SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 Identification Number)
incorporation or organization)
1390 Main Street, Sarasota, Florida 34236-5642
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 906-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether 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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of shares of the registrant's Common Stock held by
non-affiliates of the registrant as of February 27, 1998 was $16,087,217.
The number of shares of the registrant's Common Stock issued and outstanding as
of February 27, 1998 was 36,868,114 consisting of 12,533,671 shares of Class A
Common Stock and 24,334,443 shares of Class B Common Stock.
Documents Incorporated by Reference: None
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RISCORP, Inc.
Annual Report on Form 10-K
for the year ended December 31, 1997
Table of Contents
Description Page
PART I
Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote
of Security Holders 16
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 19
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers
of the Registrant 28
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain
Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 37
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 40
Signatures 51
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PART I
Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements,
particularly with respect to Legal Proceedings and the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations. Additional written or oral forward-looking statements
may be made by RISCORP, Inc. and its subsidiaries (collectively, the "Company")
from time to time, in the 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 relating to products or services of the Company, estimates concerning
the effects of litigation or other disputes, as well as assumptions regarding
any of the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. Future events and actual
results could differ materially from those set forth in or underlying the
forward-looking statements. Many factors could contribute to such differences
and include, among others, the ability of the Company to maintain licensing with
regulatory agencies; the consummation of the Company's pending asset sale to
Zenith Insurance Company ("Zenith"); the actual outcome of pending litigation or
potential investigations; the impact on the Company of current and future
federal and state regulation of workers' compensation or health care reform
legislation, including changes in the availability of recoveries from the
Florida Special Disability Trust Fund (the "SDTF"); changes in the mandated
accounting treatment of SDTF recoverables; the failure of the SDTF to pay the
Company's reimbursement requests; discontinuation of the SDTF; the Company's
limited operating history and direct loss and claims experience; the Company's
need for additional capital to meet state regulatory requirements and for other
purposes, and the ability of the Company to generate sufficient capital in a
timely fashion; the possible negative impact on the Company of the termination
of certain reinsurance agreements, or the failure of such reinsurers to meet
their obligations under such agreements; 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 were to permit competition based on price in workers' compensation
insurance; general economic conditions in Florida, North Carolina and Alabama in
particular, or the United States in general; the Company's ability to continue
and expand its relationships with independent insurance agencies which market
its products; and other factors mentioned elsewhere in this report.
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Overview
The Company offers managed care workers' compensation insurance and
services designed to lower the overall costs of work-related claims, while
providing quality, cost-effective care to injured employees. As of December 31,
1997, the Company provided workers' compensation insurance and services to
approximately 25,000 policyholders, principally in Florida and the southeastern
United States.
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 and other insurance
business, including the Company's existing inforce 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 million in
indebtedness of the Company owed to American Re-Insurance Company ("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, subject to a minimum purchase price of $35
million.
The closing of the purchase is contingent upon review and approval by
appropriate state and federal regulatory agencies, and approval by the majority
of each of the Class A Common and Class B Common shareholders of the Company. On
March 2, 1998, the Company's proxy statement for a special meeting of
shareholders to approve the Purchase Agreement was cleared by the Securities and
Exchange Commission. The special meeting was held at 10:00 a.m. in Atlanta,
Georgia on March 26, 1998. The Purchase Agreement was approved by the
shareholders at the special meeting. The Company expects the transaction to
close on April 1, 1998.
The Company's Operating Philosophy
The Company stresses an integrated approach to managed care workers'
compensation which involves the employer, employee, and care providers. This
approach combines loss prevention to promote safety in the workplace and manage
risk; early medical intervention to control costs and manage the
appropriateness, timeliness, and quality of care for injured workers; and
comprehensive medical care management, including case and utilization
management, through a provider network to establish treatment protocols,
clinical paths, and outcome measurements.
The Company's managed care approach begins with the implementation of
its First CallSM service, an early intervention system which provides employers
with a toll-free, 24-hour hotline to report claims and to seek medical attention
for injured employees. This service encourages early reporting of claims and
allows the Company to direct injured workers to appropriate medical providers
within the Company's contracted network, creating a cost-effective methodology
of dealing with claims promptly after they occur. The Company's case managers
monitor each case and use the Company's information systems to apply utilization
review and quality assurance techniques to achieve appropriate, quality medical
treatment at an affordable price.
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Industry
Workers' compensation benefits are mandated and regulated by individual
states, and most states require employers to provide medical benefits and wage
replacement to individuals injured at work, regardless of fault. Virtually all
employers in the United States are required either to purchase workers'
compensation insurance from a private insurance carrier, a state-sponsored
assigned risk pool, a self-insurance fund (an entity that allows employers to
pool their liabilities for obtaining workers' compensation coverage), or, if
permitted by their state, to be self-insured. Workers' compensation laws
generally require two kinds of benefits for injured employees: (i) medical
benefits that include expenses related to diagnosis and treatment of the injury,
as well as rehabilitation, if necessary, and (ii) payments that consist of
temporary wage replacement or permanent disability payments.
Programs and Products
The Company operates in a single industry segment.
Workers' Compensation Products
The Company's products and rating plans encompass a variety of options
designed to fit the needs of a wide selection of employers. The most basic
product is a guaranteed cost contract, where the premium is set in advance and
changes are made only when changes occur in policyholder operations or payrolls.
The premium for these policies is based on state approved rates, which vary
depending upon the type of work performed by each employee and the general
business of the insured. The Company also offers several loss sensitive plans
(retrospective rating, dividend and large deductible plans) which determine the
final premium paid for the current policy period based largely on the insured's
losses during that same period. Employers large enough to qualify will have
their premiums based on their loss experience as determined over a three-year
period. This loss experience is adjusted by the type of business and associated
risks. In Florida, policyholders can also qualify for one or more premium
credits (5% and 2%) by agreeing to comply with drug-free workplace, and/or safe
workplace policies, respectively. Policyholders who wish to assume a certain
amount of financial risk may elect a deductible that makes them responsible for
the first portion of any claim. In exchange for the deductible election the
employer receives a premium reduction.
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Workers' Compensation Management Services
The Company provides fee-based workers' compensation insurance
management services to self-insurance funds and governmental risk-sharing pools,
performing all the services of an insurance carrier except assumption of the
underwriting risk. The Company generally requires that it be given complete
managerial control over the fund's or pool's operations, and that it be entitled
to share in cost savings it generates in addition to its base fees. As of
December 31, 1997, the Company provided these services to four entities
(representing approximately 3,000 employers) with standard premiums in force
under management of approximately $80 million. The largest contracts were with
Governmental Risk Insurance Trust ("GRIT"), North Carolina Commerce Fund
("NCCF") and Third Coast Insurance Company. The Company terminated its agreement
with the Oklahoma Restaurant Group Self Insurance Association (representing
approximately $7 million standard premium) in 1997.
Third Party Administrative Services
The Company provides integrated administrative and managed care services
for self-insured employers. At December 31, 1997, approximately 9 employers were
under managed care contracts with the Company. In June 1997, the Company made a
strategic decision to exit this line of business to concentrate on its core
workers' compensation business. The elimination of this business will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Workers' Compensation Managed Care Arrangements ("WCMCAs")
Effective January 1, 1997, Florida law mandated workers' compensation
insurers to provide all medical care through WCMCAs. Under these arrangements,
the Company is allowed to direct injured employees to a provider network in
which employees must participate or face possible denial of medical cost
coverage.
The Company has developed a provider network which covered the entire
state of Florida and included approximately 5,000 physicians and 650 hospital
and ancillary facilities as of December 31, 1997. The Company believes that its
ability to obtain discounted medical fees, manage utilization, and track medical
outcomes for providers participating in its network enhances its ability to
manage claims.
The Company also maintained an arrangement with Humana Health Plans,
Inc. ("Humana"), whereby certain of the Company's medical claim costs are fixed
for the first three years of each claim. The agreement provided the Company with
access to Humana's health care provider networks in Florida. The agreement
commenced July 30, 1995, was renewed for one year upon its anniversary, and
expired in 1997. The Company had a similar arrangement with RISCORP Health
Plans, Inc. ("RHP"), an affiliated company, until the arrangement was terminated
effective May 1, 1996 whereby injured individuals were covered for three years
following any accident occurring within the policy period of any policy entered
into during the term of the agreement. The arrangement with RHP was completely
terminated on October 30, 1997 through a loss portfolio transfer agreement.
Accordingly, all liabilities under the RHP WCMCA were absorbed by the Company in
exchange for the indicated reserves plus a risk margin. To the extent that
Humana is unable to meet its contractual obligations under this arrangement, the
Company will be liable for any losses and loss adjustment expenses under this
arrangement which could result in a material adverse effect on the Company's
business, financial condition, or results of operations.
4
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Virginia Surety Underwriting Management Agreement
In September 1995, the Company entered into an Underwriting Management
Agreement ("UMA") for workers' compensation insurance with Virginia Surety
Company, Inc. ("Virginia Surety"). Under this arrangement, the Company acted as
an agent for Virginia Surety and was authorized to accept or bind business
subject to the amounts and territorial limits stipulated in the agreement.
Effective September 1, 1996, the Company renewed the UMA and extended it until
December 31, 1997. For the year ended December 31, 1997, the Company reported
written premiums of approximately $11 million under this fronting agreement.
The Company did not renew the arrangement beyond December 31, 1997.
Sales and Marketing
The Company's workers' compensation products and services are sold by
independent insurance agencies. As of December 31, 1997, the Company had
appointed approximately 800 agencies in 4 states to sell its products, of which
approximately 400 were in Florida. These independent agencies are viewed by the
Company as important to its success.
The Company's top ten agencies accounted for approximately 17% of the
Company's direct in force premium at December 31, 1997, with the top independent
insurance agency accounting for approximately 4% as of such date.
Failure of these independent insurance agencies to market the Company's
products and services successfully could have a material adverse effect on the
Company's business, financial condition, or results of operations.
Customers
The Company insured over 22,000 policyholders as of December 31, 1997.
Approximately 40% and 83% of the premiums scheduled to expire in 1997 and 1996,
respectively, were renewed by the Company's customers.
The Company generally requests that its agencies target customers who
comply with a return-to-work program, maintain a drug-free workplace, are
proactive in seeking to minimize injuries in the workplace, and are financially
sound or, for certain types of policies, are willing to provide adequate
security. The Company does not target any particular industry and believes that
its policies are issued to a diversified mix of employers. However, the Company
generally does not insure certain employers which it considers to be high risk,
including nuclear facilities operators, asbestos removers, and certain other
high-risk employers.
Employees
The Company had approximately 580 full-time employees at December 31,
1997. Of the Company's employees, approximately 434 provided services to the
Company's customers and 146 worked in the Company's administrative and financial
functions. None of the Company's employees is subject to collective bargaining
agreements. The Company believes that its employee relations and staffing are
satisfactory to meet current operating levels.
5
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Reinsurance
Through various reinsurance agreements, the Company shares the risks and
benefits of the workers' compensation insurance that it writes with other
insurance and reinsurance companies. The Company has in effect specific excess
of loss policies under which it pays its reinsurer a percentage of gross
premiums earned and the reinsurer agrees to assume all risks relating to claims
over $500,000 on a per occurrence basis (for occurrences prior to January 1,
1996, the retention was $350,000 per occurrence). The specific excess of loss
policies contain a corridor deductible of $1,250,000 for claims in the $500,000
excess of $500,000 corridor. The Company had a similar contract during 1996 with
a corridor deductible of $1,000,000. Continental Casualty Co. provided this
excess of loss program for 1997, 1996 and 1995. Continental Casualty Co. is
rated A (Excellent) by A.M. Best Company, Inc. ("A.M. Best").
The Company maintains a Quota Share Reinsurance agreement for the
workers' compensation insurance it underwrites in Florida with AmRe (the "AmRe
Quota Share agreement"), under which the Company cedes to AmRe 50% of the direct
workers' compensation premium written and losses incurred in Florida on and
after January 1, 1995. AmRe pays a ceding commission to the Company based on the
Company's Florida workers' compensation loss ratio, subject to certain
adjustments and limits. AmRe is rated A++ (Superior) by A.M. Best.
In June 1997, the Company entered into an interim reinsurance agreement
and cut-through endorsement with Zenith (rated A+ (Superior) by A.M. Best) which
provides first-dollar reinsurance coverage for Florida policyholders in the
event the Company becomes insolvent and unable to pay claims for all new,
renewal and in force policies in effect on or after June 18, 1997. See "Business
- - Asset Purchase Agreement With Zenith."
Effective October 1, 1996, the Company entered into a Quota Share
Reinsurance agreement (the "Chartwell Quota Share Reinsurance Agreement") for
the workers' compensation insurance it underwrites in RISCORP National Insurance
Company ("RNIC") in states other than Florida with three reinsurers: Chartwell
Reinsurance Company (rated A by A.M. Best), Trenwick America Reinsurance
Corporation (rated A+ by A.M. Best) and Swiss Reinsurance America Corporation
(rated A by A.M. Best). The Chartwell Quota Share Reinsurance agreement provides
for the Company to cede to the reinsurers 65% of its direct workers'
compensation premiums written and losses incurred on and after October 1, 1996.
The reinsurers pay the Company a ceding commission based on RNIC's loss ratio,
subject to certain adjustments and limits. The Chartwell Quota Share Reinsurance
Agreement was amended effective January 1, 1997 to reduce the ceded percentage
to 60%. On January 1, 1998, the Chartwell Quota Share Reinsurance Agreement was
terminated; however, the reinsurer continues to be responsible for their portion
of all losses incurred on policies effective before the termination date.
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These Quota Share Reinsurance agreements allow the company to write,
within regulatory guidelines, a larger number of policies than it could
otherwise. In the event the AmRe Quota Share Reinsurance agreements are
terminated for any reason, the Company could be required to increase its capital
substantially or reduce its level of workers' compensation premiums, unless it
is able to establish another Quota Share Reinsurance arrangement. This could
result in material adverse consequences to the Company's business and growth
prospects. There is no assurance that Quota Share Reinsurance will continue to
be available to the Company for its workers' compensation business.
The Company regularly performs internal reviews of the financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance agreements, the Company would
be responsible for the payment of all losses and loss adjustment expenses which
the Company has ceded to such reinsurer. Any such failure on the part of the
Company's reinsurers could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company's group health and property and casualty insurance business
is reinsured with reinsurers rated by A.M. Best as A- or better. The Company
retains a maximum amount of $150,000 per person per year for the group health
and $250,000 per occurrence and per risk for the commercial casualty and
commercial property. In June 1997, the Company made a strategic decision to exit
these lines of business. The Company does not expect this decision will have a
material adverse effect on the Company's business, financial condition or
results of operation.
A.M. Best Ratings of Insurance Subsidiaries
The limited operating history, pending litigation and other factors have
affected the ability of the Company's insurance subsidiaries to obtain favorable
A.M. Best and comparable ratings. A.M. Best ratings are based on, among other
things, a 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).
In May 1997, RISCORP Insurance Company ("RIC") and RISCORP Property &
Casualty Insurance Company ("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 may have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Legal Proceedings" and "Business - Regulation."
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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.
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
Insurance Company in March 1996 and the discontinuance of its prior business.
RNIC was effectively treated as a start-up operation for A.M. Best rating
purposes.
Competition
The market to provide workers' compensation insurance and services is
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools, and other significant providers of health care and insurance
services. A number of the Company's current and potential competitors are
significantly larger, have greater financial and operating resources than the
Company, and can offer their services nationwide. After a period of absence from
the market, traditional national insurance companies have re-entered the Florida
workers' compensation insurance market, thereby increasing competition in the
Company's principal market segment. In addition, the Company faces significant
competition in its newer markets, particularly North Carolina and Alabama. The
Company does not offer the full line of insurance products which is offered by
some of its competitors, and there can be no assurance that the Company will be
able to compete effectively in the future.
Regulation
General
The Company's business is subject to state-by-state regulation of
workers' compensation insurance (which in some instances includes rate
regulation and mandatory fee schedules) and workers' compensation insurance
management services. These regulations are primarily intended to protect covered
employees and policyholders, not the insurance companies nor their shareholders.
Under the workers' compensation system, employer insurance or self-funded
coverage is governed by individual laws in each of the fifty states and by
certain federal laws. In addition, many states limit the maximum amount of
dividends, distributions and loans that may be made in any year by insurance
companies. This restricts the amount of distributions that may be made by the
Company's insurance subsidiaries.
There is no assurance that the Company will seek approvals from state
regulatory authorities to pay dividends or make distributions or that, if
sought, such approvals will be obtained. This may limit the amount of
distributions by the Company's insurance subsidiaries and may decrease amounts
of capital available to the Company. In addition, the Company is required to
contribute to state-established guaranty funds or associations that pay claims
of insolvent insurers. As a result, the Company's financial performance could be
materially adversely affected by mandatory assessments from such funds over
which the Company has no control.
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Except for certain statutorily prescribed credits, Florida currently
does not permit competition on the basis of price in workers' compensation
insurance. This approach is followed in relatively few other states. If Florida
were to permit premium rates to be established with less regulatory
intervention, the Company's business, financial condition, or results of
operations could be materially and adversely affected.
The Company may from time to time need additional surplus to meet
certain state regulatory requirements. There can be no assurance that capital
will continue to be available when needed or, if available, will be on terms
acceptable to the Company.
Premium Rate Restrictions
State regulations governing the workers' compensation system and
insurance business in general impose restrictions and limitations on the
Company's business operations that are not imposed on unregulated businesses.
Among other matters, state laws regulate not only the kind of workers'
compensation benefits that must be paid to injured workers, but also the premium
rates that may be charged by the Company to insure employers for those
liabilities. As a consequence, the Company's ability to pay insured workers'
compensation claims out of the premium revenue generated from the sale of such
insurance is dependent on the level of premium rates permitted by state laws. In
this regard, it is significant that the state regulatory agency regulating
workers' compensation benefits may not be the same agency that regulates
workers' compensation insurance premium rates.
The Alabama, Florida and South Carolina Departments of Insurance (the
"ADOI", "FDOI" and "SDOI", respectively) have imposed constraints on the
Company's writings in their respective states. The ADOI has placed a $30 million
limit on in force premium for RNIC and RPC and the FDOI and SDOI have imposed a
moratorium on new business writings for RNIC. The Company does not believe these
constraints will have a material adverse effect on the Company's business,
financial condition or results of operations.
Financial and Investment Restrictions
Insurance company operations are subject to financial restrictions that
are not imposed on other businesses. State laws require insurance companies to
maintain minimum capital and surplus levels and place limits on the amount of
insurance premiums a company may write based on the amount of the company's
surplus. These limitations restrict the rate at which the Company's insurance
company operations can grow. The Company's 1997 statutory filings indicate that,
as of December 31, 1997, its insurance subsidiaries met applicable state minimum
capital and surplus requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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State laws also require insurance companies to establish reserves for
payment of policyholder liabilities and impose restrictions on the type of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its insurance subsidiaries' assets more conservatively
than if not subject to the state law restrictions which may prevent the Company
from obtaining as high a return on these assets than it might otherwise be able
to realize.
Participation in State Guaranty Funds
Every state in which the company operates has established one or more
insurance guaranty funds or associations that are charged by state law to pay
claims of policyholders insured by a company that becomes insolvent. All
insurance companies must participate in the guaranty associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying policyholder claims of an insolvent insurer. The
Company's financial performance could be adversely affected by guaranty
association assessments as a consequence of the insolvency of other insurers
over which the Company has no control. This type of guaranty fund is separate
from the SDTF which is designed to pay insurers for certain benefits paid to
previously injured workers.
Statutory Accounting and Solvency Regulation
State regulation of insurance company financial transactions and
financial condition are based on statutory accounting principles ("SAP"). SAP
differ in a number of ways from generally accepted accounting principles
("GAAP") which govern the financial reporting of most other businesses. In
general, SAP financial statements are more conservative than GAAP financial
statements, reflecting lower asset values and higher liability values.
State insurance regulators closely monitor the financial condition of
insurance companies reflected in SAP financial statements and can impose
financial and operating restrictions on an insurance company including: 1)
transfer or disposition of assets; 2) withdrawal of funds from bank accounts; 3)
extension of credit or making loans; and 4) investment of funds.
During February 1998, the FDOI completed an examination of the statutory
books and records of RIC and RPC as of December 31, 1996. The FDOI has not yet
issued a report; however, based on the February 5, 1998 closing conference with
the FDOI examiners, the resolution of the impact of the matters raised by the
FDOI will not have a material impact on the December 31, 1996 statutory
financial statements of RIC and RPC. However, because the FDOI has not released
the final results of their examination, Management cannot determine the
materiality of dollar amount of adjustments, if any, to the December 31, 1996
statutory financial statements resulting from the FDOI's 1996 examinations of
RIC and RPC. Management believes that any adjustments arising out of the
statutory examinations of RIC and RPC will have no material impact on the
accompanying GAAP financial statements.
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On October 9, 1997, the Missouri Department of Insurance ("MDOI")
completed an examination of the Company's books and records as of December 31,
1996. The MDOI issued a final report on the 1996 examination on January 12,
1998. The statutory capital and surplus as of December 31, 1996 determined by
the examiners was $29,345,804 compared to $31,012,399 reported by RNIC in its
1996 statutory financial statements. The most significant examination adjustment
was the non-admission of an accounts receivable balance relating to the loss
portfolio transfer from OSAA in the amount of approximately $900,000. This
balance was paid in full by OSAA. The remaining adjustments of approximately
$800,000 pertain to items that were either collected or charged to expense
during 1997. These examination adjustments relate to the statutory financial
statements and have no impact on the GAAP financial statements.
Healthcare and Managed Care Laws and Reform Proposals
The Company's medical provider networks are subject to various federal
and state laws and regulations, including the Agency for Health Care
Administration ("AHCA") qualification requirements for the Company's WCMCA in
Florida. There are a number of managed care reform proposals before federal and
state legislative and regulatory bodies, and the Company expects that its
business operations and products will be impacted by these proposals, if
adopted.
Losses and Loss Adjustment Expenses
The Company establishes its estimated liability for losses and loss
adjustment expenses based on facts then known, estimates of future claims
trends, experience with similar cases and historical Company and industry
trends. These trends include reserving, loss payment and reporting patterns,
claim closures and product mix.
Like many states, the Florida legislature has restructured its workers'
compensation laws several times over the years, with two significant law changes
since the Company began operations. Each time the workers' compensation laws
change, claims adjusters must segregate and manage claims according to
applicable laws, a process which is time-consuming and requires special skills.
The table below shows the development of losses and loss adjustment
expenses for 1988 through 1997. The top line indicates the estimated reserves
for unpaid losses and loss adjustment expenses as reported at the end of the
stated year. Each calendar year-end reserve includes estimated unpaid
liabilities for the current accident year and all prior accident years. The
cumulative amount paid portion of the table presents the amounts paid as of
subsequent years on those claims for which reserves were carried as of each
specific year. The section captioned "Liability Re-estimated as of" shows the
original recorded reserve as adjusted at the end of each subsequent year to
reflect cumulative amounts paid and all other facts and information discovered
during each year. For example, an adjustment made in 1996 for 1992 loss reserves
will be reflected in the re-estimated ultimate liability for each of the years
1992 through 1995. The cumulative redundancy (deficiency) line represents the
cumulative change in estimates since the initial reserve was established. It is
equal to the difference between the initial reserve and the latest liability
re-estimated amount.
11
<PAGE>
The table represents combined development for RIC, RPC and their
predecessors through 1995. Calendar year 1996 estimates of ultimate liabilities
include reserves assumed with the purchase of RNIC and the subsequent loss
portfolio transfers of five self-insurance funds. Effective in 1996, the Company
has separately reported unallocated loss adjustment expenses previously included
in general and administrative expenses. The cumulative paid and re-estimated
liability data in the following table have been restated for all years to
reflect this change. The table presents development data by calendar year and
does not relate the data to the year in which the accident occurred. Conditions
that have affected historical development of reserves will not necessarily
continue in the future.
<TABLE>
<CAPTION>
As of December 31,
- ---------------------------------------------------------------------------------------------------------
(In thousands)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and loss adjustment
expenses, net $ 954 $11,273$ 36,323$ 68,674 $ 96,755 $152,406 $ 128,453 $92,820 $196,078 $199,156
Cumulative Amount Paid:
One Year Later 355 8,927 19,335 32,241 47,572 122,603 95,229 55,875 74,639
Two Years Later 902 14,922 34,010 55,794 116,193 164,840 127,395 77,823
Three Years Later 1,185 19,675 44,551 91,441 134,193 172,699 141,803
Four Years Later 1,595 22,587 59,651 100,307 137,782 177,603
Five Years Later 1,665 26,943 62,775 102,468 140,671
Six Years Later 1,801 27,870 63,620 103,936
Seven Years Later 1,821 28,141 64,129
Eight Years Later 1,662 28,563
Nine Years Later 1,862
Liability Re-estimated as of:
One Year Later 1,016 18,508 44,192 71,145 115,116 156,866 133,651 95,843 193,677
Two Years Later 1,219 20,541 49,429 83,918 123,472 156,303 139,992 96,189
Three Years Later 1,462 24,514 55,485 91,477 123,298 162,811 144,138
Four Years Later 1,890 27,108 58,588 91,821 125,751 167,907
Five Years Later 1,977 26,670 57,867 92,878 131,074
Six Years Later 1,785 26,023 57,981 96,905
Seven Years Later 1,734 26,067 59,986
Eight Years Later 1,567 26,814
Nine Years Later 1,763
Cumulative Redundancy
(Deficiency) (809) (15,541)(23,663)(28,231) (34,319) (15,501) (15,685) (3,369) 2,401
</TABLE>
As the above table indicates, the Company's reserving methods in its
early years were adversely impacted by its short operating history and the
relative age of the accounts it insures. Additionally, the inclusion of
unallocated loss adjustment expenses in the table has increased the cumulative
deficiency for all years. Since 1992, the Company believes its reserving
methodologies have become more reliable. Key factors for this improvement are:
1) the ability to identify trends and reduce volatility based on a larger claims
database; 2) the maturation of the Company's managed care approach to claims;
and 3) industry reforms.
12
<PAGE>
The following table presents an analysis of losses and loss adjustment
expenses and provides a reconciliation of beginning and ending reserves for the
periods indicated. Favorable development for prior periods' loss and loss
adjustment expenses in calendar year 1997 represents improved experience in the
1995 and 1996 accident years partially offset by deterioration in the 1990
through 1992 accident years.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Gross reserves for losses and loss adjustment
expenses, beginning of period $458,239 $261,700 $12,668
Less reinsurance recoverables 180,698 100,675 7,398
Less SDTF recoverable 49,505 51,836 671
Less prepaid managed care fees 31,958 16,369 -
----------- ---------- -------------
Net balance at January 1 196,078 92,820 4,599
------------ ------------ -------------
Assumed during year from loss portfolio transfers and acquisitions - 88,212 123,854
------------------ --------- -----------
Incurred losses and loss adjustment expenses related to:
Current year 125,764 123,986 87,467
Prior years (2,401) 3,023 5,198
------------ ----------- ----------
Total incurred losses and loss adjustment expenses 123,363 127,009 92,665
--------- ----------- -----------
Paid related to:
Current year 45,646 56,088 33,069
Prior years 74,639 55,875 95,229
---------- ---------- -----------
Total paid 120,285 111,963 128,298
--------- --------- ------------
Net balance at December 31 199,156 196,078 92,820
Plus reinsurance recoverables 184,251 180,698 100,675
Plus SDTF recoverables 45,211 49,505 51,836
Plus prepaid managed care fees 8,420 31,958 16,369
--------- ----------- ---------
Gross reserves for losses and loss adjustment
expenses at December 31 $437,038 $458,239 $261,700
======== ======== ========
</TABLE>
Item 2. Properties
The Company owns its headquarters building in Sarasota, Florida, which
contains approximately 112,000 square feet of space, as well as an adjacent
parking facility. The Company leases an aggregate of approximately 57,000 square
feet of office space at 7 other locations in six states, including Florida,
under terms expiring through June 2001. The Company incurred rent expense of
$1.7 million for the year ended December 31, 1997. Additionally, the Company has
continuing commitments through October 2000 of approximately $0.4 million in the
aggregate related to four locations in which offices were closed during 1997.
13
<PAGE>
Item 3. Legal Proceedings
Vero Cricket Litigation. On April 2, 1996, RISCORP, Inc., 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 "Vero Cricket Litigation"). The suit claims the
defendants violated the Racketeer Influenced and Corrupt Organizations Act
("RICO"), breached fiduciary duties, and were negligent in RISCORP, Inc.'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. On
December 5, 1997, counsel for the parties reached an agreement to recommend to
their respective clients a settlement of the claims asserted in the Vero Cricket
Litigation. Plaintiff's counsel confirmed that the terms of the settlement are
acceptable to the named plaintiffs. The Company's Board of Directors has
approved the terms of the settlement, and the final settlement documents are
being reviewed by the parties and counsel. The settlement is contingent upon
preliminary approval by the court as to the fairness of the settlement,
certification of a settlement class, notice to the settlement class, opportunity
of the settlement class members to object and withdraw, no termination by either
party and final approval by the court. Pursuant to the terms of the settlement
agreement and subject to the satisfaction of the contingencies discussed above,
RIC will pay to the plaintiffs a settlement amount of $475,000. The Company
estimates that approximately 75% of the settlement amount will be covered by
insurance. Given the preliminary nature of this settlement and the various
contingencies relating to its consummation, there can be no assurance that this
litigation will ultimately be settled on this basis. The Company has recorded a
provision of $475,000 for the payment of this settlement.
