SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-27462
RISCORP, Inc.
(Exact name of registrant as specified in its charter)
Florida 65-0335150
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1390 Main Street, Sarasota, Florida 34236-5642
----------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 906-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
None None
----------------------- ----------------
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. ( )
The aggregate market value of shares of the registrant's Common Stock held by
non-affiliates of the registrant as of September 30, 1997 was $12,322,123.
The number of shares of the registrant's Common Stock issued and outstanding as
of September 30, 1997 was 36,077,778 consisting of 11,743,335 shares of Class A
Common Stock and 24,334,443 shares of Class B Common Stock.
Documents Incorporated by Reference: None
RISCORP, Inc.
Annual Report on Form 10-K/A
for the year ended December 31, 1996
Table of Contents
Description Page
PART I
Item 1. Business 1
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote
of Security Holders 20
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 23
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 31
PART III
Item 10. Directors and Executive Officers
of the Registrant 32
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 47
Signatures 58
PART I
Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K/A contains forward-looking statements,
particularly with respect to Legal Proceedings and the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations. Additional written or oral forward-looking statements
may be made by RISCORP, Inc. and its subsidiaries (collectively, the "Company")
from time to time, in the filings with the Securities and Exchange Commission or
otherwise. Such forward-looking statements are within the meaning of that term
in Sections 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Such statements
may include, but not be limited to, projections of revenues, income, losses,
cash flows, capital expenditures, plans for future operations, financing needs
or plans relating to products or services of the Company, estimates concerning
the effects of litigation or other disputes, as well as assumptions regarding
any of the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. Future events and actual
results could differ materially from those set forth in or underlying the
forward-looking statements. Many factors could contribute to such differences
and include, among others, the ability of the Company to maintain licensing with
regulatory agencies; the consummation of the Company's pending asset sale to
Zenith Insurance Company ("Zenith"); the actual outcome of pending litigation or
potential investigations; the impact on the Company of current and future
federal and state regulation of workers' compensation or health care reform
legislation, including changes in the availability of recoveries from the
Florida Special Disability Trust Fund (the "SDTF"); changes in the mandated
accounting treatment of SDTF recoverables; the failure of the SDTF to pay the
Company's reimbursement requests; discontinuation of the SDTF; the Company's
limited operating history and direct loss and claims experience; an unfavorable
rating from A.M. Best Company, Inc. ("A.M. Best") and the impact of such a
rating; the Company's need for additional capital to meet state regulatory
requirements and for other purposes, and the ability of the Company to generate
sufficient capital in a timely fashion; the possible negative impact on the
Company of the termination of quota share or excess of loss reinsurance
agreements, or the failure of such reinsurers to meet their obligations under
such agreements; the highly competitive nature of the managed care workers'
compensation insurance market; the limited nature of the Company's line of
insurance products; the negative impact on the Company if Florida were to permit
competition based on price in workers' compensation insurance; general economic
conditions in Florida, North Carolina and Alabama in particular, or the United
States in general; the Company's ability to continue and expand its
relationships with independent insurance agencies which market its products; and
other factors mentioned elsewhere in this report.
1
Overview
The Company offers managed care workers' compensation insurance and
services designed to lower the overall costs of work-related claims, while
providing quality, cost-effective care to injured employees. As of December 31,
1996, the Company provided workers' compensation insurance and services to
approximately 39,000 policyholders, principally in Florida and the southeastern
United States. As of July 1, 1997, there were approximately 33,000 policyholders
and the Company expects the number of policyholders to decline during the
remainder of the year.
The Company was unable to file its 1996 financial statements in a timely
manner. See "Recent Developments - Delisting by NASDAQ."
Recent Developments
Restructuring
On May 20, 1997, the Company named Frederick M. Dawson as Chief
Executive Officer of the Company. Mr. Dawson replaced William D. Griffin who
took an unpaid leave of absence and remained as a non-salaried, non-executive
Chairman of the Board of Directors. Concurrently, Mr. Dawson was also named to
the Board of Directors of the Company, and all employee directors other than Mr.
Griffin resigned from the Board of Directors. On September 18, 1997, Mr. Griffin
resigned from the Board of Directors of the Company and from all other positions
with the Company.
In June 1997, the Company announced a workforce reduction and a
restructuring of the Company's management team, field offices and products. The
reduction in force resulted in the termination of 128 employees of the Company.
The Company also announced in June 1997 its intention to focus solely on its
core workers' compensation insurance business and to close all field offices,
except Charlotte and Birmingham, by the end of 1997.
Asset Purchase Agreement With Zenith
In June 1997, the Company entered into an asset purchase agreement (the
"Purchase Agreement") with Zenith, a subsidiary of Zenith National Insurance
Corp. Under the terms of the Purchase Agreement, Zenith will purchase all of the
assets of the Company relating to its workers' compensation business, including
the Company's existing inforce business, as well as the right to all new and
renewal policies. After the transaction closes, the Company will no longer
engage in the workers' compensation or managed care businesses. In connection
with the transaction, Zenith will assume certain liabilities related to the
Company's insurance business, including $15 million in indebtedness of the
Company owed to American Re-Insurance Company ("AmRe"). The purchase price,
which will be paid in cash, will be the difference between the book value of the
assets purchased and the book value of the liabilities assumed by Zenith on the
closing date, subject to a minimum purchase price of $35 million.
2
The closing of the purchase is contingent upon review and approval by
appropriate state and federal regulatory agencies, and approval by the majority
of each of the Class A Common and Class B Common shareholders of the Company.
Effective June 18, 1997, Zenith entered into an interim reinsurance
agreement and cut-through endorsement with the Company. Under the terms of the
reinsurance agreement, Zenith reinsured all of the Company's liabilities on or
after June 18, 1997, as to new, renewal, and in force Florida workers'
compensation policies in the event the Company is declared insolvent under
applicable insurance law pursuant to court order. The Company has assigned to
Zenith its right to receive certain payments from other reinsurers with respect
to the business Zenith has reinsured. In addition, the Company has established
trust accounts of approximately $50 million as security to reimburse Zenith for
any amounts paid under the reinsurance agreement.
Delisting by NASDAQ
In July 1997, the Company's common stock was delisted from the NASDAQ
National Market due to the Company's failure to comply with the filing
requirements of the Exchange Act.
AmRe Loan Agreement
The Company and AmRe are parties to a senior subordinated note agreement
in the principal amount of $15.0 million due 2002 (the "AmRe loan agreement").
The AmRe loan agreement requires that the Company shall prepay the outstanding
principal balance of the notes, together with interest accrued thereon, on or
before the tenth business day following the occurrence of a Change of Control or
a Material Adverse Event. The resignation of William D. Griffin, effective on
September 18, 1997, as Chairman of RISCORP, Inc. is a Material Adverse Event as
defined in the AmRe loan agreement. On October 10, 1997, the Company received a
waiver from AmRe of the requirement to prepay these notes, as well as certain
events of default subject to the receipt of the Company's financial reports. On
October 17, 1997, the Company received a waiver from AmRe of the default based
upon the failure of the Company to deliver quarterly financial reports and to
file Form 10-Q with the Securities and Exchange Commission for the first and
second quarters of 1997. This waiver from AmRe regarding the Company's failure
to provide its financial reports and Form 10-Q's in a timely manner for the
first and second quarter of 1997 expires on December 31, 1997. In the event the
Company is unable to provide its financial reports and Form 10-Q's, including
its third quarter financial reports and Form 10-Q, to AmRe when required under
the note agreement or the waiver, additional debt covenant violations would
occur. If such debt covenant violations did occur and the Company was unable to
obtain an additional waiver of such violations from AmRe, such violations could
result in AmRe accelerating the note which, in turn, could create a liquidity
shortage for the Company.
3
Legal Developments
See "Legal Proceedings."
A.M. Best Initial Rating
See "Business - A.M. Best Ratings of Insurance Subsidiaries."
The Company's Operating Philosophy
The Company stresses an integrated approach to managed care workers'
compensation which involves the employer, employee, and care providers. This
approach combines loss prevention to promote safety in the workplace and manage
risk; early medical intervention to control costs and manage the
appropriateness, timeliness, and quality of care for injured workers; and
comprehensive medical care management, including case and utilization
management, through a provider network to establish treatment protocols,
clinical paths, and outcome measurements.
The Company's managed care approach begins with the implementation of
its First CallSM service, an early intervention system which provides employers
with a toll-free, 24-hour hotline to report claims and to seek medical attention
for injured employees. This service encourages early reporting of claims and
allows the Company to direct injured workers to appropriate medical providers
within the Company's contracted network, creating a cost-effective methodology
of dealing with claims promptly after they occur. The Company's case managers
monitor each case and use the Company's information systems to apply utilization
review and quality assurance techniques to achieve appropriate, quality medical
treatment at an affordable price.
Industry
Workers' compensation benefits are mandated and regulated by individual
states, and most states require employers to provide medical benefits and wage
replacement to individuals injured at work, regardless of fault. Virtually all
employers in the United States are required either to purchase workers'
compensation insurance from a private insurance carrier, a state-sponsored
assigned risk pool, a self-insurance fund (an entity that allows employers to
pool their liabilities for obtaining workers' compensation coverage), or, if
permitted by their state, to be self-insured. Workers' compensation laws
generally require two kinds of benefits for injured employees: (i) medical
benefits that include expenses related to diagnosis and treatment of the injury,
as well as rehabilitation, if necessary, and (ii) payments that consist of
temporary wage replacement or permanent disability payments.
4
Programs and Products
The Company operates in a single industry segment.
Workers' Compensation Products
The Company's products and rating plans encompass a variety of options
designed to fit the needs of a wide selection of employers. The most basic
product is a guaranteed cost contract, where the premium is set in advance and
changes are made only when changes occur in policyholder operations or payrolls.
The premium for these policies is based on state approved rates, which vary
depending upon the type of work performed by each employee and the general
business of the insured. The Company also offers several loss sensitive plans
(retrospective rating, dividend and large deductible plans) which determine the
final premium paid for the current policy period based largely on the insured's
losses during that same period. Employers large enough to qualify will have
their premiums based on their loss experience as determined over a three-year
period. This loss experience is adjusted by the type of business and associated
risks. In Florida, policyholders can also qualify for one or more premium
credits (5% and 2%) by agreeing to comply with drug-free workplace, and/or safe
workplace policies, respectively. Policyholders who wish to assume a certain
amount of financial risk may elect a deductible that makes them responsible for
the first portion of any claim. In exchange for the deductible election the
employer receives a premium reduction.
Workers' Compensation Management Services
The Company provides fee-based workers' compensation insurance
management services to self-insurance funds and governmental risk-sharing pools,
performing all the services of an insurance carrier except assumption of the
underwriting risk. The Company generally requires that it be given complete
managerial control over the fund's or pool's operations, and that it be entitled
to share in cost savings it generates in addition to its base fees. During 1996,
the Company converted five self-insurance funds to at-risk business and
terminated certain contracts with third parties. As of December 31, 1996, the
Company provided these services to five entities (representing approximately
2,900 employers) with standard premiums in force under management of
approximately $85 million. The largest contracts were with North Carolina
Commerce Fund ("NCCF"), Governmental Risk Insurance Trust ("GRIT"), and the
Oklahoma Restaurant Group Self Insurance Association. The Company terminated its
agreement with the Oklahoma Restaurant Group Self Insurance Association
(representing approximately $7 million standard premium) in 1997.
5
Third Party Administrative Services
The Company provides integrated administrative and managed care services
for self-insured employers. At December 31, 1996, approximately 30 employers
were under managed care contracts with the Company. In June 1997, the Company
made a strategic decision to exit this line of business which will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Workers' Compensation Managed Care Arrangements ("WCMCAs")
Effective January 1, 1997, Florida law mandated workers' compensation
insurers to provide all medical care through WCMCAs. Under these arrangements,
the Company is allowed to direct injured employees to a provider network in
which employees must participate or face possible denial of medical cost
coverage.
The Company has developed a provider network which covered the entire
state of Florida and included approximately 3,600 and 5,000 physicians and 550
and 700 hospital and ancillary facilities as of December 31, 1996 and June 30,
1997, respectively. The Company believes that its ability to obtain discounted
medical fees, manage utilization, and track medical outcomes for providers
participating in its network enhances its ability to manage claims.
The Company also maintained an arrangement with Humana Health Plans,
Inc. ("Humana"), whereby certain of the Company's medical claim costs are fixed
for the first three years of each claim. The agreement provided the Company with
access to Humana's health care provider networks in Florida. The agreement
commenced July 30, 1995, was renewed for one year upon its anniversary, and
expired in 1997. The Company had a similar arrangement with RISCORP Health
Plans, Inc. ("RHP"), an affiliated company, until the arrangement was terminated
effective May 1, 1996 whereby injured individuals were covered for three years
following any accident occurring within the policy period of any policy entered
into during the term of the agreement. To the extent that Humana or RHP is
unable to meet its contractual obligations under these arrangements, the Company
will be liable for any losses and loss adjustment expenses under these
arrangements which could have a material adverse effect on the Company's
business, financial condition, or results of operations.
Virginia Surety Underwriting Management Agreement
In September 1995, the Company entered into an Underwriting Management
Agreement ("UMA") for workers' compensation insurance with Virginia Surety
Company, Inc. ("Virginia Surety"). The Company acts as an agent for Virginia
Surety and is authorized to accept or bind business subject to the amounts and
territorial limits stipulated in the agreement. Effective September 1, 1996, the
Company renewed the UMA and extended it until December 31, 1997. For the year
ended December 31, 1996, the Company reported written premiums of approximately
$20 million under this agreement.
6
Acquisitions and Joint Venture
Acquisition of RISCORP West, Inc.
In November 1994, the Company acquired Self Insurors Service Bureau,
Inc. ("SISB"), a company that provided workers' compensation services to group
self insurance funds and self insured employers in nine states, primarily
Oklahoma and Louisiana. In January 1996, SISB changed its name to RISCORP West,
Inc. ("RWI").
Acquisition of RISCORP Insurance Company
In January 1995, the Company acquired RISCORP Insurance Company ("RIC"),
the successor to Commerce Mutual Insurance Company ("CMIC"), an Assessable
Mutual, in a transaction that was accounted for as a purchase. Concurrent with
the purchase, RIC converted from an assessable mutual insurance company to a
stock insurance company. Prior to the acquisition, the Company managed all
operations of RIC for a management fee primarily based on a percentage of
premiums and provided the insurer with reinsurance coverage. See "Legal
Proceedings."
Acquisition of CompSource
In March 1996, the Company purchased all of the stock of CompSource,
Inc. and Insura, Inc. (collectively, "CompSource") in exchange for approximately
$12.1 million in cash and 112,582 shares of the Company's Class A Common Stock.
CompSource is a workers' compensation management services company offering its
services in North Carolina managing a self-insurance fund with approximately $37
million of standard premiums in force at the acquisition date. Pursuant to a
redemption agreement entered into as part of this transaction, the former
shareholders of CompSource elected to have the Company repurchase the 112,582
shares at a purchase price of $18.653 per share on March 8, 1997, and the
Company repurchased all 112,582 shares from the former shareholders for $2.1
million in accordance with the terms of the redemption agreement.
Acquisition of Atlas
In March 1996, the Company completed its acquisition of Atlas Insurance
Company ("Atlas") for approximately $5.0 million in cash. Atlas is domiciled in
Missouri and has insurance licenses in 19 states. In addition, the acquisition
provided the Company with excess and surplus lines licenses in five additional
states. Following the acquisition, Atlas was renamed RISCORP National Insurance
Company ("RNIC").
7
Acquisition of NARM
In June 1996, RNIC acquired the assets and assumed all of the
liabilities of the National Alliance for Risk Management Fund ("NARM"), a North
Carolina workers' compensation self-insurance fund with approximately $53
million of standard premiums in force at the acquisition date. The acquisition
was accomplished by means of a loss portfolio transfer and assumption
reinsurance agreement.
Acquisition of OSAA
In September 1996, RNIC acquired certain assets and assumed all of the
claim liabilities of the Occupational Safety Association of Alabama Workers'
Compensation Fund ("OSAA"), an Alabama workers' compensation self-insurance fund
with approximately $42 million of direct premiums in force at the acquisition
date. The acquisition was accomplished by means of a loss portfolio transfer and
assumption reinsurance agreement. See "Legal Proceedings."
Acquisition of IAA and Risk Inspection
In September 1996, the Company acquired all of the stock of Independent
Association Administrators, Inc., ("IAA") and Risk Inspection Services and
Consulting, Inc., ("Risk Inspection") in Alabama. IAA, a workers' compensation
management services company offering its services in Alabama, was acquired with
790,336 shares of Class A Common Stock of the Company (then valued at $10.9
million). Risk Inspection was purchased for approximately $600,000 in cash.
Pursuant to the acquisition agreement for IAA, if the former IAA shareholders or
their successors own all of such Class A Common Stock on September 17, 1998, the
Company is obligated to issue additional shares of the Company's Class A Common
Stock in an amount sufficient to make the value of all shares of the Company's
Class A Common Stock held by the former IAA shareholders equal to an aggregate
fair market value of $10.9 million as of that date. However, in no event will
the number of additional shares issued to the former IAA shareholders exceed
790,336 shares. See "Legal Proceedings."
Acquisitions of Virginia Funds
In October 1996, RNIC acquired all of the assets and assumed all of the
liabilities of three Virginia self-insurance funds ("the Virginia Funds")
consisting of NARM Manufacturers Group Self Insurance Association of Virginia,
NARM Services Group Self Insurance Association of Virginia and NARM Mercantile
Group Self Insurance Association of Virginia. At the date of acquisition, the
Virginia Funds had approximately $5.9 million of standard premiums in force. The
acquisition were accomplished by means of loss portfolio transfers and
assumption reinsurance agreements.
8
Joint Venture Arrangement with Blue Cross and Blue Shield of Illinois
In January 1996, the Company entered into a joint venture arrangement
with Health Care Service Corporation ("HCSC"), a subsidiary of Blue Cross and
Blue Shield of Illinois, to establish Third Coast Holding Company ("TCHC"). TCHC
then formed an Illinois domestic stock insurance company, Third Coast Insurance
Company ("Third Coast"), to underwrite and sell managed care workers'
compensation insurance in Illinois, and a third-party administrative corporation
(the "Administrator") to provide administrative services to Third Coast and
third parties.
Under the terms of the arrangement, HCSC and the Company each own 50% of
the outstanding common stock of TCHC. HCSC contributed approximately $10 million
to initially capitalize Third Coast. The Company contributed no financial
capital to the venture, but contributed a non-exclusive license for the use of
its expertise, systems, and intellectual property (which was assigned a value of
$10 million) to enable Third Coast to underwrite and sell workers' compensation
insurance in Illinois. To maintain sufficient capitalization levels, HCSC agreed
to provide additional surplus loans to Third Coast in a maximum aggregate amount
of $20 million, if certain other conditions are met. On August 15, 1997 HCSC
contributed $10 million to Third Coast in the form of a surplus note.
Sales and Marketing
The Company's workers' compensation products and services are sold by
independent insurance agencies. As of December 31, 1996 and June 30, 1997, the
Company had appointed approximately 1,400 agencies in 16 states to sell its
products, of which approximately 400 were in Florida. These independent agencies
are viewed by the Company as important to its success.
The Company's top ten agencies accounted for approximately 22% and 15%
of the Company's direct premiums earned for the year ended December 31, 1996 and
the six months ended June 30, 1997, respectively, with the top independent
insurance agency accounting for approximately 6% and 2%, respectively, as of
such dates.
Failure of these independent insurance agencies to market the Company's
products and services successfully could have a material adverse effect on the
Company's business, financial condition, or results of operations.
Customers
The Company insured over 39,000 policyholders as of December 31, 1996.
As of June 30, 1997, there were approximately 33,000 policyholders.
Approximately 83% and 88% of the premiums scheduled to expire in 1996 and 1995,
respectively, were renewed by the Company's customers. Through July 1997,
approximately 40% of premiums scheduled to expire in the first seven months of
1997 were renewed by the Company's customers and the Company expects this
renewal rate to continue for the remainder of 1997.
9
The Company generally requests that its agencies target customers who
comply with a return-to-work program, maintain a drug-free workplace, are
proactive in seeking to minimize injuries in the workplace, and are financially
sound or, for certain types of policies, are willing to provide adequate
security. The Company does not target any particular industry and believes that
its policies are issued to a diversified mix of employers. However, the Company
generally does not insure certain employers which it considers to be high risk,
including nuclear facilities operators, asbestos removers, and certain other
high-risk employers.
Employees
The Company had approximately 870 full-time employees at December 31,
1996. Of the Company's employees, approximately 690 provided services to the
Company's customers and 180 worked in the Company's administrative and financial
functions. None of the Company's employees is subject to collective bargaining
agreements. The Company believes that its employee relations and staffing are
satisfactory to meet current operating levels. See "Business - Recent
Developments - Restructuring."
Reinsurance
Through various reinsurance agreements, the Company shares the risks and
benefits of the workers' compensation insurance that it writes. The Company has
in effect specific excess of loss policies under which it pays its reinsurer a
percentage of gross premiums earned and the reinsurer agrees to assume all risks
relating to claims over $500,000 on a per occurrence basis (for occurrences
prior to January 1, 1996, the retention was $350,000 per occurrence).
Continental Casualty Co. currently participates in this excess of loss program.
Continental Casualty Co. is rated A (Excellent) by A.M. Best.
The Company maintains a Quota Share Reinsurance agreement for the
workers' compensation insurance it underwrites in Florida with AmRe (the "AmRe
Quota Share agreement"), under which the Company cedes to AmRe 50% of the direct
workers' compensation premium written and losses incurred in Florida on and
after January 1, 1995. AmRe pays a ceding commission to the Company based on the
Company's Florida workers' compensation loss ratio, subject to certain
adjustments and limits. AmRe is rated A+ (Superior) by A.M. Best.
In June 1997, the Company entered into an interim reinsurance agreement
and cut-through endorsement with Zenith (rated A+ (Superior) by A.M. Best) which
provides first-dollar reinsurance coverage for Florida policyholders in the
event the Company becomes insolvent and unable to pay claims for all new,
renewal and in force policies in effect on or after June 18, 1997. See "Business
- - Recent Developments - Asset Purchase Agreement With Zenith."
Effective October 1, 1996, the Company entered into a Quota Share
Reinsurance agreement (the "Chartwell Quota Share Reinsurance agreement") for
the workers' compensation insurance it underwrites in RNIC in states other than
Florida with three reinsurers: Chartwell Reinsurance Company (rated A by A.M.
Best), Trenwick America Reinsurance Corporation (rated A+ by A.M. Best) and
Swiss Reinsurance America Corporation (rated A by A.M. Best).
10
The Chartwell Quota Share Reinsurance agreement provides for the Company to cede
to the reinsurers 65% of its direct workers' compensation premiums written and
losses incurred on and after October 1, 1996. The reinsurers pay the Company a
ceding commission based on RNIC's loss ratio, subject to certain adjustments and
limits. The Chartwell Quota Share Reinsurance Agreement was amended effective
January 1, 1997 to reduce the ceded percentage to 60%.
These Quota Share Reinsurance agreements allow the company to write,
within regulatory guidelines, a larger number of policies than it could
otherwise. In the event the Quota Share Reinsurance agreements are terminated
for any reason, the Company could be required to increase its capital
substantially or reduce its level of workers' compensation premiums, unless it
is able to establish another Quota Share Reinsurance arrangement. This could
result in material adverse consequences to the Company's business and growth
prospects. There is no assurance that Quota Share Reinsurance will continue to
be available to the Company for its workers' compensation business.
The Company regularly performs internal reviews of the financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance agreements, the Company would
be responsible for the payment of all losses and loss adjustment expenses which
the Company has ceded to such reinsurer. Any such failure on the part of the
Company's reinsurers could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company's group health and property and casualty insurance business
is reinsured with reinsurers rated by A.M. Best as B++ or better. The Company
retains a maximum amount of $150,000 per person per year for the group health
and $250,000 per occurrence and per risk for the commercial casualty and
commercial property. In June 1997, the Company made a strategic decision to exit
these lines of business. The Company does not expect this decision will have a
material adverse effect on the Company's business, financial condition or
results of operation.
A.M. Best Ratings of Insurance Subsidiaries
The limited operating history, pending litigation and other factors have
affected the ability of the Company's insurance subsidiaries to obtain favorable
A.M. Best and comparable ratings. A.M. Best ratings are based on a comparative
analysis of the financial condition and operating performance of insurance
companies as determined by their publicly available reports and meetings with
the entity's officers. A.M. Best ratings are based upon factors of concern to
policyholders and are not directed toward the protection of investors. In
assigning ratings, companies may fall within one of three A.M. Best rating
groupings: Best's Ratings, Best's Financial Performance Ratings or Not Rated.
A.M. Best ratings include: Secure, which consists of A++ and A+
(Superior), A and A- (Excellent) and B++ and B+ (Very Good); Vulnerable, which
consists of B and B- (Fair), C++ and C+ (Marginal), C and C- (Weak) and D
(Poor); E (Under Regulatory Supervision); F (In Liquidation) and S (Rating
Suspended).
11
In May 1997, RIC and RISCORP Property & Casualty Insurance Company
("RPC") were assigned a Best's Rating of C (Weak). This rating is under review
with negative implications pending resolution of certain substantial
uncertainties, including various legal issues, any material Form 10-K
disclosures, and potential regulatory actions emanating from the ongoing state
examinations. The Company believes this rating may have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Legal Proceedings" and "Business - Regulation."
Companies not assigned either Best's Ratings or Best's Financial
Performance Ratings opinions are assigned to one of several Not Rated (NR)
Categories. The NR category identifies the primary reason a rating opinion was
not assigned.
RNIC (formerly Atlas Insurance Company) had its B+ rating removed and
was given an A.M. Best's "Not Rated" classification of NR-2 (Less than Minimum
Size and/or Operating Experience) following the Company's purchase of Atlas in
March 1996 and the discontinuance of its prior business, which effectively
treated RNIC as a start-up operation for rating purposes.
Competition
The market to provide workers' compensation insurance and services is
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools, and other significant providers of health care and insurance
services. A number of the Company's current and potential competitors are
significantly larger, have greater financial and operating resources than the
Company, and can offer their services nationwide. After a period of absence from
the market, traditional national insurance companies have re-entered the Florida
workers' compensation insurance market, thereby increasing competition in the
Company's principal market segment. In addition, the Company faces significant
competition in its newer markets, particularly North Carolina and Alabama. The
Company does not offer the full line of insurance products which is offered by
some of its competitors, and there can be no assurance that the Company will be
able to compete effectively in the future.
12
Regulation
General
The Company's business is subject to state-by-state regulation of
workers' compensation insurance (which in some instances includes rate
regulation and mandatory fee schedules) and workers' compensation insurance
management services. These regulations are primarily intended to protect covered
employees and policyholders, not the insurance companies nor their shareholders.
Under the workers' compensation system, employer insurance or self-funded
coverage is governed by individual laws in each of the fifty states and by
certain federal laws. In addition, many states limit the maximum amount of
dividends, distributions and loans that may be made in any year by insurance
companies. This restricts the amount of distributions that may be made by the
Company's insurance subsidiaries.
