<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 September 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 September 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.
--------
INDEX
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
Three Months ended September 30, 1997 and 1996 4
Consolidated Statements of Operations -
Nine Months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Nine months ended September 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 17
ITEM 6. Exhibits and Reports on Form 8-K 17
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
September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
UNAUDITED
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Investments:
Bond held available for sale, at market value
(amortized cost - $32,641,105 in 1997;
$29,117,835 in 1996) $ 33,197,873 $ 29,370,067
Common stock, at market value 7,242 340
------------ ------------
Total investments 33,205,115 29,370,407
Other assets:
Cash and cash equivalents, including interest-
bearing deposits of $12,104,016 in 1997
and $14,889,744 in 1996 10,790,490 16,935,122
Premiums receivable 3,850,324 2,580,691
Reinsurance recoverable 6,658,270 7,458,298
Prepaid reinsurance premiums 288,250 750,000
Accured investment income 457,906 527,139
Deferred policy acquisition costs 165,293 84,550
Deferred income taxes 2,153,141 2,098,792
Income taxes recoverable 980,487 1,680,190
Other 942,124 1,084,992
------------ ------------
Total other assets 26,286,285 33,199,774
------------ ------------
Total assets $ 59,491,400 $ 62,570,181
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss
adjustment expenses $ 28,030,182 $ 32,887,407
Unearned premium reserve 7,819,900 6,300,111
Reinsurance premium payable 543,636 1,256,381
Other 1,274,241 736,579
------------ ------------
Total liabilities 37,667,959 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) (137,385) (571,123)
------------ ------------
Total stockholders' equity 21,823,441 21,389,703
------------ ------------
Total liabilities and
stockholders' equity $ 59,491,400 $ 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 September 30, 1997 and 1996
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Direct premiums written $ 3,616,534 $ 1,827,409
Premiums ceded to reinsurers (1,202,573) (1,755,253)
------------- -------------
Net premiums written 2,413,961 72,156
(Increase) decrease in unearned
premium reserve (967,482) 1,333,936
------------- -------------
Net premiums earned 1,446,479 1,406,092
Net investment income 650,763 671,134
------------- -------------
Total revenues 2,097,242 2,077,226
Losses and expenses:
Sales and marketing expenses 446,064 309,291
Other underwriting expenses 655,148 438,065
Losses and loss adjustment expenses 315,361 4,504,681
Dividends to policyholders - 159
------------- -------------
Total losses and expenses 1,416,573 5,252,196
Income (loss) before income taxes 680,669 (3,174,970)
Income tax benefit (expense) (300,415) 1,082,713
------------- -------------
Net income (loss) $ 380,254 $ (2,092,257)
============= =============
Net income (loss) per share $ 0.19 $ (1.05)
============= =============
Stockholders' equity:
Beginning of period $ 21,131,740 $ 24,224,326
Change in unrealized investment gains 311,447 76,507
Net income (loss) 380,254 (2,092,257)
------------- -------------
End of period $ 21,823,441 $ 22,208,576
============= =============
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
UNAUDITED
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Direct premiums written $ 8,316,828 $ 6,029,116
Premiums ceded to reinsurers (2,308,817) (3,240,592)
------------ ------------
Net premiums written 6,008,011 2,788,524
(Increase) decrease in unearned premium reserve (1,776,706) 3,253,715
------------ ------------
Net premiums earned 4,231,305 6,042,239
Net investment income 1,936,459 2,050,991
------------ ------------
Total revenues 6,167,764 8,093,230
Losses and expenses
Sales and marketing expenses 1,234,083 795,713
Other underwriting expenses 1,639,296 1,382,975
Losses and loss adjustment expenses 2,861,880 8,729,337
Dividends to policyholders - (13,921)
------------ ------------
Total losses and expenses 5,735,259 10,894,104
Income (loss) before income taxes 432,505 (2,800,874)
Income tax benefit (expense) (204,356) 971,405
------------ ------------
Net income (loss) $ 228,149 $ (1,829,469)
============ ============
Net income (loss) per share $ 0.11 $ (.91)
============ ============
Stockholders' equity:
Beginning of period $ 21,389,703 $ 24,537,278
Change in unrealized investment gains (losses) 205,589 (499,233)
Net income (loss) 228,149 (1,829,469)
------------ ------------
End of period $ 21,823,441 $ 22,208,576
============ ============
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Premiums received from policyholders $ 6,966,187 6,656,371
Premiums paid to reinsurers (2,524,828) (2,871,976)
Recoveries received from reinsurers 415,573 -
