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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 (I.R.S. Employer Identification Number)
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)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part II of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value as of March 27, 1997 of the voting stock held
by non-affiliates of the Registrant cannot be determined since there is no
market at this time for the stock.
As of March 27, 1997 there were 1,999,774 shares outstanding of the
Registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
As provided herein, portions of the following documents are incorporated herein
by reference.
Document Part of 10-K
-------- ------------
1996 Annual Report to Stockholders II
Proxy Statement for the 1997 Annual Meeting of Stockholders III
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THE TENERE GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business............................................................. 3
2. Properties........................................................... 10
3. Legal Proceedings.................................................... 10
4. Submission of Matters to a Vote of Security Holders.................. 10
PART II
5. Market for the Registrant's Common Stock and Related Stockholder
Matters.............................................................. 11
6. Selected Financial Data.............................................. 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................. 11
8. Financial Statements and Supplementary Data.......................... 11
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures................................................ 12
PART III
10. Directors and Executive Officers..................................... 12
11. Executive Compensation............................................... 13
12. Security Ownership of Certain Beneficial Owners and Management....... 13
13. Certain Relationships and Related Transactions....................... 13
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 14
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PART I
ITEM 1. BUSINESS
HISTORY
Risk Control Associates, Inc., an assessable mutual property and
casualty insurance company, was organized in 1976 under Chapter 383 of
the Revised Missouri Statutes (RSMo) to provide professional liability
coverage to physicians and dentists practicing in the State of
Missouri. In 1991, the Company reorganized under Section 379.010 of
the RSMo and became a non-assessable mutual property and casualty
insurance company. Its name was changed to RCA Mutual Insurance
Company (RCA). In 1995, the Company converted from a mutual to a stock
property and casualty insurance company and its name was changed to
Intermed Insurance Co. (Intermed). Effective with the demutualization,
Intermed became a wholly-owned subsidiary of The Tenere Group, Inc.
(Tenere), a Missouri holding company formed during the demutualization
process, and the policyholders of RCA became the stockholders of
Tenere.
Tenere has two principal operating subsidiaries, Intermed, which writes
medical and dental malpractice insurance, and Interlex Insurance
Company (Interlex), which writes legal malpractice insurance. Both
companies are admitted and write business in the States of Missouri and
Kansas. Interlex was formed in 1994 when RCA merged two of its
subsidiaries, Insurance Risks, Ltd., a Cayman Island corporation , and
Springfield Casualty Company, a Missouri corporation. Tenere operates
its businesses through a wholly-owned management company, Insurance
Services, Inc. (ISI), pursuant to a management contract between
Intermed, Interlex and ISI. Neither Tenere, Intermed nor Interlex have
employees and all persons conducting the businesses of these companies
are employees of ISI. The management contract with ISI is, in effect,
a cost reimbursement so that ISI makes neither a profit nor a loss.
PRODUCTS
Intermed currently writes medical and dental malpractice insurance in
the States of Missouri, Kansas and, through a purchasing group, Texas.
Since the formation in 1976 of a predecessor company, medical and
dental malpractice insurance has been its only line of business.
Insurance is written on two policy forms, occurrence and claims-made.
Prior to September 1, 1995 Intermed also wrote business on a
claims-paid policy form. Estimates of losses and loss adjustment
expenses on occurrence coverages are charged to income as claims are
incurred. Estimates of losses and loss adjustment expenses on
claims-made coverages are charged to income as claims are reported.
Claims-paid coverages insured against claims which were reported and
paid during the period the policy was in effect. Intermed's
obligation to defend and pay claims ended upon expiration of a
claims-paid policy. Claims-paid losses were incurred at the time of
payment so no reserves were required on open claims. Intermed,
however, was contractually liable for claims that had been reported
during the claims-paid policy period if the Company chose not to renew
or discontinued a claims-paid policy.
Intermed discontinued writing claims-paid policies effective September
1, 1995. As these policies expired over the twelve-month period ending
August 31, 1996, claims-paid policyholders were given the opportunity
to convert to claims-made policy. Reserves for all reported claims on
claims-paid policies which non-renewed or discontinued during the
period September 1, 1995 through August 31, 1996 totaled $3,977,000 at
December 31, 1996 net of reinsurance.
At December 31, 1996, Intermed had 1,228 policies in force: 485
occurrence and 743 claims-made. This was a decrease of 66 from the
prior year end. During the twelve-month period ended August 31, 1996,
367 or 91% of claims-paid policyholders converted to claims-made
policies.
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Interlex writes legal malpractice insurance on a claims-made policy
form. At December 31, 1996, the Company had 428 policies in force, an
increase of 232 over the prior year end.
MARKETING
Intermed sells its products through salaried employees and agents. For
the calendar year 1996, salaried employees wrote 70% and agents wrote
30% of total premiums written. Intermed will continue to market its
products through salaried employees and agents, with primary emphasis
on direct sales.
During 1996, Intermed formed a purchasing group, Intermedical of Texas,
Inc., and commenced operations offering medical malpractice insurance
to physicians in the State of Texas. Employees of ISI staff the
purchasing group from an office in Austin, Texas. During the first
quarter of 1997, a second purchasing group, Dental Defense Specialists,
Inc. was organized for the purpose of marketing malpractice insurance
to dentists in Texas.
Interlex also markets legal malpractice insurance through salaried
employees and agents. In calendar year 1996, salaried employees
produced 82.5% of total premiums written and agents 17.5%. Interlex
plans to continue distributing its products through salaried employees
and agents, with primary emphasis on direct sales. A purchasing group
for lawyers, Lawyers' Liability Association, Inc., has been organized
but has not commenced operations. During 1997, Interlex will seek
admission to the States of Arkansas, Oklahoma and Texas.
COMPETITION
The insurance business is highly competitive. In both Missouri and
Kansas, Intermed and Interlex compete with both regional and national
companies. In 1995, the last year for which statistics are available
from the Missouri Department of Insurance, there were 54 companies
writing medical malpractice insurance in the state. The top five
writers had 67.47% of the market. The largest market share was 20.86%.
Intermed, the sixth largest writer in 1995 in the state, had a market
share of 8.04%.
Eight companies wrote legal malpractice insurance in the State of
Missouri in 1995 according to the Missouri Department of Insurance.
One company, sponsored by the Missouri Bar Association, had a market
share of 72.3%; Interlex, which commenced operations in October 1994,
had a market share of 2.3% and was the fifth largest writer.
A number of hospitals in Missouri have begun purchasing the medical
practices of fee-for-service physicians and making the physicians
employees of the hospital or a corporate entity affiliated with the
hospital. A number of these physicians formerly purchased their own
professional liability insurance through smaller, physician-owned
insurance companies such as Intermed . As a result of the
consolidation, many of the hospitals purchasing the practices of
physicians have self-insured or seek professional liability insurance
from professional liability carriers with capital and surplus greater
than that of Intermed and at premiums lower than those currently
offered by Intermed.
The insurance industry is impacted by legislative changes, judicial
interpretations, market competition, inflation and statutory
requirements. The insurance industry is also subject to cyclical
patterns varying between "hard" and "soft" markets. The usual duration
of the cycle from one "hard" market through a "soft" market to another
"hard" market is approximately six to seven years. During the "hard"
part of the cycle, insurance is more difficult to obtain and the price
of the product is higher. It is possible to characterize this segment
as a "seller's" market. The "soft" part of the cycle is characterized
with ready availability of insurance products and com-
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mensurately lower prices for the product. This segment could be
characterized as a "buyer's" market. During the soft portion of the
cycle there is a downward pressure on pricing, thereby subjecting
Intermed to increased pricing pressures which may have an adverse
impact on its business and operations. At the present time, the
insurance industry has generally been in the soft portion of the cycle
for approximately ten years. While the industry has been in the soft
portion of the cycle for an unusually long period, no assurance can be
given that the industry will enter a hard market in the near future.
Intermed currently has excess capacity and could double its current
premium volume while maintaining required premium to surplus ratios.
UNDERWRITING
Underwriting for both Intermed and Interlex is performed by an
experienced staff at the Company's home office in Springfield,
Missouri. This is augmented by Underwriting Committees composed of
physicians and dentists for Intermed and lawyers for Interlex. Because
these Committees are geographically broad-based, there is, in most
instances, personal knowledge of applicants and renewals. This
structure has enabled the Companies to maintain uniformly high
underwriting standards.
REGULATION
The activities of Intermed and Interlex are regulated by the Missouri
Department of Insurance. The companies are subject to examination by
the Department on a periodic basis. Such examinations pertain to many
aspects of the companies' operations and financial condition, including
loss reserves, investments, licensing and rates.
A financial examination and a limited market conduct examination were
conducted by the Missouri Department of Insurance during 1996. There
were no major findings or recommendations.
LOSS RESERVES AND CLAIMS
Loss reserves are the amounts reserved by Intermed and Interlex to
provide funds for payment of policyholders' claims in the future. An
insurance company must accumulate substantial loss reserves because
policies provide for payments of substantial amounts in the future for
claims that have occurred in prior contract periods. These loss
reserves are established as balance sheet liabilities representing
estimates of future amounts needed to pay claims and related expenses
with respect to insured events which have occurred, including events
that have not yet been reported.
Loss reserves associated with professional liability coverage tend to
be relatively higher than other types of property and casualty
insurance for primarily two reasons: the "tail" and the "trend." The
time between the occurrence and settlement of a claim is the "tail."
Property coverage is generally a "short tail" line of business where
loss reserves represent only those claims in the adjustment or
reporting stages of the claim and which will, for the most part, be
settled within the next year. Liability coverage is generally a "long
tail" line and the reserves represent claims that can take up to five
to seven years to settle due to the fact that discovery of the injury
can take several years and because of the complexity of the issues
inherent in the claims. This means that while property loss reserves
represent a few months to a year of losses, professional liability loss
reserves represent five to seven years of losses at any one time.
Also, professional liability loss reserves, due to the length of time
before settlement, are more sensitive than property lines to changes in
external factors such as increased medical costs, increased jury awards
and changes in the litigation environment. These external factors are
used to calculate the "trend," which is the yearly change in the
overall costs of coverage. The trend is factored into the calculation
of the loss reserves and contributes to higher reserves for
professional liability.