There is no assurance that the Company will seek approvals from state
regulatory authorities to pay dividends or make distributions or that, if
sought, such approvals will be obtained. This may limit the amount of
distributions by the Company's insurance subsidiaries and may decrease amounts
of capital available to the Company. In addition, the Company is required to
contribute to state-established guaranty funds or associations that pay claims
of insolvent insurers. As a result, the Company's financial performance could be
materially adversely affected by mandatory assessments from such funds over
which the Company has no control.
Except for certain statutorily prescribed credits, Florida currently
does not permit competition on the basis of price in workers' compensation
insurance. This approach is followed in relatively few other states. If Florida
were to permit premium rates to be established with less regulatory
intervention, the Company's business, financial condition, or results of
operations could be materially and adversely affected.
The Company may from time to time need additional capital surplus to
meet certain state regulatory requirements. There can be no assurance that
capital will continue to be available when needed or, if available, will be on
terms acceptable to the Company.
Premium Rate Restrictions
State regulations governing the workers' compensation system and
insurance business in general impose restrictions and limitations on the
Company's business operations that are not imposed on unregulated businesses.
Among other matters, state laws regulate not only the kind of workers'
compensation benefits that must be paid to injured workers, but also the premium
rates that may be charged by the Company to insure employers for those
liabilities. As a consequence, the Company's ability to pay insured workers'
compensation claims out of the premium revenue generated from the sale of such
insurance is dependent on the level of premium rates permitted by state laws. In
this regard, it is significant that the state regulatory agency regulating
workers' compensation benefits may not be the same agency that regulates
workers' compensation insurance premium rates.
13
In October 1996, the Florida Insurance Commissioner ordered workers'
compensation providers to reduce rates by an average of 11.2% effective January
1, 1997. Concurrently, the 10% managed care credit, which had been in place on a
voluntary basis since 1994, was phased out. As of December 31, 1996, the Company
estimates that approximately 60% of the Company's premiums received the 10%
managed care credit.
The State of North Carolina approved a 13.7% decrease in loss costs
effective April 1, 1997. The Company adopted the loss costs in October 1997
which resulted in an overall 8.4% effective rate reduction.
The Alabama and South Carolina Departments of Insurance (the "ADOI" and
"SDOI", respectively) have imposed constraints on the Company's writings in
their respective states. The ADOI has placed a $30 million limit on in force
premium and the SDOI has imposed a moratorium on new business writings. The
Company does not believe these constraints will have a material adverse effect
on the Company's business, financial condition or results of operations.
Financial and Investment Restrictions
Insurance company operations are subject to financial restrictions that
are not imposed on other businesses. State laws require insurance companies to
maintain minimum capital and surplus levels and place limits on the amount of
insurance a company may write based on the amount of the company's surplus.
These limitations restrict the rate at which the Company's insurance company
operations can grow. The Company's 1996 statutory filings indicate that, as of
December 31, 1996, its insurance subsidiaries met applicable state minimum
capital and surplus requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
State laws also require insurance companies to establish reserves for
payment of policyholder liabilities and impose restrictions on the type of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its insurance subsidiaries' assets more conservatively
than if not subject to the state law restrictions which may prevent the Company
from obtaining as high a return on these assets than it might otherwise be able
to realize.
Participation in State Guaranty Funds
Every state in which the company operates has established one or more
insurance guaranty funds or associations that are charged by state law to pay
claims of policyholders insured by a company that becomes insolvent. All
insurance companies must participate in the guaranty associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying policyholder claims of an insolvent insurer. The
Company's financial performance could be adversely affected by guaranty
association assessments as a consequence of the insolvency of other insurers
over which the Company has no control. This type of guaranty fund is separate
from the SDTF which is designed to pay insurers for certain benefits paid to
previously injured workers.
14
Statutory Accounting and Solvency Regulation
State regulation of insurance company financial transactions and
financial condition are based on statutory accounting principles ("SAP"). SAP
differ in a number of ways from generally accepted accounting principles
("GAAP") which govern the financial reporting of most other businesses. In
general, SAP financial statements are more conservative than GAAP financial
statements, reflecting lower asset values and higher liability values.
State insurance regulators closely monitor the financial condition of
insurance companies reflected in SAP financial statements and can impose
financial and operating restrictions on an insurance company including: 1)
transfer or disposition of assets; 2) withdrawal of funds from bank accounts; 3)
extension of credit or making loans; 4) investment of funds.
The Florida Department of Insurance (the "FDOI") conducted a financial
examination of RIC, one of the Company's insurance subsidiaries, for 1995. The
final examination report reduced statutory surplus as of December 31, 1995 from
$31,117,099 to $4,961,478. The reduction in statutory surplus was due primarily
to adjustments related to the intercompany sale of real estate, certain related
party receivables that were considered non-admitted for statutory accounting
purposes, and an increase in the non-admitted portion of certain premium
receivables. These adjustments had no impact on the accompanying financial
statements prepared in accordance with generally accepted accounting principles.
As a result, RIC failed to meet the minimum capital and surplus requirements by
approximately $12.5 million. The Company made a capital infusion of
approximately $31.2 million into RIC in 1996, and as a result, as of December
31, 1996, the surplus of RIC exceeded the minimum capital and surplus
requirements.
The FDOI and the Missouri Department of Insurance (the "MDOI") are
currently conducting financial examinations of two of the Company's insurance
subsidiaries. While these examinations may result in adjustments to the
statutory financial statements of the insurance subsidiaries for 1996,
management does not believe that any such adjustments would be material. The
Company has not received the reports from these examinations, however, based
upon communications with the MDOI, the most significant adjustment proposed by
the MDOI is the non-admission of an accounts receivable balance of $900,000
relating to a loss portfolio transfer. This balance was received on April 14,
1997. The adjustment relates to statutory financial statements and has no impact
on GAAP financial statements, however, any adjustments could impact the dividend
paying ability of the Company's insurance subsidiaries.
Healthcare and Managed Care Laws and Reform Proposals
The Company's medical provider networks are subject to various federal
and state laws and regulations, including the Agency for Health Care
Administration ("AHCA") qualification requirements for the Company's WCMCA in
Florida. There are a number of managed care reform proposals before federal and
state legislative and regulatory bodies, and the Company expects that its
business operations and products will be impacted by these proposals, if
adopted.
15
Losses and Loss Adjustment Expenses
The Company establishes reserves to cover its estimated liability for
losses and loss adjustment expenses. Such reserves are based on facts then
known, estimates of future claims trends, experience with similar cases and
historical Company and industry trends. These trends include reserving, loss
payment and reporting patterns, claim closures and product mix.
Like many states, the Florida legislature has restructured its workers'
compensation laws several times over the years, with two significant law changes
since the Company began operations. Each time the workers' compensation laws
change, claims adjusters must segregate and manage claims according to
applicable laws, a process which is time-consuming and requires special skills.
In 1994, Florida enacted a law allowing both the medical and indemnity portions
of a claim to be settled. The Company took advantage of this opportunity to
reduce its outstanding claims by undertaking a claims settlement initiative in
1994. The initiative allows the Company's claims management personnel to operate
primarily under the 1994 law, because most claims governed by previous laws have
been closed.
The table below shows the development of losses and loss adjustment
expenses for 1988 through 1996. The top line indicates the estimated reserves
for unpaid losses and loss adjustment expenses as reported at the end of the
stated year. Each calendar year-end reserve includes estimated unpaid
liabilities for the current accident year and all prior accident years. The
cumulative amount paid portion of the table presents the amounts paid as of
subsequent years on those claims for which reserves were carried as of each
specific year. The section captioned "Liability Re-estimated as of" shows the
original recorded reserve as adjusted at the end of each subsequent year to
reflect cumulative amounts paid and all other facts and information discovered
during each year. For example, an adjustment made in 1996 for 1992 loss reserves
will be reflected in the re-estimated ultimate liability for each of the years
1992 through 1995. The cumulative (deficiency) redundancy line represents the
cumulative change in estimates since the initial reserve was established. It is
equal to the difference between the initial reserve and the latest liability
re-estimated amount.
The table represents combined development for RIC, RPC and their
predecessors through 1995. Calendar year 1996 estimates of ultimate liabilities
include reserves assumed with the purchase of RNIC and the subsequent loss
portfolio transfers of five self-insurance funds. Effective in 1996, the Company
has separately reported unallocated loss adjustment expenses previously included
in general and administrative expenses. The cumulative paid and re-estimated
liability data in the following table have been restated for all years to
reflect this change. The table presents development data by calendar year and
does not relate the data to the year in which the accident occurred. Conditions
that have affected historical development of reserves will not necessarily
continue in the future.
16
As of December 31,
------------------------------------------------------------------------------------
(In thousands)
1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Loss and loss adjustment
expenses, net $ 954 $ 11,273 $ 36,323 $ 68,674 $ 96,755 $152,407 $ 4,599 $92,820 $196,078
Cumulative Amount Paid:
One Year Later 355 8,927 19,335 32,241 47,572 122,603 95,229 55,875
Two Years Later 902 14,922 34,010 55,794 116,193 164,840 127,395
Three Years Later 1,185 19,675 44,551 91,441 134,193 172,699
Four Years Later 1,595 22,587 59,651 100,307 137,782
Five Years Later 1,665 26,943 62,775 102,468
Six Years Later 1,801 27,870 63,620
Seven Years Later 1,821 28,141
Eight Years Later 1,662
Liability Re-estimated as of:
One Year Later 1,016 18,508 44,192 71,145 115,116 156,867 133,651 95,843
Two Years Later 1,219 20,541 49,429 83,918 123,472 156,304 139,992
Three Years Later 1,462 24,514 55,485 91,477 123,298 162,812
Four Years Later 1,890 27,108 58,588 91,821 125,751
Five Years Later 1,977 26,670 57,867 92,878
Six Years Later 1,785 26,023 57,981
Seven Years Later 1,734 26,067
Eight Years Later 1,567
Cumulative (Deficiency) (613) (14,794) (21,658) (24,204) (28,996) (10,405) (11,539) (3,023)
As the above table indicates, the Company's reserving methods in its
early years were adversely impacted by its short operating history and the
relative age of the accounts it insures. Additionally, the inclusion of
unallocated loss adjustment expenses in the table has increased the cumulative
deficiency for all years. Since 1992, the Company believes its reserving
methodologies have become more reliable. Key factors for this improvement are:
1) the ability to identify trends and reduce volatility based on a larger claims
database; 2) the maturation of the Company's managed care approach to claims;
and 3) industry reforms.
17
The following table presents an analysis of losses and loss adjustment
expenses and provides a reconciliation of beginning and ending reserves for the
periods indicated. Adverse development for prior periods' loss and loss
adjustment expenses in calendar year 1996 represented deterioration in 1993 and
prior accident years offset in part by improved experience in the 1995 accident
year.
Year Ended December 31,
1996 1995 1994
(in thousands)
Gross reserves for losses and loss adjustment
expenses, beginning of period $261,700 $ 12,668 $ 6,157
Less reinsurance recoverables 100,675 7,398 -
Less SDTF recoverable 51,836 671 831
Less prepaid managed care fees 16,369 - -
Net balance at January 1 92,820 4,599 5,326
Assumed during year from loss portfolio transfers and acquisitions 88,212 123,854 -
Incurred losses and loss adjustment expenses related to:
Current year 123,986 87,467 6,026
Prior years 3,023 5,198 2,062
Total incurred losses and loss adjustment expenses 127,009 92,665 8,088
Paid related to:
Current year 56,088 33,069 4,821
Prior years 55,875 95,229 3,994
Total paid 111,963 128,298 8,815
Net balance at December 31 196,078 92,820 4,599
Plus reinsurance recoverables 180,698 100,675 7,398
Plus SDTF recoverables 49,505 51,836 671
Plus prepaid managed care fees 31,958 16,369 -
Gross reserves for losses and loss adjustment
expenses at December 31 $458,239 $261,700 $ 12,668
18
Item 2. Properties
The Company owns its headquarters building in Sarasota, Florida, which
contains approximately 112,000 square feet of space, as well as an adjacent
parking facility. The Company leases an aggregate of approximately 70,337 square
feet of office space at 11 other locations in nine states, including Florida,
under terms expiring through June 2001. The Company incurred rent expense of
$1.3 million for the year ended December 31, 1996. Additionally, the Company has
continuing commitments through July 1998 of approximately $70,000 in the
aggregate related to two locations in which offices were closed during 1996. See
"Business - Recent Developments - Restructuring."
Item 3. Legal Proceedings
On April 2, 1996, RISCORP, Inc., RIC, several officers, directors and
employees were named as defendants in a purported class action lawsuit filed in
the United States District Court for the Southern District of Florida. The suit
claims the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), breached fiduciary duties, and were negligent in
RISCORP, Inc.'s acquisition of CMIC in 1995. The suit seeks compensatory and
punitive damages and equitable relief and treble damages for the RICO counts.
The named plaintiffs, Vero Cricket Shop, Inc., Vero Cricket Shop Too, Inc., and
Falls Company of Longboat Key, Inc., claim to be former policyholders of CMIC
and claim to represent others similarly situated. The defendants moved to
dismiss the RICO counts and to strike the punitive damages claims. These
motions, as well as plaintiffs' motion for class certification, were pending
when the plaintiffs filed an amended complaint. The amended complaint added the
Florida Insurance Commissioner and Zenith as defendants in one new count seeking
declaratory relief. The remaining claims in the amended complaint are the same
as those in the original complaint. The defendants have filed a motion to
dismiss the amended complaint and to strike the punitive damages claims. The
parties have been ordered to non-binding mediation in this matter. The Company
intends to defend this action vigorously; however, there can be no assurance
that it will prevail in the litigation.
Between November 20, 1996, and January 31, 1997, nine shareholder class
action lawsuits were filed against RISCORP, Inc. and other defendants in the
United States District Court for the Middle District of Florida. In March 1997,
the Court consolidated these lawsuits and appointed co-lead plaintiffs and
co-lead counsel. The plaintiffs subsequently filed a consolidated complaint. The
consolidated complaint named as defendants RISCORP, Inc., three of its executive
officers, one non-officer director and three of the underwriters for RISCORP,
Inc.'s initial public offering. The plaintiffs in the consolidated complaint
purport to represent the class of shareholders who purchased RISCORP, Inc. Class
A Common Stock between February 28, 1996, and November 14, 1996. The
consolidated complaint alleges that RISCORP, Inc.'s Registration Statement and
Prospectus of February 28, 1996, as well as subsequent statements, contained
false and misleading statements of material fact and omissions, in violation of
sections 11 and 15 of the Securities Act and sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated thereunder. The consolidated complaint
19
seeks unspecified compensatory damages. The defendants have filed a motion to
dismiss the consolidated complaint which has been fully briefed and is pending.
Discovery will be stayed until the motion to dismiss has been decided. The
plaintiffs have filed a motion to certify the class, but the parties have agreed
that the defendants need not respond to that motion until thirty days after the
motion to dismiss has been decided. The parties have been ordered to non-binding
mediation in this matter. RISCORP, Inc. intends to defend this action
vigorously; however, there can be no assurance that it will prevail in the
litigation.
On July 17, 1997, RISCORP, Inc. and several former officers were named
as defendants in a suit filed in state court in Montgomery, Alabama. The suit
alleges violations of federal and state securities laws and breach of contract
resulting from the purchase of IAA in 1996. The suit seeks compensatory and
punitive damages and equitable relief. The named plaintiffs are Thomas Albrecht
and Peter Norman, the former shareholders of IAA. RISCORP, Inc. intends to
vigorously defend this action; however, there can be no assurance that it will
prevail in the litigation.
On August 20, 1997, RISCORP, Inc., RNIC, IAA and Peter Norman were
named as defendants in a suit filed in state court in Montgomery, Alabama. The
suit alleges common law fraud, breach of contract and breach of fiduciary duty
resulting from the acquisition of OSAA in 1996. The suit seeks compensatory and
punitive damages and equitable relief. The named plaintiff is OSAA. The Company
intends to vigorously defend this action; however, there can be no assurance
that it will prevail in the litigation.
On September 18, 1997, the U.S. Attorney's Office in Pensacola, Florida
announced that a United States grand jury had indicted RISCORP, Inc., RISCORP
Management Services, Inc. (a wholly owned, non-regulated subsidiary of RISCORP,
Inc.) and five former officers, including William D. Griffin, Founder and
Chairman of the Board, for various charges stemming from alleged illegal
political campaign contributions. On September 18, 1997, the Board of Directors
approved a guilty plea by RISCORP Management Services, Inc. to a single count of
conspiracy to commit mail fraud. The guilty plea was entered by RISCORP
Management Services, Inc. and accepted by the court on October 9, 1997. As a
result of an agreement negotiated with the U. S. Attorney, the court dismissed
the indictment against RISCORP, Inc. on the same day. Mr. Griffin has resigned
from the Board of Directors of the Company and all other positions with the
Company. The Company has recorded a provision of $1 million for the payment of
fines and other costs related to this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In addition,
certain expenses of the law suits and related legal expenses may be covered
under directors and officers' insurance coverage maintained by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Following the Company's initial public offering on February 29, 1996,
the Company's Class A Common Stock ($.01 par value) was traded on the NASDAQ
Stock Market's National Market under the symbol "RISC." As of December 31, 1996,
there were 153 record holders of Class A Common Stock. Due to the fact that
required financial statements had not been filed with the Securities and
Exchange Commission, the Company's Class A Common Stock was delisted on July 2,
1997. See - "Business - Recent Developments - Delisting by NASDAQ." The
following table sets forth the high and low closing sales prices for the
Company's Class A Common Stock for each full quarterly period.
Per Share Price of Common Stock
====================================================================================================================================
1996 1997
-------------------------------------------------------- --------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
====================================================================================================================================
High 21 1/2 23 7/8 19 1/4 18 3/4 4 3/8 3 3/4 1 1/8
Low 19 15 10 3/4 3 15/64 1 7/8 15/16 3/8
No dividends have been declared or paid since the Company's initial public
offering and it is not anticipated that dividends will be paid in the
foreseeable future.
21
Item 6. Selected Financial Data
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except for per share data)
Income Statement Data:
Revenues:
Premiums earned $173,557 $135,887 $ 1,513 $ 1,964 $ 4,257
Fee and other income 31,838 23,413 56,712 40,948 19,301
Net investment income 12,194 6,708 1,677 873 982
Total revenues 217,589 166,008 59,902 43,785 24,540
Expenses:
Losses and loss
adjustment expenses 114,093 82,532 (716) 3,571 1,584
Unallocated loss
adjustment expenses 12,916 10,133 8,804 7,637 4,839
Commissions, general and
administrative expenses 65,560 48,244 35,869 20,775 10,401
Interest 2,795 4,634 1,750 1,218
202
Depreciation and amortization 11,625 1,683 1,330 1,116 545
Total expenses 206,989 147,226 47,037 34,317 17,571
Income before income taxes 10,600 18,782 12,865 9,468 6,969
Income taxes (1) 8,202 5,099 5,992 3,714 1,183
Net income $ 2,398 $ 13,683 $ 6,873 $ 5,754 $ 5,786
Net income per share $ 0.07 $ 0.45 $ 0.23 $ 0.20 $ 0.20
Weighted average common
shares and common share
equivalents outstanding (2) (3) 36,785 30,093 30,093 28,554 28,554
_______ _________ December 31, _____
- ------
1996 1995 1994 1993 1992
Balance Sheet Data:
Cash and investments $ 281,963 $ 92,713 $47,037 $30,157 $19,622
Total assets 828,442 443,242 93,908 54,551
34,402
Long-term debt 16,303 46,417 27,840 17,015 19,599
Shareholders' equity (deficit) 157,308 16,157 3,895 1,996 (5,289)
(1) Certain subsidiaries of the Company were S Corporations prior to the
Reorganization (as defined in note 1 to the Company's consolidated
financial statements) and were not subject to corporate income taxes.
(2) 1995 amount excludes 2,556,557 shares of Class A Common Stock reserved
for issuance pursuant to the exercise of stock options outstanding as
of December 31, 1995, having a weighted average exercise price of $3.96
per share.
(3) 1996 amount includes 607,603 shares of Class A Common Stock pursuant to
the contingency clauses in the acquisition agreements with CompSource
and IAA. See notes 3 and 19 to the Company's consolidated financial
statements.
22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Prior to 1996, the Company's at-risk operations were focused in Florida.
During 1996, the Company initiated a number of acquisitions of licenses and
existing insurance funds which allowed the Company to diversify its at-risk
operations outside the state of Florida. A comparison of the Company's direct
premiums written by state (prior to reinsurance cessions or assumptions) is
presented below:
Direct Premiums Written (a)
(Dollars in millions) 1996 1995 1994
---- ---- ----
Florida $ 270.8 $ 284.8 $ 2.4
North Carolina 41.4 - -
Alabama 21.7 - -
Other 22.8 - -
Total $ 356.7 $ 284.8 $ 2.4
======= ======= =========
(a) Includes RIC, RPC and RNIC for 1996, RIC and RPC for 1995, and RPC for 1994.
Direct premiums written were reduced by specific reinsurance cessions
(1996, 1995 and 1994), the 50% AmRe Quota Share Reinsurance agreement for the
Company's Florida workers' compensation business (1996 and 1995), and the 65%
Chartwell Quota Share Reinsurance agreement (effective October 1, 1996), which
decreased to 60% effective January 1, 1997.
The majority of the Company's premiums have been written in Florida, a
regulated pricing state where premiums for guaranteed cost products are based on
state-approved rates. However, the Company also offers policies which are
subject to premium reductions as high deductible plans, participating dividend
plans, or loss sensitive plans. Pricing for these plans tends to be more
competitively based, and the Company experienced increasing competition during
1996 in pricing these plans. In addition, in October 1996, the Florida Insurance
Commissioner ordered workers' compensation providers to reduce rates by an
average of 11.2% for new or renewal policies written on or after January 1,
1997. Concurrently, 10% managed care credit was phased out. This credit had been
offered since 1994 to employers who met certain criteria for participating in a
qualified WCMCA. As of December 31, 1996, the Company estimated that
approximately 60% of the Company's premiums received the 10% managed care
credit.
23
The Company experienced increased pricing pressures during 1996 and
expects that such pressures will continue into the foreseeable future. The
Company intends to continue applying managed care techniques to differentiate
itself from its competitors and to continue to reduce claims costs. In June
1997, the Company implemented cost cutting measures which resulted in the
Company ceasing to write new business in certain states including Oklahoma,
Virginia, Missouri, Mississippi, Louisiana and Kansas, which approximates $16
million in direct premiums written.
During 1995 and 1996, the Company began to diversify by writing other
property and casualty lines of business, which accounted for less than 1% and
4%, respectively, of its premiums earned. The Company's 1996 non-workers'
compensation products included other accident and health, reinsurance, inland
marine, fire, allied lines, commercial multiple peril, other liability -
occurrence, products liability - occurrence, surety, and earthquake. Such
property and casualty lines expose the Company to the risk of significant loss
in the event of major adverse natural phenomena, known in the insurance industry
as catastrophes. These catastrophes may cause significant financial statement
losses since catastrophe losses may not be accrued in advance of the event.
During 1997, the Company made a strategic decision to exit the non-workers'
compensation lines of business.
The Company attempts to lower claims costs by applying managed care
techniques and programs to workers compensation claims, particularly by
providing prompt medical intervention, integrating claims management and
customer service, directing care of injured employees through a managed care
provider network, and availing itself of potential recoveries under subrogation
and other programs. See "Business."
Part of the Company's claims management philosophy is to seek recoveries
for claims which are reinsured or which can be subrogated or submitted for
reimbursement under various states' recovery programs. As a result, the
Company's losses and loss adjustment expenses are offset by estimated recoveries
from reinsurers under specific excess of loss and Quota Share Reinsurance
agreements, subrogation from third parties and state "second disability" funds,
including the SDTF.
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds and self-insured employers for excess workers' compensation
benefits paid to employees when an employee is injured on the job and the injury
to the physically disabled worker merges with, aggravates, or accelerates a
preexisting impairment. The SDTF is managed by the State of Florida and is
funded through assessments against insurers and self-insurers providing workers'
compensation coverage in Florida. The SDTF's assessment formula has historically
yielded sufficient revenues for annual reimbursement payments and for costs
associated with administering the SDTF; however, the SDTF has not prefunded its
claims liability and no reserves currently exist. As of September 30, 1996, the
SDTF had an actuarially projected undiscounted liability of approximately $4
billion based on a study performed for the SDTF by independent actuarial
consultants. In addition, the SDTF actuarial study indicated that, at the
current assessment rates, the payment of the existing liability would take
numerous years.
24
Under Florida sunset laws applicable to some state sponsored funds, the
SDTF would have expired on November 4, 1996, unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. The SDTF will accept no claims with
accident dates after December 31, 1997. Certain SDTF claims may have to be
refiled for reimbursement and such filing will require a refiling fee.
Additionally, companies accruing SDTF recoveries may be statutorily limited in
the level of recoverable they may be allowed to carry. The bill provides for a
funding mechanism through which companies writing workers' compensation
insurance in Florida will be assessed an annual charge to cover payments made by
the SDTF. The Company believes that even in the event of default by the SDTF,
the existing reimbursements of the SDTF would become general obligations of the
State of Florida. Management further believes that the recoveries recorded at
December 31, 1996 will not be materially adversely affected by the new
legislation.
Estimated recoveries from the SDTF were $49.5 million and $51.8 million
at December 31, 1996 and 1995, respectively. The decrease in 1996 resulted from
actual collections and a reduction in estimated recoveries due to additional
information regarding the impact of legislative reform. Actual net claim
recoveries from the SDTF totaled $2.5 million, $.9 million, and $0 respectively
for the years ended December 31, 1996, 1995 and 1994. SDTF assessments, which
are based on net premiums written, were $11.7 million, $12.9 million and $.1
million for the years ended December 31, 1996, 1995, and 1994, respectively.
While it is not possible to predict the result of any other legislative
or regulatory proposals affecting the SDTF, changes in the SDTF's operations or
funding which decrease the availability of recoveries or increase assessments
payable by the Company, could have a material adverse effect on the Company's
business, financial condition, or results of operations.
Results of Operations
The comments below should be read in conjunction with the Financial
Statements in Part IV, Item 14.
Direct premiums earned increased to $326.9 million for the year ended
December 31, 1996 from $274.3 million in 1995 and $0.6 million in 1994. The net
increase from 1995 to 1996 was primarily due to loss portfolio transfers and
premium growth in states licensed through RNIC. The increase from 1994 to 1995
was almost entirely due to the Company's January 1, 1995 acquisition of RIC,
along with additional revenue attributable to improved loss experience on
reinsurance contracts. In addition, the number of in force policies increased
from approximately 19,000 as of January 1, 1995 to approximately 22,000 as of
December 31, 1995 and to approximately 39,000 as of December 31, 1996. Premiums
assumed increased to $11.7 million in 1996 from $0.7 million in
25
1995, caused primarily by the initiation of the Virginia Surety UMA. Premiums
assumed decreased from 1994 to 1995 primarily because $4.8 million of the 1994
premium balance was assumed from RIC, which the Company acquired on January 1,
1995. Premiums ceded to reinsurers increased to $165.0 million in 1996 from
$139.1 million in 1995 and $4.5 million in 1994, primarily as a result of the
Chartwell Quota Share Reinsurance agreement and the January 1, 1995 initiation
of the AmRe Quota Share Reinsurance agreement.