Dividends paid to policyholders - (160,371)
Losses and loss adjustment expenses paid (7,693,483) (8,182,123)
Commissions paid (173,011) (136,393)
Cash paid to suppliers and employees (2,040,825) (3,017,241)
Interest received 2,177,812 2,280,186
Income taxes received 335,089 -
------------- -------------
Net cash used in operating activities (2,537,486) (5,431,547)
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 (5,014,094) (13,688,573)
Redemption on stock rights 56 -
Purchase of intangible asset - (400,000)
Sale of furniture and equipment 695 -
Purchase of furniture and equipment (43,803) (515,977)
------------- -------------
Net cash used in investing activities (3,607,146) (12,904,550)
Net increase in cash and cash equivalents (6,144,632) (18,336,097)
Cash and cash equivalents at beginning of period 16,935,122 31,180,925
------------- -------------
Cash and cash equivalents at end of period $ 10,790,490 12,844,828
============= =============
Reconciliation of net income to net cash used in
operating activities
Net income (loss) $ 228,149 (1,829,469)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization expense 123,248 133,783
Net change in deferred acquisition costs (80,743) 50,458
Deferred income tax (benefit) (160,258) 272,665
Net amoritization of discount on bonds 40,824 85,631
Change in operating assets and liabilities
Premiums receivable (1,269,633) 1,017,784
Reinsurance balances 360,143 (3,000,354)
Accrued investment income 69,233 82,542
Income taxes recoverable (payable) 699,703 (1,791,055)
Other assets 60,530 198,834
Reserve for losses and loss adjustment expenses (4,857,225) 3,320,994
Unearned premium reserve 1,708,679 (3,395,219)
Policyholder dividends payable - (160,371)
Other liabilities 539,864 (417,770)
------------- -------------
Net cash used in operating activities $ (2,537,486) $ (5,431,547)
============= =============
</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 nine
months ended September 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:
<TABLE>
<CAPTION>
As Reported As Restated
<S> <C> <C>
Net cash used in operating activities (5,831,547) (5,431,547)
Net cash used in investing activities (12,504,550) (12,904,550)
</TABLE>
(2) INVESTMENTS
The amortized cost and estimated market values of investments in bonds as
of September 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 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 $ 30,778,598 550,922 (43,769) 31,285,751
States, municipalities and
political subdivisions 1,862,507 49,615 --- 1,912,122
------------ ------- ------- ----------
Total available-for-sale 32,641,105 600,537 (43,769) 33,197,873
============ ======= ======= ==========
</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 September 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 $ 50,272 50,469
Due after one year through five years 6,454,453 6,528,972
Due after five years through ten years 26,136,380 26,618,432
----------- ----------
$32,641,105 33,197,873
=========== ==========
</TABLE>
Net investment income for the nine months ended September 30, 1997 and
1996 is comprised of the following:
<TABLE>
<CAPTION>
September 30 September 30
1997 1996
---- ----
<S> <C> <C>
Investment income:
Interest on cash equivalents and
repurchase agreements $ 639,047 926,208
Interest on bonds 1,428,707 1,185,804
---------- ----------
Gross investment income 2,067,754 2,112,012
Investment expenses (131,295) (61,021)
---------- ----------
Net investment income $1,936,459 2,050,991
========== =========
</TABLE>
Bonds with an amortized cost of $1,803,682 at September 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>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Net unrealized investment gains/losses $ 311,497 (756,413)
Federal income (taxes) benefit (105,908) 257,180
--------- --------
$ 205,589 (499,233)
========= ========
</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>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Undiscounted reserve for losses and loss
adjustment expenses 29,275,778 35,051,777
Less discount (1,245,596) (2,164,370)
----------- ----------
Discounted reserve for losses and loss
adjustment expenses $28,030,182 32,887,407
=========== ==========
</TABLE>
Premiums, premium related reinsurance amounts and reinsurance recoveries
for the nine months ended September 30, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Ceded premiums earned $2,283,985 3,386,408
========== =========
Ceded loss and loss adjustment expenses (25,620) 3,893,257
========== =========
</TABLE>
Activity in the reserve for loss and loss adjustment expenses during the
periods ended
September 30, 1997 and 1996 was:
<TABLE>
<CAPTION>
September 30, September 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 4,566,620 7,148,697
Prior year (1,704,740) 1,580,640
----------- ----------
Total incurred 2,861,880 8,729,337
----------- ----------
Paid related to:
Current year 359,378 1,983,046
Prior year 6,751,834 6,805,282
----------- ----------
