<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 JUNE 30, 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 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 11, 1997, 11,841,023 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 - June 30, 1997 and December 31, 1996 4
Consolidated Statements of Income - Three and six month periods
ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows - Six months ended
June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
3
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Held-to-maturity, at amortized cost, fair value of $54,107 and $54,396 $ 53,893 $ 53,977
Available-for-sale, at fair value, amortized cost of $44,592 and $35,854 44,650 35,872
------------ ------------
Total investments 98,543 89,849
Cash and cash equivalents 10,469 10,410
Accrued investment income 1,810 1,724
Premiums receivable, less allowance of $130 and $105 7,004 4,476
Reinsurance receivable 5,710 6,183
Reinsurance premiums receivable, net 2,803 2,555
Deferred policy acquisition costs 1,782 1,624
Furniture and equipment, net 4,212 3,423
Other assets 4,497 3,487
------------ ------------
$ 136,830 $ 123,731
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid claim and claim settlement expenses $ 55,062 $ 49,256
Unearned premiums 16,037 13,308
Accrued expenses and other liabilities 4,415 3,117
Notes payable 6,807 6,739
------------ ------------
Total liabilities 82,321 72,420
Shareholders' equity:
Common Stock, no par value; authorized 25,000,000 shares; issued
and outstanding 11,841,023 shares at June 30, 1997 and
11,807,576 shares at December 31, 1996 28,976 28,610
Retained earnings 25,496 22,690
Unrealized appreciation on securities available-for-sale 37 11
------------ ------------
Total shareholders' equity 54,509 51,311
------------ ------------
$ 136,830 $ 123,731
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
(Unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $ 19,652 15,344 $ 38,855 $ 29,108
Investment income 1,610 1,378 3,177 2,666
------------ ------------ ------------ ------------
Total revenues 21,262 16,722 42,032 31,774
EXPENSES:
Claim and claim settlement expenses 12,886 8,653 25,866 16,511
Policy acquisition costs 2,992 1,727 5,606 3,147
General and administrative expenses 2,872 2,108 5,720 3,952
------------ ------------ ------------ ------------
Total expenses 18,750 12,488 37,192 23,610
------------ ------------ ------------ ------------
Income from operations 2,512 4,234 4,840 8,164
Interest expense 196 274 392 548
------------ ------------ ------------ ------------
Income before income taxes 2,316 3,960 4,448 7,616
Provision for income taxes 850 1,479 1,642 2,852
------------ ------------ ------------ ------------
Net income $ 1,466 $ 2,481 $ 2,806 $ 4,764
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common and
common share equivalent $ 0.12 $ 0.20 $ 0.23 $ 0.39
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income to net cash provided by operating activities:
Net income $ 2,806 $ 4,764
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 496 349
Deferred income taxes (680) (615)
Changes in assets and liabilities:
Amounts due from reinsurers 225 1,038
Unpaid claim and claim settlement expenses 5,806 5,199
Unearned premiums, net of premiums receivable 201 2,931
Other, net 919 (1,096)
------------ ------------
Net cash provided by operating activities 9,773 12,570
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of held-to-maturity securities - 1,500
Purchases of available-for-sale securities (23,247) (14,772)
Sales of available-for-sale securities 14,480 -
Purchases of furniture and equipment (1,217) (763)
------------ ------------
Net cash used in investing activities (9,984) (14,035)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options and warrants exercised 1 75
Issuance of Common Stock under ESPP 154 129
Issuance of Common Stock to ESOP 115 236
------------ ------------
Net cash provided by financing activities 270 440
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59 (1,025)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,410 12,962
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,469 $ 11,937
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 339 $ 471
------------ ------------
------------ ------------
Income taxes $ 1,861 $ 3,533
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
RTW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 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 month period ended March 31,
1997 has been reclassified to conform to the three month presentation at
June 30, 1997.
NOTE B - SHAREHOLDERS' EQUITY
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.
