FORM 10-Q/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 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 -
March 31, 1998 and December 31, 1997 3-4
Consolidated Statements of Income -
For the three months ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial 15-23
Condition and Results of Operations
Part II Other Information
Item 1. Legal Proceedings 23-27
Item 2. Changes to Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
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Part I Financial Information
Item 1. Financial Statements
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(in thousands)
March 31, 1998 December 31, 1997
Assets (Unaudited)
Investments:
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Fixed maturities available for sale, at fair value
(amortized cost $114,974 in 1998 and $142,876 in 1997) $ 117,590 $ 145,571
Fixed maturities available for sale, at fair value
(amortized cost $59,448 in 1998 and $53,437 in 1997)-restricted 59,844 53,820
Fixed maturities held to maturity, at amortized cost
(fair value $24,008 in 1998 and $24,347 in 1997) 23,751 24,090
------------- ---------
Total investments 201,185 223,481
Cash and cash equivalents 15,168 16,858
Cash and cash equivalents-restricted 14,385 13,295
Premiums receivable, net 83,556 100,183
Accounts receivable--other 19,278 16,720
Recoverable from Florida Special Disability Trust Fund, net 44,552 45,211
Reinsurance recoverables 213,667 184,251
Prepaid reinsurance premiums 21,680 29,982
Prepaid managed care fees 6,182 8,420
Accrued reinsurance commissions 38,670 37,188
Deferred income taxes 22,361 22,120
Property and equipment, net 25,546 26,665
Goodwill 14,069 15,286
Other assets 6,738 9,990
------------ -------------
Total assets $ 727,037 $ 749,650
============ =============
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(in thousands)
March 31, December 31, 1997
1998
Liabilities and Shareholders' Equity (Unaudited)
Liabilities:
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Losses and loss adjustment expenses $ 461,657 $ 437,038
Unearned premiums 43,177 56,324
Notes payable of parent company 15,000 15,000
Notes payable of subsidiaries 527 609
Deposit balances payable 3,913 5,512
Accrued expenses and other liabilities 42,409 65,885
Net assets in excess of cost of business acquired 5,544 5,749
------- -------
Total liabilities 572,227 586,117
------- -------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding:
12,646,253 in 1998 and 11,855,917 in 1997 129 120
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 136,609 135,974
Retained earnings 15,873 25,195
Treasury stock - at cost, 112,582 shares
(1) (1)
Accumulated Other Comprehensive Income:
Net unrealized gains on investments 1,957 2,002
-------- --------
Total shareholders' equity 154,810 163,533
-------- --------
Total liabilities and shareholders' equity $ 727,037 $ 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 March 31, 1998 and 1997
(in thousands, except share and per share data)
1998 1997
---------------- ----------------
(Unaudited) (Unaudited)
Revenue:
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Premiums earned $ 25,819 $ 46,814
Fee income 5,723 5,146
Net realized gains 1,461 --
Net investment income 3,306 3,946
----- -----
Total revenue
36,309 55,906
------ ------
Expenses:
Losses and loss adjustment expenses 24,016 32,547
Unallocated loss adjustment expenses 2,561 4,019
Commissions, underwriting and administrative expenses 15,515 14,437
Interest expense 469 482
Depreciation and amortization 3,069 1,933
----- -----
Total expenses
45,630 53,418
------ ------
(Loss) Income before income taxes (9,321) 2,488
Income taxes
-- 1,009
Net (loss) income $(9,321) $ 1,479
======= =====
Per share data:
Net (loss) income per common share-basic $ (0.25) $ 0.04
===== ====
Net (loss) income per common share-diluted $ (0.25) $ 0.04
===== ======
Weighted average common shares outstanding 36,868,114 37,467,000
========== ==========
Weighted average common shares and common
share equivalents outstanding 36,868,114 37,775,562
========== ==========
See accompanying notes to consolidated financial statements.
