<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 PERIOD ENDED MARCH 31, 1997
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 April 16, 1997, 11,820,931 shares of Common Stock were outstanding.
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
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
- ---------------------------
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 - March 31, 1997 and December 31, 1996 4
Consolidated Statements of Income - Three months ended March 31, 1997
and 1996 5
Consolidated Statements of Cash Flows - Three months ended March 31,
1997 and 1996 6
Notes to Consolidated Financial Statements 7
-3-
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31,1996
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Held-to-maturity, at amortized cost,
fair value of $53,607 and $54,396 $ 53,936 $ 53,977
Available-for-sale, at fair value,
amortized cost of $35,831 and $35,854 35,306 35,872
--------- ----------
Total investments 89,242 89,849
Cash and cash equivalents 15,847 10,410
Accrued investment income 1,081 1,724
Premiums receivable, less allowance of $120 and $105 6,388 4,476
Reinsurance receivable 5,856 6,183
Reinsurance premiums receivable, net 3,087 2,555
Deferred policy acquisition costs 1,856 1,624
Furniture and equipment, net 3,693 3,423
Other assets 4,230 3,487
---------- ----------
$ 131,280 $ 123,731
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid claim and claim settlement expenses $ 51,840 $ 49,256
Unearned premiums 15,903 13,308
Accrued expenses and other liabilities 4,243 3,117
Notes payable 6,773 6,739
--------- ----------
Total liabilities 78,759 72,420
Shareholders' equity:
Common Stock, no par value; authorized
25,000,000 shares; issued and outstanding
11,820,931 shares at March 31, 1997 and
11,807,576 shares at December 31, 1996 28,822 28,610
Retained earnings 24,030 22,690
Unrealized appreciation (depreciation) on
securities available-for-sale (331) 11
--------- ----------
Total shareholders' equity 52,521 51,311
--------- ----------
$ 131,280 $ 123,731
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited; in thousands, except per share data)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1996
----------- --------
REVENUES:
Premiums earned $ 19,203 $13,764
Investment income 1,567 1,288
----------- --------
Total revenues 20,770 15,052
EXPENSES:
Claim and claim settlement expenses 12,742 7,858
Policy acquisition costs 2,614 1,420
General and administrative expenses 3,086 1,844
----------- --------
Total expenses 18,442 11,122
----------- --------
Income from operations 2,328 3,930
Interest expense 196 274
----------- --------
Income before income taxes 2,132 3,656
Provision for income taxes 792 1,373
----------- --------
Net income $ 1,340 $ 2,283
----------- --------
----------- --------
Net income per common and
common share equivalent $ 0.11 $ 0.19
----------- --------
----------- --------
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION> FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income to net cash provided by operating activities:
Net income $ 1,340 $ 2,283
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 238 170
Deferred income taxes (772) (503)
Changes in assets and liabilities:
Amounts due from reinsurers (205) 727
Unpaid claim and claim settlement expenses 2,584 2,349
Unearned premiums, net of premiums receivable 683 1,154
Other, net 1,927 645
---------- -------
Net cash provided by operating activities 5,795 6,825
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of held-to-maturity securities - 1,000
Purchases of available-for-sale securities - (9,825)
Purchases of furniture and equipment (474) (250)
---------- -------
Net cash used in investing activities (474) (9,075)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options and warrants exercised 1 12
Issuance of Common Stock to ESOP 115 236
---------- -------
Net cash provided by financing activities 116 248
---------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,437 (2,002)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,410 12,962
---------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,847 $ 10,960
---------- -------
---------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 177 $ 236
---------- -------
---------- -------
Income taxes $ 61 $ 363
---------- -------
---------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
RTW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(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 1996 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 consolidated financial information
included herein, other than the consolidated balance sheet at December 31, 1996,
has been prepared by management without audit by independent certified public
accountants. The consolidated balance sheet at December 31, 1996 has been
derived from the audited consolidated financial statements for the year ended
December 31, 1996, 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 consolidated financial
statements and notes thereto contained in the RTW, Inc. Annual Report to
Shareholders for the year ended December 31, 1996.
The consolidated financial statements for the three months ended March 31, 1996
have been reclassified to conform to the presentation at March 31, 1997. 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, distributed on May 17, 1996,
to shareholders of record on the close of business on May 6, 1996. All share
and per share information has been restated to reflect the stock split.
-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 March 31, 1997
and December 31, 1996 and the three months ended March 31, 1997 and 1996.
