-----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, FrEQgGXszpTcYchZ04EQU8WRcrChnksnp6dRXnmON7l8aa2yzcaTXYkngB8J5sJs 0k8fGDrTcRvR+k7c30DuCw== 0001003957-00-000010.txt : 20000516 0001003957-00-000010.hdr.sgml : 20000516 ACCESSION NUMBER: 0001003957-00-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 000-27462 FILM NUMBER: 631420 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-Q 1 RISCORP, INC. 10-Q AS OF MARCH 31, 2000 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-27462 RISCORP, INC. (Exact name of registrant as specified in its charter) FLORIDA 65-0335150 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Sarasota Tower, Suite 608 2 North Tamiami Trail Sarasota, Florida 34236 ----------------------------------------- ------------- (Address of principal executive offices) (Zip Code) (941) 366-5015 ---------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Number of shares outstanding of the issuer's Common Stock: Class Outstanding at April 30, 2000 ----- ----------------------------- Class A Common Stock, $.01 par value 14,258,671 Class B Common Stock, $.01 par value 24,334,443 1 INDEX
Page No. Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3 Consolidated Statements of Operations - For the three months ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows - For the three months ended March 31, 2000 and 1999 5 Consolidated Statements of Comprehensive Loss 6 For the three months ended March 31, 2000 and 1999 Notes to Consolidated Condensed Financial Statements 7 - 9 Item 2. Management's Discussion and Analysis of Financial 11 - 14 Condition and Results of Operations Part II Other Information Item 1. Legal Proceedings 15 - 17 Item 2. Changes to Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
2 Part I Financial Information Item 1. Financial Statements RISCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share and per share data)
March 31 December 31 2000 1999 ------------- ------------- Assets (Unaudited) Investments: Fixed maturities available for sale, at fair value (amortized cost $73,358 in 2000 and $76,058 in 1999) $ 73,261 $ 75,959 Fixed maturities available for sale, at fair value (amortized cost $4,865 in 2000 and $2,995 in 1999)-restricted 4,887 3,022 ----------- ----------- Total investments 78,148 78,981 Cash and cash equivalents 5,658 4,668 Cash and cash equivalents-restricted 1,972 1,925 Accounts receivable--other 2,545 2,545 Deferred income taxes 1,012 1,010 Property and equipment, net 163 196 Other assets 5,190 5,751 ----------- ----------- Total assets $ 94,688 $ 95,076 =========== =========== Liabilities and Shareholders' Equity Liabilities - accrued expenses and other liabilities $ 6,394 $ 6,656 ----------- ----------- Shareholders' equity: Class A Common Stock, $.01 par value, 100,000,000 shares authorized; 14,258,671 shares issued 143 143 Class B Common Stock, $.01 par value, 100,000,000 shares authorized; 24,334,443 shares issued 243 243 Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued and outstanding -- -- Additional paid-in capital 142,688 142,688 Retained deficit (54,730) (54,606) Treasury Class A Common Stock - at cost, 112,582 shares (1) (1) Accumulated Other Comprehensive Loss: Net unrealized losses on investments (49) (47) ----------- ----------- Total shareholders' equity 88,294 88,420 ----------- ----------- Total liabilities and shareholders' equity $ 94,688 $ 95,076 =========== ===========
See accompanying notes to consolidated financial statements. 3 RISCORP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except share and per share data)
Three Months Ended March 31 ---------------------------- 2000 1999 ----------- ----------- (Unaudited) (Unaudited) Revenue: Net investment income $ 1,238 $ 1,799 Other income 120 -- ----------- ----------- Total revenue 1,358 1,799 ----------- ----------- Expenses: General and administrative expenses 1,397 1,157 Interest expense 52 1,441 Depreciation and amortization 33 40 ----------- ----------- Total expenses 1,482 2,638 ----------- ----------- Loss before income taxes (124) (839) Income taxes -- -- ----------- ----------- Net loss $ (124) $ (839) =========== =========== Per share data: Net loss per common share - basic $ (0.00) $ (0.02) =========== =========== Net loss per common share - diluted $ (0.00) $ (0.02) =========== =========== Weighted average common shares outstanding 37,922,281 37,347,281 =========== =========== Weighted average common and common share equivalents outstanding 37,922,281 37,347,281 =========== ===========
See accompanying notes to consolidated financial statements. 4 RISCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)
