FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27462
RISCORP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0335150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Sarasota Tower Suite 608
2 North Tamiami Trail
Sarasota, Florida 34236
(Address of principal executive offices) (Zip Code)
(941) 366-5015
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No .
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at July 31, 1998
Class A Common Stock, $.01 par value 14,258,671
Class B Common Stock, $.01 par value 24,334,443
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INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
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Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3-4
Consolidated Statements of Operations -
For the three months ended June 30, 1998 and 1997 5
Consolidated Statements of Operations -
For the six months ended June 30, 1998 and 1997 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-15
Item 2. Management's Discussion and Analysis of Financial 16-25
Condition and Results of Operations
Part II Other Information
Item 1. Legal Proceedings 25-29
Item 2. Changes to Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29-30
Signatures 31
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Part I Financial Information
Item 1. Financial Statements
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(in thousands)
June 30, 1998 December 31, 1997
------------------
Assets (Unaudited)
Investments:
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Fixed maturities available for sale, at fair value
(amortized cost $13,977 in 1998 and $142,876 in 1997) $ 14,005 $ 145,571
Fixed maturities available for sale, at fair value
(amortized cost $7,012 in 1998 and $53,437 in 1997)-restricted 7,102 53,820
Fixed maturities held to maturity, at amortized cost (fair value $15,628 in
1998 and $24,347 in 1997)
15,466 24,090
------ ------
Total investments 36,573 223,481
Cash and cash equivalents 477 16,858
Cash and cash equivalents-restricted 13,708 13,295
Premiums receivable, net -- 100,183
Accounts receivable--other 2,952 16,720
Recoverable from Florida Special Disability Trust Fund, net -- 45,211
Reinsurance recoverables -- 184,251
Prepaid expenses 5,114 --
Prepaid reinsurance premiums -- 29,982
Prepaid managed care fees -- 8,420
Accrued reinsurance commissions -- 37,188
Receivable from Zenith 105,083 --
Deferred income taxes 23,356 22,120
Property and equipment, net 376 26,665
Goodwill -- 15,286
Other assets
5,420 9,990
----- -----
Total assets $ 193,059 $ 749,650
============== =============
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(in thousands)
June 30, December 31, 1997
1998
Liabilities and Shareholders' Equity (Unaudited)
Liabilities:
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Losses and loss adjustment expenses $ -- $ 437,038
Unearned premiums -- 56,324
Notes payable of parent company -- 15,000
Notes payable of subsidiaries 167 609
Deposit balances payable -- 5,512
Payable to Zenith 15,335 --
Accrued expenses and other liabilities 26,772 65,885
Net assets in excess of cost of business acquired
-- 5,749
Total liabilities 42,274 586,117
--------------- ---------------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding:
14,258,671 in 1998 and 11,855,917 in 1997 146 120
Class B Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding;
24,334,443 in 1998 and 1997 243 243
Preferred stock, $.01 par value, 10,000,000 shares
authorized; 0 shares issued and outstanding -- --
Additional paid-in capital 140,688 135,974
Retained earnings 9,632 25,195
Treasury stock - at cost, 112,582 shares (1)
(1)
Accumulated Other Comprehensive Income:
Net unrealized gains on investments
77 2,002
-- -----
Total shareholders' equity 150,785 163,533
-------------- ---------------
Total liabilities and shareholders' equity $ 193,059 $ 749,650
============= ==============
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended June 30, 1998 and 1997
(in thousands, except share and per share data)
1998 1997
--------------- ---------------
(Unaudited) (Unaudited)
Revenue:
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Premiums earned $ -- $ 46,652
Fee income -- 5,815
Net realized gains 2,805 --
Net investment income 2,252 4,507
Other income 93 --
Total revenue
5,150 56,974
----- ------
Expenses:
Losses and loss adjustment expenses -- 23,374
Unallocated loss adjustment expenses -- 4,081
Commissions, underwriting and administrative expenses 11,352 22,135
Interest expense 8 487
Depreciation and amortization 31 1,906
-- -----
Total expenses
11,391 51,983
------ ------
(Loss) income before income taxes (6,241) 4,991
Income taxes -- 2,025
Net (loss) income $(6,241) 2,966
======= =====
Per share data:
Net (loss) income per common share - basic $ (0.17) 0.08
====== ====
Net (loss) income per common share - diluted $ (0.17) 0.08
====== ====
Weighted average common shares outstanding 36,916,725 36,868,114
========== ==========
Weighted average common and common share
equivalents outstanding 36,916,725 37,152,420
========== ==========
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the six months ended June 30, 1998 and 1997
(in thousands, except share and per share data)
1998 1997
---------------- ----------------
(Unaudited) (Unaudited)
Revenue:
<S> <C> <C>
Premiums earned $ 25,819 $ 93,465
Fee income 5,723 10,961
Net realized gains 4,266 --
Net investment income 5,558
8,453
Other income
93 --
Total revenue
41,459 112,879
------ -------
Expenses:
Losses and loss adjustment expenses 24,016 55,921
Unallocated loss adjustment expenses 2,561 8,100
Commissions, underwriting and administrative expenses 26,868 36,571
Interest expense 477 969
Depreciation and amortization
3,100 3,839
----- -----
Total expenses
57,022 105,400
------ -------
(Loss) income before income taxes (15,563) 7,479
Income taxes -- 3,034
Net (loss) income $(15,563) 4,445
======== =====
Per share data:
Net (loss) income per common share-basic $ (0.42) 0.12
====== ====
Net (loss) income per common share-diluted $ (0.42) 0.12
====== ====
Weighted average common shares outstanding 36,892,420 37,167,557
========== ==========
Weighted average common shares and common
share equivalents outstanding 36,892,420 37,451,863
========== ==========
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 1998 and 1997
(in thousands)
1998 1997
--------------- --------------
(Unaudited) (Unaudited)
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Net cash used in operating activities $ (20,577) $ (13,299)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (777) (3,112)
Proceeds from the sale of equipment -- 72
Purchase of fixed maturities available for sale (24,210) (23,467)
Purchase of fixed maturities held to maturity (5,569) --
Proceeds from sale of fixed maturities available for sale 28,049 39,051
Proceeds from maturities of fixed maturities available for sale 6,029 7,467
Proceeds from maturities of fixed maturities held to maturity 5,700 1,000
Proceeds from sale of equity securities -- 2,780
Purchase of Maryland Fund, net of cash acquired -- 134
Cash received from Zenith for sale of net assets 35,000 --
Cash assets sold to Zenith (29,308) --
Investments to be transferred to Zenith (13,200) --
------------- --------------
Net cash provided by investing activities 1,714 23,925
-------------- ------------
Cash flows from financing activities:
Principal repayments of notes payable (245) (422)
(Decrease) increase in deposit balances payable (1,599) 250
Unearned compensation--stock options -- 547
Purchase of treasury stock 4,739 (2,100)
Other, net -- (222)
Transfer of cash and cash equivalents to restricted (413) --
--------------- ---------------
Net cash used in financing activities 2,482 (1,947)
-------------- -------------
Net (decrease) increase in cash and cash equivalents (16,381) 8,679
Cash and cash equivalents, beginning of period 16,858 26,307
------------- ------------
Cash and cash equivalents, end of period $ 477 $ 34,986
============== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 479 $ 974
============== =============
Income taxes $ 3,435 $ 3,445
============= ============
Supplemental schedule of noncash investing and financing activities:
The Company sold most of its assets and liabilities to Zenith (see Note 5).
In conjunction with the sale, a receivable from Zenith was recorded as
follows:
Book value of net assets sold $ 140,083
Cash received from Zenith (35,000)
-------------
Receivable from Zenith $ 105,083
===========
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation
RISCORP, Inc.'s (the "Company" or "RISCORP") consolidated unaudited
interim financial statements have been prepared on the basis of generally
accepted accounting principles ("GAAP") and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
condition, results of operations and cash flows for the periods
presented. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported revenues and expenses during the reporting period.
Actual results could differ from those estimates.
