-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eor0gTrEjOEK056vQQf8b4CxeR9fjVeLn69c0I00ifR1OndPcSJdOy/np5JavgyN KOqkQclVjmC0Q0fdgQO+fw== 0001003957-98-000008.txt : 19980330 0001003957-98-000008.hdr.sgml : 19980330 ACCESSION NUMBER: 0001003957-98-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RISCORP INC CENTRAL INDEX KEY: 0001003957 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 650335150 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27462 FILM NUMBER: 98575962 BUSINESS ADDRESS: STREET 1: 1390 MAIN ST CITY: SARASOTA STATE: FL ZIP: 34236 BUSINESS PHONE: 9419512022 MAIL ADDRESS: STREET 1: 1390 MAIN STREET CITY: SARASOTA STATE: FL ZIP: 34236 10-K 1 ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (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, 1997 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 X No __ 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 or any amendment to this Form 10-K. ( ) The aggregate market value of shares of the registrant's Common Stock held by non-affiliates of the registrant as of February 27, 1998 was $16,087,217. The number of shares of the registrant's Common Stock issued and outstanding as of February 27, 1998 was 36,868,114 consisting of 12,533,671 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 for the year ended December 31, 1997 Table of Contents Description Page PART I Item 1. Business 1 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 8. Financial Statements and Supplementary Data 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27 PART III Item 10. Directors and Executive Officers of the Registrant 28 Item 11. Executive Compensation 31 Item 12. Security Ownership of Certain Beneficial Owners and Management 36 Item 13. Certain Relationships and Related Transactions 37 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 40 Signatures 51 PART I Item 1. Business Forward-Looking Statements This Annual Report on Form 10-K 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; 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 certain 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, 1997, the Company provided workers' compensation insurance and services to approximately 25,000 policyholders, principally in Florida and the southeastern United States. 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 and other insurance 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. 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. On March 2, 1998, the Company's proxy statement for a special meeting of shareholders to approve the Purchase Agreement was cleared by the Securities and Exchange Commission. The special meeting was held at 10:00 a.m. in Atlanta, Georgia on March 26, 1998. The Purchase Agreement was approved by the shareholders at the special meeting. The Company expects the transaction to close on April 1, 1998. 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. 2 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. 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. 3 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. As of December 31, 1997, the Company provided these services to four entities (representing approximately 3,000 employers) with standard premiums in force under management of approximately $80 million. The largest contracts were with Governmental Risk Insurance Trust ("GRIT"), North Carolina Commerce Fund ("NCCF") and Third Coast Insurance Company. The Company terminated its agreement with the Oklahoma Restaurant Group Self Insurance Association (representing approximately $7 million standard premium) in 1997. Third Party Administrative Services The Company provides integrated administrative and managed care services for self-insured employers. At December 31, 1997, approximately 9 employers were under managed care contracts with the Company. In June 1997, the Company made a strategic decision to exit this line of business to concentrate on its core workers' compensation business. The elimination of this business 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 5,000 physicians and 650 hospital and ancillary facilities as of December 31, 1997. 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. The arrangement with RHP was completely terminated on October 30, 1997 through a loss portfolio transfer agreement. Accordingly, all liabilities under the RHP WCMCA were absorbed by the Company in exchange for the indicated reserves plus a risk margin. To the extent that Humana is unable to meet its contractual obligations under this arrangement, the Company will be liable for any losses and loss adjustment expenses under this arrangement which could result in a material adverse effect on the Company's business, financial condition, or results of operations. 4 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"). Under this arrangement, the Company acted as an agent for Virginia Surety and was 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, 1997, the Company reported written premiums of approximately $11 million under this fronting agreement. The Company did not renew the arrangement beyond December 31, 1997. Sales and Marketing The Company's workers' compensation products and services are sold by independent insurance agencies. As of December 31, 1997, the Company had appointed approximately 800 agencies in 4 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 17% of the Company's direct in force premium at December 31, 1997, with the top independent insurance agency accounting for approximately 4% as of such date. 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 22,000 policyholders as of December 31, 1997. Approximately 40% and 83% of the premiums scheduled to expire in 1997 and 1996, respectively, were renewed by the Company's customers. 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 580 full-time employees at December 31, 1997. Of the Company's employees, approximately 434 provided services to the Company's customers and 146 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. 5 Reinsurance Through various reinsurance agreements, the Company shares the risks and benefits of the workers' compensation insurance that it writes with other insurance and reinsurance companies. 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). The specific excess of loss policies contain a corridor deductible of $1,250,000 for claims in the $500,000 excess of $500,000 corridor. The Company had a similar contract during 1996 with a corridor deductible of $1,000,000. Continental Casualty Co. provided this excess of loss program for 1997, 1996 and 1995. Continental Casualty Co. is rated A (Excellent) by A.M. Best Company, Inc. ("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 - - 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 RISCORP National Insurance Company ("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). 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%. On January 1, 1998, the Chartwell Quota Share Reinsurance Agreement was terminated; however, the reinsurer continues to be responsible for their portion of all losses incurred on policies effective before the termination date. 6 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 AmRe 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 A- 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, among other things, 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). In May 1997, RISCORP Insurance Company ("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." 7 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 Insurance Company in March 1996 and the discontinuance of its prior business. RNIC was effectively treated as a start-up operation for A.M. Best 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. 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. 8 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 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. The Alabama, Florida and South Carolina Departments of Insurance (the "ADOI", "FDOI" 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 for RNIC and RPC and the FDOI and SDOI have imposed a moratorium on new business writings for RNIC. 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 premiums 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 1997 statutory filings indicate that, as of December 31, 1997, its insurance subsidiaries met applicable state minimum capital and surplus requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 9 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. 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; and 4) investment of funds. During February 1998, the FDOI completed an examination of the statutory books and records of RIC and RPC as of December 31, 1996. The FDOI has not yet issued a report; however, based on the February 5, 1998 closing conference with the FDOI examiners, the resolution of the impact of the matters raised by the FDOI will not have a material impact on the December 31, 1996 statutory financial statements of RIC and RPC. However, because the FDOI has not released the final results of their examination, Management cannot determine the materiality of dollar amount of adjustments, if any, to the December 31, 1996 statutory financial statements resulting from the FDOI's 1996 examinations of RIC and RPC. Management believes that any adjustments arising out of the statutory examinations of RIC and RPC will have no material impact on the accompanying GAAP financial statements. 10 On October 9, 1997, the Missouri Department of Insurance ("MDOI") completed an examination of the Company's books and records as of December 31, 1996. The MDOI issued a final report on the 1996 examination on January 12, 1998. The statutory capital and surplus as of December 31, 1996 determined by the examiners was $29,345,804 compared to $31,012,399 reported by RNIC in its 1996 statutory financial statements. The most significant examination adjustment was the non-admission of an accounts receivable balance relating to the loss portfolio transfer from OSAA in the amount of approximately $900,000. This balance was paid in full by OSAA. The remaining adjustments of approximately $800,000 pertain to items that were either collected or charged to expense during 1997. These examination adjustments relate to the statutory financial statements and have no impact on the GAAP financial statements. 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. Losses and Loss Adjustment Expenses The Company establishes its estimated liability for losses and loss adjustment expenses 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. The table below shows the development of losses and loss adjustment expenses for 1988 through 1997. 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 redundancy (deficiency) 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. 11 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.
As of December 31, - --------------------------------------------------------------------------------------------------------- (In thousands) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Loss and loss adjustment expenses, net $ 954 $11,273$ 36,323$ 68,674 $ 96,755 $152,406 $ 128,453 $92,820 $196,078 $199,156 Cumulative Amount Paid: One Year Later 355 8,927 19,335 32,241 47,572 122,603 95,229 55,875 74,639 Two Years Later 902 14,922 34,010 55,794 116,193 164,840 127,395 77,823 Three Years Later 1,185 19,675 44,551 91,441 134,193 172,699 141,803 Four Years Later 1,595 22,587 59,651 100,307 137,782 177,603 Five Years Later 1,665 26,943 62,775 102,468 140,671 Six Years Later 1,801 27,870 63,620 103,936 Seven Years Later 1,821 28,141 64,129 Eight Years Later 1,662 28,563 Nine Years Later 1,862 Liability Re-estimated as of: One Year Later 1,016 18,508 44,192 71,145 115,116 156,866 133,651 95,843 193,677 Two Years Later 1,219 20,541 49,429 83,918 123,472 156,303 139,992 96,189 Three Years Later 1,462 24,514 55,485 91,477 123,298 162,811 144,138 Four Years Later 1,890 27,108 58,588 91,821 125,751 167,907 Five Years Later 1,977 26,670 57,867 92,878 131,074 Six Years Later 1,785 26,023 57,981 96,905 Seven Years Later 1,734 26,067 59,986 Eight Years Later 1,567 26,814 Nine Years Later 1,763 Cumulative Redundancy (Deficiency) (809) (15,541)(23,663)(28,231) (34,319) (15,501) (15,685) (3,369) 2,401
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. 12 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. Favorable development for prior periods' loss and loss adjustment expenses in calendar year 1997 represents improved experience in the 1995 and 1996 accident years partially offset by deterioration in the 1990 through 1992 accident years.
Year Ended December 31, 1997 1996 1995 (in thousands) Gross reserves for losses and loss adjustment expenses, beginning of period $458,239 $261,700 $12,668 Less reinsurance recoverables 180,698 100,675 7,398 Less SDTF recoverable 49,505 51,836 671 Less prepaid managed care fees 31,958 16,369 - ----------- ---------- ------------- Net balance at January 1 196,078 92,820 4,599 ------------ ------------ ------------- Assumed during year from loss portfolio transfers and acquisitions - 88,212 123,854 ------------------ --------- ----------- Incurred losses and loss adjustment expenses related to: Current year 125,764 123,986 87,467 Prior years (2,401) 3,023 5,198 ------------ ----------- ---------- Total incurred losses and loss adjustment expenses 123,363 127,009 92,665 --------- ----------- ----------- Paid related to: Current year 45,646 56,088 33,069 Prior years 74,639 55,875 95,229 ---------- ---------- ----------- Total paid 120,285 111,963 128,298 --------- --------- ------------ Net balance at December 31 199,156 196,078 92,820 Plus reinsurance recoverables 184,251 180,698 100,675 Plus SDTF recoverables 45,211 49,505 51,836 Plus prepaid managed care fees 8,420 31,958 16,369 --------- ----------- --------- Gross reserves for losses and loss adjustment expenses at December 31 $437,038 $458,239 $261,700 ======== ======== ========
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 57,000 square feet of office space at 7 other locations in six states, including Florida, under terms expiring through June 2001. The Company incurred rent expense of $1.7 million for the year ended December 31, 1997. Additionally, the Company has continuing commitments through October 2000 of approximately $0.4 million in the aggregate related to four locations in which offices were closed during 1997. 13 Item 3. Legal Proceedings Vero Cricket Litigation. 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 "Vero Cricket Litigation"). 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 Commerce Mutual Insurance Company ("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. On December 5, 1997, counsel for the parties reached an agreement to recommend to their respective clients a settlement of the claims asserted in the Vero Cricket Litigation. Plaintiff's counsel confirmed that the terms of the settlement are acceptable to the named plaintiffs. The Company's Board of Directors has approved the terms of the settlement, and the final settlement documents are being reviewed by the parties and counsel. The settlement is contingent upon preliminary approval by the court as to the fairness of the settlement, certification of a settlement class, notice to the settlement class, opportunity of the settlement class members to object and withdraw, no termination by either party and final approval by the court. Pursuant to the terms of the settlement agreement and subject to the satisfaction of the contingencies discussed above, RIC will pay to the plaintiffs a settlement amount of $475,000. The Company estimates that approximately 75% of the settlement amount will be covered by insurance. Given the preliminary nature of this settlement and the various contingencies relating to its consummation, there can be no assurance that this litigation will ultimately be settled on this basis. The Company has recorded a provision of $475,000 for the payment of this settlement. Securities 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. (the "Securities Litigation"). In March 1997, the Court consolidated these lawsuits and appointed co-lead plaintiffs and co-lead counsel. The plaintiffs subsequently filed a consolidated complaint. The consolidated complaint named as defendants RISCORP, Inc., three of its executive officers, one non-officer director and three of the underwriters for RISCORP, Inc.'s initial public offering. The plaintiffs in the consolidated complaint purport to represent the class of shareholders who purchased RISCORP, Inc. Class A Common Stock between February 28, 1996, and November 14, 1996. The consolidated complaint alleges that RISCORP, Inc.'s Registration Statement and Prospectus of February 28, 1996, as well as subsequent statements, contained false and misleading statements of material fact and omissions, in violation of sections 11 and 15 of the Securities Act and sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The consolidated complaint seeks unspecified compensatory damages. Pursuant to court ordered mediation, counsel for the parties have engaged in discussions in an effort to resolve the Securities Litigation. On January 14, 1998, counsel for the Company, counsel for William D. Griffin and counsel for the plaintiffs reached an oral agreement on terms to recommend to their clients to settle this litigation. The proposed settlement is contingent upon the following: consummation of the transactions contemplated by the Purchase Agreement with Zenith, certification of a settlement class, payment by the Company to the settlement class, disclosure of certain documents, interviews of individuals to verify information relating to the settlement and a release against all defendants. Counsel to the parties are in the process of finalizing the initial settlement documents. The settlement will require preliminary approval by the court as to the fairness of the terms of the settlement. Notice to the settlement class and an opportunity to object to the terms of the settlement and to exclude themselves from the settlement class is also required. The settlement must receive final court approval after notice to the class and an opportunity to object or opt out is provided. Not all of the terms of the settlement have been finalized as of this date. Counsel to the parties have agreed to recommend to their respective clients a settlement amount of $21 million. The Company estimates that approximately $8 million of insurance proceeds will be available for contribution to the settlement amount as well as related costs and expenses. Given the preliminary nature of this settlement and the various contingencies relating to its consummation, there can be no assurance that this litigation will ultimately be settled on this basis. The Company has recorded a provision of $13 million net of estimated insurance proceeds for the payment of this settlement. 14 Alabama Litigation. On July 17, 1997, Plaintiffs Thomas K. Albrecht and Peter D. Norman filed, in the Circuit Court of Montgomery County, Alabama, an action against the Company, Mr. William D. Griffin, and several other former officers of the Company. The suit alleged violations of federal and state securities laws and breach of contract resulting from the purchase of Independent Association Administrators, Inc. ("IAA") by the Company in 1996. The plaintiffs sought compensatory and punitive damages and equitable relief. On or about December 2, 1997, counsel for the Company and counsel for plaintiffs negotiated a settlement of this action. Settlement documents have been approved and executed by all parties. As part of the settlement agreement, the Company paid $2 million to plaintiffs, advanced $2.3 million to plaintiffs against an anticipated final distribution to shareholders and accelerated a distribution of 790,336 additional shares of Class A Common Stock to plaintiffs. Such shares were contemplated under the terms of the Agreement and Plan of Merger by and among the Company, RISCORP-IAA, Inc., IAA, Thomas K. Albrecht and Peter D. Norman dated as of September 17, 1996. The Company estimates that approximately $2 million of insurance proceeds will be available to offset the total settlement amount as well as related costs and expenses. As part of the settlement agreement, plaintiffs agreed to vote all of their shares of Class A Common Stock in favor of the Purchase Agreement and the transactions contemplated therein. Plaintiffs are record holders of 1,580,672 shares of Class A Common Stock, and thus these plaintiffs hold approximately 13% of the outstanding shares of Class A Common Stock. The Company recorded the settlement expense of $2 million for the settlement of this matter. OSAA 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 the Occupational Safety Association of Alabama ("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. 15 Indictments of the Company and Certain Former Officers. 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. On February 18, 1998, a second superseding indictment was issued against the five former officers including Mr. Griffin. Neither the Company nor any of its subsidiaries were named as defendants in the second indictment. The charges asserted in the second indictment, like those in the first indictment, stem from alleged illegal political campaign contributions. Florida Insurance Industry Class Action. On March 13, 1998, RIC and RPC were named as defendants in a purported class action against the National Council on Compensation Insurance, Inc. and all insurers selling workers' compensation insurance in the State of Florida from 1985 to 1998. The suit claims the defendants violated the Sherman Antitrust Act, RICO, the Florida Antitrust Act and the common law in the collection of workers' compensation premiums for alleged residual market loads. The suit seeks compensatory and punitive damages and treble damages for the RICO counts. The named plaintiff, Bristol Hotel Asset Company, claims to be a purchaser of Florida workers' compensation insurance and claims to represent others similarly situated. The Company intends to vigorously defend this action; however, there can be no assurance it will prevail in the litigation. Employee Matters. In June 1997, the Company terminated a number of employees in connection with the workforce reduction. As a result of the workforce reduction, a number of former employees have initiated proceedings, including arbitration, against the Company for certain severance benefits. The Company intends to vigorously defend these suits; however, there can be no assurance that it will prevail in these proceedings. Other than as noted above, no provision had been made in the Company's financial statements for the above matters at December 31, 1997. Item 4. Submission of Matters to a Vote of Security Holders None. 16 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." There is no public market for the Company's Class B 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. As of December 31, 1997, there were 287 record holders of Class A Common Stock. 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 2nd Quarter 3rd 4th Quarter 1st Quarter 2nd Quarter 3rd 4th Quarter Quarter Quarter Quarter - -------- --------- ------------- ----------- ------------ -------- ------------ ------------ ----------- ------------ High 21 1/2 23 7/8 19 1/4 18 3/4 4 3/8 3 3/4 1 1/8 1 1/2 Low 19 15 10 3/4 3 15/64 1 7/8 15/16 3/8 5/8
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. 17 Item 6. Selected Financial Data
Year Ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands, except for per share data) Income Statement Data: Revenues: Premiums earned $179,729 $173,557 $ 135,887 $ 1,513 $ 1,964 Fee and other income 20,369 31,733 22,397 56,712 40,948 Net realized gains 1,546 105 1,016 - - Net investment income 16,447 12,194 6,708 1,677 873 ---------- ----------- ----------- --------- --------- Total revenues 218,091 217,589 166,008 59,902 43,785 --------- ---------- --------- -------- ------- Expenses: Losses and loss adjustment expenses 104,052 114,093 82,532 (716) 3,571 Unallocated loss adjustment expenses 19,311 12,916 10,133 8,804 7,637 Commissions, general and administrative expenses 70,800 65,685 48,244 35,869 20,775 Interest 1,919 2,795 4,634 1,750 1,218 Depreciation and amortization 7,423 11,500 1,683 1,330 1,116 ----------- ---------- ----------- ----------- ----------- Total expenses 203,505 206,989 147,226 47,037 34,317 --------- --------- --------- ---------- ---------- Income before income taxes 14,586 10,600 18,782 12,865 9,468 Income taxes (1) 7,300 8,202 5,099 5,992 3,714 ----------- ----------- ----------- ----------- ----------- Net income $ 7,286 $ 2,398 $ 13,683 $ 6,873 $ 5,754 ========== ========== ========= ========== ========== Net income per share (4) $ 0.20 $ 0.07 $ 0.49 $ 0.24 $ 0.20 =========== =========== =========== =========== =========== Net income per share assuming dilution (4)$ 0.20 $ 0.07 $ 0.45 $ 0.23 $ 0.20 ========= =========== =========== =========== =========== Weighted average common shares outstanding 36,892 34,648 28,100 28,100 28,069 ========= ========= ========= ========= ========= Weighted average common shares and common share equivalents outstanding (2) (3) 37,116 36,406 30,093 30,093 28,554 ========= ========= ========= ========= ========= December 31, --------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance Sheet Data: Cash and investments $ 253,634 $ 281,963 $92,713 $47,037 $30,157 Total assets 749,650 828,442 443,242 93,908 54,551 Long-term debt 15,609 16,303 46,417 27,840 17,015 Shareholders' equity 163,533 157,308 16,157 3,895 1,996 (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) 1997 and 1996 amounts include 790,336 and 225,503 shares, respectively, of Class A Common Stock pursuant to the contingency clauses in the acquisition agreement with IAA. See notes 3 and 19 to the Company's consolidated financial statements. (4) The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share". As required by that pronouncement, this figure has, for all years presented, been recalculated in accordance with its provisions.