Three Months Ended March 31 ---------------------------- 2000 1999 ----------- ----------- (Unaudited) (Unaudited) Net cash provided by operating activities $ 91 $ 13,533 ----------- ----------- Cash flows from investing activities: Purchase of fixed maturities available for sale (49,146) (192,877) Proceeds from sales and maturities of fixed maturities available for sale 50,045 133,819 Cash received from Zenith for sale of net assets -- 50,572 ----------- ----------- Net cash provided by (used in) investing activities 899 (8,486) ----------- ----------- Cash flows from financing activities: Transfer of cash and cash equivalents to restricted cash -- (2,232) ----------- ----------- Net cash used in financing activities -- (2,232) ----------- ----------- Net increase in cash and cash equivalents 990 2,815 Cash and cash equivalents, beginning of period 4,668 6,864 ----------- ----------- Cash and cash equivalents, end of period $ 5,658 $ 9,679 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3 $ 3 =========== =========== Income taxes $ 12 $ 82 =========== ===========
See accompanying notes to consolidated financial statements 5 RISCORP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Loss (in thousands)
Three Months Ended March 31 ---------------------------- 2000 1999 ----------- ----------- (Unaudited) (Unaudited) Net loss $ (124) $ (839) ----------- ----------- Other comprehensive loss, before income taxes: Unrealized losses on securities available for sale: Unrealized holding losses arising during the period (3) (49) Income tax benefit related to items of other comprehensive loss 1 17 ----------- ----------- Other comprehensive loss, net of income taxes (2) (32) ----------- ----------- Total comprehensive loss $ (126) $ (871) ============ ===========
See accompanying notes to consolidated financial statements. 6 RISCORP, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements (Unaudited) (1) Basis of Presentation The accompanying consolidated unaudited interim financial statements of RISCORP, Inc. ("RISCORP") and subsidiaries (collectively, the "Company") have been prepared on the basis of generally accepted accounting principles ("GAAP") and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial condition, results of operations, and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of RISCORP and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (2) Execution of Merger Agreement with William D. Griffin In November 1999, RISCORP entered into a definitive agreement (the "Merger Agreement") to merge with Griffin Acquisition Corp. ("Acquiror"), a company controlled by Mr. William D. Griffin, the majority shareholder of RISCORP. Pursuant to the terms of the Merger Agreement, each issued and outstanding share of Class A Common Stock will receive $2.85 in cash, plus a contingent right to receive an additional pro rata cash amount if RISCORP recovers any additional amounts from Zenith Insurance Company. Under the terms of the Merger Agreement, Acquiror will assume all of the liabilities of RISCORP, including its pending litigation. The transaction is subject to customary closing conditions, including shareholder approval, and is expected to close in the second quarter of 2000. This transaction, if consummated, will constitute a going private transaction. (3) Sale to Zenith Insurance Company As of April 1, 1998, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith Insurance Company ("Zenith"). In connection with the sale to Zenith, the Company ceased substantially all of its former business operations, including its insurance operations. Accordingly, after such date, the Company's operations consisted principally of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. At the present time, RISCORP has no plans to resume any operating activities. On July 7, 1999, the Company and Zenith settled, with certain limited exceptions, the claims arising out of the sale. The Asset Purchase Agreement contemplated a post-closing purchase price adjustment based on 7 the difference between the book value of the assets purchased and the book value of the liabilities assumed as of the closing date. In connection with the determination of the final purchase price, a dispute arose between the parties regarding, among other things, the book value of the assets and liabilities of the business, Zenith's assumption of certain operating liabilities of the business, and each party's indemnification obligations under the Asset Purchase Agreement. The terms of the settlement included, among other things, RISCORP's right to seek correction of alleged errors made by the neutral auditors in connection with its determination of certain reinsurance recoverable adjustments contained in the Final Business Balance Sheet. On October 7, 1999, the neutral auditors denied RISCORP's request for correction of these errors. On January 5, 2000, RISCORP filed a lawsuit against Zenith and the neutral auditors in the Superior Court of