On April 1, 1998, the Company and certain of its subsidiaries consummated
the sale of substantially all of their assets to Zenith Insurance Company
("Zenith") and ceased substantially all of their former business
operations. See Note 5 below for further discussion of the Zenith
transaction. Accordingly, the results of operations for the six months
ended June 30, 1998 will not be indicative of the results that are
expected for the full year ending December 31, 1998. These consolidated
financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited consolidated
financial statements of RISCORP, Inc. and subsidiaries for the year ended
December 31, 1997 contained in the Company's Annual Report on Form 10-K,
which was filed with the Securities and Exchange Commission on March 27,
1998.
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have
been eliminated.
(2) Sale of Joint Venture
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 held 50
percent ownership in the joint venture known as Third Coast Holding
Company ("Third Coast"). The Company contributed the use of its
expertise, insurance systems and intellectual property, while HCSC
contributed cash of $10.0 million. The Company's contributed property in
Third Coast was valued at $10.0 million; however, the Company's cost
basis in the contributed property was $0 and as of December 31, 1996, the
Company recorded its initial investment in Third Coast at $0. The
Company's investment in Third Coast at December 31, 1997 was $0.
The Company accounted for its 50 percent investment in Third Coast on the
equity basis of accounting, whereby the Company's recorded investment was
adjusted for its proportionate share of earnings or losses of Third
Coast. The Company discontinued the use of the equity method of
accounting for Third Coast in the first quarter of 1997 when the
cumulative losses reduced the Company's investment in Third Coast to $0.
In addition, the Company made no financial guarantees relating to Third
Coast and made no financial commitments to provide any future funding to
Third Coast.
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The Company and HCSC entered into an agreement dated March 11, 1998 for
the purchase of the Company's 50 percent interest in Third Coast for
$1,324,001. The effective date of the transaction was January 1, 1998.
The gain on the sale of Third Coast of $1,324,001 was included in net
realized gains at March 31, 1998 and in the accompanying Consolidated
Statements of Operations for the six months ended June 30, 1998. The
Company received all the funds due in connection with this transaction on
April 3, 1998. In connection with the closing of the sale to Zenith, the
Company received notice that Zenith believes that it is entitled to the
proceeds from the sale of Third Coast. The Company disputes Zenith's
entitlement to these proceeds and intends to vigorously defend any claim
asserted by Zenith related to the Third Coast transaction.
(3) Issuance of Additional Shares of Stock
In September 1996, the Company purchased all of the outstanding stock of
Independent Association Administrators, Inc. ("IAA") and Risk Inspection
Services and Consulting, Inc. ("RISC") in exchange for approximately
$11.5 million, consisting primarily of 790,336 shares of the Company's
Class A Common Stock valued at approximately $10.9 million on the date of
acquisition. IAA and RISC are workers' compensation management services
companies offering services in Alabama.
Under the IAA acquisition agreement, the former IAA shareholders received
790,336 shares of the Company's Class A Common Stock. Pursuant to the
acquisition agreement, if the former IAA shareholders own all of such
Class A Common Stock on September 17, 1998, the Company was obligated to
issue additional shares of the Company's Class A Common Stock in an
amount sufficient to make the value of all shares of the Company's Class
A Common Stock held by the former IAA shareholders equal to an aggregate
fair market value of $10.9 million on September 17, 1998. However, in no
event would the number of additional shares issued to the former IAA
shareholders exceed 790,336 shares. Due to decreases in the market value
of the Company's Class A Common Stock, 790,336 additional shares of the
Company's Class A Common Stock valued at $642,148 were issued on January
9, 1998 to the former shareholders of IAA. The market value of the stock
on January 9, 1998 was $0.8125 per share.
The $642,148 fair market value of the stock issued was recorded by the
Company as goodwill amortization in the March 31, 1998 financial
statements and in the accompanying Consolidated Statements of Operations
for the six months ended June 30, 1998. This amount was recorded as an
amortization expense because it could not be recovered from the remaining
future profitability of the workers' compensation business that was still
under contract on January 9, 1998.
(4) 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 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
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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. This agreement was confirmed in a written
Memorandum of Understanding executed by counsel for the respective
parties as of April 29, 1998. The proposed settlement is contingent upon
the following: execution of a definitive settlement agreement and
implementing pleadings and other documentation; consummation of the
transactions contemplated by the Purchase Agreement with Zenith;
disclosure of certain documents to plaintiff's counsel and interviews by
them of various individuals to verify information relating to the
settlement; certification of a settlement class; satisfaction of all
requirements for settlement under Rule 23 of the Federal Rules of Civil
Procedures; payment by RISCORP of $21.0 million into a settlement fund
for the benefit of the settlement class; and release by members of the
settlement class of all claims against the defendants. Counsel to the
parties are in the process of finalizing the initial settlement
documents.
The initial settlement documents have been finalized and the appropriate
pleadings filed with the court. On July 29, 1998, the court issued a
Preliminary Approval Order in which it certified the purported class for
settlement purposes and scheduled a Settlement Fairness Hearing for
October 8, 1998. Notice to the settlement class has been made.
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. The Company recognized the $21.0 million proposed
settlement and the related insurance proceeds in the December 31, 1997
financial statements. Given the preliminary nature of this settlement and
the various contingencies relating to its consummation, there can be no
assurance that this litigation will be ultimately settled on this basis.
In April 1996, RISCORP Insurance Company ("RIC") 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. In June 1997,
the plaintiffs amended the complaint to add as additional defendants
Zenith Insurance Company and the Florida Department of Insurance
("FDOI").
On June 22, 1998, the court approved a settlement between the parties and
dismissed the complaint. Pursuant to the terms of the settlement
agreement, RISCORP Insurance Company paid to the plaintiffs a settlement
amount of $475,000. Seventy-five percent of the settlement amount has
been covered by insurance. The Company recognized the $475,000 proposed
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settlement and the related insurance proceeds in the accompanying
financial statements as of December 31, 1997. In addition, RISCORP
Insurance Company and the Company agreed to assume full responsibility
for liabilities arising from all policies of insurance issued by the CMIC
prior to January 1, 1995, and for assessments which might be imposed upon
the class of plaintiffs arising from their status as policyholders of
CMIC. Upon the acquisition of the Company's assets, Zenith Insurance
Company assumed those liabilities.
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.
On August 10, 1998, the court sentenced RMS to pay (i) a fine of
$300,000, (ii) a special assessment fee of $400, (iii) the Florida
Department of Law Enforcement $75,000 for the costs of the investigation,
and (iv) to the State of Florida $50,000 in restitution. All of these
amounts have been paid in full. On August 11, 1998, William D. Griffin
was sentenced to five months incarceration, five months house arrest and
three years probation. The remaining defendants received sentences
varying from fines of $10,000 - $25,000, probation from one to three
years and, in some cases, community service.
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, common law fraud and breach of contract resulting from
the purchase by the Company of shares of IAA from Albrecht and Norman in
1996, as described above. The plaintiffs sought compensatory and punitive
damages and equitable relief. On or about December 2, 1997, counsel for
the Company and counsel for the 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 the plaintiffs, RISCORP, Inc. advanced $2.3 million to the
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 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. The 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.
On August 20, 1997, Occupational Safety Association of Alabama Workers'
Compensation Fund (the "Fund") filed a breach of contract and fraud
action against the Company and others. The Fund is an association of
self-insured employers who agreed to transfer, in a Loss Portfolio
Transfer Agreement (the "Agreement") dated August 26, 1996, substantially
all of its assets and liabilities to the Company. Co-defendant, Peter D.
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Norman, was a principal and officer of IAA. The complaint alleges that
Norman and IAA breached certain fiduciary duties owed to the Fund in
connection with the subject agreement and transfer. The complaint alleges
that the Company has breached certain provisions of the Agreement and
owes the Fund monies under the terms of the Agreement. The Fund claims,
per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund
overpaid RISCORP by approximately $6.0 million in the subject
transaction.
The court has granted defendant's Motion to Compel Arbitration per the
terms and provisions of the Agreement. The other parties to the
litigation have agreed to attempt to mediate their disputes on May 28 -
29, 1998, and have invited the Company to participate in that mediation.