18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General Prior to 1996, the Company's core at-risk operations were entirely focused in Florida; however, during 1996, the Company completed several acquisitions including an insurance company that was licensed in 19 states, and loss portfolio transfers and assumption reinsurance transactions with several self insurance funds outside the state of Florida, all of which allowed the Company to diversify its at-risk operations outside the state of Florida. The diversification of at-risk premiums outside the state of Florida continued during 1997. 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) 1997 1996 1995 ----------------------- Florida $ 180.8 $ 270.8 $ 284.8 Alabama 39.1 21.7 - North Carolina 32.2 41.4 - Other 28.4 22.8 - ---- ---- ------- Total $ 280.5 $ 356.7 $ 284.8 ======= ======= ======= (a) Includes RIC, RPC and RNIC for 1997 and 1996, and RIC and RPC for 1995. Direct premiums written were reduced by specific reinsurance cessions (1997, 1996 and 1995), the 50 percent AmRe Quota Share Reinsurance Agreement for the Company's Florida workers' compensation business (1997, 1996 and 1995), and the 65 percent Chartwell Quota Share Reinsurance Agreement (effective October 1, 1996 for business written primarily outside the state of Florida), which decreased to 60 percent 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 such as 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 1997 and 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 percent for new or renewal policies written on or after January 1, 1997. Concurrently, with the premium reduction effective January 1, 1997, the 10 percent managed care credit was phased out. This credit had been offered since 1994 to employers who met certain criteria for participating in a qualified WCMCA. In addition, on October 9, 1997, Florida further reduced premium rates by 1.7 percent for new and renewal policies written on or after January 1, 1998. The State of North Carolina approved a 13.7% 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. 19 The Company experienced increased pricing pressures during 1997 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. During 1997, the Company made the strategic decision to discontinue writing business owners' protection, commercial multiple peril and auto and focus on its core workers' compensation business. Net written premiums on these lines of business were less than $1.0 million during 1997 and were less than $0.5 million in 1996. In addition, in June 1997, the Company implemented a strategic plan to consolidate several of its field offices and announced its intention to close all field offices, except Charlotte and Birmingham, by the end of 1997, and to cease writing new business in certain states including Oklahoma, Virginia, Missouri, Mississippi, Louisiana and Kansas. The estimated impact of the decision to discontinue writing business in these states was a reduction of approximately $16.0 million in direct premiums written. The Company 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 - The Company's Operating Philosophy," for further discussion. 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 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 $4.0 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 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. 20 Estimated recoveries from the SDTF were $45.2 million and $49.5 million at December 31, 1997 and 1996, respectively. The decrease in the estimated recoveries during 1997 resulted from $5.9 million of actual collections and a reduction in the estimated recoveries due to additional information regarding the impact of the legislative reform. Actual cash recoveries from the SDTF totaled $5.9 million, $2.5 million, and $0.9 million, respectively, for the years ended December 31, 1997, 1996 and 1995. For the year ended December 31, 1997, the effect of the change in the estimated SDTF recoveries on losses and loss adjustment expenses incurred was an increase of approximately $4.3 million. For the years ended December 31, 1996 and 1995, the effect of the changes in the estimated SDTF recoveries on losses and loss adjustment expenses incurred was a decrease of approximately $0.2 million and $5.8 million, respectively. SDTF assessments, which are based on net premiums written, were $8.0 million, $11.7 million and $12.9 million for the years ended December 31, 1997, 1996 and 1995, 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 following table shows direct, assumed, ceded, and net earned premiums for the years ended December 31, 1997, 1996 and 1995: Year Ended December 31, -------------------------------------- (Dollars in millions) 1997 1996 1995 ----------------------------- Direct premiums earned $ 328.2 $ 326.9 $ 274.3 Assumed premiums earned 18.8 11.7 0.7 Premiums ceded to reinsurers (167.3) (165.0) (139.1) -------- -------- -------- Net premiums earned $ 179.7 $ 173.6 $ 135.9 ======= ======== ======== 21 The comments below should be read in conjunction with the Financial Statements in Part IV, Item 14. Direct earned premiums for the first six months of 1997 increased $31.1 million from the same period in 1996, while direct earned premiums for the last six months of 1997 decreased $29.8 million from the same period in 1996. The decrease in direct earned premiums for the last six months of 1997 of $29.8 million from the same period in 1996 was primarily due to the decrease in new and renewal premiums that the Company experienced in the second, third and fourth quarters of 1997 from the adverse publicity pertaining to the A.M. Best ratings of the Company's insurance subsidiaries (see "Business - A.M. Best Ratings of Insurance Subsidiaries"), the Company's inability to file its Form 10-K, 10-Q's and audited statutory financial statements in a timely manner and the delisting of the Company's stock by NASDAQ. In addition, the direct premiums earned for the first six months of 1997 were favorably impacted by the rapid growth that occurred in 1996 after the Company's initial public offering ("IPO") of stock in 1996. The $1.3 million net increase in the direct premiums earned for the year ended December 31, 1997 was primarily the result of the following factors: The infusion of approximately $68.9 million of capital into the Company's insurance subsidiaries from the IPO proceeds allowed the Company's insurance subsidiaries to increase their premium writing capacity and, as a result, to increase premiums during the last nine months of 1996 due to the expanded premium writing capabilities. Written premiums are earned pro rata over the policy period (usually 12 months), therefore, increased premiums written during the last nine months of 1996 will have a positive impact on earned premiums in 1996 and 1997. Written premiums increased in the third and fourth quarters of 1996 and the first quarter of 1997 from the assumption reinsurance and loss portfolio agreements entered into by the Company's insurance subsidiaries during 1996 and from the other acquisitions made during 1996. Enhanced marketing initiatives implemented after the IPO to increase the number of policies and to write accounts with larger premiums. These increases were almost entirely offset by a decrease in new and renewal premiums in the second, third and fourth quarters of 1997 due to the adverse publicity discussed above. The net increase from 1995 to 1996 was primarily due to loss portfolio transfers and premium growth in states licensed through RNIC. The increase in assumed premiums earned from 1996 to 1997 is primarily the result of the Company recording $11.4 million of earned premiums in the fourth quarter of 1997 from the National Council on Compensation Insurance, Inc. ("NCCI") pool participation. The remaining 1997 assumed premiums of $7.1 million are primarily the result of a fronting agreement entered into in September 1995 with another insurer which enabled the Company's insurance subsidiaries to begin expansion into states where they were not licensed. The assumed premiums from the fronting agreement were approximately $7.1 million for the year ended December 31, 1997 compared to $11.7 million for the year ended December 31, 1996. The assumed premiums earned for the third and fourth quarter of 1997 were approximately $1.1 million. The decrease in assumed premiums from the fronting agreement of approximately $3.0 million per quarter for the third and fourth quarters of 1997 was due to a reduction in the premium writings under this agreement. 22 For the years ended December 31, 1997, 1996 and 1995, the Company ceded approximately 50 percent of its Florida premiums to AmRe under a quota share reinsurance agreement and 60 percent of the business written by RNIC under a separate quota share agreement (65 percent during 1996) with Chartwell. The increase in premiums ceded in 1997 and 1996 is directly related to the increase in direct premiums earned. As direct premiums earned decrease in the future, the ceded premiums will also decrease. Fee and other income for the years ended December 31, 1997, 1996 and 1995 was $20.4 million, $31.7 million and $22.4 million, respectively. The decrease of $11.3 million from 1996 to 1997 was primarily due to the loss of service fees from the conversion of the National Alliance for Risk Management ("NARM") self insurance funds of Virginia (which were previously managed by the Company) to at-risk business via a loss portfolio transfer and decreases in RISCORP West, Inc. ("RWI") service fees from the termination of RWI's Mississippi and Louisiana service contracts. The decrease in fee income was partially offset by new fees generated from CompSource, the fronting agreement discussed above, the new service agreement with Third Coast Insurance Company (a joint venture between the Company and another insurer) that began April 1, 1996 and growth in other existing fee products. The net increase of $9.3 million from 1995 to 1996 was primarily due to new fees generated from CompSource, the fronting agreement entered into in 1995, the new service agreement with Third Coast Insurance Company, growth in the Company's 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 during 1996, and decreases in RWI service fees from the termination of RWI's Mississippi and Louisiana service contracts. Net investment income for the years ended December 31, 1997, 1996 and 1995 was $16.4 million, $12.2 million and $6.7 million, respectively. The $4.2 million increase from 1996 to 1997 and the $5.5 million increase from 1995 to 1996 was primarily due to the increase in the investment portfolio balance during 1997 and 1996 due primarily to (i) to the investment of proceeds from the IPO by RISCORP into its insurance subsidiaries, which, in turn, invested the proceeds in their individual investment portfolios, (ii) the growth in premium volume during 1997 and 1996 which generated positive cash flow which was used to purchase investments, and (iii) the positive cash flow generated from the proceeds received from the 1996 loss portfolio transfers and assumption reinsurance transactions which were also used to purchase investments. 23 The loss ratio for the year ended December 31, 1997, 1996 and 1995 was 57.9 percent, 65.7 percent and 60.7 percent, respectively. Losses and loss adjustment expenses for the years ended December 31, 1997, 1996 and 1995 were $104.0 million, $114.1 million and $82.5 million, respectively. The decrease in the loss ratio from 1996 to 1997 was due primarily to favorable development in Florida (6.5 percent) and North Carolina (1.0 percent), and unfavorable development in Alabama (1.0 percent) relating to the Company's 1996 and earlier accident years' loss and loss adjustment reserves. The favorable development in the Florida business was due primarily to the reduction in the loss and loss adjustment expense reserves resulting from an actuarial analysis completed in the fourth quarter of 1997 and the favorable development for the 1996 accident year resulting primarily from favorable development of post 1993 Florida accident years due to enhanced savings from the legislative changes that became effective in 1994. The net increase in the loss ratio from 1995 to 1996 was primarily attributable to higher loss ratios on the business written in new states licensed through RNIC and higher loss ratios on the business acquired through assumption reinsurance transactions than the loss ratios on the Company's core Florida business. The unallocated loss adjustment expense ratio for the years ended December 31, 1997, 1996 and 1995 was 10.7 percent, 7.4 percent and 7.5 percent, respectively. The net increase in unallocated loss adjustment expenses of $6.4 million from 1996 to 1997 was primarily due to the strengthening of these reserves in 1997 based on an actuarial analysis performed by the Company during 1997. The unallocated loss adjustment expense ratio for 1996 and 1995 were comparable. The net increase of $2.8 million from 1995 to 1996 in the unallocated loss adjustment expenses was attributable to the growth in premium volume. Commissions, general and administrative expenses for the years ended December 31, 1997, 1996 and 1995 were $70.8 million, $65.7 million and $48.2 million, respectively. The net increase of $5.1 million from 1996 to 1997 is primarily the result of a $6.3 million increase in the amortization of deferred acquisition costs; a $2.1 million increase in personnel expenses primarily related to severance payments incurred in connection with the June 1997 workforce reduction; a $5.9 million increase in accounting, auditing, consulting and legal expenses primarily resulting from the Company's inability to file its 1996 financial statements in a timely manner; a $2.8 million increase in postage, telephone and insurance expenses; a $13.0 million expense recognized in the fourth quarter of 1997 in connection with the proposed settlement of the securities class action lawsuit; an increase of $5.0 million relating to expenses associated with the NCCI pool participation; an increase in commissions paid to agents of $5.3 million; and a reduction in ceding commission income of $1.7 million. These expense increases were offset by reductions in marketing related travel expenses of $1.5 million, decreases in premium taxes of $8.5 million resulting from a decline in written premiums and a decline in bad debt expenses of $27.0 million. The net increase in expenses of $17.4 million from 1995 to 1996 was attributable primarily to significant increases in the Company's bad debts expenses 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. 24 Interest expense for the years ended December 31, 1997, 1996 and 1995 was $1.9 million, $2.8 million and $4.6 million, respectively. The decrease of $0.9 million from 1996 to 1997 and the decrease of $1.8 million from 1995 to 1996 was attributable primarily to the repayment of $28.6 million of bank borrowings in March 1996 with proceeds from the IPO. Depreciation and amortization expenses for the years ended December 31, 1997, 1996 and 1995 were $7.4 million, $11.5 million and $1.7 million, respectively. The decrease from 1996 to 1997 of $4.1 million was primarily the result of the impairment losses recognized in 1996 offset by a full year's amortization of goodwill recognized on the 1996 acquisitions. There were no impairment losses recognized in 1997. The increase of $9.8 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. The effective tax rates for the years ended December 31, 1997, 1996 and 1995 were 50.0 percent, 77.4 percent and 27.1 percent, respectively. The decrease in the effective tax rate from 1996 to 1997 was primarily the result of the decrease in the non-deductible amortization of goodwill and the reduction in state taxes in excess of the federal tax benefit. The increase in the effective tax rate from 1995 to 1996 was primarily the result of increases in the non-deductible amortization of goodwill resulting from the impairment losses recognized in 1996 and increases in state taxes in excess of the federal tax benefit. 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 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 - Asset Purchase Agreement with Zenith." Cash flow (used in) operations for the years ended December 31, 1997, 1996 and 1995 was ($22.9) million, $28.1 million and ($47.3) million, respectively. The decrease from 1996 to 1997 was due primarily to reductions in unearned premiums, and loss and loss adjustment expense reserves resulting from a decrease in direct premiums written of $76.2 million as well as increases in commissions, general and administrative expenses and unallocated loss adjustment expenses of $4.8 million and $6.4 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. 25 The Company has projected cash flows through June 1998 and believes it has sufficient liquidity and capital resources to support its operations. The Company has recorded $45.2 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, 1997, 1996 and 1995, the Company received net payments from the SDTF totaling $5.9 million, $2.5 million and $0.9 million, respectively. Barring any adverse legislative change, the Company believes that it will ultimately collect the entire balance of SDTF recoverables and that periodic reimbursement will be received following submission of proof of claim and reimbursement requests. During its approximate 40-year history, the SDTF has historically paid reimbursement requests for claims it determined were eligible for reimbursement. The Company does not believe that 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." As of December 31, 1997 and 1996, the Company's insurance subsidiaries had combined statutory capital and surplus of $96.3 million and $90.6 million, respectively. The individual statutory capital and surplus of each of the Company's insurance subsidiaries at December 31, 1997 and 1996 exceeded the minimum statutory capital and surplus required by their state of domicile. 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, 1997, 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, 1997, approximately 75% of the Company's investment portfolio was rated Aa or above by Moody's, and the portfolio contained no securities with a rating of less than Baa. The Company does not hold any common stocks in its portfolio. The average duration of the portfolio, was approximately 2.5 years at December 31, 1997. The amortized cost and fair value of the Company's investment portfolio, at December 31, 1997, was $220.4 million and $223.7 million, respectively. 26 The following table summarizes the Company's investment portfolio at December 31, 1997 (in thousands): Tax Fair Equivalent Type of Investment Value Yield* Certificates of deposit $ 1,470 6.10% U. S. government & agency obligations 57,878 6.34% Corporate obligations 89,200 6.52% Municipal obligations 63,257 6.71% Asset-backed securities 9,966 6.43% Mortgage-backed securities 1 ,967 7.23% ----------- ------ $223,738 6.53% ======== ===== * The tax equivalent yield was computed using a 35% tax rate, which represents the effective statutory tax rate for the Company 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-49 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, 1997. 27 PART III Item 10. Directors and Executive Officers of the Registrant Directors and Executive Officers Set forth below is certain information as of December 31, 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 47 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 54 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 62 1995
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. 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. 28 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). 29 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. 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. 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. 30 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 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE* Securities Under- All Other Name and Annual Compensation lying Compen- Principal Position Year Salary Bonus Other Options sation (1) Frederick M. Dawson 1997 $279,808 $ 525,000 - 2,533,326 $8,334(2) President and Chief 1996 - - - - - Executive Officer 1995 - - - - - Steven J. Berling 1997 223,750 - - - 555(3) Senior Vice President - 1996 208,333 52,083 - 20,000 3,831(3) Managed Care Services 1995 190,306 34,594 - 72,632 1,221(3) Stephen C. Rece 1997 155,438 20,000 - - 1,966(4) Senior Vice President & 1996 144,167 21,625 - 7,500 9,502(4) Chief Financial Officer 1995 134,167 53,020 - 372 32,162(4) Reed S. Killets 1997 145,800 10,200 - - 1,448(5) Senior Vice President- 1996 144,900 24,490 - 10,000 11,269(5) Human Resources 1995 133,750 28,830 - 372 4,187(5) Gregory P. Kuzma 1997 153,566 - - - 1,152(6) Senior Vice President & 1996 124,400 12,440 - 7,500 5,614(6) Treasurer 1995 119,167 12,157 - 75 27,608(6) William D. Griffin 1997 $375,000 $375,000 $30,000(7) - $11,345(10) Former Chief 1996 751,416 907,241 18,907(8) - 17,547(10) Executive Officer 1995 720,000 5,609,583 46,571(9) - 13,685(10)
*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 $7,397 for temporary housing and $937 in group term life insurance premiums. (3) Includes $3,274 in allocations to the participant's account in the Company's defined contribution plan in 1996, and $555, $557 and $487 for group term life insurance premiums in 1997, 1996 and 1995, respectively. Also includes $734 in annual fees for country club membership in 1995. (4) Includes $3,827 and $27,767 in allocations to the participant's account in the Company's defined contribution plan in 1996 and 1995, respectively, and $546, $547 and $519 for group term life insurance premiums in 1997, 1996 and 1995, respectively. Also includes $1,420, $5,128 and $3,876 in annual fees for country club membership in 1997, 1996 and 1995, respectively. 31 (5) Includes $7,945 and $2,326 in allocations to the participant's account in the Company's defined contribution plan in 1996 and 1995, respectively, and $552, $552 and $244 for group term life insurance premiums in 1997, 1996 and 1995, respectively. Also includes $896, $2,772 and $1,617 in annual fees for country club membership in 1997, 1996 and 1995, respectively. (6) Includes $3,488 and $25,530 in allocations to the participant's account in the Company's defined contribution plan in 1996 and 1995, respectively, and $260, $260 and $294 for group term life insurance premiums in 1997, 1996 and 1995, respectively. Also includes $892, $1,866 and $1,784 in annual fees for country club membership in 1997, 1996 and 1995, respectively. (7) Includes (i) a $30,000 automobile expense allowance. (8) Includes (i) a $4,591 automobile usage allowance and (ii) a $14,316 aircraft usage allowance. (9) Includes (i) a $13,936 automobile usage allowance and (ii) a $32,635 aircraft usage allowance. (10) Includes (i) $9,771, $9,103 and $7,709 cash surrender value of life insurance policies in effect in 1997, 1996 and 1995, respectively and (ii) $1,142, $7,574 and $5,976 in annual fees for a country club membership in 1997, 1996 and 1995, respectively. Also includes $432 and $870 for group term life insurance premiums in 1997 and 1996 respectively. 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. No options were granted in 1997 and all options previously granted under this plan were terminated in 1997. 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. 32 Stock Option Grants The following table shows information concerning options granted in 1997 to the officers shown in the Compensation Table at the end of 1997. All option grants to Mr. Dawson were fully vested on the date of grant except for the grant of 1,447,615 shares at $2.75 which vest over two years at the rate of 50% per year.