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 1998 and
1997
(in thousands)
1998 1997
--------------- --------------
(Unaudited) (Unaudited)
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Net cash used in operating activities $ (20,882) $ (13,557)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (693) (2,069)
Proceeds from the sale of equipment -- 23
Purchase of fixed maturities available for sale (14,684) (8,465)
Purchase of fixed maturities held to maturity (2,903) --
Proceeds from sale of fixed maturities available for sale 31,623 27,297
Proceeds from maturities of fixed maturities available for sale 5,369 2,452
Proceeds from maturities of fixed maturities held to maturity 3,250 1,000
------------ -------------
Net cash provided by investing activities 21,962 20,238
----------- ------------
Cash flows from financing activities:
Principal repayments of notes payable (82) (59)
(Decrease) increase in deposit balances payable (1,598) 205
Unearned compensation--stock options -- 173
Purchase of treasury stock -- (2,100)
Other, net -- (222)
Transfer of cash and cash equivalents to restricted (1,090) --
------------ ---------------
Net cash used in financing activities (2,770) (2,003)
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,690) 4,678
Cash and cash equivalents, beginning of period 16,858 26,307
----------- ------------
Cash and cash equivalents, end of period $ 15,168 $ 30,985
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 460 $ 462
============ =============
Income taxes $ 1,585 $ 3,057
=========== ============
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 three months
ended March 31, 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 Statement 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 is
adjusted for its proportionate share of earnings or losses of Third
Coast. The Company discontinued the use of the equity method of
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accounting for Third Coast in the first quarter of 1997 when the
cumulative losses reduced the Company's investment in Third Coast to $0.
In addition, the Company has not made any financial guarantees relating
to Third Coast and has not made any financial commitments to provide any
future funding to Third Coast.
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. 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 is obligated to
issue additional shares of the Company's Class A Common Stock in an
amount sufficient to make the value of all shares of the Company's Class
A Common Stock held by the former IAA shareholders equal to an aggregate
fair market value of $10.9 million on September 17, 1998. However, in no
event will the number of additional shares issued to the former IAA
shareholders exceed 790,336 shares. 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 accompanying March 31, 1998
financial statements. This amount was recorded as an amortization expense
because it could not be recovered from the 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
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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. Under Rule 23, the settlement will require preliminary
approval by the court as to the fairness of the terms of the settlement,
notice to the settlement class and an opportunity to object to the terms
of the settlement or to exclude themselves from the settlement class, and
final approval by the court following a hearing on the fairness of the
settlement.
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"). The plaintiffs seek only equitable relief against the two new
defendants.
On December 5, 1997, counsel for the parties reached an agreement to
recommend to their respective clients a settlement of the claims asserted
in the Vero Cricket litigation. Plaintiff's counsel has confirmed that
the terms of the settlement are acceptable to the named plaintiffs. The
Company's Board of Directors has approved the terms of the settlement.
The settlement is contingent upon preliminary approval by the court as to
the fairness of the settlement, certification of a settlement class,
notice to the settlement class, opportunity of the settlement class
members to object and withdraw, no termination by either party and final
approval by the court. The court's preliminary approval was given on
April 16, 1998, and the Settlement and Fairness Hearing has been
scheduled for June 22, 1998. Pursuant to the terms of the settlement
agreement and subject to the satisfaction of the contingencies discussed
above, RIC will pay to the plaintiffs a settlement amount of $475,000.
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The Company estimates that 75 percent of the settlement amount will be
covered by insurance. The Company recognized the $475,000 settlement and
the related insurance proceeds in the financial statements as of December
31, 1997.
On September 18, 1997, the United States Attorney's office in Pensacola,
Florida, announced that a United States grand jury had indicted RISCORP,
Inc., RISCORP Management Services, Inc. (a wholly owned, non-regulated
subsidiary of RISCORP, Inc.) and five former officers, including William
D. Griffin, Founder and Chairman of the Board, for various charges
stemming from alleged illegal political campaign contributions. On
September 18, 1997, the Board of Directors approved a guilty plea by RMS
to a single count of conspiracy to commit mail fraud. The guilty plea was
entered by RMS and accepted by the court on October 9, 1997. 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. Mr. Griffin has
resigned from the Board of Directors of the Company and all other
positions with the Company. RMS agreed to cease to operate as a third
party administrator effective October 31, 1997. As of December 31, 1996,
RMS recorded $1.0 million for the estimated fines and costs related to
this matter. On February 18, 1998, a second superseding indictment was
issued against the five former officers including Mr. Griffin. Neither
the Company nor any of its subsidiaries were named as defendants in the
second indictment. The charges asserted in the second indictment, like
those in the first indictment, stem from alleged illegal political
campaign contributions.
On July 17, 1997, plaintiffs Thomas K. Albrecht and Peter D. Norman
filed, in the Circuit Court of Montgomery County, Alabama, an action
against the Company, Mr. William D. Griffin and several other former
officers of the Company. The suit alleged violations of federal and state
securities laws, 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.
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.
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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
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 has been scheduled for June 30, 1998
on the class certification issue. Management intends to contest the 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.