Total paid 7,111,212 8,788,328
----------- ----------
21,538,612 25,401,652
Plus reinsurance recoverable on
unpaid loss and loss adjustment
expenses 6,491,570 4,562,635
----------- ----------
Balance at September 30 $28,030,182 29,964,287
=========== ==========
</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 nine months ended September 30,
1997 and 1996:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Expected tax expense (benefit) using
statutory rates $147,052 (952,298)
Other, net 57,304 (19,107)
-------- --------
$204,356 (971,405)
======== ========
</TABLE>
Income taxes consist of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Current expense (benefit) $ 364,614 (1,244,070)
Deferred expense (benefit) (160,258) 272,665
--------- ----------
Income taxes (benefit) $ 204,356 (971,405)
========= ==========
</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>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Losses and loss adjustment expenses
incurred for financial reporting
purposes but not deductible for
tax purposes $ 61,670 (26,656)
Unearned premiums not deductible for
tax purposes (120,817) (221,252)
Deferred compensation (102,642) -----
Accrued retirement (100,623) -----
Net operating loss carryforward 105,163 -----
Other, net (3,009) (24,757)
-------- --------
$(160,258) (272,665)
========= ========
</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
September 30, 1997 and December 31, 1996 are presented below:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- ------------
<S> <C> <C>
Deferred tax assets:
Discounted unpaid loss reserves $ 1,791,549 1,853,219
Discounted unearned premum reserves 531,302 410,485
Deferred commissions payable 47,777 26,916
Deferred compensation 191,042 88,400
Accrued retirement benefits 100,623 ---
Net operating loss carryforward 141,408 246,571
----------- ---------
Total gross deferred tax assets 2,803,701 2,625,591
Less valuation allowance (390,400) (400,000)
----------- ---------
Net deferred tax assets 2,413,301 2,225,591
Deferred tax liabilities:
Investments adjusted to market value (191,667) (85,758)
Deferred acquisition costs (56,199) (28,747)
Other (12,294) (12,294)
---------- ---------
Total gross deferred liabilities (260,160) (126,799)
---------- ---------
Net deferred tax asset $2,153,141 2,098,792
========== =========
</TABLE>
The valuation allowance for deferred tax assets at September 30, 1997 was
$390,400. Based on the Company's historical earnings, future
expectations of adjusted taxable income and the Company's 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 nine months ended
September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Net income (loss) of insurance companies $ 658,544 (1,457,798)
Increase (decrease):
Deferred policy acquisition costs 80,743 (50,458)
Deferred income taxes 160,258 (272,665)
Deferred compensation (301,887) ---
Accrued retirement benefits (295,951) ---
Other adjustments, net (73,558) (48,548)
--------- ----------
Net income (loss) as reported herein $ 228,149 (1,829,469)
========= ==========
</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 September 30, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Statutory capital and surplus of insurance companies $24,979,703 24,305,304
Stockholder's equity in non-insurance subsidiary 33,846 196,652
----------- -----------
Combined capital and surplus 25,013,549 24,501,956
Increase (decrease):
Deferred policy acquisition costs 165,293 84,550
Deferred income taxes 2,153,141 2,098,792
Net unrealized gain (loss) on investments
booked at market 563,726 166,473
Deferred compensation (561,887) (260,000)
Accured retirement (295,951) ---
Non-admitted assets and other adjustments, net 864,376 799,624
Consolidating eliminations and adjustments (6,078,806) (6,001,692)
----------- -----------
Stockholders' equity as reported herein $21,823,441 21,389,703
=========== ===========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AT
SEPTEMBER 30, 1997 AND RESULTS OF OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Direct premiums written in the three months ended September 30, 1997 were $3.6
million, an increase of $1.8 million or 98% over the comparable period in 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES
--------------------------- ---- ---- -------
<S> <C> <C> <C>
Medical malpractice $3,373,000 1,700,000 +98%
Legal malpractice 244,000 127,000 +92%
---------- --------- ----
Total direct premiums written $3,617,000 1,827,000 +98%
</TABLE>
Medical malpractice premiums written in Missouri and Kansas were approximately
56% above the prior year level, but this was primarily due to the timing of
renewals. Year-to-date premiums written in these two states were only 1% above
the prior year level. Medical malpractice premiums written in the State of
Texas through a purchasing group, Intermedical of Texas, Inc., totaled $764,000
in the third quarter of 1997 compared to $26,000 in the third quarter of 1996.
