-----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, V/+pPoZKA5bWxi+RaTjJfRLodkW9ZDLUhJy9HosudF2mskIyomMMyvvSxqQ8+phr unARptGsRxkDPgHxS3WhJw== 0001003957-00-000002.txt : 20000315 0001003957-00-000002.hdr.sgml : 20000315 ACCESSION NUMBER: 0001003957-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991230 FILED AS OF DATE: 20000314 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: 568477 BUSINESS ADDRESS: STREET 1: 2 NORTH TAMIAMI TRAIL STREET 2: SUITE 608 CITY: SARASOTA STATE: FL ZIP: 34236 BUSINESS PHONE: 9413665015 MAIL ADDRESS: STREET 1: 2 NORTH TAMIAMI TRAIL STREET 2: SUITE 608 CITY: SARASOTA STATE: FL ZIP: 34236 10-K 1 RISCORP, INC. DECEMBER 31, 1999 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, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 0-27462 RISCORP, Inc. (Exact name of registrant as specified in its charter) FLORIDA 65-0335150 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 North Tamiami Trail, Suite 608, Sarasota, Florida 34236 -5642 --------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (941) 366-5015 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 Class A Common Stock held by non-affiliates of the registrant as of March 9, 2000 was $34,755,511. The number of shares of the registrant's Common Stock issued and outstanding as of March 9, 2000 was 38,593,114 consisting of 14,258,671 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, 1999
Table of Contents Description Page PART I Item 1. Business 1 Item 2. Properties 13 Item 3. Legal Proceedings 13 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 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 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 28 Item 12. Security Ownership of Certain Beneficial Owners and Management 28 Item 13. Certain Relationships and Related Transactions 28 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 29 Signatures 33
PART I Item 1. Business Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements, particularly with respect to Risk Factors, Legal Proceedings, and the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Additional written or oral forward-looking statements may be made by RISCORP, Inc. ("RISCORP") and its subsidiaries (collectively, the "Company") from time to time in filings with the Securities and Exchange Commission or otherwise. Such forward-looking statements are within the meaning of that term in Sections 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements may include, without limitation, projections of revenues, income, losses, cash flows, plans for future operations, financing needs, estimates concerning the effects of litigation or other disputes, as well as assumptions regarding any of the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Many factors could contribute to such differences and include, among others, the actual outcome of pending litigation both on behalf of and against the Company, the Company's ability to gain approval and receive payment from the Florida Department of Labor for certain refund applications, the Company's ability to receive payment for the alleged errors and understatement of the Final Business Balance Sheet by the neutral auditors, the Company's need for additional capital to meet operating requirements, and other factors mentioned elsewhere in this report. Overview General RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith on April 1, 1998. In connection with the sale to Zenith, the Company ceased substantially all of its former business operations, including its insurance operations, effective April 1, 1998. Accordingly, after such date, the Company's operations have consisted primarily of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. At the present time, RISCORP has no plans to resume any operating activities. The sale to Zenith is more fully described in Note 1(c) of the accompanying consolidated financial statements. Since April 1, 1998, the Company has had no employees or insurance operations, and has provided no services to self-insurance funds or other insurance related entities. 1 Execution of Merger Agreement with William D. Griffin On November 3, 1999, RISCORP entered into a definitive agreement (the "Merger Agreement") to merge with Griffin Acquisition Corp. ("Acquiror"), a company controlled by Mr. William D. Griffin, the majority shareholder of RISCORP. Pursuant to the terms of the Merger Agreement, each issued and outstanding share of Class A Common Stock will receive $2.85 in cash, plus a contingent right to receive an additional pro rata cash amount if RISCORP recovers any additional amounts from Zenith Insurance Company. Under the terms of the Merger Agreement, Acquiror will assume all of the liabilities of RISCORP, including its pending litigation. The transaction is subject to customary closing conditions, including shareholder approval, and is expected to close in the second quarter of 2000. This transaction, if consummated, will constitute a going private transaction. Sale to Zenith Insurance Company As previously disclosed, on April 1, 1998, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith Insurance Company ("Zenith"). In connection with the sale to Zenith, the Company ceased substantially all of its former business operations, including its insurance operations. On July 7, 1999, the Company and Zenith settled, with certain limited exceptions, the claims arising out of the sale. The Asset Purchase Agreement contemplated a post-closing purchase price adjustment based on the difference between the book value of the assets purchased and the book value of the liabilities assumed as of the closing date. In connection with the determination of the final purchase price, a dispute arose between the parties regarding, among other things, the book value of the assets and liabilities of the business, Zenith's assumption of certain operating liabilities of the business, and each party's indemnification obligations under the Asset Purchase Agreement. The terms of the settlement included, among other things, RISCORP's right to seek correction of alleged errors made by the neutral auditors in connection with its determination of certain reinsurance recoverable adjustments contained in the Final Business Balance Sheet. On October 7, 1999, the neutral auditors denied RISCORP's request for correction of these errors. On January 5, 2000, RISCORP filed a lawsuit against Zenith and the neutral auditors seeking correction of these alleged errors. In connection with the sale of RISCORP's insurance operations to Zenith on April 1, 1998, RISCORP voluntarily consented to the Florida Insurance Department's request that the Company discontinue writing any new or renewal insurance business for an indefinite period of time. (d) Business Prior to April 1, 1998, RISCORP, through its wholly-owned insurance subsidiaries, was principally engaged in providing workers' compensation 2 insurance under a managed care philosophy. RISCORP provided 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, provided reinsurance, risk management advisory services, and insurance managerial services. As more fully described in Note 1(c), RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith in exchange for cash. The Company's computer systems and proprietary computer software, including the policy issue, management system, and claims systems, were included in the assets sold to Zenith. Basis of Presentation As previously disclosed, due to the sale to Zenith, the Company ceased substantially all of its business operations as of April 1, 1998. However, given the operations of the Company prior to April 1, 1998, a description of the Company's former business operations and the workers' compensation industry are included in this report to comply with the requirements of the Exchange Act and the rules and regulations of the Securities and Exchange Commission. 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 Workers' Compensation Products Prior to the sale to Zenith, the Company operated in a single industry segment. The Company's products and rating plans encompassed a variety of options designed to fit the needs of a wide selection of employers. The most basic product was a guaranteed cost contract, where the premium was set in advance and changes were made only when changes occurred in policyholder operations or payrolls. The premium for these policies was based on state approved rates, which varied depending on the type of work performed by each employee and the general business of the insured. The Company also offered several loss sensitive plans (retrospective rating, dividend, and large deductible plans) that determined the final premium to be paid based largely on the insured's losses during the policy period. Employers large enough to qualify had their premiums based on their loss experience over a three-year period. This 3 loss experience was adjusted by the type of business and associated risks. In Florida, policyholders could also qualify for one or more premium credits (5 percent and 2 percent) by agreeing to comply with drug-free workplace and/or safe workplace policies, respectively. Policyholders that elected to assume a certain amount of financial risk could elect a deductible that made them responsible for the first portion of any claim. In exchange for the deductible election, the employer received a premium reduction. As a result of the sale to Zenith, the Company no longer offers any programs or products. Workers' Compensation Management Services Prior to the sale to Zenith, the Company provided fee-based workers' compensation insurance management services to self-insurance funds and governmental risk-sharing pools, and performed all the services of an insurance carrier except assumption of the underwriting risk. The Company generally required 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 generated in addition to its base fees. Prior to the sale to Zenith, 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, North Carolina Commerce Fund, and Third Coast Insurance Company. Effective January 1, 1998, the Company entered into an agreement for the sale of the Company's 50 percent interest in Third Coast Holding Company ("Third Coast"). Third Coast owned a 100 percent interest in Third Coast Insurance Company. Workers' Compensation Managed Care Arrangements ("WCMCAs") Effective January 1, 1997, Florida law mandated that workers' compensation insurers provide all medical care through WCMCAs. Under those arrangements, the Company was allowed to direct injured employees to a provider network in which employees were required to participate or face possible denial of medical cost coverage. The Company developed a provider network that covered the entire state of Florida and included approximately 5,000 physicians and 650 hospital and ancillary facilities as of March 31, 1998. The Company believed that its ability to obtain discounted medical fees, manage utilization, and track medical outcomes for providers that participated in its network enhanced its ability to manage claims. This provider network was assumed by Zenith on April 1, 1998. Sales Prior to the sale to Zenith, the Company's workers' compensation products and services were sold by independent insurance agencies. As of March 31, 1998, the Company had appointed approximately 800 agencies in the four states where its products were sold, of which approximately 400 were in Florida. These independent agencies were viewed by the Company as important to its success. As a result of the sale to Zenith, the Company no longer maintains relationships with any agencies. 4 Customers The Company insured over 18,000 policyholders as of March 31, 1998. The Company generally requested that its agencies target customers that complied with a return-to-work program, maintained a drug-free workplace, were proactive in seeking to minimize injuries in the workplace, and were financially sound or, for certain types of policies, were willing to provide adequate security. The Company did not target any particular industry and believes that its policies were issued to a diversified mix of employers. However, the Company generally did not insure certain employers that it considered to be high risk, including nuclear facilities operators, asbestos removers, and certain other high-risk employers. The Company no longer has any customers. Employees Since April 1, 1998, the Company has had no employees or insurance operations and has provided no services to self insurance funds or other insurance related entities. Those services normally provided by employees are currently being outsourced. Reinsurance In connection with the sale to Zenith, the Company entered into an assumption and indemnity reinsurance agreement with Zenith effective April 1, 1998. Under the terms of that agreement, the Company ceded to Zenith 100 percent of its outstanding loss reserves (including incurred but not reported losses) and 100 percent of its unearned premiums as of April 1, 1998. Zenith was responsible for issuing assumption certificates to all the Company's former policyholders. Pursuant to the terms of the Asset Purchase Agreement, Zenith agreed to assume all of the Company's obligations under its then current and prior insurance and reinsurance contracts. The terms of the Asset Purchase Agreement, including the assumption and indemnity reinsurance agreement, were approved by the Florida and Missouri Insurance Departments on March 31, 1998 and April 1, 1998, respectively. The Company transferred its reinsurance assets and liabilities in their entirety to Zenith on April 1, 1998. Prior to the sale to Zenith, the Company shared the risks and benefits of the workers' compensation insurance that it wrote with other insurance and reinsurance companies through various reinsurance agreements. The Company is contingently liable to the extent that the reinsurers, including Zenith, are unable to meet their contractual obligations for any losses and loss adjustment expenses ceded. A.M. Best Ratings of Insurance Subsidiaries Due to the discontinuation of the Company's insurance operations, RISCORP's insurance subsidiaries are no longer rated by A.M. Best, an insurance rating organization, or any other rating organization. 5 Prior to the sale to Zenith, the Company's limited operating history, pending litigation, and other factors affected the ability of RISCORP'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 entities' officers. A.M. Best ratings are weighted towards factors of concern to policyholders and are not weighted 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 ("NR"). The NR category identifies the primary reason a rating opinion was not assigned. At December 31, 1998, RISCORP's three insurance subsidiaries, RISCORP Insurance Company ("RIC"), RISCORP Property & Casualty Insurance Company ("RPC"), and RISCORP National Insurance Company ("RNIC"), were each assigned a Best's classification of NR-3 (Rating Procedure Inapplicable). An NR-3 classification is assigned to companies that are not rated by A.M. Best because the A.M. Best normal rating procedures do not apply due to a company's unique or unusual business features. Competition Since April 1, 1998, the Company has not provided any insurance products or services. However, prior to ceasing its insurance operations, the Company competed in a highly competitive market. The Company's competitors included, 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 former competitors were significantly larger, had greater financial and operating resources than the Company, and could offer their services nationwide. After a period of absence from the market, traditional national insurance companies re-entered the Florida workers' compensation insurance market, which re-entry increased competition in the Company's principal market segment. In addition, the Company faced significant competition in its newer markets, particularly North Carolina and Alabama. The Company did not offer the full line of insurance products that were offered by some of its competitors. Regulation General The Company's business was subject to state-by-state regulation of workers' compensation insurance (which in some instances included rate regulation and mandatory fee schedules) and workers' compensation insurance management services. Those 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 50 states and by certain 6 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. RISCORP did not make any shareholder dividends or distributions during 1999, 1998, or 1997. 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. In accordance with the terms of the Asset Purchase Agreement, RISCORP entered into a non-compete agreement with Zenith and, pursuant thereto, its insurance subsidiaries cannot re-enter the insurance business for a period of three years from April 1, 1998. In addition, in connection with the approval of the sale to Zenith, RISCORP voluntarily consented to a request from the Florida Insurance Department to discontinue writing any new or renewal insurance business for an indefinite period of time. Based on the inability of the Company to write any new or renewal insurance business for an indefinite period of time, the impact of the non-compete on the marketability of RISCORP's insurance subsidiaries, and the future need for operating capital, RISCORP is presently considering the surrender of the Certificates of Authority ("COAs") of its insurance subsidiaries. If RISCORP surrenders the COAs of its insurance subsidiaries, it would be able to dividend funds from the insurance subsidiaries to RISCORP without regulatory approval. Premium Rate Restrictions State regulations governing the workers' compensation system and insurance business in general imposed restrictions and limitations on the Company's business operations. 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 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 was dependent on the level of premium rates permitted by state laws. In this regard, it is significant that, in certain instances applicable to the Company, the state regulatory agency that regulated workers' compensation benefits was not the same agency that regulated workers' compensation insurance premium rates and, in certain circumstances, such agencies' regulations were incompatible. Financial and Investment Restrictions Insurance company operations are subject to financial restrictions that are not imposed on most 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 restricted the rate at which the Company's insurance operations could grow. The Company's 1999 statutory filings indicate that, as of December 31, 1999, RISCORP's insurance subsidiaries met applicable state minimum capital and surplus requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 7 State laws also require insurance companies to establish reserves for the payment of policyholder liabilities and impose restrictions on the type of assets in which insurance companies may invest. Those restrictions may require the Company to invest its insurance subsidiaries' assets more conservatively than if those companies were 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 operated has established one or more insurance guaranty funds or associations that are charged by state law to pay claims of policyholders insured by companies that become 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 insolvent insurers. This type of guaranty fund is separate from the Florida Special Disability Trust Fund ("SDTF") which is designed to pay insurers for certain benefits paid to previously injured Florida workers. Pursuant to the terms of the Asset Purchase Agreement, Zenith assumed all liabilities and obligations with respect to guaranty fund assessments and similar charges attributable to the Company's former insurance operations. Statutory Accounting and Solvency Regulation State regulation of insurance company financial transactions and financial condition are based on statutory accounting practices ("SAP"). SAP differs in a number of ways from generally accepted accounting principles ("GAAP") which govern the financial reporting of most other businesses. In general, SAP-basis financial statements are more conservative than GAAP-basis financial statements, often resulting in lower asset values and higher liability values. State insurance regulators closely monitor the SAP-basis financial condition of insurance companies and can impose financial and operating restrictions on an insurance company, including the 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. At December 31, 1999 and 1998, each of RISCORP's insurance subsidiaries maintained statutory capital and surplus that met the minimum capital and surplus requirements in each state in which the individual company was licensed. The National Association of Insurance Commissioners has adopted risk-based capital standards to determine the capital requirements of an insurance carrier based on the risks inherent in its operations. The standards, which have not yet been adopted in Florida, require the computation of a risk-based capital amount that is then compared to a carrier's actual total adjusted capital. The computation involves applying factors to various financial data to address four primary risks: asset risk, insurance underwriting risk, credit risk, and off-balance sheet risk. 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, 1999 and 1998, RISCORP's insurance subsidiaries' statutory surplus was in excess of any risk-based capital action level requirements. 8 Losses and Loss Adjustment Expenses On April 1, 1998, the Company's net liabilities for losses and loss adjustment expense were transferred to Zenith; accordingly, at December 31, 1999 and 1998, no liability for losses and loss adjustment expenses was necessary. Prior to the sale to Zenith, the Company established 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 included loss payment and reporting patterns, claim closures, and product mix. The following table presents an analysis of losses and loss adjustment expenses and provides a reconciliation of beginning and ending reserves for 1998 and 1997. 1998 1997 (in thousands) Gross reserves for losses and loss adjustment expenses, beginning of year $437,038 $458,239 Less reinsurance recoverables 184,251 180,698 Less SDTF recoverable 45,211 49,505 Less prepaid managed care fees 8,420 31,958 --------- --------- Net balance at January 1 199,156 196,078 --------- --------- Incurred losses and loss adjustment expenses related to: Current year 14,860 125,764 Prior years 11,717 (2,401) --------- --------- Total incurred losses and loss adjustment expenses 26,577 123,363 --------- --------- Losses and loss adjustment expenses paid related to: Current year 1,717 45,646 Prior years 26,760 74,639 --------- --------- Total losses and loss adjustment expenses paid 28,477 120,285 --------- --------- Net balance at December 31 197,256 199,156 Plus reinsurance recoverables 214,302 184,251 Plus SDTF recoverables 44,552 45,211 Plus prepaid managed care fees 6,182 8,420 --------- --------- 462,292 437,038 Less reserves for losses and loss adjustment expenses transferred to Zenith 462,292 - --------- --------- Gross reserves for losses and loss adjustment expenses at December 31 $ - $437,038 ========== ========= The following table shows the development of losses and loss adjustment expenses for 1988 through 1997. The development data for 1998 and 1999 is not available due to the transfer of the liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998. The top line of the table indicates the estimated liabilities for unpaid losses and loss adjustment expenses as reported at the end of the stated year. Each calendar year-end reserve includes estimated 9 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 liabilities were carried as of each specific year. The section captioned "Liability Re-estimated as of" shows the original recorded liabilities as adjusted at the end of each subsequent year to give effect to the 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 liabilities were established. It is equal to the difference between the initial reserve and the latest liability re-estimated amount. The following table represents combined development for RIC, RPC, and their predecessors, as well as RNIC for 1996 and 1997. 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.