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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 report; however, based on the February 5, 1998 closing
conference with the FDOI examiners, the resolution of the impact of the
matters raised by the FDOI will not have a material impact on the
December 31, 1996 statutory financial statements of RIC and RPC. However,
because the FDOI has not released the final results of their examination,
management cannot determine the materiality or dollar amount of
adjustments, if any, to the December 31, 1996 statutory financial
statements resulting from the FDOI's 1996 examinations of RIC and RPC.
Management believes that any adjustments arising out of the statutory
examinations of RIC and RPC will have no material impact on the
accompanying GAAP financial statements.
The Company 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.
(5) Sale to Zenith Insurance Company ("Zenith")
On June 17, 1997, RISCORP, Inc. and certain of its subsidiaries entered
into an Asset Purchase Agreement for the sale of substantially all of the
assets and the assumption of certain liabilities of RISCORP and its
subsidiaries to Zenith in exchange for cash. The Asset Purchase Agreement
was amended on June 26, 1997, July 11, 1997 and March 30, 1998 (such
agreement, as so amended, shall be hereinafter referred to as the "Asset
Purchase Agreement"). On March 26, 1998, RISCORP, Inc. held a Special
Meeting of Shareholders for the purpose of voting upon the proposal to
approve and adopt the Asset Purchase Agreement. The shareholders approved
the Asset Purchase Agreement on March 26, 1998, the transaction closed on
April 1, 1998 (the "Closing Date") and, on that date, RISCORP, Inc. and
its subsidiaries (collectively, "RISCORP") ceased substantially all of
its former business operations. Capitalized terms used in these notes and
not otherwise defined herein shall have the meanings ascribed to them in
the Asset Purchase Agreement.
Not later than 70 days after April 1, 1998, RISCORP's representatives
were required under the terms of the Asset Purchase Agreement to deliver
to Zenith an audited statement of Transferred Assets and Transferred
Liabilities as of the Closing Date (the "Proposed Business Balance
Sheet"). RISCORP delivered to Zenith the Proposed Business Balance Sheet
on June 8, 1998. If Zenith and RISCORP are able to agree in writing on
the manner in which items should be treated and the appropriateness of
12
<PAGE>
the amounts contained on the Proposed Business Balance Sheet, the
Proposed Business Balance Sheet shall become the Final Business Balance
Sheet, with Zenith to pay, subject to amounts to be deposited into
escrow, any excess in the value of the Transferred Assets over the
Transferred Liabilities, less the $35.0 million paid on April 2, 1998, as
the final purchase price. If, however, RISCORP and Zenith are unable to
agree on the manner in which any items should be treated in the
preparation of the Final Business Balance Sheet, such disputed items will
be submitted to Neutral Auditors or Neutral Actuaries, as appropriate,
for a final and binding determination of such issues. Pursuant to the
terms of the Asset Purchase Agreement, the Neutral Auditors and the
Neutral Actuaries shall act as experts and not as arbitrators to
determine the resolution, based on the Accounting Principles and
Actuarial Principles, as the case may be, of those issues (and only those
issues) still in dispute.
In accordance with the Asset Purchase Agreement, on April 2, 1998, Zenith
transferred $25.0 million to RISCORP and an additional $10.0 million into
an interest-bearing escrow account as payment of the initial and minimum
purchase price. The ultimate purchase price for the net assets of RISCORP
and its subsidiaries acquired by Zenith will be based on the Final
Business Balance Sheet, as determined in accordance with the terms of the
Asset Purchase Agreement, subject to the minimum purchase price of $35.0
million. Zenith is required to pay the remaining purchase price to
RISCORP, plus interest thereon of 6.13 percent from the Closing Date
through the final payment date, in cash, less the additional amount
required to be deposited into escrow, not later than 135 days after April
1, 1998.
In accordance with the terms of the Asset Purchase Agreement, 15 percent
of the total purchase price is required to be held in escrow for a period
of two years from the Closing Date. The escrowed funds will be disbursed
pursuant to the terms of the Escrow Agreement. The escrowed funds will be
invested in United States government debt obligations or in money market
funds secured by such debt obligations. Interest income on the escrowed
funds will be paid to RISCORP at the end of each calendar quarter.
In accordance with a letter agreement dated April 1, 1998 between Zenith
and RISCORP, RISCORP has retained 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.
In addition, 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"). 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.
On June 8, 1998, pursuant to the provisions of the Asset Purchase
Agreement, RISCORP delivered to Zenith the audited Proposed Business
Balance Sheet indicating a purchase price of approximately $141.0
million. The determination of the ultimate purchase price is subject to
review by Zenith of the Proposed Business Balance Sheet and a dispute
resolution process; therefore, the final purchase price cannot be
determined at this time and may differ materially from the purchase price
reflected in the Proposed Business Balance Sheet.