SHAREHOLDER PREFERRED STOCK PURCHASE RIGHTS IN THE EVENT OF A CHANGE OF
CONTROL - In April 1997, the Company adopted a shareholder rights plan and
declared a dividend of one right for each outstanding share of common stock
to shareholders of record at the close of business on June 30, 1997. The
rights become exercisable only after any person or group (the "Acquiring
Person") becomes the beneficial owner of 15% or more of the voting power of
the Company. Certain shares held by the Company's Chairman, President and
Chief Executive Officer and his wife are excluded from the computation for
determining whether a person is an Acquiring Person. Each right entitles its
registered holder to purchase from the Company one one-hundredth share of a
new Series A Junior Participating Preferred Stock, no par value, at a price
of $85 per one one-hundredth share, subject to adjustment. If any Acquiring
Person acquires beneficial ownership of 15% or more of the voting power of
the Company, each right will entitle its holder (other than such Acquiring
Person) to purchase, at the then current purchase price of the right, that
number of shares of the Company's common stock having a market value of two
times the purchase price of the right, subject to certain possible
adjustments. In addition, if the Company is acquired in a merger or other
business combination transaction, each right will entitle its holder to
purchase, at the then current purchase price of the right, that number of
common shares of the acquiring company having a market value of two times the
purchase price of the right. Following the acquisition of a beneficial
ownership of 15% or more of the Company's outstanding common stock by any
Acquiring Person and prior to an acquisition by any Acquiring Person of 50%
or more of the Company's outstanding common stock, the Board of Directors may
exchange the outstanding rights (other than rights owned by such Acquiring
Person), in whole or in part, at an exchange ratio of one share of common
stock, or one one-hundredth share of Preferred Stock (or equivalent
securities) per right, subject to adjustment. The Company may redeem the
rights, in whole, at $.001 per right, at any time prior to an acquisition by
any Acquiring Person of 15% or more of the Company's outstanding common stock
and prior to the expiration of the rights. The rights expire on April 17,
2007, unless extended or earlier redeemed by the Company.
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 June 30, 1997
and December 31, 1996 and the three and six month periods ended June 30, 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, net of realized gains and losses.
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 and six
month periods ended June 30, 1997 and 1996 and premiums in force at June 30,
1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Gross premiums earned 19,814 15,242 $ 39,122 $ 29,282
Premiums ceded (162) 102 (267) (174)
------------ ------------ ------------ ------------
Premiums earned 19,652 15,344 38,855 29,108
Investment income 1,610 1,378 3,177 2,666
------------ ------------ ------------ ------------
Total revenues $ 21,262 $ 16,722 $ 42,032 $ 31,774
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
1997 1996
------------ ------------
(In thousands)
Premiums in force at June 30:
Minnesota $ 47,600 $ 51,100
Colorado 12,700 9,600
Missouri 9,200 1,500
Michigan 2,100 -
Illinois 500 -
Massachusetts 600 -
------------ ------------
Total in force at June 30: $ 72,700 $ 62,200
------------ ------------
------------ ------------
</TABLE>
PREMIUMS EARNED. Gross premiums earned increased 30.0% to $19.8 million
in the second quarter of 1997 from $15.2 million in the second quarter of 1996
and 33.6% to $39.1 million for the six months ended June 30, 1997 from $29.3
million for the six months ended June 30, 1996. The increase in gross premiums
earned resulted from an increase in the amount of premiums in force, due
primarily to increased policies in force 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 reflect "excess of loss" reinsurance policies purchased by the
Company. Premiums ceded increased to a cost of $162,000 in the second quarter
of 1997 from a benefit of $102,000 in the second quarter of 1996 and
increased to a cost of $267,000 for the six months ended June 30, 1997 from a
cost of $174,000 for the six months ended June 30, 1996. The increase in
premiums ceded to reinsurers resulted primarily from the recognition of a
benefit of $251,000 in the second quarter of 1996 due to an overestimate of
ceded premiums at December 31, 1995 and increased non-Minnesota business in
1997 from 1996 which is reinsured under a separate excess of loss policy. A
similar benefit was not recognized in the second quarter of 1997; however
1997 premiums ceded decreased from 1996 levels (after adjusting for the
benefit recognized) due to (i) reduced rates charged for excess of loss
reinsurance under the Minnesota Workers' Compensation Reinsurance Association
(the "WCRA") in 1997 from rates charged in the first six months of 1996, and
(ii) reduced rates negotiated for excess of loss reinsurance in non-Minnesota
locations beginning January 1, 1997 from rates on similar policies in 1996.
Minnesota's retention level for 1997 is $1.1 million while Colorado,
Missouri, Michigan, Illinois and Massachusetts retention levels are $500,000
in 1997.
Premiums earned increased 28.1% to $19.7 million in the second quarter of 1997
from $15.3 million in the second quarter of 1996 and increased 33.5% to $38.9
million for the six months ended June 30, 1997 from $29.1 million for the six
months ended June 30, 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. Premiums ceded as a percent of
gross premiums earned are expected to increase slightly from the second quarter
of 1997 as the non-Minnesota operations continue their growth relative to
Minnesota.