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
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 tables summarize the components of revenues for the three months
ended March 31, 1997 and 1996 and premiums in force at March 31, 1997 and 1996:
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
---------- ----------
(In thousands)
Gross premiums earned $ 19,308 $ 14,040
Premiums ceded, excess of loss reinsurance (105) (276)
--------- ----------
Premiums earned 19,203 13,764
Investment income 1,567 1,288
--------- ----------
Total revenues $ 20,770 $ 15,052
--------- ----------
--------- ----------
1997 1996
--------- ----------
(In thousands)
Premiums in force at March 31:
Minnesota $ 51,200 $ 46,800
Colorado 12,500 8,700
Missouri 7,300 600
Michigan 1,400 -
Illinois 200 -
---------- ----------
Total in force at March 31: $ 72,600 $ 56,100
---------- ----------
---------- ----------
PREMIUMS EARNED. Gross premiums earned increased 37.5% to $19.3 million in
the first quarter of 1997 from $14.0 million in the first quarter of 1996. The
increase in gross premiums earned resulted from an increase in the amount of
premiums in force, primarily as a result of an increased number of policies
resulting from the Company's continued growth in its existing markets and
expansion into new markets.
-8-
<PAGE>
The following factors, however, have resulted in premium reductions on renewal
accounts and reduced premiums on new accounts.
- Legislative action has reduced estimated loss costs, ultimately reducing
premiums charged for workers' compensation insurance.
- 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 repositioned its marketing efforts in the fourth quarter of
1996 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 and, in some
cases, increases competition for the customers' business.
The impact of legislative changes in estimated loss costs, increased competition
in credit modifier customers and decreasing customer loss experience may
continue to result in lower premiums generated on new and renewal policies
through the remainder of 1997.
Premiums ceded to reinsurers decreased 62.0% to $105,000 in the first quarter of
1997 from $276,000 in the first quarter of 1996. The decrease in premiums ceded
to reinsurers resulted from (i) reduced rates charged for excess of loss
reinsurance under the Minnesota Workers' Compensation Reinsurance Association
(the "WCRA") from rates charged in the first quarter of 1996, and (ii) reduced
rates negotiated for excess of loss reinsurance in non-Minnesota locations
beginning January 1, 1997. Minnesota's retention level for 1997 under the WCRA
is $1.1 million and Colorado, Missouri, Michigan, Illinois and Massachusetts (as
it begins operations) retention levels remain at $500,000 1997 under various
reinsurers.
Premiums earned increased 39.5% to $19.2 million in the first quarter of 1997
from $13.8 million in the first quarter of 1996 as a result of these changes.
The Company expects continued growth in gross premiums earned for the remainder
of 1997 as it grows in its existing states and expands into new states.
Premiums ceded as a percent of gross premiums earned are expected to remain
consistent with the first quarter of 1997.
INVESTMENT INCOME. Investment income increased to $1.6 million in the first
quarter of 1997 from $1.3 million in the first quarter of 1996 due to increased
funds available for investment and increased yields on new amounts invested.
Funds invested increased to $89.2 million at March 31, 1997 from $77.0 million
at March 31, 1996 due to increased net cash provided by operating activities
since March 31, 1996. Investment yields increased to 6.2% for the quarter ended
March 31, 1997 from 6.1% for the quarter ended March 31, 1996 due to higher
interest rates on U.S. Treasury securities purchased during the remainder of
1996 from rates on U.S. Treasury Securities purchased in prior years. The
Company entered into an agreement with an investment manager during April 1997.
The investment yield realized in the future 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 1997 will be consistent
with the yield attained during the first three months of 1997.
CLAIM AND CLAIM SETTLEMENT EXPENSES. Claim and claim settlement expenses
increased to $12.7 million in the first quarter of 1997 from $7.9 million in the
first quarter of 1996. As a percentage of premiums earned, claim and claim
settlement expenses increased to 66.4% for the first quarter of 1997 from 57.1%
for the first quarter of 1996. The net increase is due to the following:
- Premiums earned increased in the first quarter of 1997 from the first
quarter of 1996 resulting in a corresponding increase claim and claim
settlement expenses.
- Average claim cost continued to decrease slightly in the first quarter
of 1997 from the first quarter of 1996 due to efficiencies within the
Company and legislative changes in benefits to claimants. The
legislative changes have reduced estimated loss costs, ultimately
reducing premiums charged for workers' compensation insurance.
Average claim costs have not decreased as significantly as premiums
charged, however, resulting in increased claim and claim settlement
expenses as a percentage of premiums earned.
-9-
<PAGE>
- In the first quarter of 1997, the Company reduced its estimate of pre-
1997 unpaid claim and claim settlement expenses, which resulted in a
$675,000 reduction in first quarter 1997 claim and claim settlement
expenses. Comparatively, the company recorded a first quarter
reduction of $425,000 in 1996.