13
<PAGE>
(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
three months ended March 31, 1998 and 1997, respectively are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net (loss) income $ (9,321) $ 1,479
Unrealized (losses) gains on securities available for sale:
Unrealized holding losses during the period (133) (1,555)
Reclassification adjustment for realized gains included in
net earnings
89 -
Comprehensive loss $ (9,365) $ (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.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This quarterly report on Form 10-Q/A contains forward-looking statements,
particularly with respect to the Liquidity and Capital Resources section
of Management's Discussion and Analysis of Financial Condition and
Results of Operations. Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with
the Securities and Exchange Commission or otherwise. Such forward-looking
statements are within the meaning of that term in Sections 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). Such statements may
include, but not be limited to, projections of revenues, income, losses,
cash flows, capital expenditures, plans for future operations, financing
needs or plans, plans relating to products or services of the Company,
estimates concerning the effects of litigation or other disputes, as well
as assumptions to any of the foregoing.
Recent Developments
Asset Purchase Agreement with Zenith
See Part 1, Item 1, Notes to Consolidated Financial Statements, Note 5
for further discussion of the Zenith transaction.
The Phoenix Management Company, Ltd.
In contemplation of the sale to Zenith, on February 18, 1998, the Company
entered into a Management Agreement (the "Management Agreement") with The
Phoenix Management Company, Ltd. ("Phoenix") for the provision of various
management services to the Company immediately following the closing of
such transaction, including undertaking the day-to-day operating
responsibilities of the Company and its subsidiaries. Mr. Frederick M.
Dawson owns a majority interest in Phoenix, a Florida limited
partnership, and controls its operations as president of the general
partner. Mr. Walter E. Riehemann owns a minority interest in Phoenix and
serves as vice president and secretary of the general partner. With the
closing of the asset sale, the Company and its subsidiaries ceased
substantially all of their former business operations and no longer have
any employees; however, the Management Agreement specifically provides
that Mr. Dawson will hold the titles of President and Chief Executive
Officer of the Company and Mr. Riehemann will hold the titles of Chief
Investment Officer, Treasurer and Secretary of the Company.
Pursuant to the terms of the Management Agreement, Phoenix will be paid
$100,000 per month, plus expenses, and was granted a restricted stock
award for 1,725,000 shares of Class A Common Stock (subject to certain
vesting provisions) in consideration for its management services. The
Management Agreement has an initial term of three years commencing
immediately following the consummation of the sale to Zenith, and the
Company has the right to extend the term for an additional year. The
Company paid Phoenix a retainer of $600,000 immediately following the
consummation of the sale which will be applied by Phoenix against the
fees payable by the Company during the final six months of the initial
term. The restricted stock grant will vest monthly over the initial term
of the Management Agreement, and Phoenix will be entitled to all rights
applicable to holders of shares of Class A Common Stock with respect to
all such shares from the date of grant including, without limitation, the
right to receive any dividends or distributions payable on the restricted
stock. Pursuant to the terms of the Management Agreement, the Company
will pay Phoenix an amount which, on an after-tax basis, is sufficient to
15
<PAGE>
reimburse the partners of the Management Company for all taxes (exclusive
of state taxes) incurred in connection with the Section 83(b) election
which was filed with respect to such grant. It is currently anticipated
that the amount of this payment will be approximately $2,900,000, payable
in installments as the taxes are due. In the event the Management
Agreement is terminated by the Company prior to the expiration of its
initial term due to (i) the complete liquidation, dissolution and winding
up of all of the business and affairs of the Company including, without
limitation, the final distribution to all shareholders of the Company, or
(ii) the final distribution to the holders of the Class A Common Stock of
the Company, the vesting under the restricted stock grant will accelerate
immediately prior to such event and the Company will make a lump sum
payment to Phoenix equal to the unpaid balance of the amount it would
have received in monthly management fees during the initial term of the
Management Agreement.
Other Events That Have Impacted the Company During the First
Quarter of 1998
The unfavorable publicity related to the inability of the Company and its
subsidiaries to file timely financial statements, the delisting of the
Company's stock, the pending litigation and subsequent indictments, A.M.
Best's letter rating, and delays in completion of the Company's 1996
audit negatively impacted the Company's ability to retain customers and
add new business prior to the sale to Zenith. The overall effects of
these and other factors are discussed in more detail below in the
"Results of Operations".
Legal Developments
See "Part II, Item 1, Legal Proceedings."
