<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, 1998
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 April 30, 1998, 11,936,112 shares of Common Stock were outstanding.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
<C> <S> <C>
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. . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (UNAUDITED)
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
</TABLE>
3
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RTW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Available-for-sale, at fair value, amortized cost of $109,498 and $110,880 $ 111,202 $ 112,294
Cash and cash equivalents 13,362 5,798
Accrued investment income 1,357 1,836
Premiums receivable, less allowance of $266 and $182 6,762 5,763
Reinsurance recoverables 5,211 5,374
Reinsurance receivables 553 743
Deferred policy acquisition costs 1,816 1,559
Furniture and equipment, net 4,891 4,927
Other assets 4,376 3,692
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Total assets $ 149,530 $ 141,986
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid claim and claim settlement expenses $ 67,176 $ 61,069
Unearned premiums 16,729 13,580
Accrued expenses and other liabilities 2,985 4,105
Notes payable 4,896 4,875
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Total liabilities 91,786 83,629
Shareholders' equity:
Common Stock, no par value; authorized 25,000,000 shares; issued
and outstanding 11,907,973 shares at March 31, 1998 and
11,841,023 shares at December 31, 1997 29,264 28,976
Retained earnings 27,372 28,489
Unrealized gain on available-for-sale securities, net of tax 1,108 892
---------- ------------
Total shareholders' equity 57,744 58,357
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Total liabilities and shareholders' equity $ 149,530 $ 141,986
---------- ------------
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</TABLE>
See notes to consolidated financial statements.
4
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RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited; in thousands, except share and per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Premiums earned $ 22,544 $ 19,203
Investment income 2,040 1,567
---------- ----------
Total revenues 24,584 20,770
EXPENSES:
Claim and claim settlement expenses 19,273 12,980
Policy acquisition costs 3,280 2,614
General and administrative expenses 3,647 2,848
---------- ----------
Total expenses 26,200 18,442
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Income (loss) from operations (1,616) 2,328
Interest expense 139 196
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Income (loss) before income taxes (1,755) 2,132
Income tax expense (benefit) (638) 792
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Net income (loss) $ (1,117) $ 1,340
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Income (loss) per share:
Basic income (loss) per share $ (0.09) $ 0.11
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---------- ----------
Diluted income (loss) per share $ (0.09) $ 0.11
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Weighted average shares outstanding:
Basic shares outstanding 11,868,000 11,812,000
---------- ----------
---------- ----------
Diluted shares outstanding 11,868,000 12,097,000
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</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
RTW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited, in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income (loss) to net cash provided by operating activities:
Net income (loss) $ (1,117) $ 1,340
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 316 238
Deferred income taxes (842) (772)
Changes in assets and liabilities:
Amounts due from reinsurers 353 (205)
Unpaid claim and claim settlement expenses 6,107 2,584
Unearned premiums, net of premiums receivable 2,150 683
Other, net (788) 1,927
---------- ----------
Net cash provided by operating activities 6,179 5,795
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale securities 1,000 -
Proceeds from sales of available-for-sale securities 356 -
Purchases of furniture and equipment (259) (474)
---------- ----------
Net cash provided by (used in) investing activities 1,097 (474)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 258 1
Issuance of Common Stock to ESOP - 115
Proceeds from sale of Common Stock 30 -
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Net cash provided by financing activities 288 116
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,564 5,437
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,798 10,410
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,362 $ 15,847
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 117 $ 177
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---------- ----------
Income taxes $ 7 $ 61
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</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
RTW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(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 RTW, Inc. 1997 Annual Report to
Shareholders 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, 1997, has been prepared by us
without audit by independent certified public accountants. We derived the
consolidated balance sheet at December 31, 1997 from the audited consolidated
financial statements for the year ended December 31, 1997, but this report
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 our opinion,
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 1997 Annual Report.
NOTE B - RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income, and Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures About
Segments of an Enterprise and Related Information. SFAS 130 requires that
all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. The
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. Items contained in
other comprehensive income for us include unrealized gains and losses on
investments classified as available-for-sale. Our total comprehensive income
(loss) includes unrealized gains (losses) on all investments at March 31,
1998 due to reclassing held-to-maturity securities to available-for-sale in
December 1997 compared to including only unrealized gains (losses) on
available-for-sale securities at March 31, 1997. Total comprehensive income
(loss) was as follows (000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income (loss) $ (1,117) $ 1,340
Other comprehensive income (loss) 216 (342)
---------- ----------
Total comprehensive income (loss) $ (901) $ 998
---------- ----------
---------- ----------
</TABLE>
SFAS 131 requires certain disclosures about segments of an enterprise and has
no impact on our Consolidated Financial Statements.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
THE COMPANY - RTW, Inc. (RTW) and its wholly owned insurance subsidiary,
American Compensation Insurance Company (ACIC), provide disability management
services to employers. Collectively, "we," "our" and "us" will refer to
these entities in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We developed a proprietary management system, the RTW SOLUTION-Registered
Trademark-, designed to lower employers' workers' compensation costs and
return injured employees to work as soon as possible. We combine our
management system with insurance products underwritten by our insurance
subsidiary to offer services to customers. We currently provide workers'
compensation management services solely to employers insured through our
insurance subsidiary. We currently operate in Minnesota, Colorado, Missouri,
Illinois, Kansas, Michigan, Indiana, Massachusetts, Connecticut, Wisconsin,
Rhode Island and New Hampshire.