Net premiums earned include premiums related to retrospectively rated
policies ("Retros"), whose premiums are adjusted based on actual loss
experience. The Company has continually reassessed its estimates of net earned
premiums to reflect additional data becoming available through premium audits
and actuarial review. During 1995, the Company reduced its net earned premiums
by approximately $8 million to reflect a reduction in the expected ultimate
earned premium applicable to pre-1995 policies that had reached final premium
audit based on actuarial review. On January 1, 1996, the Company began recording
ongoing premiums for Retros at a percentage of the guaranteed cost equivalent
based on actuarial projections. During 1996, the Company reviewed pre-1996 Retro
policies which had been audited for final premium adjustments and reduced its
net earned premiums by $6.4 million to reflect projected ultimate premiums
earned on Retros.
The following table shows direct, assumed, ceded, and net earned
premiums for the years ended December 31, 1996, 1995 and 1994:
Year Ended December 31,
-------------------------------------------
1996 1995 1994
(in millions)
Direct premiums earned $326.9 $274.3 $ 0.6
Assumed premiums earned 11.7 0.7 5.4
Premiums ceded to reinsurers (165.0) (139.1) (4.5)
------- ------- -------
Net premiums earned $173.6 $135.9 $ 1.5
Fee and other income for the years ended December 31, 1996, 1995 and
1994 was $31.8 million, $23.4 million and $56.7 million, respectively. The net
increase of $8.4 million from 1995 to 1996 was primarily due to new fees
generated from CompSource, the Virginia Surety UMA, managing the Administrator
of the new Third Coast, and growth in other existing fee products, offset by
decreases in commissions on reinsurance premiums, loss of service fees when NARM
and the Virginia Funds (which were previously managed by the Company) were
converted to at-risk business through loss portfolio transfers, and decreases in
RWI service fees from terminations of RWI's Mississippi and Louisiana service
contracts. The decrease of $33.3 million from 1994 to 1995 resulted from the
acquisition of RIC, from which the Company previously derived fee income. This
decrease was partially offset by the inclusion of the results of RWI, growth in
fees generated from another fund managed by the Company, and an increase in
realized investment gains resulting from the Company's acquisition of RIC.
26
Net investment income for the years ended December 31, 1996, 1995 and
1994 was $12.2 million, $6.7 million and $1.7 million, respectively. The $5.5
million increase from 1995 to 1996 is primarily due to the increase in the
Company's investment portfolio created from the Company's February 29, 1996
initial public offering, as well as the portfolios acquired from the NARM and
OSAA transactions. The increase of $5.0 million from 1994 to 1995 was primarily
attributable to the increase in the investment portfolio resulting from the
acquisition of RIC and its related investment portfolios and the investment of
proceeds from Company borrowings.
Losses and loss adjustment expenses for the years ended December 31,
1996, 1995 and 1994 were $114.1 million, $82.5 million and ($0.7) million,
respectively. The net increase of $31.6 million from 1995 to 1996 was
attributable to increased activity due to acquisitions and writings in new
states licensed through RNIC and growth in the Company's core Florida
operations. The net increase of $83.2 million from 1994 to 1995 was primarily
attributable to the acquisition of RIC and is net of a $6.8 million increase in
anticipated recoveries from the SDTF and $4.7 million in loss reserve decreases
due to improved loss experience.
During 1996, the Company reclassified unallocated loss adjustment
expenses out of commissions, general and administrative expenses, and reflected
this reclassification in its 1995 and 1994 financial statements as well.
Unallocated loss adjustment expenses for the years ended December 31, 1996, 1995
and 1994 were $12.9 million, $10.1 million and $8.8 million, respectively. The
net increase of $2.8 million from 1995 to 1996 and $1.3 million from 1994 to
1995 is attributable to increases in personnel and related costs attributed to
growth in premium volume.
Commissions, general and administrative expenses for the years ended
December 31, 1996, 1995 and 1994 were $65.6 million, $48.2 million and $35.9
million, respectively. The increase of $17.3 million from 1995 to 1996 is
attributable primarily to significant increases in the Company's allowance for
bad debts and legal expenses combined with increased overall commissions,
general and administrative expenses associated with higher premiums and
personnel resulting from acquisitions and internal growth. The increases were
offset by higher ceding commissions under the Quota Share Reinsurance
agreements, including $6.3 million of additional ceding commissions recognized
under the AmRe Quota Share Reinsurance agreement which resulted from improved
loss ratio experience during the contract periods. The increase of $12.3 million
from 1994 to 1995 was due primarily to increases in employees and related costs.
Total employees at December 31, 1996, 1995 and 1994 were 871; 696; and 558,
respectively.
Interest expense for the years ended December 31, 1996, 1995 and 1994
was $2.8 million, $4.6 million and $1.8 million, respectively. The decrease of
$1.8 million from 1995 to 1996 was attributable primarily to repayment of bank
borrowings in March 1996 with proceeds from the initial public offering. The
increase of $2.8 million from 1994 to 1995 was attributable primarily to
increased borrowings associated with the bank term loan and subordinated notes.
27
Depreciation and amortization expenses for the years ended December 31,
1996, 1995 and 1994 were $11.6 million, $1.7 million and $1.3 million,
respectively. The increase of $9.9 million from 1995 to 1996 was primarily due
to the $3.2 million and $2.8 million write-off of goodwill associated with RWI
and IAA, respectively. During 1996, the Company assessed the recoverability of
the value of the assets, and wrote these assets down to $0.5 million. The
Company's assessment was based upon the termination of RWI's service contracts
with the Mississippi and Louisiana funds, the closing of former SISB offices in
several states, and the deteriorating loss ratio and declining premium retention
of OSAA. The increase of $0.4 million from 1994 to 1995 was primarily due to the
amortization of loan fees related to the bank term loan and subordinated notes,
amortization of goodwill related to the RWI acquisition, and depreciation of
fixed asset additions.
The effective tax rates for the years ended December 31, 1996, 1995 and
1994 were 77.4%, 27.1% and 46.6%, respectively. The increase from 1995 to 1996
was primarily due to the non-deductible write-off of the goodwill detailed above
which was partially offset by a higher level of tax-exempt income. The decrease
from 1994 to 1995 resulted from an increase in tax-exempt income related to the
acquisition of RIC and an increase in non-taxable earnings of RISCORP of North
Carolina, Inc. ("RONC").
Liquidity and Capital Resources
The Company has historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The Company's
primary sources of cash flow from operations are premiums and investment income,
and its cash requirements consist primarily of payment of losses and loss
adjustment expenses, support of its operating activities including various
reinsurance agreements and managed care programs and services, capital surplus
needs for its insurance subsidiaries, and other general and administrative
expenses.
On February 29, 1996, the Company completed its initial public offering
of Common Stock which generated net proceeds of $127.9 million which were used
to repay approximately $31 million of various borrowings, increase the capital
surplus of the Company's insurance subsidiaries, fund acquisitions and for
general corporate purposes. Borrowings increased by $19.6 million between 1994
and 1995 due to borrowings under a variable rate term loan and the subordinated
notes, the proceeds of which were used to repay existing debt and fund the
acquisition of RIC.
On October 15, 1996, the Company entered into a credit agreement with
NationsBank, N.A. and SouthTrust Bank of Alabama which provided a $50 million
credit facility to the Company for unsecured borrowings for a two-year revolving
period convertible into a term loan with a final maturity on September 30, 2001.
There were no borrowings under the agreement, and the Company terminated the
agreement on June 16, 1997.
28
In November 1996, the Board of Directors of the Company created a
Strategic Alternatives Committee whose primary function was to evaluate
alternatives to maximize shareholder value including, without limitation,
potential acquisitions, joint ventures, mergers, strategic alliances and the
sale of all or part of the Company. In turn, the committee hired an investment
bank to identify and evaluate entities with an interest in acquiring the Company
or its assets. On June 17, 1997, the Company entered into an agreement with
Zenith to purchase substantially all of the operating assets of the Company and
its affiliates at a purchase price equal to the greater of: (i) the book value
of the acquired assets less the book value of the assumed liabilities, or (ii)
$35 million cash and assumption of $15 million of debt. The transaction is
subject to shareholder and regulatory approval. See "Business - Recent
Developments - Asset Purchase Agreement with Zenith Insurance Company."
Cash flow from operations for the years ended December 31, 1996, 1995
and 1994 was $28.1 million, ($47.3) million and $17.8 million, respectively. The
increase from 1995 to 1996 was due primarily to the improved cash flows
resulting from ceding of premiums under the AmRe Quota Share Reinsurance
agreement and increases in reserves for losses and loss adjustment expenses. The
decrease from 1994 to 1995 was due primarily to the initiation of the AmRe Quota
Share Reinsurance agreement and other reinsurance agreements which created a net
cash outflow resulting from the cessation of $139.1 million in written premium.
The Company has projected cash flows through March 1998 and believes it
has sufficient liquidity and capital resources to support its operations without
considering dividends from the insurance company subsidiaries and transactions
resulting from the pending sale of the Company.
The Company has recorded $49.5 million in accrued net recoverables from
the SDTF, which it anticipates will be reimbursed over a number of years. For
the years ended December 31, 1996, 1995 and 1994, the Company received net
payments from the SDTF totaling $2.5 million, $0.9 million and $0, respectively.
Barring any adverse legislative change, the Company believes that it
will ultimately collect the entire balance of SDTF recoverables and that
periodic reimbursement will be received following submission of proof of claim
and reimbursement requests. During its approximate 40-year history, the SDTF has
historically paid reimbursement requests for claims it determined were eligible
for reimbursement. The Company does not believe that SDTF will fail to meet its
obligations to pay eligible reimbursement requests, although there can be no
assurance in this regard. The failure of the SDTF to meet its obligations could
adversely affect the liquidity of the Company.
In addition, the liquidity of the Company could be adversely affected by
certain legal issues and its initial A.M. Best rating. See "Legal Proceedings"
and "Business - A.M. Best Ratings of Insurance Subsidiaries."
29
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based upon the risks inherent in its operations. The
standards, which have not yet been adopted in Florida, require the computation
of a risk-based capital amount which is then compared to a carrier's actual
total adjusted capital. The computation involves applying factors to various
financial data to address four primary risks: asset risk, insurance underwriting
risk, credit risk, and off-balance sheet risk. These standards provide for
regulatory intervention when the percentage of total adjusted capital to
authorized control level risk-based capital is below certain levels. At December
31, 1996, the Company's insurance subsidiaries' statutory surplus was in excess
of any risk-based capital action level requirements.
Investment Portfolio
The Company has established an investment policy that focuses upon
safety of principal, compliance with regulations, liquidity and diversification.
As of December 31, 1996, approximately 70% of the Company's investment portfolio
was rated Aa or above by Moody's, and the portfolio contained no debt securities
with a rating of less than Baa. The Company also holds a small amount of common
stocks (less than 2% of the portfolio). The average duration of the portfolio,
including operational cash, was approximately 3.1 years at December 31, 1996.
The amortized cost and the fair value of the Company's investment portfolio, at
December 31, 1996, were $252.9 million and $255.7 million, respectively.
The following table summarizes the Company's investment portfolio at
December 31, 1996 (in thousands):
Tax
Fair Equivalent
Type of Investment Value Yield*
Certificates of deposit $ 2,250 6.26%
U.S. Government bonds 57,608 6.17%
U.S. Government agency bonds 8,909 6.71%
Corporate bonds 87,366 6.57%
Mortgage-backed securities 2,612 7.22%
Asset-backed securities 5,556 6.22%
Municipal bonds (non-taxable) 79,531 6.70%
Municipal bonds (taxable) 1,022 7.14%
Preferred stock 7,922 8.69%
Common Stock 2,963 4.10%
-------- -----
$255,739 6.56%
* The tax equivalent yield was computed using a tax rate of 35%, which
represents the effective statutory tax rate for the Company.
30
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, footnotes and
supplementary schedules are set forth on pages F-1 to F-45 hereof.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no changes in or disagreements with accountants on accounting
or financial disclosure for the two years ended December 31, 1996.
31
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
Set forth below is certain information as of September 30, 1997,
concerning the Company's executive officers, continuing directors, and nominees
for director.
Name Position(s) Age Year First
Became a Director
Frederick M. Dawson President and Chief Executive Officer 57 1997
Steven J. Berling Senior Vice President 48
Gregory P. Kuzma Senior Vice President and Treasurer 46
Richard K. Larson Executive Vice President - Marketing 57
Richard T. Magsam Vice President, Controller and Chief Accounting 41
Officer
Stephen C. Rece Senior Vice President and Chief Financial 53
Officer
Walter E. Riehemann Senior Vice President, General Counsel & 31
Secretary
Seddon Goode, Jr. Director 65 1996
George E. Greene III Director 62 1995
Walter L. Revell Director and Vice Chairman 62 1995
The following individuals include existing executive officers and directors and
former officers and directors included among the Company's four highest paid
executive officers for the year ended December 31, 1996.
Frederick M. Dawson joined the Company in May 1997 as Chief Executive Officer,
and was elected President in June 1997. Prior to joining RISCORP, Mr. Dawson was
Chairman, President and Chief Executive Officer of Integon Life Insurance
Corporation from December 1994 to July 1995 and Harcourt General Insurance
Companies from August 1992 to December 1994. Mr. Dawson's previous experience
includes executive positions with Beneficial Corporation from October 1980 to
March 1987 and Citibank, N.A. from October 1987 to August 1992.
32
Steven J. Berling has served as a Senior Vice President of the Company and
President of the Company's Managed Care Services Group since December 1995. Mr.
Berling was President of the Management Services Division from September 1994 to
December 1995. Prior to joining RISCORP, Mr. Berling was Vice President at VHA
of Florida from June 1993 to September 1994. Mr. Berling was Vice President of
Administrative Services at Sharp Health Care from 1987 to 1993 where he served
in various capacities as a hospital administrator.
Gregory P. Kuzma has served as Senior Vice President and Treasurer of the
Company since June 1997. Prior to joining RISCORP as a Senior Vice President in
1991, Mr. Kuzma was Vice President and Treasurer of Catalyst Energy Corporation
from May 1989 to June 1991. Previously, Mr. Kuzma was Assistant Treasurer of
Duracell Inc., The Pittston Company and Chesebrough-Pond's Inc., where he served
in various treasury positions from 1979 to 1989.
Richard K. Larson joined the Company as Executive Vice President - Marketing in
August 1997. Prior to joining RISCORP, Mr. Larson was President and Chief
Operating Officer of Harvest Life Insurance Company and Federal Home Life
Insurance Company, two insurance subsidiaries of GE Capital Corporation. From
August 1992 to August 1994, Mr. Larson's experience included executive positions
with Harvest Life Insurance Company, PHF Life Insurance Company and Federal Home
Life Insurance Company.
Richard T. Magsam has served as Vice President, Controller and Chief Accounting
Officer of the Company since September 1997. Mr. Magsam was Assistant Vice
President of Integon Corporation from September 1996 to September 1997 and was
previously Corporate Controller of the Company from April 1995 to September
1996. Prior to joining RISCORP, Mr. Magsam was Senior Vice President and Chief
Financial Officer of Investors Insurance Group, Inc. from 1992 to 1995 and Vice
President and Controller of Financial Benefit Group, Inc. from 1989 to 1991.
Previously, Mr. Magsam was with the public accounting firm of KPMG Peat Marwick
from 1979 to 1988.
Stephen C. Rece has served as Senior Vice President and Chief Financial Officer
of the Company since June 1997. Mr. Rece joined the company in March 1989 as
Chief Operating Officer and was named Senior Vice President of Reinsurance in
February 1995. Prior to joining RISCORP, Mr. Rece was Executive Vice President
and Chief Financial Officer of Associated Reinsurance Management Corporation
from June 1985 to March 1989. Previously, Mr. Rece was Vice President and
Secretary-Treasurer of Southern Trust Corporation from 1970 to 1985.
Walter E. Riehemann has served as Senior Vice President, General Counsel and
Secretary since October 1997. Mr. Riehemann joined RISCORP as Associate General
Counsel in August 1995 and was promoted to Vice President, General Counsel and
Secretary in June 1997. Prior to joining RISCORP, Mr. Riehemann was associated
with the law firms of Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia (1993
to 1995), Long, Aldridge & Norman, Atlanta, Georgia (1993), and Jones, Day,
Reaves & Pogue, Dallas, Texas (1990 to 1993).
33
Seddon Goode, Jr. was elected a director of the Company in November 1996. Mr.
Goode has served as President and Director of University Research Park, Inc.
since 1981. From 1977 to 1984, Mr. Goode served as Chairman of First Charlotte
Corporation. From 1968 to 1977, Mr. Goode served as Senior Vice President, Chief
Financial Officer and Director of Interstate Securities Corporation. Mr. Goode
is also a director of Trion, Inc. and is a director and chairman of Canal
Industries, Inc.
George E. Greene III was elected a director of the Company in November 1995. Mr.
Greene served as Executive Director of No Casinos, Inc., a non-profit
organization to keep casino gambling illegal in Florida, in 1994. Mr. Greene is
also a private consultant. Mr. Greene served in various management positions
with Florida Power Corporation, and other subsidiaries of Florida Progress
Corporation from 1962 to 1993, most recently as Senior Vice President of Florida
Power Corporation from 1983 to 1993. Mr. Greene retired from Florida Power Corp.
on January 1, 1994.
Walter L. Revell was elected a director of the Company in November 1995 and Vice
Chairman of the Board in November 1996. Mr. Revell has been Chairman and Chief
Executive Officer of H. J. Ross Associates, Inc., a consulting engineering,
architectural and planning firm, since 1991; Chairman and Chief Executive
Officer of Revell Investments International, Inc. since 1984 and was President
and Chief Executive Officer of Post, Buckley, Schuh & Jernigan, Inc., a
consulting engineering, architectural and planning firm, from 1975 to 1983. Mr.
Revell is also a director of St. Joe Corporation and Dycom Industries, Inc.
William D. Griffin is the Founder of the Company, and was its Chairman and Chief
Executive Officer from its inception in 1988 until his resignation in September
1997. Mr. Griffin was a member of the Florida Governor's Task Force on Workers'
Compensation in 1988, and served as chairman of the Marketplace, Conduct
Standards, and Statistics Committee of the Governor's Oversight Board in 1990.
Mr. Griffin also served on the Board of Directors of the Florida Workers'
Compensation Joint Underwriting Association, Inc. from 1993 to 1994.
Thomas S. Hall served as Senior Vice President-Corporate Development of the
Company from October 1995 until his resignation in June 1997. Mr. Hall was a
Senior Vice President of the Company and President of RISCORP U.S. Group from
1992 to 1995. Mr. Hall served as President and Chief Executive Officer of
Chautauqua Airlines (d/b/a U. S. Air Express) from 1990 to 1992.
Fred A. Hunt served as a Senior Vice President of the Company and President of
the Company's Risk & Insurance Solutions Group from October 1995 until his
resignation in June 1997. Mr. Hunt was the Company's Senior Vice President and
President of P&C Services Division from 1994 to 1995. Mr. Hunt served in various
capacities with Liberty Mutual Insurance Company from 1973 to 1993, most
recently as Vice President and Manager of Underwriting Operations.
34
James A. Malone served as President of the Company from 1993 until his
resignation in June 1997. Mr. Malone joined the Company in 1990 as Vice
President of Operations, and was named Senior Vice President and Chief Operating
Officer in 1991. Prior to joining the Company, Mr. Malone was Director of Risk
Management for Kentucky Fried Chicken, Inc., a subsidiary of PepsiCo, Inc., from
April 1990 to November 1990. Mr. Malone served as Manager of Risk Financing for
Batus, Inc. from 1988 to 1990.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than ten
percent of the Common Stock of the Company, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors, and ten percent shareholders are required by the SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received by it,
and written representations from certain reporting persons that no SEC Forms 3,
4, or 5 were required to be filed by those persons, the Company believes that
during 1996, its officers, directors and ten percent beneficial owners timely
complied with all applicable filing requirements, except for the following:
Thomas E. Danson, Jr., Paul F. DiFrancesco, Richard A.
Halloy and William D. Griffin each filed a Form 4 late.
35
Item 11. Executive Compensation
The following table sets forth the compensation received by the Company's
Chief Executive Officer and the four highest paid executive officers for
services rendered to the Company in 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE*
Securities
Under- All Other
Name and Annual Compensation lying Compen-
Principal Position Year Salary Bonus Other Options sation (1)
- ----------------------------------------------------------------------------------------------------------------
William D. Griffin 1996 $751,416 $ 907,241 $18,907(2) - $17,547(5)
Chairman and Chief 1995 720,000 5,609,583 46,571(3) - 13,685(5)
Executive Officer 1994 720,000 4,173,304 53,838(4) - 16,567(5)
James A. Malone 1996 327,500 - - - 35,098(6)
President and 1995 300,000 255,904 - 150,770 33,876(6)
Chief Operating 1994 245,000 317,149 - 929,550 33,906(6)
Officer
Thomas S. Hall 1996 223,750 44,750 - 20,000 33,291(7)
Senior Vice President- 1995 205,000 20,695 - 73,303 34,652(7)
Corporate Development 1994 153,500 278,966 - 155,063 34,000(7)
Fred A. Hunt 1996 200,000 20,000 - 20,000 12,573(8)
Senior Vice President-Risk & 1995 163,165 93,615 - 73,153 4,543(9)
Insurance Solutions 1994 101,935 54,290 - 132,991 35,000(10)
Steven J. Berling 1996 208,333 52,083 - 20,000 3,831(11)
Senior Vice President- 1995 190,306 34,594 - 72,632 734(12)
Managed Care Services 1994 54,808 7,811 - 55,381 -
*There were no restricted stock awards or LTIP payouts during the periods
covered.
(1) Includes amounts deferred by the executive pursuant to the
Company's 401(k) plan and the Company's cafeteria plan.
(2) Includes (i) a $4,591 automobile usage allowance and (ii) a $14,316
aircraft usage allowance. For a further description of the terms of Mr.
Griffin's employment agreement, see "Compensation Arrangements upon
Resignation, Retirement or Other Termination; Employment Agreements."
(3) Includes (i) a $13,936 automobile usage allowance and (ii) a $32,635
aircraft usage allowance.
(4) Includes (i) a $13,000 automobile usage allowance and (ii) a $40,838
aircraft usage allowance.
(5) Includes (i) $9,103, $7,709 and $8,394 cash surrender value of life
insurance policies in effect in 1996, 1995 and 1994, respectively and
(ii) $7,574, $5,976 and $8,173 in annual fees for a country club
membership in 1996, 1995 and 1994, respectively. Also includes $870
group term life insurance premiums in 1996.
(6) Includes (i) $30,117, $30,000 and $30,000 in allocations to the
participant's account in the Company's defined contribution plan in
1996, 1995 and 1994, respectively and (ii) $4,651, $3,876 and $3,906 in
annual fees for country club membership in 1996, 1995 and 1994,
respectively. Also includes $330 group term life insurance premiums in
1996.
36
(7) Includes (i) $30,117, $30,000 and $30,000 in allocations to the
participant's account in the Company's defined contribution plan in
1996, 1995 and 1994, respectively and (ii) $2,943, $4,652 and $4,000 in
annual fees for country club membership in 1996, 1995 and 1994,
respectively. Also includes $231 group term life insurance premiums in
1996.
(8) Includes (i) $5,988 in allocations to the participant's account in the
Company's defined contribution plan, (ii) $6,063 in annual fees for
country club membership, and (iii) $522 for group term life insurance
premiums.
(9) Represents $4,543 in annual fees for country club membership.
(10) Relocation Reimbursement.
(11) Represents a $3,274 allocation to the participant's account in the
Company's defined contribution account and $557 for group term life
insurance.
(12) Represents annual fees for country club membership.
Compensation of Directors
Directors who are not employees of the Company are paid $40,000 annually
plus $1,000 for each Board meeting attended, and $1,000 for each day of
committee meetings attended if such meeting day occurs on a day other than that
of a scheduled meeting of the Board of Directors. In addition, the Company
reserved 10,000 shares of Common Stock for future issuance upon the exercise of
stock options that may be granted to such non-employee directors. During 1996,
Messrs. Greene and Revell were granted options to purchase 1,000 shares each of
the Company's Class A Common Stock at an exercise price of $19.00 per share.
During 1996, Mr. Goode was granted options to purchase 1,000 shares of the
Company's Class A Common Stock at an exercise price of $4.44 per share. These
options vest 25% per year beginning two years from the option grant date. All
directors receive reimbursement of reasonable out-of-pocket expenses incurred in
connection with meetings of the Board of Directors. No director who is an
employee of the Company receives separate compensation for services rendered as
a director.
Stock Option Grants
The following table shows information concerning options granted in 1996
to the officers shown in the Compensation Table at the end of 1996. The options
vest at the rate of 25% per year beginning on the second anniversary of the date
of grant.
Option/SAR Grants in Last Fiscal Year*
- ---------------------------------------------------------------------------------------------- ----------------------------
Individual Grants
- ----------------------------------------------------------------------------------------------
Percent Of
Total Potential Realizable Value
Number Of Options At Assumed Annual Rates Of
Securities Granted To Stock Price Appreciation
Underlying Employees Exercise Or For Option Term
Options In Fiscal Base Expiration
Name Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- -------------------------------- ----------------- ------------- -------------- -------------- -------------- -------------
William D. Griffin 0 0 $ 0 N/A $ 0 $
0
James A. Malone 0 0 0 N/A 0 0
Thomas S. Hall 20,000 3% 4.50 11/18/08 73,800 207,000
Fred A. Hunt 20,000 3% 4.50 11/18/08 73,800 207,000
Steven J. Berling 20,000 3% 4.50 11/18/08 73,800 207,000
*No SARs have been granted.
37
Option Exercises and Year-End Option Values
The following table shows information concerning options exercised
during 1996 and options held by the officers shown in the Summary Compensation
Table at the end of 1996.
Shares Number of Securities Value of Unexercised
Acquired on Underlying Unexercised In-the-Money Options
Value Options at Fiscal Year-End at Fiscal Year-End (1) (2)
-------------------------- --------------------------
Name Exercise Realized Exerciseable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ------------ ------------- ----------- -------------
William D. Griffin - - - - - -
James A. Malone - - 524,175 556,145 $1,129,795 $ 8,134
Thomas S. Hall - - 38,766 209,600 775 2,326
Fred A. Hunt - - 33,228 192,836 665 1,994
Steven J. Berling - - 13,845 134,168 277 831
(1) Based on the closing market price on December 31, 1996 of $3.63 per share.
(2) Based on the closing market price on October 10, 1997 of $0.625 per share,
there were no in-the-money options.
Stock Option Plan
The Company's Stock Option Plan (the "Option Plan") provides for the
grant of stock options to eligible employees and consultants of the Company. The
Option Plan is intended to provide participants with an opportunity to increase
their stock ownership in the Company and to give them an additional incentive to
promote the financial success of the Company. Pursuant to the Option Plan, the
Company may grant nonqualified stock options to employees (including officers
and directors who are employees) and consultants. William D. Griffin, an officer
and director of the Company, is not eligible to participate in the Option Plan.
