FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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. Yes X No .
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at April 30, 2000
----- -----------------------------
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
<TABLE>
<CAPTION>
Page No.
Part I Financial Information
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
For the three months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows -
For the three months ended March 31, 2000 and 1999 5
Consolidated Statements of Comprehensive Loss 6
For the three months ended March 31, 2000 and 1999
Notes to Consolidated Condensed Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial 11 - 14
Condition and Results of Operations
Part II Other Information
Item 1. Legal Proceedings 15 - 17
Item 2. Changes to Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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Part I Financial Information
Item 1. Financial Statements
RISCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
------------- -------------
Assets (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value
(amortized cost $73,358 in 2000 and $76,058 in 1999) $ 73,261 $ 75,959
Fixed maturities available for sale, at fair value (amortized cost $4,865 in
2000 and $2,995 in 1999)-restricted 4,887 3,022
----------- -----------
Total investments 78,148 78,981
Cash and cash equivalents 5,658 4,668
Cash and cash equivalents-restricted 1,972 1,925
Accounts receivable--other 2,545 2,545
Deferred income taxes 1,012 1,010
Property and equipment, net 163 196
Other assets 5,190 5,751
----------- -----------
Total assets $ 94,688 $ 95,076
=========== ===========
Liabilities and Shareholders' Equity
Liabilities - accrued expenses and other liabilities $ 6,394 $ 6,656
----------- -----------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000
shares authorized; 14,258,671 shares issued 143 143
Class B Common Stock, $.01 par value, 100,000,000
shares authorized; 24,334,443 shares issued 243 243
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding -- --
Additional paid-in capital 142,688 142,688
Retained deficit (54,730) (54,606)
Treasury Class A Common Stock - at cost, 112,582 shares (1) (1)
Accumulated Other Comprehensive Loss:
Net unrealized losses on investments (49) (47)
----------- -----------
Total shareholders' equity 88,294 88,420
----------- -----------
Total liabilities and shareholders' equity $ 94,688 $ 95,076
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Net investment income $ 1,238 $ 1,799
Other income 120 --
----------- -----------
Total revenue 1,358 1,799
----------- -----------
Expenses:
General and administrative expenses 1,397 1,157
Interest expense 52 1,441
Depreciation and amortization 33 40
----------- -----------
Total expenses 1,482 2,638
----------- -----------
Loss before income taxes (124) (839)
Income taxes -- --
----------- -----------
Net loss $ (124) $ (839)
=========== ===========
Per share data:
Net loss per common share - basic $ (0.00) $ (0.02)
=========== ===========
Net loss per common share - diluted $ (0.00) $ (0.02)
=========== ===========
Weighted average common shares outstanding 37,922,281 37,347,281
=========== ===========
Weighted average common and common share
equivalents outstanding 37,922,281 37,347,281
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash provided by operating activities $ 91 $ 13,533
----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities available for sale (49,146) (192,877)
Proceeds from sales and maturities of fixed maturities available for sale 50,045 133,819
Cash received from Zenith for sale of net assets -- 50,572
----------- -----------
Net cash provided by (used in) investing activities 899 (8,486)
----------- -----------
Cash flows from financing activities:
Transfer of cash and cash equivalents to restricted cash -- (2,232)
----------- -----------
Net cash used in financing activities -- (2,232)
----------- -----------
Net increase in cash and cash equivalents 990 2,815
Cash and cash equivalents, beginning of period 4,668 6,864
----------- -----------
Cash and cash equivalents, end of period $ 5,658 $ 9,679
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3 $ 3
=========== ===========
Income taxes $ 12 $ 82
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
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RISCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net loss $ (124) $ (839)
----------- -----------
Other comprehensive loss, before income taxes:
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period (3) (49)
Income tax benefit related to items of other
comprehensive loss 1 17
----------- -----------
Other comprehensive loss, net of income taxes (2) (32)
----------- -----------
Total comprehensive loss $ (126) $ (871)
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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RISCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated unaudited interim financial statements of
RISCORP, Inc. ("RISCORP") and subsidiaries (collectively, the "Company")
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 liabilities at the date of the
financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of RISCORP and
its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
(2) Execution of Merger Agreement with William D. Griffin
In November 1999, RISCORP entered into a definitive agreement (the
"Merger Agreement") to merge with Griffin Acquisition Corp. ("Acquiror"),
a company controlled by Mr. William D. Griffin, the majority shareholder
of RISCORP. Pursuant to the terms of the Merger Agreement, each issued
and outstanding share of Class A Common Stock will receive $2.85 in cash,
plus a contingent right to receive an additional pro rata cash amount if
RISCORP recovers any additional amounts from Zenith Insurance Company.
