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.
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
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.
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.
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 $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):
The $20.5 million decrease in the accrued legal settlement is due to the payment of this liability in April 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.
The $1.4 million of interest expense consisted primarily of the interest paid in March 1999 on the settlement of a class action lawsuit.
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.
The $47.7 million loss on the sale to Zenith represents the adjustment to the purchase price as determined by the neutral auditors.
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.
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.
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.
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 ======== =======
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.
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.
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.
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.
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
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.
The estimated effect of potential increases in interest rates on the fair values of our investment securities follows (in thousands):
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.
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.
The Company's consolidated financial statements, notes, and supplementary schedules are set forth on pages to hereof.