<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number 0-24800
THE TENERE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1675969
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1903 E. Battlefield, Springfield, MO 65804
(Address of principal executive offices) (Zip code)
417-889-1010
(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
--------- ---------
As of June 30, 1997 there were 1,999,774 shares of Common Stock, $.01 par
value, issued and outstanding.
<PAGE> 2
THE TENERE GROUP, INC.
<TABLE>
<CAPTION>
PAGE NO.
-------
<S> <C>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
Three Months ended June 30, 1997 and 1996 4
Consolidated Statements of Operations -
Six Months 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
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
UNAUDITED
Assets 1997 1996
------ ------------ -----------
<S> <C> <C>
Investments:
Bonds held available for sale, at market value (amortized cost -
$27,640,384 in 1997; $29,117,835 in 1996) $27,722,267 $29,370,067
Common stock, at market value 10,239 340
------------ -----------
Total investments 27,732,506 29,370,407
Other assets:
Cash and cash equivalents, including interest-bearing
deposits of $17,407,130 in 1997 and $14,889,744 in 1996 17,168,365 16,935,122
Premiums receivable 2,972,835 2,580,691
Reinsurance recoverable 7,696,400 7,458,298
Prepaid reinsurance premiums 250,000 750,000
Accrued investment income 522,323 527,139
Deferred policy acquisition costs 110,933 84,550
Deferred income taxes 2,249,383 2,098,792
Income taxes recoverable 1,345,101 1,680,190
Other 1,004,191 1,084,992
------------ -----------
Total other assets 33,319,531 33,199,774
------------ -----------
Total assets $61,052,037 $62,570,181
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Reserves for losses and loss adjustment expenses $32,044,097 $32,887,407
Unearned premium reserve 7,070,186 6,300,111
Reinsurance premium payable - 1,256,381
Other 806,014 736,579
------------ -----------
Total liabilities 39,920,297 41,180,478
Stockholders' equity:
Common stock, $.01 par value; 7,000,000 shares authorized;
1,999,774 shares issued and outstanding 19,998 19,998
Contributed capital 21,940,828 21,940,828
Retained earnings (accumulated deficit) (829,086) (571,123)
------------ -----------
Total stockholders' equity 21,131,740 21,389,703
------------ -----------
Total liabilities and stockholders' equity $61,052,037 $62,570,181
============ ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Direct premiums written $ 2,508,230 $ 2,672,039
Premiums ceded to reinsurers (459,420) (995,307)
----------- -----------
Net premiums written 2,048,810 1,676,732
(Increase) decrease in unearned premium reserve (668,218) 671,140
----------- -----------
Net premiums earned 1,380,592 2,347,872
Net investment income 644,440 657,733
----------- -----------
Total revenues 2,025,032 3,005,605
Losses and expenses:
Sales and marketing expenses 377,763 170,092
Other underwriting expenses 446,076 404,233
Losses and loss adjustment expenses 950,558 2,324,584
Dividends to policyholders - (3,347)
----------- -----------
Total losses and expenses 1,774,397 2,895,562
Income before income taxes 250,635 110,043
Income tax expense (77,378) (21,112)
----------- -----------
Net income $ 173,257 $ 88,931
=========== ===========
Net income per share $ 0.09 $ 0.04
=========== ===========
Stockholders' equity:
Beginning of period $20,604,853 $24,279,687
Change in unrealized investment gains (losses) 353,630 (144,292)
Net income 173,257 88,931
----------- -----------
End of period $21,131,740 $24,224,326
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Direct premiums written $ 4,700,294 $ 4,201,707
Premiums ceded to reinsurers (1,106,244) (1,485,339)
----------- -----------
Net premiums written 3,594,050 2,716,368
(Increase) decrease in unearned premium reserve (809,224) 1,919,779
----------- -----------
Net premiums earned 2,784,826 4,636,147
Net investment income 1,285,696 1,335,113
----------- -----------
Total revenues 4,070,522 5,971,260
Losses and expenses:
Sales and marketing expenses 788,019 486,422
Other underwriting expenses 984,148 900,166
Losses and loss adjustment expenses 2,546,519 4,224,656
Dividends to policyholders - (14,080)
----------- -----------
Total losses and expenses 4,318,686 5,597,164
Income (loss) before income taxes (248,164) 374,096
Income tax benefit (expense) 96,059 (111,308)
----------- -----------
Net income (loss) $ (152,105) $ 262,788
=========== ===========
Net income (loss) per share $ (0.08) $ 0.13
=========== ===========
Stockholders' equity:
