<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 JUNE 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
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RTW, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1440870
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 August 1, 1996, 11,807,201 shares of Common Stock were outstanding.
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION Page
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Item 1. Consolidated Financial Statements and Notes (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
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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
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ITEM 1: FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 4
Consolidated Statements of Income - Three and six month periods ended
June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows - Six months ended
June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
3
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RTW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31,1995
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Held-to-maturity, at amortized cost, fair value of $55,954 and $59,571 $ 56,064 $ 57,662
Available-for-sale, at fair value, amortized cost of $25,397 and $10,674 25,204 10,868
--------- ---------
Total investments 81,268 68,530
Cash and cash equivalents 11,937 12,962
Accrued investment income 1,654 1,376
Premiums receivable, less allowance of $100 and $73 4,876 2,903
Reinsurance receivable 7,274 8,312
Reinsurance premiums receivable, net 1,872 1,569
Deferred policy acquisition costs 1,467 858
Furniture and equipment, net 2,476 1,957
Other assets 3,689 2,657
--------- ---------
$ 116,513 $ 101,124
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid claim and claim settlement expenses $ 42,337 $ 37,138
Unearned premiums 14,510 9,606
Accrued expenses and other liabilities 4,273 4,051
Notes payable, including related party notes of $85 and $85 8,996 8,891
--------- ---------
Total liabilities 70,116 59,686
Shareholders' equity:
Common Stock, no par value; authorized 25,000,000 shares; issued
and outstanding 11,782,126 at June 30, 1996 and 11,709,199
shares at December 31, 1995 28,046 27,606
Retained earnings 18,472 13,708
Unrealized appreciation (depreciation) on securities available-for-sale (121) 124
--------- ---------
Total shareholders' equity 46,397 41,438
--------- --------
$ 116,513 $ 101,124
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $ 15,344 $ 11,847 $ 29,108 $ 22,155
Investment income 1,378 1,066 2,666 1,626
---------- ---------- ---------- ----------
Total revenues 16,722 12,913 31,774 23,781
EXPENSES:
Claim and claim settlement expenses 8,588 7,515 16,511 14,164
Policy acquisition costs 1,792 1,071 3,147 1,964
General and administrative expenses 2,108 1,473 3,952 2,715
---------- ---------- ---------- ----------
Total expenses 12,488 10,059 23,610 18,843
---------- ---------- ---------- ----------
Income from operations 4,234 2,854 8,164 4,938
Interest expense 274 323 548 646
---------- ---------- ---------- ----------
Income before income taxes 3,960 2,531 7,616 4,292
Provision for income taxes 1,479 939 2,852 1,583
---------- ---------- ---------- ----------
Net income $ 2,481 $ 1,592 $ 4,764 $ 2,709
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common and
common share equivalent $ 0.20 $ 0.14 $ 0.39 $ 0.27
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited, in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income to net cash provided by operating activities:
Net income $ 4,764 $ 2,709
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 349 288
Deferred income taxes (615) (773)
Changes in assets and liabilities:
Premiums receivable, net of unearned premiums 2,931 2,163
Amounts due from reinsurers 1,038 2,531
Unpaid claim and claim settlement expenses 5,199 6,428
Other, net (1,096) (1,031)
--------- ---------
Net cash provided by operating activities 12,570 12,315
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities - (24,946)
Maturities of held-to-maturity securities 1,500 -
Purchases of available-for-sale securities (14,772) (2,569)
Purchases of furniture and equipment (763) (857)
--------- ---------
Net cash used in investing activities (14,035) (28,372)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering - 29,900
Equity financing costs - (2,827)
Redemption of common stock - (2)
Stock options and warrants exercised 204 -
Sales of Common Stock to ESOP 236 -
--------- ---------
Net cash provided by financing activities 440 27,071
--------- ---------
NET DECREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,025) 11,014
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,962 3,083
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,937 $ 14,097
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 471 $ 558
--------- ---------
--------- ---------
Income taxes $ 3,533 $ 2,610
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
6
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RTW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 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 six month periods ended June 30, 1995
have been reclassified to conform to the presentation at June 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.
