<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO .......
COMMISSION FILE NUMBER 0-25508
RTW, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1440870
................................. ....................................
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8500 NORMANDALE LAKE BOULEVARD, SUITE 1400
BLOOMINGTON, MN 55437
(Address of principal executive offices and zip code)
(612)-893-0403
(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
------
At November 1, 1996, 11,807,501 shares of Common Stock were outstanding.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
-----
Item 1. Consolidated Financial Statements and Notes 3
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibits 16
2
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 4
Consolidated Statements of Income - Three and nine month periods
ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
3
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31,1995
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Held-to-maturity, at amortized cost, fair value of $54,464 and $59,571 $ 54,519 $ 57,662
Available-for-sale, at fair value, amortized cost of $30,448 and $10,674 30,247 10,868
------------- ------------
Total investments 84,766 68,530
Cash and cash equivalents 13,928 12,962
Accrued investment income 1,255 1,376
Premiums receivable, less allowance of $75 and $73 4,614 2,903
Reinsurance receivable 6,795 8,312
Reinsurance premiums receivable, net 1,388 1,569
Deferred policy acquisition costs 1,690 858
Furniture and equipment, net 2,932 1,957
Other assets 3,422 2,657
------------- ------------
$ 120,790 $ 101,124
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid claim and claim settlement expenses $ 45,178 $ 37,138
Unearned premiums 14,050 9,606
Accrued expenses and other liabilities 2,977 4,051
Notes payable, including related party notes of $85 and $85 9,049 8,891
------------- ------------
Total liabilities 71,254 59,686
Shareholders' equity:
Common Stock, no par value; authorized 25,000,000 shares; issued
and outstanding 11,807,501 shares at September 30, 1996 and
11,709,199 shares at December 31, 1995 28,609 27,606
Retained earnings 21,054 13,708
Unrealized appreciation (depreciation) on securities available-for-sale (127) 124
------------- ------------
Total shareholders' equity 49,536 41,438
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$ 120,790 $ 101,124
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
1996 1995 1996 1995
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $ 16,914 $ 11,652 $ 46,022 $ 33,807
Investment income 1,465 1,164 4,131 2,790
----------- --------- --------- ----------
Total revenues 18,379 12,816 50,153 36,597
EXPENSES:
Claim and claim settlement expenses 10,114 7,139 26,625 21,303
Policy acquisition costs 2,043 803 5,190 2,767
General and administrative expenses 1,815 1,467 5,767 4,182
----------- --------- --------- ---------
Total expenses 13,972 9,409 37,582 28,252
----------- --------- --------- ---------
Income from operations 4,407 3,407 12,571 8,345
Interest expense 273 323 821 969
----------- --------- --------- ---------
Income before income taxes 4,134 3,084 11,750 7,376
Provision for income taxes 1,552 1,186 4,404 2,769
----------- --------- --------- ---------
Net income $ 2,582 $ 1,898 $ 7,346 $ 4,607
----------- --------- --------- ---------
----------- --------- --------- ---------
Net income per common and
common share equivalent $ 0.21 $ 0.16 $ 0.60 $ 0.43
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited, in thousands)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1996 1995
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 7,346 $ 4,607
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 554 449
Deferred income taxes (564) (858)
Changes in assets and liabilities:
Amounts due from reinsurers 1,698 3,275
Unpaid claim and claim settlement expenses 8,040 9,176
Unearned premiums, net of premiums receivable 2,733 1,053
Other, net (1,119) (3,107)
--------- ---------
Net cash provided by operating activities 18,688 14,595
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities - (27,858)
Maturities of held-to-maturity securities 3,000 -
Purchases of available-for-sale securities (19,845) (2,569)
Purchases of furniture and equipment (1,371) (971)
--------- ---------
Net cash used in investing activities (18,216) (31,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering - 29,900
Equity financing costs - (2,860)
Redemption of common stock - (2)
Stock options and warrants exercised 258 33
Sales of Common Stock to ESOP 236 -
--------- ---------
Net cash provided by financing activities 494 27,071
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 966 10,268
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,962 3,083
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,928 $ 13,351
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 692 $ 815
--------- ---------
--------- ---------
Income taxes $ 4,758 $ 3,973
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
6
<PAGE>
RTW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and such principles
were applied on a basis consistent with the 1995 Annual Report filed with the
Securities and Exchange Commission (SEC) except that the consolidated financial
statements were prepared in conformity with the instructions to Form 10-Q for
interim financial information and, accordingly, do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The financial information included herein, other
than the consolidated balance sheet at December 31, 1995, has been prepared by
management without audit by independent certified public accountants. The
consolidated balance sheet at December 31, 1995 has been derived from the
audited consolidated financial statements for the year ended December 31, 1995,
but does not include all the disclosures contained therein.