A total of 3,118,832 shares of Class A Common Stock has been reserved for
issuance under the Option Plan. As of December 31, 1996, the Company had granted
stock options covering 3,078,779 shares of Class A Common Stock to various
employees (including options to purchase 1,927,542 shares issued to executive
officers) at exercise prices ranging from $0.72 to $19.00 per share. Each
exercise price was determined to be not less than the fair market value of the
Class A Common Stock on the date of grant, except for grants to James A. Malone
to purchase 387,314 shares on October 10, 1994 and 2,604 shares on March 24,
1995. In November 1996, the Stock Option Committee amended the exercise price on
all options with an exercise price greater than $4.50 per share to $4.50 per
share, the fair market value of the Class A Common Stock on the date of the
amendment. As of December 31, 1996, the exercise prices range from $0.72 to
$4.50 per share.
38
The Stock Option Plan Committee is authorized to administer the Option
Plan, including selection of employees and consultants of the Company to whom
options may be granted. The Stock Option Committee also determines the number of
shares, the exercise price, the terms, any conditions on exercise and other
terms of each option. There is no limit on the term of the options. Options
granted under the Option Plan generally vest over a period of five years. The
option price is payable in full upon exercise, and payment may be made in cash,
by delivery of shares of Class A Common Stock (valued at fair market value at
the time of exercise), or by such other consideration as the Stock Option
Committee may approve at the time of grant. The options are non-transferable
other than by will or by the laws of descent and distribution and must be
exercised by the optionee during the period of his employment with the Company
or within a specified period following termination of employment. The Option
Plan may be amended or terminated at any time by the Board of Directors,
although certain amendments require shareholder approval. The Option Plan
terminates in November 2005.
The Company's board of directors adopted an additional stock option plan
in March 1997 (the "1997 Plan"). A total of 750,000 shares of Class A Common
Stock has been reserved for issuance under the 1997 Plan. The terms of the 1997
Plan are substantially similar to those of the Option Plan. The 1997 Plan will
be submitted to the Company's shareholders for approval.
Compensation Arrangements upon Resignation, Retirement or Other Termination;
Employment Agreements
The Company had entered into employment agreements with Messrs. Malone,
Hall, Hunt, and Berling, providing for base salaries of $330,000, $225,000,
$200,000 and $210,000, respectively. These employment agreements have a term of
one year (which automatically renew for successive one year periods unless
terminated) and allow the employee to participate in the Company's employee
benefit plans. Under the employment agreements, the Company may terminate the
employee at any time. If the employee's employment is terminated by the Company
for other than "Cause" (as defined in the employment agreements), or the
employee voluntarily terminates his employment for "Good Reason" due to a
material modification, without the employee's written consent, of his duties,
compensation or scope of responsibilities, then the Company must pay the
employee an amount equal to one year of the employee's base salary in effect on
the effective date of termination, payable without interest in twelve equal
monthly installments. During the twelve months, following the date the employee
is terminated for other than Cause, the employee may not compete with the
Company. If the Company terminates the Employee for other than "Cause" or the
Employee voluntarily terminates his employment for Good Reason (a) within 2
years of a "Change of Control" (as defined in the employment agreements) or (b)
within 120 days of a "Potential Change of Control" (as defined in the employment
agreements),
39
then the Company must pay the Employee an amount equal to three times the
employee's base salary in effect on the effective date of termination, payable
in a lump sum. In the event the employee is terminated after a change of
control, the non-compete period is two years. If the employee voluntarily
terminates his employment for other than Good Reason, or his employment
terminates due to disability, or if the Company terminates the employee's
employment for Cause, then the Company will pay the employee a lump sum payment
equal to the portion of his base salary accrued through the date his employment
terminates.
In accordance with his employment agreement, in effect prior to the
Company's initial public offering, Mr. Griffin's compensation includes an annual
base salary of $750,000, quarterly incentives of up to $750,000 per year based
on premiums written and revenues earned, and an annual bonus to be determined in
the discretion of the Board of Directors. This employment agreement will extend
until the earlier of the fifth anniversary of a change of control of the Company
or Mr. Griffin's 65th birthday. The employment agreement contains a covenant
prohibiting competition in the workers' compensation insurance or services
fields in the United States which continues for a period of two years after the
termination of his employment with the Company. The employment agreement
provides that if Mr. Griffin is terminated by the Company after a change of
control of the Company, he will be entitled to receive within 14 days of his
termination date, a lump sum termination payment equal to his total taxable
compensation during the three most recent calendar years, plus an amount equal
to his annual salary for the year in which termination occurs, subject to the
parachute limitations set forth in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended. In addition, the employment agreement provides for a
separate registration rights agreement, which grants to Mr. Griffin certain
rights related to shares of the Company's Class B Common Stock beneficially
owned by him. Under the employment agreement, the Company has also granted Mr.
Griffin the right to use certain intellectual property owned by the Company
bearing the name Griffin or any derivation thereof and the griffin design owned
by the Company. The Company and Mr. Griffin have reserved their rights as to
whether any severance is due to Mr. Griffin due to his recent resignation. See
"Business - Recent Developments - Restructuring."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 1996 information as
to the Company's Common Stock beneficially owned by: (i) each director of the
Company, (ii) each executive officer named in the Summary Compensation Table,
(iii) all directors and executive officers of the Company as a group, and (iv)
any person who is known by the Company to be the beneficial owner of more than
5% of the outstanding shares of Common Stock.
40
Amount and Nature of Beneficial Ownership (2)
Class A Common Class B Common
Name and Address of
Beneficial Owner (1) Number Percent Number Percent
- --------------------------------------------------------------------------------------------------------
William D. Griffin (3) -- * 22,176,052 91%
James A. Malone (4) 526,389 4% -- *
Steven J. Berling (5) 13,938 * -- *
Thomas S. Hall (6) 39,027 * -- *
Richard A. Halloy (7) 4,488 * -- *
Fred A. Hunt (8) 33,451 * -- *
L. Scott Merritt (9) (10) 13,938 * 2,158,391 9%
George E. Greene III (11) 200 * -- *
Walter L. Revell (12) -- * -- *
Seddon Goode, Jr. (13) -- * -- *
------------ ---- ----------- --------
All directors and officers as a group 631,431 5% 24,334,443 100%
(10 persons) (14)
*Less than 1%
(1) The business address for Messrs. Griffin, Malone, Berling, Hall, Halloy,
Hunt, Merritt, Greene, Revell and Goode is 1390 Main Street, Sarasota,
Florida 34236.
(2) Beneficial ownership of shares, as determined in accordance with
applicable Securities and Exchange Commission Rules, includes shares as
to which a person has or shares voting power and/or investment power.
The Company has been informed that all shares shown are held of record
with sole voting and investment power, except as otherwise indicated.
(3) Mr. Griffin's shares are Class B Common Stock and are beneficially owned
by Mr. Griffin through one corporation and two limited partnerships.
(4) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Malone also has options to acquire 553,931
additional shares of Class A Common Stock that are not exercisable
within 60 days.
(5) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Berling also has options to acquire 134,075
shares of Class A Common Stock that are not exercisable within 60 days.
(6) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Hall also has options to acquire 209,339
shares of Class A Common Stock that are not exercisable within 60 days.
(7) Represents 1,700 shares of Class A Common Stock owned directly and 2,788
shares of Class A Common Stock subject to options that are currently
exercisable. Mr. Halloy also has options to acquire 133,363 shares of
Class A Common Stock that are not exercisable within 60 days.
(8) Represents shares of Class A Common Stock subject to options that are
currently exercisable. Mr. Hunt also has options to acquire 192,613
shares of Class A Common Stock that are not exercisable within 60 days.
41
(9) Includes 13,938 shares of Class A Common Stock subject to options held
by Mr. Merritt that are currently exercisable. Mr. Merritt also has
options to acquire 89,536 shares of Class A Common Stock that are not
exercisable within 60 days.
(10) Mr. Merritt holds 2,158,391 shares of Class B Common Stock as trustee of
certain irrevocable trusts created by Mr. Griffin for the benefit of his
children. Mr. Griffin disclaims beneficial ownership of those shares.
(11) Mr. Greene owns 200 shares of Class A Common Stock directly and ha
options to acquire 8,500 shares of Class A Common Stock that are not
exercisable within 60 days.
(12) Mr. Revell has options to acquire 8,500 shares of Class A Common Stoc
that are not exercisable within 60 days.
(13) Mr. Goode has options to acquire 8,500 shares of Class A Common Stock
that are not exercisable within 60 days.
(14) Includes shares subject to options held by all directors and executive
officers that are exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
Prior to the initial public offering of the Company in February, 1996,
the Company and its predecessor and subsidiary entities were wholly-owned by
William D. Griffin and trusts for the benefit of his children and certain loans
and other business transactions between the Company, Mr. Griffin and entities
owned or controlled by him were structured for reasons related to family
business and estate planning. Prior to September 18, 1997, Mr. Griffin was an
officer and a director of all entities. Business transactions with Mr. Griffin
or other officers or directors must now be approved by a majority of outside
directors and are made on terms no less favorable to the Company than could be
obtained from unrelated third parties.
Prior to the consummation of the initial public offering, the Company
completed a reorganization of its existing corporate structure with the result
that RISCORP, Inc. became a holding company with several direct and indirect
subsidiaries (the "Reorganization"). Prior to the Reorganization, William D.
Griffin was the sole beneficial shareholder of the Common Stock of the Company.
Through a series of transactions that met the requirements of Section 351 of the
Internal Revenue Code of 1986, as amended, several entities previously owned by
Mr. Griffin became subsidiaries of the Company. In addition, RONC, which was
owned by three trusts for the benefit of Mr. Griffin's children, became a
wholly-owned subsidiary of the Company through a share exchange merger.
RONC was an S Corporation prior to the Reorganization and declared
in-kind dividends in an amount equal to substantially all of its estimated
undistributed S Corporation earnings through the date of the Reorganization,
with a value in the amount of $1.4 million.
Transactions Terminated During 1996
Loans Made by the Company
The Company was the lender pursuant to five revolving credit agreements, either
with William D. Griffin or with certain entities controlled by Mr. Griffin: (i)
a $100,000 line of credit in favor of Custodial Engineers, Inc.("CEI"), bearing
42
interest at the prime rate of First Union National Bank of North Carolina
("First Union") plus one percent; (ii) a $1.0 million line of credit in favor of
CMI Aviation Services, Inc. ("CMI"), bearing interest at the prime rate of First
Union plus one percent; (iii) a $200,000 line of credit in favor of Five Points
Properties, Inc. ("FPP"), bearing interest at the prime rate of First Union plus
one percent; (iv) a $100,000 line of credit in favor of Millennium Health
Services Limited ("MHSL"), bearing interest at the prime rate of NationsBank of
Florida, N.A. ("NationsBank"); and (v) a $2.0 million line of credit in favor of
Mr. Griffin individually, bearing interest at the prime rate of First Union plus
one percent. As of December 31, 1995, approximately $0, $833,000, $350,000,
$31,000, and $1.3 million, respectively, were outstanding under these lines of
credit including accrued interest.
On June 30, 1993, the Company loaned FPP $2.5 million with Mr. Griffin
acting individually as guarantor. On April 29, 1994, Mr. Griffin assumed the
repayment of this debt and FPP was released from any liability thereunder. The
loan had a maturity date of February 28, 1997. The aggregate amount outstanding
under this loan including accrued interest, as of December 31, 1995, was
approximately $2.9 million with interest accruing at the prime rate of First
Union plus one percent.
On January 24, 1994, NationsBank loaned Mr. Griffin $9.0 million with
the Company acting as guarantor. On January 3, 1995, the Company was released as
guarantor.
On July 1, 1994, the Company loaned RHP $2.0 million. Mr. Griffin owns
approximately 95% of the stock of RHP. The loan had a maturity date of July 1,
2001 with interest accruing at prime rate plus 1%. The aggregate principal
amount outstanding under this loan as of December 31, 1995, was approximately
$2.2 million.
On July 3, 1995, RONC loaned $3.1 million to JoFoKe Investments, Inc., a
Florida corporation controlled by Mr. Griffin. The loan had a maturity date of
June 30, 1996. The aggregate principal amount outstanding under this loan, as of
December 31, 1995, was approximately $1.7 million. This loan accrued interest at
the SouthTrust Bank of Alabama prime rate plus 1.5% per annum.
Mr. Griffin repaid all of the above listed indebtedness in March 1996,
with the exception of the loan to RHP, which was repaid in September 1996. The
Company does not intend to make loans to Mr. Griffin or other directors or their
family members, or entities under their control.
Loan Made to the Company
On December 15, 1995, the RISCORP Group Holding Company, Limited
Partnership ("RGHLP") loaned $1.0 million to the Company in connection with the
acquisition of CompSource, Inc. RGHLP is a limited partnership controlled by Mr.
Griffin. The loan accrued interest at LIBOR plus 3% per annum and had a maturity
date of April 1, 1996. This loan was repaid in March 1996.
43
Services Provided to the Company
The Company entered into certain lease agreements in 1993 and 1994 with
CMI Aviation Services, Inc. ("CMI"), whereby the Company leased two aircraft. In
September 1995, the parties terminated one of the lease agreements. The
remaining lease required a minimum monthly rental amount of $34,000, on a bare
plane basis. This lease was amended in May 1996 due to the acquisition of a new
plane by CMI. The amended lease provided for a minimum monthly rental amount of
$50,000. Effective July 1, 1996, the lease agreement with CMI was amended again
to provide that the Company would pay no minimum monthly rental, but would pay
$900 per hour for the actual use of the plane. The aggregate amounts paid by the
Company to CMI in the fiscal year ending December 31, 1996 was $223,350. Gryphus
Development Group ("GDG"), a corporation owned by Mr. Griffin, provides all
other services related to the aircraft (e.g., salaries of the pilots and the
rest of the flight crews, hangar fees, and other operating costs related to the
aircraft). Prior to May 1996, the Company paid GDG $60,000 a month for its
services, which the Company believed would be GDG's approximate cost. Due to the
acquisition of the new plane by CMI in May 1996, the agreement with GDG was
amended to provide for payments of $96,000 per month for the services related to
the aircraft. Effective July 1, 1996, the agreement with GDG was amended again
to provide that the Company would pay no minimum monthly amount, but would pay
$2,500 per hour for the actual services performed by GDG. The arrangements
between the Company and CMI and GDG related to the plane lease and the aircraft
related services were terminated completely effective March 31, 1996.
Prior to September 1996, Mr. Griffin controlled CEI, a building
custodial and maintenance service company. The Company has contracted with CEI
to provide custodial and maintenance services to the Company's headquarters in
Sarasota, Florida. The aggregate amount paid by the Company to CEI in the fiscal
year ending December 31, 1996 was $455,851. In September 1996, Mr. Griffin
disposed of his entire interest in CEI.
The Company previously contracted with GDG to provide facilities
services to the Company's Sarasota office, and this contract was terminated in
1996. In 1996, the Company paid approximately $20,000 for such services.
In November 1995, the Company entered into six computer equipment and
software leases with Gryphus Financial Services, Inc. ("GFS"), a company
controlled by Mr. Griffin. Five of the equipment leases are for a term of 36
months and one equipment lease is for a term of 24 months. The aggregate annual
payments under the equipment leases during 1996 was approximately $100,000.
These leases were sold by GFS to an unrelated financial institution during 1996.
44
Services Provided by the Company
The Company previously provided management, staff, systems, and other
support services to MHSL, in which Mr. Griffin held a 95% ownership interest.
Under a management agreement and other contractual arrangements, the Company
charged approximately $7,500 per month for rendering these services. The
contractual arrangements commenced in November 1994. The aggregate amount
charged for 1996 was $77,974. In November 1996, Mr. Griffin sold his interest in
MHSL and the Company ceased providing any services and support to MHSL.
Workers' Compensation Managed Care Arrangement
During 1996, the Company and RHP were parties to a workers' compensation
managed care contract under which RHP provided medical services and assumed risk
for medical claims under the WCMCA offered by the Company. During 1996, the
Company paid RHP approximately $17.0 million under this arrangement. This
arrangement was terminated effective as of May 1, 1996 but continues to apply to
policies with an inception date before May 1, 1996.
Transactions Continuing through 1996
Services Provided to the Company
In 1994, Mr. Griffin began leasing parking facilities to the Company at
its Sarasota office. Lease payments under this arrangement were approximately
$24,000 per month. During 1996, the Company paid $317,458 under this lease. In
February 1997, the lease agreement was amended to reduce the monthly rental to
$16,960 per month.
Mango Excess Insurance Agency, Inc., a Florida corporation ("Mango"), a
company owned and controlled by Mr. Griffin, acts as a reinsurance broker to the
Company in obtaining reinsurance for the Company's insurance subsidiaries, and
some of its self-insured clients. The commission payable to Mango and the other
terms and conditions of this relationship do not exceed industry standards for
such arrangements. In 1996, the Company paid Mango commissions of $0.9 million.
Services Provided by the Company
In 1996, the Company entered into a Bilateral Administrative Services
Cost Sharing Agreement with RHP, a company owned and controlled by Mr. Griffin.
This agreement is intended to ensure that costs shared by the two companies will
be fairly allocated between them. The Company and its affiliates provide
facilities, financial, legal, human resource, communications, information
systems, marketing, claims, technical and other administrative and management
support to RHP. RHP provides certain client services, medical provider
management, credentialing
45
and utilization management to the Company for its health indemnity products. The
Company has agreed not to compete with RHP in the development or marketing of an
HMO or other managed care health plan product and RHP has agreed not to compete
with the Company in offering workers' compensation insurance services. The two
companies will reimburse one another for the actual costs of providing the
personnel services and other support, and sharing the other resources required
by the agreement. The agreement is for a term of five years and can be renewed
for an additional five-year term, but is also terminable at will by 180-days'
notice by either party. During 1996, the Company received a net amount of
$410,158 from RHP under this agreement.
Effective as of January 1, 1996, the Company entered into an
Administrative Services Cost Sharing Agreement with GDG. This agreement is
intended to ensure that costs incurred by the Company on behalf of GDG are
reimbursed to the Company. The Company and its affiliates provide facilities,
financial, legal, human resource, communications, information systems,
marketing, claims, technical and other administrative and management support to
GDG. GDG will reimburse the Company for the actual costs of providing the
personnel services and other support. The agreement is for a term of five years
and can be renewed for an additional five year term, but is also terminable at
will by 180-days' notice by either party. During 1996, the Company received
$86,363 from GDG under this agreement.
Investment Services
The Company provided administrative services to Merritt & Company.
During 1996, the Company received approximately $86,276 for those services. The
sole shareholder of Merritt & Company is L. Scott Merritt, former officer and
Director and the trustee for certain trusts which will own more than 5% of the
Class B Common Stock. Mr. Merritt became employed by the Company on January 1,
1995. During 1996, Merritt & Company provided investment services to two
customers of the Company. During 1997, Merritt & Company's services were
discontinued.
License Arrangement
RHP pays a fee of 0.5% of all RHP revenues to the Company for the right
to use the RISCORP name and related trade designs and logos. During 1996, the
Company received $50,826 as a license fee from RHP. The Company and RHP share
contractual rights to a medical provider network utilized by both the Company
and RHP in delivering provider services. In addition, Comprehensive Care
Systems, Inc., 100% of the stock of which is owned by Mr. Griffin, also has the
right to access provider services under the network upon payment of a
commercially reasonable access charge to RHP and the Company, as determined by
the outside directors. The contract for the provider network provides that the
Company shall continue to have unrestricted access to the network on terms and
conditions at least equal to any other use of the network. The cost of
developing and maintaining the provider network is prorated between RHP and the
Company on a member usage basis. During 1996, RHP paid the Company $139,016
under this arrangement for costs incurred by the Company attributable to RHP.
46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8 - K
(a) List the following documents filed as part of this report:
1. Financial Statements.
Independent Auditors' Report...............................................................F-1
Consolidated Balance Sheets at December 31, 1996 and 1995..................................F-3
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994..............................................................................F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994...........................................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994..............................................................................F-7
Notes to Consolidated Financial Statements.................................................F-9
2. Financial Statement Schedules
I - .....................................................................................Summary
of investments - other than investments in related parties..................................F-42
II -Condensed financial information of registrant.........................................F-43
IV - Reinsurance...........................................................................F-46
VI - Supplemental information concerning property-casualty insurance operations............F-47
All other schedules are omitted because of the absence of conditions
under which they are required or because the necessary information is provided
in the consolidated financial statements or notes thereto.
3. Exhibits
Set forth in paragraph (c) below.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of 1996.
(c) Exhibits
47
The following are filed as exhibits to this report:
EXHIBIT # DESCRIPTION
- --------------- --------------------
3.1 -Amended and Restated Articles of
Incorporation.* (Incorporated herein by
reference to Exhibit 3.1 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
3.2 -Bylaws.* (Incorporated herein by reference
to Exhibit 3.2 to RISCORP's Amendment
No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
4.1 -Form of Common Stock Certificate.*
(Incorporated herein by reference to
Exhibit 4.1 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.1 -$28,000,000 Credit Agreement, dated as
of December 16, 1994, by and between
First Union National Bank of North
Carolina and the Company (f/k/a RISCORP
Group Holdings, Inc.), as amended by a
First Amendment to Credit Agreement,
dated as of December 30, 1994, and as
amended by a Second Amendment to Credit
Agreement, dated as of June 1, 1995.*
(Incorporated herein by reference to
Exhibit 10.1 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.2 -Amended and Restated Note Purchase
Agreement, dated as of January 1, 1995,
by and between American Re-Insurance
Company and the Company.* (Incorporated
herein by reference to Exhibit 10.2 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
10.3 -$2,400,000 Term Note, date
November 9, 1994, delivered by RISCORP
Acquisition, Inc. to Governmental Risk
Insurance Trust.* (Incorporated herein by
reference to Exhibit 10.3 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.4 -$2,000,000 Surplus Note, dated July 1,
1994, executed and delivered by RISCORP
Health Plans, Inc. to RISCORP Property
and Casualty Insurance Company, Inc.
(f/k/a Florida Interstate Insurance
Company).* (Incorporated herein by
reference to Exhibit 10.4 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.5 -Amended and Restated Loan Agreement,
dated as of November 1, 1995, by and
between JoFoKe Investments, Inc. and
RISCORP of North Carolina, Inc.*
(Incorporated herein by reference to
Exhibit 10.5 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.6 -$100,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and among
Custodial Engineers, Inc., as borrower,
William D. Griffin, as guarantor, and
RISCORP Management Services, Inc., as
lender, as amended by a Modification
Agreement, dated as of June 30, 1994.*
(Incorporated herein by reference to
Exhibit 10.6 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.7 -$1,000,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and among
CMI Aviation Services, Inc. (f/k/a Cocky
McGriffin, Inc.) as borrower, William D.
Griffin, as guarantor, and RISCORP
Management Services, Inc., as lender, as
amended by a Modification Agreement,
dated as of June 30, 1994.* (Incorporated
herein by reference to Exhibit 10.7 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
10.8 -$100,000 Revolving Credit Agreement,
dated as of July 1, 1993, by and between
Five Points Properties, Inc., as
borrower, William D. Griffin, as
guarantor, and RISCORP Management
Services, Inc., as lender, as amended by
a Modification Agreement, dated as of
June 30, 1994.* (Incorporated herein by
reference to Exhibit 10.8 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
48
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.9 -$100,000 Revolving Credit Agreement,
dated as of November 30, 1994, by and
between Millennium Health Services,
Limited, as borrower, and RISCORP
Management Services, Inc., as lender.*
(Incorporated herein by reference to
Exhibit 10.9 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.10 -$2,000,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and among
the Company (f/k/a Petty Cash Properties,
Inc.), as borrower, William D. Griffin,
as guarantor, and RISCORP Management
Services, Inc., as lender. as amended by
a Modification Agreement, dated as of
June 30, 1994.* (Incorporated herein by
reference to Exhibit 10.10 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.11 -$2,000,000 Revolving Credit Agreement,
dated as of January 1, 1993, by and
between William D. Griffin, as borrower,
and RISCORP Management Services, Inc., as
lender, as amended by a Modification
Agreement, dated as of June 30, 1994.*
(Incorporated herein by reference to
Exhibit 10.11 to RISCORP's Amendment No.
4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.12 -Loan Agreement, dated as of January 25,
1994, by and among NationsBank of
Florida, N.A., William D. Griffin,
RISCORP Management Services, Inc.,
RISCORP of Florida, Inc., Specialized
Risk Administrators, Inc., Petty Cash
Properties, Inc., Five Points Properties,
Inc., and Sarasota International Risk and
Insurance Services, Inc., as amended by a
Loan Agreement, dated January 3, 1995, by
and among NationsBank of Florida, N.A.,
William D. Griffin and Five Points
Properties, Inc.* (Incorporated herein by
reference to Exhibit 10.12 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.13 -$2,500,000 Loan Assumption Agreement, dated
April 29, 1994, by and among Five Point
Properties, Inc., as borrower, William D.
Griffin, as guarantor, and RISCORP
Management Services, Inc., as lender.
* (Incorporated herein by reference to
Exhibit 10.13 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.14 -$2,400,000 Promissory Note, dated
November 9, 1994, executed and delivered
by RISCORP Acquisitions, Inc. and Self
Insurors Service Bureau, Inc. to W. Gerald
Fiser, as modified by the Settlement
Agreement, dated May 1, 1995, by and among
W. Gerald Fiser, Self Insurors Service
Bureau, Inc., RISCORP Acquisitions, Inc.,
and RISCORP Group Holdings, L.P.; Stock
Purchase Agreement, dated as of November
4, 1994, by and between RISCORP
Acquisitions, Inc., Self Insurors Service
Bureau, Inc. and W. Gerald Fiser, Stock
Pledge Agreement, dated as of November 9,
1994, by and between RISCORP Acquisitions,
Inc., and W. Gerald Fiser, Security
Agreement, dated as of November 9, 1994,
by and between Self Insurors, Service
Bureau, Inc. and W. Gerald Fiser,
Guarantee Agreement, dated as of November
9, 1994, by and between RISCORP Group
Holdings, L.P., and W. Gerald Fiser,
Security Coordinating Agreement, dated
November 9, 1994 by and among, W. Gerald
Fiser, RISCORP Acquisitions, Inc., RISCORP
Group Holdings, L.P., and Self Insurors
Service Bureau, Inc.* (Incorporated herein
by reference to Exhibit 10.14 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.15 -Form of Agency Agreement by and between
the independent insurance agents and the
Company's workers' compensation insurance
subsidiaries.* (Incorporated herein by
reference to Exhibit 10.15 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
49
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.16 -Florida Workers' Compensation Managed
Care Agreement, dated July 30, 1995, by
and among RISCORP Insurance Company, Inc.,
RISCORP Management Services, Inc.,
Sarasota International Risk and Insurance
Services, Inc., and Humana Medical Plan,
Inc.* (Incorporated herein by reference to
Exhibit 10.16 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.17 -Florida Workers' Compensation Managed
Care Agreement, dated July 30, 1995, by
and among RISCORP Property and Casualty
Insurance Company, Inc., RISCORP
Management Services, Inc., Sarasota
International Risk and Insurance Services,
Inc., and Humana Medical Plan, Inc.*
(Incorporated herein by reference to
Exhibit 10.17 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.18 -Florida Workers' Compensation Managed
Care Agreement, dated January 1, 1995, by
and among RISCORP Insurance Company, Inc.,
RISCORP Property and Casualty Insurance
Company, Inc. and RISCORP Health Plans,
Inc.* (Incorporated herein by reference to
Exhibit 10.18 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.19 -Aircraft Lease, dated February 12, 1993,
by and between RISCORP Management
Services, Inc. and CMI Aviation Services.*
(Incorporated herein by reference to
Exhibit 10.19 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.20 -Aircraft Lease, dated December 24, 1994,
by and between RISCORP Management
Services, Inc. and CMI Aviation Services.*
(Incorporated herein by reference to
Exhibit 10.20 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.21 -Split Dollar Agreement, dated as of June
1, 1995, by and among RISCORP Management
Services, Inc., William D. Griffin, and L.