The following analysis of the consolidated results of operations and
financial condition of RTW and ACIC, should be read in conjunction our
consolidated financial statements and notes thereto at March 31, 1998 and
December 31, 1997 and the three months ended March 31, 1998 and 1997.
SUMMARY OPERATING RESULTS - The following table provides an overview of our
key operating results (000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
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<S> <C> <C>
Premiums in force at quarter-end $78,900 $72,600
Total revenues 24,584 20,770
Net income (loss) (1,117) 1,340
</TABLE>
Our premiums in force grew 8.7% from the first quarter of 1997 due
primarily to our focus on growth during 1997 and the first quarter of 1998.
Growth since the first quarter of 1997 stemmed primarily from our newer
markets including Missouri, Michigan and Massachusetts. The growth in these
newer markets was offset by a significant decrease in premiums in force in
Minnesota. Additionally, we recognized a $2.2 million refund received from
the Minnesota Workers' Compensation Reinsurance Association (WCRA) in the
first quarter of 1998. The focus on growth, combined with the refund
received from the WCRA and increased earnings on our investment portfolio,
resulted in first quarter revenues of $24.6 million in 1998, an 18.4% growth
over the same period for 1997. We recognized a $1.1 million loss in the
first quarter of 1998 compared to net income of $1.3 million in the first
quarter of 1997 due primarily to the following factors:
- We increased reserves for unpaid claim and claim settlement expenses
approximately $3.0 million in the first quarter of 1998 to reflect
adverse development of prior period claims. Additionally, our
average cost per claim increased in the first quarter from last year
due to medical inflation and an increase in the severity of claims
reported. Combined with pricing pressure, our loss ratio has
increased;
- Pricing pressure affected premiums in force and decreased profit
margins in all markets during the first quarter. The pricing pressure
is the result of (i) increased competition in our markets and (ii)
continued price declines due to legislative benefit changes;
- Operating costs affecting claim and claim settlement expenses, policy
acquisition costs and general and administrative expenses have
increased due to (i) opening the Michigan office in late 1996 and the
Massachusetts office in the second quarter of 1997, (ii) higher
compensation for existing employees, and (iii) increased fees for
professional services. Personnel costs and other operating expenses
increased significantly from the first quarter of 1997 and include a
charge against income for staff reductions and other restructuring
charges. Actions to reduce personnel costs have been initiated to
bring these expenses more in line with revenues. Other expenses are
also being managed aggressively and reduced where appropriate; and
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- Decreased effective income tax rates resulting from the decrease in
income.
While we expect to continue to operate in a difficult pricing
environment for the remainder of 1998, we will work on improving
profitability in all of our offices by aggressively managing expenses
and refining our sales and distribution channels.
TOTAL REVENUES: Our total revenues include premiums earned and
investment income.
PREMIUMS EARNED - Premiums on workers' compensation insurance policies are
our largest source of revenue. Premiums earned are the gross premiums
earned by us on in force workers' compensation policies, net of the effects
of ceded premiums under reinsurance agreements.
Reinsurance agreements allow us to share certain risks with other
insurance companies. The primary purpose of ceded reinsurance is to
protect us from potential losses in excess of the level we are willing to
accept. Our primary ceded reinsurance is excess of loss coverage that
limits our per incident exposure. We expect the companies to which we have
ceded reinsurance to honor their obligations. In the event that these
companies are unable to honor their obligations to us, we will be required
to pay these obligations ourselves. We are not aware of any developments
with respect to any of our reinsurers that would prevent them from honoring
any of their obligations to us.
INVESTMENT INCOME - Our investment income includes earnings on our
investment portfolio and realized capital gains and losses from sales of
investments.
TOTAL EXPENSES: Our expenses include claim and claim settlement expenses,
policy acquisition costs, general and administrative expenses, interest
expense and income taxes.
CLAIM AND CLAIM SETTLEMENT EXPENSES - Claim expenses refer to amounts that
we paid or expect to pay to claimants for events that have occurred. The
costs of investigating, resolving and processing these claims are referred
to as claim settlement expenses. We record these expenses, net of amounts
recoverable under reinsurance contracts, to claim and claim settlement
expenses in the Consolidated Statements of Operations.