Fulton County, Georgia, seeking correction of these alleged errors. In connection with the sale of RISCORP's insurance operations to Zenith on April 1, 1998, RISCORP voluntarily consented to the Florida Insurance Department's request that RISCORP discontinue writing any new or renewal insurance business for an indefinite period of time. (4) Commitments and Contingencies In August 1997, the Occupational Safety Association of Alabama Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers' compensation fund, filed a breach of contract and fraud action against the Company and others. The Fund entered into a Loss Portfolio Transfer and Assumption Reinsurance Agreement effective September 1, 1996 with RISCORP National Insurance Company ("RNIC"). Under the terms of the agreement, RNIC assumed 100 percent of the outstanding loss reserves (including incurred but not reported losses) as of September 1, 1996. Co-defendant Peter D. Norman ("Norman") was a principal and officer of Independent Association Administrators, Inc. ("IAA") prior to its acquisition by RISCORP in September 1996. The complaint alleges that Norman and IAA breached certain fiduciary duties owed to the Fund in connection with the subject agreement and transfer. The complaint alleges that RISCORP has breached certain provisions of the agreement and owes the Fund monies under the terms of the agreement. The Fund claims, per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund overpaid RNIC by $6 million in the subject transaction. The court has granted RNIC's Motion to Compel Arbitration per the terms and provisions of the agreement. On December 1, 1998, the trial court issued an order prohibiting the American Arbitration Association from administering the arbitration between RNIC and the Fund, and RNIC has appealed the trial court's ruling. The Alabama Supreme Court has stayed the current arbitration. Despite the Alabama Supreme Court's stay, the dispute between the Fund and RNIC is expected to be resolved through arbitration. The other defendants, including IAA, have appealed to the Supreme Court of Alabama the trial court's denial of their motions to compel arbitration. RNIC intends to vigorously defend the Fund's claim. In July 1999, a shareholder class action lawsuit was filed against RISCORP, two of its executive officers, and two former executive officers in the United States District Court for the Middle District of Florida styled Chap-Cap Partners, L.P. v. RISCORP, Inc., William D. Griffin, Frederick M. Dawson, Walter E. Riehemann and Stephen C. Rece, Case No. 99-1585CIV-T-26. The plaintiff in this action purports to represent the class of shareholders who purchased shares of RISCORP's Class A Common Stock between November 19, 1997 and July 20, 1998. The complaint alleges, among other things, that the financial statements included in the periodic reports filed by RISCORP with the Securities and Exchange Commission during the class period contain false and misleading statements of material fact and omissions, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. These allegations principally relate to the difference between the net book value of RISCORP as reflected on its 8 published financial statements during the class period and the net book value of the assets transferred to Zenith as determined by the neutral auditors pursuant to the terms of the Asset Purchase Agreement. The complaint seeks certification of a class and award of unspecified compensatory damages. Defendants Dawson, Riehemann and Rece sought indemnification from RISCORP. On or about February 9, 2000, the plaintiff filed an amended complaint that dropped William D. Griffin as a party and purported to substitute the Estate of Frederick M. Dawson for Frederick M. Dawson (deceased) as a party defendant. On March 31, 2000, the defendants filed a motion to dismiss the amended complaint, which remains pending. After service of the complaint, RISCORP promptly notified its directors' and officers' insurance carrier. The insurance carrier subsequently sent a letter to RISCORP denying coverage of this claim. RISCORP has disputed the insurance company's position, and has insisted on coverage. RISCORP and the indemnified defendants deny liability to the Plaintiff or to the putative class, and intend to defend this action vigorously. In February 2000, an alleged shareholder of RISCORP filed a putative class action suit against RISCORP, its Directors, and its majority shareholder in the Circuit Court of the 12th Judicial Circuit, Sarasota County, Florida, styled Harris Blackman v. William D. Griffin, Seddon Goode, Jr., George E. Greene III, Walter L. Revell, and RISCORP, Inc., Case No. 20002103 CA DIV-A. The suit contends that the pending transaction with Griffin Acquisition Corp. pursuant to which William D. Griffin, the