As of December 31 _________________________________________________________________________________________________________ (In thousands) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Loss and loss adjustment expense reserves, 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 foregoing table indicates, the Company's reserving results in its early years were adversely impacted by its short operating history and the relative age of the accounts it insured. Additionally, the inclusion of unallocated loss adjustment expenses in the table increased the cumulative deficiency for all years. From 1992 through March 31, 1998, the Company believes 10 its reserving methodologies became more reliable. Key factors for this improvement were 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. Risk Factors In evaluating the Company, prospective investors should carefully consider the following risk factors, in addition to the other information contained in this Annual Report. Cessation of Business Operations On April 1, 1998, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith. In connection with the Asset Sale, RISCORP ceased substantially all of its former business operations, including its insurance operations, effective April 1, 1998. Accordingly, since such date, the operations of the Company have consisted, and will continue to consist, primarily of the administration of the day-to-day activities of the surviving corporate entities, and the investment, protection, and maximization of the remaining assets of the Company. At the present time, the Company has no plans to resume any operating activities. Control by a Single Shareholder The Company's equity consists of RISCORP's Class A and Class B Common Stock, which vote together as a single class on all issues, except as otherwise required by law. Mr. William D. Griffin owns beneficially 22,176,052 shares of RISCORP's Class B Common Stock, each share of which has ten times the voting power of a share of Class A Common Stock. As a result, Mr. Griffin controls approximately 86 percent of the combined voting power of the Class A and Class B Common Stock and controls the outcome of substantially all shareholder votes. Uncertainties Relating to the Availability of Cash Proceeds for Distribution to Shareholders As previously disclosed, RISCORP entered into a definitive Merger Agreement to merge with Griffin Acquisition Corp., a company controlled by Mr. William D. Griffin, the majority shareholder of RISCORP. Pursuant to the terms of the Merger Agreement, each issued and outstanding share of Class A Common Stock will receive $2.85 in cash, plus a contingent right to receive an additional pro rata cash amount if RISCORP recovers any additional amounts from Zenith Insurance Company. Under the terms of the Merger Agreement, Acquiror will assume all of the liabilities of RISCORP, including its pending litigation. The transaction is subject to customary closing conditions, including shareholder approval, and is expected to close in the second quarter of 2000. This transaction, if consummated, will constitute a going private transaction. In the event that the Merger Agreement is not approved by the shareholders or regulators, the Company believes that certain assets will ultimately be available for distribution to shareholders after satisfaction of 11 all claims and contingencies pending against the Company and its subsidiaries and after funding all expenses associated therewith. Such claims and contingencies include all litigation pending as herewith instituted against RISCORP, its subsidiaries, and their respective officers, directors, and agents. The Company is unable to predict the amount or timing of any future distribution to those shareholders of record on a record date to be established by RISCORP's Board of Directors. Pursuant to the terms of RISCORP's Amended and Restated Articles of Incorporation, the holders of Class A Common Stock and Class B Common Stock are entitled to participate in any dividends declared or paid by RISCORP or distributions to the holders of common stock in connection with any liquidation, dissolution, or winding up of the Company ratably on a per share basis. Any future distribution of closing proceeds will be at the discretion of the Board of Directors and available only to RISCORP shareholders on a record date to be established at a later time in connection with any such future distribution. Shareholders who currently are record holders of Class A Common Stock or Class B Common Stock who are not record holders at the time a record date is established in connection with a future distribution will not be entitled to participate in any such distribution of closing proceeds. The Board of Directors intends to solicit additional shareholder approval prior to a final distribution of closing proceeds. Although interim distributions or dividends to shareholders do not require shareholder approval, a final distribution of closing proceeds will require additional shareholder approval. Personal Holding Company Income Following the consummation of the Asset Sale, the Company ceased substantially all of its former business operations and invested a substantial portion of its remaining assets in interest-bearing obligations pending the resolution of various outstanding claims and other contingencies. Under the Internal Revenue Code of 1986, as amended (the "Code"), corporations that have 60 percent or more of their income from various passive sources, including dividends and interest, and that have 50 percent or more of their outstanding stock held by five or fewer individuals, are subject to a tax of 39.6 percent on their undistributed personal holding company income, as defined in the Code, in addition to their regular income tax. Because the Company has ceased to have active business income, but will not be able to liquidate or make other distributions promptly, it is anticipated that in one or more post-1998 tax years the Company may be considered to be a personal holding company and will either be subject to the personal holding company tax in addition to the regular income tax or will be required to distribute an amount equal to the taxable income earned by the Company, net of certain expenses and with certain other adjustments, as regular dividends taxable as ordinary income to shareholders to avoid the imposition of such a tax. In an effort to avoid unfavorable tax treatment, the Company, pending resolution of claims or contingencies, may invest in obligations the interest of which is excluded from gross income for federal income tax purposes. The Company's failure to make such investments or in the alternative to make distributions of net investment income, if any, could have a material adverse effect on the amount distributable to shareholders. 12 Investment Company Act Considerations While the Company does not intend to conduct its affairs in a manner that would require registration as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), a determination that it is an investment company subject to registration could materially increase its administrative costs and regulatory requirements. The Investment Company Act places restrictions on the capital structure, business activities, and corporate transactions of companies registered thereunder. Registration by the Company under the Investment Company Act would require the Company to comply with various reporting and other requirements under the Investment Company Act, would subject the Company to certain additional expense, and could limit the Company's options for future operations. Generally, a company is deemed to be an investment company subject to registration if its holdings of "investment securities" (generally, securities other than securities issued by majority controlled, non-investment company subsidiaries, and government securities) exceed 40 percent of the value of its total assets exclusive of government securities and cash items on an unconsolidated basis. Pursuant to a rule of the Securities and Exchange Commission (the "Commission") under the Investment Company Act, a company that otherwise would be deemed to be an investment company may be excluded from such status for a one-year period provided that such company has a bona fide intent to be engaged primarily, as soon as reasonably possible (and in any event within that one-year period), in a business other than that of investing, reinvesting, owning, holding, or trading in securities. If the Company would otherwise be deemed to be an investment company under the Investment Company Act, the Company intends to rely on the one year exemption described above and does not intend to register as an investment company under the Investment Company Act. Item 2. Properties On April 1, 1998, the Company sold its principal executive office in Sarasota, Florida to Zenith in accordance with the terms of the Asset Purchase Agreement. The building contained 112,000 square feet of space, as well as an adjacent parking facility. The Company currently leases office space at three locations in two states, including Florida, under terms expiring through January 2001. The Company incurred rent expense of $0.1 million for 1999. The Company has aggregate continuing lease commitments through April 2000 of $10,000 related to one location in which offices were closed during 1997 and have been subleased on a month-to-month basis. Item 3. Legal Proceedings In August 1997, the Occupational Safety Association of Alabama Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers' compensation fund, filed a breach of contract and fraud action against the Company and others. The Fund entered into a Loss Portfolio Transfer and Assumption Reinsurance Agreement dated August 26, 1996 and effective September 1, 1996 with RNIC. Under the terms of the agreement, RNIC assumed 100 percent of the outstanding loss reserves (including incurred but not reported losses) as of September 1, 1996. Co-defendant Peter D. Norman ("Norman") was a principal and officer of Independent Association Administrators, Inc. ("IAA") prior to its 13 acquisition by RISCORP in September 1996. The complaint alleges that Norman and IAA breached certain fiduciary duties owed to the Fund in connection with the subject agreement and transfer. The complaint alleges that RISCORP has breached certain provisions of the agreement and owes the Fund monies under the terms of the agreement. The Fund claims, per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund overpaid RNIC by $6 million in the subject transaction. The court has granted RNIC's Motion to Compel Arbitration per the terms and provisions of the agreement. In December 1998, the trial court issued an order prohibiting the American Arbitration Association from administering the arbitration between RNIC and the Fund, and RNIC has appealed the trial court's ruling. The Alabama Supreme Court has stayed the current arbitration. Despite the Alabama Supreme Court's stay, the dispute between the Fund and RNIC is expected to be resolved through arbitration. The other defendants, including IAA, have appealed to the Supreme Court of Alabama the trial court's denial of their motions to compel arbitration. RNIC intends to vigorously defend the Fund's claim. In March 1998, RIC and RPC were added as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of Florida, styled Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety Company, a/k/a Aetna Group, et. al. Case No. 97-2240-CIV-MORENO. The plaintiffs purport to bring this action on behalf of themselves and a class consisting of all employers in the State of Florida who purchased or renewed retrospectively rated or adjusted workers' compensation policies in the voluntary market since 1985. The suit was originally filed on July 17, 1997 against approximately 174 workers' compensation insurers as defendants. The complaint was subsequently amended to add the RISCORP defendants. The amended complaint named a total of approximately 161 insurer defendants. The suit claims that the defendant insurance companies violated the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and the Florida Antitrust Act, committed breach of contract and civil conspiracy, and were unjustly enriched by unlawfully adding improper and illegal charges and fees onto retrospectively rated premiums and otherwise charging more for those policies than allowed by law. The suit seeks compensatory and punitive damages, treble damages under the Antitrust and RICO claims, and equitable relief. RIC and RPC moved to dismiss the amended complaint and have also filed certain motions to dismiss the amended complaint filed by various other defendants. In August 1998, the district court issued an order dismissing the entire suit against all defendants on one of the grounds identified in the various motions to dismiss filed by the defendants. The district court indicated that all other grounds and motions to dismiss that were pending at that time were mooted by the dismissal. In September 1998, the plaintiffs filed a Notice of Appeal. In February 1999, the district court issued, sua sponte, an Order of Reconsideration in which the court indicated its desire to vacate the dismissal of the RICO claims and pendant state claims based on a recent decision of the United States Supreme Court. In June 1999, the Eleventh Circuit remanded the case to the district court, and the district court has assigned the case to a magistrate for handling pre-trial matters. At a status conference held in October 1999, the magistrate established deadlines for the filing of a motion 14 for leave to amend the complaint, for supplemental briefing on pending motions, and set a hearing for March 7, 2000. Plaintiffs' counsel subsequently agreed to dismiss all claims against the Company without prejudice and filed a Second Amended Complaint that did not state claims against the Company. On February 25, 2000, the magistrate granted a consent motion with respect to the RISCORP defendants and ordered the dismissal of RIC and RPC without prejudice. In July 1999, a shareholder class action lawsuit was filed against RISCORP, two of its executive officers, and two former executive officers in the United States District Court for the Middle District of Florida. The plaintiff in this action purports to represent the class of shareholders who purchased shares of RISCORP's Class A Common Stock between November 19, 1997 and July 20, 1998. The complaint alleges, among other things, that the financial statements included in the periodic reports filed by RISCORP with the Securities and Exchange Commission during the class period contain false and misleading statements of material fact and omissions, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. These allegations principally relate to the difference between the net book value of RISCORP as reflected on its published financial statements during the class period and the net book value of the assets transferred to Zenith as determined by the neutral auditors pursuant to the terms of the Asset Purchase Agreement. The complaint seeks unspecified compensatory damages. RISCORP believes that these claims are without merit and intends to vigorously defend this suit. On or about February 15, 2000, an alleged shareholder of RISCORP filed a putative class action suit against the Company, its Directors, and its majority shareholder in the Circuit Court of the 12th Judicial Circuit, Sarasota County, Florida, styled Harris Blackman v. William D. Griffin, Seddon Goode, Jr., George E. Greene III, Walter L. Revell, and RISCORP, Inc., Case No. 20002103 CA DIV-A. The suit contends that the pending transaction with Griffin Acquisition Corp. pursuant to which William D. Griffin, the majority shareholder of RISCORP, proposes to purchase the Class A shares of RISCORP held by the public shareholders is inadequately priced. The suit alleges that the defendants are liable for breach of fiduciary duty, and seeks either to enjoin the transaction or to recover an unspecified amount of damages. RISCORP has received no notice of any hearing on the plaintiff's claim for equitable relief. RISCORP denies the plaintiff's allegations and intends to defend the suit vigorously. On February 25, 2000, the State of Alabama, on behalf of D. David Parsons (as Acting Commissioner of Insurance of the State of Alabama), filed a lawsuit against RNIC. The complaint alleges that RNIC owes an additional $2.5 million in premium taxes for the 1996 tax year. RNIC entered into a Loss Portfolio Transfer Agreement dated August 26, 1996 and effective September 1, 1996 with the Occupational Safety Association of Alabama Workmen's Compensation Fund (the "Fund"). According to the complaint, pursuant to the terms of the agreement, RNIC assumed the workers' compensation risks that were in the Fund and became the insurer of those risks. The State claims that premium tax is due on the consideration received by RNIC for insuring those risks. The complaint seeks compensatory damages. RNIC intends to vigorously defend this suit. 15 In April 1999, RISCORP received an invoice from Salomon Smith Barney seeking approximately $2 million for financial advisory services rendered in connection with the sale to Zenith. RISCORP disputes any liability for the payment of such fees and intends to vigorously defend any cause of action instituted by Salomon Smith Barney seeking payment. The Company, in the ordinary course of business, is party to various lawsuits. Based on information presently available, and in the light of legal and other defenses available to the Company, contingent liabilities arising from such threatened and pending litigation in the ordinary course of business are not presently considered by management to be material. Other than as noted herein, no provision had been made in the accompanying consolidated financial statements for the foregoing matters. Certain of the related legal expenses may be covered under directors and officers' insurance coverage maintained by the Company. Item 4. Submission of Matters to a Vote of Security Holders None. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Following RISCORP's initial public offering in February 1996, RISCORP Class A Common Stock ($.01 par value) was traded on the NASDAQ Stock Market's National Market under the symbol "RISC." There is no public market for RISCORP's Class B Common Stock. Due to RISCORP's inability to timely file its Annual Report on Form 10-K for the year ended December 31, 1996 or its Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, RISCORP's Class A Common Stock was delisted in July 1997. Despite RISCORP's timely filing of all periodic reports for all periods subsequent to the third quarter of 1997, RISCORP's Class A Common Stock has remained delisted, and RISCORP has no intention to seek readmission for listing on NASDAQ or any other national securities exchange. Accordingly, since July 2, 1997, there has been no public market for RISCORP's Class A Common Stock. As of December 31, 1999, there were 370 record holders of Class A Common Stock. The following table sets forth the high and low per share bid prices for RISCORP's Class A Common Stock for each quarterly period, as reported to RISCORP by a national brokerage firm. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions.
