its services in North Carolina.
Pursuant to a stock redemption agreement entered into as part of this
transaction, the former shareholders of CompSource elected to have the
Company repurchase the 112,582 shares at a purchase price of $18.653 per
share on March 8, 1997, and the Company repurchased all 112,582 shares
from the former shareholders for $2.1 million, in accordance with the
terms of the redemption agreement. This $2.1 million stock redemption has
been included in the accompanying Consolidated Balance Sheets.
On the acquisition date, the excess of the purchase price over the fair
value of the net assets acquired was $12.6 million and was recorded as
goodwill in the accompanying Consolidated Balance Sheets.
Acquisition of Atlas
In March 1996, RISCORP of Florida, Inc., a wholly-owned subsidiary of the
Company, acquired 100 percent of the outstanding capital stock of Atlas
for approximately $5.0 million in cash. As a result of the acquisition,
the name was changed from Atlas to RISCORP National Insurance Company
("RNIC"). RNIC, which primarily provides workers' compensation insurance,
is licensed to do business in 19 states and is authorized to operate on
an excess and surplus lines basis in 5 additional states. On the
acquisition date, the excess of the purchase price over the fair value of
the net assets acquired was $2.6 million and was recorded as goodwill in
the accompanying Consolidated Balance Sheets.
<PAGE>
Acquisition of Independent Association Administrators, Inc. and Risk
Inspection Services and Consulting, Inc. ("RISC")
In September 1996, the Company purchased all of the outstanding stock of
IAA and RISC in exchange for approximately $11.5 million, consisting
primarily of 790,336 shares of the Company's Class A Common Stock valued
at approximately $10.9 million on the date of acquisition. IAA and RISC
are workers' compensation management services companies offering services
in Alabama. On the acquisition date, the excess of the purchase price
over the fair value of the net assets acquired was $11.4 million and was
recorded as goodwill in the accompanying Consolidated Balance Sheets.
During the first quarter of 1997, it became evident that the goodwill
recorded at the date of the RISC and IAA acquisition could not be fully
recovered from the profitability of the workers' compensation business
that was currently under contract including the estimated 1997 renewals.
Therefore, as of December 31, 1996, $2.8 million of goodwill was written
off and is included as an expense in the accompanying Consolidated
Statements of Income.
Assumption Reinsurance Transaction
<TABLE>
The following loss portfolio transfers and assumption reinsurance
agreements were entered into by RNIC during 1996 (in thousands):
<CAPTION>
Losses Assumed at Unearned Premiums at
Entity Effective Date Date of Transfer Date of Transfer
<S> <C> <C>
NARM June 14, 1996 $ 34,544 $ 5,209
OSAA September 1, 1996 49,716 --
NARM - Virginia October 1, 1996 3,057 996
---------- ---------
Total $ 87,317 $ 6,205
======== =======
</TABLE>
Effective June 14, 1996, RNIC entered into a loss portfolio transfer and
assumption reinsurance agreement with National Alliance for Risk
Management ("NARM"), a North Carolina self-insured workers' compensation
fund. Under the terms of the agreement, RNIC assumed 100 percent of the
outstanding loss reserves (including incurred but not reported losses)
and the outstanding unearned premiums as of June 14, 1996. RNIC issued
assumption certificates to all of the NARM policyholders.
Effective September 1, 1996, RNIC entered into a loss portfolio transfer
and assumption reinsurance agreement with the Occupational Safety
Association of Alabama ("OSAA"), an Alabama self-insured workers'
compensation fund. Under the terms of the agreement, RNIC assumed 100
percent of the outstanding loss reserves (including incurred but not
reported losses) as of September 1, 1996. RNIC issued assumption
certificates to all OSAA policyholders.
Effective October 1, 1996, RNIC entered into a loss portfolio transfer
and assumption reinsurance agreement with three NARM self insurance funds
in Virginia ("NARM - Virginia"). Under the terms of the agreement, RNIC
assumed 100 percent of the outstanding loss reserves (including incurred
but not reported losses) and the outstanding unearned premiums as of
October 1, 1996. RNIC issued assumption certificates to all NARM Virginia
policyholders.
<PAGE>
In addition, OSAA transferred to RNIC approximately $11.0 million in OSAA
member deposits and cash of approximately $11.0 million. RNIC will refund
the deposits to the policyholders during 1997 when the final premium
audits are completed for the 1996 policy year. As of December 31, 1996,
OSAA owed RNIC approximately $3.3 million in connection with the
transaction. These funds were received on April 14, 1997.
(4) Commitments and Contingencies
On April 2, 1996, the Company, RISCORP Insurance Company ("RIC"), several
officers, directors and employees 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 defendants violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), breached
fiduciary duties, and were negligent in the Company's 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 defendants moved to dismiss the RICO counts and to strike
the punitive damages claims. These motions, as well as plaintiffs' motion
for class certification, were pending when the plaintiffs filed an
amended complaint. The amended complaint added the Florida Insurance
Commissioner and Zenith Insurance Company ("Zenith") as defendants in one
new count seeking declaratory relief. The remaining claims in the amended
complaint are the same as those in the original complaint. The defendants
have filed a motion to dismiss the amended complaint and to strike the
punitive damages claims. The parties have been ordered to non-binding
mediation in this matter. The Company intends to defend this action
vigorously; however, there can be no assurance that it will prevail in
the litigation.
Between November 20, 1996 and January 31, 1997, nine shareholder class
action lawsuits were filed against the Company and other defendants in
the United States District Court for the Middle District of Florida. In
March 1997, the Court consolidated these lawsuits and appointed co-lead
plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants
the Company, three of its executive officers, one non-officer director
and three of the Company's underwriters for the Company's initial public
offering. The plaintiffs in the consolidated complaint purport to
represent the class of shareholders who purchased the Company's Class A
Common Stock between February 28, 1996 and November 14, 1996. The
consolidated complaint alleges that the Company's Registration Statement
and Prospectus of February 28, 1996, as well as subsequent statements,
contained false and misleading statements of material fact and omissions,
in violation of sections 11 and 15 of the Securities Act and sections
10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder. The consolidated complaint seeks unspecified compensatory
damages. The Company has filed a motion to dismiss the consolidated
complaint which has been fully briefed and is pending. Discovery will be
stayed until the motion to dismiss has been decided. The plaintiffs have
filed a motion to certify the class, but the parties have agreed that the
Company need not respond to that motion until thirty days after the
motion to dismiss has been decided. The parties have been ordered to
non-binding mediation in this matter. The Company intends to defend this
action vigorously; however, there can be no assurance that it will
prevail in the litigation.