Under the terms of the Merger Agreement, Acquiror will assume all of the
liabilities of RISCORP, including its pending litigation. The transaction
is subject to customary closing conditions, including shareholder
approval, and is expected to close in the second quarter of 2000. This
transaction, if consummated, will constitute a going private transaction.
(3) Sale to Zenith Insurance Company
As of April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to
Zenith Insurance Company ("Zenith"). In connection with the sale to
Zenith, the Company ceased substantially all of its former business
operations, including its insurance operations. Accordingly, after such
date, the Company's operations consisted principally 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. At the present time, RISCORP has no plans to resume any
operating activities.
On July 7, 1999, the Company and Zenith settled, with certain limited
exceptions, the claims arising out of the sale. The Asset Purchase
Agreement contemplated a post-closing purchase price adjustment based on
7
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the difference between the book value of the assets purchased and the
book value of the liabilities assumed as of the closing date. In
connection with the determination of the final purchase price, a dispute
arose between the parties regarding, among other things, the book value
of the assets and liabilities of the business, Zenith's assumption of
certain operating liabilities of the business, and each party's
indemnification obligations under the Asset Purchase Agreement. The terms
of the settlement included, among other things, RISCORP's right to seek
correction of alleged errors made by the neutral auditors in connection
with its determination of certain reinsurance recoverable adjustments
contained in the Final Business Balance Sheet. On October 7, 1999, the
neutral auditors denied RISCORP's request for correction of these errors.
On January 5, 2000, RISCORP filed a lawsuit against Zenith and the
neutral auditors in the Superior Court of Fulton County, Georgia, seeking
correction of these alleged errors.
In connection with the sale of RISCORP's insurance operations to Zenith
on April 1, 1998, RISCORP voluntarily consented to the Florida Insurance
Department's request that RISCORP discontinue writing any new or renewal
insurance business for an indefinite period of time.
(4) Commitments and Contingencies
In August 1997, the Occupational Safety Association of Alabama Workers'
Compensation Fund (the "Fund"), an Alabama self-insured workers'
compensation fund, filed a breach of contract and fraud action against
the Company and others. The Fund entered into a Loss Portfolio Transfer
and Assumption Reinsurance Agreement effective September 1, 1996 with
RISCORP National Insurance Company ("RNIC"). Under the terms of the
agreement, RNIC assumed 100 percent of the outstanding loss reserves
(including incurred but not reported losses) as of September 1, 1996.
Co-defendant Peter D. Norman ("Norman") was a principal and officer of
Independent Association Administrators, Inc. ("IAA") prior to its
acquisition by RISCORP in September 1996. 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 RISCORP 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
RNIC by $6 million in the subject transaction. The court has granted
RNIC's Motion to Compel Arbitration per the terms and provisions of the
agreement. On December 1, 1998, the trial court issued an order
prohibiting the American Arbitration Association from administering the
arbitration between RNIC and the Fund, and RNIC has appealed the trial
court's ruling. The Alabama Supreme Court has stayed the current
arbitration. Despite the Alabama Supreme Court's stay, the dispute
between the Fund and RNIC is expected to be resolved through arbitration.
The other defendants, including IAA, have appealed to the Supreme Court
of Alabama the trial court's denial of their motions to compel
arbitration. RNIC intends to vigorously defend the Fund's claim.
In July 1999, a shareholder class action lawsuit was filed against
RISCORP, two of its executive officers, and two former executive officers
in the United States District Court for the Middle District of Florida
styled Chap-Cap Partners, L.P. v. RISCORP, Inc., William D. Griffin,
Frederick M. Dawson, Walter E. Riehemann and Stephen C. Rece, Case No.