majority shareholder of RISCORP, proposes to purchase the Class A shares of RISCORP held by the public shareholders is inadequately priced. The suit alleges that the defendants are liable for breach of fiduciary duty, and seeks to enjoin the transaction. RISCORP has filed a motion to dismiss, and has received no notice of any hearing on the plaintiff's claim for equitable relief. RISCORP denies the plaintiff's allegations and intends to defend the suit vigorously. In February 2000, the State of Alabama, on behalf of D. David Parsons (as Acting Commissioner of Insurance of the State of Alabama), filed a lawsuit against RNIC styled State of Alabama v. RISCORP National Insurance Company, Civil Action No. CV-2000-569PR, Circuit Court of Montgomery County, Alabama. The complaint alleges that RNIC owes an additional $2.5 million in premium taxes for the 1996 tax year. RNIC entered into a Loss Portfolio Transfer Agreement dated August 26, 1996 and effective September 1, 1996 with the Occupational Safety Association of Alabama Workmen's Compensation Fund (the "Fund"). According to the complaint, pursuant to the terms of the agreement, RNIC assumed the workers' compensation risks that were in the Fund and became the insurer of those risks. The State claims that premium tax is due on the consideration received by RNIC for insuring those risks. The complaint seeks compensatory damages. RNIC intends to vigorously defend this suit. In April 1999, RISCORP received an invoice from Salomon Smith Barney seeking approximately $2 million for financial advisory services rendered in connection with the sale to Zenith. RISCORP disputes any liability for the payment of such fees and intends to vigorously defend any cause of action instituted by Salomon Smith Barney seeking payment. On or about November 5, 1999, the Bankruptcy Trustee for Richey's Manufacturing Company, Inc. (the "Debtor") filed an adversary proceeding against Zenith Insurance Company ("Zenith") and others styled Jacob C. Pongetti, Trustee, et al. v. Zenith Insurance Company f/k/a RISCORP National Insurance Company et al. in the U.S. Bankruptcy Court for the Northern District of Mississippi. On or about April 27, 2000, the Trustee filed a Second Amended Complaint that purported to add RISCORP National 9 Insurance Company ("RNIC") as a party defendant. The suit arises from a November 16, 1996 fire that allegedly destroyed certain real property improvements and personal property owned by the Debtor. The suit alleges that the Debtor held an insurance policy issued by RNIC or its predecessor that covered such real property improvements and personal property. The suit further alleges that either RNIC, or Zenith as alleged successor to RNIC, is liable for the loss up to the policy limits, net of sums previously paid to the first lienholder on the property. The suit asserts a claim against RNIC for $1,693,510, plus attorney's fees and other unspecified claims. RNIC denies liability to the plaintiffs, and intends to defend the suit vigorously. The Company, in the ordinary course of business, is party to various lawsuits. Based on information presently available, and in the light of legal and other defenses available to the Company, contingent liabilities arising from such threatened and pending litigation in the ordinary course of business are not presently considered by management to be material. Other than as noted herein, no provision had been made in the accompanying consolidated financial statements for the foregoing matters. Certain of the related legal expenses may be covered under directors and officers' insurance coverage maintained by the Company. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements, particularly with respect to Risk Factors, Legal Proceedings, and the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Additional written or oral forward-looking statements may be made by RISCORP, Inc. ("RISCORP") and its subsidiaries (collectively, the "Company") from time to time in filings with the Securities and Exchange Commission or otherwise. Such forward-looking statements are within the meaning of that term in Sections 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements may include, without limitation, projections of revenues, income, losses, cash flows, plans for future operations, financing needs, estimates concerning the effects of litigation or other disputes, as well as assumptions regarding any of the foregoing matters. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Many factors could contribute to such differences and include, among others, the actual outcome of pending litigation, both on behalf of and against the Company; the Company's ability to gain approval and receive payment from the Florida Department of Labor for certain refund applications; the Company's ability to receive payment for the alleged errors and understatement of the Final Business Balance Sheet by the neutral auditors; the Company's need for additional capital to meet operating requirements; and other factors mentioned elsewhere in this report. Recent Developments Execution of Merger Agreement with William D. Griffin See Part, 1, Item 1, Notes to Consolidated Condensed Financial Statements, Note 2, for further discussion of the Merger Agreement. Asset Purchase Agreement with Zenith See Part 1, Item 1, Notes to Consolidated Condensed Financial Statements, Note 3, for further discussion of the Zenith transaction. Legal Developments See "Part II, Item 1, Legal Proceedings." Overview General As discussed more fully in Note 3 to the consolidated condensed financial statements, RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith on April 1, 1998. In connection with the sale to Zenith, RISCORP ceased 11 substantially all of its former business operations, including its insurance operations, effective April 1, 1998. Accordingly, after such date, the Company's operations consisted primarily of the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement, and the investment, protection, and maximization of the remaining assets of the Company. At the present time, RISCORP has no plans to resume any operating activities. Since April 1, 1998, the Company has had no employees or insurance operations, and has provided no services to self-insurance funds or other insurance related entities. Results of Operations Three Months Ended March 31, 2000 and 1999 During the three months ended March 31, 2000 and 1999, the Company's primary activities included the investment of the funds received from Zenith in 1998 and 1999, the investment of other assets retained by the Company, efforts to monetize the contingent assets and resolve the contingent liabilities of the Company, the administration of the day-to-day activities of the surviving corporate entities, compliance with the provisions of the Asset Purchase Agreement and Settlement Agreement with Zenith. During the three months ended March 31, 1999, the Company's operating activities also included the defense of the Proposed Business Balance Sheet and converting the taxes receivable to cash. Compliance with the provisions of the Asset Purchase Agreement included the transfer of all of the assets and liabilities not retained by the Company to Zenith, and assisting with the orderly transition of the Company's insurance operations to Zenith. The following is an analysis of balances contained on the March 31, 2000 and December 31, 1999 balance sheets. Investments totaling approximately $78.1 million and $79 million, respectively, consist primarily of United States Government obligations. Restricted cash and cash equivalents consist primarily of amounts on deposit with various governmental agencies. Accounts receivable-other of $2.5 million at each date presented consist primarily of a receivable of $2.3 million that is expected to be realized upon the redemption of RISCORP's outstanding stock. Deferred income taxes of $1 million at each date presented consist of federal and state income taxes that are anticipated to be recovered in future periods. Other assets of $5.2 million and $5.8 million, respectively, consist of $4.3 million and $4.6 million of prepaid expenses, and $0.9 million and $1.2 million of accrued investment portfolio income, respectively. 12 A summary of the accrued expenses and other liabilities at March 31, 2000 and December 31, 1999 is as follows (in thousands):
March 31 2000 December 31 1999 ---------------- ----------------- Income taxes payable $ 2,537 $ 2,539 Payable to Zenith 1,896 1,878 Accrued professional services 1,697 1,819 Trade accounts payable 242 205 Other accruals and payables 22 215 ---------------- ----------------- Total $ 6,394 $ 6,656 ================ =================
The Company's operating results for the three months ended March 31, 2000 and 1999 resulted in a net loss of $0.1 million and $0.8 million, respectively. Net investment income for the three months ended March 31, 2000 and 1999 was $1.2 million and $1.8 million, respectively. Net investment income for the three months ended March 31, 2000 consisted primarily of income from the investment portfolio. Net investment income for the three months ended March 31, 1999 consisted of $1.3 million of interest income on a receivable from Zenith, $0.1 million of interest income on a $12.8 million balance that was being held in escrow, and $0.4 million of other investment income. Operating expenses for the three months ended March 31, 2000 and 1999 totaled $1.5 million and $2.6 million, respectively, and consisted of the following: General and administrative expenses totaled $1.4 million and $1.2 million, respectively, and consisted of the following (in thousands):