The information furnished includes all adjustments and accruals, consisting only
of normal, recurring accrual adjustments, which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations for any interim period are not necessarily indicative
of results for the full year. The unaudited interim consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto contained in the RTW, Inc. Annual Report to Shareholders for the year
ended December 31, 1995.
The financial statements for the three and nine month periods ended September
30, 1995 have been reclassified to conform to the presentation at September 30,
1996. The reclassifications had no effect on net income.
NOTE B - STOCK SPLIT
On April 25, 1996, the Company's board of directors approved a 3-for-2 stock
split in the form of a 50 percent stock dividend to shareholders of record on
the close of business on May 6, 1996. The shares were distributed to
shareholders on May 17, 1996. All share and per share information has been
restated to reflect the stock split.
NOTE C - EXERCISE OF NON-QUALIFIED STOCK OPTIONS
The exercise of non-qualified stock options in the nine month period ending
September 30, 1996 resulted in an income tax benefit of $509,000 which was
credited to Common Stock. The income tax benefit is the tax effect of the
difference between the market price on the date of exercise and the option
price.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following analysis of the consolidated results of operations and financial
condition of RTW, Inc. (the "Company") and its wholly-owned subsidiary, American
Compensation Insurance Company ("ACIC"), should be read in conjunction with the
Company's consolidated financial statements and notes thereto at September 30,
1996 and December 31, 1995 and the three and nine month periods ended September
30, 1996 and 1995.
The Company's revenues consist of premiums earned and investment income.
Premiums earned during a period are the gross premiums earned by the Company on
outstanding workers' compensation policies less the amount of any premiums ceded
to reinsurers. Investment income represents income on the Company's investment
portfolio.
The Company's expenses are comprised of claim and claim settlement expenses,
policy acquisition costs, general and administrative expenses, interest expense
and income taxes.
RESULTS OF OPERATIONS
The following table summarizes the components of revenues for the three and nine
month periods ended September 30, 1996 and 1995 and premiums in force at
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Gross premiums earned $ 17,161 $ 12,163 $ 46,443 $ 35,088
Premiums ceded,
excess of loss reinsurance (247) (511) (421) (1,281)
--------- --------- --------- ---------
Premiums earned 16,914 11,652 46,022 33,807
Investment income 1,465 1,164 4,131 2,790
--------- --------- --------- ---------
Total revenues $ 18,379 $ 12,816 $ 50,153 $ 36,597
--------- --------- --------- ---------
--------- --------- --------- ---------
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Premiums in force at September 30:
Minnesota $ 52,900 $ 44,700
Colorado 10,600 1,600
Missouri 3,000 -
--------- ---------
Total in force at September 30: $ 66,500 $ 46,300
--------- ---------
--------- ---------
</TABLE>
PREMIUMS EARNED. Gross premiums earned increased 41.1% to $17.2 million in
the third quarter of 1996 from $12.2 million in the third quarter of 1995 and
32.4% to $46.4 million for the nine months ended September 30, 1996 from $35.1
million for the nine months ended September 30, 1995. The increase in gross
premiums earned resulted from to an increase in the amount of premiums in force
as the Company's customer base grew to 2,613 customers at September 30, 1996
from 772 customers at September 30, 1995. The Company's average annual premium
decreased to approximately $25,000 at September 30, 1996 from $60,000 at
September 30, 1995 due primarily to increased association business with smaller
average premiums written.