99-1585CIV-T-26. The plaintiff in this action purports to represent the
class of shareholders who purchased shares of RISCORP's Class A Common
Stock between November 19, 1997 and July 20, 1998. The complaint alleges,
among other things, that the financial statements included in the
periodic reports filed by RISCORP with the Securities and Exchange
Commission during the class period contain false and misleading
statements of material fact and omissions, in violation of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder. These allegations principally relate to the
difference between the net book value of RISCORP as reflected on its
8
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published financial statements during the class period and the net book
value of the assets transferred to Zenith as determined by the neutral
auditors pursuant to the terms of the Asset Purchase Agreement. The
complaint seeks certification of a class and award of unspecified
compensatory damages. Defendants Dawson, Riehemann and Rece sought
indemnification from RISCORP. On or about February 9, 2000, the plaintiff
filed an amended complaint that dropped William D. Griffin as a party and
purported to substitute the Estate of Frederick M. Dawson for Frederick
M. Dawson (deceased) as a party defendant. On March 31, 2000, the
defendants filed a motion to dismiss the amended complaint, which remains
pending. After service of the complaint, RISCORP promptly notified its
directors' and officers' insurance carrier. The insurance carrier
subsequently sent a letter to RISCORP denying coverage of this claim.
RISCORP has disputed the insurance company's position, and has insisted
on coverage. RISCORP and the indemnified defendants deny liability to the
Plaintiff or to the putative class, and intend to defend this action
vigorously.
In February 2000, an alleged shareholder of RISCORP filed a putative
class action suit against RISCORP, its Directors, and its majority
shareholder in the Circuit Court of the 12th Judicial Circuit, Sarasota
County, Florida, styled Harris Blackman v. William D. Griffin, Seddon
Goode, Jr., George E. Greene III, Walter L. Revell, and RISCORP, Inc.,
Case No. 20002103 CA DIV-A. The suit contends that the pending
transaction with Griffin Acquisition Corp. pursuant to which William D.
Griffin, the majority shareholder of RISCORP, proposes to purchase the
Class A shares of RISCORP held by the public shareholders is inadequately
priced. The suit alleges that the defendants are liable for breach of
fiduciary duty, and seeks to enjoin the transaction. RISCORP has filed a
motion to dismiss, and has received no notice of any hearing on the
plaintiff's claim for equitable relief. RISCORP denies the plaintiff's
allegations and intends to defend the suit vigorously.
In February 2000, the State of Alabama, on behalf of D. David Parsons (as
Acting Commissioner of Insurance of the State of Alabama), filed a
lawsuit against RNIC styled State of Alabama v. RISCORP National
Insurance Company, Civil Action No. CV-2000-569PR, Circuit Court of
Montgomery County, Alabama. The complaint alleges that RNIC owes an
additional $2.5 million in premium taxes for the 1996 tax year. RNIC
entered into a Loss Portfolio Transfer Agreement dated August 26, 1996
and effective September 1, 1996 with the Occupational Safety Association
of Alabama Workmen's Compensation Fund (the "Fund"). According to the
complaint, pursuant to the terms of the agreement, RNIC assumed the
workers' compensation risks that were in the Fund and became the insurer
of those risks. The State claims that premium tax is due on the
consideration received by RNIC for insuring those risks. The complaint
seeks compensatory damages. RNIC intends to vigorously defend this suit.
In April 1999, RISCORP received an invoice from Salomon Smith Barney
seeking approximately $2 million for financial advisory services rendered
in connection with the sale to Zenith. RISCORP disputes any liability for
the payment of such fees and intends to vigorously defend any cause of
action instituted by Salomon Smith Barney seeking payment.
On or about November 5, 1999, the Bankruptcy Trustee for Richey's
Manufacturing Company, Inc. (the "Debtor") filed an adversary proceeding
against Zenith Insurance Company ("Zenith") and others styled Jacob C.
Pongetti, Trustee, et al. v. Zenith Insurance Company f/k/a RISCORP
National Insurance Company et al. in the U.S. Bankruptcy Court for the
Northern District of Mississippi. On or about April 27, 2000, the Trustee
filed a Second Amended Complaint that purported to add RISCORP National
9
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Insurance Company ("RNIC") as a party defendant. The suit arises from a
November 16, 1996 fire that allegedly destroyed certain real property
improvements and personal property owned by the Debtor. The suit alleges
that the Debtor held an insurance policy issued by RNIC or its
predecessor that covered such real property improvements and personal
property. The suit further alleges that either RNIC, or Zenith as alleged
successor to RNIC, is liable for the loss up to the policy limits, net of
sums previously paid to the first lienholder on the property. The suit
asserts a claim against RNIC for $1,693,510, plus attorney's fees and
other unspecified claims. RNIC denies liability to the plaintiffs, and
intends to defend the suit vigorously.