INVESTMENT INCOME. Investment income increased to $1.6 million in the second
quarter of 1997 from $1.4 million in the second quarter of 1996 and increased to
$3.2 million for the six months ended June 30, 1997 from $2.7 million for the
six months ended June 30, 1996 due to increased funds available for investment.
Funds invested increased to $98.5 million at June 30, 1997 from $81.3 million at
June 30, 1996 due to net cash provided by operating activities since June 30,
1996. Investment yields were 6.2% for the quarters ended June 30, 1997 and
1996. Historically, the Company invested only in U.S. Treasury and Agency
Securities. In the first quarter of 1997, the Company expanded its investment
strategy to include other fixed income securities such as mortgage-backed and
corporate debt securities which meet certain criteria. The Company entered into
an agreement with an investment manager during April 1997 to provide expertise
in this investment diversification. The investment yield realized in the future
will be affected by yields attained on new investments and yield changes on
maturing investments and available-for sale investments sold as the portfolio is
repositioned. The Company expects that the investment yield for the remainder
of 1997 will be consistent with the yield attained during the first six months
of 1997.
CLAIM AND CLAIM SETTLEMENT EXPENSES. Claim and claim settlement expenses
increased 48.9% to $12.9 million in the second quarter of 1997 from $8.7 million
in the second quarter of 1996 and 56.7% to $25.9 million for the six month ended
June 30, 1997 from $16.5 million for the six months ended June 30, 1996. As a
percentage of premiums earned, claim and claim settlement expenses increased to
65.6% for the second quarter of 1997 from
9
<PAGE>
56.4% for the second quarter of 1996 and increased to 66.6% for the six
months ended June 30, 1997 from 56.7% for the six months ended June 30, 1996.
The net increase is due to the following:
- Premiums earned increased in the second quarter of 1997 from the
second quarter of 1996 resulting in a corresponding increase claim and
claim settlement expenses.
- Average claim cost continued to decrease slightly in the second
quarter of 1997 from the second 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.
- In the second quarter of 1997, the Company reduced its estimate of
pre-1997 unpaid claim and claim settlement expenses, which resulted in
an $850,000 reduction in second quarter 1997 claim and claim
settlement expenses. Combined with the first quarter reduction of
$675,000, the cumulative reduction totaled approximately $1.5 million
for the six months ended June 30, 1997. Comparatively, the Company
recorded a second quarter reduction of $650,000 in 1996 and
approximately $1.1 million for the six months ended June 30, 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 and six month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Commission expense $ 1,599 $ 1,056 $ 3,129 $ 1,942
Premium tax expense 405 311 805 609
Other policy acquisition costs 988 410 1,672 871
------------ ------------ ------------ ------------
Direct policy acquisition costs 2,992 1,777 5,606 3,422
Ceding commissions
Favorable claims experience
adjustments for 1992 to 1994 - (50) - (275)
------------ ------------ ------------ ------------
Policy acquisition costs $ 2,992 $ 1,727 $ 5,606 $ 3,147
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Policy acquisition costs increased to $3.0 million in the second quarter of 1997
from $1.7 million in the second quarter of 1996 and increased to $5.6 million
for the six months ended June 30, 1997 from $3.1 million for the six months
ended June 30, 1996 for the following reasons:
- Commission expense increased to 8.1% of gross premiums earned in the
second quarter of 1997 from 6.9% in the second quarter of 1996 and
increased to 8.0% of gross premiums earned for the six months ended
June 30, 1997 from 6.6% for the six months ended June 30, 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 Massachusetts in the second quarter of 1997, 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 second quarter
of 1997 or increase slightly for the balance of the year.
- Premium tax expense remained at 2.0% of gross premiums earned in the
second quarters of 1997 and 1996 and 2.1% for the six month periods
ending June 30, 1997 and 1996. The Company expects premium tax
10
<PAGE>
expense as a percent of gross premiums earned to remain consistent
with the results attained during the six month period ended June 30,
1997 for the remainder of 1997.
- Other policy acquisition costs increased to 5.0% of gross premiums
earned in the second quarter of 1997 from 3.1% in the second quarter
of 1996 and increased to 4.3% of gross premiums earned for the six
months ended June 30, 1997 from 3.0% for the six months ended June 30,
1996 due to increased personnel costs necessary for the growth in
premiums in force and increased focus on marketing programs as the
Company expands into new states and continues to grow in its more
established markets.