Scott Merritt, as trustee, for payment of
premiums for split-dollar life insurance.*
(Incorporated herein by reference to
Exhibit 10.21 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.22 -Split Dollar Agreement, dated as of July
1, 1994, by and among RISCORP Management
Services, Inc., William D. Griffin, and L.
Scott Merritt, as trustee for payment of
premiums for split-dollar life insurance.*
(Incorporated herein by reference to
Exhibit 10.22 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.23 -Pooling Agreement, dated as of January 1,
1995, by and between RISCORP Insurance
Company, Inc. and RISCORP Property and
Casualty Insurance Company, Inc.*
(Incorporated herein by reference to
Exhibit 10.23 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.24 -Workers' Compensation Quota Share
Re-Insurance Agreement, dated as of
December 27, 1994, by and among American
Re-Insurance Company, RISCORP Insurance
Company, Inc., and RISCORP Property and
Casualty Insurance Company, Inc.+
(Incorporated herein by reference to
Exhibit 10.24 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.25 -Workers' Compensation Excess of Loss
Reinsurance Agreement, dated January 1,
1995, by and among RISCORP Insurance
Company, Inc., RISCORP Property and
Casualty Insurance Company, Inc., Signet
Star Reinsurance Company, Republic Western
Insurance Company, and TIG Reinsurance
Company, as reinsurers.+* (Incorporated
herein by reference to Exhibit 10.25 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
50
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.26 -Workers' Compensation Excess of Loss
Reinsurance Agreement, dated September 29,
1995, by and among RISCORP Insurance
Company, Inc., RISCORP Property and
Casualty Insurance Company, Inc., and
Continental Casualty Company, as
reinsurers* (Incorporated herein by
reference to Exhibit 10.26 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.27 -Aggregate Net Excess of Loss Reinsurance
Agreement, dated December 6, 1993, by and
between Governmental Risk Insurance Trust
and RISCORP Property and Casualty
Insurance Company, Inc., as reinsurers*
(Incorporated herein by reference to
Exhibit 10.27 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.28 -Aggregate Excess of Loss Reinsurance
Agreement, effective as of October 1,
1993, by and between RISCORP Property and
Casualty Insurance Company, Inc. and
Centre Reinsurance Company of New York, as
reinsurers* (Incorporated herein by
reference to Exhibit 10.28 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.29 -RISCORP, Inc. Stock Option Plan.
* (Incorporated herein by reference to
Exhibit 10.29 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.30 -Form of RISCORP, Inc. Stock Option
Agreement.* (Incorporated herein by
reference to Exhibit 10.30 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.31 -Employment and Severance Agreement, dated
as of January 1, 1995, by and between
RISCORP Management Services, Inc. and
William D. Griffin.* (Incorporated herein
by reference to Exhibit 10.31 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.32 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and James A- Malone.
* (Incorporated herein by reference to
Exhibit 10.32 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.33 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Edward Hammel.
* (Incorporated herein by reference to
Exhibit 10.33 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.34 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Thomas Hall.
* (Incorporated herein by reference to
Exhibit 10.34 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.35 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Fred Hunt.
* (Incorporated herein by reference to
Exhibit 10.35 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.32 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and James A- Malone.
* (Incorporated herein by reference to
Exhibit 10.32 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.33 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Edward Hammel.
* (Incorporated herein by reference to
Exhibit 10.33 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.34 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Thomas Hall.
* (Incorporated herein by reference to
Exhibit 10.34 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.35 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Fred Hunt.
* (Incorporated herein by reference to
Exhibit 10.35 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.32 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and James A- Malone.
* (Incorporated herein by reference to
Exhibit 10.32 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.33 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Edward Hammel.
* (Incorporated herein by reference to
Exhibit 10.33 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.34 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Thomas Hall.
* (Incorporated herein by reference to
Exhibit 10.34 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.35 -Employment Agreement, dated as of October 10,
1995, by and between RISCORP Management
Services, Inc. and Fred Hunt.
* (Incorporated herein by reference to
Exhibit 10.35 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.36 -Agreement, dated September 16, 1993, by
and between RISCORP Insurance Company,
Inc. and the Florida Chamber of Commerce,
Inc.* (Incorporated herein by reference to
Exhibit 10.36 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.37 -$5,000,000 Letter of Credit issued by
NationsBank, N.A. in favor of Florida
Chamber of Commerce, Inc., currently
outstanding in the amount of $3,000,000.*
(Incorporated herein by reference to
Exhibit 10.37 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
51
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.38 -Service Company Agreement, dated July 1,
1995, by and between Governmental Risk
Insurance Trust and RISCORP Insurance
Services. Inc.* (Incorporated herein by
reference to Exhibit 10.38 to RISCORP's
Amendment No. 4 to Form S-1, as of February
28, 1996, Commissions File Number 33-99760)
10.39 -Service Agent Contract of National Alliance
for Risk Management Group Self Insurers'
Fund, dated as of September 15, 1993, by
and between the Trustees of National
Alliance for Risk Management Group Self
Insurers' Fund and RISCORP of North
Carolina, Inc.*(Incorporated herein by
reference to Exhibit 10.39 to RISCORP's
Amendment No. 4 to Form S-1,
as of February 28, 1996, Commissions File
Number 33-99760)
10.40 -Maintenance Service Agreement, dated May
1, 1995, by and between Custodial
Engineers, Inc. and RISCORP Property and
Casualty Insurance Company, Inc.*
(Incorporated herein by reference to
Exhibit 10.40 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.41 -Custodial Service Agreement, dated May 1, 1995,
by and between Custodial Engineers, Inc.
and RISCORP Property and Casualty Insurance
Company, Inc. *(Incorporated herein by
reference to Exhibit 10.41 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions
File Number 33-99760)
10.42 -Parking Lease Agreement, dated February
15, 1994, by and between RISCORP Management
Services, Inc. and William D. Griffin.*
(Incorporated herein by reference to
Exhibit 10.42 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.43 -Lease Nos. GFS 1 186, GFS 1 187, GFS 1 188,
Form of GFS 1 189, GFS 1 190, and
GFS 1 191, each dated November 1, 1995, by
and between Gryphus Financial Services,
Inc. and the Company.*(Incorporated herein
by reference to Exhibit 10.43 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.44 -Management Agreement of Millennium Health
Services, Limited, dated as of November 1,
1994, by and between RISCORP Management
Services, Inc. and Millennium Health
Services, Limited.* (Incorporated herein by
reference to Exhibit 10.44 to RISCORP's
Amendment No. 4 to Form S-1, as of February
28, 1996, Commissions File Number 33-99760)
10.45 -Management Subcontract for Millennium Health
Services, Limited, dated as of November 1,
1994, by and between Millennium Health
Services, Limited and RISCORP Management
Services, Inc.*(Incorporated herein by
reference to Exhibit 10.45 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.46 -Management Agreement of Millennium Health
Services of Sarasota, Limited, dated as of
November 1, 1994, by and between Millennium
Health Services, Limited and Millennium
Health Services of Sarasota, Limited.
* (Incorporated herein by reference to
Exhibit 10.46 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.47 -Financial Advisor/Manager Contract, dated
September 13, 1993, between Florida
Interstate Insurance Co. and Merritt &
Company.* (Incorporated herein by reference
to Exhibit 10.47 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.48 -Form of Stock Redemption Agreement
relating to the acquisition of the stock of
CompSource, Inc. and Insura, Inc.*
(Incorporated herein by reference to
Exhibit 10.48 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.49 -Form of Aircraft and Related Services
Agreement between RISCORP Management
Services, Inc. and GRYPHUS Development
Group dated January 1, 1996.* (Incorporated
herein by reference to Exhibit 10.49 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
52
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.50 -Form of Restated and Amended
Administrative Services Agreement between
RISCORP Management Services, Inc., and
RISCORP Health Plans, Inc. dated January 1,
1996.* (Incorporated herein by reference to
Exhibit 10.50 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.51 -Form of Memorandum of Understanding
(concerning RHP's health insurance
administrative services) between RISCORP
Health Plans, Inc. and RISCORP Management
Services, Inc.' dated
January 1, 1996.* (Incorporated herein by
reference to Exhibit 10.51 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.52 -Form of RISCORP Controlled Affiliate License
Agreement between RISCORP, Inc. and
RISCORP Management Services, Inc.
(as licenser) and RISCORP Health Plans,
Inc. (as licensee).*(Incorporated herein
by reference to Exhibit 10.52 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.53 -Form of Amendment to Florida's Worker's
Compensation Managed Care Agreement among
RISCORP Property & Casualty Company,
RISCORP Insurance Company and RISCORP
Health Plans, Inc. dated January 1, 1996.*
(Incorporated herein by reference to
Exhibit 10.53 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.54 -Form of Acknowledgment of Provider Rights
Ownership and Cost Allocation Agreement
among RISCORP Management Services, Inc.,
RISCORP Managed Care Solutions, Inc. and
RISCORP Health Plans,Inc. dated January 1,
1996.* (Incorporated herein by reference
to Exhibit 10.54 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28,
1996, Commissions File Number 33-99760)
10.55 -Form of Provider Network Access Agreement
among RISCORP Management Services, Inc.,
RISCORP Health Plans, Inc. and
Comprehensive Care Systems, Inc.*
(Incorporated herein by reference to
Exhibit 10.55 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.56 -Form of Memorandum of Understanding between
RISCORP Health Plans, Inc. and RISCORP
Insurance Company.* (Incorporated herein
by reference to Exhibit 10.56 to RISCORP's
Amendment No.4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.57 -Form of Registration Rights Agreement
dated as of February 1, 1996, by and among
RISCORP, Inc., RISCORP Management
Services, Inc. and William D. Griffin.*
(Incorporated herein by reference to
Exhibit 10.57 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.58 -Third Amendment to Credit Agreement,
dated as of November 30, 1995, by and
between RISCORP Group Holdings, Inc. and
First Union National Bank of North
Carolina.* (Incorporated herein by
reference to Exhibit 10.58 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.59 -Consent Agreement and Fourth Amendment to
Credit Agreement, dated as of January 2,
1996, by and between RISCORP Group
Holdings, Inc. and First Union of North
Carolina.* (Incorporated herein by
reference to Exhibit 10.59 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File
Number 33-99760)
10.60 -Form of Bilateral Administrative Services
Costs Sharing Agreement by and between
RISCORP Management Services, Inc. and
RISCORP Health Plans, Inc.* (Incorporated
herein by reference to Exhibit 10.60 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
53
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.61 -Agreement of Purchase and Sale of Stock,
dated as of December 15, 1995, by and
among CompSource Acquisition, Inc., James
K. Secunda, Bruce A. Flachs, the James K.
and Debra W. Secunda Charitable Remainder
Unitrust Number One, the James K. and
Debra W. Secunda Charitable Remainder
Unitrust Number Two and the Bruce Flachs
Charitable Remainder Unitrust (more
commonly referred to as the CompSource
stock purchase agreement).* (Incorporated
herein by reference to Exhibit 10.61 to
RISCORP's Amendment No. 4 to Form S-1, as
of February 28, 1996, Commissions File
Number 33-99760)
10.62 -Agreement of Purchase and Sale of Stock,
dated as of January 10, 1996, by and among
Atlas Insurance Company, RISCORP of
Florida, Inc., Atlas Financial Corporation
and Haas Wilkerson-Wohlberg, Inc.*
(Incorporated herein by reference to
Exhibit 10.62 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions
File Number 33-99760)
10.63 -Form of First Amendment to Bilateral
Administrative Services Costs Sharing
Agreement by and between RISCORP
Management Services, Inc. and RISCORP
Health Plans, Inc.* (Incorporated herein
by reference to Exhibit 10.63 to RISCORP's
Amendment No. 4 to Form S-1, as of
February 28, 1996, Commissions File Number
33-99760)
10.64 -Amendment to Agreement of Purchase and
Sale of Stock, dated as of December 15,
1995, by and among CompSource Acquisition,
Inc., James K. Secunda, Bruce A. Flachs,
the James K. and Debra W. Secunda
Charitable Remainder Unitrust Number One,
the James K. and Debra W. Secunda
Charitable Remainder Unitrust Number Two
and the Bruce Flachs Charitable Remainder
Unitrust* (more commonly referred to as
the CompSource stock purchase agreement).
(Incorporated herein by reference to
Exhibit 10.64 to RISCORP's Amendment No. 4
to Form S-1, as of February 28, 1996,
Commissions File Number 33-99760)
10.65 -Employment Agreement with James A. Malone
dated March 25, 1997.*(Incorporated herein
by reference to Exhibit 10.65 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
10.66 -Employment Agreement with Thomas S. Hall
dated January 6, 1997.*(Incorporated
herein by reference to Exhibit 10.66 to
RISCORP's Form 10-K/A filed with the
Commission on May 19, 1997)
10.67 -Employment Agreement with Steven J.
Berling dated January 6, 1997.*
(Incorporated herein by reference to
Exhibit 10.67 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.68 -Employment Agreement with Fred A. Hunt, dated
January 6, 1997.*(Incorporated herein by
reference to Exhibit 10.68 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
10.69 -Credit Agreement among the Company and
NationsBank N.A. (South) dated October 15,
1996.*(Incorporated herein by reference to
Exhibit 10.69 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.70 -Reinsurance Agreement between RISCORP
National Insurance Company and G.J.
Sullivan Co.Reinsurance dated February 4,
1997.*(Incorporated herein by
reference to Exhibit 10.65 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
10.71 -Underwriting Management Agreement dated
September 1, 1996 between RISCORP
Management Services and Virginia Surety
Company, Inc.*(Incorporated herein by
reference to Exhibit 10.71 to RISCORP's
Form 10-K/A filed with the Commission on
May 19, 1997)
54
EXHIBIT # DESCRIPTION
- --------------- --------------------
10.72 -Loss Portfolio Transfer Agreement between
RISCORP National Insurance Company and
Occupational Safety Association of Alabama
Workmen's Compensation Fund.*(Incorporated
herein by reference to Exhibit 10.72 to
RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.73 -Agreement and Plan of Merger by and among
RISCORP, Inc., RISCORP-IAA, Inc.,
Independent
Association Administrators Incorporated,
and The Stockholders of Independent
Association Administrators Incorporated*
(Incorporated herein by reference to
Exhibit 10.73 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.74 -Policy and Loss Portfolio Transfer
Assumption Reinsurance Agreement between
RISCORP National Insurance Company and
National Alliance for Risk Management
Group Self-Insurance Fund * (Incorporated
herein by reference to Exhibit 10.74 to
RISCORP's Form 10-K/A filed with the
Commission on May 19, 1997)
10.75 -Stock Purchase Agreement by and Between
RISCORP, Inc. and Thomas Albrecht, Peter
Norman and Hugh D. Langdale, Jr. *
(Incorporated herein by reference to
Exhibit 10.75 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.76 -Workers Compensation Quota Share
Retrocessional Treaty Agreement with
Chartwell Reinsurance Company.*
(Incorporated herein by reference to
Exhibit 10.76 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.77 -Loss Portfolio Transfer Assumption
Reinsurance Agreement between NARM
Mercantile Group Self Insurance
Association of Virginia and RISCORP
National Insurance Company.*
(Incorporated herein by reference to
Exhibit 10.77 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.78 -Loss Portfolio Transfer Assumption
Reinsurance Agreement between NARM
Services' Group Self Insurance Association
of Virginia and RISCORP National Insurance
Company.*
(Incorporated herein by reference to
Exhibit 10.78 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
10.79 -Loss Portfolio Transfer Assumption
Reinsurance Agreement between NARM
Manufacturers Group Self Insurance
Association of Virginia and RISCORP
National Insurance Company.*
(Incorporated herein by reference to
Exhibit 10.79 to RISCORP's Form 10-K/A
filed with the Commission on May 19, 1997)
11 -Statement Re Computation of Per Share
Earnings.
21.1 -List of Subsidiaries of the Registrant.
27 -Financial Data Schedule (for SEC use only).
28.1 -Information from Reports Furnished to State
Insurance Regulatory Authorities.*
(Incorporated herein by reference to
Exhibit 28.1 1.1 to RISCORP's Amendment
No. 4 to Form S-1, as of February 28,
1996, Commission File Number 33-99760)
* Previously filed.
+ Confidential treatment granted pursuant to Rule 406 of the Securities Act of
1933.
55
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
RISCORP, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
Net Income $2,398,000 $13,683,000 $6,873,000
Number of shares used in calculating primary earnings per share:
Weighted average outstanding
shares during the period 34,422,483 28,100,234 28,100,234
Redemption contingency for CompSource acquisition 279,865 - -
Redemption contingency for IAA acquisition 225,503 -
-
Additional common shares issuable under
employee stock options using the treasury stock
method (Note 1)..... 1,757,602 1,992,266 1,992,266
Average outstanding shares. 36,785,453 30,092,500 30,092,500
Earnings per share......... $0.07 $0.45 $0.23
(1) Based on the average quarterly market price of each period.
56
EXHIBIT 21
RISCORP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1996
Subsidiaries of the Registrant* State of Incorporation
RISCORP, Inc. (Registrant) Florida
RISCORP Acquisition, Inc. Florida
RISCORP West, Inc. Oklahoma
RISCORP of Florida, Inc. Florida
RISCORP Insurance Company Florida
RISCORP Property & Casualty Insurance Company Florida
RISCORP National Insurance Company Missouri
RISCORP Services, Inc. Florida
RISCORP Management Services, Inc. Florida
RISCORP Insurance Services, Inc. Florida
RISCORP Managed Care Services, Inc. Florida
RISCORP of Illinois, Inc. Florida
CompSource, Inc. North Carolina
Independent Association of Administrators
Incorporated Alabama
RISCORP Real Estate Holdings, Inc. Florida
*All subsidiaries below are owned, directly or indirectly,
100% by the Registrant
57
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, the
Registrant has duly caused this form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sarasota, State of
Florida, on the 27th day of February, 1998.
RISCORP, INC.
By: /s/ Frederick M. Dawson
Frederick M. Dawson
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS FORM
10-K/A REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Frederick M. Dawson
Frederick M. Dawson President, Chief Executive February 27, 1998
Officer and Director
(principal executive officer)
/s/ Stephen C. Rece
Stephen C. Rece Senior Vice President, and February 27, 1998
Chief Financial Officer
(principal financial and
accounting officer)
/s/ Seddon Goode, Jr.
Seddon Goode, Jr. Director February 27, 1998
/s/ George E. Greene III
George E. Greene III Director February 27, 1998
/s/ Walter L. Revell
Walter L. Revell Director February 27, 1998
58
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
RISCORP, Inc.:
We have audited the consolidated financial statements of RISCORP, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedules listed in the accompanying index. These consolidated
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1(a) to the accompanying consolidated financial
statements, during November 1996, the Company undertook a strategic initiative
to evaluate alternatives to maximize shareholder value. The initiative has
resulted in the pending sale and transfer of certain assets and non-contingent
liabilities of the Company and its subsidiaries. Additionally, the Company and
its Florida and Missouri domiciled insurance operating subsidiaries experienced
difficulties in completing their respective 1996 financial statements in an
accurate and timely manner, and, consequently, were delinquent in filing such
1996 financial statements with the Departments of Insurance of Florida and
Missouri, and in the case of the Company, the Securities and Exchange Commission
("SEC"). The Company and its affiliates also experienced increased scrutiny by
the respective regulatory authorities, adverse publicity, an unfavorable rating
by A.M. Best Company, Inc. and, in the case of the Company, the delisting of its
stock from the stock exchange on which it was listed. In addition, the Company
is in the process of filing amended Form 10-Q's for the first, second and third
quarters to allocate adjustments made in the fourth quarter of 1996 to the
appropriate quarter. The Company has not yet filed a Form 10-Q for the first or
second quarter of 1997. Although regulatory sanctions were not imposed by the
Florida Department of Insurance against the Company's Florida domiciled
subsidiaries in connection with the late filing of their 1996 financial
statements, the Florida Department of Insurance did request cut-through
endorsements and an interim reinsurance agreement to be executed in connection
with the pending sale. The sale is subject to the approval of the shareholders
of the Company, regulatory approval, and the filing of a proxy statement with
the SEC, among other conditions. The Company's ability to operate at its present
level of activity may be affected if the pending sale transaction is not
completed. Moreover, as discussed in Note 20, the Company's failure to file
financial reports and a Form 10-Q for the first and second quarters of 1997
resulted in violations of certain debt covenants related to a $15 million note
payable. Although the violations have been waived until December 31, 1997, there
can be no assurance that the Company will be able to file its first and second
quarter financial reports and Form 10-Q's prior to December 31, 1997 or that it
will be able to file its third quarter financial reports and Form 10-Q when
required, thus raising the possibility of additional debt covenant violations.
Additional covenant violations could result in the note being called. Further,
as discussed in Note 19, the Company and its subsidiaries, certain former key
executives, and others have been named as defendants in various lawsuits.
F-1
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RISCORP,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements, taken as a whole,
present fairly, in all material respects the information set forth therein.
/s/ KPMG Peat Marwick LLP
Ft. Lauderdale, Florida
October 15, 1997
F-2
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(in thousands, except share and per share data)
December 31, December 31, 1995
1996
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost $226,240
$226,240 in 1996 and $52,608 in 1995) $ 228,802 $ 53,390
Fixed maturities held to maturity, at amortized cost (fair value $22,892
in 1996 and $15,892 in 1995) 22,809 15,583
Equity securities, at fair value (cost $3,880 in 1996 and $389 in 1995) 4,045 392
Total investments 255,656 69,365
Cash and cash equivalents 26,307 23,348
Premiums receivable, net 122,078 93,748
Accounts and notes receivable--related party - 10,754
Accounts receivable--other 11,676 -
Recoverable from Florida Special Disability Trust Fund, net 49,505 51,836
Reinsurance recoverables 180,698 100,675
Prepaid reinsurance premiums 49,788 21,880
Prepaid managed care fees 31,958 16,369
Accrued reinsurance commissions 20,419 7,549
Deferred income taxes 22,551 11,193
Property and equipment, net 27,505 18,044
Goodwill 22,648 3,688
Other assets 7,653 14,793
Total assets $ 828,442 $ 443,242
See accompanying notes to consolidated financial statements.
F-3
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(in thousands, except share and per share data)
December 31, December 31, 1995
1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $ 458,239 $ 261,700
Unearned premiums 102,562 64,395
Notes payable of parent company 15,000 42,000
Notes payable of subsidiaries 1,303 4,417
Accounts and notes payable--related party 1,171 1,000
Deposit balances payable 4,787 3,731
Accrued expenses and other liabilities 74,706 42,451
Net assets in excess of cost of business acquired 11,266 7,391
669,034 427,085
Class A Common Stock subject to put options 2,100 -
Shareholders' equity:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding: 1996-- 11,855,917 and 1995-- 0 120 -
Class B Common Stock, $.01 par value, 100,000,000 shares authorized; shares
issued and outstanding; 1996 -- 24,334,443
and 1995-- 28,069,443 243 281
Preferred stock, $.01 par value, 10,000,000 shares authorized; 0 shares
issued and outstanding - -
Additional paid-in capital 137,813 349
Net unrealized gains on investments 1,769 510
Unearned compensation--stock options (546) (215)
Retained earnings 17,909 15,232
Total shareholders' equity 157,308 16,157
Total liabilities and shareholders' equity $ 828,442 $ 443,242
See accompanying notes to consolidated financial statements.
F-4
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME For
the years ended December 31, 1996, 1995 and
1994
(in thousands, except share and per share data)
Year ended December 31,
----------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
Revenues:
Premiums earned $ 173,557 $ 135,887 $ 1,513
Fee and other income 31,838 23,413 56,712
Net investment income 12,194 6,708 1,677
Total revenues 217,589 166,008 59,902
Expenses:
Losses and loss adjustment expenses 114,093 82,532 (716)
Unallocated loss adjustment expenses 12,916 10,133 8,804
Commissions, general and administrative expenses 65,560 48,244 35,869
Interest 2,795 4,634 1,750
Depreciation and amortization 11,625 1,683 1,330
Total expenses 206,989 147,226 47,037
Income before income taxes 10,600 18,782 12,865
Income taxes 8,202 5,099 5,992
Net income $ 2,398 $ 13,683 $ 6,873
Per share data: $ 0.07 $ 0.45 $ 0.23
Weighted average common shares and common share
equivalents outstanding 36,785,453 30,092,500 30,092,500
See accompanying notes to consolidated financial statements.
F-5
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY For the years ended
December 31, 1994, 1995, and 1996
(in thousands)
Net
Unrealized
Class A Class B Additional Gains Total
Common Common Paid-in (Losses) on Unearned Retained Shareholders'
Stock Stock Capital Investments Compensation Earnings Equity
------ ------- --------- --------- ---------- -------- ----------
Balance, January 1, 1994 $ - $ 281 $ 419 $ 271 $ (9,740) $ 10,765 $ 1,996
Net income - - - - - 6,873 6,873
Distributions - - - - - (336) (336)
Return on capital - - (69) - - - (69)
Liquidation of ESOP - - (1,120) - 9,740 (12,547) (3,927)
Unearned compensation--stock
options - - 1,119 - (930) - 189
Change in net unrealized losses
on investments - - - (831) - - (831)
Balance, December 31, 1994 - 281 349 (560) (930) 4,755 3,895
Net income - - - - - 13,683 13,683
Distributions - - - - - (3,206) (3,206)
Change in unearned compensation - - - - 715 - 715
Change in net unrealized gains
on investments - - - 1,070 - - 1,070
Balance, December 31, 1995 - 281 349 510 (215) 15,232 16,157
Net income - - - - - 2,398 2,398
Distributions - - - - - 279 279
Issuance of common stock 72 - 125,789 - - - 125,861
Conversion of common stock 38 (38) - - - - -
Issuance of common stock put options - - (2,100) - - - (2,100)
Stock options exercised 2 - 63 - - - 65
Issuance of common stock for
acquisitions 8 - 12,991 - - - 12,999
Change in unearned compensation - - 721 - (331) - 390
Change in net unrealized gains
on investments - - - 1,259 - - 1,259
Balance, December 31, 1996 $ 120 $ 243 $ 137,813 $ 1,769 $ (546) $ 17,909 $ 157,308
See accompanying notes to consolidated financial statements.
