1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 July 31, 1999
----- -----------------------------
Class A Common Stock, $.01 par value 14,258,671
Class B Common Stock, $.01 par value 24,334,443
1
2
INDEX
PAGE NO.
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3 - 4
Consolidated Statements of Operations -
For the three months ended June 30, 1999 and 1998 5
Consolidated Statements of Operations -
For the six months ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 1999 and 1998 7
Consolidated Statements of Comprehensive Loss
For the six months ended June 30, 1999 and 1998 8
Notes to Consolidated Condensed Financial Statements 9 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20 - 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21 - 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
3
Part I Financial Information
Item 1. Financial Statements
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30 DECEMBER 31
1999 1998
----------- -------------
ASSETS (Unaudited)
Investments:
Fixed maturities available for sale, at fair value
(amortized cost $58,301 in 1999 and $6,666 in 1998) $ 58,262 $ 6,716
Fixed maturities available for sale, at fair value
(amortized cost $8,639 in 1999 and $9,047 in 1998)-restricted 8,723 9,264
-------- --------
Total investments 66,985 15,980
Cash and cash equivalents 8,831 6,864
Cash and cash equivalents-restricted 14,995 14,842
Prepaid expenses 4,810 5,171
Deferred income taxes 3,358 3,141
Accounts receivable--other 2,300 7,674
Income taxes recoverable -- 17,277
Property and equipment, net 261 337
Receivable from Zenith 81 49,933
Other assets 582 2,174
-------- --------
Total assets $102,203 $123,393
======== ========
See accompanying notes to consolidated financial statements.
3
4
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30 DECEMBER 31
1999 1998
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities - accrued expenses and other liabilities $ 10,989 $ 27,827
--------- ---------
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000
shares authorized; 14,371,253 shares issued 143 143
Class B Common Stock, $.01 par value, 100,000,000
shares authorized; 24,334,443 shares issued and outstanding 243 243
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding -- --
Additional paid-in capital 140,688 140,688
Retained deficit (49,889) (45,680)
Treasury Class A Common Stock - at cost, 112,582 shares (1) (1)
Accumulated Other Comprehensive Income:
Net unrealized gains on investments 30 173
--------- ---------
Total shareholders' equity 91,214 95,566
--------- ---------
Total liabilities and shareholders' equity $ 102,203 $ 123,393
========= =========
See accompanying notes to consolidated financial statements.
4
5
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
THREE MONTHS
ENDED JUNE 30
--------------------------------------------
1999 1998
------------ -----------
(Unaudited) (Unaudited)
Revenue:
Net investment income $ 1,235 $ 2,252
Net realized gains 150 2,805
Other income 124 93
------------ ------------
Total revenue 1,509 5,150
------------ ------------
Expenses:
Commissions, underwriting, and administrative expenses 3,197 11,352
Interest expense (income) (219) 8
Depreciation and amortization 36 31
------------ ------------
Total expenses 3,014 11,391
------------ ------------
Loss from operations (1,505) (6,241)
Loss on sale of net assets to Zenith (4,760) --
------------ ------------
Loss before income taxes (6,265) (6,241)
Income tax benefit (2,896) --
------------ ------------
Net loss $ (3,369) $ (6,241)
============ ============
Per share data:
Net loss per common share - basic $ (0.09) $ (0.17)
============ ============
Net loss per common share - diluted $ (0.09) $ (0.17)
============ ============
Weighted average common shares outstanding 37,491,031 36,916,725
============ ============
Weighted average common and common share
equivalents outstanding 37,491,031 36,916,725
============ ============
See accompanying notes to consolidated financial statements.