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Intermed employs an independent consulting actuary to make
recommendations in the establishment of loss reserves and to render an
opinion regarding the adequacy of Intermed's statutory loss reserves.
The quantification of reserves is complex and imprecise as a result of
the need to project future contingent events and the unpredictability
of medical professional liability claims. In determining reserve
levels, the actuaries rely primarily on historical loss experience,
adjusted for changing circumstances as deemed appropriate. This
reliance is based on the assumption that historical loss experience
provides a good indication of future loss experience despite
uncertainties in loss cost trends and delays in reporting and settling
claims. These uncertainties are increased by changes in normal
inflation, changing propensities of individuals to file claims and new
causes of action. Despite these uncertainties in the determination of
reserve levels, management believes that the methods used by Intermed
and Interlex in establishing reserves are reasonable and appropriate.
As additional information becomes available and is reviewed, estimates
reflected in earlier reserves may be revised upward or downward. Any
such increases could have an adverse effect on results for the period
in which adjustments are made. The uncertainties inherent in
estimating ultimate losses on the basis of past experience have grown
significantly in recent years as a result of judicial expansion of
liability standards and expansive interpretations of insurance
contracts.
Reserves for losses and loss adjustment expenses are estimated based on
Tenere's consolidated historical loss and loss adjustment expense
experience supplemented by insurance industry loss data. The reserves
are reported on a present value basis discounted at the rate of 3% in
1996, 4% in 1995 and 5% in 1994. At the direction of the Missouri
Department of Insurance, the discount will be eliminated ratably over
the five-year period ending December 31, 1998.
The following Loss Reserve Development Table sets forth the development
of losses and loss adjustment expense reserve liabilities of Tenere for
the years ended December 31, 1996 through 1986. The top line of the
table shows the estimated liability for unpaid losses and loss
adjustment expense recorded at the end of each of the periods
indicated. These liabilities represent the estimated amount of losses
and loss adjustment expense reserve for claims arising in the then
current year and all prior years that are unpaid as of the end of each
period.
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GUIDE VI DISCLOSURE
LOSS RESERVE DEVELOPMENT TABLE
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid Losses and
Loss Adjustment Expenses 25,788 25,461 25,695 25,304 23,021 17,070 21,737 29,389 27,120 21,310
Cumulative Amount of Liability
Paid as of:
One year later 8,399 4,720 4,761 5,740 6,598 7,771 6,787 2,893 1,870
Two years later 11,342 8,085 9,830 12,093 14,080 14,200 9,548 4,646
Three years Later 14,375 13,478 15,096 18,030 19,651 16,636 7,082
Four years later 16,441 16,160 20,433 23,262 21,949 11,496
Five years later 21,922 21,863 24,523 24,731 15,097
Six years later 23,926 25,250 25,251 16,844
Seven years later 27,258 25,730 17,303
Eight years later 26,542 17,704
Nine years later 18,450
Liability reestimated as of:
One year later 26,876 23,759 25,850 26,277 26,677 22,351 28,186 26,765 17,612
Two years later 23,550 23,824 27,023 28,436 28,462 26,147 26,217 19,467
Three years Later 23,253 25,280 28,861 28,711 28,835 24,660 18,904
Four years later 24,303 27,309 29,380 30,947 28,899 17,824
Five years later 26,094 28,567 31,136 30,275 16,585
Six years later 26,883 30,822 30,131 20,485
Seven years later 29,592 29,201 20,418
Eight years later 28,101 19,949
Nine years later 19,335
Cumulative redundancy (deficiency) (1,415) 2,145 2,051 718 (9,024) (5,146) (203) (961) 1,975
Gross liability - end of year 32,687 26,623 28,280
Reinsurance recoverable 7,099 1,162 585
------ ------ ------
Net liability - end of year 25,788 25,461 25,695
====== ====== ======
</TABLE>
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Tenere's claims philosophy is to defend fully all claims in which an
evaluation reveals little or no negligence. In those claims in which
liability exists, Tenere moves promptly to settle the claim early in
order to minimize indemnity and loss adjustment expenses.
The Claims Department is staffed with experienced claims specialists
and is supervised by the Vice President-Claims/General Counsel of
Tenere. The case load per claims specialist is approximately 120
cases. This is purposefully kept low in order to allow for intensive
scrutiny of each claim, close tracking of the progress of each claim
and containment of loss adjustment expenses through constant
monitoring.
Based upon Tenere's data, 80% of claims closed in 1996 were with
payment of no indemnity. The average settlement for claims closed in
1996 with the payment of indemnity was approximately $165,000. Average
allocated loss adjustment expenses for claims closed in 1996 was
approximately $11,000.
REINSURANCE
Intermed had three reinsurance treaties in place during 1996:
(1) A primary excess of loss reinsurance treaty with Lloyd's
Underwriters of London, England. The treaty covered the period
October 1, 1993 through September 30, 1996 with limits of
$1,600,000 excess of $400,000. The treaty was renewed effective
October 1, 1996 for a three-year period ending September 30, 1999.
Where two or more policies and/or insureds are involved in the
same loss occurrence, the limits are $1,600,000 excess of
$400,000. The maximum premium ceded under the contract ended
September 30, 1996 would be 22.5% of net premiums earned during
the contract period. The maximum ceded under the contract ending
September 30, 1999 would be 20% assuming the contract remains in
effect for the full three year period. In 1996, Intermed ceded
earned premiums of approximately $2,208,000 and losses and
allocated loss adjustment expenses of approximately $1,674,000.
This type of reinsurance provides protection during periods when
losses are both frequent and severe and is not intended to cover
all losses.
(2) A "catastrophic awards made" excess of loss reinsurance
with Lloyd's Underwriters of London with limits of $5,000,000
excess of $250,000 for claims made after October 1, 1993 and excess
of $1,000,000 for claims made prior to that date, net of all other
reinsurance. The period covered by the treaty is through September
30, 1997 at an annual premium of 1.6% of gross net premiums
written. In 1996, Intermed ceded written premiums of approximately
$144,000 and losses of $-0-. This type of insurance covers the
Company for awards made in excess of the policyholder's original
policy limit for which the policyholder is able to hold the Company
responsible. It also covers claims related to extra-contractual
obligations.
(3) Effective January 1, 1996, the Company entered into an
Accident Year Excess of Loss Reinsurance Agreement with American
Re-Insurance Company. Under the terms of the Agreement, the
Reinsurer was responsible for 100% of the Company's aggregate
ultimate net loss from claims-paid coverages in 1996 in excess of
$4,176,000. The Reinsurers' maximum liability was limited to
$4,800,000. In 1996, the Company ceded claims-paid losses of
$2,886,000 and premiums earned of $450,000 under this section of
the Agreement.
Under this treaty, the Reinsurer also agreed to indemnify the
Company for the aggregate ultimate net loss on occurrence and
claims-made coverages in excess of the Company's
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accident year loss ratio for the four years commencing January 1,
1996 and ending December 31, 1999. The 1996 accident year loss
ratio was 75%. For subsequent years, the loss ratio shall be the
average loss ratio for the three accident years immediately
preceding the accident year for which the computation is being
made plus 2%-5% as mutually agreed to by the Reinsurer and the
Company. In 1996, the Company ceded losses of $2,000,000, the
maximum allowable, and premiums earned of $1,600,000 under this
section of the Agreement.
Interlex had three reinsurance treaties in place during 1996:
(1) A primary excess of loss reinsurance treaty with Lloyd's
Underwriters of London, England. The treaty covers the period
October 1, 1996 through September 30, 1997 with limits of $700,000
excess of $300,000 subject to a maximum recoverable of $2,100,000.
However, if the premium income of Interlex exceeds $500,000, the
maximum recoverable shall increase to $3,500,000. The premium is
7.5% of gross net premiums written for policy limits of $300,000
or less, 16.5% of gross net premiums written for policies with
limits of $500,000 and 36% of gross net written premiums for
policies with limits of $1,000,000. In 1996, Interlex ceded
written premiums of approximately $208,000 and losses of $-0-.
(2) A prior agreement excess of loss reinsurance treaty with
Lloyd's Underwriters of London, England covering the period
October 1, 1996 through September 30, 1997. Limits of the treaty
are $5,000,000 with a minimum underlying of $1,000,000 for each
insured and $3,000,000 in the aggregate each policy where
applicable. Ceded premium is equal to 100% of the policy premium
less a 10% ceding commission. In 1996, Interlex ceded written
premiums of approximately $46,000 and losses of $-0-.
(3) Effective October 1, 1996, the "catastrophic awards made"
treaty with Lloyd's Underwriters of London was expanded to include
Interlex Insurance Company under the same terms outlined above.
Management has confidence in the financial strength of the Lloyd's
syndicates and American Re-Insurance Company with which it reinsures,
and believes that amounts shown as due from reinsurers are fully
recoverable.
INVESTMENTS
Both Intermed and Interlex employ Boatmen's Trust Company,
headquartered in St. Louis, Missouri, to manage their investment
portfolios. Boatmen's Trust Company operates under general investment
guidelines which are adopted by the Boards of Directors of Intermed and
Interlex and which are reviewed periodically to assure that they are
consistent with the companies' philosophy and needs. Under the
companies' current guidelines, investments will be in U.S. Treasuries,
U.S. Agencies, high grade (Moody's and Standard & Poor's rated A or
better) corporate debt, and municipal tax-exempt debt rated Aa or
better by Moody's and Standard & Poor's. No security purchased shall
have a final maturity longer than ten years. Additionally, the
following guidelines are followed to ensure diversification of the
portfolio:
- direct or guaranteed obligations of the U.S. Government
and its agencies may be held without limit.
- corporate debt shall not exceed 10% of the portfolio. No
more than 2% will be invested in any one issuer.
- Municipal (tax-exempt) debt shall not exceed 15% of the
portfolio. No more than 2% will be invested in any one issuer.
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- Portfolio investments are limited to U.S. dollar
denominated securities.
At December 31, 1996, cash and invested assets totaled $46,306,000. Of
this total, cash and cash equivalents totaled $16,935,000. During
1996, $13,689,000 was reinvested at a yield of approximately 7%.