POLICY ACQUISITION COSTS - Policy acquisition costs are costs directly
related to writing an insurance policy and consist of commissions, state
premium taxes, underwriting personnel costs and expenses, sales and
marketing costs and other underwriting expenses, offset by ceding
commissions received from our reinsurers. Ceding commissions are amounts
that reinsurers pay to us for placing reinsurance with them. Ceding
commissions represent adjustments based on actual claim and claim
settlement expenses related to premiums ceded in prior years. Under
reinsurance agreements, our ceding commission is adjusted to the extent
that actual claim and claim settlement expenses vary from levels specified
in the agreement.
GENERAL AND ADMINISTRATIVE EXPENSES - Our general and administrative
expenses include personnel costs, office rent, certain state administrative
assessments based on premiums and other costs and expenses not specific to
claim and claim settlement expenses or policy acquisition costs.
INTEREST EXPENSE - We incur interest charges on our Senior Notes. The
Senior Notes mature in series during the years 1995 through 1999.
INCOME TAXES - We incur federal income taxes on our combined service
organization (RTW) operations and insurance (ACIC) operations. We incur
state income taxes on the results of our service organization's operations
and incur premium taxes in lieu of state income taxes for substantially all
of our insurance operations. In certain instances, we may incur state
income taxes on our insurance operations. Additionally, certain provisions
of the Internal Revenue Code adversely affect our taxable income by
accelerating recognition and payment of income taxes. Adjustments to book
income generating current tax liabilities include limitations on the
deductibility of unpaid claim and claim settlement expenses, limitations on
the deductibility of unearned premium reserves and limitations on
deductions for bad debt reserves.
In the following pages, we take a look at the March 31, 1998 and
1997 results in these areas and also explain key balance sheet
accounts in greater detail.
9
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RESULTS OF OPERATIONS
The following tables summarize the components of revenues and premiums in force
(000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Gross premiums earned $21,333 $19,308
Premiums (ceded) recovered 1,211 (105)
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Premiums earned 22,544 19,203
Investment income 2,040 1,567
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Total revenues $24,584 $20,770
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<CAPTION>
1998 1997
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Premiums in force at quarter-end:
Minnesota $41,000 $51,200
Colorado 12,500 12,500
Missouri 14,000 7,300
Michigan 6,200 1,400
Illinois 1,600 200
Massachusetts 3,400 -
Wisconsin 200 -
---------- ----------
Total premiums in force $78,900 $72,600
---------- ----------
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</TABLE>
GROSS PREMIUMS EARNED: The premium we charge a policyholder is a function of
its payroll, industry and prior workers' compensation claims experience. In
underwriting a policy, we receive policyholder payroll estimates for the
ensuing year. We record premiums written on an installment basis matching
billing to the policyholder and earn premiums on a daily basis over the life
of each insurance policy based on the payroll estimate. We record the excess
of premiums billed over premiums earned for each policy as unearned premiums
on our balance sheet. When a policy expires, we audit employer payrolls for
the policy period and adjust the estimated payroll to its actual value. The
result is a "final audit" adjustment recorded to premiums earned when the
adjustment becomes known.
Our gross premiums earned increased 10.5% to $21.3 million for the first
quarter of 1998 from $19.3 million for the first quarter of 1997. This
increase resulted, in part, from the 8.7% increase in premiums in force to
$78.9 million at March 31, 1998, from $72.6 million at March 31, 1997.
Included in this 8.7% increase is a $10.2 million decrease in Minnesota
premiums in force. Additionally, gross premiums earned included $1.5 million
of final audit premiums recognized in the first quarter of 1998 compared to
$1.6 million recognized in the first quarter of 1997. Final audit premiums
recognized during the period include billed final audit premiums plus the
change in estimate for audit premiums on unexpired and expired unaudited
policies.
Underlying these increases in gross premiums earned is another trend. The
premium rate that we charge policyholders per payroll dollar has declined for
several years. This is the result, in part, of the following:
- Many state legislatures where we provide coverage have reduced
benefits that injured employees are paid, resulting in lower loss
costs of workers' compensation insurance and decreased corresponding
premiums to the policyholder;
- As the loss cost structure of workers' compensation has declined, more
insurance companies have entered or re-entered the workers'
compensation insurance market, resulting in increased competition; and
- We continue to experience reduced pricing on renewal policies due, in
part, to our success in lowering our policyholders' loss experience
which then improves their claims history, lowering the premium that
they have to pay for insurance. The improvement that we do for our
customers also has the effect of making them more desirable to our
competition, thus increasing price competition on these accounts.
PREMIUMS CEDED: We pay reinsurers, under excess of loss reinsurance
policies, to limit our per incident exposure and record this cost as a
reduction to gross premiums earned. We are required to purchase excess of
loss coverage for Minnesota policies from the Minnesota Workers' Compensation
Reinsurance Association (WCRA). Our
10
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selected retention levels in Minnesota are $280,000 in 1998 and approximately
$1.1 million in 1997. In other states, we have chosen to limit our per
incident exposure to $500,000 and purchased this coverage from various
reinsurers.