Assuming mediation fails, the dispute between the Company and the Fund
will be resolved through arbitration. The Company intends to vigorously
defend this claim, and believes that application of appropriate
accounting and actuarial principles and methodologies to the calculation
at issue may indicate that monies are instead owed to the Company by the
Fund.
On or about April 13, 1998, the Fund filed a Motion for Preliminary
Injunction which seeks to enjoin the Company from distributing any
dividends or making any type of distributions to shareholders,
withdrawing any proceeds from the escrow account established with certain
proceeds received from Zenith, or dissolving the Company. Although
somewhat confusing, the motion appears to be based on the failure of the
Company to specifically identify this lawsuit in its proxy statement
issued in connection with the sale to Zenith. The motion was denied on
June 12, 1998.
In June 1997, the Company terminated a number of employees in connection
with the workforce reduction. As a result of the workforce reduction and
the sale to Zenith, 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 RISCORP Property & Casualty Insurance Company
("RPC") were added as defendants in a purported class action filed in the
United States District Court for the Southern District of Florida, styled
Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety
Company, a/k/a Aetna Group, et. al. Case No. 97-2240-CIV-MORENO. The
plaintiffs purport to bring this action on behalf of themselves and a
class consisting of all employers in the State of Florida who purchased
or renewed retrospectively rated or adjusted workers' compensation
policies in the voluntary market since 1985. The suit was originally
filed on July 17, 1997, against approximately 174 workers' compensation
insurers as defendants. The complaint was subsequently amended to add the
RISCORP defendants. The amended complaint named a total of approximately
161 insurer defendants. The suit claims that the defendant insurance
companies violated the Sherman Antitrust Act, the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), the Florida Antitrust Act and
committed breach of contract, civil conspiracy and were unjustly enriched
by unlawfully adding improper and illegal charges and fees onto
retrospectively rated premiums and otherwise charging more for those
policies than allowed by law. The suit seeks compensatory and punitive
damages, treble damages under the Antitrust and RICO claims, and
equitable relief. RIC and RPC have moved to dismiss the amended complaint
and the Company has provided notice to Zenith that it believes this cause
of action is included in the insurance liabilities assumed by Zenith in
connection with the asset sale. Zenith has provided the Company with
notice that it disputes this claim. On April 22, 1998, pursuant to an
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Omnibus Administrative Scheduling Order dated January 23, 1998, RISCORP
adopted certain motions to dismiss the Amended Complaint filed by various
other defendants in this action. These motions, if granted, would be
entirely dispositive of the action. The motions have been fully briefed.
Plaintiffs have filed a motion for class certification, and the parties
are engaged in discovery. A hearing was held on June 30, 1998 on the
class certification issue; however, no ruling has been issued. The
cut-off date for discovery has been extended to October 15, 1998 by an
Omnibus Order dated July 31, 1998. Management continues to contest this
case vigorously.
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.
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 final report; however, based on the draft reports
received in late July 1998, there were no proposed adjustments to the
capital and surplus of RPC and $3.5 million of proposed adjustments to
the capital and surplus of RIC. The most significant examination
adjustment was the non-admission by the FDOI examiners of $2.2 million of
investments that were held by a bank outside of Florida. The remaining
$1.3 million of adjustments related primarily to certain receivables that
were either collected or charged to expense in 1998. These statutory
adjustments have no material impact on the accompanying GAAP financial
statements.
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 were premiums and
investment income, and its cash requirements consisted 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. As discussed
more fully in Note 5 on April 1, 1998, the Company and certain of its
subsidiaries have sold substantially all of their assets and transferred
certain liabilities to Zenith in exchange for cash. In connection with
this sale to Zenith, the Company and its subsidiaries ceased
substantially all of its former business operations and, accordingly,
since April 1, 1998, the Company's cash requirements have been, and will
continue to be, satisfied through investment income and the liquidation
of investments.
(5) Sale to Zenith Insurance Company ("Zenith")
Pursuant to an Asset Purchase Agreement dated June 17, 1997, by and among
RISCORP, Inc. ("RISCORP"), certain of its subsidiaries named therein, and
Zenith, RISCORP and its subsidiaries sold substantially all of their
operating assets and transferred certain liabilities to Zenith. The
closing of the transaction occurred on April 1, 1998.
In connection with the closing of this transaction, Zenith paid $35.0
million in cash, of which $10.0 million was placed in escrow pursuant to
the terms of the Asset Purchase Agreement. The final purchase price to be
paid by Zenith will be the excess, if any, of the book value of the
transferred assets over the transferred liabilities assumed by Zenith at
closing. On June 9, 1998, RISCORP delivered to Zenith a closing date
balance sheet (the "Proposed Business Balance Sheet") representing the
audited statement of transferred assets and transferred liabilities as of
Apri1 1, 1998. The Proposed Business Balance Sheet indicated RISCORP's
calculation of the final purchase price to be approximately $141.0
million, less the $35.0 million previously paid by Zenith.
13
<PAGE>
Pursuant to the terms of the Asset Purchase Agreement, on July 9, 1998,
Zenith provided to RISCORP a list of suggested adjustments to the
Proposed Business Balance Sheet. These suggested adjustments totaled
$209.1 million and principally related to differences in the estimation
of losses and loss adjustment expense reserves and the estimate of the
allowance for uncollectible receivables. The adjustments proposed by
Zenith reflect Zenith's position that the aggregate value of the
liabilities assumed by it exceeded the value of the assets transferred by
as much as $68.0 million. Zenith subsequently proposed approximately $2.5
million in additional adjustments, increasing the total adjustments
proposed by Zenith to approximately $211.6 million. RISCORP believes
that, pursuant to the terms of the Asset Purchase Agreement, it is
impermissible for Zenith to assert these additional proposed adjustments.
The parties have engaged a nationally recognized independent accounting
firm to serve as neutral auditors and neutral actuaries to resolve the
items in dispute related to the determination of the final purchase
price. Pursuant to the terms of this engagement, each party has delivered
two written submissions to the neutral auditors and neutral actuaries
setting forth each party's analysis of the issues in dispute. Based on
RISCORP's review of the submissions tendered by Zenith, RISCORP has
agreed to aggregate adjustments to the Proposed Business Balance Sheet of
$971,323. These adjustments were recorded in the accompanying June 30,
1998 Consolidated Statements of Operations and reduced the receivable
from Zenith included in the Proposed Business Balance Sheet from
$141,054,796 to $140,083,446. RISCORP believes that the other adjustments
proposed by Zenith are without merit and RISCORP intends to vigorously
dispute each such proposed adjustment in connection with the
determination of the final purchase price to be paid by Zenith.
Notwithstanding the foregoing, if Zenith should prevail in the dispute
resolution process, it is possible that the final purchase price for this
transaction could be the $35.0 million already received by RISCORP.
In connection with the closing of this transaction, the parties entered
into a letter agreement dated April 1, 1998, pursuant to which RISCORP
retained certain assets necessary for each of its insurance subsidiaries
to maintain the minimum capital and surplus required by law to remain in
good standing in the State where each company is located (the "Definite
Exclusions"). In accordance with the provisions of this letter agreement,
RISCORP's insurance subsidiaries retained marketable securities with
carrying values of $11.4 million as of April 1, 1998. Zenith has disputed
RISCORP's determination of the amount of minimum capital and surplus
required to be retained by it pursuant to the letter agreement.
In addition to the minimum capital and surplus amounts, in the event that
RISCORP is unable to transfer to Zenith (i) certain certificates of
deposit and securities held by regulatory authorities, (ii) the stated
capital of the selling entities other than the insurance subsidiaries, or
(iii) certain certificates of deposit and securities held in trust under
certain reinsurance agreements prior to the date that Zenith is required
to pay the final purchase price, such assets, at Zenith's option and in
its sole discretion, shall be deemed not to be transferred to Zenith (the
"Possible Exclusions"). As of July 31, 1998, the amortized cost of such
certificates of deposit and securities that were still in process of
being transferred to Zenith totaled $6.5 million. If the retention by
RISCORP of the Definite Exclusions or any of the Possible Exclusions
results in the value of the Transferred Liabilities exceeding the value
of the Transferred Assets, the minimum purchase price specified in the
Asset Purchase Agreement will be reduced.