<PAGE>
On July 17, 1997, the Company and several former officers were named as
defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges violations of federal and state securities laws and breach
of contract resulting from the purchase of IAA by the Company in 1996.
The suit seeks compensatory and punitive damages and equitable relief.
The named plaintiffs are Thomas Albrecht and Peter Norman, the former
shareholders of IAA. The Company intends to vigorously defend this
action; however, there can be no assurance that it will prevail in the
litigation.
On August 20, 1997, the Company, RNIC, IAA and Peter Norman were named as
defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges common law fraud, breach of contract and breach of fiduciary
duty resulting from the assumption reinsurance and loss portfolio
transfer agreement with OSAA in 1996. The suit seeks compensatory and
punitive damages and equitable relief. The named plaintiff is OSAA. The
Company intends to vigorously defend this action; however, there can be
no assurance that it will prevail in the litigation.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the
Company, RISCORP Management Services, Inc. ("RMS") (a wholly owned,
non-regulated subsidiary of the Company) and five former officers,
including William D. Griffin, Founder and Chairman of the Board, for
various charges stemming from alleged illegal political campaign
contributions. On September 18, 1997, the Board of Directors approved a
guilty plea by RMS to a single count of conspiracy to commit mail fraud.
The guilty plea was entered by RMS and accepted by the court on October
9, 1997. As a result of an agreement negotiated with the United States
Attorney, the court dismissed the indictment against the Company on the
same day. Mr. Griffin has resigned from the Board of Directors of the
Company and its subsidiaries and all other positions with the Company and
its subsidiaries. As of December 31, 1996, the Company had recorded in
the accompanying financial statements a provision of $1.0 million for the
payment of fines and other costs related to this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In
addition, certain of the lawsuits and related legal expenses may be
covered under directors and officers' insurance coverage maintained by
the Company.
Due to a recent decrease in the market value of the Company's Class A
Common Stock, additional amounts may have to be paid to the former
shareholders of IAA. Under the IAA acquisition agreement, the former IAA
shareholders received 790,336 shares of the Company's Class A Common
Stock. Pursuant to the acquisition agreement, if the former IAA
shareholders own all of such Class A Common Stock on September 17, 1998,
the Company is obligated to issue additional shares of the Company's
Class A Common Stock in an amount sufficient to make the value of all
shares of the Company's Class A Common Stock held by the former IAA
shareholders equal to an aggregate fair market value of $10.9 million on
September 17, 1998. However, in no event will the number of additional
shares issued to the former IAA shareholders exceed 790,336 shares. Based
upon the fair market value of the Company's Class A Common Stock of $0.50
as of August 31, 1997, 790,336 additional shares would be issued to the
former IAA shareholders.
The Florida Department of Insurance (the "FDOI") conducted a financial
examination of RIC, one of the Company's insurance subsidiaries, for
1995. The final examination report reduced statutory surplus as of
December 31, 1995 from $31,117,099 to $4,961,478. As a result, RIC failed
to meet the minimum capital and surplus requirements by approximately
$12.5 million. The Company made a capital infusion of approximately $31.2
million into RIC in 1996, and as a result, as of December 31, 1996, the
surplus of RIC exceeded the minimum capital and surplus requirements.
<PAGE>
The FDOI and the Missouri Department of Insurance (the "MDOI") are
currently conducting financial examinations of two of the Company's
insurance subsidiaries. While these examinations may result in
adjustments to the statutory financial statements of the insurance
subsidiaries for 1996, management does not believe that any such
adjustments will be material. The Company has not received the reports
from these examinations, however, based upon communications with the
MDOI, the most significant adjustment proposed by the MDOI is the
non-admission of an accounts receivable balance of $900,000 relating to a
loss portfolio transfer. This balance was received on April 14, 1997. The
adjustment relates to statutory financial statements and has no impact on
these GAAP financial statements, however, any adjustments could impact
the dividend ability of the company's insurance subsidiaries and the
disclosures within these financial statements.
Under the CompSource acquisition, the former shareholder received cash
and 112,582 shares of the Company's Class A Common Stock. Per a
redemption agreement, if the former shareholders so elect, the Company is
obligated to repurchase the 112,582 shares at a purchase price of $18.653
per share during a redemption period beginning March 8, 1997 and ending
April 7, 1998. On March 19, 1997, the Company received the redemption
notice from the former CompSource shareholders. On March 19, 1997, the
Company paid the CompSource shareholders $2.1 million as payment for the
112,582 shares of Class A Common Stock pursuant to the redemption
provisions.
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The
Company's primary sources of cash flow from operations are premiums and
investment income, and its cash requirements consist primarily of payment
of losses and loss adjustment expenses, support of its operating
activities including various reinsurance agreements and managed care
programs and services, capital and surplus needs for its insurance
subsidiaries, and other general and administrative expenses.
On November 9, 1996, at a Special Board of Directors' meeting of RISCORP,
the Board voted to establish a Strategic Alternatives Committee to
evaluate alternatives to maximize shareholder value including, without
limitation, potential acquisitions, joint ventures, mergers, strategic
alliances and the sale of all or part of RISCORP and its subsidiaries.
The actions of the Strategic Alternatives Committee during the period of
November 1996 through June 1997 culminated in the June 17, 1997 agreement
for the sale and transfer of certain of RISCORP's and its subsidiaries'
assets and non-contingent liabilities to another insurer for cash. The
pending sale, which is anticipated to take place in early 1998, requires
the filing of a proxy statement with the Securities and Exchange
Commission ("SEC"), the approval of the transaction by RISCORP
shareholders and approval by the FDOI and MDOI, amongst other conditions.
(5) Events Subsequent to the Balance Sheet Date
In May 1997, RIC and RISCORP Property & Casualty Company ("RPC") were
assigned a rating of C (Weak) by A.M. Best Company, Inc. ("A.M. Best"),
one of the leading insurance rating agencies. This rating will remain
"under review with negative implications" by A.M. Best pending the
resolution of certain uncertainties, including various legal issues, the
protracted delay in RISCORP filing its annual report on Form 10-K/A, for
the year ended December 31, 1996 with the Securities and Exchange
Commission ("SEC") and the ongoing state regulatory examination for 1996.
The Company filed its annual report on Form 10K/A for the year ended
December 31, 1996 with the SEC on October 23, 1997. In April 1997, RNIC
was assigned a rating of NR-2 (Not Rated) by A.M. Best. RNIC was not
eligible for a Best Rating due to its limited operating experience.