Tenere also disposed of $4,594,000 in low-yielding bonds without
realizing a significant loss. Proceeds from these sales, as well as
from other sales and maturities, were invested short-term pending an
anticipated increase in interest rates in early 1997.
The market value of bonds held available-for-sale and carried at market
at December 31, 1996 was $29,370,000 and there was a net unrealized
gain of $252,000. At prior year end, the market value of bonds held
available for sale was $562,000 above amortized cost.
TRENDS
Tenere's most significant costs are losses and loss adjustment expenses
and the impacts of regulation, medical costs, jury awards and the
litigation environment are discussed above.
EFFECT OF INFLATION
Inflation has an effect on Tenere's general and administration expenses
through higher wages and the costs of goods and services. Inflation
impacts loss adjustment expenses as attorneys and other consultants
pass on their increased costs through increased fees.
EMPLOYEES
Neither Tenere, Intermed nor Interlex had employees during 1996.
Insurance Services had 24 employees at December 31, 1996 and these
employees provided all services required by Tenere and the two
insurance companies under management contracts approved by each
company's Board of Directors. Trout Insurance Services, Inc., was
inactive during 1996.
ITEM 2. PROPERTIES
Neither Tenere nor any of its subsidiaries owned any real estate at
December 31, 1996. ISI, a wholly-owned subsidiary of Intermed, leases
the Company's home office for approximately $78,000 per year to June
30, 2000 and approximately $89,000 per year thereafter through June 30,
2002. The lease commenced on July 1, 1995 for a period of seven years
with an option to renew for an additional three years. ISI also leases
office space in Austin, Texas for $28,000 the first year, $28,000 the
second year, and $29,000 the third year. The lease commenced on May 7,
1996 for a period of three years.
ITEM 3. LEGAL PROCEEDINGS
Neither Tenere nor any of its subsidiaries are subject to any
material pending legal proceedings other than ordinary routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Tenere did not submit any matters to a vote of its security holders
during the quarter ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Tenere common stock is not listed on any securities exchange or quoted
on any automated quotation system such as the National Association of
Securities Dealers Automated Quotations System ("NASDAQ"). There has
been no independent market for Tenere common stock and no assurance can
be given that an independent market will develop. As of December 31,
1996, there were approximately 1143 holders of record of shares of
Tenere common stock. Tenere has not paid a dividend since inception.
However, the Company's Board of Directors will, from time to time,
consider the issue based upon Tenere's financial condition, results of
operations and capital requirements at such time.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data is included on Page 23 of Tenere's 1996 Annual
Report to Stockholders and is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations is included on Pages 3 through 5 of Tenere's 1996 Annual
Report to Stockholders and is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Tenere Group,
Inc. are included on the following pages of Tenere's 1996 Annual Report
to Stockholders and are incorporated by reference herein.
Annual Report
Page(s)
-------
Independent Auditors' Report 7
Consolidated Balance Sheets at
December 31, 1996 and 1995 8
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994 9
Consolidated Statements of Stockholders'/Policyholders'
Equity Years ended December 31, 1996, 1995 and 1994 10
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994 11
Notes to Consolidated Financial Statements 12
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Statement of Management's Responsibility 22
Selected Financial Information 23
The following is supplementary financial information of Tenere or RCA
for each of the fiscal quarters in the years ended December 31, 1996
and 1995.
SUPPLEMENTARY FINANCIAL DATA
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended:
December 31, September 30, June 30, March 31,
In thousands, except per share amounts 1996 1996 1996 1996
----------- ------------ -------- ---------
<S> <C> <C> <C> <C>
Net premiums earned $ 1,604 $ 1,406 $2,348 $2,288
Total revenues 2,159 2,081 3,028 2,988
Losses and loss adjustment expenses(1) 2,496 4,505 2,325 1,900
Total expenses 3,857 5,256 2,918 2,724
Net income (1,105) (2,092) 89 174
Net income per common share $ (0.55) $ (1.05) $ 0.04 $ 0.09
<CAPTION>
December 31, September 30, June 30, March 31,
1995 1995 1995 1995
----------- ------------ -------- ---------
<S> <C> <C> <C> <C>
Net premiums earned(2) $ 4,125 $ 2,597 $2,557 $2,622
Total revenues 4,703 3,301 3,255 3,260
Losses and loss adjustment expenses 2,303 1,778 1,618 1,977
Total expenses 2,720 2,700 2,472 2,794
Net income 1,215 461 521 313
Net income per common share $ 0.61 $ 0.23 $ 0.26 $ 0.16
</TABLE>
- ----------------
(1) The increase in loss and loss adjustment expenses in the third quarter of
1996 is due to the large number of claims-paid policyholders who converted
to claims-made in the third quarter.
(2) The increase in net premiums earned in the fourth quarter of 1995 is due
to a year-end reduction in the death, disability and retirement reserve as
claims-paid policies converted to claims-made.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information regarding Directors set forth under the caption
"Election of Directors" of the Registrant's Proxy Statement for its
1997 annual meeting of stockholders is incorporated herein by
reference. The other executive officers of Tenere, their ages and
principal offices held in Tenere, Intermed, Interlex and ISI are set
forth below:
ANDREW K. BENNETT, age 45, serves as Vice President - Claims and
General Counsel of Tenere, Intermed, Interlex and ISI. He also serves
as a Director of ISI. Mr. Bennett joined Tenere in June 1994 as
Corporate Counsel and was elected to his current positions in May 1996.
Prior to joining Tenere, Mr. Bennett practiced law in Springfield,
Missouri for 17 years. He is a member of the Missouri Bar.
12
<PAGE> 13
ANDREW C. FISCHER, age 46, serves as Vice President - Underwriting and
Policy Services of Tenere, Intermed, Interlex and ISI. He also serves
as a Director and Secretary of ISI. Mr. Fischer joined Tenere in 1987
as Chief Operating Officer and was elected to his current positions in
May 1996.
CLIFTON R. STEPP, age 34, serves as Vice President - Marketing of
Tenere, Intermed, Interlex and ISI. Mr. Stepp joined Tenere in 1990 as
Marketing Director and was elected to his current positions in May
1996.
JOSEPH D. WILLIAMS, CPA, age 60, serves as Vice President - Finance
and Chief Financial Officer of Tenere, Intermed, Interlex and ISI. He
also serves as Assistant Treasurer of Tenere, Intermed and ISI and as
Treasurer of Interlex. Mr. Williams joined Tenere in October 1994 as
Chief Financial Officer and was elected to his current positions in May
1996. Prior to joining Tenere, Mr. Williams served as Senior Vice
President and Controller of ITT Lyndon Insurance Group from 1987 to
1993 and as Senior Vice President and Deputy Controller of ITT
Diversified Financial Corporation from 1990 to 1991.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in Tenere's
Proxy Statement for the 1997 Annual Meeting of Stockholders under the
caption "Compensation of Executive Officers" and is incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is included in Tenere's Proxy Statement for the 1997
Annual Meeting of Stockholders under the captions "Voting Securities
and Principal Holders Thereof" and "Security Ownership by Management,"
which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption, "Certain Transactions" of
the Registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders is incorporated herein by reference.
13
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
(1) The financial statements incorporated by reference herein are listed
in PART II - Item 8 hereof.
(2) The financial statement schedules and auditors' report thereon
included herein are listed below:
Form 10-K
Page No.
--------
Report of Independent Accountants
on Schedules 16
Schedule I Summary of Investments Other Than Investments
in Related Parties 17
Schedule IV Reinsurance 18
Schedule VI Supplemental Information Concerning Property-
Casualty Insurance Operations 19
Schedules other than listed above are omitted because they are either
not required or not applicable or because the information is presented
in the consolidated financial statements or notes thereto.
(B) EXHIBITS
See exhibit index
(C) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by Tenere during the three months
ended December 31, 1996.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
THE TENERE GROUP, INC.
Date: 3/27/97 By: /s/Raymond A. Christy
------- ---------------------
Raymond A. Christy, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ T. E. Ashley 3-25-97
------------------------- -------
Thomas E. Ashley, M.D. Director and
Vice President
/s/ Gary O. Baker 3-27-97
------------------------- -------
Gary O. Baker, D.D.S. Director
/s/ Albert J. Bonebrake 3-27-97
------------------------- -------
Albert J. Bonebrake, M.D. Director
/s/ Raymond A. Christy 3-27-97
------------------------- -------
Raymond A. Christy, M.D. Director, President
and Chief Executive Officer
/s/ Harry O. Cole 3-27-97
------------------------- -------
Harry O. Cole, M.D. Chairman of the Board of
Directors
/s/ C. Richard Gulick 3-27-97
------------------------- -------
C. Richard Gulick, M.D. Director
/s/ Michael Hoeman 3-24-97
------------------------- -------
Michael D. Hoeman, M.D. Director, Secretary
and Treasurer
/s/ Christopher J. Jung 3-27-97
------------------------- -------
Christopher H. Jung, M.D. Director
/s/ Carroll R. Wetzel 3-27-97
------------------------- -------
Carroll R. Wetzel, D.O. Director
/s/ JD Williams 3-27-97
------------------------- -------
Joseph D. Williams Vice President-Finance,
Chief Financial Officer
and Principal Accounting
Officer
15
<PAGE> 16
The Board of Directors
The Tenere Group, Inc.:
Under date of March 27, 1997 we reported on the consolidated balance sheets of
The Tenere Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations andstockholders'/
policyholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which are included in The Tenere Group, Inc.
Annual Report to Stockholders , incorporated by reference in this Form 10-K. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules in the Form 10-K. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
March 27, 1997
16
<PAGE> 17
SCHEDULE I
THE TENERE GROUP, INC.
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Amount at
which
shown in
the balance
Type of investment Cost(A) Value(B) sheet
------------------ -------- -------- -----------
<S> <C> <C> <C>
Available for sale:
United States Government and
government agencies and
authorities $27,247 $27,475 $27,475
States, municipalities, and
political subdivisions 1,871 1,895 1,895
------- ------- -------
Total available for sale 29,118 29,370 29,370
------- ------- -------
Total fixed maturities $29,118 $29,370 $29,370
======= ======= =======
</TABLE>
(A) Cost for fixed maturities represents original cost, reduced by repayments
and adjusted for amortization of premiums and accretion of discount.