Per Share Bid Information for Class A Common Stock - --------------------------------------------------------------------------------------------------------------------- 1999 1998 --------- ------------- ----------- ------------ ------------ ------------ ----------- ------------ 1st 2nd 3rd 4th 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - -------- --------- ------------- ----------- ------------ -------- ------------ ------------ ----------- ------------ High 1 1/2 1 21/32 1 47/64 2 5/8 2 1/2 2 3/8 2 1/8 1 1/32 Low 25/32 1 5/16 1 9/16 1 23/32 25/32 1 31/32 7/8 23/32
No dividends have been declared or paid since RISCORP's initial public offering and it is not anticipated that dividends will be paid in the foreseeable future. Item 6. Selected Financial Data
Year Ended December 31 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (in thousands, except for per share data) Income Statement Data: Revenues: Premiums earned $ - $25,819 $179,729 $173,557 $135,887 Fees and other income 778 5,906 20,369 31,733 22,397 Net realized gains 150 4,280 1,546 105 1,016 Net investment income 5,473 7,103 16,447 12,194 6,708 -------- -------- -------- -------- -------- Total revenues 6,401 43,108 218,091 217,589 166,008 -------- -------- -------- -------- -------- Expenses: Losses and loss adjustment expenses - 24,016 104,052 114,093 82,532 Unallocated loss adjustment expenses - 2,561 19,311 12,916 10,133 Commissions and general and administrative expenses 11,083 34,191 70,800 65,685 48,244 Interest 1,349 676 1,919 2,795 4,634 Depreciation and amortization 142 2,736 7,423 11,500 1,683 -------- -------- -------- -------- -------- Total expenses 12,574 64,180 203,505 206,989 147,226 -------- -------- -------- -------- --------
17
Year Ended December 31 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Income (loss) from operations (6,173) (21,072) 14,586 10,600 18,782 Loss on sale of net assets to Zenith (3,292) (47,747) - - - --------- -------- -------- -------- -------- Income (loss) before income taxes (9,465) (68,819) 14,586 10,600 18,782 Income taxes (1) (2,417) 2,056 7,300 8,202 5,099 --------- -------- -------- -------- -------- Net income (loss) $ (7,048) $(70,875) $ 7,286 $ 2,398 $ 13,683 ========= ======== ======== ======== ======== Net income (loss) per share (4) $ (0.19) $ (1.91) $ 0.20 $ 0.07 $ 0.49 ========= ======== ======== ======== ======== Net income (loss) per share assuming dilution (4) $ (0.19) $ (1.91) $ 0.20 $ 0.07 $ 0.45 ========= ======== ======== ======== ======== Weighted average common shares outstanding 37,563 37,012 36,892 34,648 28,100 ========= ======== ======== ======== ======== Weighted average common shares and common share equivalents outstanding (2) (3) 37,563 37,012 37,116 36,406 30,093 ========= ======== ======== ======== ======== Balance Sheet Data (at end of year): Cash and investments $ 85,574 $ 37,686 $253,634 $281,963 $ 92,713 Total assets 95,076 123,393 749,650 828,442 443,242 Long-term debt - - 15,609 16,303 46,417 Shareholders' equity 90,298 95,566 163,533 157,308 16,157
(1) Certain subsidiaries of RISCORP were S Corporations prior to the reorganization [as referred to in Note 1(a) to the Company's consolidated financial statements] and were not subject to corporate income taxes. (2) The 1995 shares exclude 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) The 1997 and 1996 shares 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 Note 4 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, these amounts have, for all years presented, been recalculated in accordance with its provisions. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General As discussed more fully in Note 1(c) of the accompanying consolidated financial statements, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith on April 1, 1998. In connection with that sale, RISCORP ceased substantially all of its former business operations, including its insurance operations, effective April 1, 1998. Accordingly, after such date, the operations of the Company consisted primarily of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. Since April 1, 1998, the Company has had no employees or insurance operations, and has provided no services to self-insurance funds or other insurance related entities. Because of the significant changes in the operating 18 activities of the Company after April 1, 1998, a comparison of the results of operations for 1999 to 1998 and 1997 is meaningless. Therefore, the results of operations for the year ended December 31, 1999 and for the nine months ended December 31, 1998 are explained separately with no comparison to the comparable prior periods. The results of operations of the Company prior to the April 1, 1998 sale to Zenith, compared to the comparable period in 1997 are included to comply with the requirements of the Exchange Act and the rules and regulations of the Securities and Exchange Commission; however, those results of operations are not indicative of the operations of the Company since April 1, 1998 and are not indicative of any future operations by the Company since no future operations are anticipated. A discussion of the balance sheets at December 31, 1999 and 1998 is included in the discussion that follows. Results of Operations April 1, 1998 to December 31, 1999 During the year ended December 31, 1999 and the nine months ended December 31, 1998, the Company's operating activities consisted primarily of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. An analysis of certain balances contained in the December 31, 1999 and 1998 consolidated balance sheets is as follows: At December 31, 1999, the $1.9 million of cash and cash equivalents-restricted consisted of amounts on deposit with various governmental agencies. The $12.9 million decrease in restricted cash and cash equivalents from December 31, 1998 to December 31, 1999 is the result of the release of the funds held in the Zenith escrow account. The $63 million increase in investments from December 31, 1998 to December 31, 1999 resulted from the collection and subsequent investment of the proceeds from the sale to Zenith and of certain tax refunds, the release of the cash previously held in escrow, and the investment of funds previously held in bank accounts. The elimination of the receivable from Zenith from December 31, 1998 to December 31, 1999 resulted from the collection in March 1999 of the remaining receivable from the sale to Zenith. The $17.3 million decrease in income taxes recoverable from December 31, 1998 to December 31, 1999 is the result of the collection of taxes due from tax agencies. The $1.6 million decrease in other assets from December 31, 1998 to December 31, 1999 resulted from the collection of interest in March 1999 from the sale to Zenith. 19 The $5.8 million and $7.3 million of other assets at December 31, 1999 and 1998, respectively, consisted of $4.6 million and $5.2 million of prepaid expenses and $1.2 million and $2.1 million of accrued investment income, respectively. The $2.1 million decrease in deferred income taxes from December 31, 1998 to December 31, 1999 is due to the collection of taxes in March and October 1999. The $5.1 million decrease in accounts receivable-other from December 31, 1998 to December 31, 1999 is primarily due to the collection of $4.8 million of certain insurance proceeds. A summary of the accrued expenses and other liabilities at December 31, 1999 and 1998 is as follows (in thousands):
1999 1998 -------------- ------------ Income taxes payable $ 2,539 $ 1,001 Accrued professional services 1,819 2,518 Trade accounts payable 205 1,309 Other accruals and payables 215 778 Accrued legal settlement - 20,500 Payable to Zenith - 1,721 -------- -------- Total $ 4,778 $ 27,827 ======== ========
The $20.5 million decrease in the accrued legal settlement is due to the payment of this liability in April 1999. The Company's operating results for the year ended December 31, 1999 resulted in a net loss of $7 million. The following comments pertain to the Company's revenues and expenses for the year ended December 31, 1999: The $5.5 million of net investment income consisted of $1.3 million of interest income on the receivable from Zenith, $0.3 million of interest income on the $12.8 million balance previously held in escrow, and $3.9 million of investment portfolio income. Operating expenses totaled $12.6 million and consisted of the following: The $11.1 million of commissions, underwriting, and administrative expenses consisted of $1.2 million of management expenses, $1.7 million of accounting and auditing expenses, $2.9 million of legal expenses, $2.3 million of recurring operating expenses such as rent, telephone, insurance, and similar costs, $2 million of amortization of unearned compensation relating to The Phoenix Management Company, Ltd. restricted stock award, and $1 million of other expenses. 20 The $1.4 million of interest expense consisted primarily of the interest paid in March 1999 on the settlement of a class action lawsuit. Depreciation and amortization expense was $0.1 million. The Company transferred all assets subject to amortization to Zenith in connection with the sale and retained $0.4 million of fixed assets (consisting principally of computer equipment) that are being depreciated over three years. The Company recorded a loss on sale of net assets to Zenith of $3.3 million pursuant to the terms of the Settlement Agreement, dated July 1999. The weighted average common and common share equivalents outstanding for the year ended December 31, 1999 was 37,562,906 as compared to 37,011,864 for the year ended December 31, 1998. These amounts include, for each period presented, the vested portion only, as of the end of such period, of shares issued in April 1998 under a Restricted Stock Award Agreement between RISCORP and The Phoenix Management Company, Ltd. As previously discussed, on April 1, 1998, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith, and the Company's operations have been limited after that date. The Company's operating results for the nine months ended December 31, 1998 resulted in a net loss of $61.6 million. The following comments pertain to the Company's revenues and expenses for the nine months ended December 31, 1998: The $47.7 million loss on the sale to Zenith represents the adjustment to the purchase price as determined by the neutral auditors. Net realized gains were $2.8 million. The net realized gains consisted primarily of gains on the sale of securities transferred to Zenith in connection with the Asset Purchase Agreement. For 1998, the net realized gains were $4.3 million, of which $1.3 million was the gain on the sale of Third Coast Holding Company recognized in the first quarter of 1998, as more fully discussed in Note 4 of the accompanying consolidated financial statements. Net investment income was $3.8 million. Net investment income consisted of $1.8 million of interest income on the $49.9 million receivable from Zenith, interest income of $0.4 million on the $10 million balance in escrow, and $1.6 million of investment portfolio income. Operating expenses totaled $18.6 million. This amount included three significant non-recurring expenses that relate to the sale to Zenith. The first non-recurring expense totaled $3.4 million and consisted of severance payments to certain of the Company's former executives and employees. The second expense totaled $4.1 million and consisted of the issuance of RISCORP stock to The Phoenix Management Company, Ltd. ("Phoenix") in accordance with a Restricted Stock Award Agreement. The third expense totaled $2.8 million and represented a payment for a tax gross up related to the issuance of 21 the restricted stock award to Phoenix. The remaining $8.3 million of operating expenses consisted of $2.8 million of accounting and auditing expenses, $1.7 million of recurring operating expenses such as rent, telephone, insurance, and similar costs, $1 million of adjustments to the Proposed Business Balance Sheet, $0.9 million of management expenses, $0.3 million of transition expenses incurred as a result of the sale to Zenith, and $1.6 million of other expenses. In September 1998, the Company received a reimbursement of $1.2 million of legal fees incurred in 1997 and 1998 in connection with payments made on behalf of certain former officers and directors of the Company. This reimbursement was included as a reduction in commissions and underwriting and administrative expenses in the accompanying 1998 consolidated statement of operations. Depreciation and amortization expense was $0.3 million. The Company transferred all assets subject to depreciation and amortization to Zenith in connection with the sale except for $0.4 million of fixed assets (consisting primarily of computer equipment) that are being depreciated over three years. Interest expense was $0.7 million. Net investment income for 1998 was $7.1 million compared to $16.4 million in 1997, a net decrease of $9.3 million. The decline in investment income was due to a decline in invested assets (including the receivable from Zenith) of $157.6 million for 1998 compared to 1997. The decrease in invested assets was primarily due to the sale to Zenith and the decline in written premiums as discussed elsewhere herein. Prior to April 1, 1998 The discussion that follows relates to the operations and operating philosophy of the Company's activities that existed prior to April 1, 1998 and includes the results for the year ended December 31, 1998 compared to 1997. Prior to 1996, the Company's at-risk operations were focused in Florida. During 1996, RISCORP acquired RNIC and its 19 licenses and assumed business from several self insurance funds outside of Florida which allowed RISCORP to diversify its at-risk operations. A comparison of the Company's direct written premiums for 1998 and 1997 (prior to reinsurance cessions or assumptions) by state is presented below (in millions): Direct Premiums Written ------------------------------ 1998 (a) 1997 ------------- -------------- Florida $ 29.2 $ 180.8 Alabama 4.1 39.1 North Carolina 4.4 32.2 Other 1.0 28.4 -------- ------- Total $ 38.7 $ 280.5 ======== ======= (a) 1st quarter 1998, prior to the sale to Zenith. 22 Direct written premiums were reduced by the 65 percent quota-share reinsurance agreement (effective October 1996), with another reinsurer for certain non-Florida business. The 65 percent quota-share reinsurance agreement was reduced to 60 percent effective January 1, 1997 and was cancelled on a run-off basis on December 31, 1997. The majority of the Company's premiums were written in Florida, a regulated pricing state where premiums for guaranteed cost products were based on state-approved rates. However, prior to the sale to Zenith, the Company also offered policies that were subject to premium reductions as high deductible plans, participating dividend plans, or other loss sensitive plans. Pricing for those plans tended to be more competitively based, and the Company experienced increased competition during 1997 and 1998 in pricing those plans. In addition, in October 1996, the Florida Insurance Commissioner ordered workers' compensation providers to reduce rates by an average of 11.2 percent for new and renewal policies written after 1996. Concurrently, with the premium reduction effective January 1, 1997, the 10 percent managed care credit was phased out. This credit had been offered since 1994 to employers who met certain criteria for participating in a qualified workers' compensation managed care arrangement. In October 1997, Florida further reduced premium rates by 1.7 percent for new and renewal policies written after 1997. North Carolina approved a 13.7 percent decrease in loss costs, effective April 1, 1997, that the Company adopted in October 1997, which resulted in an overall effective rate reduction of 8.4 percent. The Company experienced increased pricing pressures during 1997. During 1997, the Company made the strategic decision to discontinue writing business owners' protection, commercial multiple peril, and auto, and to focus on its core workers' compensation business. Net written premiums on those discontinued lines of business were less than $1 million during 1997. In June 1997, the Company implemented a strategic plan to consolidate several of its field offices and announced its intention to close all field offices, except Charlotte, North Carolina, and Birmingham, Alabama, by the end of 1997, and to cease writing new business in certain states, including Oklahoma, Virginia, Missouri, Mississippi, Louisiana, and Kansas. The estimated impact of the decision to discontinue writing business in those states was a reduction of $16 million in direct premiums written. The Company attempted to lower claim costs by applying managed care techniques and programs to workers' compensation claims, particularly by providing prompt medical intervention, integrating claims management and customer service, directing care of injured employees through a managed care provider network, and availing itself of potential recoveries under subrogation and other programs. Part of the Company's claims management philosophy was to seek recoveries for claims that were reinsured or that could be subrogated or submitted for reimbursement under various state recovery programs. As a result, the Company's losses and loss adjustment expenses were offset by estimated recoveries from reinsurers under specific excess-of-loss and quota-share 23 reinsurance agreements, subrogation from third parties, and state "second disability" funds, including the Florida Special Disability Trust Fund ("SDTF"). The following table shows direct, assumed, ceded, and net earned premiums for 1998 and 1997 (in millions): Year Ended December 31 ------------------------------ 1998 (a) 1997 -------------- -------------- Direct premiums earned $ 48.4 $328.2 Assumed premiums earned 0.1 18.8 Premiums ceded to reinsurers (22.7) (167.3) ------ ------ Net premiums earned $25.8 $179.7 ===== ====== (a) 1st quarter 1998, prior to the sale to Zenith. The Company experienced a decrease in direct earned premiums in the last six months of 1997 and the first quarter of 1998 primarily due to the decrease in new and renewal premiums experienced by the Company in the second, third, and fourth quarters of 1997. These premium declines resulted from, among other things, the adverse publicity pertaining to the A.M. Best ratings of RISCORP's insurance subsidiaries, RISCORP's inability to file its 1996 Form 10-K, 1997 Form 10-Qs, and 1996 audited statutory financial statements in a timely manner, the delisting of RISCORP's stock by NASDAQ, and the failure by Zenith to provide a cut-through endorsement for the non-Florida business, as requested by the Company. In September 1995, the Company entered into a fronting agreement with another insurer that enabled the Company to begin expansion into states where the RISCORP insurance companies were not licensed. The fronting agreement was cancelled effective December 31, 1997. The cancellation of the fronting agreement and the sale to Zenith were the primary reasons that the assumed premiums decreased to $0.1 million in 1998 from $18.8 million in 1997. The assumed premiums from the fronting agreement were $7.1 million for 1997. Although the Company assumed premiums from several insurers, the fronting agreement generated the majority of the assumed premiums. For 1997, the Company ceded 50 percent of its Florida premiums under a quota-share reinsurance agreement and 60 percent of the business written by RNIC under a separate quota-share agreement with Chartwell Reinsurance Company ("Chartwell"). The Company terminated the agreement with Chartwell at December 31, 1997; however, the reinsurer continues to receive premiums and to be responsible for its portion of all losses incurred on policies effective before the termination date. The decrease in ceded premiums to $22.7 million in 1998 from $167.3 million in 1997 was due primarily to the sale to Zenith and to the decrease in direct premiums earned discussed above. Fee income for 1998 was $5.7 million compared to $20.4 million for 1997. The decrease in fee income was primarily due to sale of the insurance operations to Zenith. 