Securities 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. (the "Securities Litigation"). 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 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. Pursuant to court ordered mediation, counsel
for the parties have engaged in discussions in an effort to resolve the
Securities Litigation. On January 14, 1998, counsel for the Company, counsel for
William D. Griffin and counsel for the plaintiffs reached an oral agreement on
terms to recommend to their clients to settle this litigation. The proposed
settlement is contingent upon the following: consummation of the transactions
contemplated by the Purchase Agreement with Zenith, certification of a
settlement class, payment by the Company to the settlement class, disclosure of
certain documents, interviews of individuals to verify information relating to
the settlement and a release against all defendants. Counsel to the parties are
in the process of finalizing the initial settlement documents. The settlement
will require preliminary approval by the court as to the fairness of the terms
of the settlement. Notice to the settlement class and an opportunity to object
to the terms of the settlement and to exclude themselves from the settlement
class is also required. The settlement must receive final court approval after
notice to the class and an opportunity to object or opt out is provided. Not all
of the terms of the settlement have been finalized as of this date. Counsel to
the parties have agreed to recommend to their respective clients a settlement
amount of $21 million. The Company estimates that approximately $8 million of
insurance proceeds will be available for contribution to the settlement amount
as well as related costs and expenses. Given the preliminary nature of this
settlement and the various contingencies relating to its consummation, there can
be no assurance that this litigation will ultimately be settled on this basis.
The Company has recorded a provision of $13 million net of estimated insurance
proceeds for the payment of this settlement.
14
<PAGE>
Alabama Litigation. On July 17, 1997, Plaintiffs Thomas K. Albrecht and
Peter D. Norman filed, in the Circuit Court of Montgomery County, Alabama, an
action against the Company, Mr. William D. Griffin, and several other former
officers of the Company. The suit alleged violations of federal and state
securities laws and breach of contract resulting from the purchase of
Independent Association Administrators, Inc. ("IAA") by the Company in 1996. The
plaintiffs sought compensatory and punitive damages and equitable relief. On or
about December 2, 1997, counsel for the Company and counsel for plaintiffs
negotiated a settlement of this action. Settlement documents have been approved
and executed by all parties. As part of the settlement agreement, the Company
paid $2 million to plaintiffs, advanced $2.3 million to plaintiffs against an
anticipated final distribution to shareholders and accelerated a distribution of
790,336 additional shares of Class A Common Stock to plaintiffs. Such shares
were contemplated under the terms of the Agreement and Plan of Merger by and
among the Company, RISCORP-IAA, Inc., IAA, Thomas K. Albrecht and Peter D.
Norman dated as of September 17, 1996. The Company estimates that approximately
$2 million of insurance proceeds will be available to offset the total
settlement amount as well as related costs and expenses. As part of the
settlement agreement, plaintiffs agreed to vote all of their shares of Class A
Common Stock in favor of the Purchase Agreement and the transactions
contemplated therein. Plaintiffs are record holders of 1,580,672 shares of Class
A Common Stock, and thus these plaintiffs hold approximately 13% of the
outstanding shares of Class A Common Stock. The Company recorded the settlement
expense of $2 million for the settlement of this matter.
OSAA 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 acquisition of the Occupational Safety
Association of Alabama ("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.
15
<PAGE>
Indictments of the Company and Certain Former Officers. On September
18, 1997, the U.S. Attorney's Office in Pensacola, Florida announced that a
United States grand jury had indicted RISCORP, Inc., RISCORP Management
Services, Inc. (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 RISCORP Management Services, Inc. to a single count of conspiracy to
commit mail fraud. The guilty plea was entered by RISCORP Management Services,
Inc. and accepted by the court on October 9, 1997. As a result of an agreement
negotiated with the U. S. Attorney, the court dismissed the indictment against
RISCORP, Inc. 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 million for the payment of fines and other costs
related to this matter. On February 18, 1998, a second superseding indictment
was issued against the five former officers including Mr. Griffin. Neither the
Company nor any of its subsidiaries were named as defendants in the second
indictment. The charges asserted in the second indictment, like those in the
first indictment, stem from alleged illegal political campaign contributions.
Florida Insurance Industry Class Action. On March 13, 1998, RIC and RPC
were named as defendants in a purported class action against the National
Council on Compensation Insurance, Inc. and all insurers selling workers'
compensation insurance in the State of Florida from 1985 to 1998. The suit
claims the defendants violated the Sherman Antitrust Act, RICO, the Florida
Antitrust Act and the common law in the collection of workers' compensation
premiums for alleged residual market loads. The suit seeks compensatory and
punitive damages and treble damages for the RICO counts. The named plaintiff,
Bristol Hotel Asset Company, claims to be a purchaser of Florida workers'
compensation insurance and claims to represent others similarly situated. The
Company intends to vigorously defend this action; however, there can be no
assurance it will prevail in the litigation.
Employee Matters. In June 1997, the Company terminated a number of
employees in connection with the workforce reduction. As a result of the
workforce reduction, a number of former employees have initiated proceedings,
including arbitration, against the Company for certain severance benefits. The
Company intends to vigorously defend these suits; however, there can be no
assurance that it will prevail in these proceedings.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
None.
16
<PAGE>
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Following the Company's initial public offering on February 29, 1996,
the Company's Class A Common Stock ($.01 par value) was traded on the NASDAQ
Stock Market's National Market under the symbol "RISC." There is no public
market for the Company's Class B Common Stock. Due to the fact that required
financial statements had not been filed with the Securities and Exchange
Commission, the Company's Class A Common Stock was delisted on July 2, 1997. As
of December 31, 1997, there were 287 record holders of Class A Common Stock. The
following table sets forth the high and low closing sales prices for the
Company's Class A Common Stock for each full quarterly period.
<TABLE>
<CAPTION>
Per Share Price of Common Stock
- ---------------------------------------------------------------------------------------------------------------------
1996 1997
--------- ------------- ----------- ------------ ------------ ------------ ----------- ------------
1st 2nd Quarter 3rd 4th Quarter 1st Quarter 2nd Quarter 3rd 4th Quarter
Quarter Quarter Quarter
- -------- --------- ------------- ----------- ------------ -------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 21 1/2 23 7/8 19 1/4 18 3/4 4 3/8 3 3/4 1 1/8 1 1/2
Low 19 15 10 3/4 3 15/64 1 7/8 15/16 3/8 5/8
</TABLE>
No dividends have been declared or paid since the Company's initial public
offering and it is not anticipated that dividends will be paid in the
foreseeable future.
17
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
Income Statement Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums earned $179,729 $173,557 $ 135,887 $ 1,513 $ 1,964
Fee and other income 20,369 31,733 22,397 56,712 40,948
Net realized gains 1,546 105 1,016 - -
Net investment income 16,447 12,194 6,708 1,677 873
---------- ----------- ----------- --------- ---------
Total revenues 218,091 217,589 166,008 59,902 43,785
--------- ---------- --------- -------- -------
Expenses:
Losses and loss
adjustment expenses 104,052 114,093 82,532 (716) 3,571
Unallocated loss
adjustment expenses 19,311 12,916 10,133 8,804 7,637
Commissions, general and
administrative expenses 70,800 65,685 48,244 35,869 20,775
Interest 1,919 2,795 4,634 1,750 1,218
Depreciation and amortization 7,423 11,500 1,683 1,330 1,116
----------- ---------- ----------- ----------- -----------
Total expenses 203,505 206,989 147,226 47,037 34,317
--------- --------- --------- ---------- ----------
Income before income taxes 14,586 10,600 18,782 12,865 9,468
Income taxes (1) 7,300 8,202 5,099 5,992 3,714
----------- ----------- ----------- ----------- -----------
Net income $ 7,286 $ 2,398 $ 13,683 $ 6,873 $ 5,754
========== ========== ========= ========== ==========
Net income per share (4) $ 0.20 $ 0.07 $ 0.49 $ 0.24 $ 0.20
=========== =========== =========== =========== ===========
Net income per share assuming dilution (4)$ 0.20 $ 0.07 $ 0.45 $ 0.23 $ 0.20
========= =========== =========== =========== ===========
Weighted average common
shares outstanding 36,892 34,648 28,100 28,100 28,069
========= ========= ========= ========= =========
Weighted average common
shares and common share
equivalents outstanding (2) (3) 37,116 36,406 30,093 30,093 28,554
========= ========= ========= ========= =========
December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and investments $ 253,634 $ 281,963 $92,713 $47,037 $30,157
Total assets 749,650 828,442 443,242 93,908 54,551
Long-term debt 15,609 16,303 46,417 27,840 17,015
Shareholders' equity 163,533 157,308 16,157 3,895 1,996
(1) Certain subsidiaries of the Company were S Corporations prior to the Reorganization (as defined in note 1 to the
Company's consolidated financial statements) and were not subject to
corporate income taxes.
(2) 1995 amount excludes 2,556,557 shares of Class A Common Stock reserved
for issuance pursuant to the exercise of stock options outstanding as
of December 31, 1995, having a weighted average exercise price of $3.96
per share.
(3) 1997 and 1996 amounts include 790,336 and 225,503 shares, respectively,
of Class A Common Stock pursuant to the contingency clauses in the
acquisition agreement with IAA. See notes 3 and 19 to the Company's
consolidated financial statements.
(4) The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share". As required by that pronouncement, this
figure has, for all years presented, been recalculated in accordance
with its provisions.
</TABLE>
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Prior to 1996, the Company's core at-risk operations were entirely
focused in Florida; however, during 1996, the Company completed several
acquisitions including an insurance company that was licensed in 19 states, and
loss portfolio transfers and assumption reinsurance transactions with several
self insurance funds outside the state of Florida, all of which allowed the
Company to diversify its at-risk operations outside the state of Florida. The
diversification of at-risk premiums outside the state of Florida continued
during 1997. A comparison of the Company's direct premiums written by state
(prior to reinsurance cessions or assumptions) is presented below:
Direct Premiums Written (a)
(Dollars in millions) 1997 1996 1995
-----------------------
Florida $ 180.8 $ 270.8 $ 284.8
Alabama 39.1 21.7 -
North Carolina 32.2 41.4 -
Other 28.4 22.8 -
---- ---- -------
Total $ 280.5 $ 356.7 $ 284.8
======= ======= =======
(a) Includes RIC, RPC and RNIC for 1997 and 1996, and RIC and RPC
for 1995.
Direct premiums written were reduced by specific reinsurance cessions
(1997, 1996 and 1995), the 50 percent AmRe Quota Share Reinsurance Agreement for
the Company's Florida workers' compensation business (1997, 1996 and 1995), and
the 65 percent Chartwell Quota Share Reinsurance Agreement (effective October 1,
1996 for business written primarily outside the state of Florida), which
decreased 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 such as deductible plans, participating dividend
plans, or loss sensitive plans. Pricing for these plans tends to be more
competitively based, and the Company experienced increasing competition during
1997 and 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 or renewal policies written on or after
January 1, 1997. Concurrently, with the premium reduction effective January 1,
1997, 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 WCMCA. In addition, on October 9, 1997, Florida further reduced
premium rates by 1.7 percent for new and renewal policies written on or after
January 1, 1998. The State of North Carolina approved a 13.7% decrease in loss
costs effective April 1, 1997. The Company adopted the loss costs in October
1997 which resulted in an overall 8.4% effective rate reduction.
19
<PAGE>
The Company experienced increased pricing pressures during 1997 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. During 1997,
the Company made the strategic decision to discontinue writing business owners'
protection, commercial multiple peril and auto and focus on its core workers'
compensation business. Net written premiums on these lines of business were less
than $1.0 million during 1997 and were less than $0.5 million in 1996. In
addition, in June 1997, the Company implemented a strategic plan to consolidate
several of its field offices and announced its intention to close all field
offices, except Charlotte and Birmingham, by the end of 1997, and to cease
writing new business in certain states including Oklahoma, Virginia, Missouri,
Mississippi, Louisiana and Kansas. The estimated impact of the decision to
discontinue writing business in these states was a reduction of approximately
$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. See "Business - The Company's Operating Philosophy," for
further discussion.
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 SDTF.
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds and self-insured employers for excess workers' compensation
benefits paid to employees when an employee is injured on the job and the injury
to the worker merges with, aggravates, or accelerates a preexisting impairment.
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; however, the SDTF has not prefunded its claims liability
and no reserves currently exist. As of September 30, 1996, the SDTF had an
actuarially projected undiscounted liability of approximately $4.0 billion based
on a study performed for the SDTF by independent actuarial consultants. In
addition, the SDTF actuarial study indicated that, at the current assessment
rates, the payment of the existing liability would take numerous years.
Under Florida sunset laws applicable to some state sponsored funds, the
SDTF would have expired on November 4, 1996, unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. The SDTF will accept no claims with
accident dates after December 31, 1997. Certain SDTF claims may have to be
refiled for reimbursement and such filing will require a refiling fee.
Additionally, companies accruing SDTF recoveries may be statutorily limited in
the level of recoverable they may be allowed to carry. The bill provides for a
funding mechanism through which companies writing workers' compensation
insurance in Florida will be assessed an annual charge to cover payments made by
the SDTF. The Company believes that even in the event of default by the SDTF,
the existing reimbursements of the SDTF would become general obligations of the
State of Florida. Management further believes that the recoveries recorded at
December 31, 1996 will not be materially adversely affected by the new
legislation.
20
<PAGE>
Estimated recoveries from the SDTF were $45.2 million and $49.5 million
at December 31, 1997 and 1996, respectively. The decrease in the estimated
recoveries during 1997 resulted from $5.9 million of actual collections and a
reduction in the estimated recoveries due to additional information regarding
the impact of the legislative reform. Actual cash recoveries from the SDTF
totaled $5.9 million, $2.5 million, and $0.9 million, respectively, for the
years ended December 31, 1997, 1996 and 1995. For the year ended December 31,
1997, the effect of the change in the estimated SDTF recoveries on losses and
loss adjustment expenses incurred was an increase of approximately $4.3 million.
For the years ended December 31, 1996 and 1995, the effect of the changes in the
estimated SDTF recoveries on losses and loss adjustment expenses incurred was a
decrease of approximately $0.2 million and $5.8 million, respectively. SDTF
assessments, which are based on net premiums written, were $8.0 million, $11.7
million and $12.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
While it is not possible to predict the result of any other legislative
or regulatory proposals affecting the SDTF, changes in the SDTF's operations or
funding which decrease the availability of recoveries or increase assessments
payable by the Company could have a material adverse effect on the Company's
business, financial condition, or results of operations.
Results of Operations
The following table shows direct, assumed, ceded, and net earned
premiums for the years ended December 31, 1997, 1996 and 1995:
Year Ended December 31,
--------------------------------------
(Dollars in millions) 1997 1996 1995
-----------------------------
Direct premiums earned $ 328.2 $ 326.9 $ 274.3
Assumed premiums earned 18.8 11.7 0.7
Premiums ceded to reinsurers (167.3) (165.0) (139.1)
-------- -------- --------
Net premiums earned $ 179.7 $ 173.6 $ 135.9
======= ======== ========
21
<PAGE>
The comments below should be read in conjunction with the Financial
Statements in Part IV, Item 14.
Direct earned premiums for the first six months of 1997 increased $31.1
million from the same period in 1996, while direct earned premiums for the last
six months of 1997 decreased $29.8 million from the same period in 1996. The
decrease in direct earned premiums for the last six months of 1997 of $29.8
million from the same period in 1996 was primarily due to the decrease in new
and renewal premiums that the Company experienced in the second, third and
fourth quarters of 1997 from the adverse publicity pertaining to the A.M. Best
ratings of the Company's insurance subsidiaries (see "Business - A.M. Best
Ratings of Insurance Subsidiaries"), the Company's inability to file its Form
10-K, 10-Q's and audited statutory financial statements in a timely manner and
the delisting of the Company's stock by NASDAQ. In addition, the direct premiums
earned for the first six months of 1997 were favorably impacted by the rapid
growth that occurred in 1996 after the Company's initial public offering ("IPO")
of stock in 1996. The $1.3 million net increase in the direct premiums earned
for the year ended December 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
Company's insurance subsidiaries to increase their premium writing
capacity and, as a result, to increase premiums during the last
nine months of 1996 due to the expanded premium writing
capabilities. Written premiums are earned pro rata over the policy
period (usually 12 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's
insurance subsidiaries during 1996 and from the other acquisitions
made during 1996.
Enhanced marketing initiatives implemented after the IPO to
increase the number of policies and to write accounts with larger
premiums.
These increases were almost entirely offset by a decrease in
new and renewal premiums in the second, third and fourth
quarters of 1997 due to the adverse publicity discussed above.
The net increase from 1995 to 1996 was primarily due to loss portfolio
transfers and premium growth in states licensed through RNIC.
The increase in assumed premiums earned from 1996 to 1997 is primarily the
result of the Company recording $11.4 million of earned premiums in the fourth
quarter of 1997 from the National Council on Compensation Insurance, Inc.
("NCCI") pool participation. The remaining 1997 assumed premiums of $7.1 million
are primarily the result of a fronting agreement entered into in September 1995
with another insurer which enabled the Company's insurance subsidiaries to begin
expansion into states where they were not licensed. The assumed premiums from
the fronting agreement were approximately $7.1 million for the year ended
December 31, 1997 compared to $11.7 million for the year ended December 31,
1996. The assumed premiums earned for the third and fourth quarter of 1997 were
approximately $1.1 million. The decrease in assumed premiums from the fronting
agreement of approximately $3.0 million per quarter for the third and fourth
quarters of 1997 was due to a reduction in the premium writings under this
agreement.
22
<PAGE>
For the years ended December 31, 1997, 1996 and 1995, the Company ceded
approximately 50 percent of its Florida premiums to AmRe under a quota share
reinsurance agreement and 60 percent of the business written by RNIC under a
separate quota share agreement (65 percent during 1996) with Chartwell. The
increase in premiums ceded in 1997 and 1996 is directly related to the increase
in direct premiums earned. As direct premiums earned decrease in the future, the
ceded premiums will also decrease.
Fee and other income for the years ended December 31, 1997, 1996 and
1995 was $20.4 million, $31.7 million and $22.4 million, respectively. The
decrease of $11.3 million from 1996 to 1997 was primarily due to the loss of
service fees from the conversion of the National Alliance for Risk Management
("NARM") self insurance funds of Virginia (which were previously managed by the
Company) to at-risk business via a loss portfolio transfer and decreases in
RISCORP West, Inc. ("RWI") service fees from the termination of RWI's
Mississippi and Louisiana service contracts. The decrease in fee income was
partially offset by new fees generated from CompSource, the fronting agreement
discussed above, the new service agreement with Third Coast Insurance Company (a
joint venture between the Company and another insurer) that began April 1, 1996
and growth in other existing fee products. The net increase of $9.3 million from
1995 to 1996 was primarily due to new fees generated from CompSource, the
fronting agreement entered into in 1995, the new service agreement with Third
Coast Insurance Company, growth in the Company's other existing fee products,
offset by decreases in commissions on reinsurance premiums, loss of service fees
when NARM and the Virginia funds (which were previously managed by the Company)
were converted to at-risk business through loss portfolio transfers during 1996,
and decreases in RWI service fees from the termination of RWI's Mississippi and
Louisiana service contracts.
Net investment income for the years ended December 31, 1997, 1996 and
1995 was $16.4 million, $12.2 million and $6.7 million, respectively. The $4.2
million increase from 1996 to 1997 and the $5.5 million increase from 1995 to
1996 was primarily due to the increase in the investment portfolio balance
during 1997 and 1996 due primarily to (i) to the investment of proceeds from the
IPO by RISCORP into its insurance subsidiaries, which, in turn, invested the
proceeds in their individual investment portfolios, (ii) the growth in premium
volume during 1997 and 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 1996 loss portfolio transfers and assumption
reinsurance transactions which were also used to purchase investments.
23
<PAGE>
The loss ratio for the year ended December 31, 1997, 1996 and 1995 was
57.9 percent, 65.7 percent and 60.7 percent, respectively. Losses and loss
adjustment expenses for the years ended December 31, 1997, 1996 and 1995 were
$104.0 million, $114.1 million and $82.5 million, respectively. The decrease in
the loss ratio from 1996 to 1997 was due primarily to favorable development in
Florida (6.5 percent) and North Carolina (1.0 percent), and unfavorable
development in Alabama (1.0 percent) relating to the Company's 1996 and earlier
accident years' loss and loss adjustment reserves. The favorable development in
the Florida business was due primarily to the reduction in the loss and loss
adjustment expense reserves resulting from an actuarial analysis completed in
the fourth quarter of 1997 and the favorable development for the 1996 accident
year resulting primarily from favorable development of post 1993 Florida
accident years due to enhanced savings from the legislative changes that became
effective in 1994. The net increase in the loss ratio from 1995 to 1996 was
primarily attributable to higher loss ratios on the business written in new
states licensed through RNIC and higher loss ratios on the business acquired
through assumption reinsurance transactions than the loss ratios on the
Company's core Florida business.
The unallocated loss adjustment expense ratio for the years ended
December 31, 1997, 1996 and 1995 was 10.7 percent, 7.4 percent and 7.5 percent,
respectively. The net increase in unallocated loss adjustment expenses of $6.4
million from 1996 to 1997 was primarily due to the strengthening of these
reserves in 1997 based on an actuarial analysis performed by the Company during
1997. The unallocated loss adjustment expense ratio for 1996 and 1995 were
comparable. The net increase of $2.8 million from 1995 to 1996 in the
unallocated loss adjustment expenses was attributable to the growth in premium
volume.
Commissions, general and administrative expenses for the years ended
December 31, 1997, 1996 and 1995 were $70.8 million, $65.7 million and $48.2
million, respectively. The net increase of $5.1 million from 1996 to 1997 is
primarily the result of a $6.3 million increase in the amortization of deferred
acquisition costs; a $2.1 million increase in personnel expenses primarily
related to severance payments incurred in connection with the June 1997
workforce reduction; a $5.9 million increase in accounting, auditing, consulting
and legal expenses primarily resulting from the Company's inability to file its
1996 financial statements in a timely manner; a $2.8 million increase in
postage, telephone and insurance expenses; a $13.0 million expense recognized in
the fourth quarter of 1997 in connection with the proposed settlement of the
securities class action lawsuit; an increase of $5.0 million relating to
expenses associated with the NCCI pool participation; an increase in commissions
paid to agents of $5.3 million; and a reduction in ceding commission income of
$1.7 million. These expense increases were offset by reductions in marketing
related travel expenses of $1.5 million, decreases in premium taxes of $8.5
million resulting from a decline in written premiums and a decline in bad debt
expenses of $27.0 million. The net increase in expenses of $17.4 million from
1995 to 1996 was attributable primarily to significant increases in the
Company's bad debts expenses and legal expenses combined with increased overall
commissions, general and administrative expenses associated with higher premiums
and personnel resulting from acquisitions and internal growth. The increases
were offset by higher ceding commissions under the quota share reinsurance
agreements, including $6.3 million of additional ceding commissions recognized
under the AmRe quota share reinsurance agreement.
24
<PAGE>
Interest expense for the years ended December 31, 1997, 1996 and 1995
was $1.9 million, $2.8 million and $4.6 million, respectively. The decrease of
$0.9 million from 1996 to 1997 and the decrease of $1.8 million from 1995 to
1996 was attributable primarily to the repayment of $28.6 million of bank
borrowings in March 1996 with proceeds from the IPO.
Depreciation and amortization expenses for the years ended December 31,
1997, 1996 and 1995 were $7.4 million, $11.5 million and $1.7 million,
respectively. The decrease from 1996 to 1997 of $4.1 million was primarily the
result of the impairment losses recognized in 1996 offset by a full year's
amortization of goodwill recognized on the 1996 acquisitions. There were no
impairment losses recognized in 1997. The increase of $9.8 million from 1995 to
1996 was primarily due to the $3.2 million and $2.8 million write-off of
goodwill associated with RWI and IAA, respectively.
The effective tax rates for the years ended December 31, 1997, 1996 and
1995 were 50.0 percent, 77.4 percent and 27.1 percent, respectively. The
decrease in the effective tax rate from 1996 to 1997 was primarily the result of
the decrease in the non-deductible amortization of goodwill and the reduction in
state taxes in excess of the federal tax benefit. The increase in the effective
tax rate from 1995 to 1996 was primarily the result of increases in the
non-deductible amortization of goodwill resulting from the impairment losses
recognized in 1996 and increases in state taxes in excess of the federal tax
benefit.
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 surplus
needs for its insurance subsidiaries, and other general and administrative
expenses.
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, or (ii) $35
million cash and assumption of $15 million of debt. The transaction is subject
to shareholder and regulatory approval. See "Business - Asset Purchase Agreement
with Zenith."
Cash flow (used in) operations for the years ended December 31, 1997,
1996 and 1995 was ($22.9) million, $28.1 million and ($47.3) million,
respectively. The decrease from 1996 to 1997 was due primarily to reductions in
unearned premiums, and loss and loss adjustment expense reserves resulting from
a decrease in direct premiums written of $76.2 million as well as increases in
commissions, general and administrative expenses and unallocated loss adjustment
expenses of $4.8 million and $6.4 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 increases in
reserves for losses and loss adjustment expenses.
25
<PAGE>
The Company has projected cash flows through June 1998 and believes it
has sufficient liquidity and capital resources to support its operations.
The Company has recorded $45.2 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, 1997, 1996 and 1995, the Company received net
payments from the SDTF totaling $5.9 million, $2.5 million and $0.9 million,
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 "Business - A.M. Best Ratings of Insurance Subsidiaries."
As of December 31, 1997 and 1996, the Company's insurance subsidiaries
had combined statutory capital and surplus of $96.3 million and $90.6 million,
respectively. The individual statutory capital and surplus of each of the
Company's insurance subsidiaries at December 31, 1997 and 1996 exceeded the
minimum statutory capital and surplus required by their state of domicile.
The National Association of Insurance Commissioners ("NAIC") 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, 1997, the Company's insurance subsidiaries' statutory surplus was in excess
of any risk-based capital action level requirements.
Investment Portfolio
The Company has established an investment policy that focuses upon
safety of principal, compliance with regulations, liquidity and diversification.
As of December 31, 1997, approximately 75% of the Company's investment portfolio
was rated Aa or above by Moody's, and the portfolio contained no securities with
a rating of less than Baa. The Company does not hold any common stocks in its
portfolio. The average duration of the portfolio, was approximately 2.5 years at
December 31, 1997. The amortized cost and fair value of the Company's investment
portfolio, at December 31, 1997, was $220.4 million and $223.7 million,
respectively.
26
<PAGE>
The following table summarizes the Company's investment portfolio at
December 31, 1997 (in thousands):
Tax
Fair Equivalent
Type of Investment Value Yield*
Certificates of deposit $ 1,470 6.10%
U. S. government & agency obligations 57,878 6.34%
Corporate obligations 89,200 6.52%
Municipal obligations 63,257 6.71%
Asset-backed securities 9,966 6.43%
Mortgage-backed securities 1 ,967 7.23%
----------- ------
$223,738 6.53%
======== =====
* The tax equivalent yield was computed using a 35% tax rate, which represents
the effective statutory tax rate for the Company
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, footnotes and
supplementary schedules are set forth on pages F-1 to F-49 hereof.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no changes in or disagreements with accountants on accounting
or financial disclosure for the two years ended December 31, 1997.
27
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
Set forth below is certain information as of December 31, 1997, concerning
the Company's executive officers, continuing directors, and nominees for
director.
<TABLE>
<CAPTION>
Name Position(s) Age Year First
Became a Director
<S> <C> <C> <C>
Frederick M. Dawson President and Chief Executive Officer 57 1997
Steven J. Berling Senior Vice President 48
Gregory P. Kuzma Senior Vice President and Treasurer 47
Richard K. Larson Executive Vice President - Marketing 57
Richard T. Magsam Vice President, Controller and Chief Accounting 41
Officer
Stephen C. Rece Senior Vice President and Chief Financial 54
Officer
Walter E. Riehemann Senior Vice President, General Counsel & 31
Secretary
Seddon Goode, Jr. Director 65 1996
George E. Greene III Director 62 1995
Walter L. Revell Director 62 1995
</TABLE>
Frederick M. Dawson joined the Company in May 1997 as Chief Executive Officer,
and was elected President in June 1997. Prior to joining RISCORP, Mr. Dawson was
Chairman, President and Chief Executive Officer of Integon Life Insurance
Corporation from December 1994 to July 1995 and Harcourt General Insurance
Companies from August 1992 to December 1994. Mr. Dawson's previous experience
includes executive positions with Beneficial Corporation from October 1980 to
March 1987 and Citibank, N.A. from October 1987 to August 1992.
Steven J. Berling has served as a Senior Vice President of the Company and
President of the Company's Managed Care Services Group since December 1995. Mr.
Berling was President of the Management Services Division from September 1994 to
December 1995. Prior to joining RISCORP, Mr. Berling was Vice President at VHA
of Florida from June 1993 to September 1994. Mr. Berling was Vice President of
Administrative Services at Sharp Health Care from 1987 to 1993 where he served
in various capacities as a hospital administrator.
28
<PAGE>
Gregory P. Kuzma has served as Senior Vice President and Treasurer of the
Company since June 1997. Prior to joining RISCORP as a Senior Vice President in
1991, Mr. Kuzma was Vice President and Treasurer of Catalyst Energy Corporation
from May 1989 to June 1991. Previously, Mr. Kuzma was Assistant Treasurer of
Duracell Inc., The Pittston Company and Chesebrough-Pond's Inc., where he served
in various treasury positions from 1979 to 1989.
Richard K. Larson joined the Company as Executive Vice President - Marketing in
August 1997. Prior to joining RISCORP, Mr. Larson was President and Chief
Operating Officer of Harvest Life Insurance Company and Federal Home Life
Insurance Company, two insurance subsidiaries of GE Capital Corporation. From
August 1992 to August 1994, Mr. Larson's experience included executive positions
with Harvest Life Insurance Company, PHF Life Insurance Company and Federal Home
Life Insurance Company.