(B) Differences in carrying value as compared to cost for fixed maturities
arise because the bonds held available for sale are carried at market
value.
See accompanying report of independent auditors.
17
<PAGE> 18
SCHEDULE IV
THE TENERE GROUP, INC.
REINSURANCE
For the Three Years Ended December 31, 1996, 1995, and 1994
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Percentage
Gross Ceded to Assumed Net of amount
premiums other from other premiums assumed
written companies companies written to net
-------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1996:
Premiums
Medical Malpractice $ 7,503 4,402 - 3,101 0%
Legal Malpractice 621 253 - 368 0%
------- ----- ----- ------ -----
Total Premiums $ 8,124 4,655 - 3,469 0%
======= ===== ===== ====== =====
1995:
Premiums
Medical Malpractice $ 9,523 1,375 - 8,149 0%
Legal Malpractice 351 131 - 220 0%
------- ----- ----- ------ -----
Total Premiums $ 9,874 1,506 - 8,369 0%
======= ===== ===== ====== =====
1994:
Premiums
Medical Malpractice $12,272 1,272 - 11,000 0%
Legal Malpractice 96 72 - 24 0%
------- ----- ----- ------ -----
Total Premiums $12,368 1,344 - 11,024 0%
======= ===== ===== ====== =====
</TABLE>
See accompanying report of independent auditors.
18
<PAGE> 19
SCHEDULE VI
THE TENERE GROUP, INC.
SCHEDULE VI - SUPPLEMENTAL INFORMATION
Years Ended December 31, 1996, 1995, and 1994
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- -------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 85 $ 140 288
Reserves for unpaid losses and loss
adjustment expenses 32,887 26,623 26,280
Discount deducted from unpaid losses
and loss adjustment expenses 2,164 2,933 3,627
Unearned premiums 6,300 10,447 13,747
Earned premiums 7,646 11,901 10,657
Net investment income 2,627 2,654 2,639
Losses and loss adjustment expenses
incurred related to:
Current year 9,813 9,612 8,638
Prior year 1,414 1,936 (441)
Amortization of deferred policy
acquisition costs 340 431 519
Paid losses and loss adjustment
expenses 10,899 7,911 7,806
Gross premiums written 8,124 9,874 12,368
Discount rates utilized are as follows: 3% 4% 5%
</TABLE>
See accompanying report of independent auditors.
19
<PAGE> 20
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.
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, 1996, 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, 1996, 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, 1996, 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>
20
<PAGE> 21
<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, 1996, 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, 1996, 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.
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
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.
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.
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.
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.
10.24 Amendment No. 1 to Employment Agreement dated February 28, 1997, between
The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing.
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.
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
13 1996 Annual Report to Shareholders
21 Subsidiaries of the Registrant, filed as Exhibit 21 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
27 Financial Data Schedules.
</TABLE>
23
<PAGE> 1
Exhibit 10.1
[TO COME]
<PAGE> 1
EXHIBIT 10.21
THE TENERE GROUP, INC.
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement ("Amendment") has been
entered into as of this 28th day of February, 1997, by and between The Tenere
Group, Inc., a Missouri corporation ("Company"), and Raymond A. Christy, M.D.,
an individual ("Executive").
RECITALS
WHEREAS, the Company and the Executive are parties to that certain
Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and
WHEREAS, the Company and the Executive wish to amend the terms of the
Agreement to extend the initial Employment Period under the Agreement from May
6, 1999 to May 6, 2000;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the
Effective Date and ending on the later of (i) May 6,
2000, or (ii) May 6 of any succeeding fiscal year during
which notice is given by either party (as described in
Section 1.1(j)) of such party's intent not to renew this
Agreement.
2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(j) "TERM" means the period that begins on the Effective
Date and ends on the earlier of: (i) the Date of Termination
as defined in Section 3.6, or (ii) the close of business on
the later of May 6, 2000 or May 6 of any renewed term as set
forth in Section 2.1 of this Agreement.
3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections
1 and 2 hereof shall be effective as of the date of the execution of this
Amendment by the Company and the Executive. Except as amended hereby, terms
and conditions of the Agreement shall continue in full force and effect and
shall be interpreted in light of the amendments contained herein.
<PAGE> 2
IN WITNESS WHEREOF, the Executive and the Company, pursuant to the
authorization from its Board of Directors, have caused this Amendment to be
executed in its name on its behalf, all as of the day and year first above
written.
EXECUTIVE
Raymond A. Christy, M.D.
------------------------
Raymond A. Christy, M.D.
THE TENERE GROUP, INC.
By Andrew K. Bennett
---------------------
Name: Andrew K. Bennett
------------------
Title: General Counsel;
Vice Press.-Claims
-------------------
ATTEST: Michael D. Hoeman, M.D.
-------------------------
Michael D. Hoeman, M.D.
Secretary
-2-
<PAGE> 1
EXHIBIT 10.22
THE TENERE GROUP, INC.
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement ("Amendment") has been
entered into as of this 28th day of February, 1997, by and between The Tenere
Group, Inc., a Missouri corporation ("Company"), and Andrew K. Bennett, an
individual ("Executive").
RECITALS
WHEREAS, the Company and the Executive are parties to that certain
Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and
WHEREAS, the Company and the Executive wish to amend the terms of the
Agreement to extend the initial Employment Period under the Agreement from May
6, 1999 to May 6, 2000;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the
Effective Date and ending on the later of (i) May 6,
2000, or (ii) May 6 of any succeeding fiscal year during
which notice is given by either party (as described in
Section 1.1(j)) of such party's intent not to renew this
Agreement.
2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(j) "TERM" means the period that begins on the Effective
Date and ends on the earlier of: (i) the Date of Termination
as defined in Section 3.6, or (ii) the close of business on
the later of May 6, 2000 or May 6 of any renewed term as set
forth in Section 2.1 of this Agreement.
3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections
1 and 2 hereof shall be effective as of the date of the execution of this
Amendment by the Company and the Executive. Except as amended hereby, terms
and conditions of the Agreement shall continue in full force and effect and
shall be interpreted in light of the amendments contained herein.
<PAGE> 2
IN WITNESS WHEREOF, the Executive and the Company, pursuant to the
authorization from its Board of Directors, have caused this Amendment to be
executed in its name on its behalf, all as of the day and year first above
written.
EXECUTIVE
Andrew K. Bennett
--------------------------
Andrew K. Bennett
THE TENERE GROUP, INC.
By Raymond A Christy
--------------------------
Name: Raymond A. Christy
--------------------
Title: President
-------------------
ATTEST: Michael D. Hoeman, M.D.
-----------------------
Michael D. Hoeman, M.D.
Secretary
- 2 -
<PAGE> 1
EXHIBIT 10.23
THE TENERE GROUP, INC.
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement ("Amendment") has been
entered into as of this 25th day of February, 1997, by and between The Tenere
Group, Inc., a Missouri corporation ("Company"), and Andrew C. Fischer, an
individual ("Executive").
RECITALS
WHEREAS, the Company and the Executive are parties to that certain
Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and
WHEREAS, the Company and the Executive wish to amend the terms of the
Agreement to extend the initial Employment Period under the Agreement from May
6, 1999 to May 6, 2000;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the
Effective Date and ending on the later of (i) May 6,
2000, or (ii) May 6 of any succeeding fiscal year during
which notice is given by either party (as described in
Section 1.1(j)) of such party's intent not to renew this
Agreement.
2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(j) "TERM" means the period that begins on the Effective
Date and ends on the earlier of: (i) the Date of Termination
as defined in Section 3.6, or (ii) the close of business on
the later of May 6, 2000 or May 6 of any renewed term as set
forth in Section 2.1 of this Agreement.
3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections
1 and 2 hereof shall be effective as of the date of the execution of this
Amendment by the Company and the Executive. Except as amended hereby, terms
and conditions of the Agreement shall continue in full force and effect and
shall be interpreted in light of the amendments contained herein.
<PAGE> 2
IN WITNESS WHEREOF, the Executive and the Company, pursuant to the
authorization from its Board of Directors, have caused this Amendment to be
executed in its name on its behalf, all as of the day and year first above
written.
EXECUTIVE
Andrew C. Fischer
-----------------------------
Andrew C. Fischer
THE TENERE GROUP, INC.
By Raymond A. Christy
--------------------------
Name: Raymond A. Christy
-----------------------
Title: President
----------------------
ATTEST: Michael D. Hoeman, M.D.
-----------------------
Michael D. Hoeman, M.D.
Secretary
-2-
<PAGE> 1
EXHIBIT 10.24
THE TENERE GROUP, INC.
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement ("Amendment") has been
entered into as of this 28th day of February, 1997, by and between The Tenere
Group, Inc., a Missouri corporation ("Company"), and Clinton R. Stepp, an
individual ("Executive").
RECITALS
WHEREAS, the Company and the Executive are parties to that certain
Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and
WHEREAS, the Company and the Executive wish to amend the terms of the
Agreement to extend the initial Employment Period under the Agreement from May
6, 1999 to May 6, 2000;
NOW THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the
Effective Date and ending on the later of (i) May 6,
2000, or (ii) May 6 of any succeeding fiscal year during
which notice is given by either party (as described in
Section 1.1(j)) of such party's intent to renew this
Agreement.
2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(j) "TERM" means the period that begins on the Effective Date
and ends on the earlier of: (i) the Date of
Termination as defined in Section 3.6, or (ii) the close of
business on the later of May 6, 2000 or May 6 of any renewed
term as set forth in Section 2.1 of this Agreement.
3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in
Sections 1 and 2 hereof shall be effective as of the date of the execution of
this Amendment by the Company and the Executive. Except as amended hereby,
terms and conditions of the Agreement shall continue in full force and effect
and shall be interpreted in light of the amendments contained herein.
<PAGE> 2
IN WITNESS WHEREOF, the Executive and the Company, pursuant to the
authorization from its Board of Directors, have caused this Amendment to be
executed in its name on its behalf, all as of the day and year first above
written.
EXECUTIVE
Clifton R. Stepp
-----------------------------
Clifton R. Stepp
THE TENERE GROUP, INC.
By: Raymond A. Christy
--------------------------
Name: Raymond A. Christy
----------------------
Title: President
----------------------
ATTEST: Michael D. Hoeman, M.D.