24 Net investment income for 1998 and 1997 was $7.1 million and $16.4 million, respectively. Net investment income consists entirely of earnings from the investment portfolio, excluding realized gains and losses in 1997. The loss ratios for 1998 and 1997 were 93 percent and 58 percent, respectively. The 35 percent increase in the 1998 loss ratio was due primarily to $10.3 million of adverse gross loss development during the first quarter of 1998 in the 1997 and prior accident years from certain business written in Florida, $2.6 million of gross favorable loss development in Alabama and North Carolina, and $0.3 million of gross adverse loss development in business written by RNIC and RPC in several smaller states. Unallocated loss adjustment expenses for 1997 were $19.3 million. The unallocated loss adjustment expense ratio for 1998 and 1997 was 10 percent and 11 percent, respectively. Commissions and general expenses for 1998 and 1997 were $34.2 million and $70.8 million, respectively. The 1997 expenses were high due to severance payments incurred in connection with the June 1997 workforce reduction, increased accounting, auditing, consulting, and legal expenses primarily resulting from the Company's inability to file its 1996 financial statements in a timely manner, a $13 million expense recognized in the fourth quarter of 1997 in connection with the proposed settlement of a securities class action lawsuit, and increases in other operating expenses. The Company had no employees at the end of 1998 and approximately 580 at December 31, 1997. Interest expense for 1997 was $1.9 million. Depreciation and amortization expense for 1997 was $7.4 million. Liquidity and Capital Resources RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith on April 1, 1998. In connection with that sale to Zenith, the Company ceased substantially all of its former business operations and, accordingly, after April 1, 1998, the Company's primary source of cash flows has been generated from investment income. The Company's future cash requirements are expected to be satisfied through investment income and the liquidation of investments. Prior to the sale to Zenith, the Company historically met its cash requirements and financed its growth through cash flows generated from operations and borrowings. The Company's primary sources of cash flow from operations were premiums and investment income, and its cash requirements consisted principally of payment of losses and loss adjustment expenses, support of its operating activities, including various reinsurance agreements and managed care programs and services, capital surplus needs for the insurance subsidiaries, and other general and administrative expenses. Cash flows from operations for the year ended December 31, 1999 and 1998 was $1.6 million and $(37.6) million, respectively. The change from 1998 to 1999 25 was due primarily to the sale to Zenith and the cessation of substantially all the Company's former business operations. The Company has projected cash flows through December 2000 and believes it has sufficient liquidity and capital resources to support its operations. As of December 31, 1999 and 1998, RISCORP's insurance subsidiaries had combined statutory capital and surplus of $12 million and $156.5 million, respectively. The decline in combined statutory surplus from 1998 to 1999 is primarily the result of 1) the determination of the final purchase price to be paid by Zenith resulted in a $34.3 million loss on the sale being recorded by RISCORP's insurance subsidiaries, and 2) RISCORP's receiving and retaining of the proceeds from the sale to Zenith. Consequently, RISCORP's insurance subsidiaries recorded $94 million of receivables from RISCORP for their portion of those proceeds. Those receivable balances are classified as a non-admitted asset at December 31, 1999 because those receivables are more than 90 days past due. The individual capital and surplus of each of RISCORP's insurance subsidiaries exceeded the minimum statutory capital and surplus required by their respective state of domicile. The National Association of Insurance Commissioners has adopted risk-based capital standards to determine the capital requirements of an insurance carrier based on the risks inherent in its operations. The standards, which have not yet been adopted in Florida, require the computation of a risk-based capital amount that is then compared to a carrier's actual total adjusted capital. The computation involves applying factors to various financial data to address four primary risks: asset risk, insurance underwriting risk, credit risk, and off-balance sheet risk. Those standards provide for regulatory intervention when the percentage of total adjusted capital to authorized control level risk-based capital is below certain levels. At December 31, 1999 and 1998, RISCORP's insurance subsidiaries' statutory surplus was in excess of any risk-based capital action level requirements. Market Risks of Investment Securities RISCORP's investment securities are exposed primarily to interest rate risk. The interest rate exposure is a result of the effect of changes in interest rates on the fair market value of the Company's investments. The Company used a sensitivity analysis prepared by the Company's investment advisor to estimate the amount of sensitivity to interest rate changes. For example, given the duration of a security, the market value of that security will increase if market interest rates decrease. Likewise, the value of the security will decrease if market interest rates increase. The estimated effect of potential increases in interest rates on the fair values of our investment securities follows (in thousands):
1999 1998 ------------------------------- ---------------------------- Market +100 Market +100 Value Basis Points Value Basis Points ------------ -------------- ------------ -------------- Fixed-maturity securities $ 78,981 $ 78,783 $ 15,980 $ 15,940 ======== ======== ======== ========
26 Should significant amounts of unrealized losses occur because of increases in market yields, the Company would not expect to realize significant losses because the Company has the ability to hold such securities to maturity. Year 2000 The term "Year 2000 issue" is a general term used to describe various problems that may result from the improper processing of date and date-sensitive calculations by computers and other machinery as the Year 2000 was approached and reached. Those types of problems could have resulted from hardware and software being unable to distinguish dates in the "2000's" from dates in the "1900's" and from other sources, such as the use of special codes and conventions that make use of a date field. Effective April 1, 1998, RISCORP ceased substantially all of its former business operations, including its core insurance and managerial services operations. RISCORP's computer systems and proprietary computer software, including the policy issue and management system and the claims systems, were included in the assets sold to Zenith pursuant to the Asset Purchase Agreement. Effective April 1, 1998, the Company entered into a computer outsourcing agreement. Under the terms of that agreement, the vendor is to provide the Company with computer configuration, software installation, network configuration and maintenance, telecommunication coordination, computer maintenance, and other computer-related services. The agreement is for a period of 36 months. Neither the Company, its suppliers, nor the financial institutions with which the Company maintains banking or investment accounts, experienced any known Year 2000 computer problems. Item 8. Financial Statements and Supplementary Data The Company's consolidated financial statements, notes, and supplementary schedules are set forth on pages F-3 to F-42 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, 1999. 27 PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item will appear in, and is incorporated by reference from, the sections entitled "Proposals for Shareholder Action - Proposal 1. Election of Directors" and "Management Directors and Executive Officers" included in RISCORP's definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders. Item 11. Executive Compensation The information required by this item will appear in the sections entitled "Executive Compensation" included in RISCORP's definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders, which information, other than the Compensation Committee Report and Performance Graph required by Items 402(k) and (l) of Regulation S-K, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item will appear in, and is incorporated by reference from, the section entitled "Security Ownership of Directors, Officers and Principal Shareholders" included in RISCORP's definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions The information required by this item will appear in, and is incorporated by reference from, the sections entitled "Certain Relationships and Related Transactions" included in RISCORP's definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders. 28 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, 1999 and 1998..................................F-3 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998, and 1997..............................................................................F-4 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998, and 1997...........................................................F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997..............................................................................F-6 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 1999, 1998, and 1997...........................................................F-8 Notes to Consolidated Financial Statements.................................................F-9
2. Financial Statement Schedules I - Summary of investments - other than investments in related parties....................F-36 II -Condensed financial information of registrant.........................................F-37 IV - Reinsurance..........................................................................F-41 VI - Supplemental information concerning property-casualty insurance operations...........F-42
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 - RISCORP filed a current report on Form 8-K on October 28, 1999, disclosing the death of Mr. Frederick M. Dawson, former president and CEO of RISCORP. - RISCORP filed a current report on Form 8-K on November 4, 1999 disclosing that RISCORP had signed a definitive agreement to merge with Griffin Acquisition Corp., a company controlled by Mr. William D. Griffin, the majority shareholder of RISCORP. (c) Exhibits The following are filed as exhibits to this report: EXHIBIT # DESCRIPTION - --------- ----------- 10.1 First Amendment to Management Agreement by and between RISCORP, Inc., its subsidiaries, the estate of Frederick M. Dawson, and Walter E. Riehemann, dated as of December 22, 1999. 11 Statement Re Computation of Per Share Net Loss 21 Subsidiaries of the Registrant 27 Financial Data Schedule 29 EXHIBIT 10.1 First Amendment to Management Agreement by and between RISCORP, Inc., its subsidiaries, the estate of Frederick M. Dawson, and Walter E. Riehemann, dated as of December 22, 1999. 30 FIRST AMENDMENT TO MANAGEMENT AGREEMENT THIS FIRST AMENDMENT TO MANAGEMENT AGREEMENT (this "Amendment") is made and entered into as of the 22nd day of December, 1999, 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"), the estate of Frederick M. Dawson, and Walter E. Riehemann, an individual resident of the State of Florida ("Mr. Riehemann"). WHEREAS, on February 18, 1998, RISCORP entered into a management agreement (the "Agreement") with the Management Company to provide all management services required in connection with the ongoing operations of RISCORP following the sale of substantially all of its assets to Zenith Insurance Company; WHEREAS, at the time RISCORP entered into the Agreement, Dawson Managers, Inc., the general partner of the Management Company, was owned and controlled by Mr. Frederick M. Dawson, the former president and chief executive officer of RISCORP; WHEREAS, on October 24, 1999, Mr. Dawson died of complications from colon cancer; WHEREAS, prior to Mr. Dawson's death, Mr. Walter E. Riehemann, former senior vice president and general counsel of RISCORP, assumed an integral role in the activities and operations of the Management Company and had principal operational responsibility for the resolution of the claims and contingencies pending against RISCORP or that have been or might be asserted by RISCORP; WHEREAS, on November 12, 1999, Mr. Riehemann exercised an option to purchase all of the outstanding shares of Dawson Managers, Inc. from the estate of Mr. Dawson and, as such, will control the activities and operations of the Management Company; WHEREAS, given the proposed privatization of RISCORP and the other significant contingencies that are pending, the Board of Directors has determined that it is in the best interest of RI and its shareholders to amend the Management Agreement on the terms and conditions set forth herein; WHEREAS, in connection with entering into this Amendment, the Management Company desires to assign the Agreement to Dawson Managers, Inc. with such assignment to be effective as of December 1, 1999. 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 agree as follows: 1. Section 3.1. Section 3.1 of the Agreement is hereby amended by deleting the words "Mr. Dawson" in the second sentence thereof and inserting the words "Mr. Riehemann" in its place. 2. Section 4.1. Section 4.1 of the Agreement is hereby amended by deleting "$100,000" in the first sentence thereof and inserting "$70,000" in its place. 3. Section 7.4. Section 7.4 of the Agreement is hereby amended by deleting "(i) Mr. Dawson" and inserting "(i) Mr. Riehemann" in its place. 4. Section 7.5. Section 7.5(B) of the Agreement is hereby deleted in its entirety and, in lieu thereof, the following new paragraph 7.5(B) is hereby inserted: 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) $520,000 and (2) the aggregate amount of the monthly management fees paid to the Management Company pursuant to Section 4.1 hereof on or after December 1, 1999 and prior to the effective date of such termination. 5. Article VIII. Article VIII of the Agreement is hereby amended by deleting the second sentence thereof in its entirety and, in lieu thereof, inserting the following new sentence: "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. Riehemann in connection with the performance of the Services hereunder and, accordingly, the Management Company - 2 - shall have no authority to delegate those duties typically performed by a chief executive officer of a corporation to any person other than Mr. Riehemann without the prior approval of the Board of Directors." 6. Effective Time. The parties agree that this Amendment shall be effective as of December 1, 1999. 7. Consent to Assignment. RISCORP hereby consents to the assignment of the Management Agreement, as amended, from the Management Company to Dawson Managers, Inc. and ratifies and confirms that all references in the Agreement to the Management Company shall be references to Dawson Managers, Inc. after the effective date hereof. 8. Other Terms and Conditions Ratified and Confirmed. All of the terms and conditions of the Agreement are hereby ratified and confirmed by the parties and shall remain in full force and effect. 9. Counterparts. This amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same instrument. [Signatures on Next Page] - 3 - IN WITNESS WHEREOF, the undersigned parties have executed this Amendment to be effective as of December 1, 1999. RISCORP, Inc., individually and on behalf of each of its subsidiaries identified as parties to this Agreement /S/ Seddon Goode, Jr. Director /S/ George E. Greene III Director /S/ Walter L. Revell Director THE PHOENIX MANAGEMENT COMPANY, LTD. By: Dawson Managers, Inc., its General Partner /S/ Walter E. Riehemann President /S/ Walter E. Riehemann ESTATE OF FREDERICK M. DAWSON /S/ Karen Dawson Executrix - 4 - EXHIBIT 11 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE RISCORP, INC. AND SUBSIDIARIES
Year Ended December 31 ------------------------------------------------ 1999 1998 1997 ---- ---- ---- Net income (loss) $ (7,048,000) $(70,875,000) $ 7,286,000 ============ ============ =========== Average outstanding shares used for calculating basic earnings or loss per share (1) 37,562,906 37,011,864 36,891,864 Additional common shares issuable under employee stock options using the treasury stock method (2) - - 223,808 ------------ ----------- ---------- Average outstanding shares used for calculating diluted earnings or loss per share 37,562,906 37,011,864 37,115,672 ============ =========== ========== Net income (loss) per share $ (0.19) $ (1.91) $ 0.20 ============= ============ ========== Net income (loss) per share - assuming dilution $ (0.19) $ (1.91) $ 0.20 ============= ============ ==========
(1) The 1997 shares include 790,336 shares of Class A Common Stock pursuant to the contingency clause in the acquisition agreement with Independent Association Administrators, Inc. (2) Based on the average quarterly market price. 31 EXHIBIT 21 RISCORP, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1999
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 identified herein are owned, directly or indirectly, 100 percent by the Registrant. 32 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 9th day of March, 2000. RISCORP, INC. By: /s/ Walter E. Riehemann Walter E. Riehemann President and General Counsel 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/ Walter E. Riehemann Walter E. Riehemann President and General Counsel March 9, 2000 (principal executive officer) /s/ Edward W. Buttner IV Edward W. Buttner IV Chief Accounting Officer March 9, 2000 /s/ Seddon Goode, Jr. Seddon Goode, Jr. Director March 9, 2000 /s/ George E. Greene III George E. Greene III Director March 9, 2000 /s/ Walter L. Revell Walter L. Revell Director March 9, 2000
33 Independent Auditors' Report The Board of Directors and Shareholders RISCORP, Inc.: We have audited the consolidated financial statements of RISCORP, Inc. and subsidiaries ("the Company") as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the related 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 19 to the accompanying consolidated financial statements, the Company, its subsidiaries, and certain of its current and former officers and directors, have been named as defendants in various litigation matters which, if the plaintiffs prevail, could have a material adverse effect on the accompanying financial statements. Management's plans with respect to these matters are also discussed in Note 19. The accompanying financial statements do not include any adjustments that might result from the outcome of the aforementioned litigation. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. [GRAPHIC OMITTED] Atlanta, Georgia March 6, 2000 F - 2 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
December 31 1999 1998 -------------- -------------- ASSETS Investments: Fixed maturities available for sale, at fair value (amortized cost $226,240 $76,058 in 1999 and $6,666 in 1998) $ 75,959 $ 6,716 Fixed maturities available for sale, at fair value (amortized cost $2,995 in 1999 and $9,047 in 1998)--restricted 3,022 9,264 ------------- ------------- Total investments 78,981 15,980 Cash and cash equivalents 4,668 6,864 Cash and cash equivalents--restricted 1,925 14,842 Receivable from Zenith - 49,933 Accounts receivable--other 2,545 7,674 Income taxes recoverable - 17,277 Deferred income taxes 1,010 3,141 Property and equipment, net 196 337 Other assets 5,751 7,345 ------------- ------------- Total assets $ 95,076 $ 123,393 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities - accrued expenses and other liabilities $ 4,778 $ 27,827 ------------- ------------- Shareholders' equity: Class A Common Stock, $.01 par value, 100,000,000 shares authorized; 14,258,671 shares issued 143 143 Class B Common Stock, $.01 par value, 100,000,000 shares authorized; 24,334,443 shares issued and outstanding 243 243 Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued or outstanding - - Additional paid-in capital 142,688 142,688 Retained deficit (52,728) (45,680) Unearned compensation--restricted stock - (2,000) Treasury Class A Common Stock--at cost, 112,582 shares (1) (1) Accumulated Other Comprehensive Income (Loss): Net unrealized gains (losses) on investments (47) 173 ------------- ------------- Total shareholders' equity 90,298 95,566 ------------- ------------- Total liabilities and shareholders' equity $ 95,076 $ 123,393 ============= =============
See accompanying notes to consolidated financial statements. F - 3 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
Year Ended December 31 ---------------------------------------------------- 1999 1998 1997 --------------- -------------- -------------- Revenues: Fees and other income $ 778 $ 5,906 $ 20,369 Net realized gains 150 4,280 1,546 Net investment income 5,473 7,103 16,447 Premiums earned - 25,819 179,729 ------------- ------------- ------------ Total revenues 6,401 43,108 218,091 Expenses: Commissions and general and administrative expenses 11,083 34,191 70,800 Interest 1,349 676 1,919 Depreciation and amortization 142 2,736 7,423 Losses and loss adjustment expenses - 24,016 104,052 Unallocated loss adjustment expenses - 2,561 19,311 ------------- ------------- ------------ Total expenses 12,574 64,180 203,505 ------------- ------------- ------------ Income (loss) from operations (6,173) (21,072) 14,586 Loss on sale of net assets to Zenith (3,292) (47,747) - ------------- ------------- ------------ Income (loss) before income taxes (9,465) (68,819) 14,586 Income tax expense (benefit) (2,417) 2,056 7,300 ------------- ------------- ------------ Net income (loss) $ ( 7,048) $ (70,875) $ 7,286 ============= ============= ============ Per share data: Net income (loss) per common share-basic $ (0.19) $ (1.91) $ 0.20 ============= ============= ============ Net income (loss) per common share-diluted $ (0.19) $ (1.91) $ 0.20 ============= ============= ============ Weighted average common shares outstanding 37,562,906 37,011,864 36,891,864 ============= ============= ============ Weighted average common shares and common share equivalents outstanding 37,562,906 37,011,864 37,115,672 ============= ============= ============
See accompanying notes to consolidated financial statements. F - 4 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended December 31, 1997, 1998, and 1999 (in thousands)
Net Unrealized Class A Class B Additional Gains Retained Total Common Common Paid-in (Losses) on Unearned Earnings Treasury Shareholders' Stock Stock Capital Investments Compensation (Deficit) Stock Equity ------- ------- ---------- ----------- ------------ --------- -------- ------------ Balance, January 1, 1997 $ 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) Increase in net unrealized gains on investments - - - 233 - - - 233 ------- ------- ---------- ----------- ------------ --------- -------- ------------ Balance, December 31, 1997 120 243 135,974 2,002 - 25,195 (1) 163,533 Net loss - - - - - (70,875) - (70,875) Issuance of common and restricted stock 26 - 6,714 - (2,000) - - 4,740 Decrease in net unrealized gains on investments - - - (1,829) - - - (1,829) Other adjustments (3) - - - - - - (3) ------- ------- ---------- ----------- ------------ --------- -------- ------------ Balance, December 31, 1998 143 243 142,688 173 (2,000) (45,680) (1) 95,566 Net loss - - - - - (7,048) - (7,048) Amortization of unearned compensation - - - - 2,000 - - 2,000 Change in net unrealized gains on investments - - - (220) - - - (220) ------- ------- ---------- ----------- ------------ --------- -------- ------------ Balance, December 31, 1999 $ 143 $ 243 $ 142,688 $ (47) $ - $(52,728) $ (1) $ 90,298 ======= ======= ========== =========== ============ ========= ======== ============