The Company, in the ordinary course of business, is party to various
lawsuits. Based on information presently available, and in the light of
legal and other defenses available to the Company, contingent liabilities
arising from such threatened and pending litigation in the ordinary
course of business are not presently considered by management to be
material.
Other than as noted herein, no provision had been made in the
accompanying consolidated financial statements for the foregoing matters.
Certain of the related legal expenses may be covered under directors and
officers' insurance coverage maintained by the Company.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements,
particularly with respect to Risk Factors, Legal Proceedings, and the
Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations. Additional
written or oral forward-looking statements may be made by RISCORP, Inc.
("RISCORP") and its subsidiaries (collectively, 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, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Such statements may include, without
limitation, projections of revenues, income, losses, cash flows, plans
for future operations, financing needs, estimates concerning the effects
of litigation or other disputes, as well as assumptions regarding any of
the foregoing matters.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. Future events and
actual results could differ materially from those set forth in or
underlying the forward-looking statements. Many factors could contribute
to such differences and include, among others, the actual outcome of
pending litigation, both on behalf of and against the Company; the
Company's ability to gain approval and receive payment from the Florida
Department of Labor for certain refund applications; the Company's
ability to receive payment for the alleged errors and understatement of
the Final Business Balance Sheet by the neutral auditors; the Company's
need for additional capital to meet operating requirements; and other
factors mentioned elsewhere in this report.
Recent Developments
Execution of Merger Agreement with William D. Griffin
See Part, 1, Item 1, Notes to Consolidated Condensed Financial
Statements, Note 2, for further discussion of the Merger Agreement.
Asset Purchase Agreement with Zenith
See Part 1, Item 1, Notes to Consolidated Condensed Financial Statements,
Note 3, for further discussion of the Zenith transaction.
Legal Developments
See "Part II, Item 1, Legal Proceedings."
Overview
General
As discussed more fully in Note 3 to the consolidated condensed financial
statements, RISCORP and certain of its subsidiaries sold substantially
all of their assets and transferred certain liabilities to Zenith on
April 1, 1998. In connection with the sale to Zenith, RISCORP ceased
11
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substantially all of its former business operations, including its
insurance operations, effective April 1, 1998. Accordingly, after such
date, the Company's operations 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. At the present time, RISCORP has no plans to resume any
operating activities.
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.
Results of Operations
Three Months Ended March 31, 2000 and 1999
During the three months ended March 31, 2000 and 1999, the Company's
primary activities included the investment of the funds received from
Zenith in 1998 and 1999, the investment of other assets retained by the
Company, efforts to monetize the contingent assets and resolve the
contingent liabilities of the Company, the administration of the
day-to-day activities of the surviving corporate entities, compliance
with the provisions of the Asset Purchase Agreement and Settlement
Agreement with Zenith. During the three months ended March 31, 1999, the
Company's operating activities also included the defense of the Proposed
Business Balance Sheet and converting the taxes receivable to cash.
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.
The following is an analysis of balances contained on the March 31, 2000
and December 31, 1999 balance sheets.
Investments totaling approximately $78.1 million and $79
million, respectively, consist primarily of United States
Government obligations.
Restricted cash and cash equivalents consist primarily of
amounts on deposit with various governmental agencies.
Accounts receivable-other of $2.5 million at each date
presented consist primarily of a receivable of $2.3 million that
is expected to be realized upon the redemption of RISCORP's
outstanding stock.
Deferred income taxes of $1 million at each date presented
consist of federal and state income taxes that are anticipated
to be recovered in future periods.
Other assets of $5.2 million and $5.8 million, respectively,
consist of $4.3 million and $4.6 million of prepaid expenses,
and $0.9 million and $1.2 million of accrued investment
portfolio income, respectively.