8
<PAGE>
The following factors have resulted premium reductions on renewal accounts and
reduced premiums on new accounts.
+ Legislative action has reduced estimated loss costs.
+ From October 1995 through September 1996, the Company attempted to
write more customers with credit experience modifiers and experienced
increased competition in this customer base (including traditional
insurance companies competing in greater numbers for accounts). The
Company has repositioned its marketing efforts to refocus on its
traditional debit experience modifier customer base.
+ The Company continues, as anticipated, to experience reduced pricing
on renewal policies due to its success in lowering customers' loss
experience which reduces customer experience modifiers.
The impact of legislative changes in estimated loss costs, increased competition
in credit modifier customers and decreasing customer loss experience can
continue to result in lower premiums generated on new and renewal policies
through the remainder of 1996 and into 1997.
Premiums ceded to reinsurers decreased 51.7% to a cost of $247,000 in the third
quarter of 1996 from a cost of $511,000 in the third quarter of 1995 and 67.1%
to a cost of $421,000 for the nine months ended September 30, 1996 from a cost
of $1,281,000 for the nine months ended September 30, 1995. The decrease in
premiums ceded to reinsurers resulted from (i) the recognition of a benefit of
$251,000 in the second quarter of 1996 due to an over estimate of ceded premiums
at December 31, 1995, (ii) the decrease in ceded premium cost in Colorado and
Missouri due to exceeding the minimum premium threshold, and (iii) the increase
to $1.0 million in 1996 from $450,000 in 1995 in the Minnesota retention level
under the Minnesota Workers' Compensation Reinsurance Association (the "WCRA")
excess of loss reinsurance coverage. Colorado and Missouri retention levels
remained at $500,000 in 1996.
Premiums earned increased 45.2% to $16.9 million in the third quarter of 1996
from $11.7 million in the third quarter of 1995 and 36.1% to $46.0 million for
the nine months ended September 30, 1996 from $33.8 million for the nine months
ended September 30, 1995 as a result of these changes.
The Company expects continued growth in gross premiums earned for the remainder
of 1996 and premiums ceded are expected to increase as a percentage of gross
premiums earned for the last quarter of the year. The premium growth is
expected to be less than the first nine months of 1996 and premiums ceded will
not include an accrual reversal as recorded in the second quarter of 1996.
INVESTMENT INCOME. Investment income increased to $1.5 million in the third
quarter of 1996 from $1.2 million in the third quarter of 1995 and increased to
$4.1 million for the nine months ended September 30, 1996 from $2.8 million for
the nine months ended September 30, 1995 due to increased funds available for
investment and increased yields on new amounts invested. Funds invested
increased to $84.8 million at September 30, 1996 from $63.4 million at September
30, 1995 due to increased net cash provided by operating activities. Investment
yields were unchanged at 6.23% for the quarters ended September 30, 1996 and
September 30, 1995 and increased to 6.18% for the nine months ended September
30, 1996 from 6.06% for the nine months ended September 30, 1995 due to higher
interest rates on U.S. Treasury securities purchased during the remainder of
1995 and in 1996 from rates on U.S. Treasury Securities purchased in prior
years. The investment yield realized in future periods will be impacted by
yields attained on new investments and yield changes on maturing investments.
The Company expects that the investment yield for the remainder of 1996 will be
consistent with the yield attained during the first nine months of 1996.