5
6
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
SIX MONTHS
ENDED JUNE 30
--------------------------------------------
1999 1998
------------- -----------
(Unaudited) (Unaudited)
Revenue:
Net investment income $ 3,034 $ 5,558
Net realized gains 150 4,266
Other income 124 93
Premiums earned -- 25,819
Fee income -- 5,723
------------ ------------
Total revenue 3,308 41,459
------------ ------------
Expenses:
Commissions, underwriting, and administrative expenses 4,354 26,868
Interest expense 1,222 477
Depreciation and amortization 76 3,100
Losses and loss adjustment expenses -- 24,016
Unallocated loss adjustment expenses -- 2,561
------------ ------------
Total expenses 5,652 57,022
------------ ------------
Loss from operations (2,344) (15,563)
Loss on sale of net assets to Zenith (4,760) --
------------ ------------
Loss before income taxes (7,104) (15,563)
Income tax benefit (2,896) --
------------ ------------
Net loss $ (4,208) $ (15,563)
============ ============
Per share data:
Net loss per common share - basic (0.11) (0.42)
============ ============
Net loss per common share - diluted (0.11) (0.42)
============ ============
Weighted average common shares outstanding 37,419,156 36,892,420
============ ============
Weighted average common and common share
equivalents outstanding 37,419,156 36,892,420
============ ============
See accompanying notes to consolidated financial statements.
6
7
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS
ENDED JUNE 30
-----------------------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Net cash provided by (used in) operating activities $ 2,231 $(15,838)
--------- --------
Cash flows from investing activities:
Purchase of fixed maturities available for sale (327,752) (24,210)
Purchase of fixed maturities held to maturity -- (5,569)
Proceeds from sale of fixed maturities available for sale 276,489 28,049
Proceeds from maturities of fixed maturities available for sale -- 6,029
Proceeds from maturities of fixed maturities held to maturity -- 5,700
Cash received from Zenith for sale of net assets 51,153 35,000
Purchase of property and equipment -- (777)
Cash assets transferred to Zenith -- (29,308)
Investments to be transferred to Zenith -- (13,200)
--------- --------
Net cash (used in) provided by investing activities (110) 1,714
--------- --------
Cash flows from financing activities:
Principal repayments of notes payable -- (245)
Decrease in deposit balances payable -- (1,599)
Transfer of cash and cash equivalents to restricted (154) (413)
--------- --------
Net cash used in financing activities (154) (2,257)
--------- --------
Net increase (decrease) in cash and cash equivalents 1,967 (16,381)
Cash and cash equivalents, beginning of period 6,864 16,858
--------- --------
Cash and cash equivalents, end of period $ 8,831 $ 477
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,124 $ 479
========= ========
Income taxes $ 82 $ 3,435
========= ========
See accompanying notes to consolidated financial statements.
7
8
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
SIX MONTHS ENDED JUNE 30
--------------------------------------
1999 1998
---------- ----------
(Unaudited) (Unaudited)
Net loss $(4,208) $(15,563)
------- --------
Other comprehensive loss, before income taxes:
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period (220) (4,063)
Income tax benefit related to items of other
comprehensive loss (77) (1,422)
------- --------
Other comprehensive loss, net of income taxes (143) (2,641)
------- --------
Total comprehensive loss $(4,351) $(18,204)
======= ========
See accompanying notes to consolidated financial statements.
8
9
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, include 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 and operations
of RISCORP and its subsidiaries. All significant intercompany balances
have been eliminated.
(2) SALE TO ZENITH INSURANCE COMPANY
As previously disclosed, on April 1, 1998, RISCORP and certain of its
subsidiaries sold substantially all of their assets and transferred
certain liabilities to Zenith Insurance Company ("Zenith") pursuant to
the terms of the Asset Purchase Agreement among the parties dated June
17, 1997, as amended (the "Asset Purchase Agreement"). In connection with
the sale to Zenith, the Company ceased substantially all of its former
business operations, including its insurance operations, effective April
1, 1998. 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
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, (i) the disbursement of
the $12.8 million in cash that has been held in escrow pursuant to the
terms of the Asset Purchase Agreement, with $6 million to be disbursed to
Zenith and the balance to be disbursed to RISCORP; (ii) RISCORP's right
to seek correction of alleged errors made by the neutral auditor in
connection with its determination of certain reinsurance recoverable
adjustments contained in the Final Business Balance Sheet; (iii)
RISCORP's right to retain any proceeds received from the Florida
Department of Labor (the "Florida DOL") in connection with RISCORP's
request for a refund of $5.3 million related to deductions for
commissions with respect to gross premiums; (iv) RISCORP's right to
retain a portion of any additional refunds received from the Florida
9
10
DOL related to deductions for premiums ceded to others; and (v) the
mutual release of all other claims and causes of action that each party
may have against the other through the date of the Settlement
Agreement, except as expressly set forth therein. The parties have also
agreed that, with certain limited exceptions, any future claim or
controversy between the parties is to be submitted to binding
arbitration pursuant to the procedures set forth in the Settlement
Agreement. As part of the settlement, the lawsuit filed by Zenith
against the Company in the United States District of New York, and the
lawsuit filed by the Company against Zenith in the United States
District Court for the Middle District of Florida, Tampa Division, have
been dismissed with prejudice.