Richard T. Magsam has served as Vice President, Controller and Chief Accounting
Officer of the Company since September 1997. Mr. Magsam was Assistant Vice
President of Integon Corporation from September 1996 to September 1997 and was
previously Corporate Controller of the Company from April 1995 to September
1996. Prior to joining RISCORP, Mr. Magsam was Senior Vice President and Chief
Financial Officer of Investors Insurance Group, Inc. from 1992 to 1995 and Vice
President and Controller of Financial Benefit Group, Inc. from 1989 to 1991.
Previously, Mr. Magsam was with the public accounting firm of KPMG Peat Marwick
from 1979 to 1988.
Stephen C. Rece has served as Senior Vice President and Chief Financial Officer
of the Company since June 1997. Mr. Rece joined the company in March 1989 as
Chief Operating Officer and was named Senior Vice President of Reinsurance in
February 1995. Prior to joining RISCORP, Mr. Rece was Executive Vice President
and Chief Financial Officer of Associated Reinsurance Management Corporation
from June 1985 to March 1989. Previously, Mr. Rece was Vice President and
Secretary-Treasurer of Southern Trust Corporation from 1970 to 1985.
Walter E. Riehemann has served as Senior Vice President, General Counsel and
Secretary since October 1997. Mr. Riehemann joined RISCORP as Associate General
Counsel in August 1995 and was promoted to Vice President, General Counsel and
Secretary in June 1997. Prior to joining RISCORP, Mr. Riehemann was associated
with the law firms of Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia (1993
to 1995), Long, Aldridge & Norman, Atlanta, Georgia (1993), and Jones, Day,
Reaves & Pogue, Dallas, Texas (1990 to 1993).
29
<PAGE>
Seddon Goode, Jr. was elected a director of the Company in November 1996. Mr.
Goode has served as President and Director of University Research Park, Inc.
since 1981. From 1977 to 1984, Mr. Goode served as Chairman of First Charlotte
Corporation. From 1968 to 1977, Mr. Goode served as Senior Vice President, Chief
Financial Officer and Director of Interstate Securities Corporation. Mr. Goode
is also a director of Trion, Inc. and is a director and chairman of Canal
Industries, Inc.
George E. Greene III was elected a director of the Company in November 1995. Mr.
Greene served as Executive Director of No Casinos, Inc., a non-profit
organization to keep casino gambling illegal in Florida, in 1994. Mr. Greene is
also a private consultant. Mr. Greene served in various management positions
with Florida Power Corporation, and other subsidiaries of Florida Progress
Corporation from 1962 to 1993, most recently as Senior Vice President of Florida
Power Corporation from 1983 to 1993. Mr. Greene retired from Florida Power Corp.
on January 1, 1994.
Walter L. Revell was elected a director of the Company in November 1995. Mr.
Revell has been Chairman and Chief Executive Officer of H. J. Ross Associates,
Inc., a consulting engineering, architectural and planning firm, since 1991;
Chairman and Chief Executive Officer of Revell Investments International, Inc.
since 1984 and was President and Chief Executive Officer of Post, Buckley, Schuh
& Jernigan, Inc., a consulting engineering, architectural and planning firm,
from 1975 to 1983. Mr. Revell is also a director of St. Joe Corporation and
Dycom Industries, Inc.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than ten
percent of the Common Stock of the Company, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors, and ten percent shareholders are required by the SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received by it,
and written representations from certain reporting persons that no SEC Forms 3,
4, or 5 were required to be filed by those persons, the Company believes that
during 1996, its officers, directors and ten percent beneficial owners timely
complied with all applicable filing requirements.
30
<PAGE>
Item 11. Executive Compensation
The following table sets forth the compensation received by the Company's
Chief Executive Officer and the four highest paid executive officers for
services rendered to the Company in 1995, 1996 and 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE*
Securities
Under- All Other
Name and Annual Compensation lying Compen-
Principal Position Year Salary Bonus Other Options sation (1)
<S> <C> <C> <C> <C> <C> <C>
Frederick M. Dawson 1997 $279,808 $ 525,000 - 2,533,326 $8,334(2)
President and Chief 1996 - - - - -
Executive Officer 1995 - - - - -
Steven J. Berling 1997 223,750 - - - 555(3)
Senior Vice President - 1996 208,333 52,083 - 20,000 3,831(3)
Managed Care Services 1995 190,306 34,594 - 72,632 1,221(3)
Stephen C. Rece 1997 155,438 20,000 - - 1,966(4)
Senior Vice President & 1996 144,167 21,625 - 7,500 9,502(4)
Chief Financial Officer 1995 134,167 53,020 - 372 32,162(4)
Reed S. Killets 1997 145,800 10,200 - - 1,448(5)
Senior Vice President- 1996 144,900 24,490 - 10,000 11,269(5)
Human Resources 1995 133,750 28,830 - 372 4,187(5)
Gregory P. Kuzma 1997 153,566 - - - 1,152(6)
Senior Vice President & 1996 124,400 12,440 - 7,500 5,614(6)
Treasurer 1995 119,167 12,157 - 75 27,608(6)
William D. Griffin 1997 $375,000 $375,000 $30,000(7) - $11,345(10)
Former Chief 1996 751,416 907,241 18,907(8) - 17,547(10)
Executive Officer 1995 720,000 5,609,583 46,571(9) - 13,685(10)
</TABLE>
*There were no restricted stock awards or LTIP payouts during the periods
covered.
(1) Includes amounts deferred by the executive pursuant to the Company's 401(k)
plan and the Company's cafeteria plan. (2) Includes $7,397 for temporary
housing and $937 in group term life insurance premiums.
(3) Includes $3,274 in allocations to the participant's account in the
Company's defined contribution plan in 1996, and $555, $557 and $487 for
group term life insurance premiums in 1997, 1996 and 1995, respectively.
Also includes $734 in annual fees for country club membership in 1995.
(4) Includes $3,827 and $27,767 in allocations to the participant's
account in the Company's defined contribution plan in 1996 and 1995,
respectively, and $546, $547 and $519 for group term life insurance
premiums in 1997, 1996 and 1995, respectively. Also includes
$1,420, $5,128 and $3,876 in annual fees for country club membership
in 1997, 1996 and 1995, respectively.
31
<PAGE>
(5) Includes $7,945 and $2,326 in allocations to the participant's account
in the Company's defined contribution plan in 1996 and 1995,
respectively, and $552, $552 and $244 for group term life insurance
premiums in 1997, 1996 and 1995, respectively. Also includes $896,
$2,772 and $1,617 in annual fees for country club membership in 1997,
1996 and 1995, respectively.
(6) Includes $3,488 and $25,530 in allocations to the participant's account
in the Company's defined contribution plan in 1996 and 1995,
respectively, and $260, $260 and $294 for group term life insurance
premiums in 1997, 1996 and 1995, respectively. Also includes $892,
$1,866 and $1,784 in annual fees for country club membership in 1997,
1996 and 1995, respectively.
(7) Includes (i) a $30,000 automobile expense allowance.
(8) Includes (i) a $4,591 automobile usage allowance and (ii) a $14,316
aircraft usage allowance.
(9) Includes (i) a $13,936 automobile usage allowance and (ii) a $32,635
aircraft usage allowance.
(10) Includes (i) $9,771, $9,103 and $7,709 cash surrender value of life
insurance policies in effect in 1997, 1996 and 1995, respectively and
(ii) $1,142, $7,574 and $5,976 in annual fees for a country club
membership in 1997, 1996 and 1995, respectively. Also includes $432 and
$870 for group term life insurance premiums in 1997 and 1996
respectively.
Compensation of Directors
Directors who are not employees of the Company are paid $40,000 annually
plus $1,000 for each Board meeting attended, and $1,000 for each day of
committee meetings attended if such meeting day occurs on a day other than that
of a scheduled meeting of the Board of Directors. In addition, the Company
reserved 10,000 shares of Common Stock for future issuance upon the exercise of
stock options that may be granted to such non-employee directors. No options
were granted in 1997 and all options previously granted under this plan were
terminated in 1997. All directors receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with meetings of the Board of
Directors. No director who is an employee of the Company receives separate
compensation for services rendered as a director.
32
<PAGE>
Stock Option Grants
The following table shows information concerning options granted in 1997
to the officers shown in the Compensation Table at the end of 1997. All option
grants to Mr. Dawson were fully vested on the date of grant except for the grant
of 1,447,615 shares at $2.75 which vest over two years at the rate of 50% per
year.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year*
- ---------------------------------------------------------------------------------------------- ----------------------------
Individual Grants
- ----------------------------------------------------------------------------------------------
Percent Of
Total Potential Realizable Value
Number Of Options At Assumed Annual Rates Of
Securities Granted To Stock Price Appreciation
Underlying Employees Exercise Or For Option Term
Options In Fiscal Base Expiration
Name Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- -------------------------------- ----------------- ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frederick M. Dawson 1,447,615 57% $2.75 Earlier of $ 0 $709,331
542,855 22% 5.00 May 19, 2007 0 0
361,904 14% 7.50 or three 0 0
180,952 7% 10.00 years after 0 0
termination
of employment
Steven J. Berling 0 0 0 N/A 0 0
Stephen C. Rece 0 0 0 N/A 0 0
Gregory P. Kuzma 0 0 0 N/A 0 0
Reed S. Killets 0 0 0 N/A 0 0
William D. Griffin 0 0 0 N/A 0 0
*No SARs have been granted.
</TABLE>
33
<PAGE>
Option Exercises and Year-End Option Values
The following table shows information concerning options exercised
during 1997 and options held by the officers shown in the Summary Compensation
Table at the end of 1997.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired on Underlying Unexercised In-the-Money Options
Value Options at Fiscal Year-End at Fiscal Year-End (1)
-------------------------- ----------------------
Name Exercise Realized Exerciseable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frederick M. Dawson - - 1,085,711 1,447,615 $0 $0
Steven J. Berling - - - - - -
Stephen C. Rece - - - - - -
Gregory P. Kuzma - - - - - -
Reed S. Killets - - - - - -
William D. Griffin - - - - - -
(1) Based on the closing market price on December 31, 1997 of $1.25 per share.
</TABLE>
Stock Option Plan
The Company's Stock Option Plan (the "Option Plan") provides for the
grant of stock options to eligible employees and consultants of the Company.
During 1997, all options granted under the Option Plan were terminated. The
Company does not anticipate granting any future options under the Option Plan.
Compensation Arrangements upon Resignation, Retirement or Other Termination;
Employment Agreements
The Company has entered into an employment agreement with Mr. Dawson
providing for an initial base salary of $450,000, escalating to $600,000 on May
31, 1998. This agreement has a term of two years and provided for a signing
bonus of $150,000 and a deferred payment of $750,000, payable in two equal
installments on December 31, 1997 and May 31, 1998. Mr. Dawson's employment
agreement also provides for the grant of certain options. See "Directors and
Officers of the Registrant - Stock Option Grants." Under the employment
agreement, the Company may terminate Mr. Dawson at any time. If Mr. Dawson is
terminated by the Company for other than Cause or if there is a change of
control of the Company, Mr. Dawson is entitled to receive an immediate payment
of all amounts remaining to be paid under the agreement.
34
<PAGE>
The Company has entered into employment agreements with Messrs. Berling,
Rece, Kuzma and Killets, providing for base salaries of $225,000, $175,000,
$150,000 and $145,000, respectively. These employment agreements have a term of
one year (which automatically renew for successive one year periods unless
terminated) and allow the employee to participate in the Company's employee
benefit plans. Under the employment agreements, the Company may terminate the
employee at any time. If the employee's employment is terminated by the Company
for other than "Cause" (as defined in the employment agreements), or the
employee voluntarily terminates his employment for "Good Reason" due to a
material modification, without the employee's written consent, of his duties,
compensation or scope of responsibilities, then the Company must pay the
employee an amount equal to one year of the employee's base salary in effect on
the effective date of termination, payable without interest in twelve equal
monthly installments. During the twelve months, following the date the employee
is terminated for other than Cause, the employee may not compete with the
Company. If the Company terminates the Employee for other than "Cause" or the
Employee voluntarily terminates his employment for Good Reason (a) within 2
years of a "Change of Control" (as defined in the employment agreements) or (b)
within 120 days of a "Potential Change of Control" (as defined in the employment
agreements), then the Company must pay the Employee an amount equal to three
times the employee's base salary in effect on the effective date of termination,
payable in a lump sum. In the event the employee is terminated after a change of
control, the non-compete period is two years. If the employee voluntarily
terminates his employment for other than Good Reason, or his employment
terminates due to disability, or if the Company terminates the employee's
employment for Cause, then the Company will pay the employee a lump sum payment
equal to the portion of his base salary accrued through the date his employment
terminates.
In accordance with his employment agreement, in effect prior to the
Company's initial public offering, Mr. Griffin's compensation included an annual
base salary of $750,000, quarterly incentives of up to $750,000 per year based
on premiums written and revenues earned, and an annual bonus to be determined in
the discretion of the Board of Directors. This employment agreement will extend
until the earlier of the fifth anniversary of a change of control of the Company
or Mr. Griffin's 65th birthday. The employment agreement contains a covenant
prohibiting competition in the workers' compensation insurance or services
fields in the United States which continues for a period of two years after the
termination of his employment with the Company. The employment agreement
provides that if Mr. Griffin is terminated by the Company after a change of
control of the Company, he will be entitled to receive within 14 days of his
termination date, a lump sum termination payment equal to his total taxable
compensation during the three most recent calendar years, plus an amount equal
to his annual salary for the year in which termination occurs, subject to the
parachute limitations set forth in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended. In addition, the employment agreement provides for a
separate registration rights agreement, which grants to Mr. Griffin certain
rights related to shares of the Company's Class B Common Stock beneficially
owned by him. Under the employment agreement, the Company has also granted Mr.
Griffin the right to use certain intellectual property owned by the Company
bearing the name Griffin or any derivation thereof and the griffin design owned
by the Company. Mr. Griffin resigned all positions with the Company on September
18, 1997. Accordingly, he currently receives no compensation from the Company.
The Company and Mr. Griffin have reserved their rights as to whether any
severance is due to Mr. Griffin due to his recent resignation.
See "Legal Proceedings - Indictment of the Company and Certain Former Officers
and Directors."
35
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 1997 information as
to the Company's Common Stock beneficially owned by: (i) each director of the
Company, (ii) each executive officer named in the Summary Compensation Table,
(iii) all directors and executive officers of the Company as a group, and (iv)
any person who is known by the Company to be the beneficial owner of more than
5% of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership (1)
Class A Common Class B Common
Name of Beneficial Owner Number Percent Number Percent
<S> <C> <C> <C> <C>
William D. Griffin(2) -- -- 22,176,052 91.1%
L. Scott Merritt(3) -- -- 2,158,391 8.9%
Directors and Named Executive Officers:
Frederick Dawson (4) 1,085,711 8.5% -- --
Steven J. Berling -- -- -- --
Stephen C. Rece -- -- -- --
Reed Killets 15 * -- --
Gregory P. Kuzma (5) 50 * -- --
Walter E. Riehemann -- -- -- --
Seddon Goode, Jr. -- -- -- --
George E. Greene II 200 * -- --
Walter L. Revell -- -- -- --
All directors and current executive officers 1,085,976 8.5% -- --
as a group (9 persons)(6)
*Less than 1%
</TABLE>
(1) Beneficial ownership of shares, as determined in accordance with
applicable Securities and Exchange Commission Rules, includes shares as to
which a person has or shares voting power and/or investment power. The
Company has been informed that all shares shown are held of record with
sole voting and investment power, except as otherwise indicated.
(2) Mr. Griffin's business address is 1830 Osprey Avenue, Suite 100A,
Sarasota, Florida 34239. Mr. Griffin's shares of Class B Common Stock are
owned of record by RISCORP Group Holding Company L.P. (17,268,841 shares)
and William D. Griffin Family Limited Partnership (4,907,211 shares). The
general partners of such limited partnerships are Gryphus Company I ("GI")
and Gryphus Company II ("GII"), respectively. Mr. Griffin is the
president, a director and the controlling shareholder of GI and GII. The
business address of GI and GII is Bank of America Plaza, Suite 1100, 300
N. Fourth Street, Las Vegas, Nevada 89101. All of the shares of Class B
Common Stock noted may be converted into shares of Class A Common Stock,
on a one for one basis. If all of the Class B Common Stock shares noted
were so converted into Class A Common Stock, Mr. Griffin would
beneficially own 65.4% of the shares of Class A Common Stock. The
information herein regarding the stock ownership of Mr. Griffin, GI and
GII was obtained from a Schedule 13G filed by such persons with the
Commission on February 20, 1997. The Company makes no representation as to
the accuracy or completeness of the information reported regarding Mr.
Griffin, GI and GII.
(3) Mr. Merritt's business address is 4711 Meadowview Circle, Sarasota,
Florida 34233. Mr. Merritt resigned as a director and officer of the
Company on May 20, 1997. Mr. Merritt has sole voting and investment power
with respect to 2,158,391 shares of Class B Common Stock as trustee of
certain irrevocable trusts created by Mr. Griffin for the benefit of his
children. Mr. Griffin disclaims beneficial ownership of those shares. All
of the shares of Class B Common Stock noted may be converted into shares
of Class A Common Stock, on a one for one basis. If all of the Class B
Common Stock shares noted were so converted into Class A Common Stock, Mr.
Merritt would beneficially own 15.5% of the shares of Class A Common
Stock. The information herein regarding the stock ownership of Mr. Merritt
was obtained from a Schedule 13G filed by Mr. Merritt with the Commission
on February 20, 1997. The Company makes no representation as to the
accuracy or completeness of the information reported regarding Mr.
Merritt.
36
<PAGE>
(4) Mr. Dawson's shares include 1,085,711 shares subject to options that are
currently exercisable. (5) Mr. Kuzma shares voting and investment power of these
shares with his wife.
(6) Includes 1,085,711 shares subject to options held by all directors and
executive officers that are exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
Parking. In 1994, Mr. Griffin began leasing parking facilities at
approximately $24,000 per month to the Company at its Sarasota office. During
1997, the Company paid $98,400 under this lease.
Reinsurance Commissions. Mango Excess Insurance Agency, Inc., a Florida
corporation ("Mango"), a company owned and controlled by Mr. Griffin, acts as a
reinsurance broker to the Company in obtaining reinsurance for the Company's
insurance subsidiaries, and some of its self-insured clients. The commission
payable to Mango and the other terms and conditions of this relationship did not
exceed industry standards for such arrangements. The arrangement with Mango was
terminated in 1997. In 1997, the Company paid Mango commissions of approximately
$8,000.
Services Provided to RHP. In 1996, the Company entered into a Bilateral
Administrative Services Cost Sharing Agreement with RHP, a company owned and
controlled by Mr. Griffin. This agreement is intended to ensure that costs
shared by the two companies will be fairly allocated between them. The Company
and its affiliates provide facilities, financial, legal, human resource,
communications, information systems, marketing, claims, technical and other
administrative and management support to RHP. RHP provides certain client
services, medical provider management, credentialing and utilization management
to the Company for its health indemnity products. In November 1997, RHP was sold
to Oxford Health Plans and the Bilateral Administrative Services Cost Sharing
Agreement was terminated. RHP is no longer owned by an affiliate of the Company.
During 1997, the Company received a net amount of approximately $204,000 from
RHP under this agreement.
Services Provided to Gryphus Development Group ("GDG") Effective as of
January 1, 1996, the Company entered into an Administrative Services Cost
Sharing Agreement with GDG, a corporation owned and controlled by Mr. Griffin.
This agreement is intended to ensure that costs incurred by the Company on
behalf of GDG are reimbursed to the Company. The Company and its affiliates
provide facilities, financial, legal, human resource, communications,
information systems, marketing, claims, technical and other administrative and
management support to GDG. GDG will reimburse the Company for the actual costs
of providing the personnel services and other support. This agreement was
terminated in 1997. During 1997, the Company received $86,363 from GDG under
this agreement.
37
<PAGE>
License Arrangement Prior to the sale of RHP, RHP paid a fee of 0.5% of
all RHP revenues to the Company for the right to use the RISCORP name and
related trade designs and logos. During 1997, the Company received $33,946 as a
license fee from RHP. This arrangement was discontinued in 1997 due to the sale
by Mr. Griffin of RHP.
Management Agreement. The Company entered into a Management Agreement
(the "Management Agreement") as of February 18, 1998, with The Phoenix
Management Company, Ltd. ("Phoenix") for the provision of various management
services to the Company immediately following the consummation of the
transactions contemplated by the Purchase Agreement with Zenith. Frederick M.
Dawson, the Company's current president and chief executive officer, owns a
majority interest in Phoenix, a Florida limited partnership, and will control
its operations as president of the general partner. Walter E. Riehemann, the
Company's current General Counsel, owns a minority interest in Phoenix and will
serve as vice president and secretary of the general partner. While neither Mr.
Dawson nor Mr. Riehemann will be employees of the Company following the
consummation of the transactions contemplated by the Purchase Agreement with
Zenith, the Management Agreement specifically provides that Mr. Dawson will hold
the titles of president and chief executive officer and Mr. Riehemann will hold
the titles of chief investment officer, treasurer and secretary. Pursuant to the
terms of the Management Agreement, Phoenix will be paid $100,000 per month, plus
expenses, and granted a restricted stock award for 1,725,000 shares of Class A
Common Stock (subject to certain vesting provisions) in consideration for its
management services. The Management Agreement will have an initial term of three
years commencing immediately following the consummation of the transactions
contemplated by the Purchase Agreement with Zenith, and the Company will have
the right to extend the term for an additional year. The Company will pay
Phoenix a retainer of $600,000 immediately following the consummation of the
transactions contemplated by the Purchase Agreement with Zenith which will be
applied by Phoenix against the fees payable by the Company during the final six
months of the initial term. The restricted stock grant will vest monthly over
the initial term of the Management Agreement, and Phoenix will be entitled to
all rights applicable to holders of shares of Class A Common Stock with respect
to all such shares from the date of grant including, without limitation, the
right to receive any dividends or distributions payable on the restricted stock.
Pursuant to the terms of the Management Agreement, the Company will pay Phoenix
an amount which, on an after-tax basis, is sufficient to reimburse the partners
of the Management Company for all taxes (exclusive of state taxes) incurred in
connection with the Section 83(b) election expected to be filed with respect to
such grant. It is currently anticipated that the amount of this payment will be
approximately $1,300,000, payable in installments as the taxes are due. In the
event the Management Agreement is terminated by the Company prior to the
expiration of its initial term due to (i) the complete liquidation, dissolution
and winding up of all of the business and affairs of the Company including,
without limitation, the final distribution to all shareholders of the Company,
or (ii) the final distribution to the holders of the Series A Common Stock of
the Company, the vesting under the restricted stock grant will accelerate
immediately prior to such event and the Company will make a lump sum payment to
Phoenix equal to the unpaid balance of the amount it would have received in
monthly management fees during the initial term of the Management Agreement.
38
<PAGE>
Pursuant to the terms of the Management Agreement, Phoenix will, among
other things, provide the following services to the Company after the
consummation of the transactions contemplated by the Purchase Agreement with
Zenith: (i) manage the day-to-day operations of the Company and its
subsidiaries; (ii) manage the preparation, negotiation and defense of the Final
Business Balance Sheet (as defined in the Purchase Agreement); (iii) provide
assistance in the overall planning and coordination of the business of the
Company; (iv) assist in the resolution of all claims and contingencies pending
or subsequently asserted against the Company; (v) coordinate the finance,
accounting and tax requirements of the Company with the specific duties to be
delegated, at the expense of the Company, to competent professionals approved by
the Board of Directors of the Company; (vi) prepare an investment policy plan
for the Company and coordinate the investment transactions through one or more
investment advisors; (vii) perform such other duties as may from time to time be
requested by the Board of Directors of the Company not inconsistent with the
terms of the Management Agreement. Based on Mr. Dawson's contributions to the
Company to date, as well as his experience and knowledge of the Company and its
unique circumstances, the Board of Directors has concluded that the terms of the
Management Agreement are reasonable and in the best interests of the Company and
the Shareholders.
On May 19, 1997, subject to shareholder approval, the Company granted
to Mr. Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of
the Company's Class A Common Stock. See "Executive Compensation - Stock Option
Grants." Pursuant to the terms of the Management Agreement, immediately
following the consummation of the transactions contemplated by the Purchase
Agreement with Zenith and the receipt of the applicable cash payments under his
employment agreement, the Company and Mr. Dawson will enter into a Termination
Agreement evidencing the termination of each party's rights, duties and
obligations under Mr. Dawson's employment agreement, including the termination
of the stock option grants and Mr. Dawson's right to receive any of the shares
thereunder. (Upon the consummation of the transactions contemplated by the
Purchase Agreement with Zenith and after Mr. Riehemann receives termination
benefits under his employment agreement, the Company and Mr. Riehemann also will
enter into a Termination Agreement evidencing the termination of Mr.
Riehemann's employment agreement.)
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8 - K
<TABLE>
<CAPTION>
(a) List the following documents filed as part of this report:
1. Financial Statements.
<S> <C> <C>
Independent Auditors' Report...............................................................F-1
Consolidated Balance Sheets at December 31, 1997 and 1996..................................F-3
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995..............................................................................F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995...........................................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995..............................................................................F-7
Notes to Consolidated Financial Statements.................................................F-9
2. Financial Statement Schedules
I - Summary of investments - other than investments in related parties...................F-45
II -Condensed financial information of registrant.........................................F-46
IV - Reinsurance...........................................................................F-49
VI - Supplemental information concerning property-casualty insurance operations............F-50
</TABLE>
All other schedules are omitted because of the absence of conditions
under which they are required or because the necessary information is provided
in the consolidated financial statements or notes thereto.
3. Exhibits
Set forth in paragraph (c) below.
(b) Reports on Form 8-K
The Company filed a Form 8-K on October 1, 1997 related to indictments
of the Company and certain former officers and directors as described
in Part 1, Item 3 of this Form 10-K.
(c) Exhibits
The following are filed as exhibits to this report:
40
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
3.1 -Amended and Restated Articles of
Incorporation.* (Incorporated herein by
reference to Exhibit 3.1 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
3.2 -Bylaws.* (Incorporated herein by reference
to Exhibit 3.2 to RISCORP's Amendment
No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
4.1 -Form of Common Stock Certificate.*
(Incorporated herein by reference to
Exhibit 4.1 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.1 -$28,000,000 Credit Agreement, dated as
of December 16, 1994, by and between
First Union National Bank of North
Carolina and the Company (f/k/a RISCORP
Group Holdings, Inc.), as amended by a
First Amendment to Credit Agreement,
dated as of December 30, 1994, and as
amended by a Second Amendment to Credit
Agreement, dated as of June 1, 1995.*
(Incorporated herein by reference to
Exhibit 10.1 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.2 -Amended and Restated Note Purchase
Agreement, dated as of January 1, 1995,
by and between American Re-Insurance
Company and the Company.* (Incorporated
herein by reference to Exhibit 10.2 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
10.3 -$2,400,000 Term Note, date
November 9, 1994, delivered by RISCORP
Acquisition, Inc. to Governmental Risk
Insurance Trust.* (Incorporated herein by
reference to Exhibit 10.3 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.4 -$2,000,000 Surplus Note, dated July 1,
1994, executed and delivered by RISCORP
Health Plans, Inc. to RISCORP Property
and Casualty Insurance Company, Inc.
(f/k/a Florida Interstate Insurance
Company).* (Incorporated herein by
reference to Exhibit 10.4 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.5 -Amended and Restated Loan Agreement,
dated as of November 1, 1995, by and
between JoFoKe Investments, Inc. and
RISCORP of North Carolina, Inc.*
(Incorporated herein by reference to
Exhibit 10.5 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.6 -$100,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and among
Custodial Engineers, Inc., as borrower,
William D. Griffin, as guarantor, and
RISCORP Management Services, Inc., as
lender, as amended by a Modification
Agreement, dated as of June 30, 1994.*
(Incorporated herein by reference to
Exhibit 10.6 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
41
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.7 -$1,000,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and among
CMI Aviation Services, Inc. (f/k/a Cocky
McGriffin, Inc.) as borrower, William D.
Griffin, as guarantor, and RISCORP
Management Services, Inc., as lender, as
amended by a Modification Agreement, dated
as of June 30, 1994.* (Incorporated herein
by reference to Exhibit 10.7 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.8 -$100,000 Revolving Credit Agreement,
dated as of July 1, 1993, by and between
Five Points Properties, Inc., as borrower,
William D. Griffin, as guarantor, and
RISCORP Management Services, Inc., as
lender, as amended by a Modification
Agreement, dated as of June 30, 1994.*
(Incorporated herein by reference to
Exhibit 10.8 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.9 -$100,000 Revolving Credit Agreement,
dated as of November 30, 1994, by and
between Millennium Health Services,
Limited, as borrower, and RISCORP
Management Services, Inc., as lender.*
(Incorporated herein by reference to
Exhibit 10.9 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.10 -$2,000,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and among
the Company (f/k/a Petty Cash Properties,
Inc.), as borrower, William D. Griffin, as
guarantor, and RISCORP Management
Services, Inc., as lender. as amended by a
Modification Agreement, dated as of June
30, 1994.* (Incorporated herein by
reference to Exhibit 10.10 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.11 -$2,000,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and
between William D. Griffin, as borrower,
and RISCORP Management Services, Inc., as
lender, as amended by a Modification
Agreement, dated as of June 30, 1994.*
(Incorporated herein by reference to
Exhibit 10.11 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.12 -Loan Agreement, dated as of January 25,
1994, by and among NationsBank of Florida,
N.A., William D. Griffin, RISCORP
Management Services, Inc., RISCORP of
Florida, Inc., Specialized Risk
Administrators, Inc., Petty Cash
Properties, Inc., Five Points Properties,
Inc., and Sarasota International Risk and
Insurance Services, Inc., as amended by a
Loan Agreement, dated January 3, 1995, by
and among NationsBank of Florida, N.A.,
William D. Griffin and Five Points
Properties, Inc.* (Incorporated herein by
reference to Exhibit 10.12 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.13 -$2,500,000 Loan Assumption Agreement, dated
April 29, 1994, by and among Five Point
Properties, Inc., as borrower, William D.