The increase in legal malpractice premiums written was due to the addition of a
marketing representative to the Home Office marketing staff in early 1997.
Net premiums written after cessions to reinsurers were $2.4 million, an
increase of $2.3 million over the third quarter of 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES
--------------------------- ---- ---- -------
<S> <C> <C> <C>
Medical Malpractice $2,248,000 (19,500) +2,267,500
Legal Malpractice 166,000 91,500 +74,500
---------- ------- ----------
Total net premiums written $2,414,000 72,000 +2,342,000
</TABLE>
12
<PAGE> 13
Premiums ceded to reinsurers in the third quarter of 1997 were $553,000 or 31%
below the prior year period due to a reduction in losses ceded under the
Company's primary excess of loss treaty for medical malpractice coverage. Net
premiums written in the three month period ended September 30, 1996 were
significantly reduced by premiums ceded to reinsurers in the quarter.
There was a $967,000 increase in the unearned premium reserve (UPR) in the
three month period ended September 30, 1997 compared to a decrease of $1.3
million in the comparable period of 1996. The increase in the 1997 period was
attributable to the sharp increase in premiums written compared to a decrease
in the 1996 period.
Net premiums written of $1.4 million in the third quarter of 1997 were
approximately 3% higher than net premiums written in the three month period
ended September 30, 1996.
Net investment income was $651,000 in the three months ended September 30,
1997, $20,000 or 3% below net investment income in the comparable period of
1996. The decrease was due to a reduction of $2.3 million in cash and invested
assets over the twelve month period ended September 30, 1997 as a result of the
negative cash flow from operations. Reasons for the negative cash flow from
operations are discussed more fully under Liquidity and Capital Resources.
Total revenues were $2.1 million in the third quarters of both 1997 and 1996.
Sales, marketing and other underwriting expenses totaled $1.1 million in the
three month period ended September 30, 1997, an increase of $354,000 or 47%
above the comparable period of 1996. However, increased production in the 1997
period resulted in an Expense Ratio of approximately 30% for the quarter
compared to approximately 41% in the prior year period.
Losses and loss adjustment expenses (LAE) totaled $315,000 in the current
quarter compared to $4.5 million in the three months ended September 30, 1996.
The significant reduction was primarily due to a release of $1.7 million in
prior year medical malpractice loss reserves offset by incurred medical
malpractice losses of $2.1 million in the current year period. The release
from prior year loss reserves was primarily the result of an in-depth analysis
of reserves at September 30, 1997 by the Company's consulting actuaries, which
indicated significant redundancies in prior year reserves.
Primarily as a result of the change in prior year loss reserves, total losses
and expenses for the quarter ended September 30, 1997 totaled $1.4 million
compared to $5.3 million in the comparable quarter of 1996.
Income before income taxes was $681,000 in the three months ended September 30,
1997, compared to a loss before income taxes of $3.2 million in the prior year
period.