<PAGE>
On June 17, 1997, the Company entered into an agreement for the sale and
transfer of certain of its assets and non-contingent liabilities to
Zenith in exchange for cash. The purchase price for the net assets of the
Company is undetermined at this time but will be based on the GAAP
statement of transferred assets and the transferred liabilities as of the
closing date, which has also not yet been determined. It is expected that
this pending transaction will transfer primarily all of the assets,
liabilities and operations of the Company to Zenith, leaving the Company
with the minimum required capital and surplus to maintain its various
state licenses and no continuing insurance operations.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the
Company and five former officers, including William D. Griffin, founder
and Chairman of the Board, for various charges stemming from alleged
illegal political campaign contributions. On September 18, 1997, the
Board of Directors approved a guilty plea by RMS, a wholly-owned,
non-regulated subsidiary of the Company, to a single count of conspiracy
to commit mail fraud. As a result of the plea with the United States
Attorney, the indictment against the Company was dismissed. Mr. Griffin
has resigned from the Board of Directors of the Company and all other
positions with the Company.
In September 1997, the Company formed 1390 Main Street Services, Inc. for
the purpose of providing the identical services that were being provided
by RMS. The FDOI approved the Managing General Agency and Service
Agreement between each of the Company's Florida domiciled insurance
subsidiaries and 1390 Main Street Services, Inc. on October 6, 1997,
under the identical terms as the previous contract with RMS. The Managing
General Agency and Service Agreement is pending approval in Missouri.
On October 1, 1997, RMS entered into a Plea and Cooperation Agreement
with the United States Attorney and pleaded guilty to a single count of
conspiracy to commit mail fraud. RMS has agreed to cease to operate as a
third party administrator effective October 31, 1997. As of December 31,
1996, RMS recorded $1.0 million provision for the payment of fines and
other costs relating to these matters.
The Company and American Re-Insurance Company ("AmRe") are parties to a
senior subordinated note agreement in the principal amount of $15.0
million due 2002 (the "AmRe loan agreement"). The AmRe loan agreement
requires that the Company shall prepay the outstanding principal balance
of the notes, together with interest accrued thereon, on or before the
tenth business day following the occurrence of a Change of Control or a
Material Adverse Event. The resignation of William D. Griffin, effective
on September 18, 1997, as Chairman of RISCORP is a Material Adverse Event
as defined in the AmRe loan agreement. On October 10, 1997, the Company
received a waiver from AmRe of the requirement to prepay these notes, as
well as certain events of default subject to the receipt of the Company's
financial statements. On October 17, 1997, the Company received a waiver
from AmRe of the default based upon the failure of the Company to deliver
quarterly financial statements and for failure to file its quarterly
report on Form 10-Q with the SEC for the quarterly periods ended March
31, 1997 and June 30, 1997. This waiver from AmRe regarding the Company's
failure to provide its financial reports and Form 10-Q's in a timely
manner for the first and second quarter of 1997 expires on December 31,
1997. In the event the Company is unable to provide its financial reports
and Form 10-Q's, including its third quarter financial reports and Form
10-Q, to AmRe when required under the note agreement or the waiver,
additional debt covenant violations would occur. If such debt covenant
violations did occur and the Company was unable to obtain an additional
waiver of such violations from AmRe, such violations could result in AmRe
accelerating the note which, in turn, could create as liquidity shortage
for the Company.
<PAGE>
(6) Adjustments Made in The Fourth Quarter of 1996
As described below, the Company made certain adjustments in the fourth
quarter of 1996 which were reflected in the December 31, 1996 Form
10-K/A. The amounts previously reported in the March 31, 1996, June 30,
1996 or September 30, 1996 Form 10-Q's have not been adjusted for the
items discussed below, or any other items. Management is presently
reviewing each of these items to determine whether any adjustments should
be made to any of the previously filed 1996 Form 10-Q's for these fourth
quarter adjustments.
Allowance for Doubtful Accounts
The Company completed a detailed review of the composition of the
December 31, 1996 premium receivables balance in 1997, in connection with
the determination of the allowance for doubtful accounts as of December
31, 1996. As a result of this analysis, an increase of approximately $7.7
million was recorded in the allowance for doubtful accounts in the fourth
quarter of 1996 to increase the allowance for doubtful accounts to $17.0
million.
Goodwill
The Company periodically reviews its assets subject to Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", ("SFAS 121") and when events or changes in
circumstances indicate that the carrying amount of an asset may no longer
be fully recoverable, the Company tests the recoverability of the asset
primarily by estimating the future cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying value of the asset, the Company recognizes an
impairment loss for this difference.
During 1996 and 1997, using the criteria contained in SFAS 121, the
Company recognized an impairment loss of $3.2 million and reduced
goodwill that was recorded in 1995 in conjunction with the purchase of
RWI, formerly known as the Self Insurers Service Bureau, Inc. ("SISB"),
and also recorded an impairment loss of $2.8 million in connection with
the acquisition of IAA. The Company's impairment assessment was primarily
based upon the closing of former SISB offices in certain states and the
Company's current focus on at-risk business. During the first quarter of
1997, it became evident that the goodwill recorded at the date of the
RISC and IAA acquisition could not be fully recovered from the
profitability of the workers' compensation business that was currently
under contract. These impairment losses were recorded as a component of
depreciation and amortization in the Company's Consolidated Statement of
Income for the year ended December 31, 1996. Remaining unamortized
goodwill related to the SISB purchase was $468,000 and the remaining
unamortized goodwill relating to IAA was $8.5 million at December 31,
1996.
Litigation Expenses
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the
Company, RISCORP Management Services, Inc. (a wholly owned, non-regulated
subsidiary of the Company) and five former officers, including William D.
Griffin, founder and Chairman of the Board, for various charges stemming
from alleged illegal political campaign contributions. On September 18,
1997, the Board of Directors approved a guilty plea by RMS to a single
count of conspiracy to commit mail fraud. The guilty plea was entered by
RMS and accepted by the court on October 9, 1997. As a result of an
agreement negotiated with the United States Attorney, the court dismissed
the indictment against the Company on the same day. Mr. Griffin has
resigned from the Board of Directors of the Company and its subsidiaries
and all other positions with the Company and its subsidiaries. As of
December 31, 1996 the Company had recorded in the accompanying financial
statements a provision of $1.0 million for the payment of fines and other
costs related to this matter.
Other Items
In connection with the review of the fourth quarter adjustments, the
Company also plans on reviewing each of the 1996 Form 10-Q's to determine
if any other items may require adjustment or allocation to another period
within the 1996 year.