14
<PAGE>
Pursuant to various provisions of the Asset Purchase Agreement, Zenith
has provided notice to RISCORP of certain alleged breaches of the
representations, warranties or covenants made by RISCORP therein. RISCORP
has disputed the allegations asserted by Zenith and has also provided
notice to Zenith of the occurrence of various indemnifiable events for
which RISCORP believes it is entitled to seek indemnification from
Zenith. In addition to disputes with respect to each party's right to be
indemnified, RISCORP anticipates a dispute with Zenith with respect to
its entitlement to the previously described security deposits held by
various state insurance departments and other regulatory agencies that
were not transferred to Zenith at closing. While it is impossible to
predict the ultimate outcome of the issues currently in dispute with
Zenith, RISCORP intends to vigorously defend all allegations asserted by
Zenith with respect to these and other matters and intends to take such
actions as it deems necessary to ensure that Zenith fully complies with
its obligations under the Asset Purchase Agreement
(6) Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This
Standard establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
standard had no impact on the Company's net income or shareholders'
equity. In addition to certain other adjustments, SFAS 130 requires
unrealized gains or losses on the Company's available for sale
securities, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income. The
components of comprehensive income, net of related income taxes, for the
six months ended June 30, 1998 and year ended 1997, respectively are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net (loss) income $ (15,563) $ 1,479
Unrealized (losses) gains on securities available for sale:
Unrealized holding losses during the period (4,553) (1,555)
Reclassification adjustment for realized gains included in
net earnings
1,912 -
Comprehensive loss $ (18,204) $ (76)
</TABLE>
(7) Reclassifications
Certain amounts in the financial statements presented have been
reclassified from amounts previously reported in order to be comparable
between periods. These reclassifications have no effect on previously
reported shareholders' equity or net income during the periods involved.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. The words "believe," "estimate," "intend,"
"anticipate," and similar expressions and variations thereof identify
certain of such forward-looking statements, which speak only as of the
dates of which they were made. RISCORP undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. Readers are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those indicated in the forward-looking
statements as a result of various factors. Readers are cautioned not to
place undue reliance on these forward-looking statements, which are
subject to a number of risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and
uncertainties include but are not limited to the following: (I)
uncertainties with respect to the final purchase price to be paid by
Zenith under the Asset Purchase Agreement; (ii) the value of the
transferred assets and the transferred liabilities; (iii) the ability of
RISCORP to recover any amounts from Zenith as a result of the occurrence
of indemnifiable events; (iv) Zenith's ability to recover from RISCORP
certain assets not transferred to it at closing; (v) projections of
revenues, income, losses and cash flows related to operations; (vi)
estimates concerning the effects of litigation or other disputes; and
(vii) other risks detailed herein and from time to time in RISCORP's
other reports and filings with the Securities and Exchange Commission.
Recent Developments
Asset Purchase Agreement with Zenith
See Part 1, Item 1, Notes to Consolidated Financial Statements, Note 5
for further discussion of the Zenith transaction.
Legal Developments
See "Part II, Item 1, Legal Proceedings."
Overview
General
As discussed more fully in Note 5, the Company and certain of its
subsidiaries sold substantially all of their assets and transferred
certain liabilities to Zenith on April 1, 1998. In connection with this
sale to Zenith, the Company and its subsidiaries ceased substantially all
of its former business operations, including its insurance operations,
effective April 1, 1998. Accordingly, after April 1, 1998, the operations
of the Company consisted primarily of the administration of the
day-to-day activities of the surviving corporate entities, compliance
with the provisions of the Asset Purchase Agreement, and the investment,
protection and maximization of the remaining assets of the Company.
Since April 1, 1998, the Company has had no employees or insurance
operations, and has provided no services to self-insurance funds or other
insurance related entities. Because of these significant changes in the
operating activities of the Company after April 1, 1998, a comparison of
16
<PAGE>
the results of operations for the three months and six months ended June
30, 1998 to the comparable period in 1997 is meaningless. Therefore, the
results of operations for the three months ended June 30, 1998 are
explained separately with no comparison to prior periods. The results of
operations of the Company prior to the April 1, 1998 sale to Zenith,
compared to the comparable period in 1997 are included to comply with the
requirements of the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Securities and Exchange Commission; however,
those results of operations are not indicative of the operations of the
Company since April 1, 1998 and are not indicative of anticipated future
operations.
Results of Operations
April 1, 1998 to June 30, 1998
During the quarter ended June 30, 1998, the Company's primary operating
activities were the preparation and the defense of the Proposed Business
Balance Sheet, the investment of the $25.0 million initial payment
received from Zenith on April 2, 1998, compliance with the provisions of
the Asset Purchase Agreement and the administration of the day-to-day
activities of the surviving corporate entities. Compliance with the
provisions of the Asset Purchase Agreement included the transfer of all
of the assets and liabilities, not retained by the Company, to Zenith,
and assisting with the orderly transition of the Company's insurance
operations to Zenith.
At June 30, 1998, the Company had investments totaling approximately
$36.6 million, of which approximately $15.3 million consisted of
securities to be transferred to Zenith. Those securities were primarily
regulatory deposits and securities held in trust in connection with
certain reinsurance agreements. The Company is awaiting the release of
the securities by the regulatory agencies and the reinsurers. Upon their
release, the securities will be transferred to Zenith in accordance with
the terms of the Asset Purchase Agreement. A liability was recorded as of
June 30, 1998 for the transfer of these securities to Zenith.
The following is an analysis of other balances contained on the June 30,
1998 balance sheet.
Restricted cash and cash equivalents consisted primarily of the
$10.0 million initial purchase price payment which is being held
in escrow under the terms of the Asset Purchase Agreement.
The Receivable from Zenith in the amount of $105.1 million
represents the remaining purchase price to be received from
Zenith as determined by the Company in connection with the
preparation of the Proposed Business Balance Sheet.
Deferred income taxes of $23.4 million consisted of federal and
state income taxes that are anticipated to be recovered in
future years. At this time, this asset is expected to be fully
recoverable.
Other assets of $5.4 million consisted primarily of $5.2
million of certain insurance recoverables which will be received
when the accrued legal settlements discussed below are actually
paid.
Prepaid expenses of $5.1 million consisted primarily of prepaid
insurance coverages and retainers paid to certain professionals
and consultants.
17
<PAGE>
Other accounts receivable of $2.9 million consisted primarily
of a receivable of $2.3 million which will be realized upon the
redemption of the Company's outstanding stock.
Accrued expenses and other liabilities totaled approximately
$26.8 million and consisted primarily of $21.0 million of an
accrued legal settlement, $1.0 million of trade accounts
payable, $1.0 million of unpaid restructuring cost relating to
the June 1997 Corporate restructuring, and $1.6 million of
accrued accounting, auditing and actuarial expenses that
primarily relate to the defense of the Proposed Business Balance
Sheet.
The Company's operating results for the three months ended June 30, 1998
resulted in a net loss of $6.2 million. The following is an analysis of
the Company's revenues and expenses for the three months ended June 30,
1998.
Net realized gains for the three months ended June 30, 1998 were $2.8
million. The net realized gains consisted primarily of gains on the sale
of securities transferred to Zenith in connection with the Asset Purchase
Agreement. For the six months ended June 30, 1998, net realized gains
were $4.3 million, of which $1.3 million was the gain on the sale of
Third Coast recognized in the first quarter of 1998, more fully discussed
in Note 2 of the consolidated financial statements contained in this
document. There were no realized gains or losses during the first or
second quarter of 1997. Investment income consists entirely of earnings
from the investment portfolio, excluding unrealized gains & losses.
Net investment income for the three months ended June 30, 1998 was $2.3
million. Net investment income consisted of interest income on the $105.1
million receivable from Zenith of $1.6 million, interest income on the
$10.0 million balance in escrow of $0.1 million and other investment
income of $0.6 million.