F-6
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and
1994
(in thousands)
Year ended December 31,
-----------------------------------------------
1996 1995 1994
-------------- ------------- -----------
Cash flows from operating activities:
Net income $ 2,398 $ 13,683 $ 6,873
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,500 1,683 1,330
Net realized (gain) loss on sale of investments (140) (1,282) 9
Net amortization (accretion) of discounts on investments 174 (82) (219)
Loss on disposal of property and equipment 294 22 21
(Increase) decrease in premiums receivable, net (24,275) (23,744) 2,247
Decrease (increase) in accounts and notes receivable--related party 10,754 642 (6,252)
Increase in accounts receivable--other (11,676) - -
Decrease (increase) in recoverable from Florida State Disability
Trust Fund, net 2,331 (5,920) 160
Increase in reinsurance recoverables (76,971) (58,534) (7,398)
Increase in prepaid reinsurance premiums (27,908) (21,880) -
Increase in prepaid managed care fees (15,589) (15,068) -
Increase in accrued reinsurance commissions (12,870) (7,549) -
(Increase) decrease in deferred income taxes (8,448) 106 (453)
Increase in losses and loss adjustment expenses 106,484 51,827 6,510
Increase in unearned premiums 30,891 7,315 2,694
Increase in accrued expenses and other liabilities 19,909 7,420 6,224
Increase in accounts payable related party 171 1,000 -
Decrease in other assets 21,026 3,110 6,087
Net cash provided by (used in) operating activities 28,055 (47,251) 17,833
Cash flows from investing activities:
Purchase of property and equipment (13,215) (6,393) (5,477)
Proceeds from the sale of equipment 532 564 45
Purchase of fixed maturities--available for sale (191,153) (23,543) (8,362)
Purchase of fixed maturities--held to maturity (2,452) - -
Proceeds from sale of fixed maturities--available for sale 88,900 60,303 992
Proceeds from maturities of fixed maturities--available for sale 6,295 10,209 1,580
Proceeds from maturities of fixed maturities--held to maturity 4,400 - -
Purchase of equity securities (3,952) (341) (80)
Proceeds from sale of equity securities 732 1,162 17
Purchase of RISCORP West, Inc., net of cash acquired - - (3,959)
Purchase of RISCORP Insurance Company, net of cash acquired - 5,885 -
Purchase of surplus note - - (2,047)
Purchase of IAA, net of cash acquired 282 - -
Purchase of RISC, net of cash acquired (538) - -
Purchase of CompSource and Insura, net of cash acquired (10,733) - -
F-7
RISCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and
1994
(in thousands)
Year ended December 31,
------------------------------------------------
1996 1995 1994
-------------- ------------- ------------
Cash flows from investing activities (continued):
Purchase of Atlas Insurance Company, net of cash acquired (5,573) - -
Purchase of NARM, net of cash acquired 2,717 - -
Purchase of Virginia Funds, net of cash acquired 1,300 - -
Net cash (used in) provided by investing activities (122,458) 47,846 (17,291)
Cash flows from financing activities:
Principal repayments of notes payable (30,202) (25,215) (16,986)
Proceeds from notes payable - 43,692 23,329
Increase (decrease) in deposit balances payable 968 (6,980) 9,175
Shareholder distributions 279 (3,206) (335)
Liquidation of ESOP - - (3,927)
(Increase) decrease in unearned compensation (331) 715 189
Proceeds of initial offering of common stock 127,908 - -
Other, net (1,325) - -
Stock options exercised 65 - -
Net cash provided by financing activities 97,362 9,006 11,445
Net increase in cash and cash equivalents 2,959 9,601 11,987
Cash and cash equivalents, beginning of period 23,348 13,747 1,760
Cash and cash equivalents, end of period $ 26,307 $ 23,348 $ 13,747
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,689 $ 3,966 $ 1,266
Income taxes $ 15,127 $ 4,969 $ 4,004
See accompanying notes to consolidated financial statements.
F-8
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Background
(a) Reorganization
RISCORP, Inc. ("RISCORP" or the "Company") was formed on February 28,
1996 through the reorganization and consolidation of several affiliated
companies which were under the common control of a majority shareholder, who, at
that time, was the Chairman of the Board and Chief Executive Officer of RISCORP
(see Note 20). The reorganization and consolidation qualified as a tax-free
reorganization of commonly controlled entities and was accounted for in a manner
similar to a "pooling of interests." Accordingly, the consolidated financial
statements have been restated to include the results of each of the individual
companies for all the periods presented. All significant intercompany accounts
and transactions have been eliminated in consolidation and the accompanying
consolidated financial statements reflect the above changes to the Company's
capital structure for all periods presented.
The Company acquired RISCORP Insurance Company ("RIC"), the successor
to Commerce Mutual Insurance Company, an Assessable Mutual ("CMIC"), on January
1, 1995. RIC, subject to a Plan of Conversion and Recapitalization, and with the
approval of CMIC's policyholders and the Florida Department of Insurance
("FDOI"), converted from an assessable mutual insurance company to a stock
insurance company as of January 1, 1995. The acquisition has been accounted for
as a purchase and RIC's results have been included in the accompanying
consolidated financial statements for 1996 and 1995 (see Note 3).
On November 9, 1996, at a Special Board of Directors' meeting of RISCORP,
the Board voted to establish a Strategic Alternatives Committee to evaluate
alternatives to maximize shareholder value including, without limitation,
potential acquisitions, joint ventures, mergers, strategic alliances and the
sale of all or part of RISCORP and its subsidiaries. The actions of the
Strategic Alternatives Committee during the period of November 1996 through June
1997 culminated in the June 17, 1997 agreement (as more fully described in Note
20) for the sale and transfer of certain of RISCORP's and its subsidiaries'
assets and non-contingent liabilities to another insurer for cash. The pending
sale, which is anticipated to take place in early 1998, requires the filing of a
proxy statement with the Securities and Exchange Commission ("SEC"), the
approval of the transaction by RISCORP shareholders and approval by the Florida
and Missouri Departments of Insurance, amongst other conditions.
RIC, RISCORP Property & Casualty Insurance Company ("RPC") (both
Florida domiciled insurance companies) and RISCORP National Insurance Company
("RNIC") (a Missouri domiciled insurance company), are all wholly-owned
subsidiaries of RISCORP and each of these companies experienced difficulty in
completing their year end December 31, 1996 statutory financial statements in an
accurate and timely manner. In addition, RIC and RPC were unable to respond in
an accurate and timely manner to requests for financial information made by
examiners from the FDOI in connection with the FDOI's financial examination of
RIC for 1996 and RPC for 1995.
While RIC, RPC and RNIC filed their 1996 statutory financial
statements by February 28, 1997, the deadline for filing such statements, each
of the companies discovered later that certain amounts contained in the
previously filed 1996 statutory financial statements were incorrect and the 1996
F-9
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
statutory financial statements of each of the companies are expected to be
amended by substitution in October 1997 as discussed in Note 20. RIC, RPC and
RNIC were also unable to file their 1996 audited statutory financial statements
by June 1, 1997, as required by Florida and Missouri statutes.
RISCORP also experienced difficulty in completing its 1996 financial
statements in a timely manner. This resulted in RISCORP being delisted by the
stock exchange on which its stock was traded and in adverse publicity in the
insurance marketplace. The Company has not yet filed a Form 10-Q for the first
or second quarter of 1997. The Company anticipates filing the first and second
quarter 1997 Form 10-Q's in the near future.
The inability of RIC and RPC to file accurate and timely financial
statements and to respond timely to requests made by the examiners from the FDOI
inhibited the FDOI's ability to assess the financial condition of RIC and RPC
and prompted increased regulatory scrutiny of the companies. As a result of the
FDOI's increased regulatory scrutiny of RIC and RPC, and in connection with the
pending sale discussed above and in Note 20, the FDOI requested the purchaser to
provide an interim reinsurance agreement and cut-through endorsement
("Agreement") on all inforce business as of June 18, 1997 and all new and
renewed business written on or after June 18, 1997. This Agreement only provides
coverage for Florida workers' compensation policyholders and was approved by the
FDOI.
The ability of RIC and RPC to operate at their present level of
insurance activity could be affected if the transaction discussed in Note 20 is
not completed and RIC and RPC are unable to replace the reinsurance agreement.
Management believes it could replace this reinsurance agreement under similar
terms.
(b) Initial Public Offering ("IPO") of Common Stock
On February 29, 1996, the Company completed an IPO of common stock
with the issuance of 10.935 million shares of Class A Common Stock. Of the
shares offered, 7.2 million were sold by the Company and 3.735 million were sold
by the majority shareholder of the Company. The following table reflects certain
summary information regarding the IPO:
Underwriting
Number Price Discounts and Net
Shares Sold by of Shares to Public Commissions Proceeds
-------------------- ------------ ---------- ----------------- ---------------
RISCORP 7,200,000 $19.00 $ 8,892,000 $127,908,000
Shareholder 3,735,000 $19.00 4,612,725 66,352,275
----------- --------------- --------------
10,935,000 $13,504,725 $194,260,275
========== =========== ============
The net proceeds reflected above are before deducting other expenses
of approximately $2.0 million incurred in conjunction with the IPO.
The Company used the proceeds from the IPO to repay outstanding debt,
fund acquisitions, increase the capital and surplus of the Company's insurance
subsidiaries and for general corporate purposes.
F-10
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company did not receive any proceeds from the sale of Class A
Common Stock by the majority shareholder; however, a portion of the majority
shareholders' proceeds was used to repay approximately $9.8 million in
outstanding indebtedness to the Company.
(c) Business
RISCORP, through its wholly-owned insurance subsidiaries, is primarily
engaged in providing workers' compensation insurance under a managed care
philosophy. RISCORP provides these managed care workers' compensation products
and services to clients throughout the Southeast and other select markets. In
addition, RISCORP, through its wholly-owned non-insurance subsidiaries, provides
reinsurance, risk management advisory services and insurance managerial
services.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been presented
in accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires the use of
assumptions and estimates in reporting certain assets and liabilities and
related disclosures. Actual results could differ from those estimates.
(b) Recognition of Revenues
Workers' compensation and employer liability insurance premiums
consist of deposit premiums and installment premiums billed under the terms of
the policy, and estimates of retrospectively-rated premiums based on experience
incurred under these contracts to date. Unbilled installment premiums and audit
premiums are recognized as revenue on the accrual basis. Premiums are primarily
recognized as revenue over the period to which the premiums relate using the
daily pro rata basis with a liability for unearned premium recorded for the
excess of premiums billed over the earned premiums.
Service fee revenue is recorded as a percentage of standard earned
premiums of the underlying insurance policies of the facilities managed, in
accordance with the specific contractual provisions.
Reinsurance premiums are recognized as revenue on a pro rata basis
over the contract term with a liability for unearned premiums established for
the unexpired portion of the contract.
F-11
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(c) Participating Insurance Policies
The Company offers participating insurance policies in connection with
custom plans, flexible retention plans and preferred account dividend plans.
Dividends are approved quarterly by the Board of Directors and are based upon
the actual loss experience of each of the policies. Participating policies
represented approximately 16.5%, 10.1% and 1% of written premiums at December
31, 1996, 1995 and 1994, respectively. The Company paid dividends to
participating policyholders of $9.2 million, $1.6 million an $0 for the years
ended December 31, 1996, 1995 and 1994, respectively.
(d) State of Florida Special Disability Trust Fund
The State of Florida maintains a Special Disability Trust Fund
("SDTF") for the purpose of providing benefits to workers who have a
pre-existing condition and incur a second or subsequent injury.
The SDTF is financed through annual assessments imposed on workers' compensation
insurers, which is based on a percentage of net workers' compensation premiums
written. The Company submits claims to the SDTF for recovery of applicable
claims paid on behalf of the Company's insureds. The Company estimates such
recoveries based on industry statistics applied to ultimate projected claims.
The amounts reflected as SDTF recoveries in the accompanying Consolidated
Balance Sheets are net of a valuation allowance of $8.9 million and $8.2 million
as of December 31, 1996 and 1995, respectively. The allowance is determined
based upon the actuarially estimated recoverable amount compared to the
estimated recovery actually expected from the SDTF by RISCORP (see Note 6).
(e) Investments
Fixed maturity investments are securities that mature at a specified
future date more than one year after being issued. Fixed maturity securities
that the Company intends to hold until maturity are classified as "fixed
maturities held to maturity" and are carried at amortized cost. Amortized cost
is based on the purchase price and is adjusted periodically so the carrying
value of the security will equal the face or par value at maturity. Fixed
maturity securities which may be sold prior to maturity due to changes in
interest rates, prepayment risks, liquidity needs, tax planning purposes or
other similar factors, are classified as "available for sale" and are carried at
fair value as determined using values from independent pricing services.
Equity securities (common and nonredeemable preferred stock) are
carried at fair value. If the current market value of equity securities is
higher than the original cost, the excess is an unrealized gain, and if lower
than the original cost, the difference is an unrealized loss. The net unrealized
gains or losses on equity securities, net of the related deferred income taxes,
are reported as a separate component of shareholders' equity, along with the net
unrealized gains or losses on fixed maturity securities available for sale.
Realized gains and losses on sales of investments are recognized in
net income on the specific identification basis, as of the trade date. A
provision for impairment, if any, resulting from other than temporary declines
in fair value is included in net investment income.
F-12
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(f) Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses is based on an
actuarial determination and represents management's best estimate of the
ultimate cost of losses and loss adjustment expenses that are unpaid at year end
including incurred but not reported claims. Although the liabilities are
supported by actuarial projections and other data, such liabilities are
ultimately based on management's reasoned expectations of future events. It is
possible that the expectations associated with these accounts could change in
the near future (i.e., within one year) and that the effect of these changes
could be material to the financial statements. The reserve for losses and loss
adjustment expenses is continually reviewed and as adjustments become necessary,
such adjustments are included in current operations.
Management believes that the liability for losses and loss adjustment
expenses at December 31, 1996 is adequate to cover the ultimate liability.
However, the ultimate settlement of losses and the related loss adjustment
expenses may vary from the amounts in the accompanying financial statements.
The Company recognizes reinsurance recoveries, estimated recoveries
from the SDTF and subrogation from third parties as reductions to losses
incurred.
(g) Reinsurance
Premiums and losses ceded under reinsurance contracts in which an
assuming enterprise provides indemnification against loss or liability relating
to an insurance risk are reported as a reduction to premium earned and losses
and loss adjustment expenses, respectively. Amounts recoverable for ceded losses
and loss adjustment expenses and ceded unearned premiums under reinsurance
agreements are recorded as assets on the balance sheet. Reinsurance contracts
that do not transfer risk are accounted for as deposits in the Consolidated
Balance Sheets.
(h) Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", ("SFAS 109"). Under SFAS 109, deferred tax assets
and liabilities are established for temporary differences between the financial
reporting basis and tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are recovered or settled.
Such temporary differences are principally related to the deferral of policy
acquisition costs, tax basis discount on reserves for unpaid losses and loss
adjustment expenses, the deductibility of unearned premiums, the allowance for
uncollectible premiums receivable and the amortization of goodwill. A valuation
allowance is established to reduce deferred tax assets to an amount that, in the
opinion of management, is more likely than not to be realized.
F-13
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(i) Policy Acquisition Costs
The cost of acquiring and renewing business; principally commissions,
premium taxes and other underwriting expenses are deferred to the extent
recoverable and amortized over the term of the related policies. Anticipated
investment income is considered in the determination of recoverability. Unearned
ceding commissions are reported as a reduction to deferred policy acquisition
costs. For the years ended December 31, 1996, 1995 and 1994, policy acquisition
costs deferred totaled $31.8 million, $48.9 million and $0.5 million,
respectively. For the years ended December 31, 1996, 1995 and 1994, amortization
of deferred policy acquisition costs totaled $33.7 million, $46.9 million and
$126,000, respectively.
(j) Goodwill
Costs in excess of net assets acquired, or goodwill, represents the
unamortized excess of cost over underlying net assets of companies acquired.
Goodwill is being amortized on a straight-line basis over periods ranging from 5
to 15 years. Amortization expense, including impairment losses of $5.6 million
in 1996, for the years ended December 31, 1996, 1995 and 1994 totaled $7.9
million, $0.3 million and $0, respectively.
The Company periodically reviews its assets subject to Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", ("SFAS 121") and when events or changes in
circumstances indicate that the carrying amount of an asset may no longer be
fully recoverable, the Company tests the recoverability of the asset primarily
by estimating the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying value of
the asset, the Company recognizes an impairment loss. Measurement of an
impairment loss is based on the carrying amount and estimated fair value of the
asset.
During 1996, using the criteria contained in SFAS 121, the Company
recognized an impairment loss of $3.2 million and reduced goodwill that was
recorded in 1995 in conjunction with the purchase of RISCORP West, formerly
known as the Self Insurors Service Bureau, Inc. ("SISB"). The Company's
impairment assessment was primarily based upon the closing of former SISB
offices in certain states and the Company's current focus on at-risk business.
The impairment loss was recorded as a component of depreciation and amortization
in the Company's Consolidated Statement of Income for the year ended December
31, 1996. Remaining unamortized goodwill related to the SISB purchase was
$468,000 at December 31, 1996.
As more fully described in Note 3, the Company also recorded an
impairment loss of $2.8 million in connection with the acquisition of
Independent Association Administrators, Inc. The remaining unamortized goodwill
relating to this acquisition is $8.5 million at December 31, 1996.
Net assets acquired in excess of cost, or "negative" goodwill, is
being amortized on a straight-line basis over 10 years. Income from amortization
of negative goodwill totaled $0.9 million, $0.8 million and $0 for the years
ended December 31, 1996, 1995 and 1994, respectively (see Note 3).
F-14
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(k) Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
useful lives of the related assets. Property and equipment recorded under
capital lease arrangements are amortized over the shorter of the asset's useful
life or the lease term.
The Company capitalizes incremental internal and external costs
directly related to internally developed software to meet the Company's needs.
These software development projects represent major system enhancements or
replacements of existing operating management information systems.
Capitalization commences when management has committed to funding the software
project and it is probable that upon completion the software will perform its
intended function. Capitalized costs are recorded in property and equipment and
amortized using the straight-line method over three years. For the years ended
December 31, 1996, 1995 and 1994, the Company capitalized $1.7 million, $0.3
million and $0, respectively. Amortization expense of $.04 million, $0 and $0
has been recorded for the years ended December 31, 1996, 1995 and 1994,
respectively, for internally developed software costs.
(l) Investment in Joint Venture
The Company accounts for its 50 percent investment in a joint venture
arrangement on the equity basis of accounting whereby the Company's recorded
investment is adjusted for its proportionate share of earnings or losses of the
joint venture. For the year ended December 31, 1996, the Company's equity in
undistributed losses of the joint venture was $0.2 million.
(m) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(n) Bad Debt Allowance
The bad debt allowance is based on the Company's experience with
uncollectible premiums receivable and represents the Company's best estimate of
the ultimate uncollectible amounts incurred through the balance sheet date.
Premiums receivable contained in the accompanying Consolidated Balance Sheets
are shown net of this valuation allowance.
(o) Earnings Per Share
Net income per common share is determined by dividing net income by
the weighted average number of common shares and common share equivalents
outstanding during the period. Included in the weighted average number of shares
are contingent shares of 607,603 for the year ended December 31, 1996 and 0 for
the years ended December 31, 1995 and 1994, related to acquisitions completed by
the Company. The weighted average number of shares used in the calculation was
36,785,453 for the year ended December 31, 1996 and 30,092,500 for both of the
years ended December 31, 1995 and 1994.
F-15
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(p) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"),
which is effective for fiscal years beginning after December 15, 1995. SFAS 123
establishes a method of accounting for stock-based compensation that is based on
the fair value of stock options and similar instruments and encourages, but does
not require, adoption of that method. The Company has elected to continue
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", for measuring compensation cost. However, as required by
SFAS 123, the Company has disclosed pro forma net income and earnings per share
for the years ended December 31, 1996 and 1995 as if the provisions of SFAS 123
had been adopted (see Note 12).
(q) Concentrations of Risk
Following is a description of significant risks facing the Company and
its property and casualty insurance subsidiaries and how those risks are
minimized:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates can create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those currently recorded in the financial statements.
The Company attempts to minimize this risk by reviewing legislative
and other regulatory changes and adjusting rates whenever possible.
All of the Company's premiums were derived from products offered to
customers located in the United States. Accordingly, the Company could
be adversely affected by economic downturns, significant unemployment
and other conditions that may occur from time. (See Notes 1(a), 6, 19
and 20)
Credit Risk is the risk that issuers of securities owned by the
Company will default, or other parties, including reinsurers, the SDTF
agents and insureds who may owe the Company money, will not pay. The
Company minimizes this risk by adhering to a conservative investment
strategy, by placing reinsurance with highly rated reinsurers and by
actively monitoring collections of the SDTF recoverable and premiums
receivable.
Interest Rate Risk is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments. The
Company mitigates this risk by attempting to match the maturity
schedule of its assets with the expected payout of its liabilities. To
the extent that liabilities come due more quickly than assets mature,
an insurer would have to sell assets prior to maturity and recognize
potential gains or losses.
(r) Reclassifications
Certain amounts in the financial statements presented have been
reclassified from amounts previously reported in order to be comparable between
years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
F-16
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) Acquisitions and Joint Venture
Acquisitions
As more fully described below, the Company acquired RIC in 1995, RNIC in
1996, and two workers' compensation management services companies in 1996. Each
of these transactions were accounted for under the purchase method of accounting
under which the aggregate purchase price paid for the entity was allocated to
the assets acquired and liabilities assumed based upon the estimated fair value
of such assets and liabilities at the dates of acquisition. The excess of the
purchase price over the fair value of the net assets acquired is reflected as
costs in excess of net assets acquired and is being accreted over periods
ranging from 5 to 15 years. For acquisitions in which net assets acquired
exceeded the purchase price, a liability for net assets acquired in excess of
costs has been recorded and is being amortized over 10 years.
Operating results of the acquired entities have been included in the
consolidated financial statements from their date of acquisition. The following
schedule summarizes certain pro forma results of operations for the years ended
December 31, 1996, 1995 and 1994, as if the acquisition took place at the
beginning of the Company's fiscal year preceding the year of acquisition (in
thousands, except per share amounts):
1996 1995 1994
Total revenues $275,410 $266,412 $243,500
Income before income taxes $ 18,503 $ 23,070 $ 22,500
Net income $ 6,860 $ 16,407 $ 13,000
Earnings per share $ 0.19 $ 0.55 $ 0.45
Acquisition of RISCORP Insurance Company
Effective January 1, 1995, RIC was acquired by RISCORP of Florida, Inc., a
wholly-owned subsidiary of the Company. As a result of the acquisition, RIC's
name was changed from CMIC. Upon conversion, 1.5 million shares of $100 par
value stock were authorized and 15,000 shares were issued and outstanding. RIC
received $25.0 million as a capital contribution from the Company in the form of
$12.0 million cash and the issuance of $13.0 million of surplus notes to the
Company. In conjunction with the acquisition, RIC, subject to a Plan of
Conversion and Recapitalization and with the approval of CMIC's policyholders
and the FDOI, converted from an assessable mutual insurance company to a stock
insurance company. RIC provides workers' compensation insurance in the State of
Florida.
In exchange for their ownership interest in RIC, former CMIC policyholders
were relieved of all contingent liabilities for future policy assessments and
the risk that recorded liabilities were insufficient
F-17
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
to cover incurred losses. On the acquisition date, the estimated fair value of
RIC's net assets in excess of the purchase price was $8.2 million, which was
recorded as negative goodwill and is being amortized on a straight-line basis
over 10 years.
Acquisition of CompSource
In March 1996, the Company purchased all of the outstanding stock of
CompSource, Inc. and Insura, Inc. (collectively, "CompSource") in exchange for
approximately $12.1 million in cash and 112,582 shares of the Company's Class A
Common Stock valued at $2.1 million on the date of acquisition. CompSource is a
workers' compensation management services company offering its services in North
Carolina. Pursuant to a stock redemption agreement entered into as part of this
transaction, the former shareholders of CompSource elected to have the Company
repurchase the 112,582 shares at a purchase price of $18.653 per share on March
8, 1997, and the Company repurchased all 112,582 shares from the former
shareholders for $2.1 million in accordance with the terms of the redemption
agreement. This $2.1 million stock redemption has been included in the
accompanying Consolidated Balance Sheets.
On the acquisition date, the excess of the purchase price over the fair
value of the net assets acquired was $12.6 million and was recorded as goodwill
in the accompanying Consolidated Balance Sheets.
Acquisition of Independent Association Administrators, Inc. ("IAA") and
Risk Inspection Services and Consulting, Inc. ("RISC")
In September 1996, the Company purchased all of the outstanding stock of
IAA and RISC in exchange for approximately $11.5 million, consisting primarily
of 790,336 shares of the Company's Class A Common Stock valued at approximately
$10.9 million on the date of acquisition. IAA and RISC are workers' compensation
management services companies offering services in Alabama. On the acquisition
date, the excess of the purchase price over the fair value of the net assets
acquired was $11.4 million and was recorded as goodwill in the accompanying
Consolidated Balance Sheets.
During the first quarter of 1997, it became evident that the goodwill
recorded at the date of the RISC and IAA acquisition could not be fully
recovered from the profitability of the workers' compensation business that was
currently under contract. Therefore, as of December 31, 1996, $2.8 million of
goodwill was written off and is included as an expense in the accompanying
Consolidated Statements of Income.
Acquisition of Atlas
In March 1996, RISCORP of Florida, Inc., a wholly-owned subsidiary of the
Company, acquired 100 percent of the outstanding capital stock of Atlas
Insurance Company ("Atlas") for approximately $5.0 million in cash. As a result
of the acquisition, the name was changed from Atlas to RNIC. RNIC, which
primarily provides workers' compensation insurance, is licensed to do business
in 19 states and is authorized to operate on an excess and surplus lines basis
in 5 additional states. On the acquisition date,
F-18
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the excess of the purchase price over the fair value of the net assets acquired
was $2.6 million and was recorded as goodwill in the accompanying Consolidated
Balance Sheets.
Assumption Reinsurance Transaction
During 1996, RNIC also entered into several assumption reinsurance
transactions that resulted in the acquisition of five self insurance funds that
are discussed in Note 7 (b).
Joint Venture Arrangement
In January 1996, the Company, through its wholly-owned subsidiary, RISCORP
of Illinois, entered into a joint venture arrangement with Health Care Service
Corporation ("HCSC"), a subsidiary of Blue Cross and Blue Shield of Illinois, to
underwrite and sell managed care workers' compensation insurance in Illinois.
The Company and HCSC each hold 50 percent ownership in the joint venture known
as Third Coast Holding Company ("Third Coast"). The Company contributed the use
of its expertise, insurance systems and intellectual property. The Company's
initial investment in Third Coast was valued at $10.0 million; however, the
Company's cost basis in the contributed property was $0. As of December 31,
1996, the Company is carrying its initial investment in Third Coast at $0.