Beginning of period $21,389,703 $24,537,278
Change in unrealized investment gains (losses) (105,858) (575,740)
Net income (loss) (152,105) 262,788
----------- -----------
End of period $21,131,740 $24,224,326
=========== ===========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Premiums received from policyholders $ 4,149,886 $ 4,442,065
Premiums paid to reinsurers (1,841,411) (1,337,134)
Dividends paid to policyholders - (147,635)
Losses and loss adjustment expenses paid (3,666,005) (5,838,945)
Commissions paid (101,719) (102,858)
Cash paid to suppliers and employees (1,453,924) (1,749,456)
Interest received 1,403,659 1,452,685
Income taxes received (paid) 335,089 (546,155)
------------- -------------
Net cash used in operating activities (1,174,425) (3,827,433)
Cash flows from investing activities:
Maturity of bonds held to maturity or available for sale 1,450,000 1,700,000
Purchase of bonds held to maturity or available for sale - (9,706,011)
Redemption on stock rights 56 -
Purchase of intangible asset - (400,000)
Purchase of furniture and equipment (42,388) (419,267)
------------- -------------
Net cash provided by (used in) investing activities 1,407,668 (8,825,278)
Net increase (decrease) in cash and cash equivalents 233,243 (12,652,711)
Cash and cash equivalents at beginning of period 16,935,122 31,180,925
------------- -------------
Cash and cash equivalents at end of period $ 17,168,365 18,528,214
============= =============
Reconciliation of net income to net cash used in operating activities
Net income (loss) $ (152,105) 262,788
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization expense 130,959 160,350
Net change in deferred acquisition costs (26,383) 49,602
Deferred income tax (benefit) (96,059) 45,918
Net amortization of discount on bonds 27,451 60,673
Change in operating assets and liabilities
Premiums receivable (392,144) 487,670
Reinsurance balances (994,483) (1,629,806)
Accrued investment income 4,816 (29,493)
Income taxes recoverable (payable) 335,089 (480,765)
Other assets (10,662) (291,057)
Reserve for losses and loss adjustment expenses (843,310) (241,881)
Unearned premium reserve 770,075 (1,998,244)
Policyholder dividends payable - (161,715)
Other liabilities 72,331 (61,473)
------------- -------------
Net cash used in operating activities $ (1,174,425) $ (3,827,433)
============= =============
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
THE TENERE GROUP, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission with regard to interim financial statements.
In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been made. Such
adjustments consisted of only normal recurring items. The results of
operations for the six months ended June 30, 1997 are not necessarily
indicative of the results which may occur for the full year. The
accompanying unaudited financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the 1996 Annual Report.
Certain reclassifications to 1996 amounts were made to conform with
1997 presentation. Included in such reclassifications was the
following material item:
As Reported As Restated
Net cash used in operating activities (4,227,433) (3,827,433)
Net cash used in investing activities (8,425,278) (8,825,278)
(2) INVESTMENTS
The amortized cost and estimated market values of investments in bonds
as of June 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
June 30, 1997 Gross Gross Estimated
Amortized unrealized unrealized market
Type of Investment cost gains losses value
- ------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
United States government,
government agencies and
authorities $25,774,944 263,516 (208,859) 25,829,601
States, municipalities and
political subdivisions 1,865,440 27,226 -- 1,892,666
----------- ------- --------- ----------
Total available-for-sale $27,640,384 290,742 (208,859) 27,722,267
=========== ======= ========= ==========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
December 31, 1996 Gross Gross Estimated
Amortized unrealized unrealized market
Type of Investment cost gains losses value
- ------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
United States government,
government agencies and
authorities $27,246,527 364,640 (136,238) 27,474,929
States, municipalities and
political subdivisions 1,871,308 23,830 - 1,895,138
----------- ------- -------- ----------
Total available-for-sale $29,117,835 388,470 (136,238) 29,370,067
=========== ======= ======== ==========
</TABLE>
The amortized cost and market values of debt securities at June 30, 1997,
by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to
prepay.