12
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A summary of the accrued expenses and other liabilities
at March 31, 2000 and December 31, 1999 is as follows
(in thousands):
<TABLE>
<CAPTION>
March 31 2000 December 31 1999
---------------- -----------------
<S> <C> <C>
Income taxes payable $ 2,537 $ 2,539
Payable to Zenith 1,896 1,878
Accrued professional services 1,697 1,819
Trade accounts payable 242 205
Other accruals and payables 22 215
---------------- -----------------
Total $ 6,394 $ 6,656
================ =================
</TABLE>
The Company's operating results for the three months ended March 31, 2000
and 1999 resulted in a net loss of $0.1 million and $0.8 million,
respectively.
Net investment income for the three months ended March 31, 2000 and 1999
was $1.2 million and $1.8 million, respectively. Net investment income
for the three months ended March 31, 2000 consisted primarily of income
from the investment portfolio. Net investment income for the three months
ended March 31, 1999 consisted of $1.3 million of interest income on a
receivable from Zenith, $0.1 million of interest income on a $12.8
million balance that was being held in escrow, and $0.4 million of other
investment income.
Operating expenses for the three months ended March 31, 2000 and 1999
totaled $1.5 million and $2.6 million, respectively, and consisted of the
following:
General and administrative expenses totaled $1.4 million and
$1.2 million, respectively, and consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
Management expenses $ 210 $ 300
Accounting and auditing expenses 542 321
Legal expenses 33 270
Recurring operating expenses (i.e., rent,
telephone, insurance, and similar costs) 583 203
Other expenses 29 63
---------------- -----------------
Total $ 1,397 $ 1,157
================ =================
</TABLE>
Interest expense was $52,000 for the three months ended March
31, 2000. Interest expense of $1.4 million for the three months
ended March 31, 1999 consisted primarily of the interest payable
on a legal settlement that was paid in April 1999.
Depreciation and amortization expense was $33,000 and $40,000,
respectively, primarily consisting of depreciation of computer
equipment.
13
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The weighted average common and common share equivalents outstanding for
the three months ended March 31, 2000 was 37,922,281 as compared to
37,347,281 for the three months ended March 31, 1999.
Liquidity and Capital Resources
RISCORP and certain of its subsidiaries sold substantially all of their
assets and transferred certain liabilities to Zenith on April 1, 1998. In
connection with that sale to Zenith, the Company ceased substantially all
of its former business operations and, accordingly, after April 1, 1998,
the Company's primary source of cash flow has been generated from
investment income. The Company's future cash requirements are expected to
be satisfied through investment income and the liquidation of
investments.
Cash flow from operations for the three months ended March 31, 2000 and
1999 was $0.1 million and $13.5 million, respectively. The positive cash
flow in 1999 was due primarily to the collection of the proceeds from the
sale to Zenith and the cessation of substantially all the Company's
former business operations.
The Company has projected cash flows through December 2000 and believes
it has sufficient liquidity and capital resources to support its
operations.
As of March 31, 2000 and 1999, RISCORP's insurance subsidiaries had
combined statutory capital and surplus of $12.3 million and $123.6
million, respectively. The decline in combined statutory surplus from
1999 to 2000 is primarily the result of RISCORP's receiving and retaining
of the proceeds from the sale to Zenith. Consequently, RISCORP's
insurance subsidiaries recorded $94 million of receivables from RISCORP
for their portion of those proceeds. Those receivable balances were
classified as a non-admitted asset at December 31, 1999 because those
receivables were more than 90 days past due. The individual capital and
surplus of each of RISCORP's insurance subsidiaries exceeded the minimum
statutory capital and surplus required by their respective state of
domicile.
The National Association of Insurance Commissioners has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based on 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 that 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. Those 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, 1999,
RISCORP's insurance subsidiaries' statutory surplus was in excess of any
risk-based capital action level requirements. The risk based capital
calculation is not made on an interim basis.
Year 2000
Neither the Company, its suppliers, nor the financial institutions with
whom the Company maintains banking or investment accounts, experienced
any known Year 2000 computer problems.
14
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Part II Other Information
Item 1. Legal Proceedings
In August 1997, the Occupational Safety Association of Alabama Workers'
Compensation Fund (the "Fund"), an Alabama self-insured workers'
compensation fund, filed a breach of contract and fraud action against
the Company and others. The Fund entered into a Loss Portfolio Transfer
and Assumption Reinsurance Agreement effective September 1, 1996 with
RISCORP National Insurance Company ("RNIC"). Under the terms of the
agreement, RNIC assumed 100 percent of the outstanding loss reserves
(including incurred but not reported losses) as of September 1, 1996.