See accompanying notes to consolidated financial statements. F - 5 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31 ----------------------------------------------- 1999 1998 1997 -------------- ------------- ----------- Cash flows from operating activities: Net income (loss) $ (7,048) $ (70,875) $ 7,286 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 142 2,736 7,423 Amortization of unearned compensation 2,000 - - Loss on sale of net assets to Zenith 3,292 47,747 - Loss (gain) on disposal of property and equipment - (99) 291 Net realized gain on sale of investments (150) (4,280) (1,545) Gain on sale of personal residence - (1) - Net amortization of discounts on investments (73) 166 14 Issuance of RISCORP, Inc. stock - 4,740 - Other 15 1,181 - Change in: Premiums receivable, net - 16,627 22,026 Accounts receivable--other 5,129 (1,558) (5,104) Recoverable from Florida State Disability Trust Fund, net - 659 4,295 Reinsurance recoverables - (30,051) (3,553) Prepaid reinsurance premiums - 8,301 19,807 Prepaid managed care fees - 2,238 23,537 Accrued reinsurance commissions - (1,481) (16,770) Income taxes recoverable 17,277 (17,277) - Deferred tax assets 2,250 20,181 431 Other assets 1,594 495 (3,249) Loss and loss adjustment expense reserves - 25,253 (21,502) Unearned premiums - (13,147) (46,280) Accounts payable--related party - - (1,171) Accrued expenses and other liabilities (22,832) (29,140) (8,880) ------------ ---------- ---------- Net cash provided by (used in) operating activities 1,596 (37,585) (22,944) ------------ ---------- ---------- Cash flows from investing activities: Proceeds from: Sales and maturities of fixed maturities--available for sale 357,510 86,533 130,542 Maturities of fixed maturities--held to maturity - 6,000 1,885 Sale of equity securities 150 1,324 4,284 Sale of equipment - 255 158 Sale of personal residence - 436 - Purchase of: Fixed maturities--available for sale (420,800) (69,215) (100,499) Fixed maturities--held to maturity - (5,874) (1,237) Equity securities - - (637) Property and equipment - (971) (4,477) Personal residence - (435) -
(continued) F - 6 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands)
Year Ended December 31 ------------------------------------------------ 1999 1998 1997 -------------- ------------- ------------ Cash flows from investing activities (continued): Net cash received from Zenith for sale of net assets 46,431 35,000 - Purchase (net of cash acquired) of: Cash and investments not yet transferred to Zenith - 7,404 - Maryland NARM Fund - - 134 --------- -------- -------- Net cash provided by (used in) investing activities (16,709) 60,457 30,153 --------- -------- -------- Cash flows from financing activities: Transfer of cash and cash equivalents from (to) restricted balances 12,917 (30,856) (13,295) Increase (decrease) in deposit balances payable - (1,598) 725 Decrease in unearned compensation - - 546 Purchase of treasury stock subject to put options - - (2,100) Principal repayments of notes payable - (412) (694) Other, net - - (1,840) --------- -------- -------- Net cash provided by (used in) financing activities 12,917 (32,866) (16,658) --------- -------- -------- Net decrease in cash and cash equivalents (2,196) (9,994) (9,449) Cash and cash equivalents, beginning of year 6,864 16,858 26,307 --------- -------- -------- Cash and cash equivalents, end of year $ 4,668 $ 6,864 $ 16,858 ========= ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,154 $ 493 $ 1,928 ========= ======== ======== Income taxes $ 247 $ 2,341 $ 6,566 ========= ======== ========
Supplemental schedule of noncash investing and financing activities: As of April 1, 1998, the Company sold substantially all of its insurance assets and transferred certain liabilities to Zenith. In conjunction with the sale and transfer, a $49,933 receivable from Zenith was recorded as of December 31, 1998 [see Note 1(c)]. See accompanying notes to consolidated financial statements. F - 7 RISCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
Year Ended December 31 ------------------------------------------------ 1999 1998 1997 -------------- ------------- ------------ Net income (loss) $ (7,048) $ (70,875) $ 7,286 ------------ ---------- --------- Other comprehensive income (loss), before income taxes: Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during year (339) 194 (2,392) Income tax expense (benefit) related to items of other comprehensive income (loss) (119) 68 (837) ------------ ---------- --------- Other comprehensive income (loss), net of income taxes (220) 126 (1,555) ------------ ---------- --------- Total comprehensive income (loss) $ (7,268) $ (70,749) $ 5,731 ============ ========== =========
F - 8 RISCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Background and Sale to Zenith Insurance Company (a) Background RISCORP, Inc. ("RISCORP") was formed in February 1996 through the reorganization and consolidation of several affiliated companies (collectively, the "Company") that 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. 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." In November 1996, at a special meeting of the Board of Directors 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 from November 1996 through June 1997 culminated in the execution of the Asset Purchase Agreement on June 17, 1997 [as more fully described in Note 1(c)] for the sale and transfer of certain of RISCORP's and its subsidiaries' assets and liabilities to another insurer for cash. In addition, the Florida Insurance Department requested the purchaser to provide an interim reinsurance agreement and cut-through endorsement on all inforce business as of June 17, 1997 and all new and renewed business written after June 17, 1997. This reinsurance agreement only provided coverage for Florida workers' compensation policyholders and was approved by the Florida Insurance Department. Following RISCORP's inability to timely file its Annual Report on Form 10-K for the year ended December 31, 1996 or its Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, RISCORP's Class A Common Stock was delisted in July 1997 by the NASDAQ Stock Market's National Market, on which its stock was traded. RISCORP filed its 1996 Form 10-K/A on October 28, 1997 and amended that filing on February 27, 1998 in response to comments received from the Securities and Exchange Commission ("SEC") in connection with the preparation of RISCORP's special meeting proxy statement that was mailed to shareholders on March 3, 1998. Despite RISCORP's timely filing of all periodic reports for all periods subsequent to the third quarter of 1997, RISCORP's Class A Common Stock has remained delisted, and RISCORP has no intention to seek readmission for listing on NASDAQ or any national securities exchange. (b) Execution of Merger Agreement with William D. Griffin In November 1999, RISCORP entered into a definitive agreement (the "Merger Agreement") to merge with Griffin Acquisition Corp. ("Acquiror"), a company controlled by Mr. William D. Griffin, the majority shareholder of RISCORP. Pursuant to the terms of the Merger Agreement, each issued and outstanding share of Class A Common Stock will receive $2.85 in cash, plus a contingent right to receive an additional pro rata cash amount if RISCORP recovers any additional amounts from Zenith Insurance Company. Under the terms of the Merger Agreement, Acquiror will assume all of the liabilities of RISCORP, including its pending litigation. The transaction is subject to customary closing conditions, including shareholder approval, and is expected to close in the second quarter of 2000. This transaction, if consummated, will constitute a going private transaction. (c) Sale to Zenith Insurance Company As of April 1, 1998, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith F - 9 Insurance Company ("Zenith"). In connection with the sale to Zenith, the Company ceased substantially all of its former business operations, including its insurance operations. Accordingly, after such date, the Company's operations consisted principally of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. At the present time, RISCORP has no plans to resume any operating activities. On July 7, 1999, the Company and Zenith settled, with certain limited exceptions, the claims arising out of the sale. The Asset Purchase Agreement contemplated a post-closing purchase price adjustment based on the difference between the book value of the assets purchased and the book value of the liabilities assumed as of the closing date. In connection with the determination of the final purchase price, a dispute arose between the parties regarding, among other things, the book value of the assets and liabilities of the business, Zenith's assumption of certain operating liabilities of the business, and each party's indemnification obligations under the Asset Purchase Agreement. The terms of the settlement included, among other things, RISCORP's right to seek correction of alleged errors made by the neutral auditors in connection with its determination of certain reinsurance recoverable adjustments contained in the Final Business Balance Sheet. On October 7, 1999, the neutral auditors denied RISCORP's request for correction of these errors. On January 5, 2000, RISCORP filed a lawsuit against Zenith and the neutral auditors in the Superior Court of Fulton County, Georgia, seeking correction of these alleged errors. In connection with the sale of RISCORP's insurance operations to Zenith on April 1, 1998, RISCORP voluntarily consented to the Florida Insurance Department's request that RISCORP discontinue writing any new or renewal insurance business for an indefinite period of time. (d) Business Prior to April 1, 1998, RISCORP, through its wholly-owned insurance subsidiaries, was principally engaged in providing workers' compensation insurance under a managed care philosophy. RISCORP provided 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, provided reinsurance, risk management advisory services, and insurance managerial services. As more fully described in Note 1(c), RISCORP and certain of its subsidiaries entered into an Asset Purchase Agreement with Zenith for the sale of substantially all of their assets and the transfer of certain liabilities in exchange for cash. The Company's computer systems and proprietary computer software, including the policy issue, management system, and claims systems, were included in the assets sold to Zenith. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). All significant intercompany accounts and transactions have been eliminated in consolidation. 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 (b) Recognition of Revenues Workers' compensation and employer liability insurance premiums consisted of deposit premiums and installment premiums billed under the terms of the policy, and estimates of retrospectively-rated premiums based on experience incurred under those contracts. Unbilled installment premiums and audit premiums were recognized as revenue on the accrual basis. Premiums were primarily recognized as revenue over the period to which the premiums related using the daily pro rata basis with a liability for unearned premiums recorded for the excess of premiums billed over the premiums earned. Service fee revenue was 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 were recognized as revenue on a pro rata basis over the contract terms with a liability for unearned premiums established for the unexpired portion of the contracts. As more fully described in Note 1(c), the Company transferred the unearned premium reserve to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (c) Florida Special Disability Trust Fund The State of Florida operates 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 assessments are based on a percentage of net workers' compensation premiums written. The Company submitted claims to the SDTF for recovery of applicable claims paid on behalf of the Company's insureds. The Company estimated such recoveries based on industry statistics applied to ultimate projected claims. As more fully described in Note 1(c), the Company transferred the SDTF recoverable to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (d) Investments Fixed maturity investments are securities that mature at a specified future date more than one year after being acquired. Fixed maturity securities that 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. When owned, equity securities (common and nonredeemable preferred stocks) were carried at fair value. If the current market value of equity securities was higher than the original cost, the excess was an unrealized gain, and if lower than the original cost, the difference was an unrealized loss. The net unrealized gains or losses on equity securities, net of the related deferred income taxes, were reported as a separate component of shareholders' equity, along with the net unrealized gains or losses on fixed maturity securities available for sale. F - 11 Realized gains and losses on sales of investments are recognized as income or loss 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. As more fully described in Note 1(c), the Company transferred the major portion of its investment portfolio, including restricted investments, to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (e) Losses and Loss Adjustment Expenses The liabilities for losses and loss adjustment expenses were based on an actuarial determination and represented management's best estimate of the ultimate cost of losses and loss adjustment expenses that were unpaid at the balance sheet date, including incurred but not reported claims. Although the liabilities were supported by actuarial projections and other data, such liabilities were ultimately based on management's reasoned expectations of future events. The liabilities for losses and loss adjustment expenses were continually reviewed and, as adjustments became necessary, such adjustments were included in current operations. The Company recognized reinsurance recoveries, estimated recoveries from the SDTF, and subrogation from third parties as reductions to losses incurred. As more fully described in Note 1(c), the Company transferred the liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (f) Reinsurance Premiums and losses and loss adjustment expenses ceded by the Company under reinsurance contracts in which the Company was provided indemnification against loss or liability relating to specified insurance risks were reported as reductions to premiums earned and losses and loss adjustment expenses, respectively. Amounts recoverable for ceded losses and loss adjustment expenses and ceded unearned premiums under reinsurance agreements were reported as assets. Reinsurance contracts that did not transfer risk were accounted for as deposits. As more fully described in Note 1(c), the Company transferred the reinsurance assets and liabilities to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (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 deferred tax 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 were 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 has been established to reduce the net deferred tax asset to an amount that, in the opinion of management, is more likely than not to be realized. F - 12 (h) Policy Acquisition Costs The costs of acquiring and renewing business, principally commissions, premium taxes, and other underwriting expenses, were deferred to the extent recoverable and amortized over the terms of the related policies. Anticipated investment income was considered in the determination of recoverability. Unearned ceding commissions were reported as a reduction to deferred policy acquisition costs. The policy acquisition costs deferred in 1998 and 1997 totaled $8.9 million and $41 million, respectively. The 1998 and 1997 policy acquisition costs amortized totaled $11.4 million and $49.2 million, respectively. The amortization of policy acquisition costs was included in commissions and general and administrative expenses in the accompanying consolidated statements of operations for 1998 and 1997. As more fully described in Note 1(c), the Company transferred the deferred policy acquisition cost asset to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (i) Goodwill The costs in excess of net assets acquired, or goodwill, represent the unamortized excess of the cost over the underlying net assets of companies acquired. The goodwill has been amortized on a straight-line basis over periods ranging from five to 15 years. The amortization expense for 1998 and 1997 totaled $0.9 million and $3.3 million, respectively, and accumulated amortization as of December 31, 1997 was $11.3 million. The net assets acquired in excess of cost, or "negative" goodwill, have been amortized on a straight-line basis over 10 years. The income from amortization of negative goodwill totaled $0.2 million and $0.8 million for 1998 and 1997, respectively. As more fully described in Note 1(c), the Company transferred the goodwill, including "negative" goodwill, to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. The Company periodically reviewed its assets subject to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and, when events or changes in circumstances indicated that the carrying amount of an asset may no longer be fully recoverable, the Company reviewed the recoverability of the asset principally 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) was less than the carrying value of the asset, the Company recognized an impairment loss. The measurement of an impairment loss was based on the carrying amount and estimated fair value of the asset. (j) Property and Equipment Property and equipment have been recorded at cost less accumulated depreciation. Depreciation was computed using the straight-line method over the useful lives of the related assets. Property and equipment recorded under capital lease arrangements was being amortized over the shorter of the asset's useful life or the lease term. The Company capitalized incremental internal and external costs directly related to internally developed software to meet the Company's needs. Those software development projects represented major system enhancements or replacements of existing operating management information systems. Capitalization commenced when management had committed to funding the software project and it was probable that upon completion the software would perform its intended function. The capitalized costs were recorded as property and equipment and amortized using the straight-line method over three years. In 1998, the Company capitalized costs of $0.3 million and recorded amortization expense for internally developed software costs of $0, $0.1 million, and $0.3 million for 1999, 1998, and 1997, respectively. F - 13 As more fully described in Note 1(c), the Company transferred the major portion of the property and equipment, including the internally developed software, to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (k) Investment in Joint Venture The Company accounted for its 50 percent investment in a joint venture arrangement on the equity basis of accounting whereby the Company's recorded investment was adjusted for its proportionate share of earnings or losses of the joint venture. (l) Cash and Cash Equivalents The Company considered all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had restricted cash at December 31, 1999 of $1.9 million, consisting of deposits with various governmental agencies. (m) Premiums Receivable, Net As more fully described in Note 1(c), the Company transferred the premiums receivable balance and related allowance for uncollectible amounts to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (n) Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation of two earnings per share ("EPS") calculations, basic EPS and diluted EPS, in the consolidated statements of operations. Basic EPS is computed by dividing net income or loss 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 summarized as follows: 1999 1998 1997 Average outstanding shares used for calculating basic EPS 37,562,906 37,011,864 36,891,864 Effect of stock options -- -- 223,808 ---------- ---------- ---------- Average outstanding shares used for calculating diluted EPS 37,562,906 37,011,864 37,115,672 ========== ========== ========== (o) Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for stock-based compensation that is based on the fair value of stock options and F - 14 similar instruments and encourages, but does not require, adoption of that method. RISCORP 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, RISCORP has disclosed pro forma net income or loss per share for 1999, 1998, and 1997, as if the provisions of SFAS 123 had been adopted (see Note 12). (p) Year 2000 Neither the Company, its suppliers, nor the financial institutions with which the Company maintains banking or investment accounts, experienced any known Year 2000 computer problems. (q) Concentrations of Risk A description of significant risks that faced RISCORP and its property and casualty insurance subsidiaries and how those risks were minimized is as follows: Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates that 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 reported in the financial statements. The Company minimized 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, an insurer could be adversely affected by economic downturns, significant unemployment, and other conditions that may occur from time to time. 