-----------------------
Michael D. Hoeman, M.D.
Secretary
-2-
<PAGE> 1
EXHIBIT 10.25
THE TENERE GROUP, INC.
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement ("Amendment") has been
entered into as of this 28th day of February, 1997, by and between The Tenere
Group, Inc., a Missouri corporation ("Company"), and Joseph D. Williams, an
individual ("Executive").
RECITALS
WHEREAS, the Company and the Executive are parties to that certain
Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and
WHEREAS, the Company and the Executive wish to amend the terms of the
Agreement to extend the initial Employment Period under the Agreement from May
6, 1999 to May 6, 2000;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the
Effective Date and ending on the later of (i) May 6,
2000, or (ii) May 6 of any succeeding fiscal year during
which notice is given by either party (as described in
Section 1.1(j)) of such party's intent not to renew this
Agreement.
2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is
hereby deleted in its entirety and replaced with the following:
1.1(j) "TERM" means the period that begins on the Effective Date
and ends on the earlier of: (i) the Date of
Termination as defined in Section 3.6, or (ii) the close of
business on the later of May 6, 2000 or May 6 of any renewed
term as set forth in Section 2.1 of this Agreement.
3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in
Sections 1 and 2 hereof shall be effective as of the date of the execution of
this Amendment by the Company and the Executive. Except as amended hereby,
terms and conditions of the Agreement shall continue in full force and effect
and shall be interpreted in light of the amendments contained herein.
<PAGE> 2
IN WITNESS WHEREOF, the Executive and the Company, pursuant to the
authorization from its Board of Directors, have caused this Amendment to be
executed in its name on its behalf, all as of the day and year first above
written.
EXECUTIVE
Joseph D. Williams
---------------------------
Joseph D. Williams
THE TENERE GROUP, INC.
By: Raymond A. Christy
----------------------
Name: Raymond A. Christy
---------------------
Title: President
--------------------
ATTEST: Michael D. Hoeman, M.D.
-----------------------
Michael D. Hoeman, M.D.
Secretary
-2-
<PAGE> 1
EXHIBIT 13
THE TENERE GROUP, INC.
PROFESSIONAL LIABILITY INSURERS
Intermed Insurance Co. Interlex Insurance Co.
Insurance Services, Inc.
[LOGO]
1996 ANNUAL REPORT
<PAGE> 2
CORPORATE PROFILE
The Tenere Group, Inc., a publicly held insurance holding company, was
organized on April 27, 1995, when the demutualization of RCA Mutual Insurance
Company was completed. Policyholders of RCA Mutual on that date became
shareholders of The Tenere Group, Inc. in proportion to their premiums over the
previous five years.
The Tenere Group, Inc. is composed of Intermed Insurance Co. (formerly RCA
Mutual Insurance Company), which markets professional liability insurance to
physicians, surgeons, dentists, oral surgeons and ancillary healthcare
professionals in the States of Missouri and Kansas; Interlex Insurance Co.,
which markets professional liability insurance to lawyers and judges in
Missouri and Kansas; Insurance Services, Inc., a management company; and Trout
Insurance Services, Inc., a full-line property/casualty insurance agency.
The Tenere Group, Inc. had its origin in 1976 when three physicians in
Springfield, Missouri organized Risk Control Associates, Inc., an assessable
mutual insurance company, to provide defense for themselves and their
associates against claims of medical malpractice. In 1991, the Company was
reorganized as a non-assessable mutual property and casualty insurance company,
RCA Mutual Insurance Company, and, in 1995, was reorganized as a stock property
and casualty insurance company known as Intermed Insurance Co. Intermed is a
wholly-owned subsidiary of The Tenere Group, Inc.; Interlex Insurance Co.,
Insurance Services, Inc. and Trout Insurance Services, Inc. are wholly-owned
subsidiaries of Intermed.
FINANCIAL HIGHLIGHTS *
<TABLE>
<CAPTION>
DECEMBER 31 CHANGE
----------- ------
1995 TO 1994 TO
------- -------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and invested assets $46,306,000 $53,585,000 $49,185,000 -14% + 9%
Total assets 62,570,000 62,614,000 61,119,000 -0- + 2%
Total reserves, including unearned premiums 39,188,000 37,070,000 40,027,000 +6% - 7%
Stockholders' (1995 & 1996)/Policyholders'
(1994) equity 21,390,000 24,537,000 19,369,000 -11% + 27%
Net premiums written 3,469,000 8,369,000 11,024,000 -54% - 24%
Net premiums earned 7,646,000 11,901,000 10,657,000 -32% + 12%
Net investment income 2,627,000 2,654,000 2,639,000 +2% + 1%
Total revenues 10,256,000 14,519,000 12,873,000 -26% + 13%
Dividends to policyholders -------- 617,000 1,289,000 -100% - 52%
Net income (loss) (2,934,000) 2,510,000 797,000 -202% +215%
Net income (loss) per share (1.47) 1.26 N.A. -202% N.A.
Book value per share 10.70 12.27 N.A. -11% N.A.
</TABLE>
* Amounts rounded to nearest thousand, except per share items.
1
<PAGE> 3
PRESIDENT'S REPORT
The year ended December 31, 1996 was one in which your Company encountered a
number of difficulties and a number of exciting opportunities in the
marketplace. In my report, I will tell you how your Board of Directors and the
management team dealt with each.
MEDICAL MALPRACTICE
- - The conversion of claims-paid policyholders to claims-made coverages
which commenced on September 1, 1995 was completed on August 31, 1996.
During that twelve-month period, 323 claims-paid policyholders, more than
90% of the total, chose to convert to a claims-made policy form upon
expiration of their claims-paid policy. I believe that this was a strong
indication of the loyalty which exists among our policyholders who are
now, since the demutualization, also the stockholders of Tenere.
Claims-paid coverages insured against claims which were reported and paid
during the period the policy was in effect. The Company's obligation to
defend and pay claims ended upon expiration of the policy. Claims-paid
losses were incurred at time of payment, therefore no reserves were
required on open claims. However, when the Company chose to discontinue
writing and renewing claims-paid policies, it became contractually liable
for all open claims that had been reported during the claims-paid policy
period. This resulted in the establishment of reserves of $1,592,000 at
December 31, 1995 and $2,575,000, net of reinsurance, at December 31,
1996. The conversion of claims-paid policyholders to claims-made coverages
is now complete and the cost is fully reflected in the accompanying
financial statements.
- - 1996 was the first full year in which Intermed granted claim-free
discounts to policyholders. Discounts ranged from 5% for one claim-free
year to a maximum of 25% for five claim-free years. Claim-free discounts
granted in 1996 totaled approximately 20% of gross premiums, an indication
of the high practice standards of our insureds. The claim-free discount
program replaced the mutual company practice of paying dividends to
policyholders. Dividends generally totaled 12% of gross premiums, so a
greater amount of each premium dollar is now being returned to
policyholders. The difference is that the dollars are now distributed on
the basis of loss experience rather than across-the-board.
- - Extreme competitive conditions in Missouri required additional discounts
from manual rates in 1996. Market-driven discounts totaled approximately
10% of gross premiums. It appears that these unfavorable market
conditions are continuing unabated, and, in response, Intermed will be
required to continue granting discounts of this magnitude in 1997.
- - In mid 1996 Intermed was recognized as a surplus lines carrier in the
State of Texas and began to write professional liability insurance on
physicians through a physician-sponsored purchasing group, Intermedical of
Texas, Inc. In 1997, the Company will begin to write professional
liability insurance on dentists through a second purchasing group, Dental
Defense Specialists, Inc. Premium projections for the State of Texas in
1997 are $4,000,000.
LEGAL MALPRACTICE
- - 1996 was the second full year of operations of Interlex, and the Company
exceeded its sales goal of $600,000 for premiums written. The sales goal
for 1997 is $1,200,000.
- - The marketing staff of Interlex has been augmented by the addition of one
new marketing representative in 1997, and marketing efforts will be
expanded into the State of Kansas. The Company is currently seeking
admission to three additional states, Arkansas, Oklahoma and Texas. It
will also commence operations in the State of Illinois through a
purchasing group, Lawyers' Liability Association, Inc.
2
<PAGE> 4
FINANCIAL RESULTS
Primarily because of the conversion of claims-paid policyholders to claims-made
coverages there was a net loss of $2,934,000 or $1.47 per share in 1996. The
Company decided to discontinue writing claims-paid coverages effective
September 1, 1995 because premium rates required for this maturing block of
business were equivalent to those charged for claims-made coverages which offer
superior protection for policyholders. Operations in 1996 were also impacted
by indemnity and loss adjustment expense payments $3,708,000 higher than in the
prior year. Management believes that 1996 was an aberration and that paid
losses in 1997 will return to the level experienced in prior years. We do not
believe that there has been a fundamental change in the historic profitability
of the Company's block of medical malpractice business.
PLAN OF OPERATION
Management will take the following steps in 1997 to return the Company to
growth and profitability:
1. Medical malpractice marketing efforts will focus on Texas and Kansas
where competitive conditions are not as extreme as in Missouri.
2. A new class plan and rate manual for medical malpractice will be
introduced in Missouri and Kansas which will make Intermed more
competitive in those specialties in which the Company has had favorable
loss experience. Management believes that this will stabilize our current
blocks of business in these states and premium income is projected at
$8,000,000 in 1997.
3. Legal malpractice marketing efforts will be expanded into Kansas and
Illinois and Interlex will seek admission to the States of Arkansas,
Oklahoma and Texas. We will continue to augment the marketing staff as
the Company is admitted in additional states.
/s/ RAYMOND A. CHRISTY, M.D.
Raymond A. Christy, M.D.
President and Chief Executive Officer
Springfield, Missouri
March 27, 1997
3
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
PERIODS ENDED DECEMBER 31, 1996
FINANCIAL CONDITION
ASSETS
Total assets declined slightly in 1996, from $62,614,000 at December 31,
1995 to $62,570,000 at December 31, 1996. Investments increased from
$22,404,000 at prior year end to $29,370,000 at the current year end due to
the reinvestment of $13,689,000 in long-term bonds with an average yield of
7.18%. Bonds with a book value of $6,294,000 and an average yield of 4.26%
were sold during the year. All bonds owned at December 31, 1996 were U.S.