(7) Reclassifications
Certain amounts in the financial statements presented have been
reclassified from amounts previously reported in order to be comparable
between periods. These reclassifications have no effect on previously
reported shareholders' equity or net income during the periods involved.
<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.
Recent Developments
Restructuring
On May 20, 1997, the Company named Frederick M. Dawson as Chief Executive
Officer of the Company. Mr. Dawson replaced William D. Griffin who took
an unpaid leave of absence and remained as a non-salaried, non-executive
Chairman of the Board of Directors. Concurrently, Mr. Dawson was also
named to the Board of Directors of the Company, and all employee
directors other than Mr. Griffin resigned from the Board of Directors.
One June 10, 1997, Mr. Dawson became president of the Company upon the
resignation of James A. Malone from the position of president and chief
operating officer on the same date. On September 18, 1997, Mr. Griffin
resigned from the Board of Directors of the Company and from all other
positions with the Company. See "Part I, Item 1, Note 5 to the
consolidated financial statements."
In June 1997, the Company announced a workforce reduction and a
restructuring of the Company's management team, field offices and
products. The reduction in the work force resulted in the termination of
128 employees of the Company. The Company also announced in June 1997 its
intention to focus solely on its core workers' compensation insurance
business and to close all field offices, except Charlotte and Birmingham,
by the end of 1997. The Company recorded $5.9 million in the second
quarter of 1997 in connection with the workforce reduction and
restructuring of the field offices and products. These non-recurring
expenses consisted primarily of severance expenses of approximately $5.1
million and occupancy costs of approximately $0.7 million. These expenses
were included in commissions, underwriting and administrative expenses in
the June 30, 1997 Consolidated Statements of Income.
<PAGE>
Asset Purchase Agreement With Zenith
In June 1997, the Company entered into an asset purchase agreement (the
"Purchase Agreement") with Zenith, a subsidiary of Zenith National
Insurance Corp. Under the terms of the Purchase Agreement, Zenith will
purchase all of the assets of the Company relating to its workers'
compensation business, including the Company's existing in force
business, as well as the right to all new and renewal policies. After the
transaction closes, the Company will no longer engage in the workers'
compensation or managed care businesses. In connection with the
transaction, Zenith will assume certain liabilities related to the
Company's insurance business, including $15.0 million in indebtedness of
the Company owed to AmRe. The purchase price, which will be paid in cash,
will be the difference between the book value of the assets purchased and
the book value of the liabilities assumed by Zenith on the closing date
including the $15.0 million AmRe debt, subject to a minimum purchase
price of $35.0 million.
The closing of the purchase is contingent upon review and approval by the
appropriate state and federal regulatory agencies, and approval by a
majority of each of the Class A Common and Class B Common shareholders of
the Company.
Effective June 18, 1997, Zenith entered into an interim reinsurance
agreement and cut-through endorsement with RIC and RISCORP Property &
Casualty Insurance Company ("RPC"). Under the terms of the reinsurance
agreement, Zenith reinsured all of the Company's liabilities on or after
June 18, 1997, as to new, renewal, and in force Florida workers'
compensation policies in the event RIC and RPC are declared insolvent
under applicable insurance law pursuant to court order. RIC and RPC have
assigned to Zenith its right to receive certain payments from other
reinsurers with respect to the business Zenith has reinsured. In
addition, RIC and RPC have established trust accounts of approximately
$50.0 million as security to reimburse Zenith for any amounts paid under
the reinsurance agreement.
Delisting by NASDAQ
After the Company's initial public offering of Class A Common Stock in
February 1996, the Company experienced personnel turnover in its finance
and treasury areas. The rapid growth of the Company and its multiple
acquisitions coupled with the loss of key personnel overloaded the
Company's internal accounting staff. As a result, the Company was not
able to provide the necessary support and back-up required to complete
the audit of its 1996 financial statements in a timely manner, and
therefore, the Company was unable to timely file with the Securities and
Exchange Commission its annual report on Form 10-K/A for the year ended
December 31, 1996. Despite management's efforts to correct these issues,
difficulties continued in 1997 resulting in the Company's inability to
timely file its quarterly reports on Form 10-Q for the quarterly periods
ended March 31, 1997 and June 30, 1997.
In July 1997, the Company's common stock was delisted from the NASDAQ
National Market due to the Company's failure to comply with the filing
requirements of the Exchange Act.
AmRe Loan Agreement
The $15.0 million AmRe loan agreement requires that the Company shall
prepay the outstanding principal balance of the notes, together with
interest accrued thereon, on or before the tenth business day following
the occurrence of a Change of Control or a Material Adverse Event. The
resignation of William D. Griffin, effective on September 18, 1997, as
Chairman of RISCORP, Inc. is a Material Adverse Event as defined in the
AmRe loan agreement. On October 10, 1997, the Company received a waiver
from AmRe of the requirement to prepay these notes, as well as certain
events of default subject to the receipt of the Company's financial
reports. On October 17, 1997, the Company received a waiver from AmRe of
the default based upon the failure of the Company to deliver quarterly
financial reports and to file its quarterly report on Form 10-Q with the
SEC for the quarterly periods ended March 31, 1997 and June 30, 1997.
This waiver from AmRe regarding the Company's failure to provide its
financial reports and Form 10-Q's in a timely manner for the first and
second quarter of 1997 expires on December 31, 1997. In the event the
Company is unable to provide its financial reports and Form 10-Q's,
including its third quarter financial reports and Form 10-Q, to AmRe when
required under the note agreement or the waiver, additional debt covenant
violations would occur. If such debt covenant violations did occur and
the Company was unable to obtain an additional waiver of such violations
from AmRe, such violations could result in AmRe accelerating the note
which, in turn, could create a liquidity shortage for the Company.
Legal Developments
See "Part II, Item 1, Legal Proceedings."
A.M. Best Initial Rating
During 1997 the Company's insurance subsidiaries were reviewed by A.M.
Best and assigned a rating. A.M. Best ratings are based on several
factors, including comparative analysis of the financial condition and
operating performance of insurance companies as determined by their
publicly available reports and meetings with the entity's officers. A.M.
Best ratings are based upon factors of concern to policyholders and are
not directed toward the protection of investors. In assigning ratings,
companies may fall within one of three A.M. Best rating groupings: Best's
Ratings, Best's Financial Performance Ratings or Not Rated.