Co-defendant Peter D. Norman ("Norman") was a principal and officer of
Independent Association Administrators, Inc. ("IAA") prior to its
acquisition by RISCORP in September 1996. 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 RISCORP 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
RNIC by $6 million in the subject transaction. The court has granted
RNIC's Motion to Compel Arbitration per the terms and provisions of the
agreement. On December 1, 1998, the trial court issued an order
prohibiting the American Arbitration Association from administering the
arbitration between RNIC and the Fund, and RNIC has appealed the trial
court's ruling. The Alabama Supreme Court has stayed the current
arbitration. Despite the Alabama Supreme Court's stay, the dispute
between the Fund and RNIC is expected to be resolved through arbitration.
The other defendants, including IAA, have appealed to the Supreme Court
of Alabama the trial court's denial of their motions to compel
arbitration. RNIC intends to vigorously defend the Fund's claim.
In July 1999, a shareholder class action lawsuit was filed against
RISCORP, two of its executive officers, and two former executive officers
in the United States District Court for the Middle District of Florida
styled Chap-Cap Partners, L.P. v. RISCORP, Inc., William D. Griffin,
Frederick M. Dawson, Walter E. Riehemann and Stephen C. Rece, Case No.
99-1585CIV-T-26. The plaintiff in this action purports to represent the
class of shareholders who purchased shares of RISCORP's Class A Common
Stock between November 19, 1997 and July 20, 1998. The complaint alleges,
among other things, that the financial statements included in the
periodic reports filed by RISCORP with the Securities and Exchange
Commission during the class period contain false and misleading
statements of material fact and omissions, in violation of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder. These allegations principally relate to the
difference between the net book value of RISCORP as reflected on its
published financial statements during the class period and the net book
value of the assets transferred to Zenith as determined by the neutral
auditors pursuant to the terms of the Asset Purchase Agreement. The
complaint seeks certification of a class and award of unspecified
compensatory damages. Defendants Dawson, Riehemann and Rece sought
indemnification from RISCORP. On or about February 9, 2000, the plaintiff
filed an amended complaint that dropped William D. Griffin as a party and
purported to substitute the Estate of Frederick M. Dawson for Frederick
M. Dawson (deceased) as a party defendant. On March 31, 2000, the
defendants filed a motion to dismiss the amended complaint, which remains
pending. After service of the complaint, RISCORP promptly notified its
directors' and officers' insurance carrier. The insurance carrier
subsequently sent a letter to RISCORP denying coverage of this claim.
RISCORP has disputed the insurance company's position, and has insisted
on coverage. RISCORP and the indemnified defendants deny liability to the
Plaintiff or to the putative class, and intend to defend this action
vigorously.
15
<PAGE>
In February 2000, an alleged shareholder of RISCORP filed a putative
class action suit against RISCORP, its Directors, and its majority
shareholder in the Circuit Court of the 12th Judicial Circuit, Sarasota
County, Florida, styled Harris Blackman v. William D. Griffin, Seddon
Goode, Jr., George E. Greene III, Walter L. Revell, and RISCORP, Inc.,
Case No. 20002103 CA DIV-A. The suit contends that the pending
transaction with Griffin Acquisition Corp. pursuant to which William D.
Griffin, the majority shareholder of RISCORP, proposes to purchase the
Class A shares of RISCORP held by the public shareholders is inadequately
priced. The suit alleges that the defendants are liable for breach of
fiduciary duty, and seeks to enjoin the transaction. RISCORP has filed a
motion to dismiss, and has received no notice of any hearing on the
plaintiff's claim for equitable relief. RISCORP denies the plaintiff's
allegations and intends to defend the suit vigorously.
In February 2000, the State of Alabama, on behalf of D. David Parsons (as
Acting Commissioner of Insurance of the State of Alabama), filed a
lawsuit against RNIC styled State of Alabama v. RISCORP National
Insurance Company, Civil Action No. CV-2000-569PR, Circuit Court of
Montgomery County, Alabama. The complaint alleges that RNIC owes an
additional $2.5 million in premium taxes for the 1996 tax year. RNIC
entered into a Loss Portfolio Transfer Agreement dated August 26, 1996
and effective September 1, 1996 with the Occupational Safety Association
of Alabama Workmen's Compensation Fund (the "Fund"). According to the
complaint, pursuant to the terms of the agreement, RNIC assumed the
workers' compensation risks that were in the Fund and became the insurer
of those risks. The State claims that premium tax is due on the
consideration received by RNIC for insuring those risks. The complaint
seeks compensatory damages. RNIC intends to vigorously defend this suit.