Operating expenses for the three months ended June 30, 1998 totaled
approximately $11.4 million. This amount included two significant
non-recurring expenses that arose due to the sale to Zenith. The first
non-recurring expense totaled approximately $3.2 million and consisted of
severance payments to certain of the Company's former executives and
employees. The second expense totaled approximately $4.1 million and
consisted of the issuance of RISCORP stock to Phoenix Management Company,
Ltd. in accordance with a Restricted Stock Award Agreement.
The remaining $4.1 million of operating expenses consisted of $0.3
million of transition expenses incurred as a result of the sale to
Zenith; $1.0 million of adjustments to the Proposed Business Balance
Sheet (discussed more fully in Note 5); $0.4 million of management
expenses; $1.4 million of legal and accounting expenses; and $1.0 million
of recurring operating expenses such as rent, telephone, insurance and
similar costs.
Depreciation and amortization expense for the three months ended June 30,
1998 was $.03 million. The Company transferred all assets subject to
amortization to Zenith in connection with the sale and retained
approximately $0.4 million of fixed assets (consisting primarily of
computer equipment) which is being depreciated over three years.
Interest expense for the three months ended June 30, 1998 was $.01
million. The Company remains liable under one note agreement in the
amount of $0.2 million through November 1998. This note bears interest at
14.85%.
18
<PAGE>
Net investment income for the six months ended June 30, 1998 was $5.6
million compared to $8.5 million for the same period in 1997, a net
decrease of $2.9 million. The decline in investment income was due to a
decline in invested assets (including the receivable from Zenith) of
approximately $84.0 million for the six month period ended June 30, 1998
compared to the same period in 1997. The decrease in invested assets was
primarily due to the sale to Zenith and the decline in written premiums.
The effective tax rate for the six months ended June 30, 1998 was 0
percent compared to 40.6 percent for the same period in 1997. The decline
in the tax rate was primarily due to the Company's uncertainty of its
ability to recover the tax benefit pertaining to the June 30, 1998 loss.
The weighted average common and common share equivalents outstanding for
the three months ended June 30, 1998 was 36,916,725 versus 37,152,420 for
the three months ended June 30, 1997.
Prior to April 1, 1998
The discussion that follows relates to the operations and operating
philosophy of the Company's activities which existed prior to April 1,
1998 and includes the results for the three months ended June 30, 1997
and the six months ended June 30, 1998 compared to the six months ended
June 30, 1997.
Prior to 1996, the Company's at-risk operations were focused in Florida.
During 1996, the Company acquired RISCORP National Insurance Company
("RNIC") and its 19 licenses and assumed business from several self
insurance funds outside of Florida which allowed the Company to diversify
its at-risk operations. A comparison of the Company's direct written
premiums for the six months ended June 30, 1998 and the calendar year
ended December 31, 1997, 1996 and 1995 (prior to reinsurance cessions or
assumptions) by state is presented below:
Direct Premiums Written (a)
(Dollars in millions) 1998 (b) 1997 1996 1995
Florida $ 29.2 $ 180.8 $ 270.8 $ 284.8
Alabama 4.1 39.1 21.7 --
North Carolina 4.4 32.2 41.4 --
Other 1.0 28.4 22.8 --
--------- --------- --------- --------
Total $ 38.7 $ 280.5 $ 356.7 $ 284.8
======= ======= ======= =======
(a) Includes RIC, RPC and RNIC for 1996, RIC and RPC for
1995. (b) 1st quarter 1998, prior to the sale to Zenith.
Direct written premiums were reduced by specific reinsurance cessions
(1996 and 1995), the 50 percent AmRe quota share reinsurance agreement
for the Company's Florida workers' compensation business (1996 and 1995)
and the 65 percent quota share reinsurance agreement (effective October
1, 1996), with another reinsurer for certain non-Florida business. This
quota share reinsurance agreement was reduced to 60 percent effective
January 1, 1997 and was cancelled on a run-off basis on December 31,
1997.
The majority of the Company's premiums were written in Florida, a
regulated pricing state where premiums for guaranteed cost products were
based on state-approved rates. However, prior to the sale to Zenith, the
Company also offered policies which were subject to premium reductions as
high deductible plans, participating dividend plans, or other loss
sensitive plans. Pricing for these plans tended to be more competitively
based, and the Company experienced increased competition during 1997 and
1998 in pricing these plans. In addition, in October 1996, the Florida
Insurance Commissioner ordered workers' compensation providers to reduce
19
<PAGE>
rates by an average of 11.2 percent for new and 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 workers' compensation managed
care arrangement. 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
percent decrease in loss costs effective April 1, 1997. The Company
adopted the loss costs in October 1997, which resulted in an overall
effective rate reduction of 8.4 percent.
The Company experienced increased pricing pressures during 1997. 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, North Carolina, and
Birmingham, Alabama, by the end of 1997, and to cease writing new
business in certain states including Oklahoma, Virginia, Missouri,
Mississippi, Louisiana and Kansas. The estimated impact of the decision
to discontinue writing business in those states was a reduction of
approximately $16.0 million in direct premiums written.
The Company attempted to lower claims costs by applying managed care
techniques and programs to workers' compensation claims, particularly by
providing prompt medical intervention, integrating claims management and
customer service, directing care of injured employees through a managed
care provider network, and availing itself of potential recoveries under
subrogation and other programs.
Part of the Company's claims management philosophy was to seek recoveries
for claims which were reinsured or which could be subrogated or submitted
for reimbursement under various states' recovery programs. As a result,
the Company's losses and loss adjustment expenses were offset by
estimated recoveries from reinsurers under specific excess of loss and
quota share reinsurance agreements, subrogation from third parties and
state "second disability" funds, including the Florida Special Disability
Trust Fund ("SDTF").
<TABLE>
<CAPTION>
The following table shows direct, assumed, ceded and net earned premiums by quarter for 1998 and 1997 (in
thousands):
Three Months Ended
---------------------------------------------------------------------------------
6-30-98 3-31-98 3-31-97 6-30-97 9-30-97 12-31-97
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Direct premiums earned $ 0 $ 48,416 $ 91,516 $ 91,761 $ 77,169 $ 67,800
Assumed premiums earned 0 79 2,827 2,064 1,118 12,500
Premiums ceded to reinsurers 0 (22,676) (47,529) (47,173) (37,870) (34,700)
------------- ---------- --------- --------- --------- ---------
Net premiums earned $ 0 $ 25,819 $ 46,814 $ 46,652 $ 40,417 $ 45,600
============ ======== ======== ======== ======== ========
</TABLE>
20
<PAGE>
The number of inforce policies were:
Quarter Ended 1996 1997 1998
March 31 22,777 30,141 18,145
June 30 26,002 29,602 0
September 30 28,772 25,649 N/A
December 31 30,081 22,357 N/A
The decrease in direct earned premiums for the last six months of 1997
and the first quarter of 1998 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, the Company's
inability to file its 1996 Form 10-K, 1997 10-Q's and 1996 audited
statutory financial statements in a timely manner, and the delisting of
the Company's stock by NASDAQ.
Direct premiums earned increased to $91.8 million for the three months
ended June 30, 1997 from $77.7 million for the same period in 1996, a net
increase of $14.1 million. Direct premiums earned increased to $183.3
million for the six months ended June 30, 1997 from $152.2 million for
the same period in 1996, a net increase of $31.1 million. The increase in
the direct premiums earned for the three months and six months ended June
30, 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 initial public
offering ("IPO") proceeds allowed the insurance subsidiaries
to increase their premium writing capacity and, as a result,
the Company was able to increase premiums during the last nine
months of 1996 due to its expanded premium writing
capabilities. Written premiums were earned pro rata over the
policy period (usually 12 months) therefore, increased
premiums written during the last nine months of 1996 had a
positive impact on earned premiums in 1996 and 1997.