At June 30, 1999, the Company recorded an additional net loss of $4.8
million on the sale to Zenith due to the final terms of the Settlement
Agreement.
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.
(3) ISSUANCE OF ADDITIONAL SHARES OF STOCK
In September 1996, RISCORP purchased all of the outstanding stock of
Independent Association Administrators, Inc. ("IAA") and Risk Inspection
Services and Consulting, Inc. ("RISC") in exchange for $11.5 million,
consisting principally of 790,336 shares of RISCORP's Class A Common
Stock valued at $10.9 million on the date of acquisition. IAA and RISC
are workers' compensation management services companies offering services
in Alabama. On the acquisition date, the excess of the purchase price
over the fair value of the net assets acquired was $11.4 million and was
recorded as goodwill. The remaining unamortized goodwill relating to
those acquisitions was $7.8 million at March 31, 1998 (just prior to the
transfer of the goodwill to Zenith on April 1, 1998).
Due to a decrease in the market value of RISCORP's Class A Common Stock,
790,336 additional shares of RISCORP's Class A Common Stock valued at
$0.6 million were issued in January 1998 to the former shareholders of
IAA.
(4) COMMITMENTS AND CONTINGENCIES
On or about January 11, 1999, Zenith filed a lawsuit against RISCORP and
certain of its subsidiaries in federal court in New York setting forth 14
separate causes of action arising out of the Asset Purchase Agreement and
certain ancillary agreements. The complaint sought an unspecified total
amount of damages, but the amount of compensatory damages sought was in
excess of $30 million, together with an unspecified amount of punitive
damages and attorneys' fees. As more fully disclosed in Note 2, on July
7, 1999, the Company and Zenith settled those claims and, in connection
therewith, this lawsuit has been dismissed with prejudice by Zenith.
On August 20, 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 dated August 26, 1996 and 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 IAA prior to its
10
11
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.
On March 13, 1998, RISCORP Insurance Company ("RIC") and RISCORP Property
& Casualty Insurance Company ("RPC") were added as defendants in a
purported class action lawsuit 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"), and the Florida Antitrust Act,
committed breach of contract and 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 moved to dismiss the amended complaint and
have also filed certain motions to dismiss the amended complaint filed by
various other defendants.
On August 26, 1998, the district court issued an order dismissing the
entire suit against all defendants on one of the grounds identified in
the various motions to dismiss filed by the defendants. The district
court indicated that all other grounds and motions to dismiss that were
pending at that time were mooted by the dismissal. On September 13, 1998,
the plaintiffs filed a Notice of Appeal. On February 9, 1999, the
district court issued, sua sponte, an Order of Reconsideration in which
the court indicated its desire to vacate the dismissal of the RICO claims
and pendant state claims based on a recent decision of the United States
Supreme Court. On March 17, 1999, plaintiffs-appellants filed an
unopposed motion to remand the action to the district court, citing the
Order of Reconsideration. On June 9, 1999, the Eleventh Circuit remanded
the case to the district court. Management will resume its vigorous
defense of the case once district court proceedings recommence.
On July 9, 1999, a shareholder class action lawsuit was filed against the
Company, two of its executive officers, and two former executive officers
in the United States District Court for the Middle District of Florida.
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
11
12
allegations principally relate to the difference between the net book
value of the Company 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 and neutral actuaries
pursuant to the terms of the Asset Purchase Agreement between the
parties. The complaint seeks unspecified compensatory damages. RISCORP
believes that these claims are without merit and intends to vigorously
defend this suit.
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.
(5) RECLASSIFICATIONS
For comparative purposes, certain amounts in the accompanying financial
statements have been reclassified from amounts previously reported. These
reclassifications had no effect on previously reported shareholders'
equity or net loss.