Three Months Ended March 31 ------------------------------------- 2000 1999 ---------------- ----------------- Management expenses $ 210 $ 300 Accounting and auditing expenses 542 321 Legal expenses 33 270 Recurring operating expenses (i.e., rent, telephone, insurance, and similar costs) 583 203 Other expenses 29 63 ---------------- ----------------- Total $ 1,397 $ 1,157 ================ =================
Interest expense was $52,000 for the three months ended March 31, 2000. Interest expense of $1.4 million for the three months ended March 31, 1999 consisted primarily of the interest payable on a legal settlement that was paid in April 1999. Depreciation and amortization expense was $33,000 and $40,000, respectively, primarily consisting of depreciation of computer equipment. 13 The weighted average common and common share equivalents outstanding for the three months ended March 31, 2000 was 37,922,281 as compared to 37,347,281 for the three months ended March 31, 1999. Liquidity and Capital Resources RISCORP and certain of its subsidiaries sold substantially all of their assets and transferred certain liabilities to Zenith on April 1, 1998. In connection with that sale to Zenith, the Company ceased substantially all of its former business operations and, accordingly, after April 1, 1998, the Company's primary source of cash flow has been generated from investment income. The Company's future cash requirements are expected to be satisfied through investment income and the liquidation of investments. Cash flow from operations for the three months ended March 31, 2000 and 1999 was $0.1 million and $13.5 million, respectively. The positive cash flow in 1999 was due primarily to the collection of the proceeds from the sale to Zenith and the cessation of substantially all the Company's former business operations. The Company has projected cash flows through December 2000 and believes it has sufficient liquidity and capital resources to support its operations. As of March 31, 2000 and 1999, RISCORP's insurance subsidiaries had combined statutory capital and surplus of $12.3 million and $123.6 million, respectively. The decline in combined statutory surplus from 1999 to 2000 is primarily the result of RISCORP's receiving and retaining of the proceeds from the sale to Zenith. Consequently, RISCORP's insurance subsidiaries recorded $94 million of receivables from RISCORP for their portion of those proceeds. Those receivable balances were classified as a non-admitted asset at December 31, 1999 because those receivables were more than 90 days past due. The individual capital and surplus of each of RISCORP's insurance subsidiaries exceeded the minimum statutory capital and surplus required by their respective state of domicile. The National Association of Insurance Commissioners has adopted risk-based capital standards to determine the capital requirements of an insurance carrier based on the risks inherent in its operations. The standards, which have not yet been adopted in Florida, require the computation of a risk-based capital amount that is then compared to a carrier's actual total adjusted capital. The computation involves applying factors to various financial data to address four primary risks: asset risk, insurance underwriting risk, credit risk, and off-balance sheet risk. Those standards provide for regulatory intervention when the percentage of total adjusted capital to authorized control level risk-based capital is below certain levels. At December 31, 1999, RISCORP's insurance subsidiaries' statutory surplus was in excess of any risk-based capital action level requirements. The risk based capital calculation is not made on an interim basis. Year 2000 Neither the Company, its suppliers, nor the financial institutions with whom the Company maintains banking or investment accounts, experienced any known Year 2000 computer problems. 14 Part II Other Information Item 1. Legal Proceedings In August 1997, the Occupational Safety Association of Alabama Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers' compensation fund, filed a breach of contract and fraud action against the Company and others. The Fund entered into a Loss Portfolio Transfer and Assumption Reinsurance Agreement effective September 1, 1996 with RISCORP National Insurance Company ("RNIC"). Under the terms of the agreement, RNIC assumed 100 percent of the outstanding loss reserves (including incurred but not reported losses) as of September 1, 1996. Co-defendant Peter D. Norman ("Norman") was a principal and officer of Independent Association Administrators, Inc. ("IAA") prior to its acquisition by RISCORP in September 1996. The complaint alleges that Norman and IAA breached certain fiduciary duties owed to