CLAIM AND CLAIM SETTLEMENT EXPENSES. Claim and claim settlement expenses
increased approximately 41.7% to $10.1 million in the third quarter of 1996 from
$7.1 million in the third quarter of 1995 and 25.0% to $26.6 million for the
nine months ended September 30, 1996 from $21.3 million for the nine months
ended September 30, 1995, due primarily to the increase in earned premiums. As
a percentage of premiums earned, claim and claim settlement expenses decreased
to 59.8% for the third quarter of 1996 from 61.3% for the third quarter of 1995
and decreased to 57.9% for the nine months ended September 30, 1996 from 63.0%
for the nine months ended September 30, 1995. In the third quarter of 1996, the
Company reduced its estimate of pre-1996 unpaid claim and claim settlement
expenses, which resulted in a $608,000 reduction in third quarter 1996 claim and
claim settlement expenses. Combined with the first quarter reduction of $425,000
and the second quarter reduction of $650,000, the cumulative reduction totaled
approximately $1.7 million for the nine months ended September 30, 1996.
Comparatively, the company recorded a third quarter reduction of $300,000 in
1995 and a cumulative reduction of $300,000 for the nine
9
<PAGE>
month period ended September 30, 1995. The decrease in claim and claim
settlement expense as a percentage of premiums earned represents continued
favorable development reflecting the Company's ability to manage and close prior
years' claims more favorably than previously anticipated. The Company believes
that continued application of its claims management technology and methods on
open claims from 1995 and prior years will continue to benefit future periods.
Average claim cost has decreased due to efficiencies within the Company and
legislative changes in benefits to claimants. The Company believes that, in the
current environment (reduced premiums due to legislative changes in estimated
loss costs, increased competition in credit modifier customers written from
October 1995 through September 1996 and decreasing customer loss experience and
decreasing average claim costs), it may experience upward pressure on claim and
claim settlement expense as a percentage of premiums earned.
POLICY ACQUISITION COSTS. The following table summarizes policy acquisition
costs for the three and nine month periods ending September 30, 1996 and 1995:
<TABLE>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Commission expense $ 1,333 $ 599 $ 3,275 $ 1,707
Premium tax expense 349 248 958 704
Other policy acquisition costs 503 222 1,374 653
---------- ---------- ---------- ----------
Direct policy acquisition costs 2,185 1,069 5,607 3,064
Ceding commissions
Favorable claims experience
adjustments for 1992 to 1994 (142) (266) (417) (297)
---------- ---------- ---------- ----------
Policy acquisition costs $ 2,043 $ 803 $ 5,190 $ 2,767
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Commission expense increased to 7.8% of gross premiums earned in the third
quarter of 1996 from 4.9% in the third quarter of 1995 and increased to 7.1% of
gross premiums earned for the nine months ended September 30, 1996 from 4.9% for
the nine months ended September 30, 1995. Commission expense increased as a
result of new marketing programs instituted in 1995 and 1996 and higher average
commissions paid to agents. The Company initiated marketing programs in the
fourth quarter of 1995 and the first quarter of 1996 that increased commission
rates to agents and expects commission rates to remain consistent with results
attained in the third quarter of 1996 or increase slightly for the balance of
the year. Premium tax expense was 2.0% of gross premiums earned in the third
quarters of 1996 and 1995 and increased slightly to 2.1% of gross premiums
earned for the nine months ended September 30, 1996 from 2.0% for the nine
months ended September 30, 1995 due to higher premium tax rates paid in
Colorado. The Company expects premium tax expense as a percent of gross
premiums earned to remain consistent with the results attained during the nine
months ended September 30, 1996 for the balance of 1996. Other policy
acquisition costs increased to 2.9% of gross premiums earned in the third
quarter of 1996 from 1.8% in the third quarter of 1995 and increased to 3.0% of
gross premiums earned for the nine months ended September 30, 1996 from 1.9% for
the nine months ended September 30, 1995. This increase is due to increased
focus on marketing programs as the Company expands into new states and continues
to grow in its more established markets and increased personnel costs necessary
for the growth in in force premiums.
Ceding commissions decreased to a benefit of $142,000 in the third quarter of
1996 from a benefit of $266,000 in the third quarter of 1995 and increased to a
benefit of $417,000 for the nine months ended September 30, 1996 from a benefit
of $297,000 for the nine months ended September 30, 1995 representing favorable
adjustments recognized by the Company as a result of continued favorable claims
experience for accident years 1992 through 1994. The Company ceded premiums and
related claim and claim settlement expenses in 1994, 1993 and 1992 at 25%, 67%
and 67%, respectively to a reinsurer on a quota share basis. As claims are
settled for 1994, 1993 and 1992, the Company makes adjustments reflecting the
adjusted ceded losses and ceding commissions. Future ceding commission changes
will be affected by the continued development of the reserves with respect to
1994, 1993 and 1992.