A.M. Best ratings include: Secure, which consists of A++ and A+
(Superior), A and A- (Excellent) and B++ and B+ (Very Good); Vulnerable,
which consists of B and B- (Fair), C++ and C+ (Marginal), C and C- (Weak)
and D (Poor); E (Under Regulatory Supervision); F (In Liquidation) and S
(Rating Suspended). Companies not assigned either Best's Ratings or
Best's Financial Performance Ratings opinions are assigned to one of
several Not Rated (NR) Categories. The NR category identifies the primary
reason a rating opinion was not assigned.
The limited operating history of the companies, pending litigation and
the factors discussed above have affected the ability of the Company's
insurance subsidiaries to obtain favorable A.M. Best and comparable
ratings. In May 1997, RIC and RPC were assigned a Best's Rating of C
(Weak). This rating is under review with negative implications pending
resolution of certain substantial uncertainties, including various legal
issues, any material Form 10-K disclosures, and potential regulatory
actions emanating from the ongoing state examinations. The Company
believes this rating and the factors discussed above will have a material
adverse effect on the Company's business, financial condition and results
of operations.
RNIC (formerly Atlas Insurance Company) had its B+ rating removed and was
given an A.M. Best's "Not Rated" classification of NR-2 (Less than
Minimum Size and/or Operating Experience) following the Company's
purchase of Atlas in March 1996 and the discontinuance of its prior
business, which effectively treated RNIC as a start-up operation for
rating purposes.
<PAGE>
1997 Events That Have Impacted The Company
On November 9, 1996, at a special meeting of the Board of Directors of
RISCORP, the Board voted to establish a Strategic Alternatives Committee
to evaluate alternatives to maximize shareholder value including, without
limitation, potential acquisitions, joint ventures, mergers, strategic
alliances and the sale of all or part of RISCORP and its subsidiaries.
The actions of the Strategic Alternatives Committee during the period of
November 1996 through June 1997 culminated in the June 17, 1997 agreement
(as more fully described in Note 5 to the consolidated financial
statements) for the sale and transfer of certain of RISCORP's and its
subsidiaries' assets and non-contingent liabilities to another insurer
for cash. The pending sale, which is anticipated to take place in early
1998, requires, among other things, the filing of a proxy statement with
the Securities and Exchange Commission ("SEC"), the approval of the
transaction by RISCORP shareholders and regulatory approval by the FDOI
and MDOI.
RIC, RPC (both Florida domiciled insurance companies) and RNIC (a
Missouri domiciled insurance company), are all wholly-owned subsidiaries
of RISCORP and each of these companies experienced difficulty in
completing their year end December 31, 1996 statutory financial
statements in an accurate and timely manner. In addition, RIC and RPC
were unable to respond in an accurate and timely manner to requests for
financial information made by examiners from the FDOI in connection with
the FDOI's financial examination of RIC for 1996 and RPC for 1995.
While RIC, RPC and RNIC filed their 1996 statutory financial statements
by February 28, 1997, the deadline for filing such statements, each of
the companies discovered later that certain amounts contained in the
previously filed 1996 statutory financial statements were incorrect and
the 1996 statutory financial statements of each of the companies were
amended by substitution in October 1997. In addition, RIC, RPC and RNIC
were also unable to file their 1996 audited statutory financial
statements by June 1, 1997, as required by Florida and Missouri statutes.
Audited financial statements were filed for each company in September,
1997. RISCORP also experienced difficulty in completing its 1996
financial statements in a timely manner. This resulted in RISCORP being
delisted by the stock exchange on which its stock was traded and in
adverse publicity in the insurance marketplace. See "Part I, Item 2,
Delisting by NASDAQ."
The inability of RIC and RPC to file accurate and timely financial
statements and to respond timely to requests made by the examiners from
the FDOI inhibited the FDOI's ability to assess the financial condition
of RIC and RPC and prompted increased regulatory scrutiny of the
companies. As a result of the FDOI's increased regulatory scrutiny of RIC
and RPC, and in connection with the pending sale discussed above and in
Note 5 to the consolidated financial statements, the FDOI requested the
purchaser to provide an interim reinsurance agreement and cut-through
endorsement ("Agreement") on all inforce business as of June 18, 1997 and
all new and renewed business written on or after June 18, 1997. This
Agreement only provides coverage for Florida workers' compensation
policyholders and was approved by the FDOI.
The ability of RIC and RPC to operate at their present level of insurance
activity could be affected if the transaction discussed in Note 5 is not
completed and RIC and RPC are unable to replace the reinsurance
agreement. Management believes it could replace this reinsurance
agreement under similar terms.
<PAGE>
The unfavorable publicity related to the inability of the Company and its
subsidiaries to file timely financial statements, the delisting of the
Company's stock, the pending litigation and subsequent indictments, A.M.
Best's letter rating, and delays in completion of the Company's 1996
audit, have negatively impacted the Company's ability to retain its
existing customers and add new business. While the first quarter of 1997
was not adversely affected by these factors, the Company anticipates that
written premiums for the second, third and fourth quarters of 1997 will
be significantly less than 1996 written premiums for comparable quarters.
In addition, the Company has experienced increased employee turnover
which has resulted in the hiring of consultants and increased operating
costs to the Company. The overall effects of these and other factors are
discussed in more detail below in the "Results of Operations".
Overview
General
Prior to 1996, the Company's at-risk operations were focused in Florida.
During 1996, the Company acquired RNIC and its 19 licenses and assumed
business from several self insurance funds outside of Florida which
allowed the Company to diversify its at-risk operations outside the state
of Florida. A comparison of the Company's direct written premiums (prior
to reinsurance cessions or assumptions) by state is presented below:
Direct Premiums Written (a)
(Dollars in millions) 1996 1995 1994
Florida $ 270.8 $ 284.8 $ 2.4
North Carolina 41.4 -- --
Alabama 21.7 -- --
Other 22.8 -- --
------- ------- -------
Total $ 356.7 $ 284.8 $ 2.4
======= ======= =======
(a) Includes RIC, RPC and RNIC for 1996, RIC and RPC for 1995, and RPC
for 1994.
Direct written premiums were reduced by specific reinsurance cessions
(1996, 1995 and 1994), the 50 percent AmRe quota share reinsurance
agreement for the Company's Florida workers' compensation business (1996
and 1995) and the 65 percent quota share reinsurance agreement (effective
October 1, 1996), with another reinsurer for certain non-Florida
business. This quota share reinsurance agreement was reduced to 60
percent effective January 1, 1997.