the Fund in connection with the subject agreement and transfer. The complaint alleges that RISCORP has breached certain provisions of the agreement and owes the Fund monies under the terms of the agreement. The Fund claims, per a Loss Portfolio Evaluation dated February 26, 1998, that the Fund overpaid RNIC by $6 million in the subject transaction. The court has granted RNIC's Motion to Compel Arbitration per the terms and provisions of the agreement. On December 1, 1998, the trial court issued an order prohibiting the American Arbitration Association from administering the arbitration between RNIC and the Fund, and RNIC has appealed the trial court's ruling. The Alabama Supreme Court has stayed the current arbitration. Despite the Alabama Supreme Court's stay, the dispute between the Fund and RNIC is expected to be resolved through arbitration. The other defendants, including IAA, have appealed to the Supreme Court of Alabama the trial court's denial of their motions to compel arbitration. RNIC intends to vigorously defend the Fund's claim. In July 1999, a shareholder class action lawsuit was filed against RISCORP, two of its executive officers, and two former executive officers in the United States District Court for the Middle District of Florida styled Chap-Cap Partners, L.P. v. RISCORP, Inc., William D. Griffin, Frederick M. Dawson, Walter E. Riehemann and Stephen C. Rece, Case No. 99-1585CIV-T-26. The plaintiff in this action purports to represent the class of shareholders who purchased shares of RISCORP's Class A Common Stock between November 19, 1997 and July 20, 1998. The complaint alleges, among other things, that the financial statements included in the periodic reports filed by RISCORP with the Securities and Exchange Commission during the class period contain false and misleading statements of material fact and omissions, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. These allegations principally relate to the difference between the net book value of RISCORP as reflected on its published financial statements during the class period and the net book value of the assets transferred to Zenith as determined by the neutral auditors pursuant to the terms of the Asset Purchase Agreement. The complaint seeks certification of a class and award of unspecified compensatory damages. Defendants Dawson, Riehemann and Rece sought indemnification from RISCORP. On or about February 9, 2000, the plaintiff filed an amended complaint that dropped William D. Griffin as a party and purported to substitute the Estate of Frederick M. Dawson for Frederick M. Dawson (deceased) as a party defendant. On March 31, 2000, the defendants filed a motion to dismiss the amended complaint, which remains pending. After service of the complaint, RISCORP promptly notified its directors' and officers' insurance carrier. The insurance carrier subsequently sent a letter to RISCORP denying coverage of this claim. RISCORP has disputed the insurance company's position, and has insisted on coverage. RISCORP and the indemnified defendants deny liability to the Plaintiff or to the putative class, and intend to defend this action vigorously. 15 In February 2000, an alleged shareholder of RISCORP filed a putative class action suit against RISCORP, its Directors, and its majority shareholder in the Circuit Court of the 12th Judicial Circuit, Sarasota County, Florida, styled Harris Blackman v. William D. Griffin, Seddon Goode, Jr., George E. Greene III, Walter L. Revell, and RISCORP, Inc., Case No. 20002103 CA DIV-A. The suit contends that the pending transaction with Griffin Acquisition Corp. pursuant to which William D. Griffin, the majority shareholder of RISCORP, proposes to purchase the Class A shares of RISCORP held by the public shareholders is inadequately priced. The suit alleges that the defendants are liable for breach of fiduciary duty, and seeks to enjoin the transaction. RISCORP has filed a motion to dismiss, and has received no notice of any hearing on the plaintiff's claim for equitable relief. RISCORP denies the plaintiff's allegations and intends to defend the suit vigorously. In February 2000, the State of Alabama, on behalf of D. David Parsons (as Acting Commissioner of Insurance of the State of Alabama), filed a lawsuit against RNIC styled State of Alabama v. RISCORP National Insurance Company, Civil Action No. CV-2000-569PR, Circuit Court of Montgomery County, Alabama. The complaint alleges that RNIC owes an additional $2.5 million in premium taxes for the 1996 tax year. RNIC entered into a Loss Portfolio Transfer Agreement dated August 26, 1996 and effective September 1, 1996 with the Occupational Safety Association of Alabama Workmen's Compensation Fund (the "Fund"). According to the complaint, pursuant to the terms of the agreement, RNIC assumed