Treasury, U.S. Agency or high-quality state obligations. The market value
of bonds exceeded amortized cost by $252,000 compared to an unrealized gain
of $562,000 at the prior year end. The maturity distribution of bonds held
at December 31, 1996 was $1,451,000 (5%) with a maturity of less than one
year, $6,552,000 (22%) with a maturity of over one through five years and
$21,115,000 (73%) with a maturity of over five years through ten years.
Future purchases will be concentrated in the one through five year range.
Cash and cash equivalents totaled $16,935,000 at December 31, 1996 compared
to $31,181,000 at the prior year end. The decrease was primarily due to the
net reinvestment of $7,395,000 in long-term bonds in 1996 as discussed above
and a negative cash flow from operations of $6,211,000 discussed below under
Liquidity and Capital Resources. Approximately $14,000,000 currently held
in cash equivalents will be reinvested long-term when interest rates
increase above our current target of 7.25%.
Premiums receivable decreased from $3,720,000 at December 31, 1995 to
$2,581,000 at the most recent year end due to the decline in net premiums
written discussed below in Results of Operations.
There was a significant increase in the reinsurance recoverable at December
31, 1996 from $1,162,000 at the prior year end to $7,458,000. The increase
was primarily due to an additional reinsurance treaty that was effective
January 1, 1996 under which $4,886,000 of losses and loss adjustment
expenses were ceded. The remainder of the increase was due to losses ceded
under the Company's primary excess of loss treaty, currently in its fourth
year.
Deferred income taxes at December 31, 1996 were $2,099,000 compared to
$1,772,000 at the prior year end. The income tax recoverable of $1,680,000
is taxes paid in early 1996 and prior profitable years that can be recouped
because of losses subsequently incurred. Other assets of $1,085,000 at
December 31, 1996 consist principally of computer software of $480,000,
furniture and equipment of $191,000 and Company-owned automobiles of
$94,000.
LIABILITIES
Reserves for losses and loss adjustment expenses increased from $26,623,000
at December 31, 1995 to $32,887,000 at December 31, 1996, an increase of
$6,264,000 or 24%. Of the increase, $6,172,000 was attributable to reserves
established for reported claims on policyholders who converted from
claims-paid to claims-made coverages during 1996. Claims-paid losses are
incurred at the time of payment so no reserves are required on open claims.
However, when the Company ceased renewing claims-paid policies effective
September 1, 1995, it was required to establish reserves for all open,
reported claims at the time of non-renewal.
The unearned premium reserve (UPR) declined from $10,447,000 at the prior
year end to $6,300,000 at December 31, 1996. There was a decrease of
$3,140,000 in the death, disability and retirement component (DD&R) of the
UPR due to the conversion of 267 claims-paid policyholders to claims-made
coverages
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
during 1996. The remainder of the decline was attributable to the lower
level of premiums written in 1996, discussed below in Results of Operations.
Total liabilities increased from $38,077,000 at December 31, 1995 to
$41,180,000 at the current year end due primarily to the increase in
reserves discussed above.
STOCKHOLDERS' EQUITY
Stockholders' equity declined from $24,537,000 at December 31, 1995 to
$21,390,000 at the current year end, a decline of $3,147,000. The decline
was attributable to the net loss of $2,934,000 discussed below in Results of
Operations and a $213,000 decrease in the net unrealized gain on bonds at
December 31, 1996 compared to prior year end.
RESULTS OF OPERATIONS
Direct premiums written were $12,368,000 in 1994, $9,874,000 in 1995 and
$8,124,000 in 1996. The decline of $2,494,000 from 1994 to 1995 was due to
a net loss of 96 insureds for Intermed, primarily due to individual
practices being purchased by larger groups or self-insured hospitals and to
the implementation of a claims-free discount program effective September 1,
1995. The decline of $1,750,000 from 1995 to 1996 was due to the full year
impact of the claims-free discount program and to other market-driven
discounts necessitated by competitive conditions in the medical malpractice
market in Missouri. In 1996, claims-free discounts approximated 20% of
gross premiums and market-driven discounts approximated another 10%. The
claims-free discount program will be continued in 1997 and it will be
necessary to continue granting market-driven discounts at the same level
experienced in 1996. Because of extreme competitive conditions in Missouri,
the Company will concentrate its marketing efforts for medical malpractice
insurance in Kansas and Texas in 1997. Intermed was recognized as a surplus
lines carrier in Texas in 1996 and writes medical malpractice insurance on
physicians through a physician-sponsored purchasing group, Intermedical of
Texas, Inc. In 1997 the Company will commence writing professional
liability insurance on dentists in Texas through a second purchasing group,
Dental Defense Specialists, Inc.
Interlex increased its number of insureds from 196 to 428 in 1996 and plans
to add another 400 insureds in 1997. While there will be some expansion
into Kansas during the year, the Company will concentrate its marketing
efforts in Missouri.
Premiums ceded to reinsurers increased from $1,344,000 in 1994 to $1,505,000
in 1995 to $4,655,000 in 1996. The significant increase of $3,150,000 in
1996 was due to:
1. A new accident year aggregate excess of loss reinsurance treaty
effective January 1, 1996 under which premiums of $2,050,000 were
ceded. This treaty covered losses incurred in calendar year 1996 in
excess of $4,176,000 on claims-paid policies and losses incurred in
1996 on occurrence and claims-made coverages in excess of 75% of
premiums earned on those coverages.
2. Losses ceded to a reinsurer under the Company's experience rated
primary excess of loss treaty resulted in $1,702,000 of ceded premiums.
As a result of the significant increase in premiums ceded to reinsurers, net
premiums written in 1996 were $3,469,000 compared to $8,369,000 in 1995 and
$11,024,000 in 1994.
There was an increase of $367,000 in the unearned premium reserve (UPR) in
1994 due to the increase in premiums written that year. The UPR decreased
$3,532,000 in 1995 and $4,178,000 in 1996. The primary reason for the large
decreases in 1995 and 1996 was the conversion of claims-paid policyholders
to claims-made coverages over the twelve-month period beginning September 1,
1995 and ending August 31, 1996. The death, disability and retirement
(DD&R) component of the UPR required for claims-made coverages is
substantially less than that required for claims-paid coverages, hence the
large releases in 1995 and 1996.
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net investment income was $2,627,000 in 1996 compared to $2,654,000 in 1995
and $2,639,000 in 1994.
Total revenues increased from $12,873,000 in 1994 to $14,519,000 in 1995 and
decreased to $10,256,000 in 1996. The reasons for these fluctuations have
been discussed above.
Sales and marketing expenses increased from $857,000 in 1994 to $955,000 in
1995 and $1,758,000 in 1996. The increase in 1995 was due to expansion of
the Home Office marketing staff. The significant increase in 1996 was due
to continued expansion of the Home Office marketing staff and to start-up
costs for a new sales office in Austin, Texas. As discussed above, Intermed
was recognized by Texas as an authorized surplus lines carrier in 1996 and
the Company opened a sales office staffed by employees of Insurance
Services, Inc.
Losses and loss adjustment expenses (LAE) declined from $8,197,000 in 1994
to $7,676,000 in 1995. The loss ratios were 77% in 1994 and 65% in 1995.
Calendar year 1995 benefited from a net release of $1,935,000 in loss
reserves related to prior accident years. Losses and LAE in 1996 totaled
$11,226,000, producing a calendar year loss ratio of 140%. The reasons for
the unfavorable loss experience in 1996 were:
1. Medical malpractice indemnity and LAE payments totaled $10,768,000
in 1996 compared with $7,060,000 in the prior year, an increase of
$3,708,000. Management believes that this significant increase was an
aberration and that paid losses in 1997 will return to the level
experienced in prior years. There is no reason to believe that there
has been a fundamental change in the historic profitability of the
Company's block of medical malpractice business. Because individual
indemnity payments in 1996 on prior year claims exceeded the reserves
established for those claims, there was a charge against current year
operations of $1,446,000.
2. As discussed above in the comments related to Liabilities, it was
necessary to establish reserves of $2,527,000, net of reinsurance, for
reported claims on claims-paid policies that converted to claims-made
coverages during 1996.
Primarily because of the factors discussed above, there was a net loss
before income taxes of $4,499,000 in 1996 compared with net income before
taxes of $3,833,000 in 1995 and $899,000 in 1994.
There was an income tax expense of $102,000 in 1994 and $1,323,000 in 1995
due to profitable operations in those years. There was an income tax
benefit of $1,564,000 in 1996 due to the net loss incurred.
Net income in 1994 was $797,000, increasing to $2,510,000 in 1995. There
was a net loss of $2,934,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Due to the continued restructuring of the bond portfolio and to a negative
cash flow from operations of $6,211,000, cash and cash equivalents totaled
$16,935,000 at December 31, 1996 compared to $31,181,000 at the prior year.
At December 31, 1996, approximately $14,000,000 invested short-term will be
re-invested in long-term bonds when interest rates improve above the current
level.
Normal operations are financed by premium and investment income. To provide
a margin of safety against unexpected cash calls, the maturity distribution
of the bond portfolio is carefully monitored to preclude forced liquidations
which could result in realized losses.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
In June 1995, the Company received a B+ (very good) rating from A.M. Best
Company, the premier rating agency of insurance companies. Best ratings are
divided into two groups, "Secure" and "Vulnerable" and the B+ rating is
classified as "Secure".