The following table summarizes the components of premiums ceded (000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
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<S> <C> <C>
Premiums (ceded to) recovered from:
WCRA $(786) $ -
Non-Minnesota excess of loss policies (250) (105)
Refund from the WCRA on prior years' activity 2,247 -
---------- ----------
Premiums (ceded) recovered $1,211 $(105)
---------- ----------
---------- ----------
</TABLE>
Premiums ceded to reinsurers was a benefit of $1.2 million for the three
months ended March 31, 1998 versus a cost of $105,000 for the three months ended
March 31, 1997. The decrease in premiums ceded resulted from the recognition of
a $2.2 million refund received from the WCRA in the first quarter of 1998. This
refund was offset by increased excess of loss premium rates in Minnesota in 1998
from 1997 and increased excess of loss premium cost resulting from reducing our
selected Minnesota excess of loss reinsurance coverage levels to $280,000 in
1998 from $1.1 million in 1997.
PREMIUMS EARNED OUTLOOK: The outlook for gross premiums earned and premiums
ceded for the remainder of 1998 includes the following factors:
- We expect continued growth in premiums in force in our non-Minnesota
markets which will lead to growth in gross premiums earned;
- We expect continued downward pressure on the amount we charge for our
products and services; and
- After adjusting for the effect of the $2.2 million refund received
from the WCRA, we expect that premiums ceded for the remainder of 1998
will remain consistent with the results attained in the first quarter
of 1998. Premiums ceded may decrease slightly in future quarters of
1998 as a percent of gross premiums earned as the non-Minnesota
markets, where we pay smaller premiums, continue to grow relative to
Minnesota. Premiums ceded (after adjusting for the WCRA refund) will
continue to run much higher in 1998 when compared to 1997 due to the
6.8% policy premium we are paying for increased excess of loss
coverage in Minnesota compared to the premium-free rate received in
1997.
INVESTMENT INCOME: We currently invest entirely in fixed maturity investments
and classify our investments as available-for-sale. We intend to hold our
available-for-sale investments to maturity, but may sell before maturity in
response to changes in interest rates, prepayment risk and funding sources or
terms, or to address liquidity needs. Our primary investment objective is to
maintain a diversified, high-quality, fixed-investment portfolio structured to
maximize our after-tax investment income without taking inappropriate credit
risk. For further discussion of investments, see the "Investments" section of
this Management's Discussion and Analysis.
Investment income increased 30.2% to $2.0 million in the first quarter of
1998 from $1.6 million in the first quarter of 1997, due to increased funds
available for investment and increased yields on amounts invested. Funds
available for investment increased to $111.2 million at March 31, 1998, from
$89.2 million at March 31, 1997, due to increased net cash provided by
operating activities, resulting primarily from (i) the difference in timing
between the receipt of premiums and the payment of claim and claim settlement
expenses and (ii) net cash provided by investment income. Investment yields
increased to 6.4% for the three months ended March 31, 1998 from 6.2% for the
three months ended March 31, 1997 due to portfolio diversification during
1997. The investment yield realized in future periods will be affected by
yields attained on new investments.
INVESTMENT INCOME OUTLOOK: In December 1997, we reclassified our entire
held-to-maturity portfolio, invested in U.S. government securities to
available-for-sale investments. We reclassified these securities to enable us
to more actively manage our investment yield and overall portfolio risk. The
held-to-maturity portfolio had a net unrealized gain of approximately
$900,000 at December 31, 1997, while the total portfolio net unrealized gain
at March 31, 1998, was $1.7 million. Barring significant changes in interest
rates or operational cash flows, we expect that our after-tax yield from our
investment portfolio for the remainder of 1998 will be affected by the
following:
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- Our investment portfolio will increase as funds become available for
investment from net cash provided by current year operating and
investing activities;
- Realized gains will increase from the first quarter as we diversify
the previously classified held-to-maturity securities from U.S.
government securities to other fixed maturity securities; and
- We broadened our investment portfolio in April 1998 by purchasing
fixed maturity tax-exempt securities to increase after-tax yields.
Fixed maturity, tax-exempt securities may have the effect of reducing
investment income recognized but are expected to contribute more to
after-tax net income as a result of the treatment they receive for
federal tax purposes.
CLAIM AND CLAIM SETTLEMENT EXPENSES: Claim and claim settlement expenses are
our largest expense and result in our largest liability. We establish
reserves that reflect our estimates of the total claim and claim settlement
expenses we will ultimately have to pay under our workers' compensation
insurance policies. These include claims that have been reported but not
settled and claims that have been incurred but not yet reported to us. For
further discussion of reserve determination, see the "Unpaid Claim and Claim
Settlement Expenses" section of this Management's Discussion and Analysis.