7
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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 June 30, 1996
and December 31, 1995 and the three and six month periods ended June 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 the 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 and income taxes.
RESULTS OF OPERATIONS
The following table summarizes the components of revenues for the three and six
month periods ended June 30, 1996 and 1995 and premiums in force at June 30,
1996 and 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Gross premiums earned $ 15,242 $ 12,272 $ 29,282 $ 22,925
Premiums ceded,
excess of loss reinsurance 102 (425) (174) (770)
---------- ---------- ---------- ----------
Premiums earned 15,344 11,847 29,108 22,155
Investment income 1,378 1,066 2,666 1,626
---------- ---------- ---------- ----------
Total revenues $ 16,722 $ 12,913 $ 31,774 $ 23,781
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1996 1995
---------- ----------
(In thousands)
Premiums in force at June 30:
Minnesota $ 51,100 $ 44,600
Colorado 9,600 1,300
Missouri 1,500 -
---------- ----------
Total in force at June 30: $ 62,200 $ 45,900
---------- ----------
---------- ----------
</TABLE>
PREMIUMS EARNED. Gross premiums earned increased 24.2% to $15.2 million in
the second quarter of 1996 from $12.3 million in the second quarter of 1995 and
27.7% to $29.3 million for the six months ended June 30, 1996 from $22.9 million
for the six months ended June 30, 1995. The increase in gross premiums resulted
from to an increase in the amount of premiums in force as the Company's
customer base grew to 2,341 customers at June 30, 1996 from 692 customers at
June 30, 1995. The Company's average annual premium decreased to approximately
$27,000 at June 30, 1996 from $66,000 at June 30, 1995 due to increased
association business with smaller average premiums written. As a result of
being successful in lowering customers loss experience (which reduces customer
experience modifiers) and increased competition in the marketplace that began in
late 1995, the Company is
8
<PAGE>
experiencing reduced premiums on renewal accounts. The impact of decreasing
customer loss experience will continue to result in reduced premiums generated
on renewal policies.
Premiums ceded to reinsurers decreased 124.0% to a benefit of $102,000 in the
second quarter of 1996 from cost of $425,000 in the second quarter of 1995 and
77.4% to expense of $174,000 for the six months ended June 30, 1996 from expense
of $770,000 for the six months ended June 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 due to increased
premiums earned, 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 29.5% to $15.3 million in the second quarter of 1996
from $11.8 million in the second quarter of 1995 and 31.4% to $29.1 million for
the six months ended June 30, 1996 from $22.2 million for the six months ended
June 30, 1995 as a result of these changes.
The Company expects continued growth in gross premiums earned in the second half
of 1996 and premiums ceded are expected to increase as a percentage of gross
premiums earned in the second half of 1996. The premium growth is expected to
be slightly slower than the first half 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 $1.4 million in the second
quarter of 1996 from $1.1 million in the second quarter of 1995 and increased to
$2.7 million for the six months ended June 30, 1996 from $1.6 million for the
six months ended June 30, 1995 due to increased funds available for investment
and increased yields on new amounts invested. Funds available for investment
increased to $81.3 million at June 30, 1996 from $60.6 million at June 30, 1995
due to increased net cash provided by operating activities. Investment yields
increased to 6.16% for the quarter ended June 30, 1996 from 6.00% for the
quarter ended June 30, 1995 and increased to 6.15% for the six months ended June
30, 1996 from 5.94% for the six months ended June 30, 1995 due to higher
interest rates on U.S. Treasury securities purchased during the remainder of
1995 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 second half of 1996 will be consistent
with the yield attained during the first six months of 1996.