The Company believes that, in the current environment (reduced premiums due to
legislative changes in estimated costs of losses, increased competition in
credit modifier customers written from October 1995 through September 1996,
decreasing customer loss experience and decreasing average claim costs), it may
continue to experience upward pressure on claim and claim settlement expenses as
a percentage of premiums earned.
POLICY ACQUISITION COSTS. The following table summarizes policy acquisition
costs for the three months ending March 31, 1997 and 1996:
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- -------
(In thousands)
Commission expense $ 1,530 $ 886
Premium tax expense 400 298
Other policy acquisition costs 684 461
-------- -------
Direct policy acquisition costs 2,614 1,645
Ceding commissions
Favorable claims experience
adjustments for 1992 to 1994 - (225)
-------- -------
Policy acquisition costs $ 2,614 $ 1,420
-------- -------
-------- -------
Policy acquisition costs increased to $2.6 million in the first quarter of 1997
from $1.4 million in the first quarter of 1996 for the following reasons:
- Commission expense increased to 7.9% of gross premiums earned in the
first quarter of 1997 from 6.3% in the first quarter of 1996. The
Company initiated marketing programs in the first quarters of 1997 and
1996, including volume-based incentive programs and higher commissions
for new business, that increased commission rates to agents resulting
in increased average commissions and commission expense.
Additionally, as the Company entered new markets, principally Michigan
and Missouri in the first quarter of 1997 and Missouri and Colorado in
the first quarter of 1996, it introduced higher commission rates to
attract business from established agents. The Company expects
commission rates to remain consistent with results attained in the
first quarter of 1997 or increase slightly for the balance of the
year.
- Premium tax expense remained at 2.1% of gross premiums earned in the
first quarters of 1997 and 1996. The Company expects premium tax
expense as a percent of gross premiums earned to remain consistent
with the results attained during the three months ended March 31, 1997
for the remainder of 1997.
- Other policy acquisition costs increased to 3.5% of gross premiums
earned in the first quarter of 1997 from 3.3% in the first quarter of
1996 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
premiums in force.
- The Company recognized no accident year 1994, 1993 or 1992 reserve
development in the first quarter of 1997, resulting in the recognition
of no ceding commissions compared to a benefit of $225,000 recognized
in the first quarter of 1996. 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 accident years 1994, 1993 and 1992.
The Company believes that continued application of its claims
management technology to 1992 through 1994 open claims will provide
future favorable ceding commission adjustments. These adjustments
are expected to decrease significantly from the levels attained in
1996 due to the reduced number of open claims remaining for those
years.
-10-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative
expenses increased to $3.1 million in the first quarter of 1997 from $1.8
million in the first quarter of 1996. This increase reflects:
- additional personnel costs for new employees
- higher compensation for existing employees
- expenses incurred for growth in Minnesota, Colorado and Missouri
- expenses incurred for expansion into Michigan, Illinois and
Massachusetts, and
- increased fees for professional services incurred in connection with
increased levels of operations
The Company anticipates that general and administrative expenses will continue
to increase in cost as it continues to expand into new states and grows in its
existing states for the remainder of 1997.
INTEREST EXPENSE. Interest expense decreased to $196,000 in the first quarter
of 1997 from $274,000 in the first quarter of 1996 due to principal payments on
the Series 1991A, Series 1991B and Senior Notes totaling approximately $2.4
million in December 1996. Notes payable decreased to $6.8 million at March 31,
1997 from $8.9 million at March 31, 1996 as a result of the payments. Interest
expense is expected to remain consistent with the results attained during the
three months ended March 31, 1997 for the remainder 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. 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 currently consists of U.S. Treasury and Agency Securities. The
Company revised its investment policy during the first quarter of 1997 to
include fixed income securities, including corporate debt securities,
obligations of the U.S. Government and its agencies, tax exempt securities of
municipal and state governments, Government Agency mortgage-backed securities
and other assets backed securities, with credit ratings that meet or exceed a
BBB rating from Standard & Poor's. Cash and cash equivalents consist primarily
of U.S. Treasury or Agency Securities acquired under repurchase agreements with
original maturities of 90 days or less, with the remaining balances in cash and
a money market fund that invests in short-term government securities.
Cash provided by operating activities for the three months ended March 31, 1997
was $5.8 million primarily as a result of the Company's net income of $1.3
million, an increase of $2.6 million in unpaid claim and claim settlement
expenses which are non-cash accruals for future claims, and an increase of
$683,000 in unearned premiums, net of premiums receivable. Net cash used in
investing activities was $474,000 due to purchases of furniture and equipment.
Net cash provided by financing activities was $116,000 primarily the result of
issuance of Common Stock to the Company's ESOP.