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 that may owe the Company money, will not pay. The Company minimized this risk by, among other means, 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 the Company's investments. The Company mitigated 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. Liquidity Risk is the risk that the liquidity of the Company could have been materially adversely affected if Zenith had prevailed in the dispute resolution process with respect to the determination of the final purchase price or if there had been a material delay in the Company's receipt of the final payment determined to be payable by Zenith. See Note 1(c) for further discussion of this issue. (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 F - 15 reduction in the work force resulted in the termination of 128 employees. The Company also announced in June 1997 its intention to focus solely on its core workers' compensation insurance business and to close all field offices, except Charlotte and Birmingham, by the end of 1997. 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. Those non-recurring expenses consisted principally of severance expenses of $5.1 million and occupancy costs of $0.7 million, of which $0.1 million and $7,000, respectively, were unpaid as of December 31, 1999 and $0.4 million and $0.2 million were unpaid as of December 31, 1998. Those non-recurring expenses were included in commissions and underwriting and administrative expenses in the accompanying 1997 consolidated statement of operations. (s) Participating Insurance Policies The Company offered participating insurance policies in connection with custom plans, flexible retention plans, and preferred account dividend plans. Policyholder dividends were approved quarterly by the Board of Directors and were based on the actual loss experience of each of the policies. Participating policies represented 20 percent and 16 percent of written premiums as of March 31, 1998 (just prior to the sale to Zenith) and December 31, 1997, respectively. The Company paid dividends to participating policyholders of $8.5 million during 1997. No policyholder dividends were paid in 1998; however, the policyholder dividends expected to be paid after 1997 were reduced by $0.5 million during the quarter ended March 31, 1998 due to loss experience. As more fully described in Note 1(c), the Company transferred the liability for policyholder dividends to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (t) Determination of Fair Values of Financial Instruments In the accompanying financial statements, cash and cash equivalents, fixed maturity securities, receivables, and other liabilities have been identified as financial instruments. The fair values of fixed maturities and equity securities are presented in Note 5. For the remaining financial instruments, management believes the carrying values 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 reported 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 could have a material effect on the estimated fair value amounts. (u) Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this standard had no impact on the Company's net income or shareholders' equity. In addition to certain other adjustments, SFAS 130 requires unrealized gains or losses on the Company's available for sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. F - 16 (v) Reclassifications For comparative purposes, certain amounts in the accompanying 1998 and 1997 financial statements have been reclassified from amounts previously reported. Those reclassifications had no effect on previously reported shareholders' equity or net income (loss). (3) Management and Outsourcing Agreements Following the consummation of the sale to Zenith on April 1, 1998, the Company has had no employees. Therefore, as more fully described below, the Company entered into a management agreement and certain outsourcing service agreements to provide the Company with the necessary resources to conduct its day-to-day activities. In February 1998, the Company entered into a Management Agreement (the "Management Agreement") with The Phoenix Management Company, Ltd. ("Phoenix") for the provision of various management services to the Company immediately following the consummation of the transactions contemplated by the Asset Purchase Agreement with Zenith. Mr. Frederick M. Dawson owned a majority interest in Phoenix, a Florida limited partnership, and controlled its operations as President of the General Partner until his death in October 1999. Mr. Walter E. Riehemann owned a minority interest in Phoenix and serves as Vice President and Secretary of the General Partner. Although neither Mr. Dawson nor Mr. Riehemann have been employees of the Company since the consummation of the transactions contemplated by the Asset Purchase Agreement with Zenith, the Management Agreement specifically provided that Mr. Dawson was to hold the titles of President and Chief Executive Officer of the Company and Mr. Riehemann was to hold the titles of Chief Investment Officer, Treasurer, and Secretary of the Company. Following Mr. Dawson's death, the Board of Directors named Mr. Riehemann to also fill the position of President of RISCORP. Pursuant to the terms of the Management Agreement, the Company was to pay Phoenix $100,000 per month, plus expenses, and granted Phoenix a restricted stock award for 1,725,000 shares of RISCORP's Class A Common Stock (subject to certain vesting provisions) in consideration for its management services. Following Mr. Dawson's death, the amount paid to Phoenix by the Company was reduced to $70,000 per month effective on December 1, 1999. The Management Agreement has an initial term of three years which commenced immediately following the consummation of the transactions contemplated by the Asset Purchase Agreement with Zenith, and the Company has the right to extend the term for an additional year. The Company paid Phoenix a retainer of $0.6 million, which retainer is to be applied by Phoenix against the fees payable by the Company during the final six months of the initial term. That retainer is included in other assets in the accompanying December 31, 1999 and 1998 consolidated balance sheets. The restricted stock grant vests monthly over the initial term of the Management Agreement, and Phoenix is entitled to all rights applicable to holders of shares of RISCORP's 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 restricted stock award agreement, Phoenix may not dispose of or otherwise transfer the restricted stock until vested. For the grant of restricted stock, unearned compensation equivalent to the fair market value of the shares at the date of the grant was recorded as a separate component of shareholders' equity and subsequently amortized to expense over the vesting period. The Company recognized amortization of $2 million and $4.1 million to consulting expense for the years ended December 31, 1999 and 1998, respectively. Pursuant to the terms of the Management Agreement, the Company paid Phoenix $2.8 million to reimburse the partners of the Management Company, F - 17 on an after-tax basis, for all taxes (exclusive of state taxes) incurred in connection with the Section 83(b) election filed with respect to the restricted stock grant. In the event that 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 RISCORP shareholders or (ii) the final distribution to the holders of RISCORP's Series A Common Stock, 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 that Phoenix would have received in monthly management fees during the initial term of the Management Agreement. Pursuant to the terms of the Management Agreement, Phoenix provides, among other things, the following services to the Company: (i) management of the day-to-day operations of RISCORP and its subsidiaries, (ii) management of the preparation, negotiation, and defense of the Final Business Balance Sheet (as defined in the Asset Purchase Agreement), (iii) assistance in the overall planning and coordination of the business of the Company, (iv) assistance in the resolution of all claims and contingencies pending or subsequently asserted against the Company, (v) coordination of 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) preparation of the investment policy for the Company and coordination of the investment transactions through one or more investment advisors, and (vii) performance of 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. In May 1997, subject to shareholder approval, RISCORP granted to Mr. Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of RISCORP's Class A Common Stock. Pursuant to the terms of the Management Agreement, immediately following the consummation of the transactions contemplated by the Asset Purchase Agreement with Zenith and the receipt of the applicable cash payments under his employment agreement, RISCORP and Mr. Dawson entered 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. Effective April 1, 1998, the Company entered into an accounting outsourcing agreement with Buttner Hammock & Company, P.A. ("BHC"). Under the terms of the agreement, BHC is to provide monthly accounting, financial reporting, tax return preparation, and certain financial and tax consulting services. Under that agreement, Mr. Buttner has been designated as the chief accounting officer for RISCORP and each of its subsidiaries. The agreement with BHC is for a period of 36 months. In consideration for the services provided by BHC, the Company is to pay BHC a monthly fee of approximately $0.1 million during 1998, 1999, and 2000, plus reasonable out-of-pocket costs. In addition, as defined in the agreement, BHC may also provide certain services to the Company that are to be billed on an hourly rate basis. The Company paid BHC a retainer of $0.5 million against the fees due for the final six months of the initial term of the agreement. That retainer is included in other assets in the accompanying December 31, 1999 and 1998 consolidated balance sheets. Effective April 1, 1998, the Company entered into a computer outsourcing agreement. Under the terms of that agreement, the vendor is to provide the Company with computer configuration, software installation, network configuration and maintenance, telecommunication coordination, computer maintenance, and other computer-related services. The agreement is for a period F - 18 of 36 months. In consideration of the services provided, the Company is to pay a fee of $100 per hour plus reasonable out-of-pocket costs with a minimum commitment of 1,020 hours for year one of the contract and a minimum commitment of 900 hours for years two and three of the contract. During 1999 and 1998, the Company expensed $3.0 million and $3.4 million in fees, respectively, excluding restricted stock grants, and tax payments previously discussed, in connection with the services provided under the foregoing management and outsourcing agreements. Those expenses are included in commissions and general and administrative expenses in the accompanying 1999 and 1998 consolidated statement of operations, respectively. (4) Acquisitions and Joint Venture Acquisition of CompSource In March 1996, RISCORP 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 RISCORP'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. 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 RISCORP repurchase the 112,582 shares in March 1997, and RISCORP repurchased those 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, RISCORP purchased all of the outstanding stock of IAA and RISC in exchange for $11.5 million, consisting principally of 790,336 shares of RISCORP's Class A Common Stock valued at $10.9 million on the date of acquisition. IAA and RISC are workers' compensation management services companies offering services in Alabama. On the acquisition date, the excess of the purchase price over the fair value of the net assets acquired was $11.4 million and was recorded as goodwill. The remaining unamortized goodwill relating to those acquisitions was $7.8 million at March 31, 1998 (just prior to the transfer of the goodwill to Zenith on April 1, 1998). Due to a decrease in the market value of RISCORP's Class A Common Stock, 790,336 additional shares of RISCORP's Class A Common Stock valued at $0.6 million were issued in January 1998 to the former shareholders of IAA. Joint Venture Arrangement In January 1996, RISCORP, through one of its wholly-owned subsidiaries, 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. RISCORP and HCSC each held 50 percent ownership in the joint venture known as Third Coast Holding Company ("Third Coast"). RISCORP contributed the use of its expertise, insurance systems, and intellectual property, while HCSC contributed cash of $10 million. RISCORP's contributed property in Third Coast was valued at $10 million; however, RISCORP's cost basis in the contributed property was F - 19 $0 and, as of December 31, 1996, RISCORP recorded its initial investment in Third Coast at $0. The carrying value of RISCORP's investment in Third Coast at December 31, 1997 was $0. Initially, RISCORP accounted for its 50 percent investment in Third Coast on the equity basis of accounting, whereby RISCORP's recorded investment was adjusted for its proportionate share of earnings or losses of Third Coast. RISCORP discontinued the use of the equity method of accounting for Third Coast in the first quarter of 1997 when the cumulative losses reduced RISCORP's investment in Third Coast to $0. RISCORP has not made any financial guarantees relating to Third Coast and has not made any financial commitments to provide any future funding to Third Coast. Effective January 1, 1998, RISCORP entered into an agreement with HCSC to sell RISCORP's 50 percent interest in Third Coast for $1.3 million. The $1.3 million gain on the sale of Third Coast was included in the 1998 net realized gains. RISCORP received the funds due in connection with this transaction in April 1998. As more fully described in Note 1(c), the Company transferred the unamortized balance of goodwill to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (5) Investments Investments (including restricted investments) included in the accompanying consolidated balance sheets as of December 31, 1999 and 1998 are summarized as follows (in thousands):
Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- December 31, 1999: Available for sale: Fixed maturity securities: U.S. government obligations $ 20,181 $ 32 $ (50) $ 20,163 Corporate obligations 58,872 1 (55) 58,818 --------- ------------ ----------- --------- Total investments $ 79,053 $ 33 $ (105) $ 78,981 ========= ============ =========== ========= Available for sale: Unrestricted $ 76,058 $ 6 $ (105) $ 75,959 Restricted 2,995 27 - 3,022 --------- ------------ ----------- --------- Total $ 79,053 $ 33 $ (105) $ 78,981 ========= ============ =========== ========= December 31, 1998: Available for sale: Fixed maturity securities: U.S. government obligations $ 13,681 $ 219 $ - $ 13,900 Corporate obligations 2,032 48 - 2,080 --------- --------- --------- --------- Total investments $ 15,713 $ 267 $ - $ 15,980 ========= ========= ========= ========= Available for sale: Unrestricted $ 6,666 $ 50 $ - $ 6,716 Restricted 9,047 217 - 9,264 --------- --------- --------- --------- Total $ 15,713 $ 267 $ - $ 15,980 ========= ========= ========= =========
The fair values of investments (including restricted investments) at December 31, 1999 and 1998 were determined using independent pricing services. F - 20 The amortized cost and estimated fair value of fixed maturities (including restricted investments) by contractual maturity, as of December 31, 1999, are summarized as follows (in thousands): Available for Sale ----------------------- Amortized Estimated Cost Fair Value --------- ---------- Due in 2000 $ 66,667 $ 66,613 Due in 2001 to 2004 11,987 11,964 Due in 2005 to 2009 399 404 --------- ---------- Total $ 79,053 $ 78,981 ========= ========= The actual maturities may differ from the contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. During 1999, 1998, and 1997, proceeds from sales and maturities of fixed maturities available for sale totaled $357.5 million, $86.5 million, and $130.5 million, respectively. Gross realized gains and gross realized losses from the sale of investments for 1999, 1998, and 1997 are summarized in the following table and were reported in net investment income in the accompanying consolidated statements of operations (in thousands): 1999 1998 1997 -------- -------- -------- Gross realized gains $ 150 $ 4,348 $ 1,770 Gross realized losses - (68) (224) -------- -------- -------- Net realized gains $ 150 $ 4,280 $ 1,546 ======== ======== ======== A gross realized gain of $2.9 million and a gross realized loss of $0.1 million relating to securities that were transferred to Zenith in connection with the Asset Purchase Agreement were included in the foregoing 1998 net realized gains. The following table summarizes the components of net investment income for 1999, 1998, and 1997 (in thousands): 1999 1998 1997 -------- -------- -------- Fixed maturities $ 3,258 $ 3,733 $ 13,815 Equity securities - (166) 469 Cash and cash equivalents 491 1,633 2,516 Zenith receivable and other accounts receivable 1,831 2,080 - -------- -------- -------- 5,580 7,280 16,800 Investment expenses (107) (177) (353) -------- -------- -------- Net investment income $ 5,473 $ 7,103 $ 16,447 ======== ======== ======== Although the Company has credit risk in the investment portfolio, no fixed maturity security had a Standard & Poor's rating of less than A at December 31, 1999. The carrying value of securities on deposit with various governmental agencies was $3.0 million and $11.6 million at December 31, 1999 and 1998, respectively. In addition, the carrying value of securities held in trust in connection with a fronting agreement between Virginia Surety Company, Inc. and RISCORP Management Services, Inc. was $1.6 F - 21 million at December 31, 1998; such securities were included in fixed maturities available for sale-restricted classification at December 31, 1998 in the accompanying consolidated balance sheets. Excluding investments issued or guaranteed by the United States, the Company had no investments in any insurer in excess of 10 percent of RISCORP's shareholders' equity at December 31, 1999 or 1998. (6) Liabilities for Losses and Loss Adjustment Expenses As more fully described in Note 1(c), the Company transferred the liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. Prior to the sale to Zenith, the Company established 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 established that liability based on facts then known, estimates of future claims trends, and other 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. The activity in the liability for losses and loss adjustment expenses for 1998 and 1997 is summarized as follows (in thousands):
1998 1997 ---------- ---------- Gross liability for losses and loss adjustment expenses, at January 1 $ 437,038 $ 458,239 Reinsurance recoverables (184,251) (180,698) SDTF recoverables (45,211) (49,505) Prepaid managed care fees (8,420) (31,958) ---------- --------- Net balance at January 1 199,156 196,078 ---------- --------- Incurred losses and loss adjustment expenses related to: Current year 14,860 125,764 Prior years 11,717 (2,401) ---------- --------- Total incurred losses and loss adjustment expenses 26,577 123,363 ---------- --------- Paid related to: Current year 1,717 45,646 Prior years 26,760 74,639 ---------- --------- Total paid 28,477 120,285 ---------- --------- Net balance at December 31 197,256 199,156 Plus reinsurance recoverables 214,302 184,251 Plus SDTF recoverables 44,552 45,211 Plus prepaid managed care fees 6,182 8,420 ---------- --------- Gross liability at December 31 462,292 437,038 Gross liability for losses and loss adjustment expenses transferred to Zenith [see Note 1(c)] (462,292) - ---------- --------- Gross liability for losses and loss adjustment expenses, at December 31 $ - $ 437,038 ========== ==========
F - 22 The 1998 adverse loss development was primarily related to increases in the actuarial estimates of remaining loss liabilities pertaining to the Florida business offset somewhat by decreases in the actuarial estimates of remaining loss liabilities pertaining to the Alabama and North Carolina business. The Company recognized 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 utilized 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 at December 31, 1998. (7) Florida Special Disability Trust Fund ("SDTF") 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. The SDTF reimburses claim payments made to a claimant whose injury merges with, aggravates, or accelerates a pre-existing permanent physical impairment. The SDTF is managed by the State of Florida and is funded through assessments against insurers and self-insurers providing workers' compensation coverage in Florida. The Company's pro-rata amount of the SDTF assessment is based on their 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. The Company has been informed that, as of September 30, 1996, the SDTF had an actuarially projected undiscounted liability of $4 billion based on a study performed for the SDTF by independent actuarial consultants. The SDTF actuarial study also indicated that, at the current assessment rates, the payment of the existing liability would take numerous years. Under Florida's sunset laws applicable to some state-sponsored funds, the SDTF would have expired in November 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. Under that 1997 bill, the SDTF is not to accept claims with accident dates after December 31, 1997; as such, certain SDTF claims may have to be refiled for reimbursement and any 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 1998 and 1997, the Company's cash recoveries from the SDTF were $1.8 million and $5.9 million, respectively. The Company's SDTF assessments were $2 million and $6.8 million for 1998 and 1997, respectively. As more fully described in Note 1(c), the Company transferred the recoverable from the SDTF to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. F - 23 (8) Reinsurance All of the reinsurance contracts described in this note and in force on April 1, 1998 were assumed by Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. The Company was involved in the cession of insurance to certain unaffiliated insurance and reinsurance companies under specific excess-of-loss and quota-share reinsurance contracts. The amounts by which certain financial statement balances have been reduced as a result of these reinsurance contracts as of and for the quarter and year ended March 31, 1998 and December 31, 1997, respectively, are as follows (in thousands):