Overview
General
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 three months ended March 31, 1998 and the calendar year
ended December 31, 1997, 1996 and 1995 (prior to reinsurance cessions or
assumptions) by state is presented below:
<TABLE>
<CAPTION>
Direct Premiums Written (a)
(Dollars in millions) 1998 1997 1996 1995
<S> <C> <C> <C> <C>
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.
</TABLE>
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.
16
<PAGE>
The majority of the Company's premiums have been written in Florida, a
regulated pricing state where premiums for guaranteed cost products are
based on state-approved rates. However, 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
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 these 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").
17
<PAGE>
Results of Operations
Three months ended March 31, 1998 compared to three months ended
March 31, 1997
<TABLE>
The following table shows direct, assumed, ceded and net earned
premiums by quarter for 1998 and 1997 (in thousands):
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
3-31-98 3-31-97 6-30-97 9-30-97 12-31-97
------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Direct premiums earned $ 48,416 $ 91,516 $ 91,761 $ 77,169 $ 67,800
Assumed premiums earned 79 2,827 2,064 1,118 12,500
Premiums ceded to reinsurers (22,676) (47,529) (47,173) (37,870) (34,700)
---------- --------- --------- --------- ---------
Net premiums earned $ 25,819 $ 46,814 $ 46,652 $ 40,417 $ 45,600
======== ======== ======== ======== ========
</TABLE>
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 N/A
September 30 28,772 25,649 N/A
December 31 30,081 22,357 N/A
Direct premiums earned decreased to $48.4 million for the three months
ended March 31, 1998 from $91.5 million for the same period in 1997, a
net decrease of $43.1 million. Direct earned premiums have been steadily
decreasing since June 1997.
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 $91.5 million for the three months
ended March 31, 1997 from $74.6 million for the same period in 1996, a
net increase of $16.9 million. The increase in the direct premiums earned
for the three months ended March 31, 1997 was primarily the result of the
following factors:
The infusion of approximately $68.9 million of capital into the
Company's insurance subsidiaries from the 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 are earned pro
rata over the policy period (usually 12 months) therefore, increased
premiums written during the last nine months of 1996 will have a
positive impact on earned premiums in 1996 and 1997.
18
<PAGE>
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 was the primary reason that the assumed premiums
decreased to $79 from $2,827 for the three months ended March 31, 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 increased
from approximately $1.1 million at March 31, 1996 to approximately $2.3
million at March 31, 1997, which primarily accounts for the increase in
assumed premiums of approximately $1.4 million during this period.
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 three months ended March 31, 1998 from
$47.5 million for the same period in 1996, a net decrease of $24.8
million, was due primarily to the decrease in direct premiums earned
discussed above. The increase in premiums ceded in 1997 was primarily
related to the increase in direct premiums earned.
Fee income for the three months ended March 31, 1998 was $5.7 million
compared to $5.1 million for the same period in 1997, a net increase of
$0.6 million. The increase in fee income of $1.4 million was primarily
due to the recognition of additional fees related to the profitability of
the self insurance funds under management. The remaining amounts and
composition of fee income was comparable between periods. Fee income for
the three months ended March 31, 1997 was $5.1 million compared to $7.1
million for the same period in 1996, a net decrease of $2.0 million. The
decrease 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.
Net realized gains for the three months ended March 31, 1998 was $1.5
million compared to $0 for the same period in 1997. The net realized
gains consist primarily of the $1.3 million gain on the sale of Third
Coast, more fully discussed in Note 2 of the consolidated financial
statements contained in this document, and $0.2 million in gains on the
sale of available for sale securities. There were no realized gains or
losses during the first quarter of 1997.
19
<PAGE>
Net investment income for the three months ended March 31, 1998 was $3.3
million compared to $3.9 million for the same period in 1997, a net
decrease of $0.6 million. The decline in investment income was due to a
decline in invested assets of approximately $30.0 million for the three
month period ended March 31, 1998 compared to the same period in 1997.
Net investment income for the three months ended March 31, 1997 was $3.9
million compared to $1.6 million for the same period in 1996, a net
increase of $2.3 million. Investment income consists entirely of earnings
from the investment portfolio, excluding realized gains and losses. The
actual yield on invested assets is comparable between quarters.
The decrease in accounts payable and other accrued expenses of $23.5
million in the first quarter of 1998 was due primarily to the payment of
$3.6 million of accounts payable and accrued expenses, the payment of
$2.6 million of federal income taxes, the transfer of security deposits
of $2.9 million to premiums receivable, the payment of $6.2 million of
accrued commissions, the payment of $1.7 million of accrued premium
taxes, a decrease in the FPA accrual of $1.2 million, payment of $5.9
million of reinsurance balances and an increase in various other accrual
balances of $0.6 million. The decrease in the invested assets of $22.3
million during the first quarter of 1998 was caused primarily by the
liquidation of investments to pay these items.