<TABLE>
<CAPTION>
Amortized Market
cost value
---- -----
<S> <C> <C>
Due in one year or less $ 50,453 50,727
Due after one year through five years 6,470,178 6,455,376
Due after five years through ten years 21,119,753 21,216,164
------------ ----------
$ 27,640,384 27,722,267
============ ==========
</TABLE>
Net investment income for the six months ended June 30, 1997 and 1996 is
comprised of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- ---------
<S> <C> <C>
Investment income:
Interest on cash equivalents and
repurchase agreements $425,295 706,746
Interest on bonds 946,097 714,759
---------- ---------
Gross investment income 1,371,392 1,421,505
Investment expenses (85,696) (86,392)
---------- ---------
Net investment income $1,285,696 1,335,113
========== =========
</TABLE>
Bonds with an amortized cost of $1,794,650 at June 30, 1997 and
$1,790,138 at December 31, 1996 were on deposit with the Department of
Insurance of the State of Missouri. These bonds and the interest income
thereon are included in the above amounts.
The net change in unrealized investment gains/losses are as follows:
<TABLE>
<CAPTION>
June 30, June 30.
1997 1996
---- ----
<S> <C> <C>
Net unrealized investment gains/losses $(160,390) (872,332)
Federal income (taxes) benefit 54,532 296,592
--------- --------
$(105,858) (575,740)
========= ========
</TABLE>
8
<PAGE> 9
(3) RESERVE FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES AND REINSURANCE
A summary of the reserves for losses and loss adjustment expenses
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Undiscounted reserve for losses and loss
adjustment expenses $34,393,233 35,051,777
Less discount (2,349,136) (2,164,370)
Discounted reserve for losses and loss ----------- ----------
adjustment expenses $32,044,097 32,887,407
=========== ==========
</TABLE>
Premiums, premium related reinsurance amounts and reinsurance
recoveries for the six months ended June 30, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
June 30 June 30
1997 1996
---- ----
<S> <C> <C>
Ceded premiums $1,106,244 1,485,339
========== =========
Ceded loss and loss adjustment expenses $374,614 2,267,212
========== =========
</TABLE>
Activity in the reserve for loss and loss adjustment expenses during
the periods ended June 30, 1997 and 1996 was:
<TABLE>
<CAPTION>
June 30, June 30
1997 1996
---- ----
<S> <C> <C>
Balance at January 1 $32,887,407 26,623,138
Less reinsurance recoverable on unpaid
loss and loss adjustment expenses 7,099,463 1,162,495
----------- ----------
25,787,944 25,460,643
Incurred related to:
Current year 2,373,847 3,435,048
Prior year 172,672 789,608
----------- ----------
Total incurred 2,546,519 4,224,656
----------- ----------
Paid related to:
Current year 375,041 857,052
Prior year 3,389,402 5,451,867
----------- ----------
Total paid 3,764,443 6,308,919
----------- ----------
24,570,020 23,376,380
Plus reinsurance recoverable on unpaid
loss and loss adjustment expenses 7,474,077 3,017,532
----------- ----------
Balance at June 30 $32,044,097 26,393,912
=========== ==========
</TABLE>
9
<PAGE> 10
(4) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. Income tax
expense (benefit) varies from the amount which would be provided by
applying the federal income tax rates to income (loss) before income
taxes. The following reconciles the expected income tax expense
(benefit) using the federal statutory tax rate of 34% to the income tax
expense (benefit) reported herein for the six months ended June 30, 1997
and 1996:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Expected tax expense (benefit) using statutory
rates $(84,375) 127,193
Other, net (11,684) (15,885)
-------- -------
$(96,059) 111,308
======== =======
</TABLE>
Income taxes consist of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Current expense $ - 65,390
Deferred expense (benefit) (96,059) 45,918
-------- --------
Income taxes $(96,059) $111,308
======== ========
</TABLE>
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. The sources of these differences and the
tax effect of each are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Losses and loss adjustment expenses
incurred for financial reporting
purposes but not deductible for
tax purposes $24,924 (87,073)
Unearned premiums not deductible for
tax purposes (55,028) 130,545
Deferred compensation (102,642) -
Net operating loss carryforward 31,623 -
Other, net 5,064 2,446
-------- ------
$(96,059) 45,918
======== ======
</TABLE>
10
<PAGE> 11
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
June 30, 1997 and December 31, 1996 are presented below:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<C> <C> <C>