12
13
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.
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, 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
Independent Expert, the Company's need for additional capital to meet
operating requirements, and other factors mentioned elsewhere in this
report.
RECENT DEVELOPMENTS
ASSET PURCHASE AGREEMENT WITH ZENITH
See Part 1, Item 1, Notes to Consolidated Financial Statements, Note 2
for further discussion of the Zenith transaction.
LEGAL DEVELOPMENTS
See "Part II, Item 1, Legal Proceedings."
OVERVIEW
GENERAL
As discussed more fully in Note 2 to the consolidated 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
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.
13
14
Since April 1, 1998, the Company has had no employees or insurance
operations, and has provided no services to self-insurance funds or other
insurance related entities. Because of these significant changes in the
operating activities of the Company after April 1, 1998, a comparison of
the results of operations for the six months ended June 30, 1999 to the
comparable period in 1998 is meaningless. Therefore, the results of
operations for the six months ended June 30, 1999 are explained
separately without comparison to the comparable prior period. The results
of operations for the three months ended June 30, 1999 are explained
separately with comparison to the comparable prior period. The results of
operations of the Company prior to the April 1, 1998 sale to Zenith are
included to comply with the requirements of the Securities Exchange Act
of 1934, as amended, and the rules and regulations of the Securities and
Exchange Commission; however, those results of operations are not
indicative of the operations of the Company since April 1, 1998 and are
not indicative of the anticipated future operations of the Company.
RESULTS OF OPERATIONS
During the six months ended June 30, 1999, the Company's primary
operating activities were the defense of the Proposed Business Balance
Sheet, the investment of the $25 million initial payment received from
Zenith on April 2, 1998, the investment of other invested assets retained
by the Company, compliance with the provisions of the Asset Purchase
Agreement, converting the taxes recoverable to cash, collecting the sale
proceeds from Zenith, the investment of the $50.8 million of sale
proceeds and interest collected from Zenith on March 26, 1999, efforts to
maximize asset recoveries, and the administration of the day-to-day
activities of the surviving corporate entities. Compliance with the
provisions of the Asset Purchase Agreement included the transfer of all
of the assets and liabilities, not retained by the Company, to Zenith,
and assisting with the orderly transition of the Company's insurance
operations to Zenith.
SIX MONTHS ENDED JUNE 30, 1999
An analysis of certain balances contained on the June 30, 1999
consolidated balance sheet is as follows:
- At June 30, 1999, the $15 million of restricted cash and cash
equivalents consisted of $12.8 million held in escrow in
connection with the sale to Zenith, $1.9 million on deposit with
various governmental agencies, and $0.3 million pledged to secure
a letter of credit.
- The $51 million increase in investments in the first six months of
1999 resulted from the collection and subsequent investment of the
proceeds from the sale to Zenith and of certain tax refunds.
- The decrease in the amount of the receivable from Zenith from
December 31, 1998 to June 30, 1999 resulted from the collection of
the remaining receivable from the sale to Zenith in March 1999.
- The decrease in other assets from December 31, 1998 to June 30,
1999 resulted from the collection of interest due from the sale to
Zenith in March 1999.
- The $4.8 million of prepaid expenses at June 30, 1999 consisted of
$3.7 million of prepaid insurance coverages and $1.1 million of
retainers paid to certain professionals and consultants.
14
15
- A summary of the accrued expenses and other liabilities at June
30, 1999 is as follows (in millions):
Payable to Zenith $ 6.2 (1)
Income taxes payable 1.7
Other accruals and payables 1.2
Accrued legal, accounting, auditing,
and actuarial services 1.1
Trade accounts payable 0.5
Other 0.3
-------
Total $ 11.0
=======
(1) Based on the Settlement Agreement, as more fully
discussed in Note 2 to the consolidated financial
statements.
The Company's operating results for the six months ended June 30, 1999
resulted in a net loss of $4.2 million.
The $3 million of net investment income for the six months ended June 30,
1999 consisted of $1.3 million of interest income on the receivable from
Zenith, $0.2 million of interest income on the $12.8 million balance in
escrow, and $1.5 million of investment portfolio income.