Option/SAR Grants in Last Fiscal Year* - ---------------------------------------------------------------------------------------------- ---------------------------- Individual Grants - ---------------------------------------------------------------------------------------------- Percent Of Total Potential Realizable Value Number Of Options At Assumed Annual Rates Of Securities Granted To Stock Price Appreciation Underlying Employees Exercise Or For Option Term Options In Fiscal Base Expiration Name Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($) (a) (b) (c) (d) (e) (f) (g) - -------------------------------- ----------------- ------------- -------------- -------------- -------------- ------------- Frederick M. Dawson 1,447,615 57% $2.75 Earlier of $ 0 $709,331 542,855 22% 5.00 May 19, 2007 0 0 361,904 14% 7.50 or three 0 0 180,952 7% 10.00 years after 0 0 termination of employment Steven J. Berling 0 0 0 N/A 0 0 Stephen C. Rece 0 0 0 N/A 0 0 Gregory P. Kuzma 0 0 0 N/A 0 0 Reed S. Killets 0 0 0 N/A 0 0 William D. Griffin 0 0 0 N/A 0 0 *No SARs have been granted.
33 Option Exercises and Year-End Option Values The following table shows information concerning options exercised during 1997 and options held by the officers shown in the Summary Compensation Table at the end of 1997.
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) -------------------------- ---------------------- Name Exercise Realized Exerciseable Unexercisable Exercisable Unexercisable - ---- -------- -------- ------------ ------------- ----------- ------------- Frederick M. Dawson - - 1,085,711 1,447,615 $0 $0 Steven J. Berling - - - - - - Stephen C. Rece - - - - - - Gregory P. Kuzma - - - - - - Reed S. Killets - - - - - - William D. Griffin - - - - - - (1) Based on the closing market price on December 31, 1997 of $1.25 per share.
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. During 1997, all options granted under the Option Plan were terminated. The Company does not anticipate granting any future options under the Option Plan. Compensation Arrangements upon Resignation, Retirement or Other Termination; Employment Agreements The Company has entered into an employment agreement with Mr. Dawson providing for an initial base salary of $450,000, escalating to $600,000 on May 31, 1998. This agreement has a term of two years and provided for a signing bonus of $150,000 and a deferred payment of $750,000, payable in two equal installments on December 31, 1997 and May 31, 1998. Mr. Dawson's employment agreement also provides for the grant of certain options. See "Directors and Officers of the Registrant - Stock Option Grants." Under the employment agreement, the Company may terminate Mr. Dawson at any time. If Mr. Dawson is terminated by the Company for other than Cause or if there is a change of control of the Company, Mr. Dawson is entitled to receive an immediate payment of all amounts remaining to be paid under the agreement. 34 The Company has entered into employment agreements with Messrs. Berling, Rece, Kuzma and Killets, providing for base salaries of $225,000, $175,000, $150,000 and $145,000, 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), 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 included 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. Mr. Griffin resigned all positions with the Company on September 18, 1997. Accordingly, he currently receives no compensation from 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 "Legal Proceedings - Indictment of the Company and Certain Former Officers and Directors." 35 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of December 31, 1997 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.
Amount and Nature of Beneficial Ownership (1) Class A Common Class B Common Name of Beneficial Owner Number Percent Number Percent William D. Griffin(2) -- -- 22,176,052 91.1% L. Scott Merritt(3) -- -- 2,158,391 8.9% Directors and Named Executive Officers: Frederick Dawson (4) 1,085,711 8.5% -- -- Steven J. Berling -- -- -- -- Stephen C. Rece -- -- -- -- Reed Killets 15 * -- -- Gregory P. Kuzma (5) 50 * -- -- Walter E. Riehemann -- -- -- -- Seddon Goode, Jr. -- -- -- -- George E. Greene II 200 * -- -- Walter L. Revell -- -- -- -- All directors and current executive officers 1,085,976 8.5% -- -- as a group (9 persons)(6) *Less than 1%
(1) 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. (2) Mr. Griffin's business address is 1830 Osprey Avenue, Suite 100A, Sarasota, Florida 34239. Mr. Griffin's shares of Class B Common Stock are owned of record by RISCORP Group Holding Company L.P. (17,268,841 shares) and William D. Griffin Family Limited Partnership (4,907,211 shares). The general partners of such limited partnerships are Gryphus Company I ("GI") and Gryphus Company II ("GII"), respectively. Mr. Griffin is the president, a director and the controlling shareholder of GI and GII. The business address of GI and GII is Bank of America Plaza, Suite 1100, 300 N. Fourth Street, Las Vegas, Nevada 89101. All of the shares of Class B Common Stock noted may be converted into shares of Class A Common Stock, on a one for one basis. If all of the Class B Common Stock shares noted were so converted into Class A Common Stock, Mr. Griffin would beneficially own 65.4% of the shares of Class A Common Stock. The information herein regarding the stock ownership of Mr. Griffin, GI and GII was obtained from a Schedule 13G filed by such persons with the Commission on February 20, 1997. The Company makes no representation as to the accuracy or completeness of the information reported regarding Mr. Griffin, GI and GII. (3) Mr. Merritt's business address is 4711 Meadowview Circle, Sarasota, Florida 34233. Mr. Merritt resigned as a director and officer of the Company on May 20, 1997. Mr. Merritt has sole voting and investment power with respect to 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. All of the shares of Class B Common Stock noted may be converted into shares of Class A Common Stock, on a one for one basis. If all of the Class B Common Stock shares noted were so converted into Class A Common Stock, Mr. Merritt would beneficially own 15.5% of the shares of Class A Common Stock. The information herein regarding the stock ownership of Mr. Merritt was obtained from a Schedule 13G filed by Mr. Merritt with the Commission on February 20, 1997. The Company makes no representation as to the accuracy or completeness of the information reported regarding Mr. Merritt. 36 (4) Mr. Dawson's shares include 1,085,711 shares subject to options that are currently exercisable. (5) Mr. Kuzma shares voting and investment power of these shares with his wife. (6) Includes 1,085,711 shares subject to options held by all directors and executive officers that are exercisable within 60 days. Item 13. Certain Relationships and Related Transactions Parking. In 1994, Mr. Griffin began leasing parking facilities at approximately $24,000 per month to the Company at its Sarasota office. During 1997, the Company paid $98,400 under this lease. Reinsurance Commissions. 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 did not exceed industry standards for such arrangements. The arrangement with Mango was terminated in 1997. In 1997, the Company paid Mango commissions of approximately $8,000. Services Provided to RHP. 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 and utilization management to the Company for its health indemnity products. In November 1997, RHP was sold to Oxford Health Plans and the Bilateral Administrative Services Cost Sharing Agreement was terminated. RHP is no longer owned by an affiliate of the Company. During 1997, the Company received a net amount of approximately $204,000 from RHP under this agreement. Services Provided to Gryphus Development Group ("GDG") Effective as of January 1, 1996, the Company entered into an Administrative Services Cost Sharing Agreement with GDG, a corporation owned and controlled by Mr. Griffin. 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. This agreement was terminated in 1997. During 1997, the Company received $86,363 from GDG under this agreement. 37 License Arrangement Prior to the sale of RHP, RHP paid 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 1997, the Company received $33,946 as a license fee from RHP. This arrangement was discontinued in 1997 due to the sale by Mr. Griffin of RHP. Management Agreement. The Company entered into a Management Agreement (the "Management Agreement") as of February 18, 1998, with The Phoenix Management Company, Ltd. ("Phoenix") for the provision of various management services to the Company immediately following the consummation of the transactions contemplated by the Purchase Agreement with Zenith. Frederick M. Dawson, the Company's current president and chief executive officer, owns a majority interest in Phoenix, a Florida limited partnership, and will control its operations as president of the general partner. Walter E. Riehemann, the Company's current General Counsel, owns a minority interest in Phoenix and will serve as vice president and secretary of the general partner. While neither Mr. Dawson nor Mr. Riehemann will be employees of the Company following the consummation of the transactions contemplated by the Purchase Agreement with Zenith, the Management Agreement specifically provides that Mr. Dawson will hold the titles of president and chief executive officer and Mr. Riehemann will hold the titles of chief investment officer, treasurer and secretary. Pursuant to the terms of the Management Agreement, Phoenix will be paid $100,000 per month, plus expenses, and granted a restricted stock award for 1,725,000 shares of Class A Common Stock (subject to certain vesting provisions) in consideration for its management services. The Management Agreement will have an initial term of three years commencing immediately following the consummation of the transactions contemplated by the Purchase Agreement with Zenith, and the Company will have the right to extend the term for an additional year. The Company will pay Phoenix a retainer of $600,000 immediately following the consummation of the transactions contemplated by the Purchase Agreement with Zenith which will be applied by Phoenix against the fees payable by the Company during the final six months of the initial term. The restricted stock grant will vest monthly over the initial term of the Management Agreement, and Phoenix will be entitled to all rights applicable to holders of shares of Class A Common Stock with respect to all such shares from the date of grant including, without limitation, the right to receive any dividends or distributions payable on the restricted stock. Pursuant to the terms of the Management Agreement, the Company will pay Phoenix an amount which, on an after-tax basis, is sufficient to reimburse the partners of the Management Company for all taxes (exclusive of state taxes) incurred in connection with the Section 83(b) election expected to be filed with respect to such grant. It is currently anticipated that the amount of this payment will be approximately $1,300,000, payable in installments as the taxes are due. In the event the Management Agreement is terminated by the Company prior to the expiration of its initial term due to (i) the complete liquidation, dissolution and winding up of all of the business and affairs of the Company including, without limitation, the final distribution to all shareholders of the Company, or (ii) the final distribution to the holders of the Series A Common Stock of the Company, the vesting under the restricted stock grant will accelerate immediately prior to such event and the Company will make a lump sum payment to Phoenix equal to the unpaid balance of the amount it would have received in monthly management fees during the initial term of the Management Agreement. 38 Pursuant to the terms of the Management Agreement, Phoenix will, among other things, provide the following services to the Company after the consummation of the transactions contemplated by the Purchase Agreement with Zenith: (i) manage the day-to-day operations of the Company and its subsidiaries; (ii) manage the preparation, negotiation and defense of the Final Business Balance Sheet (as defined in the Purchase Agreement); (iii) provide assistance in the overall planning and coordination of the business of the Company; (iv) assist in the resolution of all claims and contingencies pending or subsequently asserted against the Company; (v) coordinate the finance, accounting and tax requirements of the Company with the specific duties to be delegated, at the expense of the Company, to competent professionals approved by the Board of Directors of the Company; (vi) prepare an investment policy plan for the Company and coordinate the investment transactions through one or more investment advisors; (vii) perform such other duties as may from time to time be requested by the Board of Directors of the Company not inconsistent with the terms of the Management Agreement. Based on Mr. Dawson's contributions to the Company to date, as well as his experience and knowledge of the Company and its unique circumstances, the Board of Directors has concluded that the terms of the Management Agreement are reasonable and in the best interests of the Company and the Shareholders. On May 19, 1997, subject to shareholder approval, the Company granted to Mr. Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of the Company's Class A Common Stock. See "Executive Compensation - Stock Option Grants." Pursuant to the terms of the Management Agreement, immediately following the consummation of the transactions contemplated by the Purchase Agreement with Zenith and the receipt of the applicable cash payments under his employment agreement, the Company and Mr. Dawson will enter into a Termination Agreement evidencing the termination of each party's rights, duties and obligations under Mr. Dawson's employment agreement, including the termination of the stock option grants and Mr. Dawson's right to receive any of the shares thereunder. (Upon the consummation of the transactions contemplated by the Purchase Agreement with Zenith and after Mr. Riehemann receives termination benefits under his employment agreement, the Company and Mr. Riehemann also will enter into a Termination Agreement evidencing the termination of Mr. Riehemann's employment agreement.) 39 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, 1997 and 1996..................................F-3 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995..............................................................................F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995...........................................................F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995..............................................................................F-7 Notes to Consolidated Financial Statements.................................................F-9 2. Financial Statement Schedules I - Summary of investments - other than investments in related parties...................F-45 II -Condensed financial information of registrant.........................................F-46 IV - Reinsurance...........................................................................F-49 VI - Supplemental information concerning property-casualty insurance operations............F-50
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 filed a Form 8-K on October 1, 1997 related to indictments of the Company and certain former officers and directors as described in Part 1, Item 3 of this Form 10-K. (c) Exhibits The following are filed as exhibits to this report: 40 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) 41 EXHIBIT # DESCRIPTION - --------------- -------------------- 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) 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) 42 EXHIBIT # DESCRIPTION - --------------- -------------------- 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) 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) 43 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) 10.36 -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) 44 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) 45 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, 1996.1* (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) 46 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) 47 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) 10.80 -Employment Agreement with Frederick M. Dawson dated May 19, 1997* (Incorporated herein by reference to Exhibit No. 10.2 to RISCORP's Form 8-K, dated May 22, 1997). ** 10.81 Asset Purchase Agreement with Zenith Insurance Company dated June 17, 1997* (Incorporated herein by reference to Exhibit No. 2.1 to RISCORP's Form 8-K, dated July 2, 1997). 10.82 -Press Release dated September 18, 1997.* (Incorporated herein by reference to Exhibit No. 99 to RISCORP's Form 8-K, dated October 1, 1997) 10.83 -Management Agreement of RISCORP, Inc., dated February 18, 1998, by and between RISCORP, Inc. and subsidiaries and The Phoenix Management Company, Ltd. 11 -Statement Re Computation of Per Share Earnings. 21 -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. **Management contract on executive compensation plan or arrangement. + Confidential treatment granted pursuant to Rule 406 of the Securities Act of 1933. 48
EXHIBIT 11 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE RISCORP, INC. AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1997 1997 1996 1995 ---- ---- ---- Net Income $7,286,000 $2,398,000 $13,683,000 ========== ========== ============ Average outstanding shares used for calculating basic earnings per share (1) 36,891,864 34,647,986 28,100,234 Additional common shares issuable under employee stock options using the treasury stock method (2) 223,808 1,757,602 1,992,266 ------------ ----------- ----------- Average outstanding shares used for calculating diluted earnings per share 37,115,672 36,405,588 30,092,500 ========== ========== ========== Net income per share $ 0.20 $ 0.07 $ 0.49 =========== =========== ========= Net income per share - assuming dilution $ 0.20 $ 0.07 $ 0.45 =========== =========== ===========
(1) The 1997 and 1996 amounts include 790,336 and 225,503 shares, respectively, of Class A Common Stock pursuant to the contingency clause in the acquisition agreement with IAA. (2) Based on the average quarterly market price of each period. 49 EXHIBIT 21 RISCORP, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1997 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 1390 Main Street Services, Inc. Florida 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 RISCORP Staffing Solutions Holding, Inc. Florida RISCORP Staffing Solutions, I, Inc. Florida RISCORP Staffing Solutions II, Inc. Florida *All subsidiaries below are owned,directly or indirectly, 100% by the Registrant 50 SIGNATURES Pursuant to the requirement of the Securities Act of 1933, the Registrant has duly caused this Form 10-K 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 March, 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 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 March 27, 1998 Officer and Director (principal executive officer) /s/ Stephen C. Rece Stephen C. Rece Senior Vice President, and March 27, 1998 Chief Financial Officer (principal financial and accounting officer) /s/ Seddon Goode, Jr. Seddon Goode, Jr. Director March 27, 1998 /s/ George E. Greene III George E. Greene III Director March 27, 1998 /s/ Walter L. Revell Director March 27, 1998 Walter L. Revell
51 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 financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules 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. As requested by the Florida Department of Insurance, cut-through endorsements and an interim reinsurance agreement have been executed in connection with the pending sale. The sale is subject to the approval of the shareholders of the Company. The Company's ability to operate at its present level of activity may be affected if the pending sale transaction is not completed. Further, as discussed in Note 19, the Company and its subsidiaries 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 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 Fort Lauderdale, Florida March 24, 1998 F-2
RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (in thousands, except share and per share data) December 31, December 31, 1996 1997 ASSETS Investments: Fixed maturities available for sale, at fair value (amortized cost $226,240 $142,876 in 1997 and $226,240 in 1996) $ 145,571 $ 228,802 Fixed maturities available for sale, at fair value (amortized cost $53,437 in 1997)--restricted 53,820 - Fixed maturities held to maturity, at amortized cost (fair value $24,347 in 1997 and $22,892 in 1996) 24,090 22,809 Equity securities, at fair value (cost $3,880 in 1996) - 4,045 Total investments 223,481 255,656 Cash and cash equivalents 16,858 26,307 Cash and cash equivalents--restricted 13,295 - Premiums receivable, net 100,183 122,078 Accounts receivable--other 16,720 11,676 Recoverable from Florida Special Disability Trust Fund, net 45,211 49,505 Reinsurance recoverables 184,251 180,698 Prepaid reinsurance premiums 29,982 49,788 Prepaid managed care fees 8,420 31,958 Accrued reinsurance commissions 37,188 20,419 Deferred income taxes 22,120 22,551 Property and equipment, net 26,665 27,505 Goodwill 15,286 22,648 Other assets 9,990 7,653 Total assets $ 749,650 $ 828,442
See accompanying notes to consolidated financial statements. F-3
RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (in thousands, except share and per share data) December 31, December 31, 1996 1997 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Losses and loss adjustment expenses $ 437,038 $ 458,239 Unearned premiums 56,324 102,562 Notes payable of parent company 15,000 15,000 Notes payable of subsidiaries 609 1,303 Accounts and notes payable--related party - 1,171 Deposit balances payable 5,512 4,787 Accrued expenses and other liabilities 65,885 74,706 Net assets in excess of cost of business acquired 5,749 11,266 586,117 669,034 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: 11,855,917 in 1997 and 1996 120 120 Class B Common Stock, $.01 par value, 100,000,000 shares authorized; shares issued and outstanding: 24,334,443 in 1997 and 1996 243 243 Preferred stock, $.01 par value, 10,000,000 shares authorized; 0 shares issued and outstanding - - Additional paid-in capital 135,974 137,813 Net unrealized gains on investments 2,002 1,769 Unearned compensation--stock options - (546) Retained earnings 25,195 17,909 Treasury stock--at cost, 112,582 shares (1) - Total shareholders' equity 163,533 157,308 Total liabilities and shareholders' equity $ 749,650 $ 828,442
See accompanying notes to consolidated financial statements. F-4
RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1997, 1996 and 1995 (in thousands, except share and per share data) Year ended December 31, ---------------------------------------------------- 1997 1996 1995 --------------- -------------- -------------- Revenues: Premiums earned $ 179,729 $ 173,557 $ 135,887 Fee and other income 20,369 31,733 22,397 Net realized gains 1,546 105 1,016 Net investment income 16,447 12,194 6,708 Total revenues 218,091 217,589 166,008 Expenses: Losses and loss adjustment expenses 104,052 114,093 82,532 Unallocated loss adjustment expenses 19,311 12,916 10,133 Commissions, general and administrative expenses 70,800 65,685 48,244 Interest 1,919 2,795 4,634 Depreciation and amortization 7,423 11,500 1,683 Total expenses 203,505 206,989 147,226 Income before income taxes 14,586 10,600 18,782 Income taxes 7,300 8,202 5,099 Net income $ 7,286 $ 2,398 $ 13,683 Per share data: Net income per common share-basic $ 0.20 $ 0.07 $ 0.49 Net income per common share-diluted $ 0.20 $ 0.07 $ 0.45 Weighted average common shares outstanding 36,891,864 34,647,986 28,100,234 Weighted average common shares and common share equivalents outstanding 37,115,672 36,405,588 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, 1995, 1996, and 1997 (in thousands) Net Unrealized Class A Class B Additional Gains Total Common Common Paid-in (Losses) on Unearned Retained Treasury Shareholders' Stock Stock Capital Investments Compensation Earnings Stock Equity ------- ----- ------- ------- ---------- ------ ----- --------- Balance, January 1, 1995 $ - $ 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) - - - - - - Stock options exercised 2 - 63 - - - - 65 Issuance of common stock for - acquisitions 8 - 10,891 - - - - 10,899 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 Net income - - - - - 7,286 - 7,286 Purchase of treasury stock - - 1 - - - (1) - Change in unearned compensation - - (1,840) - 546 - - (1,294) Change in net unrealized gains on investments - - - 233 - - - 233 ---------------------------------------------- ------------ -------------- ------------- Balance, December 31, 1997 $ 120 $ 243 $ 135,974 $ 2,002 $ - $ 25,195 $ (1)$ 163,533 ===== ===== ========= ======= ======== =================== =========
See accompanying notes to consolidated financial statements. F-6
RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996 and 1995 (in thousands) Year ended December 31, ----------------------------------------------- 1997 1996 1995 -------------- ------------- ----------- Cash flows from operating activities: Net income $ 7,286 $ 2,398 $ 13,683 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,423 11,500 1,683 Loss on disposal of property and equipment 291 294 22 Net amortization (accretion) of discounts on investments 14 174 (82) Net realized gain on sale of investments (1,545) (140) (1,282) Change in: Premiums receivable, net 22,026 (24,275) (23,744) Accounts receivable--other (5,104) (11,676) - Recoverable from Florida State Disability Trust Fund, net 4,295 2,331 (5,920) Reinsurance recoverables (3,553) (76,971) (58,534) Prepaid reinsurance premiums 19,807 (27,908) (21,880) Prepaid managed care fees 23,537 (15,589) (15,068) Accrued reinsurance commissions (16,770) (12,870) (7,549) Deferred income taxes 431 (8,448) 106 Other assets (3,249) 21,026 3,110 Losses and loss adjustment expenses (21,502) 106,484 51,827 Unearned premiums (46,280) 30,891 7,315 Accounts payable related party (1,171) 171 1,000 Accounts and notes receivable--related party - 10,754 642 Accrued expenses and other liabilities (8,880) 19,909 7,420 ------------ ------------ ------------ Net cash (used in) provided by operating activities (22,944) 28,055 (47,251) ----------- ------------ ----------- Cash flows from investing activities: Proceeds from: Sale of fixed maturities--available for sale 110,299 88,900 60,303 Maturities of fixed maturities--available for sale 20,243 6,295 10,209 Sale of equity securities 4,109 732 1,162 Maturities of fixed maturities--held to maturity 1,885 4,400 - Maturities of equity securities 175 - - Sale of equipment 158 532 564 Purchase of: Maryland NARM Fund, net of cash acquired 134 - - Fixed maturities--available for sale (100,499) (191,153) (23,543) Property and equipment (4,477) (13,215) (6,393) Fixed maturities--held to maturity (1,237) (2,452) - Equity securities (637) (3,952) (341) RISCORP Insurance Company, net of cash acquired - - 5,885 IAA, net of cash acquired - 282 - RISC, net of cash acquired - (538) -
F-7
RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996 and 1995 (in thousands) Year ended December 31, ------------------------------------------------ 1997 1996 1995 -------------- ------------- ------------ Cash flows from investing activities (continued): CompSource and Insura, net of cash acquired - (10,733) - Purchase of: Atlas Insurance Company, net of cash acquired - (5,573) - NARM, net of cash acquired - 2,717 - Virginia Funds, net of cash acquired - 1,300 - -------- ----------------------------- Net cash provided by (used in) investing activities 30,153 (122,458) 47,846 -------- ---------- ------------ Cash flows from financing activities: Increase (decrease) in deposit balances payable 725 968 (6,980) Decrease (increase) in unearned compensation 546 (331) 715 Transfer of cash and cash equivalents to restricted balances (13,295) - - Purchase of common stock (treasury stock) subject to put options (2,100) - - Other, net (1,840) (1,325) - Principal repayments of notes payable (694) (30,202) (25,215) Proceeds from notes payable - - 43,692 Shareholder distributions - 279 (3,206) Proceeds of initial offering of common stock - 127,908 - Other, net (1,840) (1,325) - Stock options exercised - 65 - -------- --------------- ------------------ Net cash (used in) provided by financing activities (16,658) 97,362 9,006 -------- ------------- -------------- Net (increase) decrease in cash and cash equivalents (9,449) 2,959 9,601 Cash and cash equivalents, beginning of period 26,307 23,348 13,747 -------- ------------ ------------- Cash and cash equivalents, end of period $ 16,858 $ 26,307 $ 23,348 =========== =========== ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,928 $ 3,689 $ 3,966 ============ ============ ============= Income taxes $ 6,566 $ 15,127 $ 4,969 ============ =========== =============
See accompanying notes to consolidated financial statements. F-8 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Background (a) Reorganization RISCORP, Inc. was formed on February 28, 1996 through the reorganization and consolidation of several affiliated companies (collectively, "RISCORP" or the "Company") 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 21). 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. 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 ("FDOI" and "MDOI", respectively), amongst other conditions. In addition, the FDOI requested the purchaser to provide an interim reinsurance agreement and cut-through endorsement ("Agreement") on all inforce business as of June 17, 1997 and all new and renewed business written after June 17, 1997. This Agreement only provides coverage for Florida workers' compensation policyholders and was approved by the FDOI. The ability of RISCORP Insurance Company ("RIC") and RISCORP Property & Casualty Insurance Company ("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. RISCORP experienced difficulty in completing its 1996 financial statements in a timely manner. This resulted in RISCORP being delisted by the stock exchange (NASDAQ) on which its stock was traded on July 2, 1997 and in adverse publicity in the insurance marketplace. RISCORP filed its 1996 Form 10-K/A on October 28, 1997 and amended the 1996 Form 10-K/A on February 27, 1998 in response to comments received from the SEC in connection with the preparation of the Company's proxy statement which was mailed to shareholders on March 3, 1998. In addition, RISCORP has filed all of its 1997 Form 10-Q's with the SEC. RISCORP has not requested to be reinstated on the NASDAQ stock exchange. F-9 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 $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. 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 $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 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. F-10 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (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. (c) 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 $0 and $8.9 million as of December 31, 1997 and 1996, respectively. The allowance is determined based upon the actuarially estimated recoverable amount compared to the estimated recovery actually expected from the SDTF by RISCORP on reported claims (see Note 6). At December 31, 1997, the actuarially estimated recoverable amount exceeded the amount of the estimated recoveries on reported claims to the SDTF. (d) 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, F-11 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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. Impairment losses, if any, resulting from other than temporary declines in fair value are included in net investment income. (e) 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 liability 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, 1997 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. (f) 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. (g) 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 F-12 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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. (h) Policy Acquisition Costs The cost of acquiring and renewing business, principally commissions, premium taxes and other underwriting expenses, is 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, 1997, 1996 and 1995, policy acquisition costs deferred totaled $41.0 million, $31.8 million and $48.9 million, respectively. For the years ended December 31, 1997, 1996 and 1995, amortization of deferred policy acquisition costs totaled $49.2 million, $33.7 million and $46.9 million, respectively. Deferred policy acquisition costs are included in other assets in the accompanying Consolidated Balance Sheets. Policy acquisition costs are included in commissions, general and administrative expenses in the accompanying Consolidated Statements of Income. (i) 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 $6.0 million in 1996, for the years ended December 31, 1997, 1996 and 1995 totaled $3.3 million, $7.9 million and $0.3, respectively. Accumulated amortization for the years ended December 31, 1997 and 1996 was $11.3 million and $8.0 million, 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 $432,000 and $468,000 at December 31, 1997 and 1996, respectively. F-13 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) As more fully described in Note 3, the Company recorded an impairment loss of $2.8 million in connection with the acquisition of Independent Association Administrators, Inc. during 1996. The remaining unamortized goodwill relating to this acquisition was $7.9 million and $8.5 million at December 31, 1997 and 1996, respectively. 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 $0.8 million, $0.9 million and $0.8 million for the years ended December 31, 1997, 1996 and 1995, respectively (see Note 3). Accumulated amortization as of December 31, 1997 and 1996 was $2.5 million and $1.7 million, respectively. (j) 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, 1997, 1996 and 1995, the Company capitalized $1.3 million, $1.7 million and $0.3 million, respectively. Amortization expense of $0.3 million, $.04 million and $0 has been recorded for the years ended December 31, 1997, 1996 and 1995, respectively, for internally developed software costs. (k) 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. (l) 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. F-14 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (m) 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. (n) Earnings Per Share In February 1997, the Financial Standards Board issued Statement No. 128, "Earnings Per Share," ("SFAS 128"), which is effective for periods ending after December 15, 1997. SFAS 128 requires the presentation of two earnings per share ("EPS") calculations, basic EPS and diluted EPS, in the Consolidated Statements of Income and SFAS 128 requires restatement of all prior period EPS data that is presented in the accompanying financial statements. All previously reported earnings per share data for 1996 and 1995 have been restated to reflect the requirements of SFAS 128. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of shares outstanding for the period plus the shares for the dilutive effect of stock options, contingent shares and other common stock equivalents. The components of the weighted average shares used in the EPS calculations are as follows:
1997 1996 1995 Average outstanding shares used for calculating basic EPS 36,891,864 34,647,986 28,100,234 Effect of stock options 223,808 1,757,602 1,992,266 Average outstanding shares used for calculating diluted EPS 37,115,672 36,405,588 30,092,500
(o) 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, 1997, 1996 and 1995 as if the provisions of SFAS 123 had been adopted (see Note 12). F-15 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (p) Year 2000 In the fourth quarter of 1997, the Company developed a formal plan to convert its computer systems to be Year 2000 compliant. The Company's plan provides for all conversion efforts to be completed by the end of March 1999; however, the portion of the plan relating to the Company's policy issue and management system will be completed by October 1, 1998, the date of the first Year 2000 incident. The Year 2000 conversion is necessary primarily as the result of certain computer programs used by the Company being written using two digits rather than four digits to define the applicable year. The total cost of the Year 2000 project is estimated to be less than $1.0 million and all costs associated with these Year 2000 system changes will be expensed as the costs are incurred. (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 21) 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)Restructuring Charges In June 1997, the Company implemented a workforce reduction and a consolidation of the Company's management team, field offices and products. The reduction in the work force resulted in the termination of 128 employees of the Company. The Company also announced in June 1997 its intention to F-16 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) focus solely on its core workers' compensation insurance business and to close all field offices, except Charlotte and Birmingham, by the end of 1997. The Company recorded $5.8 million in non-recurring expenses during the second quarter of 1997 in connection with the workforce reduction and consolidation of the field offices and products. These non-recurring expenses consisted primarily of severance expenses of $5.1 million and occupancy costs of $0.7 million of which $3.2 million and $0.4 million, respectively, were unpaid as of December 31, 1997. These expenses are included in commissions, underwriting and administrative expenses in the December 31, 1997 Consolidated Statements of Income. (s) 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 15.8 percent, 16.5 percent and 10.1 percent of written premiums at December 31, 1997, 1996 and 1995, respectively. The Company paid dividends to participating policyholders of $8.5 million, $9.2 million and $1.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. (t) Determination of Fair Values of Financial Statements Management has identified the following financial instruments in the financial statements: cash and cash equivalents, fixed maturities and equity securities, receivables and other liabilities. Fair values of fixed maturities and equity securities are presented in Note 4. For the remaining instruments, management believes the carrying value approximate fair value due to the short maturity, terms and fluctuations in market conditions of those instruments. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. (u) Accounting Changes The Company will adopt the reporting requirements of SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," for the year ended December 31, 1998. The adoption will have no effect on the Company's financial position or on its results of operations. (v)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-17 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 was 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 and 1995, as if the acquisitions took place at the beginning of the Company's fiscal year preceding the year of acquisition (in thousands, except per share amounts): 1996 1995 Total revenues $275,410 $266,412 Income before income taxes 18,503 23,070 Net income 6,860 16,407 Earnings per share 0.19 0.55 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 Commerce Mutual Insurance Company ("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 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. F-18 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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 $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. 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. 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. 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 $11.5 million, consisting primarily of 790,336 shares of the Company's Class A Common Stock valued at $10.9 million on the date of acquisition. IAA and RISC are workers' compensation management services companies offering services in Alabama. On the acquisition date, the excess of the purchase price over the fair value of the net assets acquired was $11.4 million and was recorded as goodwill 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 amortization 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 $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, 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). F-19 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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. Third Coast has experienced operating losses since its inception. As of December 31, 1997 and 1996, the Company's carrying of its investment in Third Coast was $0. (4) Investments Investments (including restricted investments) included in the accompanying Consolidated Balance Sheets as of December 31, 1997 and 1996 are summarized as follows (in thousands):
Cost or Gross Gross Amortized Cost Unrealized Unrealized Estimated Gains Losses Fair Value December 31, 1997: Available for sale: Fixed maturity securities: Municipal government obligations $ 58,294 $ 718 $ 2 $ 59,010 U.S. government obligations 38,065 1,193 10 39,248 Corporate obligations 88,102 1,119 22 89,199 Mortgage backed securities 1,932 36 - 1,968 Asset backed securities 9,920 49 3 9,966 ------------ ----------- --------- ------------ Total available for sale 196,313 3,115 37 199,391 ---------- --------- -------- ---------- Held to maturity: Fixed maturity securities: U.S. government obligations 18,434 204 9 18,629 Municipal government obligations 4,186 62 - 4,248 Certificates of deposit 1,470 - - 1,470 ------------ ------------- ---------- ------------ Total held to maturity 24,090 266 9 24,347 ----------- ---------- --------- ----------- Total investments $ 220,403 $ 3,381 $ 46 $ 223,738 ========= ======== ======= ========= Available for sale: Unrestricted $ 142,876 $ 2,709 $ 14 $ 145,571 Restricted 53,437 406 23 53,820 ----------- ---------- ------- ----------- $ 196,313 $ 3,115 $ 37 $ 199,391 ========= ======== ====== =========
F-20 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Cost or Gross Gross Amortized Cost Unrealized Unrealized Estimated Gains Losses 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 ========= ======= ===== =========
The fair value of investments (including restricted investments) at December 31, 1997 and 1996 was determined using independent pricing services. The amortized cost and estimated fair value of fixed maturities (including restricted investments) by contractual maturity, as of December 31, 1997, 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 $ 20,197 $ 20,262 $ 4,298 $ 4,310 Due after one year through five years 143,418 143,577 18,137 18,326 Due after five years through ten years 19,353 21,952 1,655 1,711 Due after ten years 1,494 1,666 - - Mortgage and asset backed securities 11,851 11,934 - - ----------- --------------------------------------- $ 196,313 $ 199,391 $ 24,090 $ 24,347 ========= ========= ======== ========
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, 1997, 1996 and 1995, proceeds from sales of fixed maturities available for sale totaled $94.3 million, $88.9 million and $60.3 million, respectively. Gross realized gains F-21 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) and gross realized losses for the years ended December 31, 1997, 1996 and 1995 are summarized in the following table (in thousands) and are recorded in net investment income in the accompanying Consolidated Statements of Income: 1997 1996 1995 Gross realized gains $ 1,770 $ 178 $ 1,395 Gross realized losses (224) (73) (379) -------- ------- --------- Net realized gains $ 1,546 $ 105 $ 1,016 ======== ===== ======= The following information summarizes the components of net investment income for the years ended December 31, 1997, 1996 and 1995 (in thousands): 1997 1996 1995 Fixed maturities $ 13,815 $ 10,444 $ 5,856 Equity securities 469 547 410 Cash and cash equivalents 2,516 1,700 606 ---------- ---------- --------- 16,800 12,691 6,872 Investment expenses (353) (497) (164) ---------- ---------- -------- $ 16,447 $ 12,194 $ 6,708 ======== ======== ======= 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, 1997. The carrying value of securities on deposit with various governmental agencies was $23.8 million and $18.6 million at December 31, 1997 and 1996, respectively, and is included in fixed maturities held to maturity in the accompanying Consolidated Balance Sheets. In addition, as more fully explained in Note 7, securities with a carrying value of $53.8 million at December 31, 1997 have been pledged or are held in trust in connection with certain reinsurance transactions. The Company's investments in excess of 10 percent of shareholders' equity at December 31, 1997 and 1996, aggregated by issuer and excluding investments issued or guaranteed by the United States, consisted of the following (in thousands): Carrying Value ------------------------------- 1997 1996 ----------- -------------- Fixed maturities: State of Florida $ 20,980 $ 23,472 ======== ======== (5) Liability for Losses and Loss Adjustment Expenses The Company establishes an 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 liability based on facts then known, estimates of future claims trends and other F-22 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) factors, including the Company's experience with similar cases and historical Company and industry trends, such as reserving patterns, loss payment patterns, claim closure and reporting patterns, and product mix.