The majority of the Company's premiums have been written in Florida, a
regulated pricing state where premiums for guaranteed cost products are
based on state-approved rates. However, the Company also offers policies
which are subject to premium reductions as high deductible plans,
participating dividend plans, or other loss sensitive plans. Pricing for
these plans tends to be more competitively based, and the Company
experienced increased competition during 1996 in pricing these plans. In
addition, in October 1996, the Florida Insurance Commissioner ordered
workers' compensation providers to reduce rates by an average of 11.2
percent for new and renewal policies written on or after January 1, 1997.
Concurrently, the 10 percent managed care credit was phased out. This
credit had been offered since 1994 to employers who met certain criteria
for participating in a qualified workers' compensation managed care
arrangement. As of December 31, 1996, the Company estimated that
approximately 60 percent of the Company's premiums received the 10
percent managed care credit.
<PAGE>
The Company experienced increased pricing pressures during 1996 and
expects that such pressures will continue into the foreseeable future.
The Company intends to continue applying managed care techniques to
differentiate itself from its competitors and to continue to reduce
claims costs. In June 1997, the Company implemented cost cutting measures
which resulted in the Company ceasing to write new business in certain
states including Oklahoma, Virginia, Missouri, Mississippi, Louisiana and
Kansas, which approximates $16.0 million in direct premiums written.
The Company attempts to lower claims costs by applying managed care
techniques and programs to workers' compensation claims, particularly by
providing prompt medical intervention, integrating claims management and
customer service, directing care of injured employees through a managed
care provider network, and availing itself of potential recoveries under
subrogation and other programs.
Part of the Company's claims management philosophy is to seek recoveries
for claims which are reinsured or which can be subrogated or submitted
for reimbursement under various states' recovery programs. As a result,
the Company's losses and loss adjustment expenses are offset by estimated
recoveries from reinsurers under specific excess of loss and quota share
reinsurance agreements, subrogation from third parties and state "second
disability" funds, including the Florida Special Disability Trust Fund
("SDTF").
Results of Operations
Three months ended March 31, 1997 compared to three months ended March
31, 1996
The following table shows direct, assumed, ceded, and net earned premiums
for the three months ended March 31, 1997 and 1996 (in thousands):
Three months ended
March 31
1997 1996
Direct premiums earned $ 91,516 $ 74,572
Assumed premiums earned 2,827 1,439
Premiums ceded to reinsurers (47,529) (37,642)
--------- ---------
Net premiums earned $ 46,814 $ 38,369
======== ========
The number of inforce policies were:
Quarter Ended 1996 1997
March 31 22,777 30,141
June 30 26,002 N/A
September 30 28,772 N/A
December 31 30,081 N/A
Direct premiums earned increased to $91.5 million for the three months
ended March 31, 1997 from $74.6 million for the same period in 1996, a
net increase of $16.9 million. The increase in the direct premiums earned
for the three months ended March 31, 1997 was primarily the result of the
following factors:
The infusion of approximately $68.9 million of capital into
the Company's insurance subsidiaries from the IPO proceeds
allowed the insurance subsidiaries to increase their premium
writing capacity and, as a result, the Company was able to
increase premiums during the last nine months of 1996 due to
its expanded premium writing capabilities. Written premiums
are earned pro rata over the policy period (usually twelve
months) therefore, increased premiums written during the last
nine months of 1996 will have a positive impact on earned
premiums in 1996 and 1997.
Written premiums increased in the third and fourth quarters
of 1996 and the first quarter of 1997 from the assumption
reinsurance and loss portfolio agreements entered into by the
Company and from the acquisitions made by the Company during
1996.
Enhanced marketing initiatives implemented by the Company
after the IPO to increase the number of policies and to write
accounts with larger premiums.
In September 1995, the Company entered into a fronting agreement with
another insurer which enabled the Company to begin expansion into states
where its insurance subsidiaries were not licensed. The assumed premiums
from the fronting agreement increased from approximately $1.1 million at
March 31, 1996 to approximately $2.3 million at March 31, 1997, which
primarily accounts for the increase in assumed premiums of approximately
$1.4 million during this period.
The Company cedes approximately 50 percent of its Florida premiums to
AmRe under a quota share reinsurance agreement and the Company cedes 60
percent of the business written by RNIC under a separate quota share
reinsurance agreement (65 percent during 1996). As direct earned premiums
increase, the ceded premiums will also increase.
Fee income for the three months ended March 31, 1997 was $5.1 million
compared to $7.1 million for the same period in 1996, a net decrease of
$2.0 million. The decrease is primarily due to the loss of service fees
from the conversion of the NARM self insurance funds of North Carolina
and Virginia (which were previously managed by the Company) to at-risk
business via loss portfolio transfers and decreases in RWI service fee
income from the termination of RWI's Mississippi and Louisiana service
contracts. The decrease in fee income was partially offset by new fees
generated from the CompSource acquisition, the fronting agreement, the
new service agreement with Third Coast Insurance Company, and growth in
other existing fee products.
Net investment income for the three months ended March 31, 1997 was $3.9
million compared to $1.6 million for the same period in 1996, a net
increase of $2.3 million. Investment income consists entirely of earnings
from the investment portfolio, including realized gains and losses. The
total investments of the Company were (in thousands):
December 31, 1995 $ 69,365
March 31, 1996 $ 114,477
June 30, 1996 $ 187,528
September 30, 1996 $ 241,143
December 31, 1996 $ 255,656
March 31, 1997 $ 230,274
The increase in the investment portfolio during 1996 is due (i) to the
investment of proceeds from the IPO by RISCORP in its insurance
subsidiaries, which, in turn, invested the proceeds in their individual
investment portfolios, (ii) the growth in premium volume during 1996
which generated positive cash flow which was used to purchase
investments, and (iii) the positive cash flow generated from the proceeds
received from the assumption reinsurance and loss portfolio transfer
transactions which were also used to purchase investments. The increase
in invested assets is the primary reason for the increase in the
investment income from the first quarter of 1997 over the corresponding
quarter of 1996. The actual yield on invested assets is comparable
between quarters.
The decrease in accounts payable and other accrued expenses in the first
quarter of 1997 was primarily due to the payment of approximately $9.6
million in accrued assessments, approximately $4.0 million in amounts
held as deposits for insureds and approximately $2.7 million in net
reductions in trade accounts payable. The decrease in the invested assets
during the first quarter of 1997 was caused primarily by the liquidation
of investments to pay these items.