10
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative
expenses increased to $1.8 million in the third quarter of 1996 from $1.5
million in the third quarter of 1995 and increased to $5.8 million for the nine
months ended September 30, 1996 from $4.2 million for the nine months ended
September 30, 1995. As a percentage of premiums earned, general and
administrative expenses decreased to 10.7% for the third quarter of 1996 from
12.6% for the third quarter of 1995 and increased to 12.5% for the nine months
ended September 30, 1996 from 12.4% for the nine months ended September 30,
1995. This increase reflects additional personnel costs for new employees,
higher compensation for existing employees, expenses incurred for expansion in
Missouri and additional fees for professional services. The Company anticipates
that general and administrative expenses will continue to increase in both
dollars spent and as a percentage of premiums earned for the remainder of 1996.
INTEREST EXPENSE. Interest expense decreased to $273,000 in the third quarter
of 1996 from $323,000 in the third quarter of 1995 and to $821,000 for the nine
months ended September 30, 1996 from $969,000 for the nine months ended
September 30, 1995 due to principal payments on the Series 1991A, Series 1991B
and Senior Notes totaling approximately $1.4 million in December 1995. Notes
payable decreased to $9.0 million at September 30, 1996 from $10.2 million at
September 30, 1995 as a result of the payments. Interest expense is expected to
remain consistent with the results attained during the nine months ended
September 30, 1996 for the balance of the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premiums and investment income while
its cash requirements consist primarily of payments for claim and claim
settlement expenses, policy acquisition costs, general and administrative
expenses, income taxes, capital expenditures, principal repayment and debt
service on its outstanding Senior Notes, Series 1991A and 1991B Notes. The
Company generates positive net cash from operations due, in part, to the timing
differences between the receipt of premiums and the payment of claim and claim
settlement expenses. Cash is invested pending future payments for such
expenses. The Company's investment portfolio consists of U.S. Treasury and
Agency Securities. Cash and cash equivalents consist primarily of U.S. Treasury
or Agency Securities acquired under repurchase agreements with maturities of 90
days or less, with the remaining balances in cash and a money market fund that
invests in short-term government securities. The Company does not invest in
derivative securities.
Cash provided by operating activities for the nine months ended September 30,
1996 was $18.2 million primarily as a result of the Company's net income of $7.3
million, an increase of $8.0 million in unpaid claim and claim settlement
expenses which are non-cash accruals for future claims, an increase of $2.7
million in unearned premiums, net of premiums receivable and a decrease in
amounts due from reinsurers of $1.7 million. Net cash used in investing
activities was $18.2 million primarily as a result of purchases of $19.8 million
of available-for-sale securities and purchases of furniture and equipment of
$1.4 million offset by maturities of held-to-maturity securities of $3.0
million. Net cash provided by financing activities was $494,000 primarily the
result sales of common stock to the Company's ESOP and the exercise of stock
options and warrants.
The Company's investments increased to $84.8 million at September 30, 1996 from
$68.5 million at December 31, 1995 from cash provided by operating and investing
activities. Of the Company's investments at September 30, 1996, $54.5 million
were classified as held-to-maturity and valued at amortized cost, while $30.3
million were classified as available-for-sale and valued at fair value. All of
the Company's investment securities at September 30, 1996 were U.S. Treasury or
Agency Securities. The amortized cost and estimated fair value of held-to-
maturity and available-for-sale securities at September 30, 1996 by contractual
maturities were as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE COMBINED
---------------------- ------------------------ -----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
MATURING: COST VALUE COST VALUE COST VALUE
- --------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less $ 500 $ 500 $ 5,064 $ 5,088 $ 5,564 $ 5,588
One year through five years 44,303 44,036 20,527 20,390 64,830 64,426
Five years through ten years 9,716 9,928 4,857 4,769 14,573 14,697
------- ------- ------- ------- ------- ------
Total $54,519 $54,464 $30,448 $30,247 $84,967 $84,711
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
11
<PAGE>
Historically, changes in market interest rates have caused fluctuations in the
fair value of securities. During 1996, the Company has invested solely in
available-for-sale securities and intends to continue this investment strategy
through the remainder of 1996. As a result of the increased holdings in
securities classified as available-for-sale, and thus carried at fair value, the
Company expects increased volatility in shareholders' equity as market interest
rates and other factors change.