Griffin, as guarantor, and RISCORP
Management Services, Inc., as lender.
* (Incorporated herein by reference to
Exhibit 10.13 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.14 -$2,400,000 Promissory Note, dated
November 9, 1994, executed and delivered
by RISCORP Acquisitions, Inc. and Self
Insurors Service Bureau, Inc. to W. Gerald
Fiser, as modified by the Settlement
Agreement, dated May 1, 1995, by and among
W. Gerald Fiser, Self Insurors Service
Bureau, Inc., RISCORP Acquisitions, Inc.,
and RISCORP Group Holdings, L.P.; Stock
Purchase Agreement, dated as of November
4, 1994, by and between RISCORP
Acquisitions, Inc., Self Insurors Service
Bureau, Inc. and W. Gerald Fiser, Stock
Pledge Agreement, dated as of November 9,
1994, by and between RISCORP Acquisitions,
Inc., and W. Gerald Fiser, Security
Agreement, dated as of November 9, 1994,
by and between Self Insurors, Service
Bureau, Inc. and W. Gerald Fiser,
Guarantee Agreement, dated as of November
9, 1994, by and between RISCORP Group
Holdings, L.P., and W. Gerald Fiser,
Security Coordinating Agreement, dated
November 9, 1994 by and among, W. Gerald
Fiser, RISCORP Acquisitions, Inc., RISCORP
Group Holdings, L.P., and Self Insurors
Service Bureau, Inc.* (Incorporated herein
by reference to Exhibit 10.14 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
42
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.15 -Form of Agency Agreement by and between
the independent insurance agents and the
Company's workers' compensation insurance
subsidiaries.* (Incorporated herein by
reference to Exhibit 10.15 to RISCORP's
Amendment No. 4 to Form S-1, as of February
28, 1996, Commissions File Number 33-99760)
10.16 -Florida Workers' Compensation Managed
Care Agreement, dated July 30, 1995, by
and among RISCORP Insurance Company, Inc.,
RISCORP Management Services, Inc.,
Sarasota International Risk and Insurance
Services, Inc., and Humana Medical Plan,
Inc.* (Incorporated herein by reference to
Exhibit 10.16 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.17 -Florida Workers' Compensation Managed
Care Agreement, dated July 30, 1995, by
and among RISCORP Property and Casualty
Insurance Company, Inc., RISCORP
Management Services, Inc., Sarasota
International Risk and Insurance Services,
Inc., and Humana Medical Plan, Inc.*
(Incorporated herein by reference to
Exhibit 10.17 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.18 -Florida Workers' Compensation Managed
Care Agreement, dated January 1, 1995, by
and among RISCORP Insurance Company, Inc.,
RISCORP Property and Casualty Insurance
Company, Inc. and RISCORP Health Plans,
Inc.* (Incorporated herein by reference to
Exhibit 10.18 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.19 -Aircraft Lease, dated February 12, 1993,
by and between RISCORP Management
Services, Inc. and CMI Aviation Services.*
(Incorporated herein by reference to
Exhibit 10.19 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.20 -Aircraft Lease, dated December 24, 1994,
by and between RISCORP Management
Services, Inc. and CMI Aviation Services.*
(Incorporated herein by reference to
Exhibit 10.20 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.21 -Split Dollar Agreement, dated as of June
1, 1995, by and among RISCORP Management
Services, Inc., William D. Griffin, and L.
Scott Merritt, as trustee, for payment of
premiums for split-dollar life insurance.*
(Incorporated herein by reference to
Exhibit 10.21 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)**
10.22 -Split Dollar Agreement, dated as of July
1, 1994, by and among RISCORP Management
Services, Inc., William D. Griffin, and L.
Scott Merritt, as trustee for payment of
premiums for split-dollar life insurance.*
(Incorporated herein by reference to
Exhibit 10.22 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)**
10.23 -Pooling Agreement, dated as of January 1,
1995, by and between RISCORP Insurance
Company, Inc. and RISCORP Property and
Casualty Insurance Company, Inc.*
(Incorporated herein by reference to
Exhibit 10.23 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.24 -Workers' Compensation Quota Share
Re-Insurance Agreement, dated as of
December 27, 1994, by and among American
Re-Insurance Company, RISCORP Insurance
Company, Inc., and RISCORP Property and
Casualty Insurance Company, Inc.+
(Incorporated herein by reference to
Exhibit 10.24 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.25 -Workers' Compensation Excess of Loss
Reinsurance Agreement, dated January 1,
1995, by and among RISCORP Insurance
Company, Inc., RISCORP Property and
Casualty Insurance Company, Inc., Signet
Star Reinsurance Company, Republic Western
Insurance Company, and TIG Reinsurance
Company, as reinsurers.+* (Incorporated
herein by reference to Exhibit 10.25 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
43
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.26 -Workers' Compensation Excess of Loss
Reinsurance Agreement, dated September 29,
1995, by and among RISCORP Insurance
Company, Inc., RISCORP Property and
Casualty Insurance Company, Inc., and
Continental Casualty Company, as
reinsurers* (Incorporated herein by
reference to Exhibit 10.26 to RISCORP's
Amendment No. 4 to Form S-1, as of February
28, 1996, Commissions File Number 33-99760)
10.27 -Aggregate Net Excess of Loss Reinsurance
Agreement, dated December 6, 1993, by and
between Governmental Risk Insurance Trust
and RISCORP Property and Casualty Insurance
Company, Inc., as reinsurers* (Incorporated
herein by reference to Exhibit 10.27 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
10.28 -Aggregate Excess of Loss Reinsurance
Agreement, effective as of October 1, 1993,
by and between RISCORP Property and
Casualty Insurance Company, Inc. and Centre
Reinsurance Company of New York, as
reinsurers* (Incorporated herein by
reference to Exhibit 10.28 to RISCORP's
Amendment No. 4 to Form S-1, as of February
28, 1996, Commissions File Number 33-99760)
10.29 -RISCORP, Inc. Stock Option Plan.
* (Incorporated herein by reference to
Exhibit 10.29 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.30 -Form of RISCORP, Inc. Stock Option
Agreement.* (Incorporated herein by
reference to Exhibit 10.30 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.31 -Employment and Severance Agreement, dated
as of January 1, 1995, by and between
RISCORP Management Services, Inc. and
William D. Griffin.* (Incorporated herein
by reference to Exhibit 10.31 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.32 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and James A- Malone.
* (Incorporated herein by reference to
Exhibit 10.32 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.33 -Employment Agreement, dated as of October
10, 1995, by and between RISCORP Management
Services, Inc. and Edward Hammel.*
(Incorporated herein by reference to
Exhibit 10.33 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)**
10.34 -Employment Agreement, dated as of October
10, 1995, by and between RISCORP Management
Services, Inc. and Thomas Hall.*
(Incorporated herein by reference to
Exhibit 10.34 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)**
10.35 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Fred Hunt.
* (Incorporated herein by reference to
Exhibit 10.35 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.36 -Agreement, dated September 16, 1993, by
and between RISCORP Insurance Company, Inc.
and the Florida Chamber of Commerce, Inc.*
(Incorporated herein by reference to
Exhibit 10.36 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.37 -$5,000,000 Letter of Credit issued by
NationsBank, N.A. in favor of Florida
Chamber of Commerce, Inc., currently
outstanding in the amount of $3,000,000.*
(Incorporated herein by reference to
Exhibit 10.37 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
44
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.38 -Service Company Agreement, dated July 1,
1995, by and between Governmental Risk
Insurance Trust and RISCORP Insurance
Services. Inc.* (Incorporated herein by
reference to Exhibit 10.38 to RISCORP's
Amendment No. 4 to Form S-1, as of February
28, 1996, Commissions File Number 33-99760)
10.39 -Service Agent Contract of National Alliance
for Risk Management Group Self Insurers'
Fund, dated as of September 15, 1993, by
and between the Trustees of National
Alliance for Risk Management Group Self
Insurers' Fund and RISCORP of North
Carolina, Inc.*(Incorporated herein by
reference to Exhibit 10.39 to RISCORP's
Amendment No. 4 to Form S-1,
as of February 28, 1996, Commissions File
Number 33-99760)
10.40 -Maintenance Service Agreement, dated May
1, 1995, by and between Custodial
Engineers, Inc. and RISCORP Property and
Casualty Insurance Company, Inc.*
(Incorporated herein by reference to
Exhibit 10.40 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.41 -Custodial Service Agreement, dated May 1, 1995,
by and between Custodial Engineers, Inc.
and RISCORP Property and Casualty Insurance
Company, Inc. *(Incorporated herein by
reference to Exhibit 10.41 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions
File Number 33-99760)
10.42 -Parking Lease Agreement, dated February
15, 1994, by and between RISCORP Management
Services, Inc. and William D. Griffin.*
(Incorporated herein by reference to
Exhibit 10.42 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.43 -Lease Nos. GFS 1 186, GFS 1 187, GFS 1 188,
Form of GFS 1 189, GFS 1 190, and
GFS 1 191, each dated November 1, 1995, by
and between Gryphus Financial Services,
Inc. and the Company.*(Incorporated herein
by reference to Exhibit 10.43 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.44 -Management Agreement of Millennium Health
Services, Limited, dated as of November 1,
1994, by and between RISCORP Management
Services, Inc. and Millennium Health
Services, Limited.* (Incorporated herein by
reference to Exhibit 10.44 to RISCORP's
Amendment No. 4 to Form S-1, as of February
28, 1996, Commissions File Number 33-99760)
10.45 -Management Subcontract for Millennium
Health Services, Limited, dated as of
November 1, 1994, by and between Millennium
Health Services, Limited and RISCORP
Management Services, Inc.* (Incorporated
herein by reference to Exhibit 10.45 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
10.46 -Management Agreement of Millennium Health
Services of Sarasota, Limited, dated as of
November 1, 1994, by and between Millennium
Health Services, Limited and Millennium
Health Services of Sarasota, Limited.*
(Incorporated herein by reference to
Exhibit 10.46 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.47 -Financial Advisor/Manager Contract, dated
September 13, 1993, between Florida
Interstate Insurance Co. and Merritt &
Company.* (Incorporated herein by reference
to Exhibit 10.47 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.48 -Form of Stock Redemption Agreement
relating to the acquisition of the stock of
CompSource, Inc. and Insura, Inc.*
(Incorporated herein by reference to
Exhibit 10.48 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.49 -Form of Aircraft and Related Services
Agreement between RISCORP Management
Services, Inc. and GRYPHUS Development
Group dated January 1, 1996.* (Incorporated
herein by reference to Exhibit 10.49 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
45
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.50 -Form of Restated and Amended
Administrative Services Agreement between
RISCORP Management Services, Inc., and
RISCORP Health Plans, Inc. dated January
1, 1996.* (Incorporated herein by
reference to Exhibit 10.50 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.51 -Form of Memorandum of Understanding
(concerning RHP's health insurance
administrative services) between RISCORP
Health Plans, Inc. and RISCORP Management
Services, Inc.' dated
January 1, 1996.* (Incorporated herein by
reference to Exhibit 10.51 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.52 -Form of RISCORP Controlled Affiliate License
Agreement between RISCORP, Inc. and
RISCORP Management Services, Inc.
(as licenser) and RISCORP Health Plans,
Inc. (as licensee).*(Incorporated herein
by reference to Exhibit 10.52 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.53 -Form of Amendment to Florida's Worker's
Compensation Managed Care Agreement among
RISCORP Property & Casualty Company,
RISCORP Insurance Company and RISCORP
Health Plans, Inc. dated January 1, 1996.*
(Incorporated herein by reference to
Exhibit 10.53 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.54 -Form of Acknowledgment of Provider Rights
Ownership and Cost Allocation Agreement
among RISCORP Management Services, Inc.,
RISCORP Managed Care Solutions, Inc. and
RISCORP Health Plans, Inc. dated January
1, 1996.1* (Incorporated herein by
reference to Exhibit 10.54 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.55 -Form of Provider Network Access Agreement
among RISCORP Management Services, Inc.,
RISCORP Health Plans, Inc. and
Comprehensive Care Systems, Inc.*
(Incorporated herein by reference to
Exhibit 10.55 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.56 -Form of Memorandum of Understanding between
RISCORP Health Plans, Inc. and RISCORP
Insurance Company.* (Incorporated herein
by reference to Exhibit 10.56 to RISCORP's
Amendment No.4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.57 -Form of Registration Rights Agreement
dated as of February 1, 1996, by and among
RISCORP, Inc., RISCORP Management
Services, Inc. and William D. Griffin.*
(Incorporated herein by reference to
Exhibit 10.57 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.58 -Third Amendment to Credit Agreement,
dated as of November 30, 1995, by and
between RISCORP Group Holdings, Inc. and
First Union National Bank of North
Carolina.* (Incorporated herein by
reference to Exhibit 10.58 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.59 -Consent Agreement and Fourth Amendment to
Credit Agreement, dated as of January 2,
1996, by and between RISCORP Group
Holdings, Inc. and First Union of North
Carolina.* (Incorporated herein by
reference to Exhibit 10.59 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.60 -Form of Bilateral Administrative Services
Costs Sharing Agreement by and between
RISCORP Management Services, Inc. and
RISCORP Health Plans, Inc.* (Incorporated
herein by reference to Exhibit 10.60 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
46
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.61 -Agreement of Purchase and Sale of Stock,
dated as of December 15, 1995, by and
among CompSource Acquisition, Inc., James
K. Secunda, Bruce A. Flachs, the James K.
and Debra W. Secunda Charitable Remainder
Unitrust Number One, the James K. and
Debra W. Secunda Charitable Remainder
Unitrust Number Two and the Bruce Flachs
Charitable Remainder Unitrust (more
commonly referred to as the CompSource
stock purchase agreement).* (Incorporated
herein by reference to Exhibit 10.61 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
10.62 -Agreement of Purchase and Sale of Stock,
dated as of January 10, 1996, by and among
Atlas Insurance Company, RISCORP of
Florida, Inc., Atlas Financial Corporation
and Haas Wilkerson-Wohlberg, Inc.*
(Incorporated herein by reference to
Exhibit 10.62 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions
File Number 33-99760)
10.63 -Form of First Amendment to Bilateral
Administrative Services Costs Sharing
Agreement by and between RISCORP
Management Services, Inc. and RISCORP
Health Plans, Inc.* (Incorporated herein
by reference to Exhibit 10.63 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.64 -Amendment to Agreement of Purchase and
Sale of Stock, dated as of December 15,
1995, by and among CompSource Acquisition,
Inc., James K. Secunda, Bruce A. Flachs,
the James K. and Debra W. Secunda
Charitable Remainder Unitrust Number One,
the James K. and Debra W. Secunda
Charitable Remainder Unitrust Number Two
and the Bruce Flachs Charitable Remainder
Unitrust* (more commonly referred to as
the CompSource stock purchase agreement).
(Incorporated herein by reference to
Exhibit 10.64 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.65 -Employment Agreement with James A. Malone
dated March 25, 1997.*(Incorporated herein
by reference to Exhibit 10.65 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
10.66 -Employment Agreement with Thomas S. Hall
dated January 6, 1997.*(Incorporated
herein by reference to Exhibit 10.66 to
RISCORP's Form 10-K/A filed with the
Commission on May 19, 1997)
10.67 -Employment Agreement with Steven J.
Berling dated January 6, 1997.*
(Incorporated herein by reference to
Exhibit 10.67 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.68 -Employment Agreement with Fred A. Hunt, dated
January 6, 1997.*(Incorporated herein by
reference to Exhibit 10.68 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
10.69 -Credit Agreement among the Company and
NationsBank N.A. (South) dated October 15,
1996.*(Incorporated herein by reference to
Exhibit 10.69 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.70 -Reinsurance Agreement between RISCORP
National Insurance Company and G.J.
Sullivan Co.Reinsurance dated February 4,
1997.*(Incorporated herein by
reference to Exhibit 10.65 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
10.71 -Underwriting Management Agreement dated
September 1, 1996 between RISCORP
Management Services and Virginia Surety
Company, Inc.*(Incorporated herein by
reference to Exhibit 10.71 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
47
<PAGE>
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.72 -Loss Portfolio Transfer Agreement between
RISCORP National Insurance Company and
Occupational Safety Association of Alabama
Workmen's Compensation Fund.*(Incorporated
herein by reference to Exhibit 10.72 to
RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.73 -Agreement and Plan of Merger by and among
RISCORP, Inc., RISCORP-IAA, Inc.,
Independent
Association Administrators Incorporated,
and The Stockholders of Independent
Association Administrators Incorporated*
(Incorporated herein by reference to
Exhibit 10.73 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.74 -Policy and Loss Portfolio Transfer
Assumption Reinsurance Agreement between
RISCORP National Insurance Company and
National Alliance for Risk Management
Group Self-Insurance Fund * (Incorporated
herein by reference to Exhibit 10.74 to
RISCORP's Form 10-K/A filed with the
Commission on May 19, 1997)
10.75 -Stock Purchase Agreement by and Between
RISCORP, Inc. and Thomas Albrecht, Peter
Norman and Hugh D. Langdale, Jr. *
(Incorporated herein by reference to
Exhibit 10.75 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.76 -Workers Compensation Quota Share
Retrocessional Treaty Agreement with
Chartwell Reinsurance Company.*
(Incorporated herein by reference to
Exhibit 10.76 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.77 -Loss Portfolio Transfer Assumption
Reinsurance Agreement between NARM
Mercantile Group Self Insurance
Association of Virginia and RISCORP
National Insurance Company.*
(Incorporated herein by reference to
Exhibit 10.77 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.78 -Loss Portfolio Transfer Assumption
Reinsurance Agreement between NARM
Services' Group Self Insurance Association
of Virginia and RISCORP National Insurance
Company.*
(Incorporated herein by reference to
Exhibit 10.78 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.79 -Loss Portfolio Transfer Assumption
Reinsurance Agreement between NARM
Manufacturers Group Self Insurance
Association of Virginia and RISCORP
National Insurance Company.*
(Incorporated herein by reference to
Exhibit 10.79 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.80 -Employment Agreement with Frederick M.
Dawson dated May 19, 1997* (Incorporated
herein by reference to Exhibit No. 10.2
to RISCORP's Form 8-K, dated May 22,
1997). **
10.81 Asset Purchase Agreement with Zenith
Insurance Company dated June 17, 1997*
(Incorporated herein by reference to
Exhibit No. 2.1 to RISCORP's Form 8-K,
dated July 2, 1997).
10.82 -Press Release dated September 18, 1997.*
(Incorporated herein by reference to
Exhibit No. 99 to RISCORP's Form 8-K,
dated October 1, 1997)
10.83 -Management Agreement of RISCORP, Inc.,
dated February 18, 1998, by and between
RISCORP, Inc. and subsidiaries and The
Phoenix Management Company, Ltd.
11 -Statement Re Computation of Per Share
Earnings.
21 -List of Subsidiaries of the Registrant.
27 -Financial Data Schedule (for SEC use only).
28.1 -Information from Reports Furnished to State
Insurance Regulatory Authorities.*
(Incorporated herein by reference to
Exhibit 28.1 1.1 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commission File Number 33-99760)
* Previously filed.
**Management contract on executive compensation plan or arrangement.
+ Confidential treatment granted pursuant to Rule 406 of the Securities Act
of 1933.
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
RISCORP, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income $7,286,000 $2,398,000 $13,683,000
========== ========== ============
Average outstanding shares used for
calculating basic earnings per share (1) 36,891,864 34,647,986 28,100,234
Additional common shares issuable under
employee stock options using the treasury stock
method (2) 223,808 1,757,602 1,992,266
------------ ----------- -----------
Average outstanding shares used for
calculating diluted earnings per share 37,115,672 36,405,588 30,092,500
========== ========== ==========
Net income per share $ 0.20 $ 0.07 $ 0.49
=========== =========== =========
Net income per share - assuming dilution $ 0.20 $ 0.07 $ 0.45
=========== =========== ===========
</TABLE>
(1) The 1997 and 1996 amounts include 790,336 and 225,503 shares, respectively,
of Class A Common Stock pursuant to the contingency clause in the acquisition
agreement with IAA.
(2) Based on the average quarterly market price of each period.
49
<PAGE>
EXHIBIT 21
RISCORP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1997
Subsidiaries of the Registrant* State of Incorporation
RISCORP, Inc. (Registrant) Florida
RISCORP Acquisition, Inc. Florida
RISCORP West, Inc. Oklahoma
RISCORP of Florida, Inc. Florida
RISCORP Insurance Company Florida
RISCORP Property & Casualty Insurance Company Florida
RISCORP National Insurance Company Missouri
1390 Main Street Services, Inc. Florida
RISCORP Services, Inc. Florida
RISCORP Management Services, Inc. Florida
RISCORP Insurance Services, Inc. Florida
RISCORP Managed Care Services, Inc. Florida
RISCORP of Illinois, Inc. Florida
CompSource, Inc. North Carolina
Independent Association of Administrators Incorporated Alabama
RISCORP Real Estate Holdings, Inc. Florida
RISCORP Staffing Solutions Holding, Inc. Florida
RISCORP Staffing Solutions, I, Inc. Florida
RISCORP Staffing Solutions II, Inc. Florida
*All subsidiaries below are owned,directly or indirectly, 100% by the Registrant
50
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, the
Registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sarasota, State of
Florida, on the 27th day of March, 1998.
RISCORP, INC.
By: /s/ Frederick M. Dawson
Frederick M. Dawson
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS FORM
10-K REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Frederick M. Dawson
Frederick M. Dawson President, Chief Executive March 27, 1998
Officer and Director
(principal executive officer)
/s/ Stephen C. Rece
Stephen C. Rece Senior Vice President, and March 27, 1998
Chief Financial Officer
(principal financial and
accounting officer)
/s/ Seddon Goode, Jr.
Seddon Goode, Jr. Director March 27, 1998
/s/ George E. Greene III
George E. Greene III Director March 27, 1998
/s/ Walter L. Revell Director March 27, 1998
Walter L. Revell
</TABLE>
51
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
RISCORP, Inc.:
We have audited the consolidated financial statements of RISCORP, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedules listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1(a) to the accompanying consolidated financial statements,
during November 1996, the Company undertook a strategic initiative to evaluate
alternatives to maximize shareholder value. The initiative has resulted in the
pending sale and transfer of certain assets and non-contingent liabilities of
the Company and its subsidiaries. As requested by the Florida Department of
Insurance, cut-through endorsements and an interim reinsurance agreement have
been executed in connection with the pending sale. The sale is subject to the
approval of the shareholders of the Company. The Company's ability to operate at
its present level of activity may be affected if the pending sale transaction is
not completed. Further, as discussed in Note 19, the Company and its
subsidiaries have been named as defendants in various lawsuits.
F-1
<PAGE>
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RISCORP, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements, taken as a whole,
present fairly, in all material respects the information set forth therein.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
March 24, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except share and per share data)
December 31, December 31, 1996
1997
ASSETS
Investments:
<S> <C> <C>
Fixed maturities available for sale, at fair value (amortized cost $226,240
$142,876 in 1997 and $226,240 in 1996) $ 145,571 $ 228,802
Fixed maturities available for sale, at fair value (amortized cost $53,437
in 1997)--restricted 53,820 -
Fixed maturities held to maturity, at amortized cost (fair value $24,347
in 1997 and $22,892 in 1996) 24,090 22,809
Equity securities, at fair value (cost $3,880 in 1996) - 4,045
Total investments 223,481 255,656
Cash and cash equivalents 16,858 26,307
Cash and cash equivalents--restricted 13,295 -
Premiums receivable, net 100,183 122,078
Accounts receivable--other 16,720 11,676
Recoverable from Florida Special Disability Trust Fund, net 45,211 49,505
Reinsurance recoverables 184,251 180,698
Prepaid reinsurance premiums 29,982 49,788
Prepaid managed care fees 8,420 31,958
Accrued reinsurance commissions 37,188 20,419
Deferred income taxes 22,120 22,551
Property and equipment, net 26,665 27,505
Goodwill 15,286 22,648
Other assets 9,990 7,653
Total assets $ 749,650 $ 828,442
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except share and per share data)
December 31, December 31, 1996
1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Losses and loss adjustment expenses $ 437,038 $ 458,239
Unearned premiums 56,324 102,562
Notes payable of parent company 15,000 15,000
Notes payable of subsidiaries 609 1,303
Accounts and notes payable--related party - 1,171
Deposit balances payable 5,512 4,787
Accrued expenses and other liabilities 65,885 74,706
Net assets in excess of cost of business acquired 5,749 11,266
586,117 669,034
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: 24,334,443 in 1997 and 1996
243 243
Preferred stock, $.01 par value, 10,000,000 shares authorized; 0 shares
issued and outstanding - -
Additional paid-in capital 135,974 137,813
Net unrealized gains on investments 2,002 1,769
Unearned compensation--stock options - (546)
Retained earnings 25,195 17,909
Treasury stock--at cost, 112,582 shares (1) -
Total shareholders' equity 163,533 157,308
Total liabilities and shareholders' equity $ 749,650 $ 828,442
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
(in thousands, except share and per share data)
Year ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- -------------- --------------
Revenues:
<S> <C> <C> <C>
Premiums earned $ 179,729 $ 173,557 $ 135,887
Fee and other income 20,369 31,733 22,397
Net realized gains 1,546 105 1,016
Net investment income 16,447 12,194 6,708
Total revenues 218,091 217,589 166,008
Expenses:
Losses and loss adjustment expenses 104,052 114,093 82,532
Unallocated loss adjustment expenses 19,311 12,916 10,133
Commissions, general and administrative expenses 70,800 65,685 48,244
Interest 1,919 2,795 4,634
Depreciation and amortization 7,423 11,500 1,683
Total expenses 203,505 206,989 147,226
Income before income taxes 14,586 10,600 18,782
Income taxes 7,300 8,202 5,099
Net income $ 7,286 $ 2,398 $ 13,683
Per share data:
Net income per common share-basic $ 0.20 $ 0.07 $ 0.49
Net income per common share-diluted $ 0.20 $ 0.07 $ 0.45
Weighted average common shares outstanding 36,891,864 34,647,986 28,100,234
Weighted average common shares and common share equivalents
outstanding 37,115,672 36,405,588 30,092,500
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1995, 1996, and 1997
(in thousands)
Net
Unrealized
Class A Class B Additional Gains Total
Common Common Paid-in (Losses) on Unearned Retained Treasury Shareholders'
Stock Stock Capital Investments Compensation Earnings Stock Equity
------- ----- ------- ------- ---------- ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ - $ 281 $ 349 $ (560) $ (930) $ 4,755$ - $ 3,895
Net income - - - - - 13,683 - 13,683
Distributions - - - - - (3,206) - (3,206)
Change in unearned compensation - - - - 715 - - 715
Change in net unrealized gains
on investments - - - 1,070 - - - 1,070
-------- -------------------------------- ----------- ------------- ------------------------
Balance, December 31, 1995 - 281 349 510 (215) 15,232 - 16,157
Net income - - - - - 2,398 - 2,398
Distributions - - - - - 279 - 279
Issuance of common stock 72 - 125,789 - - - - 125,861
Conversion of common stock 38 (38) - - - - - -
Stock options exercised 2 - 63 - - - - 65
Issuance of common stock for -
acquisitions 8 - 10,891 - - - - 10,899
Change in unearned compensation - - 721 - (331) - - 390
Change in net unrealized gains
on investments - - - 1,259 - - - 1,259
--------- ------------------------------------------------------------ ------------------------
Balance, December 31, 1996 120 243 137,813 1,769 (546) 17,909 - 157,308
Net income - - - - - 7,286 - 7,286
Purchase of treasury stock - - 1 - - - (1) -
Change in unearned compensation - - (1,840) - 546 - - (1,294)
Change in net unrealized gains on
investments - - - 233 - - - 233
---------------------------------------------- ------------ -------------- -------------
Balance, December 31, 1997 $ 120 $ 243 $ 135,974 $ 2,002 $ - $ 25,195 $ (1)$ 163,533
===== ===== ========= ======= ======== =================== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Year ended December 31,
-----------------------------------------------
1997 1996 1995
-------------- ------------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 7,286 $ 2,398 $ 13,683
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,423 11,500 1,683
Loss on disposal of property and equipment 291 294 22
Net amortization (accretion) of discounts on investments 14 174 (82)
Net realized gain on sale of investments (1,545) (140) (1,282)
Change in:
Premiums receivable, net 22,026 (24,275) (23,744)
Accounts receivable--other (5,104) (11,676) -
Recoverable from Florida State Disability
Trust Fund, net 4,295 2,331 (5,920)
Reinsurance recoverables (3,553) (76,971) (58,534)
Prepaid reinsurance premiums 19,807 (27,908) (21,880)
Prepaid managed care fees 23,537 (15,589) (15,068)
Accrued reinsurance commissions (16,770) (12,870) (7,549)
Deferred income taxes 431 (8,448) 106
Other assets (3,249) 21,026 3,110
Losses and loss adjustment expenses (21,502) 106,484 51,827
Unearned premiums (46,280) 30,891 7,315
Accounts payable related party (1,171) 171 1,000
Accounts and notes receivable--related party - 10,754 642
Accrued expenses and other liabilities (8,880) 19,909 7,420
------------ ------------ ------------
Net cash (used in) provided by operating activities (22,944) 28,055 (47,251)
----------- ------------ -----------
Cash flows from investing activities:
Proceeds from:
Sale of fixed maturities--available for sale 110,299 88,900 60,303
Maturities of fixed maturities--available for sale 20,243 6,295 10,209
Sale of equity securities 4,109 732 1,162
Maturities of fixed maturities--held to maturity 1,885 4,400 -
Maturities of equity securities 175 - -
Sale of equipment 158 532 564
Purchase of:
Maryland NARM Fund, net of cash acquired 134 - -
Fixed maturities--available for sale (100,499) (191,153) (23,543)
Property and equipment (4,477) (13,215) (6,393)
Fixed maturities--held to maturity (1,237) (2,452) -
Equity securities (637) (3,952) (341)
RISCORP Insurance Company, net of cash acquired - - 5,885
IAA, net of cash acquired - 282 -
RISC, net of cash acquired - (538) -
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Year ended December 31,
------------------------------------------------
1997 1996 1995
-------------- ------------- ------------
Cash flows from investing activities (continued):
<S> <C> <C> <C>
CompSource and Insura, net of cash acquired - (10,733) -
Purchase of:
Atlas Insurance Company, net of cash acquired - (5,573) -
NARM, net of cash acquired - 2,717 -
Virginia Funds, net of cash acquired - 1,300 -
-------- -----------------------------
Net cash provided by (used in) investing activities 30,153 (122,458) 47,846
-------- ---------- ------------
Cash flows from financing activities:
Increase (decrease) in deposit balances payable 725 968 (6,980)
Decrease (increase) in unearned compensation 546 (331) 715
Transfer of cash and cash equivalents to restricted balances (13,295) - -
Purchase of common stock (treasury stock) subject to
put options (2,100) - -
Other, net (1,840) (1,325) -
Principal repayments of notes payable (694) (30,202) (25,215)
Proceeds from notes payable - - 43,692
Shareholder distributions - 279 (3,206)
Proceeds of initial offering of common stock - 127,908 -
Other, net (1,840) (1,325) -
Stock options exercised - 65 -
-------- --------------- ------------------
Net cash (used in) provided by financing activities (16,658) 97,362 9,006
-------- ------------- --------------
Net (increase) decrease in cash and cash equivalents (9,449) 2,959 9,601
Cash and cash equivalents, beginning of period 26,307 23,348 13,747
-------- ------------ -------------
Cash and cash equivalents, end of period $ 16,858 $ 26,307 $ 23,348
=========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,928 $ 3,689 $ 3,966
============ ============ =============
Income taxes $ 6,566 $ 15,127 $ 4,969
============ =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Background
(a) Reorganization
RISCORP, Inc. was formed on February 28, 1996 through the
reorganization and consolidation of several affiliated companies (collectively,
"RISCORP" or the "Company") which were under the common control of a majority
shareholder, who, at that time, was the Chairman of the Board and Chief
Executive Officer of RISCORP (see Note 21). The reorganization and consolidation
qualified as a tax-free reorganization of commonly controlled entities and was
accounted for in a manner similar to a "pooling of interests." Accordingly, the
consolidated financial statements have been restated to include the results of
each of the individual companies for all the periods presented. All significant
intercompany accounts and transactions have been eliminated in consolidation and
the accompanying consolidated financial statements reflect the above changes to
the Company's capital structure for all periods presented.