Claim and claim settlement expenses increased to $19.3 million in the
first quarter of 1998 from $13.0 million in the first quarter of 1997. As a
percent of premiums earned, claim and claim settlement expenses increased to
85.5% for the three months ended March 31, 1998 from 67.6% for the three
months ended March 31, 1997. These changes are due to the following:
- During the first quarter of 1998 we increased our estimate of the
pre-1998 liability for unpaid claim and claim settlement expenses by
$3.0 million compared to the first quarter of 1997, in which we
reduced our estimate of the pre-1997 liability for unpaid claim and
claim settlement expenses by $675,000 as a result of favorable claims
experience for those periods. After adjusting for these estimate
changes, claim and claim settlement expenses increased to 72.2% for
the three months ended March 31, 1998 from 71.1% for the three months
ended March 31, 1997 as a percent of premiums earned;
- Gross premiums earned increased to $21.3 million in the first quarter
of 1998 from $19.3 million in the first quarter of 1997 resulting in
increased claim and claim settlement expenses as we provided coverage
for more employers;
- Reduced premiums due to legislative changes in estimated loss costs,
increased competition and improving customer loss experience, have
resulted in an increase in claim and claim settlement expenses as a
percentage of premiums earned; and
- Average claim cost increased in the first quarter of 1998 due to
increasing medical and indemnity costs resulting from inflationary
changes and increased severity in our non-Minnesota states.
CLAIM AND CLAIM SETTLEMENT EXPENSE OUTLOOK: We expect that claim and claim
settlement expenses will be affected by the following factors:
- Average claim costs will be affected by (i) increases in medical and
indemnity costs resulting from inflationary changes, (ii) severity
experienced in future periods in our non-Minnesota policy holder base,
(iii) changes resulting from increases in operating efficiency and
effectiveness realized through enhancements to our internal processes
and procedures, including changes to our propriety computer systems,
and (iv) legislative changes in estimated loss costs; and
- Continued application of our claims management technology and methods
to all open claims at March 31, 1998, may benefit future periods. The
magnitude of that benefit cannot be quantified at this time.
The ultimate result of the above factors, combined with the change in
premium rates, on claim and claim settlement expenses as a percent of
premiums earned for the remainder of 1998 is unknown at this time.
12
<PAGE>
POLICY ACQUISITION COSTS. The following table summarizes policy acquisition
costs (000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Commission expense $1,691 $1,530
Premium tax expense 456 400
Other policy acquisition costs 1,133 684
---------- ----------
Direct policy acquisition costs $3,280 $2,614
---------- ----------
---------- ----------
</TABLE>
Policy acquisition costs increased to $3.3 million in the first quarter of
1998 from $2.6 million in the first quarter of 1997. As a percent of gross
premiums earned, policy acquisition costs increased to 15.4% for the three
months ended March 31, 1998 from 13.5% for the three months ended March 31,
1997. These increases reflect the following:
- Commission expense was 7.9% of gross premiums earned in the first
quarters of 1998 and 1997. Historically, as we entered new markets,
we introduced higher commission rates to attract business from
established agents. These rates have continued into current policy
periods and will have a greater impact on the commission expense
percent as the non-Minnesota states continue to grow relative to
Minnesota. In all of our markets, we believe the commission rates we
pay are marketplace competitive;
- Premium tax expense remained consistent at 2.1% of gross premiums
earned for the first quarters of 1998 and 1997. Premium tax expense is
running slightly higher than our historical rate of 2.0% due to
accrual adjustments in the first quarter of 1998 and higher premium
tax rates paid for premiums earned in Colorado. The rates in Colorado
decreased from 2.15% in 1997 to 2.10% in 1998; and
- Other policy acquisition costs increased to 5.3% of gross premiums
earned in the first quarter of 1998 from 3.5% in the first quarter of
1997, due to increased focus on marketing programs as we expanded into
Michigan and Massachusetts and continued to grow in our more
established markets and increased personnel costs necessary for the
growth in premiums in force.
POLICY ACQUISITION COST OUTLOOK: We expect that policy acquisition costs as
a percent of gross premiums earned will stabilize or remain relatively
constant as a percent of gross premiums earned during the remainder of 1998
due to the following:
- We expect commission expense as a percent of gross premiums earned to
increase during the remainder of 1998 as the non-Minnesota states
continue to grow in size relative to Minnesota;
- We expect premium tax expense as a percent of gross premiums earned to
remain consistent with the first quarter of 1998; and
- We expect that other policy acquisition costs will decrease as a
percent of gross premiums earned as we increase premiums in force and
generate additional revenues to cover the relatively fixed policy
acquisition costs. We also expect that these costs will decrease as a
result of increases in operating efficiency and effectiveness during
the remainder of 1998 realized through enhancements to our internal
processes and procedures, including changes to our propriety computer
systems.