CLAIM AND CLAIM SETTLEMENT EXPENSES. Claim and claim settlement expenses
increased approximately 14.3% to $8.6 million in the second quarter of 1996 from
$7.5 million in the second quarter of 1995 and 16.6% to $16.5 million for the
six months ended June 30, 1996 from $14.2 million for the six months ended June
30, 1995, due primarily to the increase in earned premiums. As a percentage of
premiums earned, claim and claim settlement expenses decreased to 56.0% for the
second quarter of 1996 from 63.4% for the second quarter of 1995 and decreased
to 56.7% for the six months ended June 30, 1996 from 63.9% for the six months
ended June 30, 1995. In the second quarter of 1996, the Company reduced its
estimate of pre-1995 unpaid claim and claim settlement expenses, which resulted
in a $650,000 reduction in second quarter 1996 claim and claim settlement
expenses. Combined with the first quarter reduction of $425,000, the cumulative
reduction totaled $1.1 million for the six months ended June 30, 1996. No
comparative reductions were recorded for the three and six month periods ended
June 30, 1995. The decrease in claim and claim settlement expense as a
percentage of premiums earned represents 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 prior years' open claims will
continue to benefit future periods.
9
<PAGE>
POLICY ACQUISITION COSTS. The following table summarizes policy acquisition
costs for the three and six month periods ending June 30, 1996 and 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Commission expense $ 1,056 $ 579 $ 1,942 $ 1,108
Premium tax expense 311 243 609 456
Other policy acquisition costs 475 265 871 431
---------- ---------- ---------- ----------
Direct policy acquisition costs 1,842 1,087 3,422 1,995
Ceding commissions
Favorable claims experience
adjustments for 1992 to 1994 (50) (16) (275) (31)
---------- ---------- ---------- ----------
Policy acquisition costs $ 1,792 $ 1,071 $ 3,147 $ 1,964
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Commission expense increased to 6.9% of gross premiums earned in the second
quarter of 1996 from 4.7% in the second quarter of 1995 and increased to 6.6% of
gross premiums earned for the six months ended June 30, 1996 from 4.8% for the
six months ended June 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
second quarter of 1996 or increase slightly for the balance of the year. Premium
tax expense was 2.0% of gross premiums earned in the second quarters of 1996 and
1995 and increased slightly to 2.1% of gross premiums earned for the six months
ended June 30, 1996 from 2.0% for the six months ended June 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 six months ended June 30, 1996 for the balance of
1996. Other policy acquisition costs increased to 3.1% of gross premiums earned
in the second quarter of 1996 from 2.2% in the second quarter of 1995 and
increased to 3.0% of gross premiums earned for the six months ended June 30,
1996 from 1.9% for the six months ended June 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 premium.
Ceding commissions increased to a benefit of $50,000 in the second quarter of
1996 from a benefit of $16,000 in the second quarter of 1995 and increased to a
benefit of $275,000 for the six months ended June 30, 1996 from a benefit of
$31,000 for the six months ended June 30, 1995 representing favorable
adjustments recognized by the Company as a result of continued favorable claims
experience for accident years 1993 and 1994. Future ceding commission changes
will be impacted by development of reserves for 1992 through 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative
expenses increased to $2.1 million in the second quarter of 1996 from $1.5
million in the second quarter of 1995 and increased to $4.0 million for the six
months ended June 30, 1996 from $2.7 million for the six months ended June 30,
1995. As a percentage of premiums earned, general and administrative expenses
increased to 13.7% for the second quarter of 1996 from 12.4% for the second
quarter of 1995 and increased to 13.6% for the six months ended June 30, 1996
from 12.3% for the six months ended June 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 1996.
INTEREST EXPENSE. Interest expense decreased to $274,000 in the second quarter
of 1996 from $323,000 in the second quarter of 1995 and to $548,000 for the six
months ended June 30, 1996 from $646,000 for the six months ended June 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 June 30, 1996 from $10.1 million at June 30, 1995 as a result
of the payments. Interest expense is expected to remain consistent with the
results attained during the six months ended June 30, 1996 for the balance of
the year.
10
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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 and 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 six months ended June 30, 1996 was
$12.6 million primarily as a result of the Company's net income of $4.8 million,
an increase of $5.2 million in unpaid claim and claim settlement expenses which
are non-cash accruals for future claims, an increase of $2.9 million in unearned
premiums, net of premiums receivable and a decrease in amounts due from
reinsurers of $1.0 million. Net cash used in investing activities was $14.0
million primarily as a result of purchases of $14.8 million of
available-for-sale securities and purchases of furniture and equipment of
$763,000 offset by maturities of held-to-maturity securities of $1.5 million.