1998(a) 1997 --------- ---------- Premiums written $ 16,785 $ 143,983 Premiums earned 24,420 167,274 Ceded losses and loss adjustment expenses 47,667 73,868 Liabilities for losses and loss adjustment expenses 645,892 183,150 Unearned premiums 61,384 25,842
(a) 1st quarter 1998, prior to the sale to Zenith Effective April 1, 1998, the Company entered into an assumption and indemnity reinsurance agreement with Zenith in connection with the sale to Zenith [see Note 1(c)]. Under the terms of the assumption and indemnity reinsurance agreement, the Company ceded to Zenith 100 percent of the outstanding liabilities for losses and loss adjustment expenses (including incurred but not reported losses) and 100 percent of the unearned premiums as of April 1, 1998. Zenith was responsible for issuing assumption certificates to all the Company's former policyholders. The liabilities for losses and loss adjustment expenses and unearned premiums that were transferred to Zenith on April 1, 1998 were $462.3 million and $43.2 million, respectively. In accordance with the terms of the Asset Purchase Agreement, Zenith assumed all of the Company's obligations under its then current and prior insurance and reinsurance contracts. The terms of the Asset Purchase Agreement, including the assumption and indemnity reinsurance agreement, was approved by the Florida and Missouri Insurance Departments on March 31, 1998 and April 1, 1998, respectively. Effective January 1, 1995, RISCORP Insurance Company ("RIC") and RISCORP Property & Casualty Insurance Company ("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 agreements provided for the payment of a ceding commission at rates that varied 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 agreements was 33 percent. The agreements were to remain in force for an unlimited period of time, but could be terminated by either party at any December 31. RISCORP and AmRe were parties to a senior subordinated note agreement in the principal amount of $15 million due 2002. Under the terms of the note agreement, the Company was to maintain the quota-share treaty or other comparable reinsurance agreements with AmRe for a minimum period of five years beginning January 1, 1995. Ceding commissions earned under the AmRe reinsurance agreements were $7.7 million and $50 million during 1998 and 1997, respectively. F - 24 Effective September 1, 1996, RIC entered into a retrocessional reinsurance agreement with Chartwell Reinsurance Company ("Chartwell"), whereby Chartwell was to retrocede to the Company 50 percent of workers' compensation business written by RISCORP Management Services, Inc. (an affiliate of the Company) as underwriting manager for Virginia Surety Company, Inc. The agreement provided 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 was scheduled to occur as of September 1, 2000. This agreement was terminated on December 31, 1997. On April 18, 1997, RIC entered into a trust agreement with Chartwell whereby RIC agreed to maintain in trust for the benefit of Chartwell 102 percent of RIC's portion of the outstanding loss liabilities and unearned premiums. The balance in this trust account was generally adjusted on a monthly basis, one month in arrears. Effective January 1, 1996, RPC entered into a quota-share reinsurance agreement with Allstate Insurance Company ("Allstate"), Chartwell, Signet Star Reinsurance Company ("Signet"), and San Francisco Reinsurance Company ("San Fran Re"), whereby RPC ceded 90 percent of its inforce, and its new or renewal 1996 gross written premiums, for commercial umbrella coverage. The maximum limit under this agreement was $5 million per insured, per occurrence. The agreement provided for the payment of a ceding commission of 30 percent of the ceded premiums. This agreement was to remain in force for an unlimited period of time, but could be terminated by either party at any December 31. During 1997, Allstate and San Fran Re were replaced on this agreement by Scor Reinsurance Company ("Scor") and Hartford Fire Insurance Company ("Hartford"), respectively. All other terms and conditions of the agreement were unchanged. This agreement was terminated as of December 31, 1997; however, the reinsurers continue 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, Chartwell, Signet, San Fran Re, and Great Lakes American Reinsurance Company, whereby RPC ceded 90 percent of its inforce, and its 1996 new or renewal gross written premiums, for commercial property coverage. The limit of coverage under this agreement was 90 percent of $2.5 million per risk, subject to an occurrence limitation of not less than $10 million nor greater than $15 million. The agreement provided for the payment of a ceding commission of 30 percent of ceded premiums. This agreement was to remain in force for an unlimited period of time, but could be terminated by either party at any December 31. During 1997, Allstate and San Fran Re were replaced on this agreement by Scor and Hartford, respectively. All other terms and conditions of the agreement were unchanged. This agreement was terminated as of December 31, 1997; however, the reinsurers continue 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, Chartwell, Signet, and San Fran Re, whereby RPC ceded 100 percent of all losses incurred on business inforce, written or renewed during the term of this agreement, per occurrence, in excess of $0.25 million to $1 million. RPC was required to pay 11.5 percent of earned premiums, subject to a minimum premium of $0.5 million under the agreement. This agreement was to remain in force for an unlimited period of time, but could be terminated by either party at any December 31. During 1997, Allstate and San Fran Re were replaced on this agreement by Scor and Hartford, respectively. All other terms and conditions of the agreement were unchanged. This agreement was terminated as of December 31, 1997; however, the reinsurers continue to be responsible for their portion of all losses incurred on policies effective before the termination date. F - 25 Effective September 1, 1995, RPC entered into a medical excess-of-loss reinsurance agreement with Cologne Life Reinsurance Company, whereby RPC ceded 100 percent of all losses incurred per insured, per agreement year, in excess of $0.15 million up to $1 million. RPC paid $6.79 per certificate of insurance per month for this coverage. The agreement was to be continuous, but could be canceled by either party at any September 1. The agreement was transferred to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. Effective January 1, 1997, RIC, RNIC, and RPC ceded losses in excess of $0.5 million to Continental Casualty Company ("CNA") under an excess-of-loss reinsurance treaty. This treaty contained a corridor deductible of $1.25 million which is applicable in the aggregate to claims in the $0.5 million excess of $0.5 million corridor for the Company. RIC and RPC had a similar contract with CNA effective January 1, 1996 with a corridor deductible of $1 million. Although the contract contained provisions for minimum and deposit premiums, the premiums for 1997, based on earned premiums, exceeded the minimum premium provisions specified under the contract. Effective October 1, 1996, RNIC entered into a quota-share reinsurance agreement with Chartwell, Swiss Reinsurance America Corporation, and Trenwick America Reinsurance Corporation (collectively the "Reinsurers"), whereby RNIC ceded 65 percent of its net unearned premiums as of October 1, 1996 and 65 percent of net written workers' compensation and employers liability premiums, new or renewal, for the last four months of 1996. Effective January 1, 1997, RNIC reduced the ceded quota-share amount to 60 percent. The agreement provided for the payment of a ceding commission at rates which varied from 27 percent to 49 percent based on the loss ratio of the business ceded. The provisional ceding commission contained in the agreement was 33 percent. This agreement was terminated as of December 31, 1997; however, the reinsurers continue to be responsible for their portion of all losses incurred on policies effective before the termination date. Effective January 1, 1997, RNIC entered into an agreement with the Insurance Company of New York ("INSCORP") and Chartwell 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 with letters of credit in amounts equal to 29.2 percent of the gross written premiums on all ALE policies plus $1.25 million in fixed maturities. 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, 1998 and 1997, based on the gross premiums subject to ALE's, RNIC provided letters of credit of $0 and $3.7 million, respectively, under this agreement. RNIC incurred fees of $39,000 during 1997 and $0 in 1998 prior to the transfer to Zenith. RNIC also maintained specific excess-of-loss coverage with Allstate on the run-off of the book of business acquired by RNIC in March 1996. In connection with the sale to Zenith [as more fully described in Note 1(c)], RIC and RPC entered into an interim reinsurance agreement and cut-through endorsement with Zenith 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 were to be deposited into a trust account for the benefit of Zenith. In addition, the agreement required the Company to pay a fee to Zenith of one percent of the subject premiums. The agreement with Zenith was terminated on April 1, 1998. As of December 31, 1998 and 1997, the market value of the securities in the trust account was $0 and $52.4 million, respectively, and the required trust account balance was $0 and $51.6 million, respectively, based on the direct written premiums for the period June 18, 1997 F - 26 through March 31, 1998 and the unearned premiums at June 17, 1997. The balance in the trust account was to be adjusted on a monthly basis, one month in arrears. The Company incurred fees to Zenith of $0.1 million and $1.4 million during 1998 and 1997, respectively, under this agreement. The Company had no reinsurance recoverables or ceded unearned premiums as of December 31, 1999 and 1998. The Company is contingently liable to the extent that the reinsurers, including Zenith, are unable to meet their contractual obligations for any losses and loss adjustment expenses ceded. (9) Managed Care Agreements RIC and RPC were parties 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, RIC's and RPC's medical claim costs were capped for the first three years of each claim. In May 1996, RIC and RPC terminated those arrangements with RHP; however, injured individuals were covered for three years following any accident that occurred 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 were covered for three years following any accident occurring within the policy periods. In October 1997, RIC and RPC entered into loss portfolio transfer agreements under which RHP transferred its liability to RIC and RPC under the managed care agreements; at that date, RHP's remaining liability under the managed care agreement was determined by an independent consulting actuarial firm to be $8 million and, in November 1997, RHP transferred that amount to RIC and RPC in full satisfaction of RHP's liability. Included in losses and loss adjustment expenses were $0.3 million and $6.1 million of managed care fees for 1998 and 1997, respectively. RIC is no longer contingently liable for any unpaid losses and loss adjustment expenses based on the terms of the July 7, 1999 settlement agreement between Zenith and the Company, to the extent that Humana was unable to meet its contractual obligations under its agreement with RIC As described in Note 1(c), RISCORP transferred the Humana and RHP contractual obligations to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (10) Income Taxes The components of income taxes for 1999, 1998, and 1997 are summarized as follows (in thousands):
1999 1998 1997 Current: - ------------------------------------------------------------------------------------------------------------------- Federal $ (4,768) $(19,165) $ 6,197 State 320 1,040 798 ---------- --------- -------- Total - current (4,448) (18,125) 6,995 Deferred - Federal 2,031 20,181 305 --------- --------- -------- Total income tax expense (benefit) $ (2,417) $ 2,056 $ 7,300 ========= ========= =========
F - 27 The differences between taxes computed at the statutory rates and recorded income tax expense for 1999, 1998, and 1997 are summarized as follows (in thousands):
1999 1998 1997 ---------- ---------- ---------- Computed "expected" tax expense (benefit) $ (3,313) $(24,087) $ 5,105 State taxes in excess of federal benefit 320 807 519 Non-taxable income - (231) (1,188) Goodwill and other amortization - 3,339 801 Valuation allowance 2,844 21,168 412 Fines and penalties - 6 64 Benefits not previously recorded (2,268) - - Other - 1,054 1,587 --------- -------- -------- Income tax expense (benefit) $ (2,417) $ 2,056 $ 7,300 ========= ======== ========
The tax effects of temporary differences that gave rise to the deferred tax assets at December 31, 1999 and 1998 are summarized as follows (in thousands):
December 31 -------------------- 1999 1998 ------ ------ Deferred tax assets: Net operating losses $ 22,772 $ 17,479 Accrued litigation settlement costs 70 5,415 Accrued employee benefits 4 224 Tax credit carryforwards 985 - State refunds 1,603 1,603 --------- -------- Gross deferred tax assets 25,434 24,721 Valuation allowance (24,424) (21,580) --------- -------- Net deferred tax asset $ 1,010 $ 3,141 ========= ========
The Company estimated that $1 million of its December 31, 1999 net deferred tax asset could be realized through 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 $25 million relating to the December 31, 1999 deferred tax asset balance has been established. The Company has $43.4 million of net operating loss carryforwards that expire in 2018 and $21.6 million that expire in 2019. The Company has approximately $1 million of alternative minimum tax credit carryforwards that are available indefinitely. The Company received $22.8 million in federal income tax refunds during 1999. The filed federal income tax refund claim relating to the 1998 loss is currently under examination. Although the ultimate results of that examination cannot be predicted with certainty, the Company's management believes that the examination will not have a material adverse effect on its consolidated financial condition or results of operations. F - 28 (11) Shareholders' Equity RISCORP has 100 million shares of $.01 par value Class A Common Stock authorized and 14,258,671 issued shares at December 31, 1999 and 1998. RISCORP's Class B Common Stock, par value $.01, consists of 100 million shares authorized and 24,334,443 shares issued and outstanding at December 31, 1999 and 1998. 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. RISCORP did not declare any shareholder dividends during 1999, 1998, or 1997. At December 31, 1999 and 1998, there were 112,582 shares of RISCORP's Class A Common Stock in treasury. RISCORP's insurance subsidiaries are limited by statute in their ability to distribute unassigned surplus without the approval of their respective domiciliary insurance department. Dividends or distributions to shareholders that are made under these statutes and that do not require the prior approval of the Florida or the Missouri Insurance Departments are determined based on a consideration of an insurer's net income, realized and unrealized capital gains, percentages of dividends and distributions of surplus, and the relationship of surplus after any such dividend or distribution is made to the minimum required statutory surplus. During 2000, RISCORP's insurance subsidiary, RNIC, has the ability to dividend $0.4 million to RISCORP without the prior approval of the Missouri Insurance Department. The combined statutory surplus as of December 31, 1999, 1998, and 1997, and the combined statutory net income for the years then ended for RISCORP's insurance subsidiaries, were as follows (in thousands): 1999 1998 1997 ----------- ----------- ----------- Surplus $ 12,004 $ 156,480 $ 96,280 Net income 305 14,672 11,042 The decline in combined statutory surplus from 1998 to 1999 is primarily the result of 1) the determination of the final purchase price to be paid by Zenith resulted in a $34.3 million loss on the sale being recorded by RISCORP's insurance subsidiaries, and 2) RISCORP's receiving and retaining of the proceeds from the sale to Zenith. Consequently, RISCORP's insurance subsidiaries recorded $94 million of receivables from RISCORP for their portion of those proceeds. Those receivable balances are classified as a non-admitted asset at December 31, 1999 because those receivables are more than 90 days past due. The individual capital and surplus of each of RISCORP's insurance subsidiaries exceeded the minimum statutory capital and surplus required by their respective state of domicile. 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 are subject to varying degrees of regulatory action, depending on the level of F - 29 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 companies monitor their RBC results in anticipation of future filings. The other RISCORP insurance subsidiary, RNIC, is domiciled in Missouri and RBC information is filed with state regulators. RBC is calculated on an annual basis. At December 31, 1999 and 1998, RISCORP's insurance subsidiaries had statutory surplus in excess of any action level requirements. (12) Stock Options In conjunction with the reorganization discussed in Note 1(a), stock options of RISCORP were substituted for options previously granted to certain officers and employees of RISCORP's affiliates. The options granted in 1997 were exercisable for 10 years after the date and the options vested over periods ranging from immediately to two years. The options granted in 1996 were exercisable over a 12 year period after the date of the grant and the options vested over periods ranging from two to nine years. At December 31, 1999 and 1998, RISCORP had no stock options outstanding. A summary of the status of RISCORP's stock option plan as of and for the years ended December 31, 1999, 1998, and 1997 is as follows:
1999 1998 1997 ---------------------- ------------------ --------------------- Weighted Weighted Weighted Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- ------ -------------- ------ -------------- ------ -------------- Outstanding, beginning of year - $ - 2,533,326 $4.43 3,078,779 $3.67 Granted - - - - 2,533,326 4.43 Canceled - - (2,533,326) 4.43 (3,078,779) 3.67 ---- --------- ----------- ----- ----------- ----- Outstanding, end of year - $ - - $ - 2,533,326 $4.43 ==== ========= =========== ===== =========== ===== Options exercisable at end of year - $ - - $ - 1,085,711 $6.67 ==== ========= =========== ===== =========== =====
Weighted average fair value of options granted during the year $ - $ - $1.92 ======= ======== =====