GENERAL AND ADMINISTRATIVE EXPENSES: Our general and administrative expenses
increased to $3.6 million in the first quarter of 1998 from $2.8 million in
the first quarter of 1997. As a percent of gross premiums earned, general and
administrative expenses increased to 17.1% for the three months ended March
31, 1998 from 14.8% for the three months ended March 31, 1997. These
increases reflect:
- expenses incurred for expansion in Michigan and Massachusetts, not
offset by revenues from premiums in force in those states;
- additional personnel costs for new employees resulting from the growth
in in force premium;
- higher compensation for existing employees; and
- charges recorded in the first quarter of 1998 to reflect reduced staff
in Minnesota.
13
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES OUTLOOK: We expect that general and
administrative expenses will be affected by the following:
- We expect to aggressively manage general and administrative expenses,
specifically legal and consulting expenses to decrease relative costs
during the remainder of 1998;
- We have no plans to open new state offices in 1998 and expect growth
in premiums in force in Michigan and Massachusetts will result in
additional revenues to cover the fixed costs in those states;
- We expect to increase operational efficiency during 1998 through
enhancements to our internal processes and procedures, including
changes to our internal propriety computer systems; and
- We will limit our salary increases.
INTEREST EXPENSE: We are paying interest at rates ranging from 9.25% to
9.50% during 1998 and paid interest at rates ranging from 9.00% to 9.50%
during 1997 on the outstanding balance on our Senior Notes.
Interest expense decreased to $139,000 in the first quarter of 1998 from
$196,000 in the first quarter of 1997 due to principal payments on the Senior
Notes in December 1997.
INTEREST EXPENSE OUTLOOK: Interest expense for the remainder of 1998 is
expected to be consistent with the results attained in the first quarter of
1998. Total interest expense on the Senior Notes is expected to decrease to
$546,000 in 1998 from $777,000 in 1997 as a result of principal payments of
$2.0 million made in December 1997.
INCOME TAXES: The income tax benefit was $638,000 for the first quarter of
1998 compared to income tax expense of $792,000 for the first quarter of
1997. As a percent of income (loss) before income taxes, the income tax
expense (benefit) decreased slightly to 36.4% for the three months ended
March 31, 1998 from 37.1% for the three months ended March 31, 1997. The
decrease in the first quarter of 1998 is the result of decreased taxable net
income from the service organization (RTW) which is subject to both federal
and state income taxes and decreases in the profitability of ACIC.
INCOME TAX OUTLOOK: We expect that income tax expense (benefit) will
continue to decrease as a percent of income (loss) before taxes during the
remainder of 1998 as we include non-taxable municipal fixed investments in
our investment portfolio. The ultimate decrease is unknown at this time.
INVESTMENTS
Our portfolio consisted entirely of taxable fixed maturity securities at
March 31, 1998, and included U.S. government securities (60.4%), corporate
securities (20.5%), mortgage-backed securities (12.8%) and asset-backed
securities (6.3%). After several years of purchasing solely U.S. government
securities, we engaged an investment manager in the second quarter of 1997 to
diversify our portfolio to other fixed maturity investments and maximize our
after-tax investment income without taking inappropriate credit risk. We
manage our fixed maturity portfolio conservatively, investing exclusively in
investment grade (BBB or better rating from Standard and Poor's) securities.
During the remainder of 1998, we expect to further diversify our portfolio to
investment grade tax-exempt securities. We do not invest in derivative
securities. Additionally, in December 1997, we reclassified our entire
held-to-maturity portfolio, invested in U.S. government securities with a
historical cost, net of amortization, of $53.8 million and a fair value of
$54.7 million, to available-for-sale investments. We reclassified these
securities to enable us to more actively manage our investment yield and
overall portfolio risk.
Funds provided by our operating cash flows and investment cash flows are
the source of growth in our investment portfolio. Operating cash flows
consist of the excess of premiums collected over claim and claim settlement
expenses and other operating expenses paid. Investment cash flows consist of
income on existing investments and proceeds from sales and maturities of
investments. Our investment portfolio grew 24.6% or $22.0 million to $111.2
million at March 31, 1998, from $89.2 million at March 31, 1997, as a result
of these factors. We invest solely in available-for-sale securities and
intend to continue this investment strategy for the foreseeable future.
We record investments on our balance sheet at fair value, with the
corresponding appreciation or depreciation from amortized cost recorded in
shareholders' equity, net of taxes. Because value is based on the
relationship between the portfolio's stated yields and prevailing market
yields at any given time, interest rate fluctuations can
14
<PAGE>
have a swift and significant impact on the carrying value of these
securities. As a result of the increased holdings in securities classified as
available-for-sale, and thus carried at fair value, we expect to encounter
larger adjustments in shareholders' equity as market interest rates and other
factors change.
UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES
Our unpaid claim and claim settlement expenses represent established,
undiscounted reserves for the estimated total unpaid cost of claim and claim
settlement expenses, which cover events that occurred through March 31, 1998.
These reserves reflect our estimates of the total costs of claims that were
reported, but not yet paid, and the cost of claims incurred but not yet
reported (IBNR). For reported claims, we establish reserves on a "case"
basis. For IBNR claims, we estimate reserves using established actuarial
methods. Both our case and IBNR reserve estimates reflect such variables as
past claims experience, current claim trends and prevailing social, economic
and legal environments. Due to commencing operations in 1992, we have limited
historical data to estimate our reserves for unpaid claim and claim
settlement expenses and accordingly supplement our experience with external
industry data, as adjusted, to reflect anticipated differences between our
results and the industry. We reduce the unpaid claim and claim settlement
expenses for estimated amounts of subrogation.
We believe our reserves for unpaid claim and claim settlement expenses are
adequate to cover the ultimate costs of claim and claim settlement expenses.
The ultimate cost of claim and claim settlement expenses may differ from the
established reserves, particularly when claims may not be settled for many
years. Reserves for unpaid claim and claim settlement expenses and
assumptions used in their development are continually reviewed. We record
adjustments to prior estimates of unpaid claim and claim settlement expenses
to operations in the year in which the adjustments are made.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to our ability to generate sufficient cash flows to meet the
short- and long-term cash requirements of our operations. Capital resources
represent those funds deployed or available to be deployed to support our
business operations.
Our primary sources of cash from operations are premiums collected and
investment income. Our investment portfolio is also a source of liquidity,
through the sale of readily marketable fixed maturity investments, as well as
longer-term investments that have appreciated in value. Our primary cash
requirements consist of payments for (i) claim and claim settlement expenses,
(ii) policy acquisition costs, (iii) general and administrative expenses,
(iv) capital expenditures, (v) income taxes, and (vi) debt service or
principal repayment on our outstanding Senior Notes. We generate positive net
cash from operations due, in part, to timing differences between the receipt
of premiums and the payment of claim and claim settlement expenses. Cash
generated is either invested in short-term cash and cash equivalents or
longer term available-for-sale securities pending future payments for such
expenses as indemnity, medical benefits and other operating expenses. Cash
and cash equivalents consist primarily of U.S. government 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.
Cash provided by operating activities for the first quarter of 1998 was
$6.2 million. This is primarily a result of an increase of $6.1 million in
unpaid claim and claim settlement expenses which are non-cash accruals for
future claims and an increase of $2.2 million in unearned premiums, net of
premiums receivable offset by our net loss of $1.1 million and an increase in
deferred tax assets of $842,000. Net cash provided by investing activities
was $1.1 million, primarily the result of maturities of $1.0 million of
available-for-sale investments. Net cash provided by financing activities was
$288,000, primarily due to the exercise of stock options totaling $258,000.
Our need for additional capital is primarily the result of regulations
which require certain ratios of capital to premiums written. In the future,
we expect that our need for additional capital will be primarily related to
the growth of our insurance subsidiary and the need to maintain appropriate
capital to premium ratios as defined by state regulatory bodies. As an
alternative to raising additional capital, we believe we 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
our insurance subsidiary to us. The maximum amount of dividends that can be
paid by ACIC to us in any year is equal to the greater of: (i) 10% of ACIC's
statutory surplus as of the end of the previous fiscal year, or (ii) the
statutory net gain from operations (not
15
<PAGE>
including realized capital gains) of ACIC in its most recent fiscal year.
Based on this limitation, the maximum dividend that ACIC could pay to us in
1998, without regulatory approval, is approximately $4.5 million. ACIC may be
subject to more restrictive limitations on dividends as we enter additional
states. ACIC has never paid a dividend to us and, for the foreseeable future,
we intend to retain capital in the insurance subsidiary to enable us to
expand our operations.
We believe that cash flow generated by our operations and our cash and
investment balances will be sufficient to fund continuing operations,
principal repayments and debt service on our outstanding Senior Notes,
including principal repayments of $2.5 million due in December 1998, and
capital expenditures for the next 12 months.
IMPACT OF THE YEAR 2000 ON COMPUTER APPLICATIONS
The year 2000 is a critical year for computer applications. Many computer
programs were historically written using two digits rather than four to
define the appropriate year. As a result, many computer programs that have
date sensitive fields may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruption of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in other critical
business activities.
Our insurance subsidiary operations began in 1992. Since 1992, we have
developed our own internal computer systems to manage our claims and related
claim settlement expenses and administer our policy information. These
computer systems are year 2000 compliant. Additionally, during 1998 we will
implement third-party provided, general ledger and accounts payable software
and develop internally a billing and cash receipt system which will be year
2000 compliant. These system replacements and software developments are
occurring as a part of our ongoing operations and are not specifically
occurring as a result of the year 2000 issue. We anticipate that our computer
hardware and software systems will be fully year 2000 compliant in 1998 and
we are taking steps to ensure that our significant vendors are compliant
during 1999.