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 (as more fully described in Note
20) 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 Florida
and Missouri Departments of Insurance ("FDOI" and "MDOI", respectively), amongst
other conditions.
In addition, the FDOI requested the purchaser to provide an interim
reinsurance agreement and cut-through endorsement ("Agreement") on all inforce
business as of June 17, 1997 and all new and renewed business written after June
17, 1997. This Agreement only provides coverage for Florida workers'
compensation policyholders and was approved by the FDOI. The ability of RISCORP
Insurance Company ("RIC") and RISCORP Property & Casualty Insurance Company
("RPC") to operate at their present level of insurance activity could be
affected if the transaction discussed in Note 20 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.
RISCORP experienced difficulty in completing its 1996 financial
statements in a timely manner. This resulted in RISCORP being delisted by the
stock exchange (NASDAQ) on which its stock was traded on July 2, 1997 and in
adverse publicity in the insurance marketplace. RISCORP filed its 1996 Form
10-K/A on October 28, 1997 and amended the 1996 Form 10-K/A on February 27, 1998
in response to comments received from the SEC in connection with the preparation
of the Company's proxy statement which was mailed to shareholders on March 3,
1998. In addition, RISCORP has filed all of its 1997 Form 10-Q's with the SEC.
RISCORP has not requested to be reinstated on the NASDAQ stock exchange.
F-9
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Initial Public Offering ("IPO") of Common Stock
On February 29, 1996, the Company completed an IPO of common stock
with the issuance of 10.935 million shares of Class A Common Stock. Of the
shares offered, 7.2 million were sold by the Company and 3.735 million were sold
by the majority shareholder of the Company. The following table reflects certain
summary information regarding the IPO:
Underwriting
Number Price Discounts and Net
Shares Sold by of Shares to Public Commissions Proceeds
------------------ ------------ ---------- -------------- ---------------
RISCORP 7,200,000 $19.00 $ 8,892,000 $127,908,000
Shareholder 3,735,000 $19.00 4,612,725 66,352,275
----------- -------------- --------------
10,935,000 $13,504,725 $194,260,275
========== =========== ============
The net proceeds reflected above are before deducting other expenses
of $2.0 million incurred in conjunction with the IPO.
The Company used the proceeds from the IPO to repay outstanding debt,
fund acquisitions, increase the capital and surplus of the Company's insurance
subsidiaries and for general corporate purposes.
The Company did not receive any proceeds from the sale of Class A
Common Stock by the majority shareholder; however, a portion of the majority
shareholders' proceeds was used to repay $9.8 million in outstanding
indebtedness to the Company.
(c) Business
RISCORP, through its wholly-owned insurance subsidiaries, is primarily
engaged in providing workers' compensation insurance under a managed care
philosophy. RISCORP provides managed care workers' compensation products and
services to clients throughout the Southeast and other select markets. In
addition, RISCORP, through its wholly-owned non-insurance subsidiaries, provides
reinsurance, risk management advisory services and insurance managerial
services.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been presented
in accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires the use of
assumptions and estimates in reporting certain assets and liabilities and
related disclosures. Actual results could differ from those estimates.
F-10
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(b) Recognition of Revenues
Workers' compensation and employer liability insurance premiums
consist of deposit premiums and installment premiums billed under the terms of
the policy, and estimates of retrospectively-rated premiums based on experience
incurred under these contracts to date. Unbilled installment premiums and audit
premiums are recognized as revenue on the accrual basis. Premiums are primarily
recognized as revenue over the period to which the premiums relate using the
daily pro rata basis with a liability for unearned premium recorded for the
excess of premiums billed over the earned premiums.
Service fee revenue is recorded as a percentage of standard earned
premiums of the underlying insurance policies of the facilities managed, in
accordance with the specific contractual provisions.
Reinsurance premiums are recognized as revenue on a pro rata basis
over the contract term with a liability for unearned premiums established for
the unexpired portion of the contract.
(c) State of Florida Special Disability Trust Fund
The State of Florida maintains a Special Disability Trust Fund
("SDTF") for the purpose of providing benefits to workers who have a
pre-existing condition and incur a second or subsequent injury.
The SDTF is financed through annual assessments imposed on workers'
compensation insurers, which is based on a percentage of net workers'
compensation premiums written. The Company submits claims to the SDTF for
recovery of applicable claims paid on behalf of the Company's insureds. The
Company estimates such recoveries based on industry statistics applied to
ultimate projected claims. The amounts reflected as SDTF recoveries in the
accompanying Consolidated Balance Sheets are net of a valuation allowance of $0
and $8.9 million as of December 31, 1997 and 1996, respectively. The allowance
is determined based upon the actuarially estimated recoverable amount compared
to the estimated recovery actually expected from the SDTF by RISCORP on reported
claims (see Note 6). At December 31, 1997, the actuarially estimated recoverable
amount exceeded the amount of the estimated recoveries on reported claims to the
SDTF.
(d) Investments
Fixed maturity investments are securities that mature at a specified
future date more than one year after being issued. Fixed maturity securities
that the Company intends to hold until maturity are classified as "fixed
maturities held to maturity" and are carried at amortized cost. Amortized cost
is based on the purchase price and is adjusted periodically so the carrying
value of the security will equal the face or par value at maturity. Fixed
maturity securities which may be sold prior to maturity due to changes in
interest rates, prepayment risks, liquidity needs, tax planning purposes or
other similar factors, are classified as "available for sale" and are carried at
fair value as determined using values from independent pricing services.
Equity securities (common and nonredeemable preferred stock) are
carried at fair value. If the current market value of equity securities is
higher than the original cost, the excess is an unrealized gain,
F-11
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and if lower than the original cost, the difference is an unrealized loss. The
net unrealized gains or losses on equity securities, net of the related deferred
income taxes, are reported as a separate component of shareholders' equity,
along with the net unrealized gains or losses on fixed maturity securities
available for sale.
Realized gains and losses on sales of investments are recognized in
net income on the specific identification basis, as of the trade date.
Impairment losses, if any, resulting from other than temporary declines in fair
value are included in net investment income.
(e) Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses is based on an
actuarial determination and represents management's best estimate of the
ultimate cost of losses and loss adjustment expenses that are unpaid at year end
including incurred but not reported claims. Although the liabilities are
supported by actuarial projections and other data, such liabilities are
ultimately based on management's reasoned expectations of future events. It is
possible that the expectations associated with these accounts could change in
the near future (i.e., within one year) and that the effect of these changes
could be material to the financial statements. The liability for losses and loss
adjustment expenses is continually reviewed and as adjustments become necessary,
such adjustments are included in current operations.
Management believes that the liability for losses and loss adjustment
expenses at December 31, 1997 is adequate to cover the ultimate liability.
However, the ultimate settlement of losses and the related loss adjustment
expenses may vary from the amounts in the accompanying financial statements.
The Company recognizes reinsurance recoveries, estimated recoveries
from the SDTF and subrogation from third parties as reductions to losses
incurred.
(f) Reinsurance
Premiums and losses ceded under reinsurance contracts in which an
assuming enterprise provides indemnification against loss or liability relating
to an insurance risk are reported as a reduction to premium earned and losses
and loss adjustment expenses, respectively. Amounts recoverable for ceded losses
and loss adjustment expenses and ceded unearned premiums under reinsurance
agreements are recorded as assets on the balance sheet. Reinsurance contracts
that do not transfer risk are accounted for as deposits in the Consolidated
Balance Sheets.
(g) Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," ("SFAS 109"). Under SFAS 109, deferred tax assets
and liabilities are established for temporary differences between the financial
reporting basis and tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are recovered or settled.
Such temporary differences are
F-12
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
principally related to the deferral of policy acquisition costs, tax basis
discount on reserves for unpaid losses and loss adjustment expenses, the
deductibility of unearned premiums, the allowance for uncollectible premiums
receivable and the amortization of goodwill. A valuation allowance is
established to reduce deferred tax assets to an amount that, in the opinion of
management, is more likely than not to be realized.
(h) Policy Acquisition Costs
The cost of acquiring and renewing business, principally commissions,
premium taxes and other underwriting expenses, is deferred to the extent
recoverable and amortized over the term of the related policies. Anticipated
investment income is considered in the determination of recoverability. Unearned
ceding commissions are reported as a reduction to deferred policy acquisition
costs. For the years ended December 31, 1997, 1996 and 1995, policy acquisition
costs deferred totaled $41.0 million, $31.8 million and $48.9 million,
respectively. For the years ended December 31, 1997, 1996 and 1995, amortization
of deferred policy acquisition costs totaled $49.2 million, $33.7 million and
$46.9 million, respectively. Deferred policy acquisition costs are included in
other assets in the accompanying Consolidated Balance Sheets. Policy acquisition
costs are included in commissions, general and administrative expenses in the
accompanying Consolidated Statements of Income.
(i) Goodwill
Costs in excess of net assets acquired, or goodwill, represents the
unamortized excess of cost over underlying net assets of companies acquired.
Goodwill is being amortized on a straight-line basis over periods ranging from 5
to 15 years. Amortization expense, including impairment losses of $6.0 million
in 1996, for the years ended December 31, 1997, 1996 and 1995 totaled $3.3
million, $7.9 million and $0.3, respectively. Accumulated amortization for the
years ended December 31, 1997 and 1996 was $11.3 million and $8.0 million,
respectively.
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. Measurement of an
impairment loss is based on the carrying amount and estimated fair value of the
asset.
During 1996, 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 RISCORP West, formerly
known as the Self Insurors Service Bureau, Inc. ("SISB"). 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.
The impairment loss was 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
$432,000 and $468,000 at December 31, 1997 and 1996, respectively.
F-13
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
As more fully described in Note 3, the Company recorded an impairment
loss of $2.8 million in connection with the acquisition of Independent
Association Administrators, Inc. during 1996. The remaining unamortized goodwill
relating to this acquisition was $7.9 million and $8.5 million at December 31,
1997 and 1996, respectively.
Net assets acquired in excess of cost, or "negative" goodwill, is
being amortized on a straight-line basis over 10 years. Income from amortization
of negative goodwill totaled $0.8 million, $0.9 million and $0.8 million for the
years ended December 31, 1997, 1996 and 1995, respectively (see Note 3).
Accumulated amortization as of December 31, 1997 and 1996 was $2.5 million and
$1.7 million, respectively.
(j) Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
useful lives of the related assets. Property and equipment recorded under
capital lease arrangements are amortized over the shorter of the asset's useful
life or the lease term.
The Company capitalizes incremental internal and external costs
directly related to internally developed software to meet the Company's needs.
These software development projects represent major system enhancements or
replacements of existing operating management information systems.
Capitalization commences when management has committed to funding the software
project and it is probable that upon completion the software will perform its
intended function. Capitalized costs are recorded in property and equipment and
amortized using the straight-line method over three years. For the years ended
December 31, 1997, 1996 and 1995, the Company capitalized $1.3 million, $1.7
million and $0.3 million, respectively. Amortization expense of $0.3 million,
$.04 million and $0 has been recorded for the years ended December 31, 1997,
1996 and 1995, respectively, for internally developed software costs.
(k) Investment in Joint Venture
The Company accounts for its 50 percent investment in a joint venture
arrangement on the equity basis of accounting whereby the Company's recorded
investment is adjusted for its proportionate share of earnings or losses of the
joint venture.
(l) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-14
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(m) Bad Debt Allowance
The bad debt allowance is based on the Company's experience with
uncollectible premiums receivable and represents the Company's best estimate of
the ultimate uncollectible amounts incurred through the balance sheet date.
Premiums receivable contained in the accompanying Consolidated Balance Sheets
are shown net of this valuation allowance.
(n) Earnings Per Share
In February 1997, the Financial Standards Board issued Statement No.
128, "Earnings Per Share," ("SFAS 128"), which is effective for periods ending
after December 15, 1997. SFAS 128 requires the presentation of two earnings per
share ("EPS") calculations, basic EPS and diluted EPS, in the Consolidated
Statements of Income and SFAS 128 requires restatement of all prior period EPS
data that is presented in the accompanying financial statements. All previously
reported earnings per share data for 1996 and 1995 have been restated to reflect
the requirements of SFAS 128. Basic EPS is computed by dividing net income by
the weighted average number of shares outstanding for the period. Diluted EPS is
computed by dividing net income by the weighted average number of shares
outstanding for the period plus the shares for the dilutive effect of stock
options, contingent shares and other common stock equivalents.
The components of the weighted average shares used in the EPS
calculations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Average outstanding shares used for
calculating basic EPS 36,891,864 34,647,986 28,100,234
Effect of stock options 223,808 1,757,602 1,992,266
Average outstanding shares used for
calculating diluted EPS 37,115,672 36,405,588 30,092,500
</TABLE>
(o) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"),
which is effective for fiscal years beginning after December 15, 1995. SFAS 123
establishes a method of accounting for stock-based compensation that is based on
the fair value of stock options and similar instruments and encourages, but does
not require adoption of that method. The Company has elected to continue
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," for measuring compensation cost. However, as required by
SFAS 123, the Company has disclosed pro forma net income and earnings per share
for the years ended December 31, 1997, 1996 and 1995 as if the provisions of
SFAS 123 had been adopted (see Note 12).
F-15
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(p) Year 2000
In the fourth quarter of 1997, the Company developed a formal plan to
convert its computer systems to be Year 2000 compliant. The Company's plan
provides for all conversion efforts to be completed by the end of March 1999;
however, the portion of the plan relating to the Company's policy issue and
management system will be completed by October 1, 1998, the date of the first
Year 2000 incident. The Year 2000 conversion is necessary primarily as the
result of certain computer programs used by the Company being written using two
digits rather than four digits to define the applicable year. The total cost of
the Year 2000 project is estimated to be less than $1.0 million and all costs
associated with these Year 2000 system changes will be expensed as the costs are
incurred.
(q) Concentrations of Risk
Following is a description of significant risks facing the Company and
its property and casualty insurance subsidiaries and how those risks are
minimized:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates can create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those currently recorded in the financial statements.
The Company attempts to minimize this risk by reviewing legislative
and other regulatory changes and adjusting rates whenever possible.
All of the Company's premiums were derived from products offered to
customers located in the United States. Accordingly, the Company could
be adversely affected by economic downturns, significant unemployment
and other conditions that may occur from time. (See Notes 1(a), 6, 19
and 21)
Credit Risk is the risk that issuers of securities owned by the
Company will default, or other parties, including reinsurers, the
SDTF, agents and insureds who may owe the Company money, will not pay.
The Company minimizes this risk by adhering to a conservative
investment strategy, by placing reinsurance with highly rated
reinsurers and by actively monitoring collections of the SDTF
recoverable and premiums receivable.
Interest Rate Risk is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments. The
Company mitigates this risk by attempting to match the maturity
schedule of its assets with the expected payout of its liabilities. To
the extent that liabilities come due more quickly than assets mature,
an insurer would have to sell assets prior to maturity and recognize
potential gains or losses.
(r)Restructuring Charges
In June 1997, the Company implemented a workforce reduction and a
consolidation 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
F-16
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 $5.8 million in non-recurring expenses during the second
quarter of 1997 in connection with the workforce reduction and consolidation of
the field offices and products. These non-recurring expenses consisted primarily
of severance expenses of $5.1 million and occupancy costs of $0.7 million of
which $3.2 million and $0.4 million, respectively, were unpaid as of December
31, 1997. These expenses are included in commissions, underwriting and
administrative expenses in the December 31, 1997 Consolidated Statements of
Income.
(s) Participating Insurance Policies
The Company offers participating insurance policies in connection with
custom plans, flexible retention plans and preferred account dividend plans.
Dividends are approved quarterly by the Board of Directors and are based upon
the actual loss experience of each of the policies. Participating policies
represented approximately 15.8 percent, 16.5 percent and 10.1 percent of written
premiums at December 31, 1997, 1996 and 1995, respectively. The Company paid
dividends to participating policyholders of $8.5 million, $9.2 million and $1.6
million for the years ended December 31, 1997, 1996 and 1995, respectively.
(t) Determination of Fair Values of Financial Statements
Management has identified the following financial instruments in the
financial statements: cash and cash equivalents, fixed maturities and equity
securities, receivables and other liabilities. Fair values of fixed maturities
and equity securities are presented in Note 4. For the remaining instruments,
management believes the carrying value approximate fair value due to the short
maturity, terms and fluctuations in market conditions of those instruments. The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
(u) Accounting Changes
The Company will adopt the reporting requirements of SFAS 130,
"Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," for the year ended December 31, 1998.
The adoption will have no effect on the Company's financial position or on its
results of operations.
(v)Reclassifications
Certain amounts in the financial statements presented have been
reclassified from amounts previously reported in order to be comparable between
years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
F-17
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) Acquisitions and Joint Venture
Acquisitions
As more fully described below, the Company acquired RIC in 1995, RNIC in
1996, and two workers' compensation management services companies in 1996. Each
of these transactions was accounted for under the purchase method of accounting
under which the aggregate purchase price paid for the entity was allocated to
the assets acquired and liabilities assumed based upon the estimated fair value
of such assets and liabilities at the dates of acquisition. The excess of the
purchase price over the fair value of the net assets acquired is reflected as
costs in excess of net assets acquired and is being accreted over periods
ranging from 5 to 15 years. For acquisitions in which net assets acquired
exceeded the purchase price, a liability for net assets acquired in excess of
costs has been recorded and is being amortized over 10 years.
Operating results of the acquired entities have been included in the
consolidated financial statements from their date of acquisition. The following
schedule summarizes certain pro forma results of operations for the years ended
December 31, 1996 and 1995, as if the acquisitions took place at the beginning
of the Company's fiscal year preceding the year of acquisition (in thousands,
except per share amounts):
1996 1995
Total revenues $275,410 $266,412
Income before income taxes 18,503 23,070
Net income 6,860 16,407
Earnings per share 0.19 0.55
Acquisition of RISCORP Insurance Company
Effective January 1, 1995, RIC was acquired by RISCORP of Florida, Inc., a
wholly-owned subsidiary of the Company. As a result of the acquisition, RIC's
name was changed from Commerce Mutual Insurance Company ("CMIC"). Upon
conversion, 1.5 million shares of $100 par value stock were authorized and
15,000 shares were issued and outstanding. RIC received $25.0 million as a
capital contribution from the Company in the form of $12.0 million cash and the
issuance of $13.0 million of surplus notes to the Company. In conjunction with
the acquisition, RIC, subject to a Plan of Conversion and Recapitalization and
with the approval of CMIC's policyholders and the FDOI, converted from an
assessable mutual insurance company to a stock insurance company. RIC provides
workers' compensation insurance in the State of Florida.
In exchange for their ownership interest in RIC, former CMIC policyholders
were relieved of all contingent liabilities for future policy assessments and
the risk that recorded liabilities were insufficient to cover incurred losses.
On the acquisition date, the estimated fair value of RIC's net assets in excess
of the purchase price was $8.2 million, which was recorded as negative goodwill
and is being amortized on a straight-line basis over 10 years.
F-18
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Acquisition of CompSource
In March 1996, the Company purchased all of the outstanding stock of
CompSource, Inc. and Insura, Inc. (collectively, "CompSource") in exchange for
$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. 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. 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.
Acquisition of Independent Association Administrators, Inc. ("IAA") 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 $11.5 million, consisting primarily of 790,336
shares of the Company's Class A Common Stock valued at $10.9 million on the date
of acquisition. IAA and RISC are workers' compensation management services
companies offering services in Alabama. On the acquisition date, the excess of
the purchase price over the fair value of the net assets acquired was $11.4
million and was recorded as goodwill 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. Therefore, as of December 31, 1996, $2.8 million of
goodwill was written off and is included as amortization expense in the
accompanying Consolidated Statements of Income.
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
Insurance Company ("Atlas") for $5.0 million in cash. As a result of the
acquisition, the name was changed from Atlas to 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.
Assumption Reinsurance Transaction
During 1996, RNIC also entered into several assumption reinsurance
transactions that resulted in the acquisition of five self insurance funds that
are discussed in Note 7(b).
F-19
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. The Company's
initial investment in Third Coast was valued at $10.0 million; however, the
Company's cost basis in the contributed property was $0. Third Coast has
experienced operating losses since its inception. As of December 31, 1997 and
1996, the Company's carrying of its investment in Third Coast was $0.
(4) Investments
Investments (including restricted investments) included in the
accompanying Consolidated Balance Sheets as of December 31, 1997 and 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Gains Losses Fair Value
December 31, 1997:
Available for sale:
Fixed maturity securities:
<S> <C> <C> <C> <C>
Municipal government obligations $ 58,294 $ 718 $ 2 $ 59,010
U.S. government obligations 38,065 1,193 10 39,248
Corporate obligations 88,102 1,119 22 89,199
Mortgage backed securities 1,932 36 - 1,968
Asset backed securities 9,920 49 3 9,966
------------ ----------- --------- ------------
Total available for sale 196,313 3,115 37 199,391
---------- --------- -------- ----------
Held to maturity:
Fixed maturity securities:
U.S. government obligations 18,434 204 9 18,629
Municipal government obligations 4,186 62 - 4,248
Certificates of deposit 1,470 - - 1,470
------------ ------------- ---------- ------------
Total held to maturity 24,090 266 9 24,347
----------- ---------- --------- -----------
Total investments $ 220,403 $ 3,381 $ 46 $ 223,738
========= ======== ======= =========
Available for sale:
Unrestricted $ 142,876 $ 2,709 $ 14 $ 145,571
Restricted 53,437 406 23 53,820
----------- ---------- ------- -----------
$ 196,313 $ 3,115 $ 37 $ 199,391
========= ======== ====== =========
</TABLE>
F-20
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Gains Losses Fair Value
December 31, 1996:
Available for sale:
Fixed maturity securities:
<S> <C> <C> <C> <C>
Municipal government obligations $ 75,844 $ 559 $ 55 $ 76,348
U.S. government obligations 49,144 983 47 50,080
Corporate obligations 86,726 734 94 87,366
Mortgage backed securities 2,588 25 1 2,612
Asset backed securities 5,501 57 2 5,556
Redeemable preferred stocks 6,437 408 5 6,840
----------- --------- -------- ------------
226,240 2,766 204 228,802
Equity securities:
Nonredeemable preferred stocks 1,063 28 9 1,082
Common stocks 2,817 205 59 2,963
----------- ---------- -------- ------------
3,880 233 68 4,045
----------- ---------- -------- ------------
Total available for sale 230,120 2,999 272 232,847
--------- --------- ------- ----------
Held to maturity:
Fixed maturity securities:
U.S. government obligations 16,355 144 62 16,437
Municipal government obligations 4,204 5 4 4,205
Certificates of deposit 2,250 - - 2,250
------------ ------------ --------- ------------
Total held to maturity 22,809 149 66 22,892
----------- --------- ------- -----------
Total investments $ 252,929 $ 3,148 $ 338 $ 255,739
========= ======= ===== =========
</TABLE>
The fair value of investments (including restricted investments) at
December 31, 1997 and 1996 was determined using independent pricing services.
The amortized cost and estimated fair value of fixed maturities (including
restricted investments) by contractual maturity, as of December 31, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Due in one year or less $ 20,197 $ 20,262 $ 4,298 $ 4,310
Due after one year through five years 143,418 143,577 18,137 18,326
Due after five years through ten years 19,353 21,952 1,655 1,711
Due after ten years 1,494 1,666 - -
Mortgage and asset backed securities 11,851 11,934 - -
----------- ---------------------------------------
$ 196,313 $ 199,391 $ 24,090 $ 24,347
========= ========= ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
During the years ended December 31, 1997, 1996 and 1995, proceeds from
sales of fixed maturities available for sale totaled $94.3 million,
$88.9 million and $60.3 million, respectively. Gross realized gains
F-21
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and gross realized losses for the years ended December 31, 1997,
1996 and 1995 are summarized in the following table (in thousands) and are
recorded in net investment income in the accompanying Consolidated Statements
of Income:
1997 1996 1995
Gross realized gains $ 1,770 $ 178 $ 1,395
Gross realized losses (224) (73) (379)
-------- ------- ---------
Net realized gains $ 1,546 $ 105 $ 1,016
======== ===== =======
The following information summarizes the components of net investment
income for the years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
Fixed maturities $ 13,815 $ 10,444 $ 5,856
Equity securities 469 547 410
Cash and cash equivalents 2,516 1,700 606
---------- ---------- ---------
16,800 12,691 6,872
Investment expenses (353) (497) (164)
---------- ---------- --------
$ 16,447 $ 12,194 $ 6,708
======== ======== =======
While the Company has credit risk in the investment portfolio, no fixed
maturity security had a Standard & Poor's rating of less than BBB at December
31, 1997. The carrying value of securities on deposit with various governmental
agencies was $23.8 million and $18.6 million at December 31, 1997 and 1996,
respectively, and is included in fixed maturities held to maturity in the
accompanying Consolidated Balance Sheets. In addition, as more fully explained
in Note 7, securities with a carrying value of $53.8 million at December 31,
1997 have been pledged or are held in trust in connection with certain
reinsurance transactions.
The Company's investments in excess of 10 percent of shareholders' equity
at December 31, 1997 and 1996, aggregated by issuer and excluding investments
issued or guaranteed by the United States, consisted of the following (in
thousands):
Carrying Value
-------------------------------
1997 1996
----------- --------------
Fixed maturities:
State of Florida $ 20,980 $ 23,472
======== ========
(5) Liability for Losses and Loss Adjustment Expenses
The Company establishes an estimated liability for losses and loss
adjustment expenses with respect to reported claims and claims incurred but not
yet reported as of the end of each accounting period. The Company establishes
its liability based on facts then known, estimates of future claims trends and
other
F-22
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
factors, including the Company's experience with similar cases and historical
Company and industry trends, such as reserving patterns, loss payment patterns,
claim closure and reporting patterns, and product mix.
<TABLE>
<CAPTION>
Activity in the liability for losses and loss adjustment expenses for the years ended December 31, 1997, 1996 and 1995
is summarized as follows (in thousands):
1997 1996 1995
<S> <C> <C> <C>
Gross reserves for losses and loss adjustment expenses, beginning of period $ 458,239 $ 261,700 $ 12,668
Less reinsurance recoverables 180,698 100,675 7,398
Less SDTF recoverables 49,505 51,836 671
Less prepaid managed care fees 31,958 16,369 -
---------- --------------------------
Net balance at January 1 196,078 92,820 4,599
--------- ----------- -----------
Assumed during year from loss portfolio transfers and acquisitions - 88,212 123,854
--------------- ----------- ---------
Incurred losses and loss adjustment expenses related to:
Current year 125,764 123,986 87,467
Prior years (2,401) 3,023 5,198
Total incurred losses and loss adjustment expenses 123,363 127,009 92,665
--------- ---------- ---------
Paid related to:
Current year 45,646 56,088 33,069
Prior years 74,639 55,875 95,229
Total paid 120,285 111,963 128,298
Net balance at December 31 199,156 196,078 92,820
Plus reinsurance recoverables 184,251 180,698 100,675
Plus SDTF recoverables 45,211 49,505 51,836
Plus prepaid managed care fees 8,420 31,958 16,369
------------ ----------- -----------
Gross reserves for losses and loss adjustment expenses, at December 31 $ 437,038 $ 458,239 $ 261,700
========= ========= =========
</TABLE>
The Company recognizes recoveries from the SDTF and subrogation from third
parties as a reduction of incurred losses. In determining the best estimate of
the effect of these recoveries on the ultimate cost of all unpaid losses and
loss adjustment expenses, the Company utilizes historical and industry
statistics. The estimated amount of recoveries from the SDTF included as a
reduction to the liability for losses and loss adjustment expenses was $45.2
million and $49.5 million at December 31, 1997 and 1996, respectively.