Operating expenses for the six months ended June 30, 1999 totaled $5.7
million and consisted of the following:
- The $4.4 million of commissions, underwriting, and administrative
expenses consisted of $0.6 million of management expenses, $0.7
million of accounting and auditing expenses, $1.6 million of legal
expenses, $0.6 million of recurring operating expenses such as
rent, telephone, insurance, and similar costs, and $0.9 million of
other expenses.
- The $1.2 million of interest expense consisted principally of the
interest paid in March 1999 on the settlement of a class action
lawsuit.
- Depreciation and amortization expense was $76,000. The Company
transferred all assets subject to amortization to Zenith in
connection with the sale and retained $0.4 million of fixed assets
(consisting principally of computer equipment) that are being
depreciated over three years.
As of June 30, 1999, the Company recorded an additional net loss of $4.8
million on the sale to Zenith due to the final terms of the Settlement
Agreement, as discussed more fully in Note 2 to the consolidated
financial statements.
The weighted average common and common share equivalents outstanding for
the six months ended June 30, 1999 was 37,419,156 as compared to
36,892,420 for the six months ended June 30, 1998. This includes, for
each period presented, the vested portion only, as of the end of such
period, of shares issued in April 1998 under a Restricted Stock Award
Agreement between RISCORP and Phoenix Management Company, Ltd.
15
16
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
The Company's operating results for the three months ended June 30, 1999
and 1998 resulted in a net loss of $3.4 million and $6.2 million,
respectively.
The components of net investment income for the three months ended June
30, 1999 and 1998 are summarized as follows (in millions):
1999 1998
----- ------
Interest income on the Zenith sale
proceeds $ 0.1 $ 1.6
Interest income on the balance in escrow 0.1 0.1
Other investment income 1.0 0.6
----- -----
Total $ 1.2 $ 2.3
===== =====
The components of commissions, underwriting, and administrative expenses
for the three months ended June 30, 1999 and 1998 are summarized as
follows (in millions):
1999 1998
----- -----
Management expenses $ 0.3 $ 0.4
Accounting and auditing expenses 0.4 0.3
Transition expenses incurred as a result
of the sale to Zenith 0.1 0.3
Legal expenses 1.3 0.3
Recurring operating expenses
(rent, telephone, insurance, and
similar costs) 0.4 1.0
Other expenses 0.7 0.8
Significant non-recurring expenses
discussed below -- 8.3
----- ------
Total $ 3.2 $ 11.4
===== ======
Interest expense (income) for the three months ended June 30, 1999 and
1998 was $(0.2) million and $8,255, respectively. The 1999 interest item
is net of $0.3 million reimbursed to the Company by RISCORP's majority
shareholder for interest previously paid by the Company on the
shareholder's behalf.
Operating expenses for the three months ended June 30, 1998 included
three significant non-recurring expenses that arose due to the sale to
Zenith, namely, $3.2 million of severance payments to certain of the
Company's former executives and employees, $4.1 million for the issuance
of RISCORP stock to Phoenix Management Company, Ltd. in accordance with a
Restricted Stock Award Agreement, and $1 million of adjustments to the
Proposed Business Balance Sheet.
As of June 30, 1999, the Company recorded an additional net loss of $4.8
million on the sale to Zenith due to the terms of the Settlement
Agreement, as discussed more fully in Note 2 to the consolidated
financial statements.
Depreciation and amortization expense was $36,000 and $31,000 for the
three months ended June 30, 1999 and 1998, respectively. The Company
transferred all assets subject to amortization to Zenith in
16
17
connection with the sale and retained $0.4 million of fixed assets
(consisting principally of computer equipment) that is being depreciated
over three years.
The weighted average common and common share equivalents outstanding for
the three months ended June 30, 1999 was 37,491,031 as compared to
36,916,725 for the three months ended June 30, 1998. This includes, for
each period presented, the vested portion only, as of the end of such
period, of shares issued in April 1998 under a Restricted Stock Award
Agreement between RISCORP and Phoenix Management Company, Ltd.
THREE MONTHS ENDED MARCH 31, 1998
The discussion that follows relates to the operations and operating
philosophy of the Company's activities that existed prior to April 1,
1998 and addresses the operating results for the three months ended March
31, 1998.
Prior to 1996, the Company's at-risk operations were focused in Florida.