The Company's need for additional capital is primarily the result of regulations
which require certain ratios of capital to premiums written. In order to support
premium growth, ACIC required additional capital to support the higher premium
levels. The Company raised approximately $27.0 million in April 1995 through an
initial public offering and contributed $18.0 million in 1995 to ACIC. In the
future, the Company expects that its need for additional capital will be
primarily related to the growth of ACIC and the need to maintain appropriate
capital to premium ratios as defined by state regulatory bodies. As an
alternative to raising additional capital, the Company believes it could secure
quota-share or other reinsurance agreements which would have the effect of
reducing the ratio of premiums to capital and could be used to satisfy state
regulatory requirements. The Company entered into its quota share reinsurance
agreements during 1992, 1993 and 1994 for that purpose.
The Company is organized as an operating corporation that has a wholly owned
insurance company subsidiary, ACIC, for which the Company provides all operating
functions pursuant to a service agreement (the "Service Agreement"). Under the
Service Agreement, ACIC pays the Company a fee, based on gross premiums earned,
for managed care, claims adjustment administration and underwriting services.
State insurance regulations limit distributions, including dividends, from ACIC
to the Company. The maximum amount of dividends that can be paid by ACIC to the
Company in any year is equal to the lesser of: (i) 10% of ACIC's statutory
surplus as of the end of the previous fiscal year, and (ii) the statutory net
gain from operations (not including realized capital gains) of ACIC in its most
recent fiscal year. Based on this limitation, the maximum dividend that ACIC
could pay to the Company in 1996, without regulatory approval, is $3.6 million.
ACIC may be subject to more restrictive limitations on dividends as it enters
additional states. ACIC has never paid a dividend to the Company and, for the
foreseeable future, the Company intends to retain capital in ACIC to enable the
Company to expand its operations.
The Company believes that cash flow generated by its operations and its cash and
investment balances will be sufficient to fund continuing operations, principal
repayments of $2.4 million due in December 1996, debt service on its outstanding
Senior Notes, Series 1991A and Series 1991B Notes and capital expenditures for
the next 12 months.
NAIC RISK-BASED CAPITAL STANDARDS
The National Association of Insurance Commissioners (NAIC) has adopted risk-
based capital standards to determine the capital requirements of a property and
casualty insurance carrier based upon the risks inherent in its operations. The
standards require the computation of a risk-based capital amount which is then
compared to a carrier's actual total adjusted capital. The computation involves
applying factors to various financial data to address four primary risks: asset
risk, insurance underwriting risk, credit risk and off-balance sheet risk.
These standards provide for regulatory intervention when the percentage of total
adjusted capital to authorized control level risk-based capital is below certain
levels. The Company's percentage of total adjusted capital is substantially in
excess of authorized control level risk-based capital.
REGULATION
The Company's insurance subsidiary is subject to substantial regulation by the
governmental agencies in the states in which it is licensed, and will be subject
to such regulation in any state in which it provides workers' compensation
products and services in the future. State regulatory agencies have broad
administrative power with respect to all aspects of the business of the Company
and its insurance subsidiary, including premium rates, benefit levels, policy
forms, dividend payments, capital adequacy and the amount and type of
investments. These regulations are primarily intended to protect covered
employees and policyholders rather than the insurance company. Both the
legislation covering insurance companies and the regulations adopted by state
agencies are subject to change. The Company's
12
<PAGE>
insurance subsidiary is currently licensed to do business in Minnesota,
Colorado, Missouri, Michigan and Pennsylvania.