The 1995 activity in the liability for losses and loss adjustment expenses
reflects the acquisition of RIC on January 1, 1995. Adverse development in 1996
occurred due to deterioration in 1993 and prior accident years offset in part by
improved experience for the 1995 accident year. The favorable development in
1997 is discussed in Note 21.
(6) State of Florida Special Disability Trust Fund
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds and self-insured employers in Florida for certain workers'
compensation benefits paid to injured employees. SDTF reimburses claim payments
made to a claimant whose injury merges with, aggravates or accelerates a
pre-existing permanent physical impairment. The SDTF is managed by the State of
Florida and is funded
F-23
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
through assessments against insurers and self-insurers providing workers'
compensation coverage in Florida. RISCORP's pro-rata amount of the SDTF
assessment is based upon its written premiums compared to the total workers'
compensation premiums written by all Florida insurers and self-insurance funds.
Should a carrier stop writing business, it has no obligation for future
assessments. 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 prefunded its claims liability and no
reserves currently exist. As of September 30, 1996, the SDTF had an actuarial
projected undiscounted liability of $4.0 billion based on a study performed for
the SDTF by independent actuarial consultants. In addition, the SDTF actuarial
study indicated that, at the current assessment rates, the payment of the
existing liability would take numerous years.
Under Florida sunset laws applicable to some state-sponsored funds, the
SDTF would have expired on November 4, 1996 unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. The SDTF will accept no claims with
accident dates after December 31, 1997. Certain SDTF claims may have to be
refiled for reimbursement and such filing may require a refiling fee.
Additionally, companies accruing SDTF recoveries may be statutorily limited in
the level of recoverables they may be allowed to carry. The bill provides for a
funding mechanism through which companies writing workers' compensation
insurance in Florida will be assessed an annual charge to cover payments made by
the SDTF. The Company believes that even in the event of default by the SDTF,
the existing reimbursements of the SDTF would become general obligations of the
State of Florida.
For the years ended December 31, 1997, 1996 and 1995, SDTF cash recoveries
were $5.9 million, $2.5 million and $0.9 million, respectively. SDTF assessments
were $6.8 million, $11.7 million and $12.9 million for the years ended December
31, 1997, 1996 and 1995, respectively.
In December 1997, the American Institute of Certified Public Accountants
issued a Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The SOP
provides guidance for determining and measuring a liability for guaranty-fund
and other insurance-related assessments, including second injury trust funds.
Management is currently assessing the impact, if any, of this SOP on the future
financial results of the Company's insurance subsidiaries.
(7) Reinsurance
(a) General
The Company is involved in the cession of insurance to certain
unaffiliated insurance and reinsurance companies under specific excess of loss
and quota share reinsurance contracts. Amounts by
F-24
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
which certain financial statement balances have been reduced as a result of
these reinsurance contracts as of and for the years ended December 31, 1997,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Premiums written $ 143,983 $ 192,528 $ 161,696
Premiums earned 167,274 165,022 139,144
Reserve for losses and loss adjustment expenses 183,150 180,698 100,675
Unearned premiums 25,842 49,788 21,880
</TABLE>
Ceded losses and loss adjustment expenses were $73.9 million, $152.3
million and $78.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and are reflected as reductions in the related financial statement
balances.
Effective January 1, 1995, RIC and RPC entered into quota share
reinsurance agreements with American Re-Insurance Company ("AmRe"), whereby RIC
and RPC ceded 50 percent of new and renewal premiums written and losses
incurred. These reinsurance agreements provide for the payment of a ceding
commission at rates which vary from 27.5 percent to 60 percent based on the loss
ratio of the business ceded, excluding unallocated loss adjustment expenses. The
provisional ceding commission provided for in the reinsurance agreements was 33
percent. These reinsurance agreements will remain in force for an unlimited
period of time, but may be terminated by either party at any December 31 after
December 31, 1995. The Company and AmRe are parties to a senior subordinated
note agreement in the principal amount of $15.0 million due 2002. Under the
terms of the note agreement, the Company must maintain the quota share treaty or
other comparable reinsurance agreements with AmRe for a minimum period of five
years beginning January 1, 1995 (see Note 21). Ceding commissions earned under
the AmRe reinsurance agreements were $50.0 million, $58.2 million and $48.6
million for the years ended December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, the Company was contingently liable for return
ceding commissions to AmRe of $9.3 million and $21.2 million, respectively.
Effective September 1, 1996, RIC entered into a retrocessional
reinsurance agreement with Chartwell Reinsurance Company, whereby Chartwell
Reinsurance Company retrocedes to the Company 50 percent of workers'
compensation business written by RMS (an affiliate of the Company) as
underwriting manager for Virginia Surety Company, Inc. ("Virginia Surety"). The
reinsurance agreement provides for a profit commission in addition to the 30
percent ceding commission based on the loss ratio and other expenses incurred
under the contract. The initial profit commission calculation will take place on
September 1, 2000. This agreement terminated on December 31, 1997; however the
Company continues to be responsible for its portion of the losses incurred on
policies reinsured before the termination date.
On April 18, 1997, the Company entered into a trust agreement with
Chartwell Reinsurance Company whereby the Company agreed to maintain in trust
for the benefit of Chartwell Reinsurance Company 102 percent of the Company's
portion of the outstanding loss reserves and unearned premiums. As of December
31, 1997, the market value of the securities in the trust account was $8,645,981
and the required trust account balance, based on the outstanding loss reserves
and unearned premium reserves, was $5,159,689. The balance in this trust account
is generally adjusted on a monthly basis, one month in arrears.
F-25
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Effective January 1, 1996, RPC entered into a quota share reinsurance
agreement with Allstate Insurance Company, Chartwell Reinsurance Company, Signet
Star Reinsurance Company and San Francisco Reinsurance Company, whereby the
Company ceded 90 percent of its inforce, new or renewal gross written premiums
for commercial umbrella coverage for the period January 1, 1996 to December 31,
1996. The maximum limits under this agreement are $5.0 million per insured, per
occurrence. The reinsurance agreement provides for the payment of a ceding
commission of 30 percent of the ceded premiums. This reinsurance agreement will
remain in force for an unlimited period of time, but may be terminated by either
party at December 31, 1996 or any December 31 thereafter. During 1997, Allstate
Insurance Company and San Francisco Reinsurance Company were replaced on this
reinsurance agreement by Scor Reinsurance Company and Hartford Fire Insurance
Company, respectively. All other terms and conditions of the reinsurance
agreement were unchanged. This agreement was terminated at December 31, 1997;
however, the reinsurer continues to be responsible for their portion of all
losses incurred on policies effective before the termination date.
Effective January 1, 1996, RPC entered into a quota share reinsurance
agreement with Allstate Insurance Company, Chartwell Reinsurance Company, Signet
Star Reinsurance Company, San Francisco Reinsurance Company and Great Lakes
American Reinsurance Company, whereby the Company ceded 90 percent of its
inforce, new or renewal gross written premiums for commercial property coverage
for the period January 1, 1996 to December 31, 1996. The limits of coverage
under this agreement are 90 percent of $2.5 million per risk, subject to an
occurrence limitation of not less than $10.0 million nor greater than $15.0
million. The reinsurance agreement provides for the payment of a ceding
commission of 30 percent of ceded premiums. This reinsurance agreement will
remain in force for an unlimited period of time, but may be terminated by either
party at December 31, 1996 or any December 31 thereafter. During 1997, Allstate
Insurance Company and San Francisco Reinsurance Company were replaced on this
reinsurance agreement by Scor Reinsurance Company and Hartford Fire Insurance
Company, respectively. All other terms and conditions of the reinsurance
agreement were unchanged. This agreement was terminated at December 31, 1997;
however, the reinsurer continues to be responsible for their portion of all
losses incurred on policies effective before the termination date.
Effective January 1, 1996, RPC entered into a commercial casualty
excess of loss reinsurance agreement with Allstate Insurance Company, Chartwell
Reinsurance Company, Signet Star Reinsurance Company and San Francisco
Reinsurance Company, whereby the Company ceded 100 percent of all losses
incurred on business inforce, written or renewed during the term of this
agreement, per occurrence, in excess of $250,000 to $1,000,000. The Company is
required to pay 11.5 percent of earned premiums subject to a minimum premium of
$483,000 under the agreement. This reinsurance agreement will remain in force
for an unlimited period of time, but may be terminated by either party at
December 31, 1996 or any December 31 thereafter. During 1997, Allstate Insurance
Company and San Francisco Reinsurance Company were replaced on this reinsurance
agreement by Scor Reinsurance Company and Hartford Fire Insurance Company,
respectively. All other terms and conditions of the reinsurance agreement were
unchanged. This agreement was terminated at December 31, 1997; however, the
reinsurer continues to be responsible for their portion of all losses incurred
on policies effective before the termination date.
F-26
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Effective September 1, 1995, RPC entered into a medical excess of loss
reinsurance agreement with Cologne Life Reinsurance Company, whereby the Company
ceded 100 percent of all losses incurred per insured, per agreement year, in
excess of $150,000 up to $1.0 million. The Company pays $6.79 per certificate of
insurance per month for this coverage. The agreement is continuous, but can be
canceled by either party at September 1, 1996 or any September 1 thereafter.
RIC, RNIC and RPC ceded losses in excess of $500,000 to Continental
Casualty Company ("CNA") under an excess of loss reinsurance treaty effective
January 1, 1997. This treaty contains a corridor deductible of $1,250,000 which
is applicable in the aggregate to claims in the $500,000 excess of $500,000
corridor for the Company. RIC and RPC had a similar contract with CNA effective
January 1, 1996 with a corridor deductible of $1,000,000. While the contract
contains provisions for minimum and deposit premiums, the premiums for 1997
based on earned premiums exceeded the minimum premium provisions specified under
the contract.
RNIC has ceded losses in excess of $500,000 to CNA under three
separate excess of loss reinsurance treaties. These treaties have effective
dates of January 1, June 14, and September 1, 1996 and provide for the payment
of premiums to CNA based on earned premiums. While the contracts contain
provisions for minimum premiums, the premiums for 1996 exceed the minimum
premium provisions specified under these contracts. Each of these treaties with
CNA expired on January 1, 1997.
In connection with the proposed sale to Zenith (as more fully
described in Note 15), RIC and RPC entered into an interim reinsurance agreement
and cut-through endorsement covering all inforce business as of June 17, 1997
and all new and renewal business written after June 17, 1997 on Florida workers'
compensation policies. In connection with this agreement, Zenith required that
33 percent of the direct written premiums and 33 percent of the initial unearned
premiums subject to this agreement be deposited into a trust account for the
benefit of Zenith. In addition, the agreement requires the Company to pay a fee
to Zenith of 1 percent of subject premiums.
As of December 31, 1997, the market value of the securities in the
trust account was $52,413,270 and the required trust account balance, based on
the direct written premiums for the period June 18, 1997 through December 31,
1997 and the unearned premiums at June 17, 1997, was $51,567,757. The balance in
the trust account is generally adjusted on a monthly basis, one month in
arrears. In addition, the Company incurred fees to Zenith of $1.4 million during
1997 under this agreement.
Effective October 1, 1996, RNIC entered into a quota share reinsurance
agreement with Chartwell Reinsurance Company, Swiss Reinsurance America
Corporation and Trenwick America Reinsurance Corporation (collectively the
"Reinsurers"), whereby the Company ceded 65 percent of its net unearned premiums
as of October 1, 1996 and 65 percent of net written workers' compensation and
employers liability premiums, new or renewal, for the period October 1 to
December 31, 1996. Effective January 1, 1997, RNIC reduced the ceded quota share
amount to 60 percent. The reinsurance agreement provides for the payment of a
ceding commission at rates which vary from 27 percent to 49 percent based on the
loss ratio of the business ceded. The provisional ceding commission contained in
the reinsurance agreement was
F-27
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
33 percent. This reinsurance agreement was terminated at December 31, 1997;
however, the reinsurer continues to be responsible for their portion of all
losses incurred on policies effective before the termination date.
RNIC entered into an agreement with the Insurance Company of New York
("INSCORP") and Chartwell Reinsurance Company, effective January 1, 1997, to
issue assumption of liability endorsements ("ALE") to certain policyholders of
RNIC. This agreement expired on December 31, 1997 and was not renewed. In
connection with this agreement, RNIC was required to provide INSCORP and
Chartwell Reinsurance Company with letters of credit in amounts equal to 29.2
percent of the gross written premiums on all ALE policies plus $1,250,000. The
agreement also required RNIC to pay a fee of .5 percent of gross premiums
subject to a minimum fee of $50 and a maximum fee of $1,000 per ALE.
As of December 31, 1997, based on the gross premiums subject to ALE's,
RNIC provided letters of credit of $3,742,090 under this agreement. These
letters of credit are secured by certificates of deposits and are included in
the accompanying balance sheets under the caption "Cash and short-term
investments--restricted." In addition, RNIC incurred fees of $38,797 during 1997
under this agreement.
RNIC also maintains specific excess of loss coverage on the run off of
the Atlas book of business with Allstate Insurance Company.
The combined reinsurance recoverables and ceded unearned premiums (by
reinsurer) in excess of three percent of shareholders' equity as of December 31,
1997 are detailed below (in thousands):
Reinsurance Ceded Unearned
Recoverables Premiums
Reinsurer
American Re-Insurance Company $ 89,437 $ 20,995
Continental Casualty Company 42,841 -
TIG Reinsurance Company 9,286 -
Chartwell Reinsurance Company 22,198 2,350
Swiss Reinsurance America Company 11,041 1,175
Trenwick American Reinsurance Company 11,041 1,175
The unaffiliated reinsurers of each of the Company's insurance
subsidiaries are reinsurance companies with A.M. Best ratings of A- or higher.
The Company actively monitors and evaluates the financial condition of its
reinsurers. As a result, the Company does not believe it has any significant
credit risk associated with unaffiliated reinsurance recoverables. To the extent
that the reinsurers are unable to meet their contractual obligations, the
Company is contingently liable for any losses and loss adjustment expenses
ceded.
At December 31, 1997 and 1996, reinsurance recoverables consisted of
$184.3 million and $180.7 million of recoverables for unpaid losses and loss
adjustment expenses. At December 31, 1997, $89.4 million of the reinsurance
recoverable balance related to RIC's and RPC's quota share agreement with one
F-28
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
reinsurer. The remaining recoverable balance of $94.9 million reflected
estimated recoveries from 17 unaffiliated reinsurers that provided quota share,
specific and aggregate excess of loss coverage. The previous table includes all
reinsurance recoverables in excess of three percent of shareholders' equity at
December 31, 1997.
(b) Assumption Reinsurance Transactions
During 1996, RNIC entered into loss portfolio transfer and assumption
reinsurance agreements with National Alliance for Risk Management ("NARM"), a
North Carolina self-insured workers' compensation fund; Occupational Safety
Association of Alabama ("OSAA"), an Alabama self-insured workers' compensation
fund; and three NARM self insurance funds in Virginia ("NARM - Virginia"). Under
the terms of the agreements, RNIC assumed 100 percent of the outstanding loss
reserves (including incurred but not reported losses) and the outstanding
unearned premiums as of the respective dates of transfer. RNIC issued assumption
certificates to all affected policyholders.
The following loss portfolio transfers and assumption reinsurance
agreements were entered into by RNIC during 1996 (in thousands):
Losses Assumed at Unearned Premiums at
Entity Effective Date Date of Transfer Date of Transfer
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
======== =======
RISCORP received cash and marketable securities from the ceding
companies of $93.5 million to fund the loss and unearned premium reserves
assumed in connection with these transactions. In addition, OSAA transferred to
RNIC $11.0 million in OSAA member deposits and cash of $11.0 million. RNIC
refunded the deposits to the policyholders during 1997 upon completion of final
premium audits for the 1996 policy year.
(8) Managed Care Agreements
The Company is party to arrangements with both Humana Medical Plans, Inc.
("Humana"), an unaffiliated health maintenance organization ("HMO"), and RISCORP
Health Plans, Inc. ("RHP"), an affiliated HMO, whereby, upon policyholder
election to participate, the Company's medical claim costs are fixed for the
first three years of each claim. On May 1, 1996, the Company terminated its
arrangement with RHP; however, injured individuals are covered for three years
following any accident occurring during policy periods in effect prior to
termination. The Humana arrangement, which commenced July 1, 1995, was renewed
for one additional year at the anniversary date. Under the Humana arrangement,
injured individuals are covered for three years following any accident occurring
within the policy periods. On October 30, 1997, the Company entered into a loss
portfolio transfer agreement with RHP to transfer the liability of RHP under the
managed care agreement. The remaining liability under the managed care
F-29
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
agreement was determined by the Company's consulting actuarial firm to be $8.0
million and on November 4, 1997, RHP transferred $8.0 million to the Company in
full satisfaction of RHP's liability under the managed care agreement. The fees
paid to Humana and RHP are recognized as prepaid assets and losses and loss
adjustment expenses in the Consolidated Balance Sheets. Included in losses and
loss adjustment expenses were $6.1 million, $30.6 million and $19.0 million of
such fees for the years ended December 31, 1997, 1996 and 1995, respectively.
To the extent that Humana is unable to meet its contractual obligations
under the agreements, the Company is liable for any unpaid losses and loss
adjustment expenses. At December 31, 1997 and 1996, estimated unpaid losses and
loss adjustment expenses to be covered by Humana were $4.8 million and $17.7
million, respectively.
(9) Income Taxes
The components of income taxes for the years ended December 31, 1997, 1996
and 1995 are as follows (in thousands):
1997 1996 1995
Current:
Federal $ 6,197 $ 17,919 $ 4,042
State 798 2,280 1,037
--------- ---------- --------
Total current 6,995 20,199 5,079
-------- --------- --------
Deferred:
Federal 305 (12,126) 219
State - 129 (199)
--------- ----------- ---------
Total deferred 305 (11,997) 20
--------- -------- ----------
Total income taxes $ 7,300 $ 8,202 $ 5,099
======= ========= =======
The differences between taxes computed at the federal statutory rate
and recorded income tax expense for the years ended December 31, 1997, 1996
and 1995 are as follows (in thousands):
1997 1996 1995
Computed "expected" tax expense $ 5,105 $ 3,710 $ 6,574
State taxes in excess of federal benefit 519 1,336 545
Non-taxable income (1,188) (982) (637)
Goodwill and other amortization 801 2,437 (287)
Valuation allowance 412 - -
S corporation earnings - - (984)
Fines and penalties 64 543 -
Amounts related to prior years - 980 -
Other 1,587 178 (112)
-------- ------- ---------
Income tax expense $ 7,300 $ 8,202 $ 5,099
======= ======= =======
F-30
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
Deferred tax assets:
<S> <C> <C>
Unearned premium $ 2,132 $ 3,688
Discount on reserve for losses and loss adjustment expenses 14,160 13,149
Accrued settlement costs 4,550 -
Accrued employee benefits 575 709
Bad debts 2,450 5,950
Deferred acquisition costs 422 -
Other 811 1,507
----------- ----------
Gross deferred tax assets 25,100 25,003
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs - 156
Unrealized gains on investments 1,077 952
Depreciation 645 446
Other 846 898
----------- -----------
Gross deferred tax liabilities 2,568 2,452
---------- ----------
Deferred tax assets before valuation allowance 22,532 22,551
Valuation allowance (412) -
---------- -------------
Net deferred tax asset $ 22,120 $ 22,551
========= =========
</TABLE>
The Company estimated it could realize $22.1 million of its December 31,
1997 net deferred tax asset through the carryback of future tax losses to prior
years or the generation of future taxable income, and it is more likely than not
that the tax benefits of the deferred tax assets will be realized. Accordingly,
a valuation allowance of $0.4 million relating to the December 31, 1997 deferred
taxes has been established. No valuation allowance was necessary at December 31,
1996.
(10) Notes Payable
<TABLE>
<CAPTION>
Notes payable consist of the following at December 31, 1997 and 1996 (in
thousands):
1997 1996
<S> <C> <C>
Subordinated notes from quota share reinsurer,
bearing interest at 12%; matures December 31, 2002. $ 15,000 $ 15,000
Notepayable from acquisition of subsidiary, with implicit interest rate of
9.76% computed on the payment
stream; matures November 9, 1998. 330 756
Term loan, implicit interest rate of 12% computed on
the payment stream; matures January 1, 1999. 279 470
Notes payable on five automobiles, bearing interest
at 7%; various maturities throughout 2000. - 77
-------------- ------------
$ 15,609 $ 16,303
======== ========
</TABLE>
F-31
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Notes payable at December 31, 1997 are due as follows (in thousands):
1998 $ 586
1999 23
2000 -
2001 -
2002 and thereafter 15,000
---------
$ 15,609
The Company is in compliance with debt covenant requirements under the
AmRe note agreement.
(11) Shareholders' Equity
The Company has 100 million shares of $.01 par value Class A Common Stock
authorized and 11,855,917 issued and outstanding shares at December 31, 1997 and
1996, respectively. Class B Common Stock, par value $.01, consists of 100
million shares authorized and 24.3 million shares issued and outstanding at
December 31, 1997 and 1996, respectively. Ten million shares of preferred stock
are authorized, but no shares are issued or outstanding. The characteristics of
the Class B Common Stock are identical to those of the Class A Common Stock,
except that each holder of the Class B Common Stock is entitled to 10 votes for
each share held. The Class B Common Stock may be converted into Class A Common
Stock at any time at the election of the holders on a one-for-one basis.
The Company's insurance subsidiaries are limited by statute in their
ability to distribute unassigned surplus without approval of the Commissioner of
Insurance for the state of domicile. Dividends or distributions to shareholders
that are made under these statutes and that do not require the prior approval of
the FDOI or the MDOI are determined based on a combination of an insurer's net
income, realized and unrealized capital gains, percentages of dividends and
distribution of surplus, and the relationship of surplus after the dividend or
distribution is made to the minimum required statutory surplus. The Company did
not declare any shareholder dividends during 1997 and 1996. In December 1997,
RISCORP received a dividend of $2.2 million from RPC. The Company paid dividends
to participating policyholders of $8.6 million, $9.2 million and $1.6 million
for the years ended December 31, 1997, 1996 and 1995, respectively. As of
December 31, 1997, the Company's insurance subsidiaries have the ability to
dividend $13.5 million to RISCORP without the prior approval of the FDOI or the
MDOI, consisting of $12.3 million from RPC, $1.2 million from RNIC and $0 from
RIC.
Combined statutory policyholders' surplus as of December 31, 1997 and
1996, and combined statutory net income for the years ended December 31, 1997
and 1996 for the Company's insurance subsidiaries, were as follows (in
thousands):
1997 1996
----------- -----------
Policyholders' surplus $ 96,280 $ 90,639
Net income 11,042 13,980
F-32
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In order to facilitate the regulators' responsibility to monitor insurer
solvency, the National Association of Insurance Commissioners issued a model law
in January 1995 to implement risk-based capital ("RBC") reporting requirements
for property and casualty insurance companies. The model law is designed to
assess capital adequacy and the level of protection that statutory surplus
provides for policyholder obligations. The RBC formula for property and casualty
insurance companies measures four major areas of risk facing property and
casualty insurers: (i) underwriting, which encompasses the risk of adverse loss
development and inadequate pricing; (ii) credit risk, which evaluates the
declines in asset values; (iii) investment risk, which evaluates declines in
asset values; and (iv) off balance sheet risk. Pursuant to the model law,
insurers having less statutory surplus than required by the RBC calculation will
be subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. RPC and RIC are domiciled in the State of Florida which has
yet to adopt the provisions of the RBC model law; however, these insurance
subsidiaries monitor their RBC results in anticipation of future filings. The
Company's third insurance subsidiary, RNIC, is domiciled in the State of
Missouri and RBC information is filed with state regulators. RBC is calculated
on an annual basis. At December 31, 1997, the Company's insurance subsidiaries
had statutory surplus in excess of any action level requirements.
(12) Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"). SFAS 123
establishes a method of accounting for stock-based compensation that is based on
the fair value of stock options and similar instruments and is effective for
fiscal years beginning after December 15, 1995. The adoption of SFAS 123 is not
required and the Company has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measuring
compensation cost. Had the Company adopted SFAS 123, pro forma net income and
earnings per share for the years ended December 31, 1997, 1996 and 1995 would
have been as follows (in thousands, except per share data):
1997 1996 1995
---------- ---------- -----------
Net income - as reported $ 7,286 $ 2,398 $ 13,683
- pro forma 5,286 1,933 13,506
Net income per
common share-diluted - as reported $ 0.20 $ 0.07 $ 0.45
- pro forma 0.14 0.06 0.45
In conjunction with the reorganization discussed in Note 1, stock options
of the Company were substituted for options previously granted to certain
officers and employees of the Company's affiliates. Options granted in 1997 are
exercisable for 10 years after the date and the options vest over periods
ranging from immediately to 2 years. In 1996 and 1995, options are exercisable
for 12 years after the date of the grant and the options vest over periods
ranging from two to nine years.
F-33
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A summary of the status of the Company's Stock Option Plan as of and for
the years ended December 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- ------ -------------- ------ -------------- ------ --------------
Outstanding,
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 3,078,779 $3.67 2,556,557 $3.96 1,854,392 $3.01
Granted 2,533,326 4.43 1,572,538 6.84 702,165 $6.50
Exercised - - (17,999) 3.61 - -
Canceled (3,078,779) 3.67 (1,032,317) 9.22 - -
---------- ------ --------- ----------------------- ---------
Outstanding, end of year 2,533,326 $4.43 3,078,779 $3.67 2,556,557 $3.96
========= ===== ========= ===== ========= =====
Options
exercisable at year end 1,085,711 $6.67 731,849 $2.08 193,657 $0.73
========= ===== ======= ===== ======= =====
Weighted average fair value of
options granted during the year $1.92 $5.44 $5.67
===== ===== =====
</TABLE>
The fair value of each option has been estimated on the date the option
was granted using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1997, 1996 and 1995,
respectively: dividend yield of 0 percent for all years; expected volatility of
62 percent for 1997 and 60 percent for 1996 and 1995; risk-free interest rate of
5.5 percent (1997), 8.1 percent (1996) and 6.5 percent (1995); and expected
lives of 10 years for 1997 and 12 years for 1996 and 1995. Due to events
subsequent to December 31, 1997 and 1996, the amount shown above for the
weighted average fair value of options granted during 1997 and 1996 may not be
indicative of the current market value of the Company's stock.
The exercise price of options granted were determined to be not less than
the fair market value of the Class A Common Stock on the date the option was
granted, with the exception of options for 387,314 and 2,604 shares made to two
employees at exercise prices of $0.72 and $4.50, respectively, and fair values
of $22.78 and $12.54, respectively. Compensation expense recognized for options
with exercise prices below fair market value totaled $0, $0.3 million and $0.7
million for the years ended December 31, 1997, 1996 and 1995, respectively. This
compensation expense was reversed in the fourth quarter of 1997 following
termination of these options.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------
Range of Number Weighted Avg Number Weighted Avg
Exercise Outstanding Remaining Weighted Avg Exercisable Exercise Price
Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97
------------- ----------------- ------------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 2.75 1,447,615 9.4 years $ 2.75 - $ -
$ 5.00 542,855 9.4 years 5.00 542,855 5.00
$ 7.50 361,904 9.4 years 7.50 361,904 7.50
$ 10.00 180,952 9.4 years 10.00 180,952 10.00
---------- --------- ------- ---------- -------
2,533,326 9.4 years $ 4.43 1,085,711 $ 6.67
========= ========= ======= ========= =======
</TABLE>
F-34
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(13) Property and Equipment
Property and equipment consist of the following at December 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Life 1997 1996
<S> <C> <C> <C>
Furniture and equipment 3-7 years $ 16,542 $ 15,984
Building 39 years 8,084 7,846
Leasehold improvements 5-10 years 4,810 4,896
Software 3 years 6,758 5,041
Land 1,200 1,200
---------- ----------
37,394 34,967
Less accumulated depreciation and amortization (10,729) (7,462)
-------- ----------
$ 26,665 $ 27,505
======== ========
</TABLE>
Depreciation and amortization expense related to property and equipment
totaled $4.9 million, $3.6 million and $2.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. Included in these amounts is amortization
expense of $1.4 million, $0.8 million and $0.2 million for the years ended
December 31, 1997, 1996 and 1995, respectively, related to both purchased and
capitalized internally developed software costs.
(14) Leases
The Company leases space for some of its office facilities under
non-cancelable operating leases expiring through January 2002, with renewal
options available for certain leases. Total rental expense for the years ended
December 31, 1997, 1996 and 1995 was $1.7 million, $1.3 million and $0.9
million, respectively. At December 31, 1997, the Company was obligated under
aggregate minimum annual rentals as follows (in thousands):
Year ended December 31, Annual Rental
1998 $ 950
1999 455
2000 327
2001 182
2002 33
Thereafter -
-----------
$ 1,947
F-35
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(15) Employee Health Benefits
The Company self-insures its employees' health benefits and has purchased
excess insurance that limits its exposure to $1.1 million in the aggregate and
$50,000 per occurrence. The Company estimates its liability for unpaid claims
based on aggregate limits for health insurance payments less actual payments
made. These estimates are continually reviewed and adjustments, if any, are
reflected in current operations. Included in accrued expenses at December 31,
1997 and 1996 is a liability for self-insured health benefits of $0.9 million
and $0.4 million, respectively. Expenses for self-insured health benefits were
$3.3 million, $2.6 million and $1.4 million for the years ended December 31,
1997, 1996 and 1995, respectively.