The cost of any hardware and software changes required to comply with the
year 2000, other than those contemplated as routine upgrades in our
operations, are not expected to have a material adverse effect on our results
of operations.
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.
These 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 percent of total adjusted capital to authorized control level
risk-based capital is below certain levels. Based upon the risk-based capital
standards, our percent of total adjusted capital is substantially in excess
of authorized control level risk-based capital.
REGULATION
Our insurance subsidiary is subject to substantial regulation by governmental
agencies in the states in which we operate, and will be subject to such
regulation in any state in which we provide workers' compensation products
and services in the future. State regulatory agencies have broad
administrative power with respect to all aspects of our business, 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. At December
31, 1997, our insurance subsidiary was licensed to do business in Minnesota,
Colorado, Missouri, Michigan, Massachusetts, Pennsylvania, Illinois, Kansas,
Connecticut, South Dakota, Tennessee and Wisconsin. We received Indiana,
Iowa, Rhode Island and Maryland licenses so far in 1998.
The codification of the statutory accounting principles is complete and
has been adopted by the NAIC. Implementation is expected in 2001and the
impact of this project on current statutory policies and practices is unknown.
16
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits." This Statement revises
employers' disclosures about pension and other post-retirement benefit plans.
It does not change the measurement or recognition of those plans. This
Statement standardizes the disclosure requirements for pensions and other
post-retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures. Restatement of disclosures for earlier periods is required. This
Statement is effective for financial statements for fiscal years beginning
after December 15, 1997. We do not expect this standard to have an impact on
our Consolidated Financial Statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Opinion ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. This SOP requires that entities capitalize certain
internal-use software costs once certain criteria are met. Currently, we
expense the costs of developing or obtaining internal-use software as
incurred. We are currently evaluating SOP 98-1, but do not expect it to have
a material impact on our Consolidated Financial Statements. This SOP is
effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged in fiscal years for which annual
financial statements have not been issued.
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 our actual results and could cause our actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) competition from traditional workers'
compensation insurance carriers, (ii) our ability to manage both our existing
claims and our new claims in an effective manner, (iii) our ability to
further penetrate our existing markets, (iv) changes in workers' compensation
regulation by states, including changes in mandated benefits or insurance
company regulation, (v) our ability to retain our existing customers at
favorable beneficial premium rates when their policies renew (vi) our ability
to expand into new states and attract customers in those states, and (vii)
our ability to successfully introduce new products and services.
17
<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 BASIC AND
DILUTED LOSS PER SHARE
Exhibit 27 - FINANCIAL STATEMENT SCHEDULE
(b) LISTING OF REPORTS ON FORM 8-K
None
18
<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 12, 1998 By /s/ Carl B. Lehmann
----------------------------------------------
Carl B. Lehmann
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: May 12, 1998 By /s/ Alfred L. LaTendresse
----------------------------------------------
Alfred L. LaTendresse
Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
----------- --------------------------------------------------------- ----
<C> <S> <C>
11 Statement Regarding Computation of Basic and Diluted Loss
Per Share 21
27 Financial Statement Schedule 22
</TABLE>
20
<PAGE>
EXHIBIT 11
RTW, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
1998
-------------
<S> <C>
BASIC WEIGHTED AVERAGE SHARES 11,868,375
OUTSTANDING
STOCK OPTIONS
Options at $25.00
Options at $19.33 -
Options at $16.67 -
Options at $12.50 -
Options at $10.75 -
Options at $ 8.67 -
Options at $ 7.13 -
Options at $ 7.00 -
Options at $ 6.75 -
Options at $ 2.67 -
Options at $ 2.00 -
-------------
DILUTED WEIGHTED AVERAGE shares 11,868,375
-------------
-------------
NET LOSS ($000'S) $(1,117)
-------------
-------------
NET LOSS PER SHARE:
BASIC LOSS PER SHARE $(0.09)
-------------
-------------
DILUTED LOSS PER SHARE $(0.09)
-------------
-------------
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 111,202
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 111,202
<CASH> 13,362
<RECOVER-REINSURE> 5,211
<DEFERRED-ACQUISITION> 1,816
<TOTAL-ASSETS> 149,530
<POLICY-LOSSES> 67,176
<UNEARNED-PREMIUMS> 16,729
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,896
0
0
<COMMON> 29,264
<OTHER-SE> 28,480
<TOTAL-LIABILITY-AND-EQUITY> 149,530
22,544
<INVESTMENT-INCOME> 2,040
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 19,273
<UNDERWRITING-AMORTIZATION> 3,280
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (1,755)
<INCOME-TAX> (638)
<INCOME-CONTINUING> (1,117)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,117)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