Deferred tax assets:
Discounted unpaid loss reserves $1,828,295 1,853,219
Discounted unearned premium reserves 465,513 410,485
Investments adjusted to market value - 88,400
Deferred commissions payable 30,822 26,916
Deferred compensation 191,042 -
Net operating loss carryforward 214,948 246,571
---------- ----------
Total gross deferred tax assets 2,730,620 2,625,591
Less valuation allowance (400,000) (400,000)
---------- ----------
Net deferred tax assets 2,330,620 2,225,591
Deferred tax liabilities:
Investments adjusted to market value (31,226) (85,758)
Deferred acquisition costs (37,717) (28,747)
Other (12,294) (12,294)
---------- ----------
Total gross deferred liabilities (81,237) (126,799)
---------- ----------
Net deferred tax asset $2,249,383 2,098,792
========== ==========
</TABLE>
The valuation allowance for deferred tax assets at June 30, 1997 was
$400,000. Based on the Company's historical earnings, future expectations
of adjusted taxable income and its ability to change its investment
strategy, as well as reversing gross deferred tax liabilities, management
believes it is more likely than not that the Company will fully realize the
gross deferred tax assets less the valuation allowance. However, there can
be no assurances that the Company will generate the necessary adjusted
taxable income in any future period.
(5) RECONCILIATION TO STATUTORY ACCOUNTING
The Company's two wholly-owned insurance subsidiaries, Intermed
Insurance Co. and Interlex Insurance Co., are required to file statutory
financial statements with state regulatory authorities. Accounting
principles used to prepare the statutory financial statements differ from
financial statements prepared on the basis of generally accepted accounting
principles.
Reconciliations of statutory net income (loss), as determined using
statutory accounting principles, to the amounts included in the
accompanying consolidated financial statements for the six months ended
June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Net income of insurance companies $76,382 402,306
Increase (decrease):
Deferred policy acquisition costs 26,383 (49,600)
Deferred income taxes 96,059 (45,918)
Deferred compensation (301,887) -
Other adjustments, net (49,042) (44,000)
--------- -------
Net income (loss) as reported herein $(152,105) 262,788
========= =======
</TABLE>
11
<PAGE> 12
Reconciliations of statutory capital and surplus, as determined using
statutory accounting principles, to stockholders' equity included in the
accompanying consolidated financial statements at June 30, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Statutory capital and surplus of insurance companies $24,362,178 24,305,304
Stockholder's equity in non-insurance subsidiary 33,846 196,652
----------- -----------
Combined capital and surplus 24,396,024 24,501,956
Increase (decrease):
Deferred policy acquisition costs 110,933 84,550
Deferred income taxes 2,249,383 2,098,792
Net unrealized gain (loss) on investments booked at 81,883 166,473
market
Deferred compensation 561,887 (260,000)
Non-admitted assets and other adjustments, net 687,981 799,624
Consolidating eliminations and adjustments (6,956,351) (6,001,692)
----------- -----------
Stockholders' equity as reported herein 21,131,740 21,389,703
=========== ===========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis addresses the Company's financial
condition at June 30, 1997 and results of operations for the three and six
months ended June 30, 1997 and 1996.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997
Direct premiums written in the three months ended June 30, 1997 totaled $2.5
million, $164,000 or 6% below the prior year period. Results by line of
business were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
MEDICAL
Direct premiums written $2,280,000 $2,574,000 -11.4%
Premiums ceded to reinsurers 362,000 961,000 -62.3%
---------- ---------- -----
Net premiums written $1,918,000 1,613,000 18.9%
LEGAL
Direct premiums written $229,000 98,000 133.1%
Premiums ceded to reinsurers 97,000 34,000 186.3%
---------- ---------- -----
Net premiums written $132,000 64,000 105.1%
</TABLE>
Net premiums written were $2.0 million, $372,000 or 22% higher than the
comparable period of 1996. The favorable variance in net premiums written was
due to a $536,000 reduction in premiums ceded to reinsurers in the current
period. The reduction was due to (a) completion of the conversion from
claims-made to claims-paid coverages in 1996, which was covered by reinsurance,
and (b) favorable loss experience in 1997.