The Company's investments decreased to $89.2 million at March 31, 1997 from
$89.8 million at December 31, 1996 due to changes in market values of the
available-for-sale investments and amortization of premiums on the held-to-
maturity investments. Of the Company's investments at March 31, 1997, $53.9
million were classified as held-to-maturity and valued at amortized cost, while
$35.3 million were classified as available-for-sale and valued at fair value.
The amortized cost and fair value of held-to-maturity and available-for-sale
securities at March 31, 1997 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 $ 1,006 $ 996 $ 7,525 $ 7,533 $ 8,531 $ 8,529
One year through five years 43,194 42,789 18,582 18,319 61,776 61,108
Five years through ten years 9,736 9,822 9,724 9,454 19,460 19,276
----------- ----------- ----------- ----------- ----------- --------
Total $ 53,936 $ 53,607 $ 35,831 $ 35,306 $ 89,767 $ 88,913
----------- ----------- ----------- ----------- ----------- --------
----------- ----------- ----------- ----------- ----------- --------
</TABLE>
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<PAGE>
Historically, changes in market interest rates have caused fluctuations in the
fair value of securities. During 1996 and through the first three months of
1997, the Company invested solely in available-for-sale securities. 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 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 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.
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 1997, without regulatory approval, is approximately
$4.0 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 $2.0 million due in December 1997, debt service on its outstanding
Senior Notes and capital expenditures for the next 12 months.
NAIC RISK-BASED CAPITAL STANDARDS
The National Association of Insurance Commissioners ("NAIC") has risk-based
capital standards to determine the capital requirements of a property and
casualty insurance carrier based upon the risks inherent in its operations.
Such 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. Based upon the risk-based capital standards,
the Company's insurance subsidiary's percent of total adjusted capital is 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,
Massachusetts Pennsylvania and Illinois.
The NAIC is in the process of codifying statutory accounting principles. The
ultimate completion date is expected in the first quarter of 1999 and impact of
this project on current statutory policies and practices is unknown.
-12-
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which is
effective for the Company for periods ending after December 15, 1997. SFAS No.
128 revises standards for computing and presenting earnings per share (EPS),
replaces the presentation of primary EPS with a presentation of basic EPS,
requires dual presentation of basic and diluted EPS on the face of the income
statement and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS No. 128 supersedes Opinion No. 15 and AICPA Accounting
Interpretations 1-102 of Opinion No. 15. The Company will continue to apply APB
Opinion No. 15 to compute EPS through the effective date. The income per share
amounts as computed under SFAS No. 128 for the first quarter of 1997 are not
materially different from those computed under APB 15.
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 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: May 9, 1997 By /s/ David C. Prosser
------------------------------------------------
David C. Prosser
Chairman, President, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: May 9, 1997 By /s/ Alfred L. LaTendresse
-------------------------------------------------
Alfred L. LaTendresse
Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
-15-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------------- ------------------------------------------------------------- -----
<S> <C> <C>
11 Statement Regarding Computation of Net Income Per Common
and Common Share Equivalent 17
27 Financial Statement Schedule 18
</TABLE>
-16-
<PAGE>
EXHIBIT 11
RTW, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF NET INCOME PER COMMON AND COMMON SHARE
EQUIVALENT
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
----------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, UNADJUSTED 11,811,832 11,725,149
STOCK WARRANTS - 12,959
STOCK OPTIONS
Options at $19.33 - 2,428
Options at $16.67 - 968
Options at $12.50 - 2.913
Options at $10.88 3,678 -
Options at $ 8.67 18,628 41,663
Options at $ 2.67 60,989 68,473
Options at $ 2.00 302,020 372,130
---------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING 12,197,147 12,226,683
---------- -----------
---------- -----------
NET INCOME ($000'S) $1,340 $2,283
---------- -----------
---------- -----------
NET INCOME PER COMMON AND COMMON
SHARE EQUIVALENT $0.11 $0.19
---------- -----------
---------- -----------
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 35,306
<DEBT-CARRYING-VALUE> 53,936
<DEBT-MARKET-VALUE> 53,607
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 89,242
<CASH> 15,847
<RECOVER-REINSURE> 5,856
<DEFERRED-ACQUISITION> 1,856
<TOTAL-ASSETS> 131,280
<POLICY-LOSSES> 51,840
<UNEARNED-PREMIUMS> 15,903
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 6,773
0
0
<COMMON> 28,822
<OTHER-SE> 23,699
<TOTAL-LIABILITY-AND-EQUITY> 131,280
19,203
<INVESTMENT-INCOME> 1,567
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 12,742
<UNDERWRITING-AMORTIZATION> 2,614
<UNDERWRITING-OTHER> 3,086
<INCOME-PRETAX> 2,132
<INCOME-TAX> 792
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,340
<EPS-PRIMARY> .11
<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>