The decrease in premiums receivables of $16.6 million during the first
quarter of 1998 was primarily due to the significant decline in direct
written premiums as discussed above.
Losses and loss adjustment expenses for the three months ended March 31,
1998 were $24.0 million compared to $32.5 million for the same period in
1997, a net decrease of $8.5 million. The $8.5 million decrease was
primarily due to a significant decrease in earned premiums during the
first quarter combined with reserve increases. Losses and loss adjustment
expenses for the three months ended March 31, 1997, were $32.5 million
compared to $24.4 million for the same period in 1996, a net increase of
$8.1 million. The $8.1 million increase 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.
The loss ratio for the three months ended March 31, 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 in 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.
Unallocated loss adjustment expenses for the three months ended March 31,
1998 were $2.6 million compared to $4.0 million for the same period in
1997, a net decrease of $1.4 million. The decrease was primarily due to a
significant decrease in premium volume. Unallocated loss adjustment
expenses for the three months ended March 31, 1997, were $4.0 million
compared to $2.8 million for the same period in 1996, a net increase of
$1.2 million. This increase was primarily due to the increased premium
volume and increased loss reserves during this period. The unallocated
loss adjustment expense ratio for the three months ended March 31, 1998,
1997 and 1996 was 9.9 percent, 8.5 percent and 7.3 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.
20
<PAGE>
Commissions, general and administrative 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 March 31, 1997
were $14.4 million compared to $13.0 million for the same period in 1996.
The net increase of $1.4 million from 1996 to 1997 was attributable to
increases in commissions and personnel costs caused by higher premiums
generated from acquisitions and new and renewal premium growth, increased
operating expenses from the addition of employees to support the premium
growth and increases in legal expenses from actions initiated in 1996.
The net increase in those expenses were partially offset by increased
ceding commission income of $4.0 million received from reinsurers under
the quota share reinsurance agreements. The Company's total employees
were 561, 820 and 739 at March 31, 1998, 1997 and 1996, respectively.
Interest expense for the three months ended March 31, 1998 was $0.5
million compared to $0.5 million for the same period in 1997. The amount
and composition of outstanding debt was also comparable during these
periods. Interest expense for the three months ended March 31, 1997 was
$0.5 million compared to $1.1 million for the same period in 1996. The
decrease 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 three months ended March
31, 1998 was $3.1 million compared to $1.9 million for the same period in
1997, a net increase of $1.2 million. The increase was due to the
issuance of the additional stock during the first quarter of 1998
relating to the IAA acquisition of $0.6 million and increased
depreciation expense of $0.6 million. Depreciation and amortization
expense for the three months ended March 31, 1997 were $1.9 million
compared to $1.0 million for the same period in 1996, a net increase of
$0.9 million. The increase was primarily the result of amortization of
goodwill related to the acquisitions of CompSource and IAA in 1996, and
additions to property and equipment during 1996 necessary to support the
Company's growth. This increase in depreciation and amortization in 1997
was partially offset by the reduction in recurring amortization of
goodwill from a $3.0 million writedown of goodwill associated with RWI
and a $2.8 million writedown of goodwill associated with the IAA
acquisition in the fourth quarter of 1996.
The effective tax rate for the three months ended March 31, 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 March 31, 1998 loss.
The effective tax rate for the three months ended March 31, 1997 was 40.6
percent compared to 36.8 percent for the same period in 1996. The
increase in the tax rate is principally due to the increase in the
amortization of goodwill, which is non-deductible for tax purposes.
The weighted average common shares outstanding for the three months
ending March 31, 1998 was 36,868,114 versus 37,775,562 for the three
months ending March 31, 1997. The decrease in the weighted average number
of shares was due primarily to the inclusion of certain common stock
equivalents for stock options at March 31, 1997 that were cancelled in
October 1997 and no longer included at March 31, 1998. The weighted
average common shares outstanding for the three months ending March 31,
1997 was 37,775,562 versus 32,536,343 for the three months ending March
31, 1996. The increase in the weighted average number of shares was due
primarily to the inclusion of the shares issued in connection with the
February 29, 1996 IPO for the entire first quarter of 1997 versus the
inclusion of shares issued in connection with the IPO for only one month
for the first quarter of 1996, and the inclusion of certain contingent
shares reserved for issuance in connection with the acquisitions of
21
<PAGE>
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 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.