During 1996, the Company acquired RNIC and its 19 state licenses and
assumed business from several self insurance funds outside of Florida
which allowed the Company to diversify its at-risk operations.
The majority of the Company's premiums were written in Florida, a
regulated pricing state where premiums for guaranteed cost products were
based on state-approved rates. However, prior to the sale to Zenith, the
Company also offered policies that were subject to premium reductions on
high deductible plans, participating dividend plans, or other loss
sensitive plans. Pricing for those plans tended to be more competitively
based, and the Company experienced increased competition during 1997 and
1998 in pricing those plans.
In June 1997, the Company implemented a strategic plan to consolidate
several of its field offices and announced its intention to close all
field offices, except Charlotte, North Carolina, and Birmingham, Alabama,
by the end of 1997, and to cease writing new business in certain states,
including Oklahoma, Virginia, Missouri, Mississippi, Louisiana, and
Kansas. The estimated impact of the decision to discontinue writing
business in those states was a reduction of $16 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 that were reinsured or that 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
18
The direct, assumed, ceded, and net earned premiums for the first quarter
of 1998 are summarized as follows (in thousands):
Direct premiums earned $ 48,416
Assumed premiums earned 79
Premiums ceded to reinsurers (22,676)
---------
Net premiums earned $ 25,819
========
There were no direct, assumed, ceded, or net earned premiums after the
April 1, 1998 sale to Zenith. At March 31, 1998, there were 18,145
policies in force.
Fee income for the first three months of 1998 was $5.7 million. After
April 1, 1998, the Company ceased generating fee income when those
activities were transferred to Zenith.
Net realized gains during the first quarter of 1998 were $1.5 million,
consisting principally of the $1.3 million gain on the sale of an
interest in a joint venture.
Net investment income for the three months ended March 31, 1998 was $3.3
million, consisting entirely of earnings from the investment portfolio,
excluding realized gains and losses.
For the three months ended March 31, 1998, the loss ratio was 93 percent,
losses and loss adjustment expenses were $24 million, unallocated loss
adjustment expenses were $2.6 million, commissions, underwriting, and
administrative expenses were $15.5 million, interest expense was $0.5
million, and depreciation and amortization expense was $3.1 million.
The weighted average common and common share equivalents outstanding for
the three months ended March 31, 1998 was 36,868,114.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically met its cash requirements and financed its
growth through cash flows 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 principally 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 the insurance
subsidiaries, and other general and administrative expenses. 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 flows 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 flows from operations for the six months ended June 30, 1999 and
1998 was $2.2 million and ($15.8) million, respectively. The change from
1998 to 1999 was due primarily to the sale to Zenith and the cessation of
substantially all the Company's former business operations.
18
19
The Company has projected cash flows through December 1999 and believes
it has sufficient liquidity and capital resources to support its
operations.
As of June 30, 1999 and 1998, RISCORP's insurance subsidiaries had
combined statutory capital and surplus of $129.8 million and $151.9
million, respectively. 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, 1998,
RISCORP's insurance subsidiaries' statutory surplus was in excess of any
risk-based capital action level requirements.
YEAR 2000
The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing of date and
date-sensitive calculations by computers and other machinery as the Year
2000 is approached and reached. These problems may arise from hardware
and software unable to distinguish dates in the "2000's" from dates in
the "1900's" and from other sources, such as the use of special codes and
conventions that make use of a date field.
Effective April 1, 1998, RISCORP ceased substantially all of its former
business operations, including its core insurance and managerial services
operations. RISCORP's computer systems and proprietary computer software,
including the policy issue and management system and the claims systems,
were included in the assets sold to Zenith pursuant to the Asset Purchase
Agreement.
Effective April 1, 1998, the Company entered into a computer outsourcing
agreement. Under the terms of that agreement, the vendor is to provide
the Company with computer configuration, software installation, network
configuration and maintenance, telecommunication coordination, computer
maintenance, and other computer-related services. The agreement is for a
period of 36 months.
Due to the cessation of its operations, RISCORP does not believe it has
any material third-party relationships that present significant Year 2000
risks. The Company has requested confirmation from the financial
institutions with which it maintains accounts that such institutions are
Year 2000 compliant.