There were no employee benefit plans in 1997. Expenses relating to
employee benefit plans were $0.4 million and $0.2 million for the years ended
December 31, 1996 and 1995, respectively.
(16) Related Party Transactions
The Company had accounts receivable of $0.8 million from several
affiliates which are included in accounts and notes receivable-other in the
accompanying Consolidated Balance Sheets at December 31, 1997. Additionally, the
Company had accounts and notes payable of $1.2 million at December 31, 1996 to
those same affiliates.
In addition, the Company contracted with affiliated entities for
transportation, facilities management, and custodial and maintenance services.
The Company also leased parking facilities from affiliated entities. Expenses
relating to these services totaled $0.1 million, $1.6 million and $2.5 million
for the years ended December 31, 1997, 1996 and 1995, respectively. These
expenses are included in commissions, general and administrative expenses in the
accompanying Consolidated Statements of Income.
The Company paid brokerage fees to an affiliated company for the
negotiation and placement of reinsurance under several specific excess of loss
coverages. These fees totaled $0, $0.9 million and $0.8 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The Company terminated its
agreement with the affiliated company during 1997.
The Company provides administrative and support services to three
affiliated companies. Under these arrangements, one of which terminated in 1996,
the Company received $0.6 million, $0.8 million and $1.02 million for the years
ended December 31, 1997, 1996 and 1995, respectively. In addition, the Company
performed certain unreimbursed services totaling $1.6 million during 1995 for
one of these affiliates.
As described in Note 8, the Company was party to a managed care
arrangement with RHP, an affiliated HMO, until May 1, 1996. Fees paid to RHP for
the years ended December 31, 1997, 1996 and 1995 totaled $3.7 million, $17.1
million and $1.5 million, respectively. The managed care arrangement with RHP
was terminated in October 1997 following its sale to Oxford Health Plans. As
more fully described in Note 8, the Company assumed the outstanding liability
for unpaid losses and loss adjustment expenses which totaled $8.0 million.
F-36
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(17) Bad Debt Allowance
The following table summarizes activity in the bad debt allowance account
for premiums receivable for the years ended December 31, 1997, 1996 and 1995
(in thousands):
1997 1996 1995
Balance at beginning of period $ 17,000 $ 5,899 $ 5
Allowance acquired from acquisitions - 782 7,542
Additions to allowance 4,374 31,424 3,852
Write-offs against allowance (14,374) (21,105) (5,500)
--------- --------- -------
Balance at end of period $ 7,000 $ 17,000 $ 5,899
========= ======== =======
Premiums receivable included in the accompanying Consolidated Balance
Sheets as of December 31, 1997 and 1996 are summarized as follows (in
thousands):
1997 1996
------------ ------------
Commercial accounts including final
premium audit adjustments $ 29,612 $ 42,245
Loss sensitive contracts 68,804 91,594
NCCI pool accounts 6,987 -
Other 1,780 5,239
------------ ------------
107,183 139,078
Less bad debt allowance (7,000) (17,000)
----------- ----------
$ 100,183 $ 122,078
========= =========
(18) Concentration in a Single State
Although the Company has expanded its operations into additional states,
70 percent, 74 percent and 93 percent of its revenues for the years ended
December 31, 1997, 1996 and 1995, respectively, were derived from products and
services offered to customers located in Florida. Accordingly, the Company could
be adversely affected by economic downturns, significant unemployment, and other
conditions that may occur from time to time in Florida, which may not
significantly affect its more geographically diversified competitors.
(19) Commitments and Contingencies
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 (the "Securities
Litigation"). In March 1997, the court consolidated these lawsuits and appointed
F-37
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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.
Pursuant to court ordered mediation, counsel for the parties have engaged in
discussions in an effort to resolve the Securities Litigation. On January 14,
1998, counsel for the Company, counsel for William D. Griffin and counsel for
the plaintiffs reached an oral agreement on terms to recommend to their clients
to settle this litigation. The proposed settlement is contingent upon the
following: consummation of the transactions contemplated by the Purchase
Agreement with Zenith, certification of a settlement class, payment by the
Company to the settlement class, disclosure of certain documents, interviews of
individuals to verify information relating to the settlement and a release
against all defendants. Counsel to the parties are in the process of finalizing
the initial settlement documents. The settlement will require preliminary
approval by the court as to the fairness of the terms of the settlement. Notice
to the settlement class and an opportunity to object to the terms of the
settlement and to exclude themselves from the settlement class is also required.
The settlement must receive final court approval after notice to the settlement
class and an opportunity to object or opt out is provided. Not all of the terms
of the settlement have been finalized as of this date. Counsel to the parties
have agreed to recommend to their respective clients a settlement amount of
$21.0 million. The Company estimates that $8.0 million of insurance proceeds
will be available for contribution to the settlement amount, as well as related
costs and expenses. Given the preliminary nature of this settlement and the
various contingencies relating to its consummation, there can be no assurance
that this litigation will ultimately be settled on this basis. The Company
recognized the $21.0 million proposed settlement and the related insurance
proceeds in the accompanying financial statements as of December 31, 1997.
In April 1996, RISCORP Insurance Company and certain officers and
directors were named as defendants in a purported class action suit filed in the
United States District Court for the Southern District of Florida (the "Vero
Cricket Litigation"). In this action, the plaintiffs claimed that 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 plaintiffs sought
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., claimed to be former
policyholders of CMIC and claimed to represent others similarly situated.
On December 5, 1997, counsel for the parties reached an agreement to
recommend to their respective clients a settlement of the claims asserted in the
Vero Cricket litigation. Plaintiff's counsel has confirmed that the terms of the
settlement are acceptable to the named plaintiffs. The Company's Board of
Directors has approved the terms of the settlement, and the final settlement
documents are being reviewed by the
F-38
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
parties and counsel. The settlement is contingent upon preliminary approval by
the court as to the fairness of the settlement, certification of a settlement
class, notice to the settlement class, opportunity of the settlement class
members to object and withdraw, no termination by either party and final
approval by the court. Pursuant to the terms of the settlement agreement and
subject to the satisfaction of the contingencies discussed above, RISCORP
Insurance Company will pay to the plaintiffs a settlement amount of $475,000.
The Company estimates that 75 percent of the settlement amount will be covered
by insurance. The Company recognized the $475,000 proposed settlement and the
related insurance proceeds in the accompanying financial statements as of
December 31, 1997.
On September 18, 1997, the United States Attorney's office in Pensacola,
Florida announced that a United States grand jury had indicted RISCORP, Inc.,
RISCORP Management Services, Inc. (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 RISCORP, Inc. on the same day. Mr.
Griffin has resigned from the Board of Directors of the Company and all other
positions with the Company. RMS agreed to cease to operate as a third party
administrator effective October 31, 1997. As of December 31, 1996, RMS recorded
$1.0 million for the estimated fines and costs related to this matter. On
February 18, 1998, a second superseding indictment was issued against the five
former officers including Mr. Griffin. Neither the Company nor any of its
subsidiaries were named as defendants in the second indictment. The charges
asserted in the second indictment, like those in the first indictment, stem from
alleged illegal political campaign contributions.
On July 17, 1997, plaintiffs Thomas K. Albrecht and Peter D. Norman filed,
in the Circuit Court of Montgomery County, Alabama, an action against the
Company, Mr. William D. Griffin and several other former officers of the
Company. The suit alleged violations of federal and state securities laws and
breach of contract resulting from the purchase of IAA by the Company in 1996.
The plaintiffs sought compensatory and punitive damages and equitable relief. On
or about December 2, 1997, counsel for the Company and counsel for plaintiffs
negotiated a settlement of this action. Settlement documents have been approved
and executed by all parties. As part of the settlement agreement, the Company
paid $2.0 million to plaintiffs, RISCORP, Inc. advanced $2.3 million to
plaintiffs against an anticipated final distribution to shareholders and
RISCORP, Inc. accelerated a distribution of 790,336 additional shares of Class A
Common Stock to the plaintiffs. Such shares were contemplated under the terms of
the Agreement and Plan of Merger by and among the Company, RISCORP-IAA, Inc.,
IAA, Thomas K. Albrecht and Peter D. Norman, dated as of September 17, 1996. The
Company estimates that $2.0 million of insurance proceeds will be available to
offset the total settlement amount as well as related costs and expenses. The
Company recognized the $2.0 million proposed settlement and the related
insurance proceeds in the accompanying financial statements as of December 31,
1997. As part of the settlement agreement, the plaintiffs agreed to vote all
their shares of Class A Common Stock in favor of the Purchase Agreement and the
transaction contemplated therein. Plaintiffs are record holders of 1,580,672
shares of Class A Common Stock, and, thus, these plaintiffs hold 13 percent of
the outstanding shares of Class A Common Stock.
F-39
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On August 20, 1997, RISCORP, Inc., the Company, 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 acquisition of 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. It should be noted that the frequency of
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which the Company has substantial
business, particularly in Alabama, continues to increase universally, creating
the potential for unpredictable material adverse judgments in any given punitive
damage suit.
In June 1997, the Company terminated a number of employees in connection
with the workforce reduction. As a result of the workforce reduction, a number
of former employees have initiated proceedings, including arbitration, against
the Company for certain severance benefits. The Company intends to vigorously
defend these suits; however, there can be no assurance that it will prevail in
these proceedings.
On March 13, 1998, RIC and RPC were named as defendants in a purported
class action against the National Council on Compensation Insurance, Inc. and
all insurers selling workers' compensation insurance in the State of Florida
from 1985 to 1998. The suit claims the defendants violated the Sherman Antitrust
Act, RICO, the Florida Antitrust Act and the common law in the collection of
workers' compensation premiums for alleged residual market loads. The suit seeks
compensatory and punitive damages and treble damages for the RICO counts. The
named plaintiff, Bristol Hotel Asset Company, claims to be a purchaser of
Florida workers' compensation insurance and claims to represent others similarly
situated. The Company intends to vigorously defend this action; however, there
can be no assurance it will prevail in the litigation.
The Company, in the normal course of business, is party to various
lawsuits which management believes will not materially affect the financial
position of the Company. Based upon information presently available, and in
light of legal and other defenses available to the Company, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. However, no assurance can be given, or
may be taken that material adverse judgments will not be rendered against the
Company as a result of the aforementioned matters.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1997 and 1996. In
addition, certain of the lawsuits and related legal expenses may be covered
under directors and officers' insurance coverage maintained by the Company.
The Company entered into a contract with the Florida Chamber of Commerce
("the Chamber") in 1993, under which the Company agreed to pay the Chamber $1.0
million annually through 1998 for the Chamber's endorsement of the Company, a
non-compete agreement by the Chamber and certain other restrictive covenants.
The fee incurred for each of the years ended December 31, 1996 and 1997 under
this agreement was $1.0 million. The Company collateralized its obligation under
the agreement with an irrevocable letter of credit and RISCORP secured the
letter of credit with certificates of deposit. The final payment of $1.0 million
under this contract was paid in December 1997.
F-40
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On October 9, 1997, the MDOI completed an examination of the Company's
books and records as of December 31, 1996. The MDOI issued a final report on the
1996 examination on December 10, 1997. The statutory capital and surplus as of
December 31, 1996 determined by the examiners was $29,345,804 compared to
$31,012,399 reported by RNIC in its 1996 statutory financial statements. The
most significant examination adjustment was the non-admission of an accounts
receivable balance relating to the loss portfolio transfer from OSAA in the
amount of $900,000. This balance was paid in full by OSAA. The remaining
adjustments of $800,000 pertain to items that were either collected or charged
to expense during 1997. These examination adjustments relate to the statutory
financial statements and have no impact on the GAAP financial statements.
During February 1998, the FDOI completed an examination of the statutory
books and records of RIC and RPC as of December 31, 1996. The FDOI has not yet
issued a report; however, based on the February 5, 1998 closing conference with
the FDOI examiners, the resolution of the impact of the matters raised by the
FDOI will not have a material impact on the December 31, 1996 statutory
financial statements of RIC and RPC. However, because the FDOI has not released
the final results of their examination, Management cannot determine the
materiality or dollar amount of adjustments, if any, to the December 31, 1996
statutory financial statements resulting from the FDOI's 1996 examinations of
RIC and RPC. Management believes that any adjustments arising out of the
statutory examinations of RIC and RPC will have no material impact on the
accompanying GAAP financial statements.
The Company 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 surplus
needs for its insurance subsidiaries, and other general and administrative
expenses.
(20) Proposed Sale to Zenith Insurance Company ("Zenith")
On June 17, 1997, RISCORP and certain of its subsidiaries entered into an
Asset Purchase Agreement for the sale of substantially all of the assets and the
assumption of certain liabilities of RISCORP and its subsidiaries to Zenith in
exchange for cash. The Asset Purchase Agreement was amended on June 26, 1997 and
July 11, 1997. The purchase price for the net assets of RISCORP and its
subsidiaries to be acquired by Zenith is undetermined at this time but will be
based on the GAAP Statement of Transferred Assets and Transferred Liabilities as
of the closing date. The Statement of Transferred Assets and Transferred
Liabilities is required to be prepared by RISCORP and audited by RISCORP's
independent accountants within 70 days from the closing date. 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. RISCORP has scheduled a special meeting
of shareholders to be held on March 26, 1998 for the purpose of voting upon the
proposal to approve and adopt the Asset Purchase Agreement. Assuming the
shareholders approve the Purchase Agreement on March 26, 1998, the parties
expect the transaction to close on April 1, 1998.
F-41
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(21) Adjustments Made in the Fourth Quarter
As described below, the Company made certain adjustments in the fourth
quarter of 1997 which have been included in the accompanying December 31, 1997
financial statements. The impact of the fourth quarter adjustments described
below was an increase of $0.3 million to 1997 income before income taxes.
Allowance for Doubtful Accounts
In the fourth quarter of 1997, the Company completed a detailed review of
the composition of the December 31, 1997 premium receivables balance in
connection with the determination of the allowance for doubtful accounts. This
analysis was the continuation of the analysis performed in connection with the
determination of the 1996 allowance for doubtful accounts discussed below. As a
result of this analysis, an increase of $4.4 million was recorded in the
allowance for doubtful accounts to increase the allowance for doubtful accounts
to $21.4 million.
In addition, the allowance for doubtful accounts was reduced by $14.4
million in the fourth quarter as a result of write-offs of bad debts of $14.4
million. This adjustment had no effect on the accompanying statements of income.
Proposed Litigation Settlements
As more fully discussed in Note 19, the Company negotiated settlements of
three lawsuits during December 1997 and January 1998. As a result of these
proposed settlements, the Company recognized an expense in the fourth quarter of
$13.1 million, net of estimated insurance proceeds, in the accompanying
financial statements as of December 31, 1997.
Involuntary Pools
During 1996, RISCORP expanded its workers' compensation business into
Alabama, Georgia, Kansas, North Carolina, South Carolina and Virginia primarily
as a result of the acquisition of Atlas Insurance Company (see Note 3). The
National Council on Compensation Insurance, Inc. ("NCCI") is the administrator
for the National Workers' Compensation Reinsurance Pool ("POOL") for the above
states.
On January 9, 1998, the NCCI notified RISCORP of its proportionate share
of POOL results through September 30, 1997, and RISCORP recorded the information
received from the NCCI in the fourth quarter of 1997. The impact of recording
the information was an increase of earned premiums of $11.6 million, increases
in loss and loss adjustment expenses of $8.9 million and increases in
commissions, general and administrative expenses of $5.0 million.
Favorable Reserve Development
During the fourth quarter of 1997, the Company completed a detailed
analysis of its loss and loss adjustment expense reserves in connection with the
determination of the December 31, 1997 loss and loss
F-42
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
adjustment expense reserves. This analysis, combined with favorable development
experienced in the fourth quarter of 1997, resulted in an overall reduction of
the loss and loss adjustment expense reserves of $12.2 million in the fourth
quarter of 1997.
Quota Share Ceding Commissions
The Company recognized $6.3 million of ceding commission income in the
fourth quarter of 1997 primarily resulting from the impact of the decrease in
loss and loss adjustment expense reserves discussed above. Ceding commission
income is recorded as a reduction of commissions, general and administrative
expenses in the accompanying financial statements.
Stock Options
In the fourth quarter of 1997, the Company terminated all stock options
previously granted under its stock option plan. As a result of the termination
of the stock options, the Company reversed $1.6 million of compensation expense
that had previously been recorded on the stock options granted by the Company.
As described below, the Company made certain adjustments in the fourth
quarter of 1996 which have been included in the accompanying December 31, 1996
financial statements. The impact of the fourth quarter adjustments described
below was a reduction of $11.5 million to 1996 income before income taxes.
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 $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
As more fully discussed in Note 2(i) and Note 3, 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. The Company
performed an analysis of the carrying value of the goodwill recorded in
connection with this acquisition and recognized an impairment loss of $2.8
million in the fourth quarter of 1996. This impairment loss was 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 IAA was $8.5 million at December 31, 1996.
F-43
<PAGE>
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Litigation Expenses
As discussed in Note 19, in the fourth quarter of 1996, the Company
recorded a provision of $1.0 million for payment of fines and other costs
related to the RMS matter. This provision was included in the Company's
Consolidated Statement of Income for the year ended December 31, 1996.
F-44
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
RISCORP, Inc. and Subsidiaries
December 31, 1997
(in thousands)
Value at Which
Shown in the
Type of Investment Cost Market Value Balance Sheet
Available for sale:
Fixed maturity securities:
<S> <C> <C> <C>
Municipal government obligations $ 58,294 $ 59,010 $ 59,010
U.S. government obligations 38,065 39,248 39,248
Corporate obligations 88,102 89,199 89,199
Mortgage backed securities 1,932 1,968 1,968
Asset backed securities 9,920 9,966 9,966
--------- ----------- -----------
Total available for sale 196,313 199,391 199,391
--------- --------- ---------
Held to maturity:
Fixed maturity securities:
U.S. government obligations 18,434 18,629 18,434
Municipal government obligations 4,186 4,248 4,186
Certificates of deposit 1,470 1,470 1,470
---------- ----------- -----------
Total held to maturity 24,090 24,347 24,090
--------- ---------- ----------
Total investments $220,403 $223,738 $223,481
======== ======== ========
Available for sale:
Unrestricted $142,876 $145,571 $145,571
Restricted 53,437 53,820 53,820
--------- ---------- ----------
$196,313 $199,391 $199,391
======== ======== ========
</TABLE>
See accompanying auditors' report.
F-45
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
RISCORP, Inc. (Parent Company Only)
(in thousands)
December 31, December 31,
1997 1996
ASSETS
<S> <C> <C>
Investments at fair value (cost $1,000 and $7,816) 1,000 $ 7,816
Cash and cash equivalents (1,152) 274
Investment in wholly-owned subsidiaries 172,463 153,118
Surplus note receivable from subsidiary 13,000 13,000
Other assets 28,145 8,186
---------- ------------
Total assets $ 213,456 $ 182,394
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 15,000 $ 15,000
Accrued expenses and other liabilities 34,923 7,986
---------- ------------
Total liabilities 49,923 22,986
---------- -----------
Class A Common Stock subject to put options - 2,100
---------- ------------
Shareholders' equity:
Common stock 363 363
Additional paid-in capital 135,974 137,813
Net unrealized gains on investments 2,002 1,769
Unearned compensation--stock options - (546)
Retained earnings 25,195 17,909
Treasury stock at cost, 112.6 shares (1) -
---------- ----------
Total shareholders' equity 163,533 157,308
---------- ----------
Total liabilities and shareholders' equity $ 213,456 $ 182,394
========= =========
</TABLE>
See notes to consolidated financial statements.
See accompanying auditors' report.
F-46
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
RISCORP, Inc. (Parent Company Only)
(in thousands)
Year ended December 31,
----------------------------------------------
1997 1996 1995
Revenues:
<S> <C> <C> <C>
Net investment income $ 517 $ 2,590 $ 1,469
Dividend income 3,446 18,335 2,652
Other income - 3 -
Total revenue 3,963 20,928 4,121
Expenses:
General and administrative expenses 16,421 1,995 90
Interest expens 1,800 2,234 4,170
Depreciation and amortization 857 3,830 205
Total expenses 19,078 8,059 4,465
(Loss) income before equity in income of
subsidiaries and income taxes (15,115) 12,869 (344)
Equity in income (loss) of subsidiaries before
income taxes 20,935 (11,428) 13,036
--------- -------- ---------
Income before income taxes 5,820 1,441 12,692
Income taxes (1,466) (957) (991)
---------- ----------- -----------
Net income $ 7,286 $ 2,398 $ 13,683
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
See accompanying auditors' report.
F-47
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOW
RISCORP, Inc. (Parent Company Only)
(in thousands)
Year ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 7,286 $ 2,398 $ 13,683
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in accrued expenses and other liabilities 26,934 3,421 3,415
Depreciation and amortization 857 3,830 -
Net realized loss (gain) on sale of investments 35 (4) -
(Increase) decrease in other assets (20,555) 2,750 4,494
Equity in net (income) loss of subsidiaries (18,344) 5,967 (11,035)
Net amortization of discounts on investments - 80 -
Increase in surplus note receivable - - (13,000)
----------- ------------ -----------
Net cash (used in) provided by operating activities (3,787) 18,442 (2,443)
----------- ------------ -----------
Cash flows from investing activities:
Proceeds from sale of fixed maturities--available for sale 4,206 44,124 -
Proceeds from the sale of equity securities 1,548 353 -
Proceeds from maturities of fixed maturities--available
for sale 1,000 1,000 -
Capital contributions to subsidiaries (1,000) (114,375) (31,045)
Purchase of fixed maturities--available for sale - (48,438) (3,000)
Purchase of equity securities - (1,905) -
Purchase of IAA, net of cash acquired - 282 -
Purchase of RISC, net of cash acquired - (538) -
----------- ------------ -----------
Net cash used in investing activities 5,754 (119,497) (34,045)
----------- ------------ -----------
Cash flows from financing activities:
Purchase of treasury stock subject to put option (2,100) - -
Other, net (1,293) 709 -
Proceeds from note payable - - 43,000
Principal repayment of notes payable - (27,000) (6,867)
Exercise of stock options - 65 -
Proceeds of initial offering of common stock - 127,908 -
----------- ------------ -----------
Net cash (used in) provided by financing activities (3,393) 101,682 36,133
----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents (1,426) 627 (355)
Cash and cash equivalents, beginning of period 274 (353) 2
=========== ============ ===========
Cash and cash equivalents, end of year $ (1,152) $ 274 $ (353)
=========== ============ ===========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 1,800 $ 2,684 $ 3,966
=========== ============ ===========
Income taxes $ 6,556 $ 15,127 $ 4,969
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
See accompanying auditors' report.
F-48
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV - REINSURANCE
RISCORP, Inc. and Subsidiaries
(in thousands)
Ceded to Assumed Percentage
Gross Other From Other Net of Amount
Amount Companies Companies Amount Assumed to Net
Years Ended
December 31,
1997
<S> <C> <C> <C> <C> <C>
Premiums earned $ 328,191 $ 167,274 $ 18,812 $ 179,729 10.5%
========= ========= ======== ========= =====
1996
Premiums earned $ 326,875 $ 165,022 $ 11,704 $ 173,557 6.7%
========= ========= ======== ========= ====
1995
Premiums earned $ 274,351 $ 139,144 $ 680 $ 135,887 .5%
========= ========= ========== ========= ===
</TABLE>
See accompanying auditors' report.
F-49
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMENTAL INFORMATION
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
(Col. C)
Reserves for Losses and Loss Amortization Net
Deferred Unpaid Losses Discount, Adjustment Expenses of Deferred Paid Losses
Policy and Loss if any, Net Net Incurred Related to: Policy and Loss Net
Acquisition Adjustment deducted Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Year Costs Expenses in Col. C. Premiums Premiums Income Year Years Costs Expenses Written
---- ------- ---------- ---------- -------- -------- -------- ------ ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $ (2,053) $ 437,038 $ - $ 56,324 $ 179,729 $ 16,447 $ 125,764 $ (2,401) $ 49,221 $ 120,285 $ 157,495
1996 $ 446 $ 458,239 $ - $ 102,562 $ 173,557 $ 12,194 $ 123,986 $ 3,023 $ 33,716 $ 111,963 $ 179,706
1995 $ 2,389 $ 261,700 $ - $ 64,395 $ 135,887 $ 6,708 $ 87,467 $ 5,198 $ 46,878 $ 128,298 $ 123,429
</TABLE>
See accompanying auditors' report.
F-50
<PAGE>
MANAGEMENT AGREEMENT
of
RISCORP, INC.
THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into as
of the 18th day of February, 1998, by and among The Phoenix Management Company,
Ltd., a Florida limited partnership (the "Management Company"), RISCORP, Inc., a
Florida corporation ("RI"), RISCORP Management Services, Inc., a Florida
corporation ("RMS"), 1390 Main Street Services, Inc., a Florida corporation
("1390"), RISCORP of Illinois, Inc., an Illinois corporation ("ROI"),
Independent Association Administrators, Incorporated, an Alabama corporation
("IAA"), RISCORP Insurance Services, Inc., a Florida corporation ("RIS"),
RISCORP Managed Care Services, Inc., a Florida corporation ("RMCS"), CompSource,
Inc., a North Carolina corporation ("CompSource"), RISCORP Real Estate Holdings,
Inc., a Florida corporation ("RREH"), RISCORP West, Inc., an Oklahoma
corporation ("RWl"), RISCORP of Florida, Inc., a Florida corporation ("ROF"),
RISCORP Insurance Company, a Florida corporation ("RIC"), RISCORP Property &
Casualty Insurance Company, a Florida corporation ("RPC"), RISCORP National
Insurance Company, a Missouri corporation ("RNIC"), RISCORP Services, Inc., a
Florida corporation ("RSI"), RISCORP Staffing Solutions Holding, Inc., a Florida
corporation ("RSSH"), RISCORP Staffing Solutions, Inc. I, a Florida corporation
("RSSI"), and RISCORP Staffing Solutions, Inc. II, a Florida corporation
("RSSII") (RI, RMS, 1390, ROI, IAA, RIS, RMCS, CompSource, RREH, RWI, ROF, RIC,
RPC, RNIC, RSI, RSSH, RSSI and RSSII are hereinafter collectively or, if the
context otherwise requires, individually referred to as "RISCORP"), Frederick M.
Dawson, an individual resident of the State of Florida ("Mr. Dawson"), and
Walter E. Riehemann, an individual resident of the State of Florida ("Mr.
Riehemann").
R E C I T A L S:
WHEREAS, RISCORP has agreed to transfer substantially all of its
operating assets and noncontingent liabilities to Zenith Insurance Company, a
California corporation ("Zenith"), pursuant to the terms of that certain Asset
Purchase Agreement by and among RISCORP and Zenith dated June 17, 1997, as
amended (the "Asset Purchase Agreement"), and following the consummation of such
transaction it is anticipated that RISCORP will not have any employees;
WHEREAS, Mr. Dawson, the current President and CEO of RI, was hired by
RI as a crisis manager pursuant to the terms of that certain Employment
Agreement by and between Mr. Dawson, RMS and RI, effective as of May 19, 1997
(the "Employment Agreement") and, in such capacity, has demonstrated exceptional
leadership and has significantly contributed to the value that is expected to be
available for distribution to the shareholders of RI following the sale to
Zenith and the resolution of all claims and contingencies related to RISCORP's
former operations;
WHEREAS, the consummation of the sale to Zenith will constitute a
Change of Control as such term is defined in the Employment Agreement and, as
such, Mr. Dawson will have the right to terminate the Employment Agreement
immediately after the closing date;
WHEREAS, Mr. Riehemann, the current Senior Vice President and General
Counsel of RI, will also have the right to terminate his employment with RI in
connection with the Change of Control pursuant to the terms of his Employment
Agreement with RMS dated April 2, 1997 (the "Riehemann Employment Agreement");
WHEREAS, Mr. Dawson has formed the Management Company to provide
executive management and consulting services to business organizations following
the sale to Zenith;
WHEREAS, Mr. Dawson will serve as the President of the general partner
of the Management Company and, in such capacity, shall control the activities
and operations of the Management Company, and Mr. Walter E. Riehemann will serve
as Vice President and Secretary of the general partner;
WHEREAS, given the significant issues that will continue to face
RISCORP following the sale to Zenith and the financial consequences that the
resolution of these issues will have on any subsequent distribution to the
shareholders of RI, the Board of Directors has determined that it is in the best
interests of RI and its shareholders to retain the Management Company following
such sale;
WHEREAS, pursuant to the terms of this Agreement, RISCORP hereby
retains the Management Company and through it the personal services of Mr.
Dawson and the other senior management personnel of the Management Company,
including Mr. Riehemann, to provide all management services required in
connection with the ongoing operations of RISCORP following the sale to Zenith,
and the Management Company agrees to accept such duties and responsibilities on
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants, conditions,
and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto do hereby covenant and agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "Board of Directors" or "Board" means the Board of Directors
of RI.
1.2 "Effective Date" means the date of the consummation of the sale of
substantially all of the assets and noncontingent liabilities of RISCORP to
Zenith pursuant to the terms of the Asset Purchase Agreement commencing
immediately following the consummation of such transaction and the termination
of the Employment Agreement.
1.3 "Management Company" means The Phoenix Management Company, Ltd., a
Florida limited partnership, which will serve as the management company for
RISCORP pursuant to this Agreement.
1.4 "Records of RISCORP" means, whether hard copy or on computer media,
without limitation: any records pertaining to underwriting and claims, both open
and closed; procedure manuals; mailing lists; safety reports and data; marketing
plans, data and records; statistical reports; accounting records; historical
records; funds received and in the custody of the Management Company; records
relating to the book of business, contracts and claims; all government filings;
and any other documents, materials, data, computer disks, tapes, source
documents, or data file layouts pertaining to or bearing information about
RISCORP and in the possession of the Management Company, its agents or
subcontractors.