(4) Investments
Investments included in the accompanying Consolidated Balance Sheets as of
December 31, 1996 and 1995 are summarized as follows (in thousands):
Cost or Gross Gross
Amortized Cost Unrealized Unrealized
Gains Losses Estimated
Fair Value
December 31, 1996:
Available for sale:
Fixed maturity securities:
Municipal government obligations $ 75,844 $ 559 $ 55 $ 76,348
U.S. government obligations 49,144 983 47 50,080
Corporate obligations 86,726 734 94 87,366
Mortgage backed securities 2,588 25 1 2,612
Asset backed securities 5,501 57 2 5,556
Redeemable preferred stocks 6,437 408 5 6,840
226,240 2,766 204 228,802
Equity securities:
Nonredeemable preferred stocks 1,063 28 9 1,082
Common stocks 2,817 205 59 2,963
3,880 233 68 4,045
Total available for sale 230,120 2,999 272 232,847
Held to maturity:
Fixed maturity securities:
U.S. government obligations 16,355 144 62 16,437
Municipal government obligations 4,204 5 4 4,205
Certificates of deposit 2,250 - - 2,250
Total held to maturity 22,809 149 66 22,892
Total investments $ 252,929 $ 3,148 $ 338 $ 255,739
F-19
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Cost or Gross Gross
Amortized Cost Unrealized Unrealized
Gains Losses Estimated
Fair Value
December 31, 1995:
Available for sale:
Fixed maturity securities:
Municipal government obligations $ 29,112 $ 342 $ 75 $ 29,379
U.S. government obligations 13,754 58 9 13,803
Corporate obligations 4,024 69 1 4,092
Redeemable preferred stocks 5,718 402 4 6,116
52,608 871 89 53,390
Equity securities:
Nonredeemable preferred stocks 175 1 1 175
Common stocks 214 14 11 217
389 15 12 392
Total available for sale 52,997 886 101 53,782
Held to maturity:
Fixed maturity securities:
U.S. government obligations 12,133 309 - 12,442
Certificates of deposit 3,450 - - 3,450
Total held to maturity 15,583 309 - 15,892
Total investments $ 68,580 $ 1,195 $ 101 $ 69,674
The fair value of investments at December 31, 1996 and 1995 was determined
using independent pricing services.
The amortized cost and estimated fair value of fixed maturities by
contractual maturity, as of December 31, 1996, are as follows (in thousands):
Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due in one year or less $ 17,524 $ 17,614 $ 3,052 $ 3,050
Due after one year through five years 152,133 153,315 15,510 15,601
Due after five years through ten years 36,933 37,892 3,927 3,926
Due after ten years 17,062 17,369 320 315
Mortgage backed securities 2,588 2,612 - -
$ 226,240 $ 228,802 $ 22,809 $ 22,892
Actual maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
During the years ended December 31, 1996, 1995 and 1994, proceeds from
sales of fixed maturities available for sale totaled $88.9 million, $60.3
million and $1.0 million, respectively. Gross realized gains and gross realized
losses for the years ended December 31, 1996, 1995 and 1994 are summarized in
the following table (in thousands) and are recorded in net investment income in
the accompanying Consolidated Statements of Income:
F-20
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1996 1995 1994
Gross realized gains $ 178 $ 1,395 $ -
Gross realized losses (73) (379) (9)
Net realized gains (losses) $ 105 $ 1,016 $ (9)
The following information summarizes the components of net investment
income for the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
Fixed maturities $ 10,444 $ 5,856 $ 1,376
Equity securities 547 410 113
Cash and cash equivalents 1,700 606 398
12,691 6,872 1,887
Investment expenses (497) (164) (210)
$ 12,194 $ 6,708 $ 1,677
While the Company has credit risk in the investment portfolio, no fixed
maturity security had a Standard & Poor's rating of less than BBB at December
31, 1996. The carrying value of securities on deposit with various governmental
agencies was $18.6 million and $15.6 million at December 31, 1996 and 1995,
respectively, and is included in fixed maturities held to maturity in the
accompanying Consolidated Balance Sheets.
The Company's investments in excess of 10 percent of shareholders' equity
at December 31, 1996 and 1995, aggregated by issuer and excluding investments
issued or guaranteed by the United States, consisted of the following (in
thousands):
Carrying Value
---------------------------------
1996 1995
------------- --------------
Fixed maturities:
State of California $ - $ 2,171
State of Florida 23,472 3,450
State of Illinois - 3,331
State of Minnesota - 2,479
State of New Jersey - 2,823
$ 23,472 $ 14,254
(5) Reserve for Losses and Loss Adjustment Expenses
The Company establishes reserves to cover its estimated liability for
losses and loss adjustment expenses with respect to reported claims and claims
incurred but not yet reported as of the end of each accounting period. The
Company establishes its reserves based on facts then known, estimates of future
claims trends and other factors, including the Company's experience with similar
cases and historical
F-21
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Company and industry trends, such as reserving patterns, loss payment patterns,
claim closure and reporting patterns, and product mix.
Activity in the reserve for losses and loss adjustment expenses for the
years ended December 31, 1996, 1995 and 1994 is summarized as follows (in
thousands):
1996 1995 1994
Gross reserves for losses and loss adjustment expenses, beginning of period $ 261,700 $ 12,668 $ 6,157
Less reinsurance recoverables 100,675 7,398 -
Less SDTF recoverables 51,836 671 831
Less prepaid managed care fees 16,369 - -
Net balance at January 1 92,820 4,599 5,326
Assumed during year from loss portfolio transfers and acquisitions 88,212 123,854 -
Incurred losses and loss adjustment expenses related to:
Current year 123,986 87,467 6,026
Prior years 3,023 5,198 2,062
Total incurred losses and loss adjustment expenses 127,009 92,665 8,088
Paid related to:
Current year 56,088 33,069 4,821
Prior years 55,875 95,229 3,994
Total paid 111,963 128,298 8,815
Net balance at December 31 196,078 92,820 4,599
Plus reinsurance recoverables 180,698 100,675 7,398
Plus SDTF recoverables 49,505 51,836 671
Plus prepaid managed care fees 31,958 16,369 -
Gross reserves for losses and loss adjustment expenses, at December 31 $ 458,239 $ 261,700 $ 12,668
The Company recognizes recoveries from the SDTF and subrogation from third
parties as a reduction to incurred losses. In determining the best estimate of
the effect of these recoveries on the ultimate cost of all unpaid losses and
loss adjustment expenses, the Company utilizes historical and industry
statistics. The estimated amount of recoveries from the SDTF included as a
reduction to the reserve for losses and loss adjustment expenses was $49.5
million and $51.8 million at December 31, 1996 and 1995, respectively.
The 1995 activity in the reserve for losses and loss adjustment expenses
reflects the acquisition of RIC on January 1, 1995. Adverse development in 1996
occurred due to deterioration in 1993 and prior accident years offset in part by
improved experience for the 1995 accident year.
Prior to the acquisition of RIC, the Company's insurance operations
consisted primarily of providing excess reinsurance coverage to other entities.
Because of the nature and volatility of these excess coverages and the short
history of operations, few losses were reported and paid under these excess
policies. As a result of changes in estimates of insured events in prior years,
the net provision for unpaid losses and loss adjustment expenses for such prior
years decreased by $1.9 million in 1994.
F-22
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(6) State of Florida Special Disability Trust Fund
Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds and self-insured employers in Florida for certain workers'
compensation benefits paid to injured employees. SDTF reimburses claim payments
made to a claimant whose injury merges with, aggravates or accelerates a
pre-existing permanent physical impairment. The SDTF is managed by the State of
Florida and is funded through assessments against insurers and self-insurers
providing workers' compensation coverage in Florida. RISCORP's pro-rata amount
of the SDTF assessment is based upon its written premiums compared to the total
workers' compensation premiums written by all Florida insurers and
self-insurance funds. Should a carrier stop writing business, it has no
obligation for future assessments. The SDTF's assessment formula has
historically yielded sufficient revenues for annual reimbursement payments and
for costs associated with administering the SDTF. The SDTF has not prefunded its
claims liability and no reserves currently exist. As of September 30, 1996, the
SDTF had an actuarial projected undiscounted liability of approximately $4.0
billion based on a study performed for the SDTF by independent actuarial
consultants. In addition, the SDTF actuarial study indicated that, at the
current assessment rates, the payment of the existing liability would take
numerous years.
Under Florida sunset laws applicable to some state-sponsored funds, the
SDTF would have expired on November 4, 1996 unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws
until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. The SDTF will accept no claims with
accident dates after December 31, 1997. Certain SDTF claims may have to be
refiled for reimbursement and such filing may require a refiling fee.
Additionally, companies accruing SDTF recoveries may be statutorily limited in
the level of recoverables they may be allowed to carry. The bill provides for a
funding mechanism through which companies writing workers' compensation
insurance in Florida will be assessed an annual charge to cover payments made by
the SDTF. The Company believes that even in the event of default by the SDTF,
the existing reimbursements of the SDTF would become general obligations of the
State of Florida. Management further believes that the recoveries recorded at
December 31, 1996 will not be materially adversely affected by the new
legislation.
For the years ended December 31, 1996 and 1995, the change in the
estimated SDTF recoveries was a decrease in losses and loss adjustment expenses
incurred of approximately $200,000 and $5.8 million, respectively. For the years
ended December 31, 1996 and 1995, SDTF cash recoveries were $2.5 million and
$0.9 million, respectively. SDTF assessments were $11.7 million, $12.9 million
and $0.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
(7) Reinsurance
(a) General
The Company is involved in the cession of insurance to certain
unaffiliated insurance and reinsurance companies under specific excess of loss
and quota share reinsurance contracts. Amounts by which certain financial
statement balances have been reduced as a result of these reinsurance contracts
as of and for the years ended December 31, 1996 and 1995 are as follows (in
thousands):
F-23
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1996 1995 1994
Premiums written $ 192,528 $ 161,696 $ 4,523
Premiums earned $ 165,022 $ 139,144 $ 4,523
Reserve for losses and loss adjustment expenses $ 180,698 $ 100,675 $ 7,398
Unearned premiums $ 49,788 $ 21,880 $ -
Ceded losses and loss adjustment expenses were $152.3 million, $78.7
and $6.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and are reflected as reductions in the related financial statement
balances.
Effective January 1, 1995, RIC entered into a quota share reinsurance
agreement with American Re-Insurance Company ("AmRe"), whereby RIC ceded 50
percent of new and renewal premiums written and losses incurred. The reinsurance
agreement provides for the payment of a ceding commission at rates which vary
from 27.5 percent to 60 percent based on the loss ratio of the business ceded,
excluding unallocated loss adjustment expenses. The provisional ceding
commission provided for in the reinsurance agreement was 33 percent. This
reinsurance agreement will remain in force for an unlimited period of time, but
may be terminated by either party at any December 31 after December 31, 1995.
The Company and AmRe are parties to a senior subordinated note agreement in the
principal amount of $15.0 million due 2002. Under the terms of the note
agreement, the Company must maintain the quota share treaty or other comparable
reinsurance agreement with AmRe for a minimum period of five years beginning
January 1, 1995 (see Note 20). Ceding commissions earned under the AmRe
reinsurance agreement were $58.2 million and $48.6 million for the years ended
December 31, 1996 and 1995, respectively.
The combined reinsurance recoverables and ceded unearned premiums (by
reinsurer) in excess of three percent of shareholders' equity as of December 31,
1996 are detailed below (in thousands):
Reinsurance Ceded Unearned
Reinsurer Recoverables Premiums
American Re-Insurance Company $ 96,345 $ 40,962
Continental Casualty Company $ 38,688 $ -
Signet Star Reinsurance Company $ 15,977 $ 123
TIG Reinsurance Company $ 10,492 $ -
Chartwell Reinsurance Company $ 5,800 $ 4,272
National Union Fire Insurance Company $ 5,572 $ -
Swiss Reinsurance America Company $ 2,875 $ 2,090
Trenwick American Reinsurance Company $ 2,875 $ 2,090
Effective September 1, 1995, RPC entered into a medical excess of loss
reinsurance agreement with Cologne Life Reinsurance Company, whereby the Company
ceded 100 percent of all losses incurred per insured, per agreement year, in
excess of $150,000 up to $1.0 million. The Company pays $5.99 per certificate of
insurance per month for this coverage. The agreement is continuous, but can be
canceled by either party at September 1, 1996 or any September 1 thereafter.
F-24
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Effective January 1, 1996, RPC entered into a commercial casualty
excess of loss reinsurance agreement with Allstate Insurance Company, Chartwell
Reinsurance Company, Signet Star Reinsurance Company and San Francisco
Reinsurance Company, whereby the Company ceded 100 percent of all losses
incurred on business inforce, written or renewed during the term of this
agreement, per occurrence, in excess of $250,000 to $1.0 million. RPC is
required to pay 11.5 percent of earned premiums subject to a minimum premium of
$483,000 under the agreement. This reinsurance agreement will remain in force
for an unlimited period of time, but may be terminated by either party at
December 31, 1996 or any December 31 thereafter.
RPC ceded reinsurance to an unaffiliated insurer which was funded
through a deposit premium based on a percentage of estimated written premiums.
RPC determined that the agreement did not transfer risk. Accordingly, the
contract was accounted for using deposit accounting. Non-refundable premiums of
$229,962 were paid to the reinsurer for the year ended December 31, 1995 and
were expensed pro rata over the policy period in the accompanying financial
statements with the remaining unexpired portion recorded as a deposit. There
were no losses ceded to this contract for the year December 31, 1995. This
reinsurance agreement was canceled in 1996.
Effective October 1, 1996, RNIC entered into a quota share reinsurance
agreement with Chartwell Reinsurance Company, Swiss Reinsurance America
Corporation and Trenwick American Reinsurance Corporation (collectively the
"Reinsurers"), whereby RNIC ceded 65 percent of its net unearned premiums as of
October 1, 1996, and 65 percent of net written workers' compensation and
employers liability premiums, new or renewal, for the period October 1 to
December 31, 1996. Effective January 1, 1997, RNIC reduced the ceded quota share
amount to 60 percent. The reinsurance agreement provides for the payment of a
ceding commission at rates which vary from 27 percent to 49 percent based on the
loss ratio of the business ceded. The provisional ceding commission contained in
the reinsurance agreement was 33 percent. This reinsurance agreement will remain
in force for an unlimited period of time, but may be terminated by either party
at December 31, 1997 or any December 31 thereafter.
RNIC has ceded losses in excess of $500,000 to Continental Casualty
Company ("CNA") under three separate excess of loss reinsurance treaties. These
treaties have effective dates of January 1, June 14, and September 1, 1996 and
provide for the payment of premiums to CNA based on earned premiums. While the
contracts contain provisions for minimum premiums, the premiums for 1996 based
on earned premiums will exceed the minimum premium provisions specified under
these contracts. Each of these treaties with CNA expired on January 1, 1997.
RNIC also maintains specific excess of loss coverage on the run off of
the Atlas book of business with Allstate Insurance Company.
The unaffiliated reinsurers of each of the Company's insurance
subsidiaries are reinsurance companies with A.M. Best ratings of A- or higher.
The Company actively monitors and evaluates the financial condition of its
reinsurers. As a result, the Company does not believe it has any significant
credit risk associated with unaffiliated reinsurance recoverables. To the extent
that the reinsurers are
F-25
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
unable to meet their contractual obligations, the Company is contingently liable
for any losses and loss adjustment expenses ceded.
At December 31, 1996 and 1995, reinsurance recoverables consisted of
$180.7 million and $100.7 million of recoverables on reserves for losses and
loss adjustment expenses, respectively.
At December 31, 1996, approximately $91.5 million of the reinsurance
recoverable balance related to RIC's quota share agreement with one reinsurer.
The remaining recoverable balance of $89.5 million reflected estimated
recoveries from 15 unaffiliated reinsurers that provided specific and aggregate
excess of loss coverage. The previous table includes all reinsurance
recoverables in excess of three percent of shareholders' equity at December 31,
1996.
(b) Assumption Reinsurance Transactions
Effective June 14, 1996, RNIC entered into a loss portfolio transfer
and assumption reinsurance agreement with National Alliance for Risk Management
("NARM"), a North Carolina self-insured workers' compensation fund. Under the
terms of the agreement, RNIC assumed 100 percent of the outstanding loss
reserves (including incurred but not reported losses) and the outstanding
unearned premiums as of June 14, 1996. RNIC issued assumption certificates to
all of the NARM policyholders.
Effective September 1, 1996, RNIC entered into a loss portfolio
transfer and assumption reinsurance agreement with the Occupational Safety
Association of Alabama ("OSAA"), an Alabama self-insured workers' compensation
fund. 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. RNIC issued assumption certificates to all OSAA
policyholders.
Effective October 1, 1996, RNIC entered into a loss portfolio transfer
and assumption reinsurance agreement with three NARM self insurance funds in
Virginia ("NARM - Virginia"). Under the terms of the agreement, RNIC assumed 100
percent of the outstanding loss reserves (including incurred but not reported
losses) and the outstanding unearned premiums as of October 1, 1996. RNIC issued
assumption certificates to all NARM Virginia policyholders.
The following loss portfolio transfers and assumption reinsurance
agreements were entered into by RNIC during 1996 (in thousands):
Losses Assumed at Date Unearned Premiums at
Entity Effective Date of Transfer Date of Transfer
NARM June 14, 1996 $ 34,544 $ 5,209
OSAA September 1, 1996 49,716 -
NARM - Virginia October 1, 1996 3,057 996
Total $ 87,317 $ 6,205
F-26
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
RISCORP received primarily cash and marketable securities from the
ceding companies of approximately $93.5 million to fund the loss and unearned
premium reserves assumed in connection with these transactions. In addition,
OSAA transferred to RNIC approximately $11.0 million in OSAA member deposits and
cash of approximately $11.0 million. RNIC will refund the deposits to the
policyholders during 1997 when the final premium audits are completed for the
1996 policy year. As of December 31, 1996, OSAA owed RNIC approximately $3.3
million in connection with the transaction. These funds were received on April
14, 1997.
(8) Managed Care Agreements
The Company is party to arrangements with both Humana Medical Plans, Inc.
("Humana"), an unaffiliated health maintenance organization ("HMO"), and RISCORP
Health Plans, Inc. ("RHP"), an affiliated HMO, whereby upon policyholder
election to participate, the Company's medical claim costs are fixed for the
first three years of each claim. On May 1, 1996, the Company terminated its
arrangement with RHP; however, injured individuals are covered for three years
following any accident occurring during policy periods in effect prior to
termination. The Humana arrangement, which commenced July 1, 1995, was renewed
for one additional year at the anniversary date. Under the Humana arrangement,
injured individuals are covered for three years following any accident occurring
within the policy periods. The fees paid to Humana and RHP are recognized as
prepaid assets and losses and loss adjustment expenses in the Consolidated
Balance Sheets. Included in losses and loss adjustment expenses were $30.6
million, $19.0 million and $0 of such fees for the years ended December 31,
1996, 1995 and 1994, respectively.
To the extent that Humana or RHP is unable to meet its contractual
obligations under the agreements, the Company is liable for any unpaid losses
and loss adjustment expenses. At December 31, 1996 and 1995, unpaid losses and
loss adjustment expenses covered by Humana and RHP were $32.0 million and $16.4
million, respectively.
(9) Income Taxes
The components of income taxes for the years ended December 31, 1996, 1995
and 1994 are as follows (in thousands):
1996 1995 1994
Current:
Federal $ 17,919 $ 4,042 $ 5,366
State 2,280 1,037 924
Total current 20,199 5,079 6,290
F-27
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1996 1995 1994
Deferred:
Federal (12,126) 219 (274)
State 129 (199) (24)
Total deferred (11,997) 20 (298)
Total income taxes $ 8,202 $ 5,099 $ 5,992
The differences between taxes computed at the federal statutory rate and
recorded income tax expense for the years ended December 31, 1996, 1995 and 1994
are as follows (in thousands):
1996 1995 1994
Computed "expected" tax expense $ 3,710 $ 6,574 $ 4,503
State taxes in excess of federal benefit 1,336 545 582
Non-taxable income (982) (637) (260)
Goodwill and other amortization 2,437 (287) -
ESOP termination benefit expense - - 1,245
Excise tax - - 595
S corporation earnings - (984) (444)
Fines and penalties 543 - -
Amounts related to prior years 980 - -
Other 178 (112) (229)
Income tax expense $ 8,202 $ 5,099 $ 5,992
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows (in thousands):
1996 1995
Deferred tax assets:
Unearned premium $ 3,688 $ 2,920
Discount on reserve for losses and loss adjustment expenses 13,149 5,950
Deferred income - 2,074
Accrued employee benefits 709 327
Bad debts 5,950 -
Other 1,507 1,448
Gross deferred tax assets 25,003 12,719
Deferred tax liabilities:
Deferred acquisition costs 156 849
Unrealized gains on investments 952 275
Depreciation 446 287
Other 898 115
Gross deferred tax liabilities 2,452 1,526
Net deferred tax asset $ 22,551 $ 11,193
F-28
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company believes it could realize its net deferred tax asset through
the carryback of future tax losses to prior years or the generation of future
taxable income, and it is more likely than not that the tax benefits of the
deferred tax assets will be realized. Accordingly, no valuation allowance
relating to deferred taxes has been established.
(10) Notes Payable
Notes payable consist of the following at December 31, 1996 and 1995 (in
thousands):
1996 1995
Subordinated notes from quota share reinsurer,
bearing interest at 12%; matures December 31, 2002. $ 15,000 $ 15,000
Notepayable from acquisition of subsidiary, with implicit interest rate of
9.76% computed on the payment
stream; matures November 9, 1998. 756 1,147
Term loan, implicit interest rate of 12% computed on
the payment stream; matures January 1, 1999. 470 690
Notes payable on five automobiles, bearing interest
at 7%; various maturities throughout 2000. 77 -
Termloan, bearing interest at a rate above prime or LIBOR (8.75% at
December 31,1995), secured by all of the Company's assets and
guaranteed by Company's majority shareholder and affiliates;
(repaid March, 1996). - 25,000
$2.0 million line of credit, bearing interest at a rate
above LIBOR or prime; (repaid March, 1996). - 2,000
Note payable to an insurance pool, bearing interest at
prime plus 1%, unsecured; (repaid March 1996). - 2,580
$ 16,303 $ 46,417
F-29
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Notes payable are due as follows at December 31, 1996 (in thousands):
1997 $ 645
1998 614
1999 43
2000 1
2001 and thereafter 15,000
$ 16,303
The Company is currently in default of several debt covenants contained in
the AmRe loan agreement including the filing of the audited GAAP financial
statements by March 31, 1997. On October 10, 1997, the Company received a waiver
from AmRe concerning these defaults, subject to their actual receipt of the
delinquent financial statements. On October 17, 1997, the Company received a
waiver from AmRe of the default based upon the failure of the Company to deliver
quarterly financial statements and for failure to file Form 10-Q with the
Securities and Exchange Commission for the first and second quarters of 1997.
Additional covenant violations could result in the note being called.
(11) Shareholders' Equity
The Company has 100 million shares of $.01 par value Class A Common Stock
authorized and 11,855,917 issued and outstanding shares at December 31, 1996.
Class B Common Stock, par value $.01, consists of 100 million shares authorized,
24.3 million and 28.1 million shares issued and outstanding at December 31, 1996
and 1995, respectively. Ten million shares of preferred stock are authorized,
but no shares are issued or outstanding. The characteristics of the Class B
Common Stock are identical to those of the Class A Common Stock, except that
each holder of the Class B Common Stock is entitled to 10 votes for each share
held. The Class B Common Stock may be converted into Class A Common Stock at any
time at the election of the holders on a one-for-one basis.
The Company's insurance subsidiaries are limited by statute in their
ability to distribute unassigned surplus without approval of the Commissioner of
Insurance for the state of domicile. Dividends or distributions to shareholders
that are made under these statutes and that do not require the prior approval of
the FDOI or the Missouri Department of Insurance ("MDOI") are determined based
on a combination of an insurer's net income realized and unrealized capital
gains, percentages of dividends and distribution of surplus, and the
relationship of surplus after the dividend or distribution is made to the
minimum required statutory surplus. The Company did not declare any shareholder
dividends during 1996 and 1995. The Company paid dividends to participating
policyholders of $9.2 million, $1.6 million and $0 for the years ended December
31, 1996, 1995 and 1994, respectively. As of December 31, 1996, the Company's
insurance subsidiaries have the ability to dividend approximately $16.0 million
to RISCORP without the prior approval of the FDOI or the MDOI, consisting of
$14.9 million from RIC and $1.1 million from RPC.
F-30
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Combined statutory policyholders' surplus as of December 31, 1996 and
1995, and combined statutory net income for the years ended December 31, 1996
and 1995 (as filed and adjusted for the FDOI examination adjustments as
discussed in initial Note) for the Company's insurance subsidiaries, were as
follows (in thousands):
1996 1995
----------- -----------
Policyholders' surplus $ 90,639 $ 13,945
Net income $ 13,980 $ 15,354
The amount of policyholders' surplus for 1995 does not reflect FDOI
examination adjustments as discussed in Note 19.
In order to facilitate their responsibility to monitor insurer solvency,
the National Association of Insurance Commissioners in January 1995 issued a
model law to implement risk-based capital ("RBC") reporting requirements for
property and casualty insurance companies. The model law is designed to assess
capital adequacy and the level of protection that statutory surplus provides for
policyholder obligations. The RBC formula for property and casualty insurance
companies measures four major areas of risk facing property and casualty
insurers: (i) underwriting, which encompasses the risk of adverse loss
development and inadequate pricing; (ii) credit risk, which evaluates the
declines in asset values; (iii) investment risk, which evaluates declines in
asset values; and (iv) off balance sheet risk. Pursuant to the model law,
insurers having less statutory surplus than required by the RBC calculation will
be subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. RPC and RIC are domiciled in the State of Florida which has
yet to adopt the provisions of the RBC model law; however, these insurance
subsidiaries monitor their RBC results in anticipation of future filings. The
Company's third insurance subsidiary, RNIC, is domiciled in the State of
Missouri and RBC information is filed with state regulators. RBC is calculated
on an annual basis. At December 31, 1996, the Company's insurance subsidiaries
had statutory surplus in excess of any action level requirements.
(12) Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"). SFAS 123
establishes a method of accounting for stock-based compensation that is based on
the fair value of stock options and similar instruments and is effective for
fiscal years beginning after December 15, 1995. The adoption of SFAS 123 is not
required and the Company has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", for measuring
compensation cost. Had the Company adopted SFAS 123, pro forma net income and
earnings per share for the years ended December 31, 1996 and 1995 would have
been as follows (in thousands, except per share data):
1996 1995
------------ --------------
Net income - as reported $ 2,398 $ 13,683
- pro forma $ 2,479 $ 13,506
Earnings per share - as reported $ 0.07 $ 0.45
- pro forma $ 0.07 $ 0.45
F-31
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The pro forma effect on net income for 1996 and 1995 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
In conjunction with the reorganization discussed in Note 1, stock options
of the Company were substituted for options previously granted to certain
officers and employees of the Company's affiliates. Options are exercisable for
12 years after the date of the grant and the options vest over periods ranging
from two to nine years.
A summary of the status of the Company's Stock Option Plan as of and for
the years ended December 1996, 1995 and 1994 is presented below:
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
Outstanding,
Beginning of year 2,556,557 $3.96 1,854,392 $3.01 - -
Granted 1,572,538 6.84 702,165 $6.50 1,854,392 $3.01
Exercised (17,999) 3.61 - - - -
Canceled (1,032,317) 9.22 - - - -
Outstanding, end of year 3,078,779 $3.67 2,556,557 $3.96 1,854,392 $3.01
Options
exercisable at year end 731,849 $2.08 193,657 $0.73 -
-
Weighted average fair value of
options granted during the year $5.44 $5.67 $7.11
The fair value of each option has been estimated on the date the option
was granted using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996, 1995 and 1994,
respectively: dividend yield of 0 percent for all years; expected volatility of
60 percent for all years; risk-free interest rate of 8.1 percent (1996), 6.5
percent (1995) and 6.6 percent (1994); and expected lives of 12 years for all
years. Due to events subsequent to December 31, 1996, the amount shown above for
the weighted average fair value of options granted during 1996 may not be
indicative of the current market value of the Company's stock.