Activity in the liability for losses and loss adjustment expenses for the years ended December 31, 1997, 1996 and 1995 is summarized as follows (in thousands): 1997 1996 1995 Gross reserves for losses and loss adjustment expenses, beginning of period $ 458,239 $ 261,700 $ 12,668 Less reinsurance recoverables 180,698 100,675 7,398 Less SDTF recoverables 49,505 51,836 671 Less prepaid managed care fees 31,958 16,369 - ---------- -------------------------- Net balance at January 1 196,078 92,820 4,599 --------- ----------- ----------- Assumed during year from loss portfolio transfers and acquisitions - 88,212 123,854 --------------- ----------- --------- Incurred losses and loss adjustment expenses related to: Current year 125,764 123,986 87,467 Prior years (2,401) 3,023 5,198 Total incurred losses and loss adjustment expenses 123,363 127,009 92,665 --------- ---------- --------- Paid related to: Current year 45,646 56,088 33,069 Prior years 74,639 55,875 95,229 Total paid 120,285 111,963 128,298 Net balance at December 31 199,156 196,078 92,820 Plus reinsurance recoverables 184,251 180,698 100,675 Plus SDTF recoverables 45,211 49,505 51,836 Plus prepaid managed care fees 8,420 31,958 16,369 ------------ ----------- ----------- Gross reserves for losses and loss adjustment expenses, at December 31 $ 437,038 $ 458,239 $ 261,700 ========= ========= =========
The Company recognizes recoveries from the SDTF and subrogation from third parties as a reduction of 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 liability for losses and loss adjustment expenses was $45.2 million and $49.5 million at December 31, 1997 and 1996, respectively. The 1995 activity in the liability 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. The favorable development in 1997 is discussed in Note 21. (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 F-23 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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 $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. For the years ended December 31, 1997, 1996 and 1995, SDTF cash recoveries were $5.9 million, $2.5 million and $0.9 million, respectively. SDTF assessments were $6.8 million, $11.7 million and $12.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. In December 1997, the American Institute of Certified Public Accountants issued a Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP provides guidance for determining and measuring a liability for guaranty-fund and other insurance-related assessments, including second injury trust funds. Management is currently assessing the impact, if any, of this SOP on the future financial results of the Company's insurance subsidiaries. (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 F-24 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) which certain financial statement balances have been reduced as a result of these reinsurance contracts as of and for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995 Premiums written $ 143,983 $ 192,528 $ 161,696 Premiums earned 167,274 165,022 139,144 Reserve for losses and loss adjustment expenses 183,150 180,698 100,675 Unearned premiums 25,842 49,788 21,880
Ceded losses and loss adjustment expenses were $73.9 million, $152.3 million and $78.7 million for the years ended December 31, 1997, 1996 and 1995, respectively, and are reflected as reductions in the related financial statement balances. Effective January 1, 1995, RIC and RPC entered into quota share reinsurance agreements with American Re-Insurance Company ("AmRe"), whereby RIC and RPC ceded 50 percent of new and renewal premiums written and losses incurred. These reinsurance agreements provide 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 agreements was 33 percent. These reinsurance agreements 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 agreements with AmRe for a minimum period of five years beginning January 1, 1995 (see Note 21). Ceding commissions earned under the AmRe reinsurance agreements were $50.0 million, $58.2 million and $48.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, the Company was contingently liable for return ceding commissions to AmRe of $9.3 million and $21.2 million, respectively. Effective September 1, 1996, RIC entered into a retrocessional reinsurance agreement with Chartwell Reinsurance Company, whereby Chartwell Reinsurance Company retrocedes to the Company 50 percent of workers' compensation business written by RMS (an affiliate of the Company) as underwriting manager for Virginia Surety Company, Inc. ("Virginia Surety"). The reinsurance agreement provides for a profit commission in addition to the 30 percent ceding commission based on the loss ratio and other expenses incurred under the contract. The initial profit commission calculation will take place on September 1, 2000. This agreement terminated on December 31, 1997; however the Company continues to be responsible for its portion of the losses incurred on policies reinsured before the termination date. On April 18, 1997, the Company entered into a trust agreement with Chartwell Reinsurance Company whereby the Company agreed to maintain in trust for the benefit of Chartwell Reinsurance Company 102 percent of the Company's portion of the outstanding loss reserves and unearned premiums. As of December 31, 1997, the market value of the securities in the trust account was $8,645,981 and the required trust account balance, based on the outstanding loss reserves and unearned premium reserves, was $5,159,689. The balance in this trust account is generally adjusted on a monthly basis, one month in arrears. F-25 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Effective January 1, 1996, RPC entered into a quota share reinsurance agreement with Allstate Insurance Company, Chartwell Reinsurance Company, Signet Star Reinsurance Company and San Francisco Reinsurance Company, whereby the Company ceded 90 percent of its inforce, new or renewal gross written premiums for commercial umbrella coverage for the period January 1, 1996 to December 31, 1996. The maximum limits under this agreement are $5.0 million per insured, per occurrence. The reinsurance agreement provides for the payment of a ceding commission of 30 percent of the ceded premiums. 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. During 1997, Allstate Insurance Company and San Francisco Reinsurance Company were replaced on this reinsurance agreement by Scor Reinsurance Company and Hartford Fire Insurance Company, respectively. All other terms and conditions of the reinsurance agreement were unchanged. This agreement was terminated at December 31, 1997; however, the reinsurer continues to be responsible for their portion of all losses incurred on policies effective before the termination date. Effective January 1, 1996, RPC entered into a quota share reinsurance agreement with Allstate Insurance Company, Chartwell Reinsurance Company, Signet Star Reinsurance Company, San Francisco Reinsurance Company and Great Lakes American Reinsurance Company, whereby the Company ceded 90 percent of its inforce, new or renewal gross written premiums for commercial property coverage for the period January 1, 1996 to December 31, 1996. The limits of coverage under this agreement are 90 percent of $2.5 million per risk, subject to an occurrence limitation of not less than $10.0 million nor greater than $15.0 million. The reinsurance agreement provides for the payment of a ceding commission of 30 percent of ceded premiums. 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. During 1997, Allstate Insurance Company and San Francisco Reinsurance Company were replaced on this reinsurance agreement by Scor Reinsurance Company and Hartford Fire Insurance Company, respectively. All other terms and conditions of the reinsurance agreement were unchanged. This agreement was terminated at December 31, 1997; however, the reinsurer continues to be responsible for their portion of all losses incurred on policies effective before the termination date. 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 $1,000,000. The Company 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. During 1997, Allstate Insurance Company and San Francisco Reinsurance Company were replaced on this reinsurance agreement by Scor Reinsurance Company and Hartford Fire Insurance Company, respectively. All other terms and conditions of the reinsurance agreement were unchanged. This agreement was terminated at December 31, 1997; however, the reinsurer continues to be responsible for their portion of all losses incurred on policies effective before the termination date. F-26 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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 $6.79 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. RIC, RNIC and RPC ceded losses in excess of $500,000 to Continental Casualty Company ("CNA") under an excess of loss reinsurance treaty effective January 1, 1997. This treaty contains a corridor deductible of $1,250,000 which is applicable in the aggregate to claims in the $500,000 excess of $500,000 corridor for the Company. RIC and RPC had a similar contract with CNA effective January 1, 1996 with a corridor deductible of $1,000,000. While the contract contains provisions for minimum and deposit premiums, the premiums for 1997 based on earned premiums exceeded the minimum premium provisions specified under the contract. RNIC has ceded losses in excess of $500,000 to 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 exceed the minimum premium provisions specified under these contracts. Each of these treaties with CNA expired on January 1, 1997. In connection with the proposed sale to Zenith (as more fully described in Note 15), RIC and RPC entered into an interim reinsurance agreement and cut-through endorsement covering all inforce business as of June 17, 1997 and all new and renewal business written after June 17, 1997 on Florida workers' compensation policies. In connection with this agreement, Zenith required that 33 percent of the direct written premiums and 33 percent of the initial unearned premiums subject to this agreement be deposited into a trust account for the benefit of Zenith. In addition, the agreement requires the Company to pay a fee to Zenith of 1 percent of subject premiums. As of December 31, 1997, the market value of the securities in the trust account was $52,413,270 and the required trust account balance, based on the direct written premiums for the period June 18, 1997 through December 31, 1997 and the unearned premiums at June 17, 1997, was $51,567,757. The balance in the trust account is generally adjusted on a monthly basis, one month in arrears. In addition, the Company incurred fees to Zenith of $1.4 million during 1997 under this agreement. Effective October 1, 1996, RNIC entered into a quota share reinsurance agreement with Chartwell Reinsurance Company, Swiss Reinsurance America Corporation and Trenwick America Reinsurance Corporation (collectively the "Reinsurers"), whereby the Company 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 F-27 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 33 percent. This reinsurance agreement was terminated at December 31, 1997; however, the reinsurer continues to be responsible for their portion of all losses incurred on policies effective before the termination date. RNIC entered into an agreement with the Insurance Company of New York ("INSCORP") and Chartwell Reinsurance Company, effective January 1, 1997, to issue assumption of liability endorsements ("ALE") to certain policyholders of RNIC. This agreement expired on December 31, 1997 and was not renewed. In connection with this agreement, RNIC was required to provide INSCORP and Chartwell Reinsurance Company with letters of credit in amounts equal to 29.2 percent of the gross written premiums on all ALE policies plus $1,250,000. The agreement also required RNIC to pay a fee of .5 percent of gross premiums subject to a minimum fee of $50 and a maximum fee of $1,000 per ALE. As of December 31, 1997, based on the gross premiums subject to ALE's, RNIC provided letters of credit of $3,742,090 under this agreement. These letters of credit are secured by certificates of deposits and are included in the accompanying balance sheets under the caption "Cash and short-term investments--restricted." In addition, RNIC incurred fees of $38,797 during 1997 under this agreement. RNIC also maintains specific excess of loss coverage on the run off of the Atlas book of business with Allstate Insurance Company. The combined reinsurance recoverables and ceded unearned premiums (by reinsurer) in excess of three percent of shareholders' equity as of December 31, 1997 are detailed below (in thousands): Reinsurance Ceded Unearned Recoverables Premiums Reinsurer American Re-Insurance Company $ 89,437 $ 20,995 Continental Casualty Company 42,841 - TIG Reinsurance Company 9,286 - Chartwell Reinsurance Company 22,198 2,350 Swiss Reinsurance America Company 11,041 1,175 Trenwick American Reinsurance Company 11,041 1,175 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 unable to meet their contractual obligations, the Company is contingently liable for any losses and loss adjustment expenses ceded. At December 31, 1997 and 1996, reinsurance recoverables consisted of $184.3 million and $180.7 million of recoverables for unpaid losses and loss adjustment expenses. At December 31, 1997, $89.4 million of the reinsurance recoverable balance related to RIC's and RPC's quota share agreement with one F-28 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) reinsurer. The remaining recoverable balance of $94.9 million reflected estimated recoveries from 17 unaffiliated reinsurers that provided quota share, 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, 1997. (b) Assumption Reinsurance Transactions During 1996, RNIC entered into loss portfolio transfer and assumption reinsurance agreements with National Alliance for Risk Management ("NARM"), a North Carolina self-insured workers' compensation fund; Occupational Safety Association of Alabama ("OSAA"), an Alabama self-insured workers' compensation fund; and three NARM self insurance funds in Virginia ("NARM - Virginia"). Under the terms of the agreements, RNIC assumed 100 percent of the outstanding loss reserves (including incurred but not reported losses) and the outstanding unearned premiums as of the respective dates of transfer. RNIC issued assumption certificates to all affected policyholders. The following loss portfolio transfers and assumption reinsurance agreements were entered into by RNIC during 1996 (in thousands): Losses Assumed at Unearned Premiums at Entity Effective Date 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 ======== ======= RISCORP received cash and marketable securities from the ceding companies of $93.5 million to fund the loss and unearned premium reserves assumed in connection with these transactions. In addition, OSAA transferred to RNIC $11.0 million in OSAA member deposits and cash of $11.0 million. RNIC refunded the deposits to the policyholders during 1997 upon completion of final premium audits for the 1996 policy year. (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. On October 30, 1997, the Company entered into a loss portfolio transfer agreement with RHP to transfer the liability of RHP under the managed care agreement. The remaining liability under the managed care F-29 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) agreement was determined by the Company's consulting actuarial firm to be $8.0 million and on November 4, 1997, RHP transferred $8.0 million to the Company in full satisfaction of RHP's liability under the managed care agreement. 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 $6.1 million, $30.6 million and $19.0 million of such fees for the years ended December 31, 1997, 1996 and 1995, respectively. To the extent that Humana 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, 1997 and 1996, estimated unpaid losses and loss adjustment expenses to be covered by Humana were $4.8 million and $17.7 million, respectively. (9) Income Taxes The components of income taxes for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands): 1997 1996 1995 Current: Federal $ 6,197 $ 17,919 $ 4,042 State 798 2,280 1,037 --------- ---------- -------- Total current 6,995 20,199 5,079 -------- --------- -------- Deferred: Federal 305 (12,126) 219 State - 129 (199) --------- ----------- --------- Total deferred 305 (11,997) 20 --------- -------- ---------- Total income taxes $ 7,300 $ 8,202 $ 5,099 ======= ========= ======= The differences between taxes computed at the federal statutory rate and recorded income tax expense for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands): 1997 1996 1995 Computed "expected" tax expense $ 5,105 $ 3,710 $ 6,574 State taxes in excess of federal benefit 519 1,336 545 Non-taxable income (1,188) (982) (637) Goodwill and other amortization 801 2,437 (287) Valuation allowance 412 - - S corporation earnings - - (984) Fines and penalties 64 543 - Amounts related to prior years - 980 - Other 1,587 178 (112) -------- ------- --------- Income tax expense $ 7,300 $ 8,202 $ 5,099 ======= ======= ======= F-30 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 Deferred tax assets: Unearned premium $ 2,132 $ 3,688 Discount on reserve for losses and loss adjustment expenses 14,160 13,149 Accrued settlement costs 4,550 - Accrued employee benefits 575 709 Bad debts 2,450 5,950 Deferred acquisition costs 422 - Other 811 1,507 ----------- ---------- Gross deferred tax assets 25,100 25,003 --------- --------- Deferred tax liabilities: Deferred acquisition costs - 156 Unrealized gains on investments 1,077 952 Depreciation 645 446 Other 846 898 ----------- ----------- Gross deferred tax liabilities 2,568 2,452 ---------- ---------- Deferred tax assets before valuation allowance 22,532 22,551 Valuation allowance (412) - ---------- ------------- Net deferred tax asset $ 22,120 $ 22,551 ========= =========
The Company estimated it could realize $22.1 million of its December 31, 1997 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, a valuation allowance of $0.4 million relating to the December 31, 1997 deferred taxes has been established. No valuation allowance was necessary at December 31, 1996. (10) Notes Payable
Notes payable consist of the following at December 31, 1997 and 1996 (in thousands): 1997 1996 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. 330 756 Term loan, implicit interest rate of 12% computed on the payment stream; matures January 1, 1999. 279 470 Notes payable on five automobiles, bearing interest at 7%; various maturities throughout 2000. - 77 -------------- ------------ $ 15,609 $ 16,303 ======== ========
F-31 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Notes payable at December 31, 1997 are due as follows (in thousands): 1998 $ 586 1999 23 2000 - 2001 - 2002 and thereafter 15,000 --------- $ 15,609 The Company is in compliance with debt covenant requirements under the AmRe note agreement. (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, 1997 and 1996, respectively. Class B Common Stock, par value $.01, consists of 100 million shares authorized and 24.3 million shares issued and outstanding at December 31, 1997 and 1996, 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 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 1997 and 1996. In December 1997, RISCORP received a dividend of $2.2 million from RPC. The Company paid dividends to participating policyholders of $8.6 million, $9.2 million and $1.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, the Company's insurance subsidiaries have the ability to dividend $13.5 million to RISCORP without the prior approval of the FDOI or the MDOI, consisting of $12.3 million from RPC, $1.2 million from RNIC and $0 from RIC. Combined statutory policyholders' surplus as of December 31, 1997 and 1996, and combined statutory net income for the years ended December 31, 1997 and 1996 for the Company's insurance subsidiaries, were as follows (in thousands): 1997 1996 ----------- ----------- Policyholders' surplus $ 96,280 $ 90,639 Net income 11,042 13,980 F-32 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) In order to facilitate the regulators' responsibility to monitor insurer solvency, the National Association of Insurance Commissioners issued a model law in January 1995 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, 1997, 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, 1997, 1996 and 1995 would have been as follows (in thousands, except per share data): 1997 1996 1995 ---------- ---------- ----------- Net income - as reported $ 7,286 $ 2,398 $ 13,683 - pro forma 5,286 1,933 13,506 Net income per common share-diluted - as reported $ 0.20 $ 0.07 $ 0.45 - pro forma 0.14 0.06 0.45 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 granted in 1997 are exercisable for 10 years after the date and the options vest over periods ranging from immediately to 2 years. In 1996 and 1995, options are exercisable for 12 years after the date of the grant and the options vest over periods ranging from two to nine years. F-33 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) A summary of the status of the Company's Stock Option Plan as of and for the years ended December 1997, 1996 and 1995 is presented below:
1997 1996 1995 Weighted Weighted Weighted Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- ------ -------------- ------ -------------- ------ -------------- Outstanding, Beginning of year 3,078,779 $3.67 2,556,557 $3.96 1,854,392 $3.01 Granted 2,533,326 4.43 1,572,538 6.84 702,165 $6.50 Exercised - - (17,999) 3.61 - - Canceled (3,078,779) 3.67 (1,032,317) 9.22 - - ---------- ------ --------- ----------------------- --------- Outstanding, end of year 2,533,326 $4.43 3,078,779 $3.67 2,556,557 $3.96 ========= ===== ========= ===== ========= ===== Options exercisable at year end 1,085,711 $6.67 731,849 $2.08 193,657 $0.73 ========= ===== ======= ===== ======= ===== Weighted average fair value of options granted during the year $1.92 $5.44 $5.67 ===== ===== =====
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 1997, 1996 and 1995, respectively: dividend yield of 0 percent for all years; expected volatility of 62 percent for 1997 and 60 percent for 1996 and 1995; risk-free interest rate of 5.5 percent (1997), 8.1 percent (1996) and 6.5 percent (1995); and expected lives of 10 years for 1997 and 12 years for 1996 and 1995. Due to events subsequent to December 31, 1997 and 1996, the amount shown above for the weighted average fair value of options granted during 1997 and 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 and 2,604 shares made to two employees at exercise prices of $0.72 and $4.50, respectively, and fair values of $22.78 and $12.54, respectively. Compensation expense recognized for options with exercise prices below fair market value totaled $0, $0.3 million and $0.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. This compensation expense was reversed in the fourth quarter of 1997 following termination of these options. The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------------------------- -------------------------------- Range of Number Weighted Avg Number Weighted Avg Exercise Outstanding Remaining Weighted Avg Exercisable Exercise Price Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 ------------- ----------------- ------------------- --------------- ------------- --------------- $ 2.75 1,447,615 9.4 years $ 2.75 - $ - $ 5.00 542,855 9.4 years 5.00 542,855 5.00 $ 7.50 361,904 9.4 years 7.50 361,904 7.50 $ 10.00 180,952 9.4 years 10.00 180,952 10.00 ---------- --------- ------- ---------- ------- 2,533,326 9.4 years $ 4.43 1,085,711 $ 6.67 ========= ========= ======= ========= =======
F-34 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (13) Property and Equipment Property and equipment consist of the following at December 31, 1997 and 1996 (in thousands):