Cash flow from operations for the quarter ended March 31, 1998 and for
the years ended December 31, 1997 and 1996 was $(20.9) million, $(22.9)
million and $28.1 million, respectively. The decrease from January 1,
1998 to March 31, 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.
The increase from 1996 to 1997 was primarily due to reductions in
unearned premiums and loss and loss adjustment expense reserves resulting
from a decrease in direct premiums written, as well as increases in
commissions, general and administration expenses and unallocated loss
adjustment expenses.
The Company had projected cash flows through December 1998 and believes
it has sufficient liquidity and capital resources to support its
operations.
At March 31, 1998, the Company has recorded $44.6 million in accrued net
recoverables from the SDTF, which it anticipates will be reimbursed over
a number of years. During the first quarter of 1998, the Company received
net payments from the SDTF totaling $0.9 million. For the years ended
December 31, 1997, 1996 and 1995, the Company received net payments from
the SDTF totaling $5.9 million, $2.5 million and $0.9 million,
respectively.
Barring any adverse legislative change, the Company believes that it will
ultimately collect the entire balance of SDTF recoverables and that
periodic reimbursement will be received following submission of proof of
claim and reimbursement requests. During its approximate 40-year history,
the SDTF has historically paid reimbursement requests for claims it
determined were eligible for reimbursement. The Company does not believe
that the SDTF will fail to meet its obligations to pay eligible
reimbursement requests, although there can be no assurance in this
regard. The failure of the SDTF to meet its obligations could adversely
affect the liquidity of the Company.
As of March 31, 1998 and 1997, the Company's insurance subsidiaries had
combined statutory capital and surplus of approximately $98.1 million and
$88.0 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.
22
<PAGE>
In addition, the liquidity of the Company could be adversely affected by
certain legal issues and the final payment of the ultimate purchase price
to be paid by Zenith. See "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
percentage of total adjusted capital to authorized control level
risk-based capital is below certain levels. At December 31, 1997, the
Company's insurance subsidiaries' statutory surplus was in excess of any
risk-based capital action level requirements.
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. Under Rule 23, the settlement will require preliminary
approval by the court as to the fairness of the terms of the settlement,
notice to the settlement class and an opportunity to object to the terms
of the settlement or to exclude themselves from the settlement class, and
final approval by the court following a hearing on the fairness of the
settlement.
23
<PAGE>
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"). The plaintiffs seek only equitable relief against the two new
defendants.
On December 5, 1997, counsel for the parties reached an agreement to
recommend to their respective clients a settlement of the claims asserted
in the Vero Cricket litigation. Plaintiff's counsel has confirmed that
the terms of the settlement are acceptable to the named plaintiffs. The
Company's Board of Directors has approved the terms of the settlement.
The settlement is contingent upon preliminary approval by the court as to
the fairness of the settlement, certification of a settlement class,
notice to the settlement class, opportunity of the settlement class
members to object and withdraw, no termination by either party and final
approval by the court. The court's preliminary approval was given on
April 16, 1998, and the Settlement and Fairness Hearing has been
scheduled for June 22, 1998. Pursuant to the terms of the settlement
agreement and subject to the satisfaction of the contingencies discussed
above, RIC will pay to the plaintiffs a settlement amount of $475,000.
The Company estimates that 75 percent of the settlement amount will be
covered by insurance. The Company recognized the $475,000 settlement and
the related insurance proceeds in the accompanying financial statements
as of December 31, 1997.
On September 18, 1997, the United States Attorney's office in Pensacola,
Florida, announced that a United States grand jury had indicted RISCORP,
Inc., RISCORP Management Services, Inc. (a wholly owned, non-regulated
subsidiary of RISCORP, Inc.) and five former officers, including William
D. Griffin, Founder and Chairman of the Board, for various charges
stemming from alleged illegal political campaign contributions. On
September 18, 1997, the Board of Directors approved a guilty plea by RMS
to a single count of conspiracy to commit mail fraud. The guilty plea was
entered by RMS and accepted by the court on October 9, 1997. 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. Mr. Griffin has
resigned from the Board of Directors of the Company and all other
positions with the Company. RMS agreed to cease to operate as a third
party administrator effective October 31, 1997. As of December 31, 1996,
RMS recorded $1.0 million for the estimated fines and costs related to
this matter. On February 18, 1998, a second superseding indictment was
issued against the five former officers including Mr. Griffin. Neither
the Company nor any of its subsidiaries were named as defendants in the
second indictment. The charges asserted in the second indictment, like
those in the first indictment, stem from alleged illegal political
campaign contributions.
On July 17, 1997, plaintiffs Thomas K. Albrecht and Peter D. Norman
filed, in the Circuit Court of Montgomery County, Alabama, an action
24
<PAGE>
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.