Income tax expense in the third quarter of 1997 was $300,000 compared to an
income tax benefit of $1.1 million in the third quarter of 1996.
13
<PAGE> 14
Net income in the three months ended September 30, 1997 was $380,000 or $.19
per share compared to a net loss of $2.1 million or $1.05 per share in the
three month period ended September 30, 1996.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Direct premiums written in the nine months ended September 30, 1997 were $8.3
million, an increase of $2.3 million or approximately 38% over the comparable
period of 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES
--------------------------- ---- ---- -------
<S> <C> <C> <C>
Medical malpractice $7,527,000 $5,679,000 +33%
Legal malpractice 790,000 350,000 +126%
---------- ---------- ----
Total direct premiums written $8,317,000 $6,029,000 +38%
</TABLE>
Premiums written in the States of Missouri and Kansas increased approximately
1% in the nine months ended September 30, 1997. Premiums written in the State
of Texas through Intermedical of Texas, Inc., a purchasing group, increased
from $26,000 in the first nine months of 1996 to $1.8 million in the nine
months ended September 30, 1997.
Net premiums written after cessions to reinsurers were $6.0 million in the nine
months ended September 30, 1997 compared to $2.8 million in the prior year
period, an increase of $3.2 million or 115%.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES
--------------------------- ---- ---- -------
<S> <C> <C> <C>
Medical malpractice $5,542,000 $2,559,000 +117%
Legal malpractice 466,000 230,000 +103%
---------- ---------- ----
Total net premiums written $6,008,000 $2,789,000 +115%
</TABLE>
The decrease of $932,000 in premiums ceded to reinsurers is attributable to a
decrease in losses ceded under the Company's primary excess of loss treaty for
medical malpractice coverage.
There was an increase of $1.8 million in the unearned premium reserve (UPR) in
the first nine months of 1997 compared to a release of $3.3 million in the
prior year period. Premiums written in the 1997 period increased over the
prior year compared to a decrease in premium written in 1996 compared to 1995.
The primary factor in the 1996 period was, however, a release of $2.3 from the
death, disability and retirement (DD&R) component of the UPR resulting from the
conversion of claims-paid policyholders to claims-made policies.
Net premiums earned were $4.2 million in the first nine months of 1997 compared
to $6.0 million in the comparable period of 1996 due to the change in the UPR
discussed above.
Net investment income was $1.9 million in the nine months ended September 30,
1997 compared to $2.0 million in the 1996 period. The decrease of $115,000 was
due to the decrease in invested assets as a result of a negative cash flow from
operations.
14
<PAGE> 15
Total revenues of the Company were $6.2 million in the nine month period ended
September 30, 1997 compared to $8.1 million in the first nine months of 1996.
Sales, marketing and other underwriting expenses totaled $2.9 million in the
nine month period ended September 30, 1997 compared to $2.2 million in the same
period of 1996, an increase of $695,000 or 32%. However, due to the
significant increase in premiums written, the Expense Ratio in the nine months
ended September 30, 1997 was 34.5% compared to 36% in the prior year period.
The Company's long-term objective is an Expense Ratio of under 20%. This will
be attained through continued growth in premiums written coupled with an
effective expense control program.
Losses and loss adjustment expenses totaled $2.9 million in the nine months
ended September 30, 1997 compared to $8.7 million in the same period of 1996.
The 1997 period benefited from a release of $1.7 million in prior year medical
malpractice reserves offset by incurred medical malpractice losses of $4.3
million in the current accident year.
Total losses and expenses totaled $5.7 million in the nine month period ended
September 30, 1997 compared to $10.9 million in the nine months ended September
30, 1996.
Income before income taxes in the nine month period ended September 30, 1997
was $432,500 compared to a loss before income taxes of $2.8 million in the
prior year period. Income tax expense of $204,000 resulted in net income for
the 1997 period to $228,000 or $.011 per share. An income tax benefit of
$971,000 resulted in net loss for the nine month period ended September 30,
1996 to $1.8 million or $.91 per share.