ARTICLE II
TERMINATION OF EMPLOYMENT AGREEMENTS
2.1 Termination of Dawson Employment Agreement. Immediately following
the consummation of the sale to Zenith, RI shall make cash payments to Mr.
Dawson required pursuant to Sections 3(d) and 7(b) of the Employment Agreement
and, upon the receipt of such payments, the Employment Agreement shall be
terminated and shall be of no further force and effect. In connection with the
delivery of such payment, the parties shall enter into a Termination Agreement
evidencing the termination of each party's rights, duties and obligations under
the Employment Agreement including, without limitation, the termination of the
stock option grant set forth in Section 3(c) thereof and Mr. Dawson's right to
receive any of the shares thereunder.
2.2 Termination of Riehemann Employment Agreement. Immediately
following the consummation of the sale to Zenith, RMS shall make the cash
payment to Mr. Riehemann required pursuant to Section 7(b)(2)(i) of the
Riehemann Employment Agreement and, upon the receipt of such payment, the
Riehemann Employment Agreement (other than Section 8 thereof) shall be
terminated and shall be of no further force and effect. In connection with the
delivery of such payment, the parties shall enter into a Termination Agreement
evidencing the termination of each party's rights, duties and obligations
thereunder, other than the prohibitions with respect to the disclosure of
confidential information or engaging in competitive activities by Mr. Riehemann.
<PAGE>
ARTICLE III
DUTIES AND RESPONSIBILITIES OF MANAGEMENT COMPANY
3.1 Representations and Warranties of Management Company. The
Management Company represents and warrants that its principals, employees, or
subcontractors have the experience and qualifications to perform its duties
under the Agreement, including, but not limited to, management of the day-to-day
operations of RISCORP after the consummation of the transactions with Zenith,
managing the preparation, negotiation and defense of the final business balance
sheet to be provided to Zenith within 70 days of the closing thereof, providing
assistance in the overall planning and coordination of the business of RISCORP,
providing summary data relating to RISCORP's operations, and the skill and
experience to assist RISCORP in the collection and marshaling of RISCORP's
assets, resolving the outstanding liabilities of RISCORP and the orderly
liquidation of RISCORP. The Management Company further represents and warrants
that throughout the term of this Agreement Mr. Dawson shall control the
activities and operations of the Management Company and shall personally devote
a sufficient portion of his business time, efforts, skills, attention and
energies to enable the Management Company to perform the Services hereunder. The
Management Company agrees that neither it nor any of its senior management
personnel shall become engaged or involved in any activities or matters which
may adversely affect or reflect discredit on RISCORP or its respective
businesses, or conflict with the Services to be provided hereunder to RISCORP.
Nothing contained herein shall be construed to limit or restrict the passive
investment or other business activities of any of the senior management
personnel of the Management Company that do not interfere with the discharge of
the Services hereunder in any material respect.
3.2 Management Services. Subject to the direction and control of the
Board of Directors, the Management Company is hereby engaged to perform
directly, or, with the prior approval of the Board, to retain competent
professionals to perform, the following services in addition to those duties
otherwise contemplated in this Agreement (collectively, the "Services"), and the
Management Company hereby accepts such engagement on the terms and conditions
set forth herein:
A. General Management Responsibilities. The following duties
will be performed by the Management Company at its expense,
unless otherwise approved by the Board of Directors.
1. Management of the day-to-day operations and affairs
of RISCORP including, without limitation, performing
all duties normally performed by the chief executive
officer and other senior management personnel of a
corporation.
2. Management of all outsourcing contracts.
3. Management of all litigation.
4. Management of the preparation and defense of the
Proposed Business Balance Sheet and the determination
of the Final Business Balance Sheet (as such terms
are defined in the Asset Purchase Agreement) in
accordance with the terms of the Asset Purchase
Agreement.
5. Management of the indemnification process with
respect to all litigation targets (i.e. the Board,
RISCORP, as well as its officers, employees and
agents).
6. Management of claims investigation, targeting, data
evaluation, quantification of financial opportunity,
and ultimate litigation management.
7. Responsibility for the preparation of all shareholder
communications, press releases, responses to media
inquiries and similar public communications on behalf
of RISCORP for approval by the Board of Directors
prior to issuance.
8. Entering into contracts approved by the Board of Directors.
9. Performance of such other duties as may from time to
time be requested by the Board of Directors not
inconsistent with the Services set forth herein.
10. Responsibility for maintaining, at the expense of
RISCORP, all policies of insurance related to
RISCORP's continuing operations, including, without
limitation, appropriate D&O insurance coverage.
B. Monthly Accounting and Consulting Services. The Management Company
shall have oversight responsibility for the following functions with
the specific duties to be delegated, at the expense of RISCORP, to
competent professionals approved by the Board.
1. Deposit and account for all cash receipts.
2. Monitor cash balances in all bank accounts and
prepare cash transfers when necessary.
3. Prepare and maintain cash flow projections for
all entities to facilitate proper cash control.
4. Prepare invoices for all amounts due RISCORP and
monitor collection and aging of receivables.
5. Maintain accounts payable detail.
6. Review and approve all vendor invoices for payment
and prepare vendor checks. Subject to the
availability of sufficient cash, net of adequate
reserve cash balances, sign and mail checks when
required in order to obtain any vendor discounts.
7. Prepare payroll for the Company for those former employees
continuing to receive severance benefits.
8. Maintain all fixed asset schedules and account for all
additions and disposals.
9. Maintain monthly general ledgers for all entities
including:
a. recording of all cash receipts;
b. recording of all cash disbursements;
c. recording of all investment activity;
d. recording of the fixed asset transactions;
e. reconcile all bank accounts;
f. reconcile investment accounts;
g. verify the accurate and timely payment of
payroll taxes;
h. reconcile all remaining general ledger
balance sheet accounts monthly to verify
account balances; and
i. review all income statement accounts for
reasonableness of balances.
10. Prepare distribution payments to shareholders after
approval by the Board of Directors.
11. Prepare monthly financial statements on a GAAP and
statutory basis.
12. Prepare GAAP to statutory conversions of the accounting
data needed for certified audits.
13. Prepare budgets for the RISCORP entities remaining after
the Zenith transaction.
14. Prepare quarterly reports of actual vs. budgeted results
for review by the Board of Directors.
15. Prepare explanations of significant budget variances.
16. Prepare all premium tax returns for 1998.
17. Respond to all regulatory correspondence.
18. Maintain document depository of accounting records for
litigation and tax purposes.
19. Perform such other duties customarily performed by a chief
financial officer and a corporate accounting staff.
C. Regulatory Filings, Reports and Relationships with Regulatory
Authorities. The Management Company shall have oversight responsibility
for the following functions with the specific duties to be delegated,
at the expense of RISCORP, to competent professionals approved by the
Board.
1. Prepare and file all reports required under the
Securities Exchange Act of 1934, as amended, with the
Securities Exchange Commission ("SEC").
2. Prepare and file all reports required under
applicable insurance laws where any RISCORP entit
is required to file reports.
3. Meet with representatives of any state department of
insurance having jurisdiction over RISCORP, the SEC
or any other state or federal regulatory authority to
which RISCORP is subject and take such other actions
as may be necessary or appropriate to maintain and
enhance RISCORP's relationship with each such
regulatory authority.
D. Tax Services. The Management Company shall have oversight
responsibility for the following functions with the specific duties to
be delegated, at the expense of RISCORP, to competent professionals
approved by the Board.
1. Prepare and file all local, state and federal tax
returns for RISCORP, including but not limited to
income, property, franchise, sales and intangible
taxes.
2. Defend RISCORP in any audits related to its tax returns,
including gathering information and responding to questions.
3. Prepare tax information for financial statements.
4. Perform quarterly tax calculations and determine the
allocation of the tax liabilities among the entities.
5. To the extent necessary, prepare tax provisions and
returns for Third Coast Insurance Company,
Governmental Risk Insurance Trust, National Alliance
for Risk Management Association and the North
Carolina Commerce Fund.
6. Prepare and file information returns on Forms 1099
and provide backup withholding notices on Forms B.
E. General Administration. Except as set forth below, the
following duties will be performed by the Management Compan
at its expense, unless otherwise approved by the Board of
Directors
1. Make such reports pertaining to matters of concern or
general interest with respect to RISCORP as the Board
of Directors may reasonably request and provide such
administrative assistance and staff support to the
Board and its committees as may be reasonably
necessary for the directors to carry out their duties
and responsibilities to RISCORP.
2. Purchase or otherwise demonstrate to the satisfaction
of the Board of Directors that the Management Company
has acquired, and is maintaining in full force and
effect throughout the term of this Agreement,
fidelity bond coverages in reasonable amounts and as
required by the applicable insurance departments. The
allocated portion of the premiums for such fidelity
bond coverage relating to that portion of the
Management Company's operations performed on behalf
of RISCORP shall be purchased and maintained at
RISCORP expense.
3. Provide to the certified public accountants selected
by the Board such reports and information as may
reasonably be necessary to enable such accountants to
express their professional opinion as to the
financial condition of RISCORP.
4. Upon request of the Board of Directors, represent
RISCORP at any examinations, hearings, meetings, and
administrative inquiries involving the financial
interests of RISCORP, and before the SEC or any
insurance department or any other agency of a state
in which RISCORP does business; provided, however,
that the Management Company shall not bear the
expense of RISCORP's separate representation by an
attorney and any other professional advisors at such
examinations, hearings, meetings and administrative
inquiries.
5. Upon reasonable request, provide to the actuaries
employed by RISCORP such reports and information as
may reasonably be necessary for such actuaries to
express their professional opinion as to the
financial status of RISCORP.
6. Provide to the Board of Directors financial
information and reports regarding RISCORP, assist in
overseeing the fiscal policies and financial matters
of RISCORP, provide administrative support for the
fiscal operation and management of RISCORP, including
preparation, accumulation and maintenance of the
Records of RISCORP in accordance with statutes or
regulations promulgated by the SEC, the Internal
Revenue Service or any insurance department or
governing authority.
F. Investment Policy. The following duties will be performed by the
Management Company at its expense, unless otherwise approved by the
Board of Directors.
1. Prepare and submit to the Board of Directors for
approval or modification, as appropriate, an
investment policy plan for RISCORP.
2. Coordinate investment transactions with one or more
investment advisers selected by the Management
Company with the approval of the Board of Directors.
3. Verify that the investment policy adopted by the
Board of Directors is properly implemented and
followed by the aforesaid investment advisers.
4. Provide to the Board of Directors, at reasonable
intervals, reports regarding compliance with the
provisions of the applicable law regulating
permissible investment policies.
5. Provide to the Board of Directors, at reasonable
intervals, reports regarding compliance with
investment policies established by RISCORP.
6. Provide to the Board of Directors, at least
quarterly, a portfolio analysis detailing
descriptions of securities, maturity dates,
interest/dividend rates, yield to maturity, after tax
yield, par value, book value, and realized and
unrealized gains/losses.
G. Auditing. Cooperate with and provide such information relating to
RISCORP as may be reasonably necessary for the external auditors or other
qualified consultants to evaluate the performance by the Management Company of
its duties and responsibilities.
H. Budget. Prepare a proposed annual budget to be reviewed, amended,
modified or revised, if necessary, and approved by the Board.
I. Personnel. In connection with discharging its duties under this
Agreement, Management Company shall be responsible for employing at its expense
such personnel as may be necessary to perform the Services contemplated by this
Agreement, subject to the terms hereof.
J. Plan of Liquidation. In a timely manner, prepare and submit
to the Board of Directors for approval or modification, as appropriate,
a plan of liquidation for RISCORP.
K. Miscellaneous. Provide such other reasonably necessary services as
may be required to fully execute and perform the Management Company's duties and
responsibilities pursuant to this Agreement.
ARTICLE IV
COMPENSATION
4.1 Management Fee. In consideration for the services provided by the
Management Company hereunder, RISCORP shall pay the Management Company $100,000
per month on the first day of each month during the term of this Agreement
(excluding the final six months of the initial term as set forth below), plus
reasonable and necessary out-of-pocket expenses of the Management Company,
including but not limited to, RISCORP's allocated portion of all insurance
costs, supplies, facilities, equipment and transportation expenses incurred in
connection with the services provided by the Management Company to or on behalf
of RISCORP. The fees and expenses payable hereunder shall be prorated for any
partial month that this Agreement is in effect. Upon the Effective Date, RISCORP
shall pay to the Management Company a retainer of $600,000 which shall be
applied by the Management Company against the fees due to the Management Company
during the final six (6) months of the initial term of this Agreement.
4.2 Restricted Stock Grant. On the Effective Date, RISCORP shall
deliver to the Share Custodian (as such term is defined in Exhibit A)
certificates representing 1,725,000 shares of RISCORP, Inc. Class A Common Stock
(the "Restricted Stock"). Such shares shall be subject to the terms and
conditions of a Restricted Stock Award Agreement in substantially the form of
Exhibit A attached hereto. Ten days prior to the date any tax payment is due by
the partners of the Management Company pursuant to an election under Section
83(b) of the Internal Revenue Code, as amended, to include the value of such
shares of Restricted Stock in income on the date of grant, RISCORP shall pay the
Management Company an amount which, on an after-tax basis, is sufficient to
reimburse the partners of the Management Company for that portion of all federal
income, employment and excise taxes incurred in connection with such election
under Section 83(b) then being paid. RISCORP further agrees to indemnify and
hold harmless the partners of the Management Company, on an after-tax basis,
from any additional federal taxes, interest or penalties incurred in connection
with this Restricted Stock grant (exclusive of any assessment for state taxes)
by the partners of the Management Company in the event any of the foregoing
taxing authorities assess one or more of the partners for any such additional
taxes, interest or penalties not initially reimbursed by RISCORP. RISCORP and
the Management Company agree that the initial reimbursement payment shall be
equal to 71.05% of the aggregate value of the shares of Restricted Stock on the
date of grant as reported in the over-the-counter market and that the foregoing
amount is not intended to include any reimbursement for any state taxes that may
be payable by any partner of the Management Company. For purposes of this
Section, "partners of the Management Company" includes such persons or entities
as are subject to federal tax on income recognized by the Management Company.
4.3 Expenses. RISCORP shall reimburse the Management Company for the
reasonable expenses actually incurred by the Management Company for legal
services rendered and the advice of a compensation consultant in connection with
the negotiation of this Agreement within 10 business days of the receipt of
acceptable invoices for such services approved by the Board of Directors.
RISCORP shall also reimburse the Management Company for its allocated portion
(not to exceed the lesser of 25% or $5,000) of the organization costs of the
Management Company and for all customary business and travel expenses approved
by the Board within 10 business days of the receipt of acceptable expense
reports. In addition, the Management Company will be provided with such number
of corporate credit cards in the name of RISCORP as the Board of Directors may
approve to help defray out-of-pocket expenses.
ARTICLE V
EXPENSES OF RISCORP
It is understood and agreed by the parties that the fees paid to the
Management Company are in consideration for the Management Company performing
the Services described herein, but that such fees do not include the following
services and expenses, which shall be borne by RISCORP:
5.1 The cost of services performed by any actuary retained on behalf of
RISCORP.
5.2 The cost of audits by certified public accountants or other
auditors retained on behalf of RISCORP as required by applicable law or
regulations, and preparation of financial statements (whether "audited" or
periodic "reviewed") and all returns and reports required by federal, state or
local taxing authorities.
5.3 Legal fees for services performed by attorneys retained on behalf
of RISCORP.
5.4 All legal fees, costs and expenses incurred in the prosecution
or defense of lawsuits filed by or against RISCORP.
5.5 The cost of services performed by any other professionals retained
with the approval of the Board of Directors on behalf of RISCORP, including but
not limited to financial consultants to operate as the finance department of
RISCORP, information systems specialists to help gather and preserve the Records
of RISCORP and tax professionals to assist in the preparation, filing and
defense of RISCORP tax returns.
5.6 The costs incurred on behalf of RISCORP related to any
examination or investigation by the SEC, the IRS or any insurance department.
5.7 Premiums for errors and omissions insurance, directors and officers
insurance, and fidelity coverage (including an allocated portion of the premiums
for such coverage related to that portion of the Management Company's operations
performed on behalf of RISCORP) and surety bonds to satisfy the needs of
RISCORP, its officers, directors, employees and agents.
5.8 Such other reasonable and necessary expenses incurred by the
Management Company in the performance of its duties hereunder and approved by
the Board.
5.9 Cost of investing RISCORP monies.
5.10 Taxes and assessments charged against RISCORP.
5.11 The Management Company shall prepare and submit to the Board of
Directors a suggested annual budget for the fees, costs and other expenses to be
incurred by RISCORP described in this Article V. Subject to the direction and
control of the Board, upon approval of a budget, the Management Company shall
proceed with carrying out the programs and projects contemplated therein, with
the costs thereof to be advanced monthly by RI and at the rate provided in the
budget.
5.12 All other expenses described under this Article V shall be paid by
either RISCORP or the Management Company according to such procedures as the
parties shall agree upon from time to time; provided, however, that if the
Management Company pays for any such items, it will be reimbursed by RISCORP
within ten (10) days after providing copies of the invoice and its checks to
RISCORP or such other reasonable time as the parties may determine.
<PAGE>
ARTICLE VI
RECORDS AND OFFICE
6.1 Principal Office. The Management Company shall maintain at
its principal office an original counterpart of this Agreement.
6.2 Access to Records. The Board of Directors and its representatives
shall have complete and unfettered access to the books and records of RISCORP
maintained by the Management Company and the Management Company shall make all
such books and records reasonably available at the request of the Board.
6.3 Location of Records. The primary activities of the Management
Company under this Agreement shall be handled from RISCORP's offices in
Sarasota, Florida and Orlando, Florida, and the Records of RISCORP shall be
maintained in the Sarasota office unless another location is approved by the
Board.
6.4 Confidentiality. The Management Company recognizes and acknowledges
that all programs and Records of RISCORP used by RISCORP are the property of
RISCORP and shall be deemed confidential and proprietary information of RISCORP.
The Management Company covenants and agrees that it will not, during the term of
this Agreement or after termination thereof, use, disseminate, disclose or in
any manner publish any such confidential and proprietary information without
RISCORP's consent; provided, however, that the Management Company may in its
discretion and at its expense make copies of or have access to such information
to the extent it is needed for defending or prosecuting any legal, tax, or other
administrative investigation or proceeding against the Management Company or
pertaining to the performance of its duties hereunder.
6.5 Return of Records and Assets. Upon termination of this Agreement,
all original Records of RISCORP, hardware and software (except software
purchased or developed by the Management Company) utilized in generating and
maintaining those records in the custody of the Management Company or its
subcontractors shall be assembled by the Management Company and delivered to
RISCORP all at the expense of RISCORP; provided, however, that the Management
Company may in its discretion and at its expense make copies of or have access
to such information to the extent it is needed for defending or prosecuting any
legal, tax, or other administrative investigation or proceeding against the
Management Company or pertaining to the performance of its duties hereunder.
ARTICLE VII
TERM AND TERMINATION
7.1 Term. The term of this Agreement shall commence on the Effective
Date and, subject to the terms of this Article VII, shall remain in full force
and effect for a period of three (3) years thereafter. After the initial term of
this Agreement, at the election of RISCORP, this Agreement may be renewed for an
additional one-year term upon providing written notice to the Management Company
of its election to extend this Agreement at least 120 days prior to the
termination of the initial term. Such extension, if elected by RISCORP, shall be
on the terms and conditions set forth herein, including the payment of the
monthly management fee set forth in Section 4.1 hereof.
7.2 Disqualification by Insurance Department. Notwithstanding the
provisions of Section 7.1, this Agreement may be terminated by RISCORP if the
Management Company is disqualified from acting as a management company by any
insurance department and the Management Company is thereafter unable to cure the
deficiencies cited by such agency within a reasonable period of time.
7.3 Annual Review. RISCORP's independent auditors shall annually review
the Management Company's performance hereunder. If the independent auditors or
the members of the Board of Directors (exclusive of Mr. Dawson) unanimously
determine in good faith that the Management Company is not in compliance, in all
material respects, with the terms of this Agreement or applicable law, then
written notice of such noncompliance shall be given to the Management Company
and the Management Company shall be given a reasonable time (not less than 60
days) to correct the noncompliance. If the Management Company fails to correct
the noncompliance in all material respects within such cure period, then the
Management Company shall pay RISCORP liquidated damages in the amount of ten
percent (10%) of the annual management fee then in effect and RISCORP shall have
the right to terminate this Agreement at the expiration of such cure period.
Unless the acts or omissions of the Management Company constitute gross
negligence or willful misconduct, such liquidated damages shall constitute the
satisfaction of all liabilities to RISCORP under this Agreement.
7.4 Termination by RISCORP. RISCORP shall have the right to terminate
this Agreement following the occurrence of any of the following events: (i) Mr.
Dawson ceases to actively exercise management and control over the activities
and operations of the Management Company on behalf of RISCORP, exclusive of any
period of physical or mental disability not in excess of 12 weeks during any
period of 12 consecutive months; (ii) Management Company's neglect of or refusal
to perform its duties or the material breach of any provision of this Agreement
by the Management Company if such breach is not cured within the time period
reasonably prescribed by the Board of Directors for such breach or violation
(such cure period to be not less than 60 days); (iii) any act of fraud,
misappropriation, dishonesty or embezzlement by any senior management personnel
of the Management Company; (iv) the indictment of any senior management
personnel of the Management Company for any felony criminal offense; (v) any
change of control, dissolution or liquidation of the Management Company; (vi)
any merger, consolidation or other reorganization of the Management Company,
other than a transaction not involving a change of control; (vii) the filing of
a petition in voluntary bankruptcy or an assignment for the benefit of creditors
by the Management Company, or upon other action taken or suffered, voluntarily
or involuntarily, under any federal or state law for the benefit of insolvents
by a party, except for the filing of a petition of involuntary bankruptcy
against a party with the dismissal of such petition within 30 days after filing;
(viii) the complete liquidation, dissolution and winding up of all of the
business and affairs of RISCORP including, without limitation, the final
distribution to all shareholders of RISCORP; or (ix) the final distribution to
the holders of the Series A Common Stock of RI.
7.5 Effect of Termination.
A. Upon termination of this Agreement for any reason other than as set
forth in Section 7.4(viii) or (ix), RISCORP shall cease all payments to the
Management Company as of the effective date of such termination and, except as
set forth in subparagraph C below, within 30 days of the effective date thereof,
the Management Company shall refund to RISCORP the advance payment set forth in
Section 4.1 hereof, as well as any other funds advanced to the Management
Company for services to be rendered after the termination date.
B. Upon the termination of this Agreement pursuant to Section 7.4(viii)
or (ix), the Management Company shall be entitled to retain the $600,000
prepayment described in Section 4.1 hereof and RISCORP shall pay the Management
Company an additional amount equal to the difference between (1) $3,000,000 and
(2) the aggregate amount of the monthly management fees paid to the Management
Company pursuant to Section 4.1 hereof prior to the effective date of such
termination.
C. Upon the termination of this Agreement due to the death or
disability of Mr. Dawson, the Management Company shall be entitled to retain the
$600,000 prepayment described in Section 4.1 hereof; however, any other funds
advanced to the Management Company for services to be rendered after the
termination date shall be refunded to RISCORP within 30 days of the effective
date of termination.
D. Upon the termination of this Agreement, at the request of the Board
of Directors, the Management Company agrees to assist RISCORP in the orderly
transition of the Services being provided hereunder to a new management services
provider or to the executive officers and employees then being employed by
RISCORP, as the case may be. A prorated portion of the management fee set forth
in Section 4.1 hereof shall be payable with respect to any such transition
services requested by the Board; provided, however, the Management Company shall
not be required to perform any such services for more than 120 days following
the termination of this Agreement.
ARTICLE VIII
DELEGATION OF DUTIES
Subject to the approval of the Board of Directors, the Management
Company shall have the right to delegate its duties under this Agreement to such
persons or entities as agents, delegates or assignees as it may properly deem
necessary for the efficient performance of the duties and responsibilities
assigned to the Management Company hereunder. Notwithstanding the foregoing, the
parties hereto agree that RISCORP is entering into this Agreement with the
Management Company to, among other things, obtain the personal services of Mr.
Dawson in connection with the performance of the Services hereunder and,
accordingly, the Management Company shall have no authority to delegate those
duties typically performed by a chief executive officer of a corporation to any
person other than Mr. Dawson without the prior approval of the Board of
Directors. Neither the Management Company nor any of its employees shall be
liable to RISCORP in connection with any actions taken in reliance upon the
advice of any professionals selected or approved by the Board of Directors with
respect to the subject matter of their engagement.
ARTICLE IX
PREVAILING LAW
This Agreement shall be construed according to the laws of the State of
Florida to the extent that such laws are not preempted by Federal law.
ARTICLE X
INDEMNIFICATION
RISCORP agrees to indemnify and hold the Management Company and
officers, directors and employees harmless from and against all costs, damages,
judgments, attorneys' fees, expenses, obligations and liabilities of any kind or
nature that occur, arise or result from the Management Company's (or its
delegates' or agents') mismanagement of RISCORP's assets or any other breach of
their duties to RISCORP or its shareholders, or any other duties imposed by law
(except to the extent that such mismanagement or breach of duties results from
the gross negligence or willful misconduct of the Management Company, its
officers, directors and employees).
ARTICLE XI
MISCELLANEOUS
11.1 Fidelity Bond. During the term of this Agreement, the Management
Company, at the expense of RISCORP shall maintain a fidelity bond covering its
employees, with RISCORP as obligee, to protect all monies placed in any
revolving account made available to the Management Company for the payment of
claims, judgments and other related expenses for the benefit of RISCORP. The
coverage and amount for the bond shall be as required by the applicable
insurance departments or other applicable law.
11.2 No Violation. This Agreement has been duly adopted by the partners
of the Management Company and the Board of Directors of RISCORP. This Agreement
does not and will not conflict with or violate the charter or other
organizational documents of any party, or any agreement, instrument, law, order,
rule, regulation, or other obligation or arrangement by which a party may be
bound.
11.3 Assignment. Except as expressly set forth herein, this Agreement
shall not be assignable without the express written consent of the other parties
hereto.
11.4 Performance. Neither party nor any representative, agent,
employee, designee or other firm or individual acting on its behalf or at its
direction, shall in bad faith take any action for the primary purpose of
circumventing, diminishing or otherwise avoiding the party's obligations under
this Agreement, terminating this Agreement, or causing the non-renewal of the
same, including the (i) imposition of unreasonable or unfair obligations upon
the other party for the purpose of causing the other party to request
termination of this Agreement, (ii) the imposition of arbitrary standards,
policies or procedures upon the other party, or (iii) unreasonably withholding
consent or unreasonably exercising its discretion where such consent or
discretion may be requested by the other party.
11.5 Corporate Authority. Prior to the Effective Date of this
Agreement, the Board of Directors of RI shall adopt such resolutions as may be
necessary or advisable for the Management Company to carryout its duties and
responsibilities hereunder, including, without limitation, resolutions naming
Mr. Dawson as the President and Chief Executive Officer of RI and Mr. Riehemann
as Chief Investment Officer, Treasurer and Secretary thereof.
11.6 Entire Agreement. This Agreement constitutes the entire agreement
between the parties, cannot be modified except in a writing signed by the
parties, and shall be binding upon and for the benefit of the respective
successors and permitted assigns of the parties (including any entities, funds,
or other organizations merging into, consolidated with, formed by, or acquired
by RISCORP).
11.7 Key Man Life Insurance. At the request of the Board of Directors,
Mr. Dawson and Mr. Riehemann each agree to undergo annual physical examinations
and cooperate with RISCORP in seeking to obtain, at the expense of RISCORP, "key
man" insurance against their death or disability in connection with the Services
to be provided hereunder.
11.8 Arbitration. RISCORP and the Management Company agree that any
dispute or disagreement arising under or related to this Agreement will be
subject to final and binding arbitration conducted under the rules of the
American Arbitration Association. The parties agree to request a proposed panel
of seven (7) arbitrators and to engage in respective strikes until one (1)
arbitrator remains. The expenses of the arbitration, including the arbitrator's
fee, will be shared equally between RISCORP and the Management Company provided
that each party shall be responsible for the fees and expenses of its own
counsel, except as the arbitrator, in his or her sole discretion, may otherwise
determine.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
RISCORP, Inc., individually and on behalf of each of
its subsidiaries identified as parties to this
Agreement
/s/ Seddon Goode, Jr.
---------------------------------
Seddon Goode, Jr.
Director
/s/ George E. Greene III
---------------------------------
George E. Greene III
Director
/s/ Walter L. Revell
---------------------------------
Walter L. Revell
Director
THE PHOENIX MANAGEMENT
COMPANY, LTD.
By:Dawson Managers, Inc., its General Partner
/s/ Frederick M. Dawson
---------------------------------
Frederick M. Dawson
President
/s/ Frederick M. Dawson
--------------------------------
Frederick M. Dawson
/s/ Walter E. Riehemann
--------------------------------
Walter E. Riehemann
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 199,391
<DEBT-CARRYING-VALUE> 24,090
<DEBT-MARKET-VALUE> 24,327
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 223,481
<CASH> 30,153
<RECOVER-REINSURE> 184,251
<DEFERRED-ACQUISITION> 2,053
<TOTAL-ASSETS> 749,650
<POLICY-LOSSES> 437,038
<UNEARNED-PREMIUMS> 56,324
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<NOTES-PAYABLE> 15,609
0
0
<COMMON> 363
<OTHER-SE> 163,170
<TOTAL-LIABILITY-AND-EQUITY> 749,650
179,729
<INVESTMENT-INCOME> 16,447
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<UNDERWRITING-OTHER> 89,750
<INCOME-PRETAX> 14,586
<INCOME-TAX> 7,300
<INCOME-CONTINUING> 7,286
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<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> .20
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<RESERVE-OPEN> 458,239
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<PROVISION-PRIOR> (2,401)
<PAYMENTS-CURRENT> 45,646
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</TABLE>