There was a $668,000 increase in the unearned premium reserve (UPR) in the
three months ended June 30, 1997 compared to a $671,000 decrease in the prior
year period. This $1.3 million variance was due in part to the increase in net
premiums written in the 1997 period. Addition-
12
<PAGE> 13
ally, the death, disability and retirement (DDR) reserve, a component of UPR,
was reduced by $923,000 in the three months ended June 30, 1996 due to the
claims paid conversion. The conversion was completed by the end of 1996. The
DDR was increased in the three months ended June 30, 1997 by $358,000 due to an
increase in the number of policyholders.
Net investment income totaled $644,000 in the current year period versus
$658,000 in the same period of 1996. The decline of $13,000, or 2%, was
primarily due to a change in the mix of short- and long-term investments
between periods.
Sales, marketing and other underwriting expenses were approximately $824,000 in
the 1997 period compared to $574,000 in the same period of 1996. The increase
of $250,000, or 43%, was primarily attributable to an increase in the Home
Office marketing staff, the establishment of a sales office in Austin, Texas
and accrual of certain post-retirement benefits. The expense ratio in the
current year period was 33% compared to 21% in the three months ended June 30,
1996 due to the increase in expenses without a corresponding increase in
premiums written.
Losses and loss adjustment expenses in the quarter ended June 30, 1997 totaled
$951,000 compared to $2.3 million in the same period in 1996. The loss ratio
in the three months ended June 30, 1997 was 69% compared to 99% in the prior
year period. Fewer claims were settled in the 1997 period at a lower average
cost than in the prior year period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED: JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Claims settled with indemnity 8 16
Average indemnity paid $100,837 $174,885
</TABLE>
The $1.4 million reduction in losses and loss adjustment expenses in the 1997
period compared to the same period of 1996 was the primary reason for the $1.1
million reduction in total losses and expenses.
Income before income taxes was $251,000 in the 1997 period compared to $110,000
in the comparable period of 1996. Net income for the three month period ended
June 30, 1997 was $173,000 or $.09 per share compared to $89,000 or $.04 per
share in the same period of 1996. Favorable claim experience in the 1997
period was the primary reason for the improvement over the comparable period of
1996.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997
Direct premiums written totaled $4.7 million in the first six months of 1997
compared to $4.2 million in the comparable period of 1996. The $499,000, or
12%, increase was due to increased writing of legal malpractice insurance in
the States of Missouri and Kansas and sales of medical malpractice insurance in
the State of Texas through Intermedical of Texas, a physician-sponsored
purchasing group located in Austin, Texas. Medical malpractice premiums in the
State of Missouri were approximately 23% below the prior year period. Results
by line of business were:
13
<PAGE> 14
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
MEDICAL
Direct premiums written $4,155,000 3,978,000 4.4%
Premiums ceded to reinsurers 860,000 1,400,000 -38.6%
---------- --------- ------
Net premiums written $3,295,000 2,578,000 27.8%
LEGAL
Direct premiums written $ 546,000 223,000 144.8%
Premiums ceded to reinsurers 246,000 85,000 189.4%
---------- --------- ------
Net premiums written $ 300,000 138,000 116.8%
</TABLE>
Premiums ceded to reinsurers in the six month period ended June 30, 1997 were
$1.1 million, a decrease of $379,000, or 25%, from the prior year period. The
reduction was due to (a) completion of the conversion from claims-made to
claims-paid coverages in 1996, which was covered by reinsurance, and (b)
favorable loss experience in 1997.
Net premiums written in the six month period ended June 30, 1997 were $3.6
million, an increase of $878,000 or 32% over the prior year period. The
favorable increase was due to the increase of $499,000 in direct premiums
written and the decrease of $379,000 in premiums ceded to reinsurers.