In 1996, A.M. Best increased the Company's rating from B+ to B++.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Tenere Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Tenere
Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations and stockholders'/policyholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Tenere Group,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
March 27, 1997
7
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments:
Bonds held to maturity, at amortized cost
(market - $1,854,359 in 1995) $ -- 1,867,111
Bonds held available for sale, at market value
(amortized cost - $29,117,835 in 1996;
$19,961,424 in 1995) 29,370,067 20,536,518
Common stock 340 340
----------- ----------
Total investments 29,370,407 22,403,969
Other assets:
Cash and cash equivalents, including interest-
bearing deposits of $14,889,744 in 1996 and
$29,614,311 in 1995 16,935,122 31,180,925
Premiums receivable 2,580,691 3,720,202
Reinsurance recoverable 7,458,298 1,162,495
Prepaid reinsurance premiums 750,000 1,175,252
Accrued investment income 527,139 567,306
Deferred policy acquisition costs 84,550 140,450
Deferred income taxes 2,098,792 1,772,314
Income taxes recoverable 1,680,190 --
Other 1,084,992 491,101
----------- ----------
Total other assets 33,199,774 40,210,045
----------- ----------
$62,570,181 62,614,014
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $32,887,407 26,623,138
Unearned premium reserve 6,300,111 10,447,006
Reinsurance premium payable 1,256,381 137,878
Income taxes payable -- 214,444
Other 736,579 654,270
----------- ----------
Total liabilities 41,180,478 38,076,736
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) (571,123) 2,576,452
Commitments and contingencies (see note 9)
----------- ----------
Total stockholders' equity 21,389,703 24,537,278
----------- ----------
$62,570,181 62,614,014
=========== ==========
</TABLE>
See notes to consolidated financial statements
8
<PAGE> 10
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Direct premiums written $ 8,124,319 9,874,270 12,367,991
Premiums ceded to reinsurers 4,655,382 1,505,427 1,343,902
----------- ---------- ----------
Net premiums written 3,468,937 8,368,843 11,024,089
(Increase) decrease in unearned
premium reserve 4,177,545 3,532,480 (367,216)
----------- ---------- ----------
Net premiums earned 7,646,482 11,901,323 10,656,873
Net investment income 2,626,983 2,654,037 2,639,266
Net realized investment losses (17,135) (36,263) (423,264)
----------- ---------- ----------
Total revenues 10,256,330 14,519,097 12,872,875
LOSSES AND EXPENSES:
Sales and marketing expenses 1,758,312 955,021 857,422
Other underwriting expenses 1,784,324 1,437,718 1,631,124
Losses and loss adjustment expenses 11,226,461 7,676,488 8,196,665
Dividends to policyholders (13,921) 616,948 1,288,641
----------- ---------- ----------
Total losses and expenses 14,755,176 10,686,175 11,973,852
----------- ---------- ----------
Income before income taxes (4,498,846) 3,832,922 899,023
Income tax (benefit) expense (1,564,360) 1,323,066 101,997
----------- ---------- ----------
Net income (loss) $(2,934,486) 2,509,856 797,026
----------- ---------- ----------
Net income (loss) per share $(1.47) 1.26 N/A
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements
9
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'/POLICYHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
RETAINED
EARNINGS/
COMMON CONTRIBUTED (ACCUMULATED POLICYHOLDERS'
STOCK CAPITAL DEFICIT) EQUITY TOTAL
------- ----------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- -- -- 20,844,790 20,844,790
Change in unrealized
investment gains (losses) -- -- -- (2,273,260) (2,273,260)
Net income -- -- -- 797,026 797,026
------- ---------- ---------- ----------- ----------
Balance at December 31, 1994 -- -- -- 19,368,556 19,368,556
Demutualization (note 1) $19,998 21,940,828 (2,592,270) (19,368,556) --
Change in unrealized
investment gains (losses) -- -- 2,658,866 -- 2,658,866
Net income -- -- 2,509,856 -- 2,509,856
------- ---------- ---------- ----------- ----------
Balance at December 31, 1995 19,998 21,940,828 2,576,452 -- 24,537,278
Change in unrealized
investment gains (losses) -- -- (213,089) -- (213,089)
Net income -- -- (2,934,486) -- (2,934,486)
------- ---------- ---------- ----------- ----------
Balance at December 31, 1996 $19,998 21,940,828 (571,123) -- 21,389,703
======= ========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (2,934,486) 2,509,856 797,026
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Net realized investment losses 17,135 36,263 423,264
Depreciation and amortization expense 187,418 160,634 127,288
Equity in loss of real estate partnership -- -- 2,225
Net change in deferred acquisition costs 55,900 147,172 (26,167)
Deferred income tax expense (benefit) (216,705) 487,427 (324,346)
Net amortization of discount on bonds 105,218 516,508 759,368
Change in deferred tax valuation allowance -- -- 6,028
Change in operating assets and liabilities:
Premiums receivable 1,139,511 423,063 (1,065,577)
Reinsurance balances (4,752,048) (1,308,346) (717,802)
Accrued investment income 40,167 795,427 (429,753)
Income taxes recoverable (1,894,634) 650,715 743,241
Other assets (158,515) 1,208 (24,620)
Reserve for losses and loss adjustment
expenses 6,244,114 245,816 824,064
Unearned premium reserve (4,146,895) (3,299,570) 367,216
Policyholder dividends payable (152,042) (277,596) 96,918
Other liabilities 254,507 86,240 (177,081)
------------ ---------- -----------
Net cash provided by (used in)
operating activities (6,211,355) 1,174,817 1,381,292
------------ ---------- -----------
Cash flows from investing activities:
Maturity of bonds held to maturity or
available for sale 1,700,000 1,360,000 --
Sale of bonds held to maturity 1,826,094 -- --
Sale of bonds available for sale 2,750,826 27,246,304 24,697,159
Purchase of bonds held to maturity or
available for sale (13,688,573) -- (25,576,587)
Purchase of furniture and equipment (622,795) (250,255) (270,167)
------------ ---------- -----------
Net cash provided by (used in)
investing activities (8,034,448) 28,356,049 (1,149,595)
------------ ---------- -----------
Net increase (decrease) in cash and
cash equivalents (14,245,803) 29,530,866 231,697
Cash and cash equivalents at beginning
of period 31,180,925 1,650,059 1,418,362
------------ ---------- -----------
Cash and cash equivalents at end of period $ 16,935,122 31,180,925 1,650,059
============ ========== ===========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of The Tenere Group, Inc.
(Tenere, the Company) and its wholly-owned subsidiaries, Intermed
Insurance Company (Intermed), Interlex Insurance Company (Interlex) and
Insurance Services, Inc. (ISI), is presented to assist in understanding
the Company's financial statements. The financial statements herein
represent the operations of Intermed and its subsidiaries, Interlex and
ISI. Tenere, the holding company, currently has no operations other than
ownership of Intermed.
The consolidated financial statements and notes thereto are
representations of the Company's management, which is responsible for
their integrity and objectivity. The consolidated financial statements
have been prepared on the basis of generally accepted accounting
principles which differ from the statutory basis of accounting followed
in reporting to insurance regulatory authorities. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
DESCRIPTION OF COMPANY
Effective April 27, 1995, RCA Mutual Insurance Company (RCA), a
non-assessable mutual property and casualty insurance company, completed
the demutualization process begun in 1993 and became a stock property and
casualty insurance company. The Company's name was changed from RCA
Mutual Insurance Company to Intermed Insurance Company. Also effective
April 27, 1995, Intermed became a wholly-owned subsidiary of The Tenere
Group, Inc., an insurance holding company organized under the laws of the
State of Missouri, and the policyholders of RCA became the stockholders
of Tenere. This transaction was accounted for using policyholders'
equity as of April 1, 1995. Issued in exchange for $21,960,826 of
membership interests were 1,999,774 shares of Tenere Group stock which
approximated one share of $.01 par value Tenere Group stock for every
$10.98 of policyholder surplus attributable to the policyholder.
Intermed writes medical and dental professional liability insurance on
occurrence and claims-made bases in the States of Missouri and Kansas.
Prior to September 1, 1995, the Company also wrote coverages on a
claims-paid basis in the State of Missouri. Effective August 1, 1996
Intermed was recognized as a surplus lines carrier in the State of Texas
and began writing professional liability insurance on physicians through
a physician-sponsored purchasing group, Intermedical of Texas, Inc. In
1997, the Company will begin to write professional liability insurance on
dentists in Texas through a second physician-sponsored purchasing group,
Dental Defense Specialists, Inc. Coverages in Texas are written on both
occurrence and claims-made policy forms. Interlex writes legal
professional liability insurance on a claims-made basis in the States of
Missouri and Kansas. Since operations are currently conducted in only
three states, they are subject to changes in the legal and economic
climates of those states.
Estimates of losses and loss adjustment expenses on occurrence coverages
are charged to income as claims are incurred. Estimates of losses and
loss adjustment expenses on claims-made coverages are charged to income
as claims are reported. Claims-paid coverages insured against claims
which were reported and paid during the period the policy was in effect.
The Company's obligation to defend and pay claims ended upon expiration
of a claims-paid policy. Claims-paid losses were incurred at the time of
payment so no reserves were required on open claims. However, when the
Company discontinued writing or renewing claims-paid policies effective
September 1, 1995, it became liable for all open claims that had been
reported during the claims-paid policy period.
12
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
Excess cash is invested on a short-term basis in an interest-bearing
money market fund and under an interest-bearing repurchase agreement.
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of
three months or less to be cash equivalents.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities (Statement 115). Statement 115 required a change
in accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. In general this statement requires that securities must be
classified in three categories, with the accounting and reporting as
follows:
Held-to-maturity securities - Debt securities that
management has the positive intent and ability to hold to
maturity are classified as held to maturity and reported at
amortized cost.
Trading securities - Securities bought with the purpose of
selling them in the near term are classified as trading
securities. Securities in this category are reported at
fair market value, with unrealized gains and losses included
in earnings.
Available-for-sale securities - Securities which are not
classified in one of the other categories are held as
available-for-sale and are reported at fair market value.
Unrealized gains and losses for this category are excluded
from earnings and are reported as a separate component of
stockholders' equity, net of income tax.
The adoption of Statement 115 had no effect on the net income of the
Company. Gains and losses from the sale of investments are calculated
using the specific identification method.
PREMIUMS RECEIVABLE
Premiums receivable represent unpaid premium balances due directly from
the insured and are secured by the related unearned premiums. The
Company cancels all policies with receivable balances outstanding more
than 90 days.
PREMIUMS
Premium income is recognized on a pro rata basis over the terms of the
respective policy contracts. The unearned premium reserve represents the
portion of premiums written which are applicable to the unexpired terms
of policies in force. In addition, the unearned premium reserve includes
the liability for death, disability and retirement waiver benefit (see
note 5).
POLICY ACQUISITION COSTS
Policy acquistion costs, consisiting primarily of commissions, are
deferred and amortized in proportion to the premium revenue recognized.