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 Company believes the
motion to be completely without merit and will be filing an appropriate
response in the near future. The motion was originally set for hearing on
May 14, 1998, but has been continued.
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
25
<PAGE>
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
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 has been scheduled for June 30, 1998
on the class certification issue. Management intends to contest the 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 report; however, based on the February 5, 1998 closing
conference with the FDOI examiners, the resolution of the impact of the
matters raised by the FDOI will not have a material impact on the
December 31, 1996 statutory financial statements of RIC and RPC. However,
because the FDOI has not released the final results of their examination,
management cannot determine the materiality or dollar amount of
adjustments, if any, to the December 31, 1996 statutory financial
statements resulting from the FDOI's 1996 examinations of RIC and RPC.
Management believes that any adjustments arising out of the statutory
examinations of RIC and RPC will have no material impact on the
accompanying GAAP financial statements.
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The
26
<PAGE>
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.
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 March 26, 1998, the Company held a Special Meeting of the Shareholders
of RISCORP, Inc. to (1) vote upon the approval and adoption of an Asset
Purchase Agreement (the "Purchase Agreement") whereby substantially all
of the assets of RISCORP, Inc. and certain of its subsidiaries would be
acquired by Zenith Insurance Company, and (2) to vote upon the approval
for the adjournment or postponement of the Special Meeting of the
Shareholders if the Company failed to receive a sufficient number of
votes to approve the adoption of the Asset Purchase Agreement.
Pursuant to the Company's Amended and Restated Article 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" proposal 1, and proposal 2,
consisting of 100 percent of the outstanding shares of Class B Common
Stock. Holders of the Class A Common Stock voted their shares as set
forth below for the proposals.
<TABLE>
<CAPTION>
Proposal 1 Proposal 2
--------------------- --------------------
<S> <C> <C>
For 8,307,109 8,038,491
Against 194,812 460,646
Abstained 58,315 61,099
Broker non votes 3,563,776 3,563,776
Votes withheld 409,659 409,659
------------ ------------
Total 12,533,671 12,533,671
========== ==========
</TABLE>
Item 5. Other Information
None.
Item 6.Exhibits and Reports on Form 8-K
a) Exhibit
11 Statement Re Computation of Per Share Earnings
27
<PAGE>
27 Financial Data Schedules
b) Reports on Form 8-K
The Company filed a Form 8-K on April 15, 1998 in connection with the
consummation of the transactions contemplated in the Asset Purchase
Agreement between the Company, certain of its subsidiaries named
therein and Zenith Insurance Company, as described more fully in Part
1, Item 1 of this Form 10-Q.
28
<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: June 15, 1998
By: /s/Edward W. Buttner, IV
Edward W. Buttner IV, CPA
Principal Accounting Officer
Date: June 15, 1998
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
RISCORP, INC. AND SUBSIDIARIES
Statement Re. Computation of Per Share Earnings
For the three months ended March 31, 1998 and 1997
(in thousands, except share and per share amounts)
1998 1997
--------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net (loss) income $ (9,321) $ 1,479
============= ==============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,868,414 36,174,098
Redemption contingency for CompSource acquisition -- 502,566
Redemption contingency for IAA acquisition -- 790,336
---------------- -------------
Weighted average common shares outstanding - (basic) 36,868,414 37,467,000
Common stock equivalents--assumed exercise of stock options -- 308,562
Weighted average common and common share
equivalents outstanding - (diluted) 36,868,414 37,775,562
=========== ===========
Net (loss) income per common share--basic $ (0.25) $ 0.04
============== =============
Net (loss) income per common share--diluted $ (0.25) $ 0.04
============== =============
</TABLE>
30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998<F1><F2><F3>
<DEBT-HELD-FOR-SALE> 177,434
<DEBT-CARRYING-VALUE> 23,751
<DEBT-MARKET-VALUE> 24,008
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 201,185
<CASH> 29,553
<RECOVER-REINSURE> 213,667
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 727,037
<POLICY-LOSSES> 461,657
<UNEARNED-PREMIUMS> 43,177
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15,527
0
0
<COMMON> 372
<OTHER-SE> 154,438
<TOTAL-LIABILITY-AND-EQUITY> 727,037
25,819
<INVESTMENT-INCOME> 3,306
<INVESTMENT-GAINS> 1,461
<OTHER-INCOME> 5,723
<BENEFITS> 26,577
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 15,515
<INCOME-PRETAX> (9,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,321)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
<RESERVE-OPEN> 437,038
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 461,657
<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>