In April 1999, RISCORP received an invoice from Salomon Smith Barney
seeking approximately $2 million for financial advisory services rendered
in connection with the sale to Zenith. RISCORP disputes any liability for
the payment of such fees and intends to vigorously defend any cause of
action instituted by Salomon Smith Barney seeking payment.
On or about November 5, 1999, the Bankruptcy Trustee for Richey's
Manufacturing Company, Inc. (the "Debtor") filed an adversary proceeding
against Zenith Insurance Company ("Zenith") and others styled Jacob C.
Pongetti, Trustee, et al. v. Zenith Insurance Company f/k/a RISCORP
National Insurance Company et al. in the U.S. Bankruptcy Court for the
Northern District of Mississippi. On or about April 27, 2000, the Trustee
filed a Second Amended Complaint that purported to add RISCORP National
Insurance Company ("RNIC") as a party defendant. The suit arises from a
November 16, 1996 fire that allegedly destroyed certain real property
improvements and personal property owned by the Debtor. The suit alleges
that the Debtor held an insurance policy issued by RNIC or its
predecessor that covered such real property improvements and personal
property. The suit further alleges that either RNIC, or Zenith as alleged
successor to RNIC, is liable for the loss up to the policy limits, net of
sums previously paid to the first lienholder on the property. The suit
asserts a claim against RNIC for $1,693,510, plus attorney's fees and
other unspecified claims. RNIC denies liability to the plaintiffs, and
intends to defend the suit vigorously.
The Company, in the ordinary course of business, is party to various
lawsuits. Based on information presently available, and in the light of
legal and other defenses available to the Company, contingent liabilities
arising from such threatened and pending litigation in the ordinary
course of business are not presently considered by management to be
material.
16
<PAGE>
Other than as noted herein, no provision had been made in the
accompanying consolidated financial statements for the foregoing matters.
Certain of the related legal expenses may be covered under directors and
officers' insurance coverage maintained by the Company.
Item 2. Changes to Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11 Statement Re Computation of Per Share Loss
27 Financial Data Schedules
b) Reports on Form 8-K
None.
17
<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
President and General Counsel
Date: May 12, 2000
By: /s/Edward W. Buttner IV
------------------------------
Edward W. Buttner IV, CPA
Chief Accounting Officer
Date: May 12, 2000
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
RISCORP, INC. AND SUBSIDIARIES
Statement Re Computation of Per Share Loss
(in thousands, except share and per share amounts)
Three Months Ended March 31
---------------------------------------
2000 1999
----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net loss $ (124) $ (839)
============= ==============
Weighted average common and common share equivalents outstanding:
Average number of common shares outstanding 36,868,114 36,868,114
Restricted stock vested 1,054,167 479,167
------------- --------------
Weighted average common shares outstanding - (basic) 37,922,281 37,347,281
============= ==============
Weighted average common and common share
equivalents outstanding - (diluted) 37,922,281 37,347,281
============= ==============
Net loss per common share--basic $ (0.00) $ (0.02)
============== ==============
Net loss per common share--diluted $ (0.00) $ (0.02)
============= ==============
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27
RISCORP, INC. AND SUBSIDIARIES
Financial Data Schedule
As of and for the three month period ended March 31, 2000 (Unaudited)
(in thousands)
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000 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-31-2000
<PERIOD-END> MAR-31-2000<F1><F2>
<DEBT-HELD-FOR-SALE> 78,148
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 78,148
<CASH> 7,630
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 94,688
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 386
<OTHER-SE> 87,908
<TOTAL-LIABILITY-AND-EQUITY> 94,688
0
<INVESTMENT-INCOME> 1,238
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 120
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124)
<EPS-BASIC> (.00)
<EPS-DILUTED> (.00)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Financial Data Schedule information for the year
ending December 31, 1999 is incorporated by reference herein to FORM 10-K/A
annual report as filed with the Securities and Exchange Commission by the
Company on April 20, 2000.
<F2>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>