There was an $809,000 increase in the unearned premium reserve (UPR) in the six
months ended June 30, 1997 compared to a $1.9 million decrease in the prior
year period. This $2.7 million variance was due in part to an increase in
premiums written in the 1997 period. Additionally, the death, disability and
retirement (DDR) reserve, a component of UPR, was reduced by $1.3 million in
the six months ended June 30, 1996 due to the claims paid conversion. The
conversion was completed by the end of 1996. The DDR was increased in the six
months ended June 30, 1997 by $358,000 due to an increase in the number of
policyholders.
Net premiums earned in the six months ended June 30, 1997 were $2.8 million
compared to $4.6 million in the prior year period. The $809,000 increase in
the UPR in the 1997 period contrasted to a $1.9 million decrease in the 1996
period accounted for the decrease in net premiums earned.
Net investment income was $1.3 million in both the 1997 and 1996 periods.
The increase in sales, marketing and other underwriting expenses, $1.8 million
in 1997 versus $1.4 million in the comparable period of 1996, was primarily due
to expansion of the Home Office marketing staff, the establishment of a sales
office in Austin, Texas and accrual of certain post-retirement benefits. The
expense ratio in the six months ended June 30, 1997 was 38%, compared to 33% in
the prior year period.
Losses and loss adjustment expenses were $2.5 million in the six month period
ended June 30, 1997 compared to $4.2 million in the prior year period.
14
<PAGE> 15
Fewer claims were settled in the 1997 period at a lower average cost than in
the prior year period:
<TABLE>
<CAPTION>
SIX MONTHS ENDED: JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Claims settled with indemnity 18 30
Average indemnity paid $123,671 $157,489
</TABLE>
The loss ratio in the six months ended June 30, 1997 and 1996 was 91%.
Total losses and expenses were $4.3 million in 1997 compared to $5.6 million in
1996 due primarily to the improvement in losses and loss adjustment expenses.
The Company incurred a loss before income taxes of $248,000 in the current year
period compared to a gain of $374,000 in the prior year period. A tax benefit
of $96,000 in the 1997 period reduced the net loss to $152,000 or $.08 per
share. A federal income tax expense of $111,000 in the 1996 period reduced net
income to $263,000 or $.13 per share in 1996.
FINANCIAL CONDITION
ASSETS:
Total assets declined $1.5 million in the six months ended June 30, 1997, from
a $62.6 million at December 31, 1996 to $61.1 million. Cash and invested
assets declined $1.4 million in the period due primarily to a negative cash
flow from operations of $1.2 million. Reasons for the negative cash flow are
discussed below under Liquidity and Capital Resources. Approximately $15
million currently held in cash and cash equivalents will be re-invested
long-term when interest rates improve above their current level. Future
investments will be concentrated in one through five year maturities.
There was an unrealized gain of $82,000 in the bond portfolio at June 30, 1997
compared to an unrealized gain of $252,000 at prior year end. The Company's
investment in common stock increased in market value from $340 at prior year
end to $10,239 at June 30, 1997. The increase was due to an exchange of stock
in one company for stock in the company which acquired it. Changes in
unrealized gains are reflected in the Stockholders' Equity section of the
Balance Sheet.
LIABILITIES
Total liabilities declined $1.3 million in the six months ended June 30, 1997
due primarily to settlement of the reinsurance premium that was payable at
prior year end. The reserve for losses and loss adjustment expense declined
$843,000 due to settlement of a number of prior year claims during the current
period. The unearned premium reserve increased $770,000 during the six months
ended June 30, 1997 due to the increase in net premiums written in the current
year period.
15
<PAGE> 16
EQUITY
Stockholders' equity declined $258,000 in the six month period ended June 30,
1997 due to a net loss of $152,000 and a reduction in unrealized gains of
$106,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations in the six months ended June 30, 1997 was a negative
$1.2 million compared to a negative $3.8 million in the prior year period. The
$2.6 million improvement in cash flow was primarily the result of the $2.2
million reduction in paid losses and loss adjustment expense in the 1997
period.