Estimated Useful Life 1997 1996 Furniture and equipment 3-7 years $ 16,542 $ 15,984 Building 39 years 8,084 7,846 Leasehold improvements 5-10 years 4,810 4,896 Software 3 years 6,758 5,041 Land 1,200 1,200 ---------- ---------- 37,394 34,967 Less accumulated depreciation and amortization (10,729) (7,462) -------- ---------- $ 26,665 $ 27,505 ======== ========
Depreciation and amortization expense related to property and equipment totaled $4.9 million, $3.6 million and $2.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Included in these amounts is amortization expense of $1.4 million, $0.8 million and $0.2 million for the years ended December 31, 1997, 1996 and 1995, respectively, related to both purchased and capitalized internally developed software costs. (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, 1997, 1996 and 1995 was $1.7 million, $1.3 million and $0.9 million, respectively. At December 31, 1997, the Company was obligated under aggregate minimum annual rentals as follows (in thousands): Year ended December 31, Annual Rental 1998 $ 950 1999 455 2000 327 2001 182 2002 33 Thereafter - ----------- $ 1,947 F-35 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (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, 1997 and 1996 is a liability for self-insured health benefits of $0.9 million and $0.4 million, respectively. Expenses for self-insured health benefits were $3.3 million, $2.6 million and $1.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. There were no employee benefit plans in 1997. Expenses relating to employee benefit plans were $0.4 million and $0.2 million for the years ended December 31, 1996 and 1995, respectively. (16) Related Party Transactions The Company had accounts receivable of $0.8 million from several affiliates which are included in accounts and notes receivable-other in the accompanying Consolidated Balance Sheets at December 31, 1997. Additionally, the Company had accounts and notes payable of $1.2 million at December 31, 1996 to those same affiliates. 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 $0.1 million, $1.6 million and $2.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. These expenses are included in commissions, general and administrative expenses in the accompanying Consolidated Statements of Income. 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, $0.9 million and $0.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. The Company terminated its agreement with the affiliated company during 1997. The Company provides administrative and support services to three affiliated companies. Under these arrangements, one of which terminated in 1996, the Company received $0.6 million, $0.8 million and $1.02 million for the years ended December 31, 1997, 1996 and 1995, 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, 1997, 1996 and 1995 totaled $3.7 million, $17.1 million and $1.5 million, respectively. The managed care arrangement with RHP was terminated in October 1997 following its sale to Oxford Health Plans. As more fully described in Note 8, the Company assumed the outstanding liability for unpaid losses and loss adjustment expenses which totaled $8.0 million. F-36 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, 1997, 1996 and 1995 (in thousands): 1997 1996 1995 Balance at beginning of period $ 17,000 $ 5,899 $ 5 Allowance acquired from acquisitions - 782 7,542 Additions to allowance 4,374 31,424 3,852 Write-offs against allowance (14,374) (21,105) (5,500) --------- --------- ------- Balance at end of period $ 7,000 $ 17,000 $ 5,899 ========= ======== ======= Premiums receivable included in the accompanying Consolidated Balance Sheets as of December 31, 1997 and 1996 are summarized as follows (in thousands): 1997 1996 ------------ ------------ Commercial accounts including final premium audit adjustments $ 29,612 $ 42,245 Loss sensitive contracts 68,804 91,594 NCCI pool accounts 6,987 - Other 1,780 5,239 ------------ ------------ 107,183 139,078 Less bad debt allowance (7,000) (17,000) ----------- ---------- $ 100,183 $ 122,078 ========= ========= (18) Concentration in a Single State Although the Company has expanded its operations into additional states, 70 percent, 74 percent and 93 percent of its revenues for the years ended December 31, 1997, 1996 and 1995, 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 Between November 20, 1996 and January 31, 1997, nine shareholder class action lawsuits were filed against RISCORP, Inc. and other defendants in the United States District Court for the Middle District of Florida (the "Securities Litigation"). In March 1997, the court consolidated these lawsuits and appointed F-37 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) co-lead plaintiffs and co-lead counsel. The plaintiffs subsequently filed a consolidated complaint. The consolidated complaint named as defendants RISCORP, Inc., three of its executive officers, one non-officer director and three of the underwriters for RISCORP, Inc.'s initial public offering. The plaintiffs in the consolidated complaint purport to represent the class of shareholders who purchased RISCORP, Inc. Class A Common Stock between February 28, 1996 and November 14, 1996. The consolidated complaint alleges that RISCORP, Inc.'s Registration Statement and Prospectus of February 28, 1996, as well as subsequent statements, contained false and misleading statements of material fact and omissions, in violation of sections 11 and 15 of the Securities Act and sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The consolidated complaint seeks unspecified compensatory damages. Pursuant to court ordered mediation, counsel for the parties have engaged in discussions in an effort to resolve the Securities Litigation. On January 14, 1998, counsel for the Company, counsel for William D. Griffin and counsel for the plaintiffs reached an oral agreement on terms to recommend to their clients to settle this litigation. The proposed settlement is contingent upon the following: consummation of the transactions contemplated by the Purchase Agreement with Zenith, certification of a settlement class, payment by the Company to the settlement class, disclosure of certain documents, interviews of individuals to verify information relating to the settlement and a release against all defendants. Counsel to the parties are in the process of finalizing the initial settlement documents. The settlement will require preliminary approval by the court as to the fairness of the terms of the settlement. Notice to the settlement class and an opportunity to object to the terms of the settlement and to exclude themselves from the settlement class is also required. The settlement must receive final court approval after notice to the settlement class and an opportunity to object or opt out is provided. Not all of the terms of the settlement have been finalized as of this date. Counsel to the parties have agreed to recommend to their respective clients a settlement amount of $21.0 million. The Company estimates that $8.0 million of insurance proceeds will be available for contribution to the settlement amount, as well as related costs and expenses. Given the preliminary nature of this settlement and the various contingencies relating to its consummation, there can be no assurance that this litigation will ultimately be settled on this basis. The Company recognized the $21.0 million proposed settlement and the related insurance proceeds in the accompanying financial statements as of December 31, 1997. In April 1996, RISCORP Insurance Company and certain officers and directors were named as defendants in a purported class action suit filed in the United States District Court for the Southern District of Florida (the "Vero Cricket Litigation"). In this action, the plaintiffs claimed that the defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), breached fiduciary duties and were negligent in the Company's acquisition of Commerce Mutual Insurance Company ("CMIC") in 1995. The plaintiffs sought compensatory and punitive damages and equitable relief and treble damages for the RICO counts. The named plaintiffs, Vero Cricket Shop, Inc., Vero Cricket Shop Too, Inc., and Falls Company of Longboat Key, Inc., claimed to be former policyholders of CMIC and claimed to represent others similarly situated. On December 5, 1997, counsel for the parties reached an agreement to recommend to their respective clients a settlement of the claims asserted in the Vero Cricket litigation. Plaintiff's counsel has confirmed that the terms of the settlement are acceptable to the named plaintiffs. The Company's Board of Directors has approved the terms of the settlement, and the final settlement documents are being reviewed by the F-38 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) parties and counsel. The settlement is contingent upon preliminary approval by the court as to the fairness of the settlement, certification of a settlement class, notice to the settlement class, opportunity of the settlement class members to object and withdraw, no termination by either party and final approval by the court. Pursuant to the terms of the settlement agreement and subject to the satisfaction of the contingencies discussed above, RISCORP Insurance Company will pay to the plaintiffs a settlement amount of $475,000. The Company estimates that 75 percent of the settlement amount will be covered by insurance. The Company recognized the $475,000 proposed settlement and the related insurance proceeds in the accompanying financial statements as of December 31, 1997. On September 18, 1997, the United States Attorney's office in Pensacola, Florida announced that a United States grand jury had indicted RISCORP, Inc., RISCORP Management Services, Inc. (a wholly owned, non-regulated subsidiary of RISCORP, Inc.) and five former officers, including William D. Griffin, Founder and Chairman of the Board, for various charges stemming from alleged illegal political campaign contributions. On September 18, 1997, the Board of Directors approved a guilty plea by RMS to a single count of conspiracy to commit mail fraud. The guilty plea was entered by RMS and accepted by the court on October 9, 1997. As a result of an agreement negotiated with the United States Attorney, the court dismissed the indictment against RISCORP, Inc. on the same day. Mr. Griffin has resigned from the Board of Directors of the Company and all other positions with the Company. RMS agreed to cease to operate as a third party administrator effective October 31, 1997. As of December 31, 1996, RMS recorded $1.0 million for the estimated fines and costs related to this matter. On February 18, 1998, a second superseding indictment was issued against the five former officers including Mr. Griffin. Neither the Company nor any of its subsidiaries were named as defendants in the second indictment. The charges asserted in the second indictment, like those in the first indictment, stem from alleged illegal political campaign contributions. On July 17, 1997, plaintiffs Thomas K. Albrecht and Peter D. Norman filed, in the Circuit Court of Montgomery County, Alabama, an action against the Company, Mr. William D. Griffin and several other former officers of the Company. The suit alleged violations of federal and state securities laws and breach of contract resulting from the purchase of IAA by the Company in 1996. The plaintiffs sought compensatory and punitive damages and equitable relief. On or about December 2, 1997, counsel for the Company and counsel for plaintiffs negotiated a settlement of this action. Settlement documents have been approved and executed by all parties. As part of the settlement agreement, the Company paid $2.0 million to plaintiffs, RISCORP, Inc. advanced $2.3 million to plaintiffs against an anticipated final distribution to shareholders and RISCORP, Inc. accelerated a distribution of 790,336 additional shares of Class A Common Stock to the plaintiffs. Such shares were contemplated under the terms of the Agreement and Plan of Merger by and among the Company, RISCORP-IAA, Inc., IAA, Thomas K. Albrecht and Peter D. Norman, dated as of September 17, 1996. The Company estimates that $2.0 million of insurance proceeds will be available to offset the total settlement amount as well as related costs and expenses. The Company recognized the $2.0 million proposed settlement and the related insurance proceeds in the accompanying financial statements as of December 31, 1997. As part of the settlement agreement, the plaintiffs agreed to vote all their shares of Class A Common Stock in favor of the Purchase Agreement and the transaction contemplated therein. Plaintiffs are record holders of 1,580,672 shares of Class A Common Stock, and, thus, these plaintiffs hold 13 percent of the outstanding shares of Class A Common Stock. F-39 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) On August 20, 1997, RISCORP, Inc., the Company, 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. It should be noted that the frequency of large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which the Company has substantial business, particularly in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. In June 1997, the Company terminated a number of employees in connection with the workforce reduction. As a result of the workforce reduction, a number of former employees have initiated proceedings, including arbitration, against the Company for certain severance benefits. The Company intends to vigorously defend these suits; however, there can be no assurance that it will prevail in these proceedings. On March 13, 1998, RIC and RPC were named as defendants in a purported class action against the National Council on Compensation Insurance, Inc. and all insurers selling workers' compensation insurance in the State of Florida from 1985 to 1998. The suit claims the defendants violated the Sherman Antitrust Act, RICO, the Florida Antitrust Act and the common law in the collection of workers' compensation premiums for alleged residual market loads. The suit seeks compensatory and punitive damages and treble damages for the RICO counts. The named plaintiff, Bristol Hotel Asset Company, claims to be a purchaser of Florida workers' compensation insurance and claims to represent others similarly situated. The Company intends to vigorously defend this action; however, there can be no assurance it will prevail in the litigation. The Company, in the normal course of business, is party to various lawsuits which management believes will not materially affect the financial position of the Company. Based upon information presently available, and in light of legal and other defenses available to the Company, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. However, no assurance can be given, or may be taken that material adverse judgments will not be rendered against the Company as a result of the aforementioned matters. Other than as noted above, no provision had been made in the Company's financial statements for the above matters at December 31, 1997 and 1996. In addition, certain of the lawsuits and related legal expenses may be covered under directors and officers' insurance coverage maintained by the Company. The Company entered into a contract with the Florida Chamber of Commerce ("the Chamber") in 1993, under which the Company agreed to pay the Chamber $1.0 million annually through 1998 for the Chamber's endorsement of the Company, a non-compete agreement by the Chamber and certain other restrictive covenants. The fee incurred for each of the years ended December 31, 1996 and 1997 under this agreement was $1.0 million. The Company collateralized its obligation under the agreement with an irrevocable letter of credit and RISCORP secured the letter of credit with certificates of deposit. The final payment of $1.0 million under this contract was paid in December 1997. F-40 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) On October 9, 1997, the MDOI completed an examination of the Company's books and records as of December 31, 1996. The MDOI issued a final report on the 1996 examination on December 10, 1997. The statutory capital and surplus as of December 31, 1996 determined by the examiners was $29,345,804 compared to $31,012,399 reported by RNIC in its 1996 statutory financial statements. The most significant examination adjustment was the non-admission of an accounts receivable balance relating to the loss portfolio transfer from OSAA in the amount of $900,000. This balance was paid in full by OSAA. The remaining adjustments of $800,000 pertain to items that were either collected or charged to expense during 1997. These examination adjustments relate to the statutory financial statements and have no impact on the GAAP financial statements. During February 1998, the FDOI completed an examination of the statutory books and records of RIC and RPC as of December 31, 1996. The FDOI has not yet issued a report; however, based on the February 5, 1998 closing conference with the FDOI examiners, the resolution of the impact of the matters raised by the FDOI will not have a material impact on the December 31, 1996 statutory financial statements of RIC and RPC. However, because the FDOI has not released the final results of their examination, Management cannot determine the materiality or dollar amount of adjustments, if any, to the December 31, 1996 statutory financial statements resulting from the FDOI's 1996 examinations of RIC and RPC. Management believes that any adjustments arising out of the statutory examinations of RIC and RPC will have no material impact on the accompanying GAAP financial statements. The Company 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. (20) Proposed Sale to Zenith Insurance Company ("Zenith") On June 17, 1997, RISCORP and certain of its subsidiaries entered into an Asset Purchase Agreement for the sale of substantially all of the assets and the assumption of certain liabilities of RISCORP and its subsidiaries to Zenith in exchange for cash. The Asset Purchase Agreement was amended on June 26, 1997 and July 11, 1997. The purchase price for the net assets of RISCORP and its subsidiaries to be acquired by Zenith is undetermined at this time but will be based on the GAAP Statement of Transferred Assets and Transferred Liabilities as of the closing date. The Statement of Transferred Assets and Transferred Liabilities is required to be prepared by RISCORP and audited by RISCORP's independent accountants within 70 days from the closing date. 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. RISCORP has scheduled a special meeting of shareholders to be held on March 26, 1998 for the purpose of voting upon the proposal to approve and adopt the Asset Purchase Agreement. Assuming the shareholders approve the Purchase Agreement on March 26, 1998, the parties expect the transaction to close on April 1, 1998. F-41 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (21) Adjustments Made in the Fourth Quarter As described below, the Company made certain adjustments in the fourth quarter of 1997 which have been included in the accompanying December 31, 1997 financial statements. The impact of the fourth quarter adjustments described below was an increase of $0.3 million to 1997 income before income taxes. Allowance for Doubtful Accounts In the fourth quarter of 1997, the Company completed a detailed review of the composition of the December 31, 1997 premium receivables balance in connection with the determination of the allowance for doubtful accounts. This analysis was the continuation of the analysis performed in connection with the determination of the 1996 allowance for doubtful accounts discussed below. As a result of this analysis, an increase of $4.4 million was recorded in the allowance for doubtful accounts to increase the allowance for doubtful accounts to $21.4 million. In addition, the allowance for doubtful accounts was reduced by $14.4 million in the fourth quarter as a result of write-offs of bad debts of $14.4 million. This adjustment had no effect on the accompanying statements of income. Proposed Litigation Settlements As more fully discussed in Note 19, the Company negotiated settlements of three lawsuits during December 1997 and January 1998. As a result of these proposed settlements, the Company recognized an expense in the fourth quarter of $13.1 million, net of estimated insurance proceeds, in the accompanying financial statements as of December 31, 1997. Involuntary Pools During 1996, RISCORP expanded its workers' compensation business into Alabama, Georgia, Kansas, North Carolina, South Carolina and Virginia primarily as a result of the acquisition of Atlas Insurance Company (see Note 3). The National Council on Compensation Insurance, Inc. ("NCCI") is the administrator for the National Workers' Compensation Reinsurance Pool ("POOL") for the above states. On January 9, 1998, the NCCI notified RISCORP of its proportionate share of POOL results through September 30, 1997, and RISCORP recorded the information received from the NCCI in the fourth quarter of 1997. The impact of recording the information was an increase of earned premiums of $11.6 million, increases in loss and loss adjustment expenses of $8.9 million and increases in commissions, general and administrative expenses of $5.0 million. Favorable Reserve Development During the fourth quarter of 1997, the Company completed a detailed analysis of its loss and loss adjustment expense reserves in connection with the determination of the December 31, 1997 loss and loss F-42 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) adjustment expense reserves. This analysis, combined with favorable development experienced in the fourth quarter of 1997, resulted in an overall reduction of the loss and loss adjustment expense reserves of $12.2 million in the fourth quarter of 1997. Quota Share Ceding Commissions The Company recognized $6.3 million of ceding commission income in the fourth quarter of 1997 primarily resulting from the impact of the decrease in loss and loss adjustment expense reserves discussed above. Ceding commission income is recorded as a reduction of commissions, general and administrative expenses in the accompanying financial statements. Stock Options In the fourth quarter of 1997, the Company terminated all stock options previously granted under its stock option plan. As a result of the termination of the stock options, the Company reversed $1.6 million of compensation expense that had previously been recorded on the stock options granted by the Company. 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. The impact of the fourth quarter adjustments described below was a reduction of $11.5 million to 1996 income before income taxes. 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 $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. Goodwill As more fully discussed in Note 2(i) 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. F-43 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Litigation Expenses As discussed in Note 19, in the fourth quarter of 1996, the Company recorded a provision of $1.0 million for payment of fines and other costs related to the RMS matter. This provision was included in the Company's Consolidated Statement of Income for the year ended December 31, 1996. F-44
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES RISCORP, Inc. and Subsidiaries December 31, 1997 (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 $ 58,294 $ 59,010 $ 59,010 U.S. government obligations 38,065 39,248 39,248 Corporate obligations 88,102 89,199 89,199 Mortgage backed securities 1,932 1,968 1,968 Asset backed securities 9,920 9,966 9,966 --------- ----------- ----------- Total available for sale 196,313 199,391 199,391 --------- --------- --------- Held to maturity: Fixed maturity securities: U.S. government obligations 18,434 18,629 18,434 Municipal government obligations 4,186 4,248 4,186 Certificates of deposit 1,470 1,470 1,470 ---------- ----------- ----------- Total held to maturity 24,090 24,347 24,090 --------- ---------- ---------- Total investments $220,403 $223,738 $223,481 ======== ======== ======== Available for sale: Unrestricted $142,876 $145,571 $145,571 Restricted 53,437 53,820 53,820 --------- ---------- ---------- $196,313 $199,391 $199,391 ======== ======== ========