The National Association of Insurance Commissioners is in the process of
codifying statutory accounting principles. The ultimate completion date and
impact of this project on current statutory policies and practices are not
known.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which was to be effective for the Company beginning January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the required
pro forma effect on net income and net income per common and common share
equivalent in the Company's Annual Report.
FORWARD LOOKING STATEMENTS
Information included in this 10-Q which can be identified by the use of forward-
looking terminology such as "may", "will", "expect", "anticipate", "estimate",
or "continue" or the negative thereof or other variations thereon or comparable
terminology constitutes forward-looking information. The following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any forward-
looking statement: (i) the Company's ability to expand into new states and
attract customers in those states, (ii) the Company's ability to further
penetrate the market in its existing states, (iii) competition from traditional
workers' compensation insurance carriers, (iv) the Company's ability to retain
its existing customers at favorable beneficial premium rates when their policies
renew and (v) changes in workers' compensation regulation by states, including
changes in mandated benefits or insurance company regulation.
13
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
None
ITEM 2. CHANGES IN SECURITIES
- -------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- -----------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
- ---------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Listing of Exhibits
-------------------
Exhibit 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME PER
COMMON AND COMMON SHARE EQUIVALENT
Exhibit 27 - FINANCIAL STATEMENT SCHEDULE
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RTW, INC.
Dated: November 11, 1996 By /s/ David C. Prosser
--------------------------------------
David C. Prosser
Chairman, President, Chief Executive
Officer and Director
(Principal Executive Officer)
Dated: November 11, 1996 By /s/ Alfred L. LaTendresse
--------------------------------------
Alfred L. LaTendresse
Secretary, Treasurer and Chief Financial
Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ---------- ----------------------------------------------------------- ------
11 Statement Regarding Computation of Net Income Per Common
and Common Share Equivalent 17
27 Financial Statement Schedule 18
16
<PAGE>
EXHIBIT 11
RTW, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF NET INCOME PER COMMON AND COMMON SHARE
EQUIVALENT
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS
----------------------------------------- ENDED
MAR-96 JUN-96 SEP-96 SEP-96
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, UNADJUSTED 11,725,149 11,763,624 11,806,909 11,765,227
STOCK WARRANTS 12,959 4,340 - 5,766
STOCK OPTIONS
Options at $25.00 - - 227 76
Options at $19.33 1,768 11,776 13,952 9,165
Options at $16.67 968 1,908 2,156 1,677
Options at $12.50 2,913 3,920 4,186 3,673
Options at $ 8.67 41,509 47,574 48,741 45,941
Options at $ 2.67 68,473 70,729 71,325 70,176
Options at $ 2.00 372,130 368,207 344,113 361,483
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING 12,225,869 12,272,078 12,291,609 12,263,184
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME ($000'S) $2,283 $2,481 $2,582 $7,346
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON AND COMMON
SHARE EQUIVALENT $0.19 $0.20 $0.21 $0.60
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 30,247
<DEBT-CARRYING-VALUE> 54,519
<DEBT-MARKET-VALUE> 54,464
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 84,766
<CASH> 13,928
<RECOVER-REINSURE> 6,795
<DEFERRED-ACQUISITION> 1,690
<TOTAL-ASSETS> 120,790
<POLICY-LOSSES> 45,178
<UNEARNED-PREMIUMS> 14,050
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,049
0
0
<COMMON> 28,609
<OTHER-SE> 20,927
<TOTAL-LIABILITY-AND-EQUITY> 120,790
46,022
<INVESTMENT-INCOME> 4,131
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 26,625
<UNDERWRITING-AMORTIZATION> 5,190
<UNDERWRITING-OTHER> 5,767
<INCOME-PRETAX> 11,750
<INCOME-TAX> 4,404
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,346
<EPS-PRIMARY> .60
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