Based on its limited operations, the Company believes its most reasonable
likely worst case scenario Year 2000 problem would be a temporary
inability to access its accounts with financial institutions if such
institutions' systems are not Year 2000 compliant. Because the Company
does not expect that the Year 2000 will have a material adverse effect on
the Company, it has determined that it is unnecessary to develop a
contingency plan.
19
20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about January 11, 1999, Zenith filed a lawsuit against RISCORP
and certain of its subsidiaries in federal court in New York setting
forth 14 separate causes of action arising out of the Asset Purchase
Agreement and certain ancillary agreements. The complaint sought an
unspecified total amount of damages, but the amount of compensatory
damages sought was in excess of $30 million, together with an
unspecified amount of punitive damages and attorneys' fees. As more
fully disclosed in Note 2 of the consolidated financial statements,
on July 7, 1999, the Company and Zenith settled those claims and, in
connection therewith, this lawsuit has been dismissed with prejudice
by Zenith.
On August 20, 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 dated August
26, 1996 and effective September 1, 1996 with 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 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.
On March 13, 1998, RIC and RPC were added as defendants in a
purported class action lawsuit 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"), and the Florida Antitrust Act, committed
breach of contract and 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 moved to dismiss the amended
complaint and have also filed certain motions to dismiss the amended
complaint filed by various other defendants.
20
21
On August 26, 1998, the district court issued an order dismissing the
entire suit against all defendants on one of the grounds identified
in the various motions to dismiss filed by the defendants. The
district court indicated that all other grounds and motions to
dismiss that were pending at that time were mooted by the dismissal.
On September 13, 1998, the plaintiffs filed a Notice of Appeal. On
February 9, 1999, the district court issued, sua sponte, an Order of
Reconsideration in which the court indicated its desire to vacate the
dismissal of the RICO claims and pendant state claims based on a
recent decision of the United States Supreme Court. On March 17,
1999, plaintiffs-appellants filed an unopposed motion to remand the
action to the district court, citing the Order of Reconsideration. On
June 9, 1999, the Eleventh Circuit remanded the case to the district
court. Management will resume its vigorous defense of the case once
district court proceedings recommence.
On July 9, 1999, a shareholder class action lawsuit was filed against
the Company, two of its executive officers, and two former executive
officers in the United States District Court for the Middle District
of Florida. 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
the Company 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 and neutral actuaries
pursuant to the terms of the Asset Purchase Agreement between the
parties. The complaint seeks unspecified compensatory damages.
RISCORP believes that these claims are without merit and intends to
vigorously defend this suit.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 1999, the Company held its 1999 Annual Meeting of
Shareholders. The shareholders voted upon one proposal, to elect
Frederick M. Dawson, Seddon Goode, Jr., George E. Greene III and
Walter L. Revell to serve as directors of the Company until the next
annual meeting of
21
22
shareholders and until their successors are elected and qualified.
Pursuant to the Company's Amended and Restated Articles of Incorporation,
holders of Class B Common Stock are entitled to 10 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
24,334,443 Class B votes cast "for" each of the nominees for director,
consisting of 100 percent of the outstanding shares of Class B Common
Stock. Holders of Class A Common Stock voted their shares as set forth
below for each of the nominees:
FOR WITHHELD
SHARES VOTES SHARES VOTES
Frederick M. Dawson Class A 7,964,703 7,964,703 79,398 79,398
Seldon Goode, Jr. Class A 7,960,788 7,960,788 83,313 83,313
George E. Greene III Class A 7,960,788 7,960,788 83,313 83,313
Walter L. Revell Class A 7,960,788 7,960,788 83,313 83,313
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Form of Director Indemnity Agreement
10.2 Settlement Agreement with Zenith Insurance Company
11 Statement Re Computation of Per Share Net Loss
27 Financial Data Schedules
b) Reports on Form 8-K
RISCORP filed a report on Form 8-K on May 14, 1999 with
respect to the Shareholder Protection Rights Agreement adopted
by RISCORP.
22
23
SIGNATURES
Pursuant to the requirements of the Securities 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:
By: /s/ Edward W. Buttner
-----------------------------------
Edward W. Buttner IV, CPA
Principal Accounting Officer
Date: August 16, 1999
23