FINANCIAL CONDITION
ASSETS:
Total assets declined $3.1 million or approximately 5% in the nine months ended
September 30, 1997. Cash and invested assets declined $2.3 million or
approximately 5% in the same period. The declines in total assets and cash and
invested assets were primarily due to a negative cash flow from operations of
$2.5 million in the nine month period ended September 30, 1997. Reasons for
the negative cash flow are discussed below under Liquidity and Capital
Resources.
There was a $3.8 million increase in the Company's bond portfolio in the first
nine months of 1997 due to the purchase of bonds with a par value of $5.0
million offset by the maturity of a bond with a par value of $1.45 million.
The new purchases had a yield-to-maturity of approximately 7.2%. The average
yield-to-maturity of the investment portfolio (including short-term
investments) at September 30, 1997 was approximately 6.5%.
There was an unrealized gain of $557,000 in the bond portfolio at September 30,
1997 compared to an unrealized gain of $252,000 at December 31, 1996. Since
the bond portfolio is classified as available-for-sale, changes in unrealized
gains or losses are reflected in the equity account net of federal income
taxes.
15
<PAGE> 16
Approximately $8.0 million currently invested in cash equivalents will be
reinvested long-term when interest rates increase above current levels. Future
purchases will be concentrated in one through five year maturities.
The principle components of other assets at September 30, 1997 were goodwill
($123,000), furniture and fixtures ($152,000) and software ($456,000).
LIABILITIES:
Reserves for losses and loss adjustment expenses decreased by $4.9 million in
the nine month period ended September 30, 1997 from $32.9 million at the prior
year end to $28.0 million. The decrease was primarily due to an actuarial
re-evaluation of prior year loss reserves discussed more fully under Results of
Operations.
Premiums are earned over the twelve month lives of policies written. The
unearned premium reserve (UPR) increased from $6.3 million at December 31, 1996
to $7.8 million at September 30, 1997, an increase of $1.5 million. The
significant increase was due to increased writings in the nine month period
ended September 30, 1997 compared to the prior year period.
Other liabilities at September 30, 1997 consisted primarily of deferred
compensation ($562,000), accrued retirement benefits ($296,000), and salaries,
commissions, taxes and accounts payable.
EQUITY:
Stockholders' equity increased from $21.4 million at December 31, 1996 to $21.8
million at September 30, 1997 due to net income of $228,000 and an increase of
$206,000 in net unrealized gains in the bond portfolio. Stockholders' equity
at September 30, 1997 was $10.91 per share, an increase of $.21 per share over
book value at December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations in the nine month period ended September 30, 1997 was
a negative $2.5 million compared to a negative $5.4 million in the comparable
period of 1996. The $2.9 million improvement in cash flow over the prior year
period was attributable to the following:
$ 310,000 increase in premiums received
347,000 decrease in premium paid to reinsurers
416,000 recovery from reinsurers
489,000 decrease in losses and loss adjustment expenses paid
976,000 decrease in operating expenses paid
335,000 income tax refund received
160,000 reduction in dividends paid to policyholders
(102,000) decrease in interest received
----------
$2,931,000 improvement in cash flow from operations
16
<PAGE> 17
The Company anticipates that net investment income of $2.6 million in 1997 and
a cash position of $10.8 million at September 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
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)
November 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> SEP-30-1997
<DEBT-HELD-FOR-SALE> 33,197,873
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7,242
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 33,205,115
<CASH> 10,790,490
<RECOVER-REINSURE> 166,700
<DEFERRED-ACQUISITION> 165,293
<TOTAL-ASSETS> 59,491,400
<POLICY-LOSSES> 28,030,182
<UNEARNED-PREMIUMS> 7,819,900
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 19,998
<OTHER-SE> 21,803,443
<TOTAL-LIABILITY-AND-EQUITY> 59,491,400
4,231,305
<INVESTMENT-INCOME> 1,936,459
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 2,861,880
<UNDERWRITING-AMORTIZATION> 1,234,083
<UNDERWRITING-OTHER> 1,639,296
<INCOME-PRETAX> 432,505
<INCOME-TAX> 204,356
<INCOME-CONTINUING> 228,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 228,149
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