The Company anticipates that net investment income of $2.6 million in 1997 and
a cash position of $17.2 million at June 30, 1997 will provide sufficient
liquidity to fund operations without the necessity of liquidating investments
or obtaining alternative financing to meet cash requirements.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The FASB has issued Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings per Share," which is effective for periods ending after
December 15, 1997, including interim periods. SFAS 128 establishes standards
for computing and presenting earnings per share and applies to all entities
with publicly held common stock or potential common stock. The Company will
implement the statement in the required period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K: None
16
<PAGE> 17
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.
THE TENERE GROUP, INC.
(Registrant)
August 12, 1997 /s/ J D Williams
- --------------- ------------------------------
Date Joseph D. Williams, CPA
Vice President - Finance
Chief Financial Officer and
Principal Accounting Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -- -----------
<S> <C>
3.1 Articles of Incorporation of the Registrant, filed as
Exhibit 3.1 to the Registrant's Registration Statement on Forms
S-1 (Reg. No. 33-78702) is incorporated herein by this
reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
33-78702) is incorporated herein by this reference.
4.1 Form of common stock certificate, filed as Exhibit
4.1 to the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-78702) is incorporated herein by this reference.
10.1 Management Contract, dated July 8, 1994, by and between RCA
Mutual Insurance Company, Interlex Insurance Co. and Insurance
Services, Inc., filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
10.2 Lease Agreement, dated December 7, 1994, by and between
Georgetown Square II, Ltd. and Insurance Services, Inc., filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the nine months ended September 30, 1995, is incorporated herein
by reference.
10.3 Medical Practitioners' Liability Primary Excess of Loss
Reinsurance Contract, dated October 1, 1993, by and between RCA
Mutual Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.3 to the Registrant's Quarterly Report
on Form 10-Q for the nine months ended September 30, 1995, is
incorporated herein by reference.
10.4 Addendum No. 1 to Medical Practitioners' Liability
Primary Excess of Loss Reinsurance Contract, dated February 1,
1995, by and between RCA Mutual Insurance Company and Certain
Reinsurers of Lloyd's of London, filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1995, is incorporated herein by
reference.
10.5 Addendum No. 2 to Medical Practitioners' Liability
Primary Excess of Loss Reinsurance Contract, effective April 27,
1995, by and between RCA Mutual Insurance Company and Certain
Reinsurers of Lloyd's of London, filed as Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1995, is incorporated herein by
reference.
10.6 Reinsurance Cover Note: 95/1146/RM to Medical Practitioners'
Liability Primary Excess of Loss Reinsurance Contract, dated
October 16, 1995, by and between RCA Mutual Insurance Company and
Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.6 to
the Registrant's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1995, is incorporated herein by reference.
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C>
10.7 Reinsurance Cover Note: 95/1212/RM(A) to Catastrophe
"Awards Made" Excess of Loss Reinsurance Contract, dated October
16, 1995, by and between RCA Mutual Insurance Company and Certain
Reinsurers of Lloyd's of London, filed as Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1995, is incorporated herein by
reference.
10.8 Catastrophe "Awards Made" Excess of Loss Reinsurance
Contract, commencing February 1, 1995, by and between RCA Mutual
Insurance Company and Certain Reinsurers of Lloyd's of London
including Amendment No. 1, effective April 27, 1995, filed as
Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for
the nine months ended September 30, 1995, is incorporated herein
by reference.
10.9 Reinsurance Cover Note: 95/1249/IP to Lawyers' Professional
Liability Primary Excess of Loss Reinsurance Treaty, dated October
16, 1995, by and between Interlex Insurance Company and Certain
Reinsurers of Lloyd's of London, filed as Exhibit 10.9 to the
Registrant's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1995, is incorporated herein by reference.
10.10 Lawyers' Professional Liability Primary Excess of Loss
Reinsurance Contract, commencing July 1, 1995, by and between
Interlex Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.10 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1995,
is incorporated herein by reference.
10.11 Reinsurance Cover Note: 95/1250/IP to Prior Agreement
Excess of Loss Reinsurance Contract, dated October 16, 1995, by
and between Interlex Insurance Company and Certain Reinsurers of
Lloyd's of London, filed as Exhibit 10.11 to the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September
30, 1995, is incorporated herein by reference.