Written premiums increased in the third and fourth quarters
of 1996 and the first quarter of 1997 from the assumption
reinsurance and loss portfolio agreements entered into by the
Company and from the acquisitions made by the Company during
1996.
Enhanced marketing initiatives implemented by the Company
after the IPO to increase the number of policies and to write
accounts with larger premiums.
In September 1995, the Company entered into a fronting agreement with
another insurer which enabled the Company to begin expansion into states
where its insurance subsidiaries were not licensed. The fronting
agreement was cancelled effective December 31, 1997. The cancellation of
the fronting agreement and the sale to Zenith were the primary reasons
that the assumed premiums decreased to $79 from $4,891 for the six months
ended June 30, 1998 from the same period in 1997. The increase in assumed
premiums earned during the fourth quarter of 1997 from previous quarters
was primarily the result of the Company recording $11.4 million of earned
premiums from the National Council on Compensation Insurance, Inc.
("NCCI") pool participation. The assumed premiums from the fronting
agreement were approximately $2.0 million for the three months ended June
30, 1997 and June 30, 1996. The increase in assumed premiums of $1.4
21
<PAGE>
million for the six months ended June 30, 1997 compared to the six months
ended June 30, 1996 was primarily due to increased premiums from the
fronting agreement. While the company assumes premiums from several
insurers, the fronting agreement generated the majority of the assumed
premiums.
For the years ended December 31, 1997 and 1996, 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 Company terminated the agreement with Chartwell at
December 31, 1997; however, the reinsurer continues to receive premiums
and to be responsible for their portion of all losses incurred on
policies effective before the termination date. The decrease in ceded
premiums to $22.7 million for the six months ended June 30, 1998 from
$94.7 million for the same period in 1997 was due primarily to the
decrease in direct premiums earned discussed above.
Fee income for the six months ended June 30, 1998 was $5.7 million
compared to $11.0 million for the same period in 1997, a net decrease of
$5.3 million. The decrease in fee income was primarily due to sale of the
insurance operations to Zenith. Fee income for the first quarter of 1998
was comparable to fee income for the first quarter of 1997. Fee income
for the six months ended June 30, 1997 was $5.1 million compared to $7.1
million for the same period in 1996, a net decrease of $2.0 million. The
decrease between 1996 and 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 North Carolina and Virginia (which were
previously managed by the Company) to at-risk business via loss portfolio
transfers and decreases in RISCORP West Incorporated ("RWI") service fee
income from the termination of RWI's Mississippi and Louisiana service
contracts. The decrease in fee income was partially offset by new fees
generated from the CompSource acquisition, the fronting agreement, the
new service agreement with Third Coast Insurance Company and growth in
other existing fee products.
There were no realized gains or losses during the second quarter of 1997
or for the six months ended June 30, 1997.
Net investment income for the six months ended June 30, 1997 was $3.9
million compared to $1.6 million for the same period in 1996, a net
increase of $2.3 million. Investment income consists entirely of earnings
from the investment portfolio, excluding realized gains and losses. The
actual yield on invested assets is comparable between quarters.
The loss ratio for the six months ended June 30, 1998, 1997 and 1996 was
93.0 percent, 69.5 percent and 63.5 percent, respectively. The increase
in the 1998 loss ratio of 23.5 percent was due primarily to gross adverse
loss development during the first quarter of 1998 in the 1997 and prior
accident years from certain business written in Florida of approximately
$10.3 million, gross favorable loss development in Alabama and North
Carolina of approximately $2.6 million and gross adverse loss development
of $0.3 million in business written by RNIC and RPC in several smaller
states. The increase in the 1997 loss ratio was due to adverse loss
development in 1996 and prior accident years from certain business
written in Alabama of approximately $4.0 million, adverse loss
development of approximately $1.8 million in certain business written by
RNIC in several smaller states, and favorable loss development of $2.5
million from business written in North Carolina.
Losses and loss adjustment expenses for the six months ended June 30,
1997, were $32.5 million compared to $24.4 million for the same period in
1996, a net increase of $8.1 million. The $8.1 million increase was
primarily due to loss portfolio transfers and writings in new states
licensed through RNIC, as well as growth in the Company's core Florida
operations.
Unallocated loss adjustment expenses for the six months ended June 30,
1997, were $4.0 million compared to $2.8 million for the same period in
1996, a net increase of $1.2 million. This increase was primarily due to
the increased premium volume and increased loss reserves during this
period. The unallocated loss adjustment expense ratio for the six months
ended June 30, 1998, 1997 and 1996 was 9.9 percent, 8.5 percent and 7.3
22
<PAGE>
percent, respectively. The 9.9 percent ratio at March 31, 1998 is
comparable to the December 31, 1997 year to date ratio of 10.7 percent.
The 1.2 percent increase in the 1997 ratio was primarily due to increased
personnel and personnel related costs.
Commissions, general and administrative expenses for the three months
ended June 30, 1998 are discussed above. Such expenses for the three
months ended March 31, 1998 were $15.5 million compared to $14.4 million
for the same period in 1997. The net increase of $1.1 million from 1997
to 1998 was primarily attributable to a $4.3 million decrease in
personnel expenses, a $4.4 million increase in legal and consulting
expenses, and a $1.0 million increase in premium taxes, agents
commissions, ceding commission income and underwriting expenses.
Commissions, underwriting and administrative expenses for the three
months ended June 30, 1997 were $22.1 million compared to $13.2 million
for the same period in 1996, a net increase of $8.9 million. In addition,
such costs were $14.4 million for the three months ended March 31, 1997.
During the second quarter of 1997 the Company recorded a charge to
earnings of $5.9 million in connection with the workforce reduction and
restructuring. This non-recurring charge consisted of $5.1 million of
personnel expenses (primarily severance costs), $0.7 million of occupancy
costs (primarily lease cancellations) and $0.1 million of other
restructuring costs. These restructuring costs were included in the
accompanying financial statements with commissions, underwriting and
administrative expenses. The remaining net increase of $3.0 million ($8.9
million including the restructuring charges) from 1996 to 1997 is
attributable to increases in commissions, premium taxes and personnel
costs caused by higher premiums generated from acquisitions and new and
renewal premium growth, increased operating expenses from the addition of
employees and increases in legal expenses from actions initiated in 1996.
The Company's total employees were 0, 693 and 790 at June 30, 1998, 1997
and 1996, respectively.
Interest expense for the six months ended June 30, 1997 was $0.5 million
compared to $1.1 million for the same period in 1996. The decrease was
due to the repayment of approximately $28.6 million of debt in March 1996
using the proceeds from the initial public offering.
Depreciation and amortization expense for the six months ended June 30,
1997 were $1.9 million compared to $1.0 million for the same period in
1996, a net increase of $0.9 million. The increase was primarily the
result of amortization of goodwill related to the acquisitions of
CompSource and IAA in 1996, and additions to property and equipment
during 1996 necessary to support the Company's growth. This increase in
depreciation and amortization in 1997 was partially offset by the
reduction in recurring amortization of goodwill from a $3.0 million
writedown of goodwill associated with RWI and a $2.8 million writedown of
goodwill associated with the IAA acquisition in the fourth quarter of
1996.
The effective tax rate for the six months ended June 30, 1997 was 40.6
percent compared to 36.8 percent for the same period in 1996. The
increase in the tax rate is principally due to the increase in the
amortization of goodwill, which is non-deductible for tax purposes.
The weighted average common and common share equivalents outstanding for
the three months ended June 30, 1997 was 37,152,420 versus 37,462,722 for
the three months ended June 30, 1996. The weighted average common shares
outstanding for the six months ended June 30, 1997 and 1996 were
37,451,863 and 35,012,634, respectively. The increase in the weighted
average number of shares for the six months ended June 30, 1997, was due
primarily to the inclusion of the shares issued in connection with the
23
<PAGE>
February 29, 1996 IPO for the entire first and second quarters of 1997
versus inclusion of such shares for only four months for the first and
second quarters of 1996, and the inclusion of certain contingent shares
reserved for issuance in connection with the acquisitions of CompSource
and IAA, as more fully discussed in Note 3 of the consolidated financial
statements included in this document. The increase was partially offset
by a decrease in common stock equivalents for option shares assumed to be
exercised.