See accompanying auditors' report. F-45
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS RISCORP, Inc. (Parent Company Only) (in thousands) December 31, December 31, 1997 1996 ASSETS Investments at fair value (cost $1,000 and $7,816) 1,000 $ 7,816 Cash and cash equivalents (1,152) 274 Investment in wholly-owned subsidiaries 172,463 153,118 Surplus note receivable from subsidiary 13,000 13,000 Other assets 28,145 8,186 ---------- ------------ Total assets $ 213,456 $ 182,394 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 15,000 $ 15,000 Accrued expenses and other liabilities 34,923 7,986 ---------- ------------ Total liabilities 49,923 22,986 ---------- ----------- Class A Common Stock subject to put options - 2,100 ---------- ------------ Shareholders' equity: Common stock 363 363 Additional paid-in capital 135,974 137,813 Net unrealized gains on investments 2,002 1,769 Unearned compensation--stock options - (546) Retained earnings 25,195 17,909 Treasury stock at cost, 112.6 shares (1) - ---------- ---------- Total shareholders' equity 163,533 157,308 ---------- ---------- Total liabilities and shareholders' equity $ 213,456 $ 182,394 ========= =========
See notes to consolidated financial statements. See accompanying auditors' report. F-46
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME RISCORP, Inc. (Parent Company Only) (in thousands) Year ended December 31, ---------------------------------------------- 1997 1996 1995 Revenues: Net investment income $ 517 $ 2,590 $ 1,469 Dividend income 3,446 18,335 2,652 Other income - 3 - Total revenue 3,963 20,928 4,121 Expenses: General and administrative expenses 16,421 1,995 90 Interest expens 1,800 2,234 4,170 Depreciation and amortization 857 3,830 205 Total expenses 19,078 8,059 4,465 (Loss) income before equity in income of subsidiaries and income taxes (15,115) 12,869 (344) Equity in income (loss) of subsidiaries before income taxes 20,935 (11,428) 13,036 --------- -------- --------- Income before income taxes 5,820 1,441 12,692 Income taxes (1,466) (957) (991) ---------- ----------- ----------- Net income $ 7,286 $ 2,398 $ 13,683 ========= ========= ========
See notes to consolidated financial statements. See accompanying auditors' report. F-47
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOW RISCORP, Inc. (Parent Company Only) (in thousands) Year ended December 31, ----------------------------------------------- 1997 1996 1995 ------------- ------------- ------------ Cash flows from operating activities: Net income $ 7,286 $ 2,398 $ 13,683 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued expenses and other liabilities 26,934 3,421 3,415 Depreciation and amortization 857 3,830 - Net realized loss (gain) on sale of investments 35 (4) - (Increase) decrease in other assets (20,555) 2,750 4,494 Equity in net (income) loss of subsidiaries (18,344) 5,967 (11,035) Net amortization of discounts on investments - 80 - Increase in surplus note receivable - - (13,000) ----------- ------------ ----------- Net cash (used in) provided by operating activities (3,787) 18,442 (2,443) ----------- ------------ ----------- Cash flows from investing activities: Proceeds from sale of fixed maturities--available for sale 4,206 44,124 - Proceeds from the sale of equity securities 1,548 353 - Proceeds from maturities of fixed maturities--available for sale 1,000 1,000 - Capital contributions to subsidiaries (1,000) (114,375) (31,045) Purchase of fixed maturities--available for sale - (48,438) (3,000) Purchase of equity securities - (1,905) - Purchase of IAA, net of cash acquired - 282 - Purchase of RISC, net of cash acquired - (538) - ----------- ------------ ----------- Net cash used in investing activities 5,754 (119,497) (34,045) ----------- ------------ ----------- Cash flows from financing activities: Purchase of treasury stock subject to put option (2,100) - - Other, net (1,293) 709 - Proceeds from note payable - - 43,000 Principal repayment of notes payable - (27,000) (6,867) Exercise of stock options - 65 - Proceeds of initial offering of common stock - 127,908 - ----------- ------------ ----------- Net cash (used in) provided by financing activities (3,393) 101,682 36,133 ----------- ------------ ----------- Net (decrease) increase in cash and cash equivalents (1,426) 627 (355) Cash and cash equivalents, beginning of period 274 (353) 2 =========== ============ =========== Cash and cash equivalents, end of year $ (1,152) $ 274 $ (353) =========== ============ =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,800 $ 2,684 $ 3,966 =========== ============ =========== Income taxes $ 6,556 $ 15,127 $ 4,969 =========== ============ ===========
See notes to consolidated financial statements. See accompanying auditors' report. F-48
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, 1997 Premiums earned $ 328,191 $ 167,274 $ 18,812 $ 179,729 10.5% ========= ========= ======== ========= ===== 1996 Premiums earned $ 326,875 $ 165,022 $ 11,704 $ 173,557 6.7% ========= ========= ======== ========= ==== 1995 Premiums earned $ 274,351 $ 139,144 $ 680 $ 135,887 .5% ========= ========= ========== ========= ===
See accompanying auditors' report. F-49
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 ---- ------- ---------- ---------- -------- -------- -------- ------ ------- ------- ---------- -------- 1997 $ (2,053) $ 437,038 $ - $ 56,324 $ 179,729 $ 16,447 $ 125,764 $ (2,401) $ 49,221 $ 120,285 $ 157,495 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
See accompanying auditors' report. F-50 EX-10 2 MANAGEMENT CONTRACT WITH PHOENIX MANAGEMENT CO. MANAGEMENT AGREEMENT of RISCORP, INC. THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into as of the 18th day of February, 1998, by and among The Phoenix Management Company, Ltd., a Florida limited partnership (the "Management Company"), RISCORP, Inc., a Florida corporation ("RI"), RISCORP Management Services, Inc., a Florida corporation ("RMS"), 1390 Main Street Services, Inc., a Florida corporation ("1390"), RISCORP of Illinois, Inc., an Illinois corporation ("ROI"), Independent Association Administrators, Incorporated, an Alabama corporation ("IAA"), RISCORP Insurance Services, Inc., a Florida corporation ("RIS"), RISCORP Managed Care Services, Inc., a Florida corporation ("RMCS"), CompSource, Inc., a North Carolina corporation ("CompSource"), RISCORP Real Estate Holdings, Inc., a Florida corporation ("RREH"), RISCORP West, Inc., an Oklahoma corporation ("RWl"), RISCORP of Florida, Inc., a Florida corporation ("ROF"), RISCORP Insurance Company, a Florida corporation ("RIC"), RISCORP Property & Casualty Insurance Company, a Florida corporation ("RPC"), RISCORP National Insurance Company, a Missouri corporation ("RNIC"), RISCORP Services, Inc., a Florida corporation ("RSI"), RISCORP Staffing Solutions Holding, Inc., a Florida corporation ("RSSH"), RISCORP Staffing Solutions, Inc. I, a Florida corporation ("RSSI"), and RISCORP Staffing Solutions, Inc. II, a Florida corporation ("RSSII") (RI, RMS, 1390, ROI, IAA, RIS, RMCS, CompSource, RREH, RWI, ROF, RIC, RPC, RNIC, RSI, RSSH, RSSI and RSSII are hereinafter collectively or, if the context otherwise requires, individually referred to as "RISCORP"), Frederick M. Dawson, an individual resident of the State of Florida ("Mr. Dawson"), and Walter E. Riehemann, an individual resident of the State of Florida ("Mr. Riehemann"). R E C I T A L S: WHEREAS, RISCORP has agreed to transfer substantially all of its operating assets and noncontingent liabilities to Zenith Insurance Company, a California corporation ("Zenith"), pursuant to the terms of that certain Asset Purchase Agreement by and among RISCORP and Zenith dated June 17, 1997, as amended (the "Asset Purchase Agreement"), and following the consummation of such transaction it is anticipated that RISCORP will not have any employees; WHEREAS, Mr. Dawson, the current President and CEO of RI, was hired by RI as a crisis manager pursuant to the terms of that certain Employment Agreement by and between Mr. Dawson, RMS and RI, effective as of May 19, 1997 (the "Employment Agreement") and, in such capacity, has demonstrated exceptional leadership and has significantly contributed to the value that is expected to be available for distribution to the shareholders of RI following the sale to Zenith and the resolution of all claims and contingencies related to RISCORP's former operations; WHEREAS, the consummation of the sale to Zenith will constitute a Change of Control as such term is defined in the Employment Agreement and, as such, Mr. Dawson will have the right to terminate the Employment Agreement immediately after the closing date; WHEREAS, Mr. Riehemann, the current Senior Vice President and General Counsel of RI, will also have the right to terminate his employment with RI in connection with the Change of Control pursuant to the terms of his Employment Agreement with RMS dated April 2, 1997 (the "Riehemann Employment Agreement"); WHEREAS, Mr. Dawson has formed the Management Company to provide executive management and consulting services to business organizations following the sale to Zenith; WHEREAS, Mr. Dawson will serve as the President of the general partner of the Management Company and, in such capacity, shall control the activities and operations of the Management Company, and Mr. Walter E. Riehemann will serve as Vice President and Secretary of the general partner; WHEREAS, given the significant issues that will continue to face RISCORP following the sale to Zenith and the financial consequences that the resolution of these issues will have on any subsequent distribution to the shareholders of RI, the Board of Directors has determined that it is in the best interests of RI and its shareholders to retain the Management Company following such sale; WHEREAS, pursuant to the terms of this Agreement, RISCORP hereby retains the Management Company and through it the personal services of Mr. Dawson and the other senior management personnel of the Management Company, including Mr. Riehemann, to provide all management services required in connection with the ongoing operations of RISCORP following the sale to Zenith, and the Management Company agrees to accept such duties and responsibilities on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants, conditions, and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby covenant and agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: 1.1 "Board of Directors" or "Board" means the Board of Directors of RI. 1.2 "Effective Date" means the date of the consummation of the sale of substantially all of the assets and noncontingent liabilities of RISCORP to Zenith pursuant to the terms of the Asset Purchase Agreement commencing immediately following the consummation of such transaction and the termination of the Employment Agreement. 1.3 "Management Company" means The Phoenix Management Company, Ltd., a Florida limited partnership, which will serve as the management company for RISCORP pursuant to this Agreement. 1.4 "Records of RISCORP" means, whether hard copy or on computer media, without limitation: any records pertaining to underwriting and claims, both open and closed; procedure manuals; mailing lists; safety reports and data; marketing plans, data and records; statistical reports; accounting records; historical records; funds received and in the custody of the Management Company; records relating to the book of business, contracts and claims; all government filings; and any other documents, materials, data, computer disks, tapes, source documents, or data file layouts pertaining to or bearing information about RISCORP and in the possession of the Management Company, its agents or subcontractors. ARTICLE II TERMINATION OF EMPLOYMENT AGREEMENTS 2.1 Termination of Dawson Employment Agreement. Immediately following the consummation of the sale to Zenith, RI shall make cash payments to Mr. Dawson required pursuant to Sections 3(d) and 7(b) of the Employment Agreement and, upon the receipt of such payments, the Employment Agreement shall be terminated and shall be of no further force and effect. In connection with the delivery of such payment, the parties shall enter into a Termination Agreement evidencing the termination of each party's rights, duties and obligations under the Employment Agreement including, without limitation, the termination of the stock option grant set forth in Section 3(c) thereof and Mr. Dawson's right to receive any of the shares thereunder. 2.2 Termination of Riehemann Employment Agreement. Immediately following the consummation of the sale to Zenith, RMS shall make the cash payment to Mr. Riehemann required pursuant to Section 7(b)(2)(i) of the Riehemann Employment Agreement and, upon the receipt of such payment, the Riehemann Employment Agreement (other than Section 8 thereof) shall be terminated and shall be of no further force and effect. In connection with the delivery of such payment, the parties shall enter into a Termination Agreement evidencing the termination of each party's rights, duties and obligations thereunder, other than the prohibitions with respect to the disclosure of confidential information or engaging in competitive activities by Mr. Riehemann. ARTICLE III DUTIES AND RESPONSIBILITIES OF MANAGEMENT COMPANY 3.1 Representations and Warranties of Management Company. The Management Company represents and warrants that its principals, employees, or subcontractors have the experience and qualifications to perform its duties under the Agreement, including, but not limited to, management of the day-to-day operations of RISCORP after the consummation of the transactions with Zenith, managing the preparation, negotiation and defense of the final business balance sheet to be provided to Zenith within 70 days of the closing thereof, providing assistance in the overall planning and coordination of the business of RISCORP, providing summary data relating to RISCORP's operations, and the skill and experience to assist RISCORP in the collection and marshaling of RISCORP's assets, resolving the outstanding liabilities of RISCORP and the orderly liquidation of RISCORP. The Management Company further represents and warrants that throughout the term of this Agreement Mr. Dawson shall control the activities and operations of the Management Company and shall personally devote a sufficient portion of his business time, efforts, skills, attention and energies to enable the Management Company to perform the Services hereunder. The Management Company agrees that neither it nor any of its senior management personnel shall become engaged or involved in any activities or matters which may adversely affect or reflect discredit on RISCORP or its respective businesses, or conflict with the Services to be provided hereunder to RISCORP. Nothing contained herein shall be construed to limit or restrict the passive investment or other business activities of any of the senior management personnel of the Management Company that do not interfere with the discharge of the Services hereunder in any material respect. 3.2 Management Services. Subject to the direction and control of the Board of Directors, the Management Company is hereby engaged to perform directly, or, with the prior approval of the Board, to retain competent professionals to perform, the following services in addition to those duties otherwise contemplated in this Agreement (collectively, the "Services"), and the Management Company hereby accepts such engagement on the terms and conditions set forth herein: A. General Management Responsibilities. The following duties will be performed by the Management Company at its expense, unless otherwise approved by the Board of Directors. 1. Management of the day-to-day operations and affairs of RISCORP including, without limitation, performing all duties normally performed by the chief executive officer and other senior management personnel of a corporation. 2. Management of all outsourcing contracts. 3. Management of all litigation. 4. Management of the preparation and defense of the Proposed Business Balance Sheet and the determination of the Final Business Balance Sheet (as such terms are defined in the Asset Purchase Agreement) in accordance with the terms of the Asset Purchase Agreement. 5. Management of the indemnification process with respect to all litigation targets (i.e. the Board, RISCORP, as well as its officers, employees and agents). 6. Management of claims investigation, targeting, data evaluation, quantification of financial opportunity, and ultimate litigation management. 7. Responsibility for the preparation of all shareholder communications, press releases, responses to media inquiries and similar public communications on behalf of RISCORP for approval by the Board of Directors prior to issuance. 8. Entering into contracts approved by the Board of Directors. 9. Performance of such other duties as may from time to time be requested by the Board of Directors not inconsistent with the Services set forth herein. 10. Responsibility for maintaining, at the expense of RISCORP, all policies of insurance related to RISCORP's continuing operations, including, without limitation, appropriate D&O insurance coverage. B. Monthly Accounting and Consulting Services. The Management Company shall have oversight responsibility for the following functions with the specific duties to be delegated, at the expense of RISCORP, to competent professionals approved by the Board. 1. Deposit and account for all cash receipts. 2. Monitor cash balances in all bank accounts and prepare cash transfers when necessary. 3. Prepare and maintain cash flow projections for all entities to facilitate proper cash control. 4. Prepare invoices for all amounts due RISCORP and monitor collection and aging of receivables. 5. Maintain accounts payable detail. 6. Review and approve all vendor invoices for payment and prepare vendor checks. Subject to the availability of sufficient cash, net of adequate reserve cash balances, sign and mail checks when required in order to obtain any vendor discounts. 7. Prepare payroll for the Company for those former employees continuing to receive severance benefits. 8. Maintain all fixed asset schedules and account for all additions and disposals. 9. Maintain monthly general ledgers for all entities including: a. recording of all cash receipts; b. recording of all cash disbursements; c. recording of all investment activity; d. recording of the fixed asset transactions; e. reconcile all bank accounts; f. reconcile investment accounts; g. verify the accurate and timely payment of payroll taxes; h. reconcile all remaining general ledger balance sheet accounts monthly to verify account balances; and i. review all income statement accounts for reasonableness of balances. 10. Prepare distribution payments to shareholders after approval by the Board of Directors. 11. Prepare monthly financial statements on a GAAP and statutory basis. 12. Prepare GAAP to statutory conversions of the accounting data needed for certified audits. 13. Prepare budgets for the RISCORP entities remaining after the Zenith transaction. 14. Prepare quarterly reports of actual vs. budgeted results for review by the Board of Directors. 15. Prepare explanations of significant budget variances. 16. Prepare all premium tax returns for 1998. 17. Respond to all regulatory correspondence. 18. Maintain document depository of accounting records for litigation and tax purposes. 19. Perform such other duties customarily performed by a chief financial officer and a corporate accounting staff. C. Regulatory Filings, Reports and Relationships with Regulatory Authorities. The Management Company shall have oversight responsibility for the following functions with the specific duties to be delegated, at the expense of RISCORP, to competent professionals approved by the Board. 1. Prepare and file all reports required under the Securities Exchange Act of 1934, as amended, with the Securities Exchange Commission ("SEC"). 2. Prepare and file all reports required under applicable insurance laws where any RISCORP entit is required to file reports. 3. Meet with representatives of any state department of insurance having jurisdiction over RISCORP, the SEC or any other state or federal regulatory authority to which RISCORP is subject and take such other actions as may be necessary or appropriate to maintain and enhance RISCORP's relationship with each such regulatory authority. D. Tax Services. The Management Company shall have oversight responsibility for the following functions with the specific duties to be delegated, at the expense of RISCORP, to competent professionals approved by the Board. 1. Prepare and file all local, state and federal tax returns for RISCORP, including but not limited to income, property, franchise, sales and intangible taxes. 2. Defend RISCORP in any audits related to its tax returns, including gathering information and responding to questions. 3. Prepare tax information for financial statements. 4. Perform quarterly tax calculations and determine the allocation of the tax liabilities among the entities. 5. To the extent necessary, prepare tax provisions and returns for Third Coast Insurance Company, Governmental Risk Insurance Trust, National Alliance for Risk Management Association and the North Carolina Commerce Fund. 6. Prepare and file information returns on Forms 1099 and provide backup withholding notices on Forms B. E. General Administration. Except as set forth below, the following duties will be performed by the Management Compan at its expense, unless otherwise approved by the Board of Directors 1. Make such reports pertaining to matters of concern or general interest with respect to RISCORP as the Board of Directors may reasonably request and provide such administrative assistance and staff support to the Board and its committees as may be reasonably necessary for the directors to carry out their duties and responsibilities to RISCORP. 2. Purchase or otherwise demonstrate to the satisfaction of the Board of Directors that the Management Company has acquired, and is maintaining in full force and effect throughout the term of this Agreement, fidelity bond coverages in reasonable amounts and as required by the applicable insurance departments. The allocated portion of the premiums for such fidelity bond coverage relating to that portion of the Management Company's operations performed on behalf of RISCORP shall be purchased and maintained at RISCORP expense. 3. Provide to the certified public accountants selected by the Board such reports and information as may reasonably be necessary to enable such accountants to express their professional opinion as to the financial condition of RISCORP. 4. Upon request of the Board of Directors, represent RISCORP at any examinations, hearings, meetings, and administrative inquiries involving the financial interests of RISCORP, and before the SEC or any insurance department or any other agency of a state in which RISCORP does business; provided, however, that the Management Company shall not bear the expense of RISCORP's separate representation by an attorney and any other professional advisors at such examinations, hearings, meetings and administrative inquiries. 5. Upon reasonable request, provide to the actuaries employed by RISCORP such reports and information as may reasonably be necessary for such actuaries to express their professional opinion as to the financial status of RISCORP. 6. Provide to the Board of Directors financial information and reports regarding RISCORP, assist in overseeing the fiscal policies and financial matters of RISCORP, provide administrative support for the fiscal operation and management of RISCORP, including preparation, accumulation and maintenance of the Records of RISCORP in accordance with statutes or regulations promulgated by the SEC, the Internal Revenue Service or any insurance department or governing authority. F. Investment Policy. The following duties will be performed by the Management Company at its expense, unless otherwise approved by the Board of Directors. 