10.12 Prior Agreement Excess of Loss Reinsurance Contract,
commencing July 1, 1995, by and between Interlex Insurance Company
and Certain Reinsurers of Lloyd's of London, filed as Exhibit
10.12 to the Registrant's Quarterly Report on Form 10-Q for the
nine months ended September 30, 1995, is incorporated herein by
reference.
10.13 Draft Reinsurance Slip by and between Intermed Insurance
Company and American Re-Insurance Company filed as Exhibit 10.13
to the Registrant's Quarterly Report on Form 10-Q for the three
months ended March 31, 1996, is incorporated herein by
reference.
10.14 Employment Agreement dated May 6, 1996 between The Tenere Group,
Inc. and Raymond A. Christy, M.D., President and Chief Executive
officer, filed as Exhibit 10.14 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1996,
is incorporated herein by reference.
10.15
Employment Agreement dated May 6, 1996 between The Tenere Group,
Inc. and Andrew K. Bennett, Vice President-Claims and General
Counsel, filed as Exhibit 10.15 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1996,
is incorporated herein by reference.
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -- -----------
<S> <C>
10.16 Employment Agreement dated May 6, 1996 between The Tenere Group,
Inc. and Andrew C. Fischer, Vice President-Underwriting and Policy
Services, filed as Exhibit 10.16 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1996,
is incorporated herein by reference.
10.17 Employment Agreement dated May 6, 1996 between The Tenere Group,
Inc. and Clifton R. Stepp, Vice President-Marketing, filed as
Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q
for the nine months ended September 30, 1996, is incorporated
herein by reference.
10.18 Employment Agreement dated May 6, 1996 between The
Tenere Group, Inc. and Joseph D. Williams, Vice President-Finance,
Chief Financial Officer and Assistant Treasurer filed as Exhibit
10.18 to the Registrant's Quarterly Report on Form 10-Q for the
nine months ended September 30, 1996, is incorporated herein by
reference.
10.19 The Tenere Group, Inc. Retirement Plan for Directors
effective May 17, 1996, filed as Exhibit 10.19 to the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September
30, 1996, is incorporated herein by reference.
10.20 The Tenere Group, Inc. 1996 Long Term Incentive Plan
effective April 17, 1996 filed as Annex A to the Registrant's
definitive proxy statements for the 1996 Annual Meeting of
Shareholders, is incorporated herein by reference.
10.21 Amendment No. 1 to Employment Agreement, dated February 28,
1997, between The Tenere Group, Inc. and Raymond A. Christy, M.D.,
President and Chief Executive Officer, filed as Exhibit 10.21 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference.
10.22 Amendment No. 1 to Employment Agreement dated February 28,
1997, between The Tenere Group, Inc. and Andrew K. Bennett, Vice
President-Claims and General Counsel, filed as Exhibit 10.22 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference.
10.23 Amendment No. 1 to Employment Agreement dated February 28,
1997, between The Tenere Group, Inc. and Andrew C. Fischer, Vice
President-Underwriting and Policy Services, filed as Exhibit 10.23
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference.
10.24 Amendment No. 1 to Employment Agreement dated February 28,
1997, between The Tenere Group, Inc. and Clifton R. Stepp, Vice
President-Marketing, filed as Exhibit 10.24 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996,
is incorporated herein by reference.
10.25 Amendment No. 1 to Employment Agreement dated February 28,
1997, between The Tenere Group, Inc. and Joseph D. Williams, Vice
President-Finance, Chief Financial Officer and Assistant
Treasurer, filed as Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
27 Financial Data Schedules
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 27,722,267
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 10,239
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 27,732,506
<CASH> 17,168,365
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 110,933
<TOTAL-ASSETS> 61,052,037
<POLICY-LOSSES> 32,044,097
<UNEARNED-PREMIUMS> 7,070,186
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 19,998
<OTHER-SE> 21,111,742
<TOTAL-LIABILITY-AND-EQUITY> 61,052,037
2,784,826
<INVESTMENT-INCOME> 1,285,696
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 2,546,519
<UNDERWRITING-AMORTIZATION> 788,019
<UNDERWRITING-OTHER> 984,148
<INCOME-PRETAX> (248,164)
<INCOME-TAX> (96,059)
<INCOME-CONTINUING> (152,105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152,105)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
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