Liquidity and Capital Resources
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The
Company's primary sources of cash flow from operations were premiums and
investment income, and its cash requirements consisted 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. As discussed
more fully in Note 5, the Company and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to
Zenith in exchange for cash on April 1, 1998. In connection with this
sale to Zenith, the Company and its subsidiaries ceased substantially all
of its former business operations and, accordingly, after April 1, 1998,
the Company's primary source of cash flow will be generated from
investment income. The Company's future cash requirements will be
satisfied through investment income and the liquidation of investments.
Cash flow from operations for the six months ended June 30, 1998 and for
the year ended December 31, 1997 was $(20.6) million and $(13.3) million,
respectively. The decrease from January 1, 1998 to June 30, 1998 was due
primarily to reductions in unearned premiums resulting from a decrease in
direct premiums written and increases in losses and loss adjustment
expenses, unallocated loss adjustment expenses and commissions,
underwriting and administration expenses in relation to premiums earned
during the first quarter of 1998 and due to the expenses related to the
sale to Zenith. These expenses included severance payments to certain
employees, the payment of accrued employee benefits and the payment of
other expenses related to the sale.
The Company had projected cash flows through December 1998 and believes
it has sufficient liquidity and capital resources to support its
operations.
As of June 30, 1998 and 1997, the Company's insurance subsidiaries had
combined statutory capital and surplus of approximately $151.9 million
and $219.7 million, respectively. The individual capital and surplus of
each of the Company's insurance subsidiaries exceeded the minimum
statutory capital and surplus required by their state of domicile.
In addition, the liquidity of the Company could be materially adversely
affected if Zenith should prevail in the dispute resolution process with
respect to the determination of the final purchase price, as well as by
certain legal issues or any material delay in the Company's receipt of
the final payment of the ultimate purchase price determined to be payable
by Zenith. See "Sale to Zenith," "Legal Proceedings" and "Recent
Developments."
The National Association of Insurance Commissioners has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based upon the risks inherent in its operations. The
standards, which have not yet been adopted in Florida, require the
computation of a risk-based capital amount which is then compared to a
carrier's actual total adjusted capital. The computation involves
applying factors to various financial data to address four primary risks:
asset risk, insurance underwriting risk, credit risk, and off-balance
sheet risk. These standards provide for regulatory intervention when the
24
<PAGE>
percentage of total adjusted capital to authorized control level
risk-based capital is below certain levels. At June 30, 1998 and December
31, 1997, the Company's insurance subsidiaries' statutory surplus was in
excess of any risk-based capital action level requirements.
Part II Other Information
Item 1. Legal Proceedings
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. This agreement was confirmed in a written
Memorandum of Understanding executed by counsel for the respective
parties as of April 29, 1998. The proposed settlement is contingent upon
the following: execution of a definitive settlement agreement and
implementing pleadings and other documentation; consummation of the
transactions contemplated by the Purchase Agreement with Zenith;
disclosure of certain documents to plaintiff's counsel and interviews by
them of various individuals to verify information relating to the
settlement; certification of a settlement class; satisfaction of all
requirements for settlement under Rule 23 of the Federal Rules of Civil
Procedures; payment by RISCORP of $21.0 million into a settlement fund
for the benefit of the settlement class; and release by members of the
settlement class of all claims against the defendants. Counsel to the
parties are in the process of finalizing the initial settlement
documents.
The initial settlement documents have been finalized and the appropriate
pleadings filed with the court. On July 29, 1998, the court issued a
Preliminary Approval Order in which it certified the purported class for
settlement purposes and scheduled a Settlement Fairness Hearing for
October 8, 1998. Notice to the settlement class has been made.
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. The Company recognized the $21.0 million proposed
settlement and the related insurance proceeds in the December 31, 1997
financial statements. Given the preliminary nature of this settlement and
the various contingencies relating to its consummation, there can be no
assurance that this litigation will be ultimately settled on this basis.
In April 1996, RISCORP Insurance Company ("RIC") 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
25
<PAGE>
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. In June 1997,
the plaintiffs amended the complaint to add as additional defendants
Zenith Insurance Company and the Florida Department of Insurance
("FDOI").
On June 22, 1998, the court approved a settlement between the parties and
dismissed the complaint. Pursuant to the terms of the settlement
agreement, RISCORP Insurance Company paid to the plaintiffs a settlement
amount of $475,000. Seventy-five percent of the settlement amount has
been 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. In addition, RISCORP
Insurance Company and the Company agreed to assume full responsibility
for liabilities arising from all policies of insurance issued by the CMIC
prior to January 1, 1995, and for assessments which might be imposed upon
the class of plaintiffs arising from their status as policyholders of
CMIC. Upon the acquisition of the Company's assets, Zenith Insurance
Company assumed those liabilities.
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. Sentencing
has been scheduled for August 10, 1998. As a result of an agreement
negotiated with the United States Attorney, the court dismissed the
indictment against RISCORP, Inc. on the same day.
On August 10, 1998, the court sentenced RMS to pay (i) a fine of
$300,000, (ii) a special assessment fee of $400, (iii) the Florida
Department of Law Enforcement $75,000 for the costs of the investigation,
and (iv) to the State of Florida $50,000 in restitution. All of these
amounts have been paid in full. On August 11, 1998, William D. Griffin
was sentenced to five months incarceration, five months house arrest and
three years probation. The remaining defendants received sentences
varying from fines of $10,000 - $25,000, probation from one to three
years and, in some cases, community service.
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, common law fraud and breach of contract resulting from
the purchase by the Company of shares of IAA from Albrecht and Norman in
1996, as described above. The plaintiffs sought compensatory and punitive
damages and equitable relief. On or about December 2, 1997, counsel for
the Company and counsel for the 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 the plaintiffs, RISCORP, Inc. advanced $2.3 million to the
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
26
<PAGE>
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 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. The 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.
On August 20, 1997, Occupational Safety Association of Alabama Workers'
Compensation Fund (the "Fund") filed a breach of contract and fraud
action against the Company and others. The Fund is an association of
self-insured employers who agreed to transfer, in a Loss Portfolio
Transfer Agreement (the "Agreement") dated August 26, 1996, substantially
all of its assets and liabilities to the Company. Co-defendant, Peter D.
Norman, was a principal and officer of IAA. The complaint alleges that
Norman and IAA breached certain fiduciary duties owed to the Fund in
connection with the subject agreement and transfer. The complaint alleges
that the Company has breached certain provisions of the Agreement and
owes the Fund monies under the terms of the Agreement. The Fund claims,
per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund
overpaid RISCORP by approximately $6.0 million in the subject
transaction.
The court has granted defendant's Motion to Compel Arbitration per the
terms and provisions of the Agreement. The other parties to the
litigation have agreed to attempt to mediate their disputes on May 28 -
29, 1998, and have invited the Company to participate in that mediation.
Assuming mediation fails, the dispute between the Company and the Fund
will be resolved through arbitration. The Company intends to vigorously
defend this claim, and believes that application of appropriate
accounting and actuarial principles and methodologies to the calculation
at issue may indicate that monies are instead owed to the Company by the
Fund.
On or about April 13, 1998, the Fund filed a Motion for Preliminary
Injunction which seeks to enjoin the Company from distributing any
dividends or making any type of distributions to shareholders,
withdrawing any proceeds from the escrow account established with certain
proceeds received from Zenith, or dissolving the Company. Although
somewhat confusing, the motion appears to be based on the failure of the
Company to specifically identify this lawsuit in its proxy statement
issued in connection with the sale to Zenith. The motion was denied on
June 12, 1998.