1. Prepare and submit to the Board of Directors for approval or modification, as appropriate, an investment policy plan for RISCORP. 2. Coordinate investment transactions with one or more investment advisers selected by the Management Company with the approval of the Board of Directors. 3. Verify that the investment policy adopted by the Board of Directors is properly implemented and followed by the aforesaid investment advisers. 4. Provide to the Board of Directors, at reasonable intervals, reports regarding compliance with the provisions of the applicable law regulating permissible investment policies. 5. Provide to the Board of Directors, at reasonable intervals, reports regarding compliance with investment policies established by RISCORP. 6. Provide to the Board of Directors, at least quarterly, a portfolio analysis detailing descriptions of securities, maturity dates, interest/dividend rates, yield to maturity, after tax yield, par value, book value, and realized and unrealized gains/losses. G. Auditing. Cooperate with and provide such information relating to RISCORP as may be reasonably necessary for the external auditors or other qualified consultants to evaluate the performance by the Management Company of its duties and responsibilities. H. Budget. Prepare a proposed annual budget to be reviewed, amended, modified or revised, if necessary, and approved by the Board. I. Personnel. In connection with discharging its duties under this Agreement, Management Company shall be responsible for employing at its expense such personnel as may be necessary to perform the Services contemplated by this Agreement, subject to the terms hereof. J. Plan of Liquidation. In a timely manner, prepare and submit to the Board of Directors for approval or modification, as appropriate, a plan of liquidation for RISCORP. K. Miscellaneous. Provide such other reasonably necessary services as may be required to fully execute and perform the Management Company's duties and responsibilities pursuant to this Agreement. ARTICLE IV COMPENSATION 4.1 Management Fee. In consideration for the services provided by the Management Company hereunder, RISCORP shall pay the Management Company $100,000 per month on the first day of each month during the term of this Agreement (excluding the final six months of the initial term as set forth below), plus reasonable and necessary out-of-pocket expenses of the Management Company, including but not limited to, RISCORP's allocated portion of all insurance costs, supplies, facilities, equipment and transportation expenses incurred in connection with the services provided by the Management Company to or on behalf of RISCORP. The fees and expenses payable hereunder shall be prorated for any partial month that this Agreement is in effect. Upon the Effective Date, RISCORP shall pay to the Management Company a retainer of $600,000 which shall be applied by the Management Company against the fees due to the Management Company during the final six (6) months of the initial term of this Agreement. 4.2 Restricted Stock Grant. On the Effective Date, RISCORP shall deliver to the Share Custodian (as such term is defined in Exhibit A) certificates representing 1,725,000 shares of RISCORP, Inc. Class A Common Stock (the "Restricted Stock"). Such shares shall be subject to the terms and conditions of a Restricted Stock Award Agreement in substantially the form of Exhibit A attached hereto. Ten days prior to the date any tax payment is due by the partners of the Management Company pursuant to an election under Section 83(b) of the Internal Revenue Code, as amended, to include the value of such shares of Restricted Stock in income on the date of grant, RISCORP shall pay the Management Company an amount which, on an after-tax basis, is sufficient to reimburse the partners of the Management Company for that portion of all federal income, employment and excise taxes incurred in connection with such election under Section 83(b) then being paid. RISCORP further agrees to indemnify and hold harmless the partners of the Management Company, on an after-tax basis, from any additional federal taxes, interest or penalties incurred in connection with this Restricted Stock grant (exclusive of any assessment for state taxes) by the partners of the Management Company in the event any of the foregoing taxing authorities assess one or more of the partners for any such additional taxes, interest or penalties not initially reimbursed by RISCORP. RISCORP and the Management Company agree that the initial reimbursement payment shall be equal to 71.05% of the aggregate value of the shares of Restricted Stock on the date of grant as reported in the over-the-counter market and that the foregoing amount is not intended to include any reimbursement for any state taxes that may be payable by any partner of the Management Company. For purposes of this Section, "partners of the Management Company" includes such persons or entities as are subject to federal tax on income recognized by the Management Company. 4.3 Expenses. RISCORP shall reimburse the Management Company for the reasonable expenses actually incurred by the Management Company for legal services rendered and the advice of a compensation consultant in connection with the negotiation of this Agreement within 10 business days of the receipt of acceptable invoices for such services approved by the Board of Directors. RISCORP shall also reimburse the Management Company for its allocated portion (not to exceed the lesser of 25% or $5,000) of the organization costs of the Management Company and for all customary business and travel expenses approved by the Board within 10 business days of the receipt of acceptable expense reports. In addition, the Management Company will be provided with such number of corporate credit cards in the name of RISCORP as the Board of Directors may approve to help defray out-of-pocket expenses. ARTICLE V EXPENSES OF RISCORP It is understood and agreed by the parties that the fees paid to the Management Company are in consideration for the Management Company performing the Services described herein, but that such fees do not include the following services and expenses, which shall be borne by RISCORP: 5.1 The cost of services performed by any actuary retained on behalf of RISCORP. 5.2 The cost of audits by certified public accountants or other auditors retained on behalf of RISCORP as required by applicable law or regulations, and preparation of financial statements (whether "audited" or periodic "reviewed") and all returns and reports required by federal, state or local taxing authorities. 5.3 Legal fees for services performed by attorneys retained on behalf of RISCORP. 5.4 All legal fees, costs and expenses incurred in the prosecution or defense of lawsuits filed by or against RISCORP. 5.5 The cost of services performed by any other professionals retained with the approval of the Board of Directors on behalf of RISCORP, including but not limited to financial consultants to operate as the finance department of RISCORP, information systems specialists to help gather and preserve the Records of RISCORP and tax professionals to assist in the preparation, filing and defense of RISCORP tax returns. 5.6 The costs incurred on behalf of RISCORP related to any examination or investigation by the SEC, the IRS or any insurance department. 5.7 Premiums for errors and omissions insurance, directors and officers insurance, and fidelity coverage (including an allocated portion of the premiums for such coverage related to that portion of the Management Company's operations performed on behalf of RISCORP) and surety bonds to satisfy the needs of RISCORP, its officers, directors, employees and agents. 5.8 Such other reasonable and necessary expenses incurred by the Management Company in the performance of its duties hereunder and approved by the Board. 5.9 Cost of investing RISCORP monies. 5.10 Taxes and assessments charged against RISCORP. 5.11 The Management Company shall prepare and submit to the Board of Directors a suggested annual budget for the fees, costs and other expenses to be incurred by RISCORP described in this Article V. Subject to the direction and control of the Board, upon approval of a budget, the Management Company shall proceed with carrying out the programs and projects contemplated therein, with the costs thereof to be advanced monthly by RI and at the rate provided in the budget. 5.12 All other expenses described under this Article V shall be paid by either RISCORP or the Management Company according to such procedures as the parties shall agree upon from time to time; provided, however, that if the Management Company pays for any such items, it will be reimbursed by RISCORP within ten (10) days after providing copies of the invoice and its checks to RISCORP or such other reasonable time as the parties may determine. ARTICLE VI RECORDS AND OFFICE 6.1 Principal Office. The Management Company shall maintain at its principal office an original counterpart of this Agreement. 6.2 Access to Records. The Board of Directors and its representatives shall have complete and unfettered access to the books and records of RISCORP maintained by the Management Company and the Management Company shall make all such books and records reasonably available at the request of the Board. 6.3 Location of Records. The primary activities of the Management Company under this Agreement shall be handled from RISCORP's offices in Sarasota, Florida and Orlando, Florida, and the Records of RISCORP shall be maintained in the Sarasota office unless another location is approved by the Board. 6.4 Confidentiality. The Management Company recognizes and acknowledges that all programs and Records of RISCORP used by RISCORP are the property of RISCORP and shall be deemed confidential and proprietary information of RISCORP. The Management Company covenants and agrees that it will not, during the term of this Agreement or after termination thereof, use, disseminate, disclose or in any manner publish any such confidential and proprietary information without RISCORP's consent; provided, however, that the Management Company may in its discretion and at its expense make copies of or have access to such information to the extent it is needed for defending or prosecuting any legal, tax, or other administrative investigation or proceeding against the Management Company or pertaining to the performance of its duties hereunder. 6.5 Return of Records and Assets. Upon termination of this Agreement, all original Records of RISCORP, hardware and software (except software purchased or developed by the Management Company) utilized in generating and maintaining those records in the custody of the Management Company or its subcontractors shall be assembled by the Management Company and delivered to RISCORP all at the expense of RISCORP; provided, however, that the Management Company may in its discretion and at its expense make copies of or have access to such information to the extent it is needed for defending or prosecuting any legal, tax, or other administrative investigation or proceeding against the Management Company or pertaining to the performance of its duties hereunder. ARTICLE VII TERM AND TERMINATION 7.1 Term. The term of this Agreement shall commence on the Effective Date and, subject to the terms of this Article VII, shall remain in full force and effect for a period of three (3) years thereafter. After the initial term of this Agreement, at the election of RISCORP, this Agreement may be renewed for an additional one-year term upon providing written notice to the Management Company of its election to extend this Agreement at least 120 days prior to the termination of the initial term. Such extension, if elected by RISCORP, shall be on the terms and conditions set forth herein, including the payment of the monthly management fee set forth in Section 4.1 hereof. 7.2 Disqualification by Insurance Department. Notwithstanding the provisions of Section 7.1, this Agreement may be terminated by RISCORP if the Management Company is disqualified from acting as a management company by any insurance department and the Management Company is thereafter unable to cure the deficiencies cited by such agency within a reasonable period of time. 7.3 Annual Review. RISCORP's independent auditors shall annually review the Management Company's performance hereunder. If the independent auditors or the members of the Board of Directors (exclusive of Mr. Dawson) unanimously determine in good faith that the Management Company is not in compliance, in all material respects, with the terms of this Agreement or applicable law, then written notice of such noncompliance shall be given to the Management Company and the Management Company shall be given a reasonable time (not less than 60 days) to correct the noncompliance. If the Management Company fails to correct the noncompliance in all material respects within such cure period, then the Management Company shall pay RISCORP liquidated damages in the amount of ten percent (10%) of the annual management fee then in effect and RISCORP shall have the right to terminate this Agreement at the expiration of such cure period. Unless the acts or omissions of the Management Company constitute gross negligence or willful misconduct, such liquidated damages shall constitute the satisfaction of all liabilities to RISCORP under this Agreement. 7.4 Termination by RISCORP. RISCORP shall have the right to terminate this Agreement following the occurrence of any of the following events: (i) Mr. Dawson ceases to actively exercise management and control over the activities and operations of the Management Company on behalf of RISCORP, exclusive of any period of physical or mental disability not in excess of 12 weeks during any period of 12 consecutive months; (ii) Management Company's neglect of or refusal to perform its duties or the material breach of any provision of this Agreement by the Management Company if such breach is not cured within the time period reasonably prescribed by the Board of Directors for such breach or violation (such cure period to be not less than 60 days); (iii) any act of fraud, misappropriation, dishonesty or embezzlement by any senior management personnel of the Management Company; (iv) the indictment of any senior management personnel of the Management Company for any felony criminal offense; (v) any change of control, dissolution or liquidation of the Management Company; (vi) any merger, consolidation or other reorganization of the Management Company, other than a transaction not involving a change of control; (vii) the filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the Management Company, or upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit of insolvents by a party, except for the filing of a petition of involuntary bankruptcy against a party with the dismissal of such petition within 30 days after filing; (viii) the complete liquidation, dissolution and winding up of all of the business and affairs of RISCORP including, without limitation, the final distribution to all shareholders of RISCORP; or (ix) the final distribution to the holders of the Series A Common Stock of RI. 7.5 Effect of Termination. A. Upon termination of this Agreement for any reason other than as set forth in Section 7.4(viii) or (ix), RISCORP shall cease all payments to the Management Company as of the effective date of such termination and, except as set forth in subparagraph C below, within 30 days of the effective date thereof, the Management Company shall refund to RISCORP the advance payment set forth in Section 4.1 hereof, as well as any other funds advanced to the Management Company for services to be rendered after the termination date. B. Upon the termination of this Agreement pursuant to Section 7.4(viii) or (ix), the Management Company shall be entitled to retain the $600,000 prepayment described in Section 4.1 hereof and RISCORP shall pay the Management Company an additional amount equal to the difference between (1) $3,000,000 and (2) the aggregate amount of the monthly management fees paid to the Management Company pursuant to Section 4.1 hereof prior to the effective date of such termination. C. Upon the termination of this Agreement due to the death or disability of Mr. Dawson, the Management Company shall be entitled to retain the $600,000 prepayment described in Section 4.1 hereof; however, any other funds advanced to the Management Company for services to be rendered after the termination date shall be refunded to RISCORP within 30 days of the effective date of termination. D. Upon the termination of this Agreement, at the request of the Board of Directors, the Management Company agrees to assist RISCORP in the orderly transition of the Services being provided hereunder to a new management services provider or to the executive officers and employees then being employed by RISCORP, as the case may be. A prorated portion of the management fee set forth in Section 4.1 hereof shall be payable with respect to any such transition services requested by the Board; provided, however, the Management Company shall not be required to perform any such services for more than 120 days following the termination of this Agreement. ARTICLE VIII DELEGATION OF DUTIES Subject to the approval of the Board of Directors, the Management Company shall have the right to delegate its duties under this Agreement to such persons or entities as agents, delegates or assignees as it may properly deem necessary for the efficient performance of the duties and responsibilities assigned to the Management Company hereunder. Notwithstanding the foregoing, the parties hereto agree that RISCORP is entering into this Agreement with the Management Company to, among other things, obtain the personal services of Mr. Dawson in connection with the performance of the Services hereunder and, accordingly, the Management Company shall have no authority to delegate those duties typically performed by a chief executive officer of a corporation to any person other than Mr. Dawson without the prior approval of the Board of Directors. Neither the Management Company nor any of its employees shall be liable to RISCORP in connection with any actions taken in reliance upon the advice of any professionals selected or approved by the Board of Directors with respect to the subject matter of their engagement. ARTICLE IX PREVAILING LAW This Agreement shall be construed according to the laws of the State of Florida to the extent that such laws are not preempted by Federal law. ARTICLE X INDEMNIFICATION RISCORP agrees to indemnify and hold the Management Company and officers, directors and employees harmless from and against all costs, damages, judgments, attorneys' fees, expenses, obligations and liabilities of any kind or nature that occur, arise or result from the Management Company's (or its delegates' or agents') mismanagement of RISCORP's assets or any other breach of their duties to RISCORP or its shareholders, or any other duties imposed by law (except to the extent that such mismanagement or breach of duties results from the gross negligence or willful misconduct of the Management Company, its officers, directors and employees). ARTICLE XI MISCELLANEOUS 11.1 Fidelity Bond. During the term of this Agreement, the Management Company, at the expense of RISCORP shall maintain a fidelity bond covering its employees, with RISCORP as obligee, to protect all monies placed in any revolving account made available to the Management Company for the payment of claims, judgments and other related expenses for the benefit of RISCORP. The coverage and amount for the bond shall be as required by the applicable insurance departments or other applicable law. 11.2 No Violation. This Agreement has been duly adopted by the partners of the Management Company and the Board of Directors of RISCORP. This Agreement does not and will not conflict with or violate the charter or other organizational documents of any party, or any agreement, instrument, law, order, rule, regulation, or other obligation or arrangement by which a party may be bound. 11.3 Assignment. Except as expressly set forth herein, this Agreement shall not be assignable without the express written consent of the other parties hereto. 11.4 Performance. Neither party nor any representative, agent, employee, designee or other firm or individual acting on its behalf or at its direction, shall in bad faith take any action for the primary purpose of circumventing, diminishing or otherwise avoiding the party's obligations under this Agreement, terminating this Agreement, or causing the non-renewal of the same, including the (i) imposition of unreasonable or unfair obligations upon the other party for the purpose of causing the other party to request termination of this Agreement, (ii) the imposition of arbitrary standards, policies or procedures upon the other party, or (iii) unreasonably withholding consent or unreasonably exercising its discretion where such consent or discretion may be requested by the other party. 11.5 Corporate Authority. Prior to the Effective Date of this Agreement, the Board of Directors of RI shall adopt such resolutions as may be necessary or advisable for the Management Company to carryout its duties and responsibilities hereunder, including, without limitation, resolutions naming Mr. Dawson as the President and Chief Executive Officer of RI and Mr. Riehemann as Chief Investment Officer, Treasurer and Secretary thereof. 11.6 Entire Agreement. This Agreement constitutes the entire agreement between the parties, cannot be modified except in a writing signed by the parties, and shall be binding upon and for the benefit of the respective successors and permitted assigns of the parties (including any entities, funds, or other organizations merging into, consolidated with, formed by, or acquired by RISCORP). 11.7 Key Man Life Insurance. At the request of the Board of Directors, Mr. Dawson and Mr. Riehemann each agree to undergo annual physical examinations and cooperate with RISCORP in seeking to obtain, at the expense of RISCORP, "key man" insurance against their death or disability in connection with the Services to be provided hereunder. 11.8 Arbitration. RISCORP and the Management Company agree that any dispute or disagreement arising under or related to this Agreement will be subject to final and binding arbitration conducted under the rules of the American Arbitration Association. The parties agree to request a proposed panel of seven (7) arbitrators and to engage in respective strikes until one (1) arbitrator remains. The expenses of the arbitration, including the arbitrator's fee, will be shared equally between RISCORP and the Management Company provided that each party shall be responsible for the fees and expenses of its own counsel, except as the arbitrator, in his or her sole discretion, may otherwise determine. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. RISCORP, Inc., individually and on behalf of each of its subsidiaries identified as parties to this Agreement /s/ Seddon Goode, Jr. --------------------------------- Seddon Goode, Jr. Director /s/ George E. Greene III --------------------------------- George E. Greene III Director /s/ Walter L. Revell --------------------------------- Walter L. Revell Director THE PHOENIX MANAGEMENT COMPANY, LTD. By:Dawson Managers, Inc., its General Partner /s/ Frederick M. Dawson --------------------------------- Frederick M. Dawson President /s/ Frederick M. Dawson -------------------------------- Frederick M. Dawson /s/ Walter E. Riehemann -------------------------------- Walter E. Riehemann EX-27 3 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1997 199,391 24,090 24,327 0 0 0 223,481 30,153 184,251 2,053 749,650 437,038 56,324 0 0 15,609 0 0 363 163,170 749,650 179,729 16,447 1,546 20,369 104,052 49,221 89,750 14,586 7,300 7,286 0 0 0 7,286 .20 .20 458,239 125,764 (2,401) 45,646 74,639 458,038 0
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