Losses and loss adjustment expenses for the three months ended March 31,
1997, were $32.5 million compared to $24.4 million for the same period in
1996, a net increase of $8.1 million. The $8.1 million increase is
primarily due to loss portfolio transfers and writings in new states
licensed through RNIC, as well as growth in the Company's core Florida
operations. The loss ratio for the three months ended March 31, 1997 and
1996 was 69.5 percent and 63.5 percent, respectively. The increase in the
1997 loss ratio was due to adverse loss development in 1996 and prior
accident years from certain business written in Alabama of approximately
$4.0 million, adverse loss development of approximately $1.8 million in
certain business written by RNIC in several smaller states, and favorable
loss development of $2.5 million from business written in North Carolina.
Unallocated loss adjustment expenses for the three months ended March 31,
1997, were $4.0 million compared to $2.8 million for the same period in
1996, a net increase of $1.2 million. This increase is primarily due to
the increased premium volume and increased loss reserves during this
period. The unallocated loss adjustment expense ratio for the three
months ended March 31, 1997 and 1996 was 8.5 percent and 7.3 percent,
respectively. The 1.2 percent increase in the ratio was primarily due to
increased personnel and personnel related costs.
Commissions, underwriting and administrative expenses for the three
months ended March 31, 1997 were $14.4 million compared to $13.0 million
for the same period in 1996. The net increase of $1.4 million from 1996
to 1997 is attributable to increases in commissions and personnel costs
caused by higher premiums generated from acquisitions and new and renewal
premium growth, increased operating expenses from this addition of
employees to support the premium growth and increases in legal expenses
from actions initiated in 1996. The Company's total employees increased
from 739 as of March 31, 1996 to 820 at March 31, 1997. The net increase
in these expenses were partially offset by increased ceding commission
income of $4.0 million received from reinsurers under the quota share
reinsurance agreements.
Interest expense for the three months ended March 31, 1997 was $0.5
million compared to $1.1 million for the same period in 1996. The
decrease is due to the repayment of approximately $28.6 million of debt
in March 1996 using the proceeds from the initial public offering.
Depreciation and amortization expenses for the three months ended March
31, 1997 were $1.9 million compared to $1.0 million for the same period
in 1996, a net increase of $0.9 million. The increase was primarily the
result of amortization of goodwill related to the acquisitions of
CompSource and IAA in 1996, and additions to property and equipment
during 1996 necessary to support the Company's growth. This increase in
depreciation and amortization in 1997 was partially offset by the
reduction in recurring amortization of goodwill from a $3.0 million
writedown of goodwill associated with RWI and a $2.8 million writedown of
goodwill associated with the IAA acquisition in the third and fourth
quarter of 1996. These adjustments to goodwill are more fully discussed
in Note 6 to the consolidated financial statements.
The effective tax rate for the three months ended March 31, 1997 was 40.6
percent compared to 36.8 percent for the same period in 1996. The
increase in the tax rate is principally due to the increase in the
amortization of goodwill, which is non-deductible for tax purposes.
The weighted average common shares outstanding for the three months
ending March 31, 1997, was 37,775,562 versus 32,536,343 for the three
months ending March 31, 1996. The increase in the weighted average number
of shares is due primarily to the inclusion of the shares issued in
connection with the February 29, 1996 IPO for the entire first quarter of
1997 versus the inclusion of shares issued in connection with the IPO for
only one month for the first quarter of 1996, and the inclusion of
certain contingent shares reserved for issuance in connection with the
acquisitions of CompSource and IAA, as more fully discussed in Note 3 of
the consolidated financial statements included in this document. The
increase was partially offset by a decrease in common stock equivalents
for option shares assumed to be exercised.
Liquidity and Capital Resources
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The
Company's primary sources of cash flow from operations are premiums and
investment income, and its cash requirements consist primarily of payment
of losses and loss adjustment expenses, support of its operating
activities including various reinsurance agreements and managed care
programs and services, capital and surplus needs for its insurance
subsidiaries, and other general and administrative expenses.
On February 29, 1996, the Company completed its initial public offering
of Common Stock which generated net proceeds of $127.9 million which were
used to repay approximately $28.6 million of various borrowings, increase
the capital and surplus of the Company's insurance subsidiaries, fund
acquisitions and for general corporate purposes. Borrowings increased by
$19.6 million between 1994 and 1995 due to borrowings under a variable
rate term loan and the subordinated notes, the proceeds of which were
used to repay existing debt and fund the acquisition of RIC.
On October 15, 1996, the Company entered into a credit agreement with
NationsBank, N.A. and SouthTrust Bank of Alabama which provided a $50.0
million credit facility to the Company for unsecured borrowings for a
two-year revolving period convertible into a term loan with a final
maturity on September 30, 2001. There were no borrowings under the
agreement, and the Company terminated the agreement on June 16, 1997.
In November 1996, the Board of Directors of the Company formed a
Strategic Alternatives Committee whose primary function was to evaluate
alternatives to maximize shareholder value including, without limitation,
potential acquisitions, joint ventures, mergers, strategic alliances and
the sale of all or part of the Company. In turn, the committee hired an
investment bank to identify and evaluate entities with an interest in
acquiring the Company or its assets. On June 17, 1997, the Company
entered into an agreement with Zenith to purchase substantially all of
the operating assets of the Company and its affiliates at a purchase
price equal to the greater of: (i) the book value of the acquired assets
less the book value of the assumed liabilities including the $15.0
million AmRe debt, or (ii) $35.0 million in cash. The transaction is
subject to shareholder and regulatory approval.
Cash flow from operations for the years ended December 31, 1996, 1995 and
1994 was $28.1 million, ($47.3) million and $17.8 million, respectively.
The increase from 1995 to 1996 was due primarily to the improved cash
flows resulting from ceding of premiums under the AmRe quota share
reinsurance agreement and the increase in losses and loss adjustment
expenses. The decrease from 1994 to 1995 was due primarily to the
initiation of the AmRe quota share reinsurance agreement and other
reinsurance agreements which created a net cash outflow resulting from
the ceding of $139.1 million in written premium.
The Company has projected cash flows through March 1998 and believes it
has sufficient liquidity and capital resources to support its operations
without considering dividends from the insurance company subsidiaries and
transactions resulting from the pending sale of the Company.
The Company has recorded $49.5 million in accrued net recoverables from
the SDTF, which it anticipates will be reimbursed over a number of years.
For the years ended December 31, 1996, 1995 and 1994, the Company
received net payments from the SDTF totaling $2.5 million, $0.9 million
and $0, respectively.
Barring any adverse legislative change, the Company believes that it will
ultimately collect the entire balance of SDTF recoverables and that
periodic reimbursement will be received following submission of proof 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 does not believe
that SDTF will fail to meet its obligations to pay eligible reimbursement
requests, although there can be no assurance in this regard. The failure
of the SDTF to meet its obligations could adversely affect the liquidity
of the Company.