In June 1997, the Company terminated a number of employees in connection
with the workforce reduction. As a result of the workforce reduction and
the sale to Zenith, 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 RISCORP Property & Casualty Insurance Company
("RPC") were added as defendants in a purported class action filed in the
United States District Court for the Southern District of Florida, styled
Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety
Company, a/k/a Aetna Group, et. al. Case No. 97-2240-CIV-MORENO. The
plaintiffs purport to bring this action on behalf of themselves and a
class consisting of all employers in the State of Florida who purchased
or renewed retrospectively rated or adjusted workers' compensation
policies in the voluntary market since 1985. The suit was originally
filed on July 17, 1997, against approximately 174 workers' compensation
insurers as defendants. The complaint was subsequently amended to add the
RISCORP defendants. The amended complaint named a total of approximately
161 insurer defendants. The suit claims that the defendant insurance
27
<PAGE>
companies violated the Sherman Antitrust Act, the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), the Florida Antitrust Act and
committed breach of contract, civil conspiracy and were unjustly enriched
by unlawfully adding improper and illegal charges and fees onto
retrospectively rated premiums and otherwise charging more for those
policies than allowed by law. The suit seeks compensatory and punitive
damages, treble damages under the Antitrust and RICO claims, and
equitable relief. RIC and RPC have moved to dismiss the amended complaint
and the Company has provided notice to Zenith that it believes this cause
of action is included in the insurance liabilities assumed by Zenith in
connection with the asset sale. Zenith has provided the Company with
notice that it disputes this claim. On April 22, 1998, pursuant to an
Omnibus Administrative Scheduling Order dated January 23, 1998, RISCORP
adopted certain motions to dismiss the Amended Complaint filed by various
other defendants in this action. These motions, if granted, would be
entirely dispositive of the action. The motions have been fully briefed.
Plaintiffs have filed a motion for class certification, and the parties
are engaged in discovery. A hearing was held on June 30, 1998 on the
class certification issue; however, no ruling has been issued. The
cut-off date for discovery has been extended to October 15, 1998 by the
Omnibus Order dated July 31, 1998. Management continues to contest this
case vigorously.
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.
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 final report; however, based on the draft reports
received in late July, 1998, there were no proposed adjustments to the
capital and surplus of RPC and $3.5 million of proposed adjustments to
the capital and surplus of RIC. The most significant examination
adjustment was the non-admission by the FDOI examiners of $2.2 million of
investments that were held by a bank outside of Florida. The remaining
$1.3 million of adjustments related primarily to certain receivables that
were either collected or charged to expense in 1998. These statutory
adjustments have no material impact on the accompanying GAAP financial
statements.
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 were premiums and
investment income, and its cash requirements consisted 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. As discussed
more fully in Note 5, the Company and certain of its subsidiaries have
sold substantially all of their assets and transferred certain
liabilities to Zenith in exchange for cash on April 1, 1998. In
connection with this sale to Zenith, the Company and its subsidiaries
ceased substantially all of its former business operations and,
accordingly, after April 1, 1998, the Company's primary source of cash
flow will be generated from investment income. The Company's future cash
requirements will be satisfied through investment income and the
liquidation of investments.
28
<PAGE>
Item 2. Changes to Securities
None.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Submission of Matters to a Vote of Security Holders
On June 4, 1998, the Company held its 1998 Annual Meeting of
Shareholders. The shareholders voted upon one proposal, to elect Fredrick
M. Dawson, Seddon Goode, Jr., George E. Greene III and Walter L. Revell
to serve as directors of the Company until the next annual meeting of
shareholders and until their successors are elected and qualified.
Pursuant to the Company's Amended and Restated Articles of Incorporation,
holders of Class B Common Stock are entitled to ten votes per share and
the holders of Class A Common Stock are entitled to one vote per share on
all matters to be voted on by the shareholders of the Company. There were
243,344,430 Class B votes cast "for" each of the nominees for director,
consisting of 100 percent of the outstanding shares of Class B Common
Stock. Holders of Class A Common Stock voted their shares as set forth
below for each of the nominees:
<TABLE>
<CAPTION>
Fredrick M. Dawson Seddon Goode, Jr. George E. Greene, III Walter L. Revell
<S> <C> <C> <C> <C>
For: 10,209,861 10,210,000 10,206,024 10,209,000
Withheld: 219,598 219,459 223,435 220,459
Total: 10,429,459 10,429,459 10,429,459 10,429,459
</TABLE>
Item 5. Other Information
Shareholder Proposals
The proxy statement solicited by management of the Company with respect
to the 1999 Annual Meeting of Shareholders will confer discretionary
authority to vote on proposals of shareholders of the Company intended to
be presented for consideration at such Annual Meeting that are submitted
to the Company after May 14, 1999.
Item 6.Exhibits and Reports on Form 8-K
a) Exhibit
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedules
29
<PAGE>
b) Reports on Form 8-K
The Company filed a Form 8-K on each of April 15, 1998 (as amended by
a Form 8-K/A filed on June 15, 1998) and July 20, 1998, in
connection with the consummation of the transactions contemplated
in the Asset Purchase Agreement and the determination of the final
purchase price, as described more fully in Part 1, Item 1 of this
Form 10-Q.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RISCORP, INC.
(Registrant)
By: /s/Walter E. Riehemann
Walter E. Riehemann
Senior Vice President and Secretary
Date: August 19, 1998
By: /s/Edward W. Buttner, IV
Edward W. Buttner IV, CPA
Principal Accounting Officer
Date: August 19, 1998
31
<TABLE>
<CAPTION>
Exhibit 11
RISCORP, INC. AND SUBSIDIARIES
Statement Re. Computation of Per Share Earnings
For the three months ended June 30, 1998 and 1997
(in thousands, except share and per share amounts)
1998 1997
--------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net (loss) income $ (6,241) $ 2,966
============== ==============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,868,114 36,077,778
Redemption contingency for CompSource acquisition -- --
Redemption contingency for IAA acquisition -- 790,336
Restricted stock vested 48,611 --
Weighted average common shares outstanding - (basic) 36,916,725 36,868,114
Common stock equivalents--assumed exercise of stock options -- 284,306
Weighted average common and common share
equivalents outstanding - (diluted) 36,916,725 37,152,420
=========== ===========
Net (loss) income per common share--basic $ (0.17) $ 0.08
=============== ===============
Net (loss) income per common share--diluted $ (0.17) $ 0.08
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Exhibit 11
RISCORP, INC. AND SUBSIDIARIES
Statement Re. Computation of Per Share Earnings
For the six months ended June 30, 1998 and 1997
(in thousands, except share and per share amounts)
1998 1997
--------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net (loss) income $ (15,563) $ 4,445
=============== ==============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,868,114 36,125,938
Redemption contingency for CompSource acquisition -- 251,283
Redemption contingency for IAA acquisition -- 790,336
Restricted stock vested 24,306 --
--------------- ------------
Weighted average common shares outstanding - (basic) 36,892,420 37,167,557
Common stock equivalents--assumed exercise of stock options -- 284,306
Weighted average common and common share
equivalents outstanding - (diluted) 36,892,420 37,451,863
============ ===========
Net (loss) income per common share--basic $ (0.42) $ 0.12
Net (loss) income per common share--diluted $ (0.42) 0.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE PERIOD MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998<F1><F2><F3>
<DEBT-HELD-FOR-SALE> 21,107
<DEBT-CARRYING-VALUE> 15,466
<DEBT-MARKET-VALUE> 15,628
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 36,573
<CASH> 14,185
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 193,059
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 167
0
0
<COMMON> 389
<OTHER-SE> 150,396
<TOTAL-LIABILITY-AND-EQUITY> 193,059
25,819
<INVESTMENT-INCOME> 5,558
<INVESTMENT-GAINS> 4,266
<OTHER-INCOME> 93
<BENEFITS> 26,577
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 26,868
<INCOME-PRETAX> (15,563)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,563)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
<RESERVE-OPEN> 437,038
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Net investment income is reported net of any realized gains and losses in
the Statement of Income.
<F2>Financial Data Schedule information for the year
ending December 31, 1997 is incorporated by reference herein to FORM 10-K annual
report as filed with the Securities and Exchange Commission by the Company on
March 27, 1998.
<F3>Amounts inapplicable or not disclosed as a separate line on
the Statement of Financial Position or Results of Operations are reported as 0
herein.
</FN>
</TABLE>