- The Company recognized no accident year 1994, 1993 or 1992 reserve
development in the second quarter of 1997 or for the six months ended
June 30, 1997, resulting in the recognition of no ceding commissions
compared to a benefit of $50,000 recognized in the second quarter of
1996 and a benefit of $275,000 recognized for the six months ended
June 30, 1996. As claims are settled for 1994, 1993 and 1992, the
Company records 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.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative
expenses increased to $2.9 million in the second quarter of 1997 from $2.1
million in the second quarter of 1996 and increased to $5.7 million for the six
months ended June 30, 1997 from $4.0 million for the six months ended June 30,
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 second quarter
of 1997 from $274,000 in the second quarter of 1996 and decreased to $392,000
for the six months ended June 30, 1997 from $548,000 for the six months ended
June 30, 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 June 30, 1997 from $9.0 million at June 30,
1996 as a result of the payments. Interest expense is expected to remain
consistent with the results attained during the six months ended June 30, 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, mortgage
backed securities and corporate debt 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 asset 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
11
<PAGE>
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 six months ended June 30, 1997 was
$9.8 million primarily as a result of the Company's net income of $2.8 million,
an increase of $5.8 million in unpaid claim and claim settlement expenses which
are non-cash accruals for future claims, and an increase of $201,000 in unearned
premiums, net of premiums receivable. Net cash used in investing activities
was $10.0 million due to $23.2 million in purchases of available-for-sale
securities and $1.2 million in purchases of furniture and equipment offset by
$14.5 million in proceeds from sales of available-for-sale securities. Net cash
provided by financing activities was $270,000 primarily the result of issuance
of Common Stock to the Company's ESOP and ESPP plans.
The Company's investments increased to $98.5 million at June 30, 1997 from
$89.8 million at December 31, 1996 due to net purchases of available-for-sale
investments, changes in market values of the available-for-sale investments
net of amortization of premiums on the held-to-maturity investments. Of
the Company's investments at June 30, 1997, $53.9 million were classified as
held-to-maturity and valued at amortized cost, while $44.7 million were
classified as available-for-sale and valued at fair value.
Historically, changes in market interest rates have caused fluctuations in the
fair value of securities. Beginning July 1995, 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.
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 and ACIC to expand their operations.
The Company believes that cash flow generated by its operations and its cash
and investment balances will be sufficient to fund continuing operations,
debt service on its outstanding Senior Notes, including principal repayments
of $2.0 million due in December 1997, 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.
12
<PAGE>
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, Illinois and Kansas.
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.
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 second quarter of 1997 are not
materially different from those computed under APB Opinion No. 15.
FORWARD LOOKING STATEMENTS
Information included in this Form 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
(b) Listing of Reports on Form 8-K
------------------------------
The Company filed a Report on Form 8-K dated April 17, 1997
to report the adoption of a shareholder rights plan.
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 11, 1997 By /s/ David C. Prosser
--------------------------------------------
David C. Prosser
Chairman, President, Chief Executive Officer
and Director
(Principal Executive Officer)
Dated: August 11, 1997 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 SIX MONTHS
---------------------------------- ENDED
MAR-97 JUN-97 JUN-97
-------------- -------------- --------------
<S> <C> <C> <C>
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, UNADJUSTED 11,811,832 11,837,048 11,824,440
STOCK OPTIONS
Options at $19.33 - - -
Options at $16.67 - - -
Options at $12.50 - - -
Options at $10.88 3,678 - 1,839
Options at $ 8.67 18,628 1,188 9,908
Options at $ 2.67 60,989 54,932 57,960
Options at $ 2.00 302,020 281,055 291,538
-------------- -------------- --------------
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING 12,197,147 12,174,223 12,185,685
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME ($000'S) $1,340 $1,466 $2,806
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME PER COMMON AND COMMON
SHARE EQUIVALENT $0.11 $0.12 $0.23
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 44,650
<DEBT-CARRYING-VALUE> 53,893
<DEBT-MARKET-VALUE> 54,107
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 98,543
<CASH> 10,469
<RECOVER-REINSURE> 5,710
<DEFERRED-ACQUISITION> 1,782
<TOTAL-ASSETS> 136,830
<POLICY-LOSSES> 55,062
<UNEARNED-PREMIUMS> 16,037
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 6,807
0
0
<COMMON> 28,976
<OTHER-SE> 25,533
<TOTAL-LIABILITY-AND-EQUITY> 136,830
38,855
<INVESTMENT-INCOME> 3,177
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 25,866
<UNDERWRITING-AMORTIZATION> 5,606
<UNDERWRITING-OTHER> 5,720
<INCOME-PRETAX> 4,448
<INCOME-TAX> 1,642
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,806
<EPS-PRIMARY> 0.23
<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>