the workers' compensation risks that were in the Fund and became the insurer of those risks. The State claims that premium tax is due on the consideration received by RNIC for insuring those risks. The complaint seeks compensatory damages. RNIC intends to vigorously defend this suit. In April 1999, RISCORP received an invoice from Salomon Smith Barney seeking approximately $2 million for financial advisory services rendered in connection with the sale to Zenith. RISCORP disputes any liability for the payment of such fees and intends to vigorously defend any cause of action instituted by Salomon Smith Barney seeking payment. On or about November 5, 1999, the Bankruptcy Trustee for Richey's Manufacturing Company, Inc. (the "Debtor") filed an adversary proceeding against Zenith Insurance Company ("Zenith") and others styled Jacob C. Pongetti, Trustee, et al. v. Zenith Insurance Company f/k/a RISCORP National Insurance Company et al. in the U.S. Bankruptcy Court for the Northern District of Mississippi. On or about April 27, 2000, the Trustee filed a Second Amended Complaint that purported to add RISCORP National Insurance Company ("RNIC") as a party defendant. The suit arises from a November 16, 1996 fire that allegedly destroyed certain real property improvements and personal property owned by the Debtor. The suit alleges that the Debtor held an insurance policy issued by RNIC or its predecessor that covered such real property improvements and personal property. The suit further alleges that either RNIC, or Zenith as alleged successor to RNIC, is liable for the loss up to the policy limits, net of sums previously paid to the first lienholder on the property. The suit asserts a claim against RNIC for $1,693,510, plus attorney's fees and other unspecified claims. RNIC denies liability to the plaintiffs, and intends to defend the suit vigorously. The Company, in the ordinary course of business, is party to various lawsuits. Based on information presently available, and in the light of legal and other defenses available to the Company, contingent liabilities arising from such threatened and pending litigation in the ordinary course of business are not presently considered by management to be material. 16 Other than as noted herein, no provision had been made in the accompanying consolidated financial statements for the foregoing matters. Certain of the related legal expenses may be covered under directors and officers' insurance coverage maintained by the Company. Item 2. Changes to Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 11 Statement Re Computation of Per Share Loss 27 Financial Data Schedules b) Reports on Form 8-K None. 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RISCORP, INC. (Registrant) By: /s/ Walter E. Riehemann ------------------------------ Walter E. Riehemann President and General Counsel Date: May 12, 2000 By: /s/Edward W. Buttner IV ------------------------------ Edward W. Buttner IV, CPA Chief Accounting Officer Date: May 12, 2000 18 EX-11 2 RISCORP, INC. PER SHARE EARNINGS AS OF 3/31/00
Exhibit 11 RISCORP, INC. AND SUBSIDIARIES Statement Re Computation of Per Share Loss (in thousands, except share and per share amounts) Three Months Ended March 31 --------------------------------------- 2000 1999 ----------------- ----------------- (Unaudited) (Unaudited) Net loss $ (124) $ (839) ============= ============== Weighted average common and common share equivalents outstanding: Average number of common shares outstanding 36,868,114 36,868,114 Restricted stock vested 1,054,167 479,167 ------------- -------------- Weighted average common shares outstanding - (basic) 37,922,281 37,347,281 ============= ============== Weighted average common and common share equivalents outstanding - (diluted) 37,922,281 37,347,281 ============= ============== Net loss per common share--basic $ (0.00) $ (0.02) ============== ============== Net loss per common share--diluted $ (0.00) $ (0.02) ============= ==============
EX-27 3 FINANCIAL DATA SCHEDULE
7 Exhibit 27 RISCORP, INC. AND SUBSIDIARIES Financial Data Schedule As of and for the three month period ended March 31, 2000 (Unaudited) (in thousands) THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-2000 MAR-31-2000 78,148 0 0 0 0 0 78,148 7,630 0 0 94,688 0 0 0 0 0 0 0 386 87,908 94,688 0 1,238 0 120 0 0 0 (124) 0 (124) 0 0 0 (124) (.00) (.00) 0 0 0 0 0 0 0 Financial Data Schedule information for the year ending December 31, 1999 is incorporated by reference herein to FORM 10-K/A annual report as filed with the Securities and Exchange Commission by the Company on April 20, 2000. Amounts inapplicable or not disclosed as a separate line on the Statement of Financial Position or Results of Operations are reported as 0 herein.
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