Net cash provided by financing activities was $440,000 primarily the result of
sales of common stock to the Company's ESOP and the exercise of stock options
and warrants.
The Company's investments increased to $81.3 million at June 30, 1996 from $68.5
million at December 31, 1995 from cash provided by operating and financing
activities. Of the Company's investments at June 30, 1996, $56.1 million were
classified as held-to-maturity and valued at amortized cost, while $25.2 were
classified as available-for-sale and valued at fair value. All of the Company's
investment securities at June 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 June 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 $ 2,005 $ 2,006 $ 5,085 $ 5,114 $ 7,090 $ 7,120
One year through five years 44,353 44,029 15,459 15,334 59,812 59,363
Five years through ten years 9,706 9,919 4,853 4,756 14,559 14,675
--------- --------- --------- --------- --------- ---------
Total $ 56,064 $ 55,954 $ 25,397 $ 25,204 $ 81,461 $ 81,158
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
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 for ACIC
to begin operations, the Company raised capital and contributed it to ACIC. As
ACIC grew, additional capital was required to support the higher premium levels.
As a result, the Company raised approximately $27.0 million in April 1995
through an initial public offering and $9.2 million in January 1994 through the
issuance of Senior Notes and contributed $18.0 million in 1995 and $9.0 million
in 1994 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 reinsurance agreements
during 1992, 1993 and 1994 for that purpose.
11
<PAGE>
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 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
12
<PAGE>
employees and will disclose the required pro forma effect on net income and
income per share 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 termination 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) the Company's ability to
retain its existing customers when their policies renew, (iv) competition from
traditional workers' compensation insurance carriers 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
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: August 8, 1996 By /s/ David C. Prosser
------------------------------------------------
David C. Prosser
Chairman, President, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: August 8, 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
16
<PAGE>
EXHIBIT 11
RTW, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF NET INCOME PER COMMON AND COMMON SHARE
EQUIVALENT
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS
-------------------------- ENDED
MAR-96 JUN-96 JUN-96
----------- ----------- -----------
<S> <C> <C> <C>
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, UNADJUSTED 11,725,149 11,763,624 11,744,387
STOCK WARRANTS 12,959 4,340 8,650
STOCK OPTIONS
Options at $19.33 2,428 11,776 7,102
Options at $16.67 968 1,908 1,438
Options at $12.50 2,913 3,920 3,417
Options at $ 8.67 41,663 47,574 44,618
Options at $ 2.67 68,473 70,729 69,601
Options at $ 2.00 372,130 368,207 370,168
----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING 12,226,683 12,272,078 12,249,381
----------- ----------- -----------
----------- ----------- -----------
NET INCOME ($000'S) $2,283 $2,481 $4,764
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER COMMON AND COMMON
SHARE EQUIVALENT $0.19 $0.20 $0.39
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<CIK> 0000915781
<NAME> RTW, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 25,204
<DEBT-CARRYING-VALUE> 56,064
<DEBT-MARKET-VALUE> 55,954
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 81,268
<CASH> 11,937
<RECOVER-REINSURE> 7,274
<DEFERRED-ACQUISITION> 1,467
<TOTAL-ASSETS> 116,513
<POLICY-LOSSES> 42,337
<UNEARNED-PREMIUMS> 14,510
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 8,996
0
0
<COMMON> 28,046
<OTHER-SE> 18,351
<TOTAL-LIABILITY-AND-EQUITY> 116,513
29,108
<INVESTMENT-INCOME> 2,666
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 16,511
<UNDERWRITING-AMORTIZATION> 3,147
<UNDERWRITING-OTHER> 3,952
<INCOME-PRETAX> 7,616
<INCOME-TAX> 2,852
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,764
<EPS-PRIMARY> .39
<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>