The exercise price of options granted were determined to be not less than
the fair market value of the Class A Common Stock on the date the option was
granted with the exception of options for 387,314, 2,604 and 16,725 shares made
to two employees at exercise prices of $0.72, $4.50 and $4.50, respectively, and
fair values of $22.78, $12.54 and $12.33, respectively. Compensation expense
recognized for options with exercise prices below fair market value totaled $0.3
million, $0.7 million and $0.2 million for the years ended December 31, 1996,
1995 and 1994, respectively.
F-32
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------
Range of Number Weighted Avg Number
Exercise Prices Outstanding Remaining Weighted Avg Exercisable Weighted Avg
at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ---------------- ----------------- ------------------- --------------- ------------- ---------------
$ 0.72 387,314 9.8 years $ 0.72 387,314 $ 0.72
$ 3.61 1,426,927 9.8 years 3.61 343,233 3.61
$ 19.00 13,158 11.2 years 19.00 - -
$ 4.50 1,251,380 11.9 years 4.50 1,302 4.50
3,078,779 10.6 years $ 3.67 731,849 $ 2.08
On August 28, 1996, the Company repriced 126,500 options with an average
exercise price of $18 per share to $12.50 per share. On November 18, 1996, the
Company repriced 830,380 options with an average exercise price of $8 per share
to $4.50 per share. Remaining options available for grant totaled 40,053 at
December 31, 1996.
(13) Property and Equipment
Property and equipment consist of the following at December 31, 1996 and
1995 (in thousands):
Estimated
Useful Life 1996 1995
Furniture and equipment 3-7 years $ 15,984 $ 8,853
Building 39 years 7,846 7,036
Leasehold improvements 5-10 years 4,896 2,710
Software 3 years 5,041 2,182
Land 1,200 1,200
34,967 21,981
Less accumulated depreciation and amortization (7,462) (3,937)
$ 27,505 $ 18,044
Depreciation and amortization expense totaled $3.6 million, $2.0 million
and $1.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Included in these amounts is amortization expense of $0.8 million,
$0.2 million and $0 for the years ended December 31, 1996, 1995 and 1994,
respectively, related to both purchased and capitalized internally developed
software costs.
F-33
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(14) Leases
The Company leases space for some of its office facilities under
non-cancelable operating leases expiring through January 2002, with renewal
options available for certain leases. Total rental expense for the years ended
December 31, 1996, 1995 and 1994 was $1.3 million, $0.9 million and $1.5
million, respectively. At December 31, 1996, the Company was obligated under
aggregate minimum annual rentals as follows (in thousands):
Year ended December 31, Annual Rental
1997 $1,387
1998 1,212
1999 637
2000 529
2001 391
Thereafter 249
(15) Employee Health Benefits
The Company self-insures its employees' health benefits and has purchased
excess insurance that limits its exposure to $1.1 million in the aggregate and
$50,000 per occurrence. The Company estimates its liability for unpaid claims
based on aggregate limits for health insurance payments less actual payments
made. These estimates are continually reviewed and adjustments, if any, are
reflected in current operations. Included in accrued expenses at December 31,
1996 and 1995 is a liability for self-insured health benefits of approximately
$0.4 million and $0.5 million, respectively. Expenses for self-insured health
benefits were $2.6 million, $1.4 million and $1.1 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
Expenses relating to employee benefit plans were $0.4 million, $0.2
million and $3.6 million for the yearsended December 31, 1996, 1995 and 1994,
respectively.
(16) Related Party Transactions
The Company has accounts receivable of $0 and $1.3 million from several
affiliates which are included in accounts and notes receivable-related party in
the accompanying Consolidated Balance Sheets at December 31, 1996 and 1995,
respectively. Additionally, the Company has accounts and notes payable of $1.2
million and $1.0 million at December 31, 1996 and 1995, respectively, to those
same affiliates.
F-34
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
At December 31, 1996 and 1995, notes receivable consisted of the following
(in thousands):
1996 1995
---------- ----------
Notes receivable from shareholder and affiliated companies at rates from
prime to prime plus 1%,
guaranteed by shareholder; repaid March 1996. $ - $ 7,273
Surplus note receivable. RHP, an affiliated company,
at prime plus 1%; repaid September 1996. - 2,150
$ - $ 9,423
The shareholder referred to above was the Chairman of the Board of the
Company and the affiliated companies were controlled or wholly-owned by him.
In addition, the Company contracted with affiliated entities for
transportation, facilities management, and custodial and maintenance services.
The Company also leased parking facilities from affiliated entities. Expenses
relating to these services totaled approximately $1.6 million, $2.5 million and
$1.2 million for the years ended December 31, 1996, 1995 and 1994, respectively.
These expenses are included in commissions, general and administrative expenses
in the accompanying Consolidated Statements of Income.
Beginning in 1994, the Company paid brokerage fees to an affiliated
company for the negotiation and placement of reinsurance under several specific
excess of loss coverages. These fees totaled $0.9 million, $0.8 million and
$0.01 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company provides administrative and support services to three
affiliated companies. Under these arrangements, one of which terminated in 1996,
the Company received $0.8 million, $1.02 million and $0.07 million for the years
ended December 31, 1996, 1995 and 1994, respectively. In addition, the Company
performed certain unreimbursed services totaling $1.6 million during 1995 for
one of these affiliates.
As described in Note 8, the Company was party to a managed care
arrangement with RHP, an affiliated HMO, until May 1, 1996. Fees paid to RHP for
the years ended December 31, 1996, 1995 and 1994 totaled $17.1 million, $1.5
million and $0, respectively. To the extent RHP is unable to meet its
contractual obligations remaining under the arrangements, the Company is liable
for any unpaid losses and loss adjustment expenses. At December 31, 1996 and
1995, unpaid losses and loss adjustment expenses covered by RHP were $7.1
million and $0.6 million, respectively.
F-35
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(17) Bad Debt Allowance
The following table summarizes activity in the bad debt allowance account
for premiums receivable for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
1996 1995 1994
Balance at beginning of period $ 5,899 $ 5 $ -
Allowance acquired from acquisitions 782 7,542 -
Additions to allowance 31,424 3,852 5
Write-offs against allowance (21,105) (5,500) -
Balance at end of period $17,000 $ 5,899 $ 5
(18) Concentration in a Single State
Although the Company has expanded its operations into additional states,
approximately 74 percent, 93 percent and 100 percent of its revenues for the
years ended December 31, 1996, 1995 and 1994, respectively, were derived from
products and services offered to customers located in Florida. Accordingly, the
Company could be adversely affected by economic downturns, significant
unemployment, and other conditions that may occur from time to time in Florida,
which may not significantly affect its more geographically diversified
competitors.
(19) Commitments and Contingencies
On April 2, 1996, the Company, RIC, several officers, directors and
employees were named as defendants in a purported class action filed in the
United States District Court for the Southern District of Florida. The suit
claims the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), breached fiduciary duties, and were negligent in the
Company's acquisition of CMIC in 1995. The suit seeks compensatory and punitive
damages and equitable relief and treble damages for the RICO counts. The named
plaintiffs, Vero Cricket Shop, Inc., Vero Cricket Shop Too, Inc., and Falls
Company of Longboat Key, Inc., claim to be former policyholders of CMIC and
claim to represent others similarly situated. The defendants moved to dismiss
the RICO counts and to strike the punitive damages claims. These motions, as
well as plaintiffs' motion for class certification, were pending when the
plaintiffs filed an amended complaint. The amended complaint added the Florida
Insurance Commissioner and Zenith as defendants in one new count seeking
declaratory relief. The remaining claims in the amended complaint are the same
as those in the original complaint. The defendants have filed a motion to
dismiss the amended complaint and to strike the punitive damages claims. The
parties have been ordered to non-binding mediation in this matter. The Company
intends to defend this action vigorously; however, there can be no assurance
that it will prevail in the litigation.
F-36
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Between November 20, 1996 and January 31, 1997, nine shareholder class
action lawsuits were filed against the Company and other defendants in the
United States District Court for the Middle District of Florida. In March 1997,
the Court consolidated these lawsuits and appointed co-lead plaintiffs and
co-lead counsel. The plaintiffs subsequently filed a consolidated complaint. The
consolidated complaint named as defendants the Company, three of its executive
officers, one non-officer director and three of the Company's underwriters for
the Company's initial public offering. The plaintiffs in the consolidated
complaint purport to represent the class of shareholders who purchased the
Company's Class A Common Stock between February 28, 1996 and November 14, 1996.
The consolidated complaint alleges that the Company's Registration Statement and
Prospectus of February 28, 1996, as well as subsequent statements, contained
false and misleading statements of material fact and omissions, in violation of
sections 11 and 15 of the Securities Act and sections 10(b) and 20(a) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder. The consolidated
complaint seeks unspecified compensatory damages. The Company has filed a motion
to dismiss the consolidated complaint which has been fully briefed and is
pending. Discovery will be stayed until the motion to dismiss has been decided.
The plaintiffs have filed a motion to certify the class, but the parties have
agreed that the Company need not respond to that motion until thirty days after
the motion to dismiss has been decided. The parties have been ordered to
non-binding mediation in this matter. The Company intends to defend this action
vigorously; however, there can be no assurance that it will prevail in the
litigation.
On July 17, 1997, the Company and several former officers were named as
defendants in a suit filed in state court in Montgomery, Alabama. The suit
alleges violations of federal and state securities laws and breach of contract
resulting from the purchase of IAA by the Company in 1996. The suit seeks
compensatory and punitive damages and equitable relief. The named plaintiffs are
Thomas Albrecht and Peter Norman, the former shareholders of IAA. The Company
intends to vigorously defend this action; however, there can be no assurance
that it will prevail in the litigation.
On August 20, 1997, the Company, RNIC, IAA and Peter Norman were named as
defendants in a suit filed in state court in Montgomery, Alabama. The suit
alleges common law fraud, breach of contract and breach of fiduciary duty
resulting from the acquisition of OSAA in 1996. The suit seeks compensatory and
punitive damages and equitable relief. The named plaintiff is OSAA. The Company
intends to vigorously defend this action; however, there can be no assurance
that it will prevail in the litigation.
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the Company,
RISCORP Management Services, Inc. (a wholly owned, non-regulated subsidiary of
the Company) and five former officers, including William D. Griffin, Founder and
Chairman of the Board, for various charges stemming from alleged illegal
political campaign contributions. On September 18, 1997, the Board of Directors
approved a guilty plea by RISCORP Management Services, Inc. to a single count of
conspiracy to commit mail fraud. The guilty plea was entered by RISCORP
Management Services, Inc. and accepted by the court on October 9, 1997. As a
result of an agreement negotiated with the U.S. Attorney, the court dismissed
the indictment against the Company on the same day. Mr. Griffin has resigned
from the Board of Directors of the Company
F-37
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and its subsidiaries and all other positions with the Company and its
subsidiaries. The Company has recorded in the accompanying financial statements
a provision of $1.0 million for the payment of fines and other costs related to
this matter.
Other than as noted above, no provision had been made in the Company's
financial statements for the above matters at December 31, 1996. In addition,
certain of the lawsuits and related legal expenses may be covered under
directors and officers' insurance coverage maintained by the Company.
Due to a recent decrease in the market value of the Company's Class A
Common Stock, additional amounts may have to be paid to the former shareholders
of IAA. Under the IAA acquisition agreement, the former IAA shareholders
received 790,336 shares of the Company's Class A Common Stock. Pursuant to the
acquisition agreement, if the former IAA shareholders own all of such Class A
Common Stock on September 17, 1998, the Company is obligated to issue additional
shares of the Company's Class A Common Stock in an amount sufficient to make the
value of all shares of the Company's Class A Common Stock held by the former IAA
shareholders equal to an aggregate fair market value of $10.9 million on
September 17, 1998. However, in no event will the number of additional shares
issued to the former IAA shareholders exceed 790,336 shares. The Company has
included 225,503 contingent shares in the calculation of weighted average number
of common shares and common share equivalents for the year ended December 31,
1996. Based upon the fair market value of the Company's Class A Common Stock of
$0.50 as of August 31, 1997, 790,336 additional shares would be issued to the
former IAA shareholders.
The Florida Department of Insurance conducted a financial examination of
RIC, one of the Company's insurance subsidiaries, for 1995. The final
examination report reduced statutory surplus as of December 31, 1995 from
$31,117,099 to $4,961,478. The reduction in statutory surplus was due primarily
to adjustments related to the intercompany sale of real estate, certain related
party receivables that were considered non-admitted for statutory accounting
purposes, and an increase in the non-admitted portion of certain premium
receivables. These adjustments had no impact on the accompanying financial
statements prepared in accordance with generally accepted accounting principles.
As a result, RIC failed to meet the minimum capital and surplus requirements by
approximately $12.5 million. The Company made a capital infusion of
approximately $31.2 million into RIC in 1996, and as a result, as of December
31, 1996, the surplus of RIC exceeded the minimum capital and surplus
requirements.
The FDOI and the MDOI are currently conducting financial examinations of
two of the Company's insurance subsidiaries. While these examinations may result
in adjustments to the statutory financial statements of the insurance
subsidiaries for 1996, management does not believe that any such adjustments
would be material. The Company has not received the reports from these
examinations, however, based upon communications with the MDOI, the most
significant adjustment proposed by the MDOI is the non-admission of an accounts
receivable balance of $900,000 relating to a loss portfolio transfer. This
balance was received on April 14, 1997. The adjustment relates to statutory
financial statements and has no impact on these GAAP financial statements,
however, any adjustments could impact the dividend ability of the company's
insurance subsidiaries and the disclosures within these financial statements.
F-38
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Under the CompSource acquisition, the former shareholder received cash and
112,582 shares of the Company's Class A Common Stock. Per a redemption
agreement, if the former shareholders so elect, the Company is obligated to
repurchase the 112,582 shares at a purchase price of $18.653 per share during a
redemption period beginning March 8, 1997 and ending April 7, 1998. The Company
has included 382,100 contingent shares in the calculation of weighted average
number of common shares and common share equivalents for the year ended December
31, 1996. On March 19, 1997, the Company received the redemption notice from the
former CompSource shareholders. On March 19, 1997, the Company paid the
CompSource shareholders $2.1 million as payment for the 112,582 shares of Class
A Common Stock pursuant to the redemption provisions.
The Company historically met its cash requirements and financed its growth
through cash flow generated from operations and borrowings. The Company's
primary sources of cash flow from operations are premiums and investment income,
and its cash requirements consist primarily of payment of losses and loss
adjustment expenses, support of its operating activities including various
reinsurance agreements and managed care programs and services, capital surplus
needs for its insurance subsidiaries, and other general and administrative
expenses.
In November 1996, the Board of Directors of the Company created a
Strategic Alternatives Committee whose primary function was to enhance
shareholder value by addressing the Company's capital needs and seeking
alternative sources of capital for the Company. In turn, the committee hired an
investment bank to identify and evaluate entities with an interest in acquiring
the Company or its assets. On June 17, 1997, the Company announced an agreement
with Zenith Insurance Company ("Zenith") to purchase substantially all of the
operating assets of the Company and its affiliates at a purchase price equal to
the greater of either the book value of the acquired assets less the book value
of the liabilities assumed or $35.0 million. The transaction is subject to
shareholder and regulatory approval, and is expected to close during the first
quarter of 1998.
(20) Adjustments Made in the Fourth Quarter of 1996
As described below, the Company made certain adjustments in the fourth quarter
of 1996 which have been included in the accompanying December 31, 1996 financial
statements.
Allowance for Doubtful Accounts
The Company completed a detailed review of the composition of the December 31,
1996 premium receivables balance in 1997, in connection with the determination
of the allowance for doubtful accounts as of December 31, 1996. As a result of
this analysis, an increase of approximately $7.7 million was recorded in the
allowance for doubtful accounts in the fourth quarter of 1996 to increase the
allowance for doubtful accounts to $17.0 million.
F-39
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Goodwill
As more fully discussed in Note 2(j) and Note 3, during the first quarter of
1997, it became evident that the goodwill recorded at the date of the RISC and
IAA acquisition could not be fully recovered from the profitability of the
workers' compensation business that was currently under contract. The Company
performed an analysis of the carrying value of the goodwill recorded in
connection with this acquisition and recognized an impairment loss of $2.8
million in the fourth quarter of 1996. This impairment loss was recorded as a
component of depreciation and amortization in the Company's Consolidated
Statement of Income for the year ended December 31, 1996. Remaining unamortized
goodwill related to IAA was $8.5 million at December 31, 1996.
Litigation Expenses
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States Grand Jury had indicted the Company,
RISCORP Management Services, Inc., a wholly owned, non-regulated subsidiary of
the Company ("RMS"), and five former officers, including William D. Griffin,
founder and Chairman of the Board, for various charges stemming from alleged
illegal political campaign contributions. On September 18, 1997, the Board of
Directors approved a guilty plea by RMS to a single count of conspiracy to
commit mail fraud. The guilty plea was entered by RMS and accepted by the court
on October 9, 1997. As a result of an agreement negotiated with the United
States Attorney, the court dismissed the indictment against the Company on the
same day. Mr. Griffin has resigned from the Board of Directors of the Company
and its subsidiaries and all other positions with the Company and its
subsidiaries. In the fourth quarter of 1996, the Company recorded a provision of
$1.0 million for payment of fines and other costs related to this matter. This
provision was included in the Company's Consolidated Statement of Income for the
year ended December 31, 1996.
(21) Events Subsequent to the Balance Sheet Date
On June 17, 1997, the Company entered into an agreement for the sale
and transfer of certain of its assets and non-contingent liabilities to Zenith
in exchange for cash. The purchase price for the net assets of the Company is
undetermined at this time but will be based on the GAAP statement of transferred
assets and the transferred liabilities as of the closing date, which has also
not yet been determined. It is expected that this pending transaction will
transfer primarily all of the assets, liabilities and operations of the Company
to Zenith, leaving the Company with the minimum required capital and surplus to
maintain its various state licenses and no continuing insurance operations.
F-40
RISCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On September 18, 1997, the United States Attorney's Office in Pensacola,
Florida, announced that a United States grand jury had indicted the Company and
five former officers, including William D. Griffin, founder and Chairman of the
Board, for various charges stemming from alleged illegal political campaign
contributions. On September 18, 1997, the Board of Directors approved a guilty
plea by RISCORP Management Services, Inc., a wholly-owned, non-regulated
subsidiary of the Company, to a single count of conspiracy to commit mail fraud.
As a result of the plea with the United States Attorney, the indictment against
the Company was dismissed. Mr. Griffin has resigned from the Board of Directors
of the Company and all other positions with the Company.
On October 1, 1997, RMS entered into a Plea and Cooperation Agreement with
the United States Attorney and pleaded guilty to a single count of conspiracy to
commit mail fraud. RMS has agreed to cease to operate as a third party
administrator effective October 31, 1997. As of December 31, 1996, RMS recorded
$1.0 million for the estimated fines relating to these matters.
In September 1997, the Company formed 1390 Main Street Services, Inc. for
the purpose of providing the identical services that were being provided by RMS.
The FDOI approved the Managing General Agency and Service Agreement between each
of the Company's Florida domiciled insurance subsidiaries and 1390 Main Street
Services, Inc. on October 6, 1997, under the identical terms as the previous
contract with RMS. The Managing General Agency and Service Agreement is pending
approval in Missouri.
In May 1997, RIC and RPC were assigned a rating of C (Weak) by A.M. Best,
one of the leading insurance rating agencies. This rating will remain "under
review with negative implications" by A.M. Best pending the resolution of
certain uncertainties, including various legal issues, the protracted delay in
RISCORP filing its 1996 Form 10-K with the SEC and the ongoing state regulatory
examination for the year ended 1996.
In April 1997, RNIC was assigned a rating of NR-2 (Not Rated) by A.M.
Best. RNIC was not eligible for a Best Rating due to its limited operating
experience.
The AmRe loan agreement requires that the Company shall prepay the
outstanding principal balance of the Notes, together with interest accrued
thereon, on or before the tenth business day following the occurrence of a
Change of Control or a Material Adverse Event. The resignation of William D.
Griffin, effective on September 18, 1997, as Chairman of RISCORP is a Material
Adverse Event as defined in the AmRe loan agreement. On October 10, 1997, the
Company received a waiver from AmRe of the requirement to prepay these notes, as
well as certain events of default subject to the receipt of the Company's
financial statements. On October 17, 1997, the Company received a waiver from
AmRe of the default based upon the failure of the Company to deliver quarterly
financial statements and for failure to file Form 10-Q with the Securities and
Exchange Commission for the first and second quarters of 1997.
Additional covenant violations could result in the note being called.
(22) Events Subsequent to the Date of the Independent Auditors'
Report - Unaudited
The Company completed its review and analysis of each of the fourth
quarter adjustments discussed more fully in Note 20 and based upon the specific
facts and circumstances relating to each of the adjustments, the Company has
determined that no adjustment to the previously filed 1996 Form 10-Q's was
necessary.
F-41
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
RISCORP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996
(in thousands)
Value at Which
Shown in the
Type of Investment Cost Market Value Balance Sheet
Available for sale:
Fixed maturity securities:
Municipal government obligations $75,844 $76,348 $76,348
U.S. government obligations 49,144 50,080 50,080
Corporate obligations 86,726 87,366 87,366
Mortgage backed securities 2,588 2,612 2,612
Asset backed securities 5,501 5,556 5,556
Redeemable preferred stocks 6,437 6,840 6,840
Equity securities:
Nonredeemable preferred stocks 1,063 1,082 1,082
Common stocks 2,817 2,963 2,963
Total available for sale 230,120 232,847 232,847
Held to maturity:
Fixed maturity securities:
U.S. government obligations 16,355 16,437 16,355
Municipal government obligations 4,204 4,205 4,204
Certificates of deposit 2,250 2,250 2,250
Total held to maturity 22,809 22,892 22,809
Total investments $252,929 $255,739 $255,656
F-42
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
RISCORP, INC. (Parent Company Only)
(in thousands, except share and per share data)
December 31, December 31,
1996 1995
ASSETS
Investments at fair value (cost $7,816 and $3,000) $ 7,816 $ 3,000
Cash and cash equivalents 274 (353)
Investment in wholly-owned subsidiaries 153,118 44,623
Surplus note receivable from subsidiary 13,000 13,000
Other assets 8,186 2,453
Total assets $ 182,394 $ 62,723
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 15,000 $ 42,000
Accrued expenses and other liabilities 7,986 4,566
Total liabilities 22,986 46,566
Class A Common Stock subject to put options 2,100 -
Shareholders' equity:
Common stock 363 281
Additional paid-in capital 137,813 349
Net unrealized gains on investments 1,769 510
Unearned compensation--stock options (546) (215)
Retained earnings 17,909 15,232
Total shareholders' equity 157,308 16,157
Total liabilities and shareholders' equity $ 182,394 $ 62,723
F-43
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
RISCORP, INC. (Parent Company Only)
(in thousands, except share and per share data)
Year ended December 31,
----------------------------------------------
1996 1995 1994
Revenues:
Net investment income $ 2,590 $ 1,469 $ -
Dividend income 18,335 2,652 -
Other income 3 - 1,617
Total revenue 20,928 4,121 1,617
Expenses:
General and administrative expenses 1,870 90 722
Interest expense 2,234 4,170 456
Depreciation and amortization 3,955 205 119
Total expenses 8,059 4,465 1,297
Income (loss) before equity in income of
subsidiaries and income taxes 12,869 (344) 320
Equity in (loss) income of subsidiaries before
income taxes (2,269) 19,126 12,545
Income before income taxes 10,600 18,782 12,865
Income taxes 8,202 5,099 5,992
Net income $ 2,398 $ 13,683 $ 6,873
F-44
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOW
RISCORP, INC. (Parent Company Only)
(in thousands, except share and per share data)
Year ended December 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- ------------
Cash flows from operating activities:
Net income $ 2,398 $ 13,683 $ 6,873
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,955 - -
Net amortization of discounts on investments 80 - -
Interest on present value of future profits (125) - -
Net realized gain on sale of investments (4) - -
Decrease (increase) in other assets 2,750 4,494 (1,146)
Equity in net loss (income) of subsidiaries 5,967 (11,035) (6,758)
Increase in surplus note receivable - (13,000) -
Increase in accrued expenses and other liabilities 3,421 3,415 336
----------- ------------ -----------
Net cash provided by operating activities 18,442 (2,443) (695)
----------- ------------ -----------
Cash flows from investing activities:
Capital contributions to subsidiaries (114,375) (31,045) -
Purchase of fixed maturities--available for sale (48,438) (3,000) -
Proceeds from sale of fixed maturities--held for sale 44,124 - -
Purchase of equity securities 1,000 - -
Purchase of equity securities (1,905) - -
Proceeds from the sale of equity securities 353 - -
Purchase of IAA, net of cash acquired (10,618) - -
Purchase of RISC, net of cash acquired (538) - -
----------- ------------ -----------
Net cash used in investing activities (130,397) (34,045) -
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from note payable - 43,000 867
Principal repayment of notes payable (27,000) (6,867) -
Shareholder distributions - - (135)
Exercise of stock options 65 - -
Decrease in APIC - - (70)
Proceeds of initial offering of common stock 127,908 - -
Other, net 11,609 - -
----------- ------------ -----------
Net cash provided by financing activities 112,582 36,133 662
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 627 (355) (33)
Cash and cash equivalents, beginning of period (353) 2 35
=========== ============ ===========
Cash and cash equivalents, end of year $ 274 $ (353) $ 2
=========== ============ ===========
Supplemental disclosures of cash flow information: Cash paid during the year for:
Interest $ 2,684 $ 3,966 $ 66
=========== ============ ===========
Income taxes $ 15,127 $ 4,969 $ 4,004
=========== ============ ===========
F-45
SCHEDULE IV - REINSURANCE
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
Ceded to Assumed Percentage
Gross Other From Other Net of Amount
Amount Companies Companies Amount Assumed to Net
Years Ended
December 31,
1996
Premiums earned $ 326,875 $ 165,022 $ 11,704 $ 173,557 6.7%
1995
Premiums earned $ 274,351 $ 139,144 $ 680 $ 135,887 .5%
1994
Premiums earned $ 614 $ 4,523 $ 5,422 $ 1,513 358.4%
F-46
SCHEDULE VI - SUPPLEMENTAL INFORMATION
RISCORP, INC. AND SUBSIDIARIES
(in thousands)
(Col. C)
Reserves for Losses and Loss Amortization Net
Deferred Unpaid Losses Discount, Adjustment Expenses of Deferred Paid Losses
Policy and Loss if any, Net Net Incurred Related to: Policy and Loss Net
Acquisition Adjustment deducted Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Year Costs Expenses in Col. C. Premiums Premiums Income Year Years Costs Expenses Written
---- ------- ---------- ---------- -------- -------- -------- ------ ------- ------- ---------- --------
1996 $ 446 $458,239 $ - $102,562 $173,557 $12,194 $123,986 $ 3,023 $33,716 $111,963 $179,706
1995 $2,389 $261,700 $ - $ 64,395 $135,887 $ 6,708 $ 87,467 $ 5,198 $46,878 $128,298 $123,429
1994 $ 362 $ 12,668 $ - $ 5,438 $ 1,513 $ 1,677 $ 6,026 $ 2,062 $ 126 $ 8,815 $ 4,207
F-47