In addition, the liquidity of the Company could be adversely affected
by certain legal issues and its initial A.M. Best Rating. See "Legal
Proceedings" and "Recent Developments - A.M. Best Initial Rating."
The National Association of Insurance Commissioners has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based upon the risks inherent in its operations. The
standards, which have not yet been adopted in Florida, require the
computation of a risk-based capital amount which is then compared to a
carrier's actual total adjusted capital. The computation involves
applying factors to various financial data to address four primary risks:
asset risk, insurance underwriting risk, credit risk, and off-balance
sheet risk. These standards provide for regulatory intervention when the
percentage of total adjusted capital to authorized control level
risk-based capital is below certain levels. At December 31, 1996 and
March 31, 1997, 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, RIC, several officers, directors and
employees were named as defendants in a purported class action lawsuit
filed in the United States District Court for the Southern District of
Florida. The suit claims the defendants violated the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), breached fiduciary duties, and
were negligent in the Company's 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 defendants moved to dismiss the RICO
counts and to strike the punitive damages claims. These motions, as well
as plaintiffs' motion for class certification, were pending when the
plaintiffs filed an amended complaint. The amended complaint added the
Florida Insurance Commissioner and Zenith as defendants in one new count
seeking declaratory relief. The remaining claims in the amended complaint
are the same as those in the original complaint. The defendants have
filed a motion to dismiss the amended complaint and to strike the
punitive damages claims. The parties have been ordered to non-binding
mediation in this matter. The Company intends to defend this action
vigorously; however, there can be no assurance that it will prevail in
the litigation.
Between November 20, 1996, and January 31, 1997, nine shareholder class
action lawsuits were filed against RISCORP, Inc. and other defendants in
the United States District Court for the Middle District of Florida. In
March 1997, the Court consolidated these lawsuits and appointed co-lead
plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants
RISCORP, Inc., three of its former executive officers, one non-officer
director and three of the underwriters for RISCORP, Inc.'s initial public
offering. The plaintiffs in the consolidated complaint purport to
represent the class of shareholders who purchased RISCORP, Inc. Class A
Common Stock between February 28, 1996, and November 14, 1996. The
consolidated complaint alleges that RISCORP, Inc.'s Registration
Statement and Prospectus of February 28, 1996, as well as subsequent
statements, contained false and misleading statements of material fact
and omissions, in violation of sections 11 and 15 of the Securities Act
and sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder. The consolidated complaint seeks unspecified
compensatory damages. The defendants have filed a motion to dismiss the
consolidated complaint which has been fully briefed and is pending.
Discovery will be stayed until the motion to dismiss has been decided.
The plaintiffs have filed a motion to certify the class, but the parties
have agreed that the defendants need not respond to that motion until
thirty days after the motion to dismiss has been decided. The parties
have been ordered to non-binding mediation in this matter. RISCORP, Inc.
intends to defend this action vigorously; however, there can be no
assurance that it will prevail in the litigation.
On July 17, 1997, RISCORP, Inc. and several former officers were named as
defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges violations of federal and state securities laws and breach
of contract resulting from the purchase of IAA in 1996. The suit seeks
compensatory and punitive damages and equitable relief. The named
plaintiffs are Thomas Albrecht and Peter Norman, the former shareholders
of IAA. RISCORP, Inc. intends to vigorously defend this action; however,
there can be no assurance that it will prevail in the litigation.
On August 20, 1997, RISCORP, Inc., RNIC, IAA and Peter Norman were named
as defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges common law fraud, breach of contract and breach of fiduciary
duty resulting from the assumption of the OSAA business in 1996. The suit
seeks compensatory and punitive damages and equitable relief. The named
plaintiff is OSAA. The Company intends to vigorously defend this action;
however, there can be no assurance that it will prevail in the
litigation.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the
Company, RMS (a wholly owned, non-regulated subsidiary of RISCORP, Inc.)
and five former officers, including William D. Griffin, Founder and
Chairman of the Board, for various charges stemming from alleged illegal
political campaign contributions. On September 18, 1997, the Board of
Directors approved a guilty plea by RMS to a single count of conspiracy
to commit mail fraud. The guilty plea was entered by RMS and accepted by
the court on October 9, 1997. As a result of an agreement negotiated with
the United States Attorney, the court dismissed the indictment against
the Company on the same day. Mr. Griffin has resigned from the Board of
Directors of the Company and all other positions with the Company. The
Company has recorded a provision of $1.0 million for the payment of fines
and other costs related to this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In
addition, certain expenses of the law suits and related legal expenses
may be covered under directors and officers' insurance coverage
maintained by the Company.
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)
By: /s/Stephen C. Rece
Stephen C. Rece
Senior Vice President and
Chief Financial Officer
Date: November 19, 1997
<TABLE>
<CAPTION>
Exhibit 11
RISCORP, INC. AND SUBSIDIARIES
Statement Re. Computation of Per Share Earnings
For the three months ended March 31, 1997 and 1996
(in thousands, except share and per share amounts)
1997 1996
-------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net income $ 1,479 $ 3,057
=============== ===============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,174,098 30,488,744
Redemption contingency for CompSource acquisition 502,566 --
Redemption contingency for IAA acquisition 790,336 --
Common stock equivalents--assumed exercise of stock options 308,562 2,047,599
------------- -----------
Weighted average common and
common share equivalents outstanding 37,775,562 32,536,343
============ ============
Earnings per share $ 0.04 $ 0.09
================ ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997<F1><F2><F3>
<DEBT-HELD-FOR-SALE> 204,479
<DEBT-CARRYING-VALUE> 21,879
<DEBT-MARKET-VALUE> 21,568
<EQUITIES> 3,916
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 230,274
<CASH> 30,985
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 827,966
<POLICY-LOSSES> 480,537
<UNEARNED-PREMIUMS> 100,323
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,244
0
0
<COMMON> 363
<OTHER-SE> 156,391
<TOTAL-LIABILITY-AND-EQUITY> 827,966
46,814
<INVESTMENT-INCOME> 3,946
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 5,146
<BENEFITS> 36,566
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 2,488
<INCOME-TAX> 1,009
<INCOME-CONTINUING> 1,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,479
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<RESERVE-OPEN> 458,239
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 480,537
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Net investment income is reported net of any realized gains and losses in
the Statement of Income.
<F2>Financial Data Schedule information for the year ending December 31, 1996 is
incorporated by reference herein to FORM 10-K/A annual report as filed with the
Securities and Exchange Commission by the Company on October 23, 1997.
<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>