The fair value of each option was estimated on the date that the option was granted. The exercise prices of options granted were determined to be not less than the fair market value of RISCORP's Class A Common Stock. Compensation expense recognized for options with exercise prices below fair market value totaled $0 for 1999, 1998, and 1997. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for stock-based compensation that is based on the fair value of stock options and similar instruments. The adoption of SFAS 123 is not required and the Company has elected to continue following Accounting Principles Board Opinion No. 25, F - 30 "Accounting for Stock Issued to Employees," for measuring compensation cost. Had the Company adopted SFAS 123, the pro forma net income or loss per share for 1999, 1998, and 1997, would have been as follows (in thousands, except per share data): 1999 1998 1997 ------------ ------------ ------------ Net income (loss) - as reported $ (7,048) $ (70,875) $ 7,286 - pro forma (7,048) (70,875) 5,286 Net income (loss) per common share-diluted - as reported (0.19) (1.91) 0.20 - pro forma (0.19) (1.91) 0.14 (13) Property and Equipment The components of the property and equipment at December 31, 1999 and 1998 are summarized as follows (in thousands): Estimated December 31 Useful Life 1999 1998 ----------- ------ ------ Furniture and equipment 3-7 years $ 358 $ 358 Leasehold improvements 5-10 years 9 9 Software 3 years 81 81 ------- -------- 448 448 Less accumulated depreciation and amortization 252 111 ------- -------- Net carrying amount $ 196 $ 337 ======== ======== Depreciation and amortization expense related to property and equipment totaled $0.1 million, $1.8 million, and $4.9 million, for 1999, 1998, and 1997, respectively. Included in those amounts is amortization expense of $29,000, $0.4 million, and $1.4 million, for 1999, 1998, and 1997, respectively, related to both purchased and capitalized internally developed software costs. As more fully described in Note 1(c), the major portion of the Company's property and equipment, including computer software, was transferred to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. (14) Leases The Company leases space for some of its office facilities under non-cancelable operating leases expiring through 2001, with renewal options available for certain leases. Total rental expense for 1999, 1998, and 1997 was $0.1 million, $0.2 million, and $1.7 million, respectively. At December 31, 1999, the Company was obligated under aggregate minimum annual rentals as follows (in thousands): Year Annual Rental 2000 $ 103 2001 8 --------- Total $ 111 ========= F - 31 (15) Employee Health Benefits The Company self-insured its employees' health benefits and purchased excess insurance that limits its exposure to $1.1 million in the aggregate and $50,000 per occurrence. The Company estimated its liability for unpaid claims based on aggregate limits for health insurance payments less actual payments made. Those estimates were continually reviewed and adjustments, if any, were reported in current operations. Included in accrued expenses at December 31, 1999 and 1998 is a liability for self-insured health benefits of $10,000 and $0.6 million, respectively. The Company realized $0.6 million of income in 1999 due to the reduction of the self insured health benefits payable and incurred expenses of $0.6 million and $3.3 million for 1998 and 1997, respectively. (16) Related Party Transactions The Company had accounts receivable of $0.2 million and $0.5 million from companies owned by RISCORP's majority shareholder ("affiliates or affiliated entity") that are included in accounts receivable-other in the accompanying consolidated balance sheets at December 31, 1999 and 1998, respectively. The Company contracted with affiliated entities for transportation, facilities management, and custodial and maintenance services. The Company also leased parking facilities from affiliated entities. The expense for those services amounted to $0.1 million for 1997 and is included in commissions and general and administrative expenses in the accompanying consolidated statements of operations. In 1997 and the first quarter of 1998, the Company provided administrative and support services to three affiliated entities. Under those arrangements, the Company received $0.2 million and $0.6 million during 1998 and 1997, respectively. As described in Note 9, RIC was party to a managed care arrangement with RHP, an affiliated HMO. Fees paid by RIC to RHP during 1997 totaled $3.7 million and no fees were paid in 1998 or 1999. The managed care arrangement with RHP was terminated in October 1997 following the sale of RHP to an unaffiliated entity. RIC assumed the outstanding liability for unpaid losses and loss adjustment expenses that totaled $8 million in November 1997. During 1998, all of the foregoing contracts with the related parties were cancelled and the Company has no further obligations under any of the contracts as of December 31, 1998. See Note 3 for a discussion of the agreements between the Company and Phoenix and BHC. (17) Bad Debt Allowance As more fully described in Note 1(c), the Company transferred the outstanding premiums receivable balance, net of the allowance for bad debts, to Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase Agreement. The Company did not record any bad debt allowance at December 31, 1999. F - 32 The following table summarizes activity in the bad debt allowance account for premiums receivable for 1998 and 1997 (in thousands):
1998 1997 -------- -------- Balance at beginning of year $ 7,000 $ 17,000 Addition (reduction) to allowance (1,100) 4,374 Recoveries (write-offs) against allowance 100 (14,374) Balance transferred to Zenith [see Note 1(c)] (6,000) - --------- -------- Balance at end of year $ - $ 7,000 ======== ========
(18) Concentration in a Single State Although the Company had expanded its operations into additional states, 75 percent and 70 percent of its premium revenues for 1998 and 1997, respectively, were derived from products and services offered to customers located in Florida. Accordingly, the Company previously could have been adversely affected by economic downturns, significant unemployment, and other conditions that could have occurred from time to time in Florida, which conditions may not have significantly affected its more geographically diversified competitors. (19) Commitments and Contingencies In August 1997, the Occupational Safety Association of Alabama Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers' compensation fund, filed a breach of contract and fraud action against the Company and others. The Fund entered into a Loss Portfolio Transfer and Assumption Reinsurance Agreement effective September 1, 1996 with RNIC. Under the terms of the agreement, RNIC assumed 100 percent of the outstanding loss reserves (including incurred but not reported losses) as of September 1, 1996. Co-defendant Peter D. Norman ("Norman") was a principal and officer of IAA prior to its acquisition by RISCORP in September 1996. The complaint alleges that Norman and IAA breached certain fiduciary duties owed to the Fund in connection with the subject agreement and transfer. The complaint alleges that RISCORP has breached certain provisions of the agreement and owes the Fund monies under the terms of the agreement. The Fund claims, per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund overpaid RNIC by $6 million in the subject transaction. The court has granted RNIC's Motion to Compel Arbitration per the terms and provisions of the agreement. On December 1, 1998, the trial court issued an order prohibiting the American Arbitration Association from administering the arbitration between RNIC and the Fund, and RNIC has appealed the trial court's ruling. The Alabama Supreme Court has stayed the current arbitration. Despite the Alabama Supreme Court's stay, the dispute between the Fund and RNIC is expected to be resolved through arbitration. The other defendants, including IAA, have appealed to the Supreme Court of Alabama the trial court's denial of their motions to compel arbitration. RNIC intends to vigorously defend the Fund's claim. In March 1998, RIC and RPC were added as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of Florida, styled Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety Company, a/k/a Aetna Group, et. al. Case No. 97-2240-CIV-MORENO. The plaintiffs purport to bring this action on behalf of themselves and a class consisting of all employers in the State of Florida who purchased or renewed retrospectively rated or adjusted workers' compensation policies in the voluntary market since 1985. The suit was originally filed on F - 33 July 17, 1997 against approximately 174 workers' compensation insurers as defendants. The complaint was subsequently amended to add the RISCORP defendants. The amended complaint named a total of approximately 161 insurer defendants. The suit claims that the defendant insurance companies violated the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and the Florida Antitrust Act, committed breach of contract and civil conspiracy, and were unjustly enriched by unlawfully adding improper and illegal charges and fees onto retrospectively rated premiums and otherwise charging more for those policies than allowed by law. The suit seeks compensatory and punitive damages, treble damages under the Antitrust and RICO claims, and equitable relief. RIC and RPC moved to dismiss the amended complaint and have also filed certain motions to dismiss the amended complaint filed by various other defendants. In August 1998, the district court issued an order dismissing the entire suit against all defendants on one of the grounds identified in the various motions to dismiss filed by the defendants. The district court indicated that all other grounds and motions to dismiss that were pending at that time were mooted by the dismissal. In September 1998, the plaintiffs filed a Notice of Appeal. On February 9, 1999, the district court issued, sua sponte, an Order of Reconsideration in which the court indicated its desire to vacate the dismissal of the RICO claims and pendant state claims based on a recent decision of the United States Supreme Court. In June 1999, the Eleventh Circuit remanded the case to the district court, and the district court has assigned the case to a magistrate for handling pre-trial matters. At a status conference held in October 1999, the magistrate established deadlines for the filing of a motion for leave to amend the complaint, for supplemental briefing on pending motions, and set a hearing for March 7, 2000. Plaintiffs' counsel subsequently agreed to dismiss all claims against the Company without prejudice and filed a Second Amended Complaint that did not state claims against the Company. On February 25, 2000, the magistrate granted a consent motion with respect to the RISCORP defendants and ordered the dismissal of RIC and RPC without prejudice. In July 1999, a shareholder class action lawsuit was filed against the Company, two of its executive officers, and two former executive officers in the United States District Court for the Middle District of Florida. The plaintiff in this action purports to represent the class of shareholders who purchased shares of RISCORP's Class A Common Stock between November 19, 1997 and July 20, 1998. The complaint alleges, among other things, that the financial statements included in the periodic reports filed by RISCORP with the Securities and Exchange Commission during the class period contain false and misleading statements of material fact and omissions, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. These allegations principally relate to the difference between the net book value of the Company as reflected on its published financial statements during the class period and the net book value of the assets transferred to Zenith as determined by the neutral auditors and neutral actuaries pursuant to the terms of the Asset Purchase Agreement between the parties. The complaint seeks unspecified compensatory damages. RISCORP believes that these claims are without merit and intends to vigorously defend this suit. On or about February 15, 2000, an alleged shareholder of RISCORP filed a putative class action suit against the Company, its Directors, and its majority shareholder in the Circuit Court of the 12th Judicial Circuit, Sarasota County, Florida, styled Harris Blackman v. William D. Griffin, Seddon Goode, Jr., George E. Greene III, Walter L. Revell, and RISCORP, Inc., Case No. 20002103 CA DIV-A. The suit contends that the pending transaction with Griffin Acquisition Corp. pursuant to which William D. Griffin, the majority shareholder of RISCORP, proposes to purchase the Class A shares of RISCORP held by the public shareholders is inadequately priced. The suit alleges that the defendants are liable for breach of fiduciary duty, and seeks either to enjoin the transaction or to recover an unspecified amount of damages. RISCORP has received no notice of any hearing on the plaintiff's claim for equitable relief. RISCORP denies the plaintiff's allegations and intends to defend the suit vigorously. F - 34 On February 25, 2000, the State of Alabama, on behalf of D. David Parsons (as Acting Commissioner of Insurance of the State of Alabama), filed a lawsuit against RISCORP National Insurance Company ("RNIC"). The complaint alleges that RNIC owes an additional $2.5 million in premium taxes for the 1996 tax year. RNIC entered into a Loss Portfolio Transfer Agreement dated August 26, 1996 and effective September 1, 1996 with the Occupational Safety Association of Alabama Workmen's Compensation Fund (the "Fund"). According to the complaint, pursuant to the terms of the agreement, RNIC assumed the worker's compensation risks that were in the Fund and became the insurer of those risks. The State claims that premium tax is due on the consideration received by RNIC for insuring those risks. The complaint seeks compensatory damages. RNIC intends to vigorously defend this suit. In April 1999, RISCORP received an invoice from Salomon Smith Barney seeking approximately $2 million for financial advisory services rendered in connection with the sale to Zenith. RISCORP disputes any liability for the payment of such fees and intends to vigorously defend any cause of action instituted by Salomon Smith Barney seeking payment. The Company, in the ordinary course of business, is party to various lawsuits. Based on information presently available, and in the light of legal and other defenses available to the Company, contingent liabilities arising from such threatened and pending litigation in the ordinary course of business are not presently considered by management to be material. Other than as noted herein, no provision had been made in the accompanying consolidated financial statements for the foregoing matters. Certain of the related legal expenses may be covered under directors and officers' insurance coverage maintained by the Company. See accompanying notes to consolidated financial statements. F - 35 SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES RISCORP, INC. AND SUBSIDIARIES DECEMBER 31, 1999 (in thousands) Type of Investment Cost Market Value - ----------------------- ---------- ------------ Available for sale: Fixed maturity securities: U.S. government obligations $ 20,181 $ 20,163 Corporate obligations 58,872 58,818 ---------- ---------- Total available for sale $ 79,053 $ 78,981 ========= ========= Available for sale: Unrestricted $ 76,058 $ 75,959 Restricted 2,995 3,022 ---------- ---------- Total $ 79,053 $ 78,981 ========= ========= See accompanying Auditors' Report. F - 36 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS RISCORP, INC. (Parent Company Only) (in thousands)
December 31 1999 1998 --------- ----------- ASSETS Investments at fair value (cost $65,355 and $4,635) $ 65,291 $ 4,636 Cash and cash equivalents 3,800 1,140 Cash and cash equivalents - restricted - 10,000 Investment in wholly-owned subsidiaries 142,405 148,357 Surplus note receivable from subsidiary 13,000 13,000 Other assets 8,100 18,840 ---------- --------- Total assets $ 232,596 $ 195,973 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accrued expenses and other liabilities $ 24,256 $ 38,572 Payable to affiliates 118,042 61,835 ---------- --------- Total liabilities 142,298 100,407 ---------- --------- Shareholders' equity: Common stock 386 386 Additional paid-in capital 142,688 142,688 Retained deficit (52,728) (45,680) Unearned compensation - (2,000) Treasury stock at cost (1) (1) Net unrealized gains (losses) on investments (47) 173 ---------- --------- Total shareholders' equity 90,298 95,566 ---------- --------- Total liabilities and shareholders' equity $ 232,596 $ 195,973 ========== =========
See accompanying Auditors' Report. F - 37 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS RISCORP, INC. (Parent Company Only) (in thousands)
Year Ended December 31 ---------------------------------------------- 1999 1998 1997 --------- --------- --------- Revenues: Net investment income $ 4,483 $ 2,681 $ 517 Dividend income - - 3,446 Other income 27 146 - ---------- ----------- ----------- Total revenue 4,510 2,827 3,963 ---------- ----------- ----------- Expenses: General and administrative expenses 5,030 10,871 16,421 Interest expense 1,316 641 1,800 Depreciation and amortization 142 359 857 ---------- ----------- ----------- Total expenses 6,488 11,871 19,078 ---------- ----------- ----------- Income (loss) from operations (1,978) (9,044) (15,115) Loss on sale of net assets to Zenith (3,292) (47,747) - ---------- ----------- ----------- Loss before equity in income or loss of subsidiaries and income taxes (5,270) (56,791) (15,115) Equity in income (loss) of subsidiaries (4,195) (20,322) 20,935 ---------- ----------- ----------- Income (loss) before income taxes (9,465) (77,113) 5,820 Income tax benefit (2,417) (6,238) (1,466) ---------- ----------- ----------- Net income (loss) $ (7,048) $(70,875) $ 7,286 ========= ======== ========
See accompanying Auditors' Report. F - 38 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOW RISCORP, INC. (Parent Company Only) (in thousands)
Year Ended December 31 ----------------------------------------------- 1999 1998 1997 ------------- ------------- ------------ Cash flows from operating activities: Net income (loss) $ (7,048) $ (70,875) $ 7,286 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in net loss (income) of subsidiaries 4,195 20,322 (18,344) Amortization of unearned compensation 2,000 - - Depreciation and amortization 142 359 857 Net amortization of discounts on investments 23 - - Net realized loss (gain) on sale of investments - - 35 Loss on sale of net assets to Zenith 3,292 47,747 - Issuance of RISCORP, Inc. stock - 4,740 - Decrease (increase) in other assets 10,716 4,166 (20,555) Increase (decrease) in total liabilities (2,640) 3,751 26,934 Other, net 1,468 - - ----------- ----------- ---------- Net cash provided by (used in) operating activities 12,148 10,210 (3,787) ----------- ----------- ---------- Cash flows from investing activities: Proceeds from sales and maturities of investments 350,541 69,617 5,206 Proceeds from the sale of equity securities - - 1,548 Net cash received from Zenith for sale of net assets 46,431 9,345 - Cash due to Zenith - 388 - Purchase of fixed maturities--available for sale (416,460) (73,252) - Capital contributions to subsidiaries - (1,000) (1,000) Purchase of property and equipment - (448) - ----------- ----------- ---------- Net cash provided by (used in) investing activities (19,488) 4,650 5,754 ----------- ----------- ---------- Cash flows from financing activities: Purchase of treasury stock subject to put option - - (2,100) Transfer of cash and cash equivalents to restricted balances 10,000 (12,568) - Other, net - - (1,293) ----------- ----------- ---------- Net cash provided by (used in) financing activities 10,000 (12,568) (3,393) ----------- ----------- ---------- Net increase (decrease) in cash and cash equivalents 2,660 2,292 (1,426) Cash and cash equivalents, beginning of year 1,140 (1,152) 274 =========== ============ =========== Cash and cash equivalents, end of year $ 3,800 $ 1,140 $ (1,152) =========== ============ =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,120 $ 450 $ 1,800 =========== ============ =========== Income taxes $ 173 $ - $ 6,556 =========== ============ ===========
See accompanying Auditors' Report. F - 39 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF COMPREHENSIVE INCOME (LOSS) RISCORP, INC. (Parent Company Only) (in thousands)
Year Ended December 31 ------------------------------------------------ 1999 1998 1997 -------------- ------------- ------------ Net income (loss) $ (7,048) $ (70,875) $ 7,286 ------------ ---------- --------- Other comprehensive income (loss), before income taxes: Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during year (339) 194 (2,392) Income tax expense (benefit) related to items of other comprehensive income (loss) (119) 68 (837) ------------ ---------- --------- Other comprehensive income (loss), net of income taxes (220) 126 (1,555) ------------ ---------- --------- Total comprehensive income (loss) $ (7,268) $ (70,749) $ 5,731 ============ ========== =========
See accompanying Auditors' Report. F - 40 SCHEDULE IV - REINSURANCE RISCORP, INC. AND SUBSIDIARIES (in thousands)
Premiums Earned -------------------------------------------------------------------------------------------- Ceded to Assumed Percentage Year Ended Gross Other from Other Net of Amount December 31 Amount Companies Companies Amount Assumed to Net - ------------ ------ --------- ----------- ------ -------------- 1999 $ - $ - $ - $ - - ========== ========== ======== ========= ====== 1998 $ 48,416* $ 22,676* $ 79* $ 25,819 -* ========== ========== ======== ========= ====== 1997 $ 328,191 $ 167,274 $ 18,812 $ 179,729 10% ========== ========== ======== ========= ======
* These amounts represent the first three months of 1998. See accompanying Auditors' Report. F - 41 SCHEDULE VI - SUPPLEMENTAL INFORMATION RISCORP, INC. AND SUBSIDIARIES (in thousands) December 31 - ------------------------------------------------------------------------------ Reserves for Discount, Deferred Unpaid Losses if any, Policy and Loss deducted Acquisition Adjustment in Previous Unearned Year Costs Expenses Column Premiums - -------------- ------------- ---------------- ------------- ------------- 1999 $ - $ - $ - $ - 1998 $ - $ - $ - $ - 1997 $ (2,053) $ 437,038 $ - $ 56,324
SCHEDULE VI - SUPPLEMENTAL INFORMATION, CONTINUED RISCORP, INC. AND SUBSIDIARIES (in thousands) Year Ended December 31 - -------------------------------------------------------------------------------------------------------------- Losses and Loss Amortization Net Adjustment Expenses of Deferred Paid Losses Net Net Incurred Related to: Policy and Loss Net Earned Investment Current Prior Acquisition Adjustment Premiums Year Premiums Income Year Years Costs Expenses Written --------- --------- ---------- ------------------------- ------------ ------------ --------- 1999 $ - $ 5,473 $ - $ - $ - $ - $ - 1998 $ 25,819* $ 7,103 $ 14,860* $ 11,717* $ 3,681* $ 28,501* $ 20,209* 1997 $ 179,729 $ 16,447 $ 125,764 $ (2,401) $ 49,221 $ 120,285 $ 157,495
* These amounts represent the first three months of 1998. See accompanying Auditors' Report. F - 42 EX-27 2 FINANCIAL DATA SCHEDULE
7 Exhibit 27 RISCORP, INC. AND SUBSIDIARIES Financial Data Schedule As of and for the nine month period ended December 31, 1999 (in thousands) THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS DEC-31-1999 DEC-31-1999 78,981 0 0 0 0 0 78,981 6,593 0 0 95,076 0 0 0 0 0 0 0 386 89,912 95,076 0 5,473 150 778 0 0 0 (9,465) (2,417) (7,048) 0 0 0 (7,048) (.19) (.19) 0 0 0 0 0 0 0 Financial Data Schedule information for the year ending December 31, 1998 is incorporated by reference herein to FORM 10-K/A annual report as filed with the Securities and Exchange Commission by the Company on June 7, 1999. Amounts inapplicable or not disclosed as a separate line on the Statement of Financial Position or Results of Operations are reported as 0 herein.
-----END PRIVACY-ENHANCED MESSAGE-----