13
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses are estimated based on
the Company's historical loss and loss adjustment expense experience
supplemented by insurance industry loss data. The reserves are reported
on a present value basis discounted at the rate of 3% in 1996 and 4% in
1995. At the direction of the Missouri Department of Insurance, the
discount will be eliminated ratably over the five year period ending
December 31, 1998.
The reserve for losses and loss adjustment expenses is based on
long-range projections subject to uncertainty. Uncertainty regarding
reserves of a given accident year are gradually reduced as new
information emerges each succeeding year, allowing more reliable
re-evaluations of such reserves. While management believes the reserve
for losses and loss adjustment expenses at December 31, 1996 makes a good
and reasonable provision for claim liabilities, uncertainties inherent in
the reserving process could cause such reserves to develop favorably or
unfavorably. Any adjustments to reserves are reflected in the operating
results of the periods in which they are made. Changes in reserves which
are small relative to the total amount of such reserves could
significantly impact future reported income.
FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. Current Federal income taxes are charged or credited to
operations based upon amounts estimated to be payable or recoverable as a
result of taxable operations for the current year. Deferred income tax
assets and liabilities are recognized based on the difference between
financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The reserves for losses and loss adjustment expenses
represent the most significant estimate in the accompanying financial
statements.
(2) INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
The amortized cost and estimated market values of investments in bonds as
of December 31, 1996 and December 31, 1995 are presented below. The
estimated market values presented in this footnote were determined using
quoted market prices, where available, or independent pricing services.
14
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
Type of Investment cost gains losses value
- ------------------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
December 31, 1996
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
=========== ========= ========= ==========
December 31, 1995
Held-to-maturity:
United States government,
government agencies and
authorities $ 1,867,111 ------ (12,752) 1,854,359
Available-for-sale:
United States government,
government agencies and
authorities 17,960,592 579,886 ------- 18,540,478
States, municipalities and
political subdivisions 2,000,832 ------ (4,792) 1,996,040
----------- --------- --------- ----------
Total available-for-sale 19,961,424 579,886 (4,792) 20,536,518
----------- --------- --------- ----------
Total fixed maturities $21,828,535 579,886 (17,544) 22,390,877
=========== ========= ========= ==========
</TABLE>
The amortized cost and market value of investments in fixed maturities at
December 31, 1996 by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
15
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Available-for-sale
Amortized Market
cost value
----------- ----------
<S> <C> <C>
Due in one year or less $ 1,450,700 1,457,482
Due after one year
through five years 6,552,441 6,572,525
Due after five years
through ten years 21,114,694 21,340,060
----------- ----------
$29,117,835 29,370,067
=========== ==========
</TABLE>
Proceeds from sales of available-for sale securities were $2,750,826 in
1996, $28,606,304 in 1995, and $24,697,159 in 1994. Gross gains and
losses on those sales were: $2,120 and $9,130 in 1996; $383,816 and
$420,079 in 1995; and $66,015 and $489,279 in 1994, respectively.
In 1996, the Company continued the restructuring of its investment
portfolio which resulted in the sale of low-yielding bonds on deposit
with the State of Missouri which were classified held to maturity.
Proceeds from sales of held to maturity securities were $1,826,094 and
realized losses were $10,125.
Net investment income for the years ended December 31, 1996, 1995 and
1994 is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Investment income:
Interest on cash equivalents
and repurchase agreements $1,115,565 616,621 48,735
Interest on federal
income tax refund ----- ----- 103,484
Interest on bonds 1,695,754 2,217,427 2,610,672
---------- --------- ---------
Gross investment income 2,811,319 2,834,048 2,762,891
Investment expenses (184,336) (180,011) (123,625)
---------- --------- ---------
Net investment income $2,626,983 2,654,037 2,639,266
========== ========= =========
</TABLE>
Bonds with an amortized cost $1,790,138 at December 31, 1996 and
$1,867,111 at December 31, 1995 were on deposit with the Department of
Insurance of the State of Missouri. The amortized cost of these bonds
and the interest income thereon are included in the above amounts.
The net changes in unrealized investment gains are as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net unrealized investment gains (losses) ($322,862) 4,028,585 (3,444,336)
Federal income (taxes) benefit 109,773 (1,369,719) 1,171,076
----------- ----------- -----------
($213,089) 2,658,866 (2,273,260)
=========== =========== ===========
</TABLE>
16
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying values of cash and cash equivalents, premiums receivable and
other liabilities approximate their fair values at December 31, 1996 and
1995.
(3) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
A summary of the reserves for losses and loss adjustment expenses
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Undiscounted reserves for losses and loss
adjustment expenses $35,051,777 29,555,760
Less discount (see note 1) (2,164,370) (2,932,622)
----------- ----------
Discounted reserves for losses and loss
adjustment expenses $32,887,407 26,623,138
=========== ==========
</TABLE>
Following is the activity in the reserves for losses and loss adjustment
expenses:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $26,623,138 26,279,977 25,553,413
Less reinsurance recoverable on unpaid loss
and loss adjustment expenses (1,162,495) (584,913) (248,721)
----------- ---------- ----------
25,460,643 25,695,064 25,304,692
----------- ---------- ----------
Incurred related to:
Current year 9,812,694 9,612,075 8,638,000
Prior year 1,413,767 (1,935,587) (441,335)
----------- ---------- ----------
Total incurred 11,226,461 7,676,488 8,196,665
----------- ---------- ----------
Paid related to:
Current year 2,499,788 3,190,397 3,045,000
Prior year 8,399,372 4,720,512 4,761,293
----------- ---------- ----------
Total paid 10,899,160 7,910,909 7,806,293
----------- ---------- ----------
25,787,944 25,460,643 25,695,064
Plus reinsurance recoverable on unpaid loss
and loss adjustment expenses 7,099,463 1,162,495 584,913
----------- ---------- ----------
Balance at December 31: $32,887,407 26,623,138 26,279,977
=========== ========== ==========
</TABLE>
The reserves for losses and loss adjustment expenses are estimated based
on development information available at each reporting date. As a
result of the nature of the risks underwritten, claims development may
occur over an extended period of time. The changes in the incurred
amounts disclosed above related to prior years are the result of
utilizing improved claim development information as that information
becomes available. In particular, the $1,413,767 increase in prior year
incurred amounts for 1996 reflect adverse development on several large
claims which were settled in 1996.
(4) REINSURANCE
As is customary in the insurance industry, the Company reinsures portions
of certain insurance policies it writes, thereby providing a greater
diversification of risk and minimizing exposure on larger risks. The
Company remains contingently at risk with respect to any reinsurance
ceded and would incur an additional loss if an assuming company were
unable to meet its obligation under the reinsurance treaty.
17
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company monitors the financial condition of its reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company believes that the failure of any single reinsuring syndicate
or company to meet its obligations would not have a significant effect on
the Company's financial position. Amounts recoverable from one reinsurer
at December 31, 1996 represent 69% of total reserves for losses and loss
adjustment expenses ceded.
Premiums and premium related reinsurance amounts for the years ended
December 31, 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<C> <C> <C> <C>
Ceded premiums $4,655,382 1,505,427 1,343,902
========== ========= =========
Ceded losses and loss adjustment expenses $6,560,538 577,582 336,192
========== ========= =========
</TABLE>
At December 31, 1996, the Company recorded reinsurance recoverable on
unpaid loss and loss adjustment expenses of $7,099,463, reinsurance
recoverable on paid loss adjustment expenses of $98,438 and reinsurance
premium recoverable of $260,397. At December 31, 1995, the Company
recorded reinsurance recoverable on unpaid loss and loss adjustment
expenses of $1,162,495.
(5) UNEARNED PREMIUMS
The Company reserves for future utilization of the death, disability and
retirement waiver benefit on a full funding basis. This reserve was
estimated to be $1,628,000 at December 31, 1996 and $4,776,000 at
December 31, 1995, and is reflected in the unearned premium reserve.
(6) STOCKHOLDERS' EQUITY
The NAIC requires a risk-based capital (RBC) calculation as part of the
information to be filed with the annual statutory statement. This
risk-based capital calculation and analysis is an attempt to measure the
theoretical capital and surplus needs of a company compared with its
adjusted capital and surplus. The capital and surplus of Intermed and
Interlex substantially exceeds the NAIC's RBC requirements for Property
and Casualty companies at the end of 1996 and 1995.
In 1996 the shareholders of the Company adopted the 1996 Long Term
Incentive Plan. The Plan is to encourage certain employees, officers and
directors of the Company and its subsidiaries to acquire Common Stock of
the Company or to receive monetary payments based on the value of such
stock or based upon achieving certain goals on a basis mutually
advantageous to such employees and the Company. The authorized number of
shares of Common Stock reserved for issuance under the Plan is 350,000.
The options and stock appreciation rights are generally granted at a
price not less than 100% of the fair market value at the date of grant.
No awards were made in 1996.
On February 28, 1997, subsequent to year end, the compensation committee
of the board of directors granted options to purchase 182,052 shares of
stock to certain officers of the Company and non employee directors. The
exercise price is $5.45 per share and the options become fully
exerciseable on July 31, 1997.
Dividends paid to the Company by insurance subsidiaries are restricted by
regulatory requirements of the subsidiaries' state of domicile. The
maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Missouri to stockholders without prior approval
of the Insurance Director is limited to the lesser of (a) 10% of the
Company's statutory capital and surplus as of December 31 of the
preceding year or (b) net investment income for the twelve-month period
ending December 31 of the preceding year. At December 31, 1996 and 1995,
statutory capital and surplus of In-
18
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
termed was $18,401,550 and $19,728,912 respectively. For the years
ended December 31, 1996 and 1995, net investment income of Intermed was
$2,264,106 and $2,354,522, respectively. The maximum dividend which can
be paid in 1996 by Intermed without the prior approval of the Missouri
Insurance Director is, therefore, $1,840,155.
(7) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. Income tax
expense varies from the amount which would be provided by applying the
federal income tax rates to income before income taxes. The following
reconciles the expected provision for income tax expense using the
federal statutory tax rate of 34% to the provision for income tax expense
reported herein for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected tax (benefit) expense using
statutory rates ($1,529,607) 1,303,787 305,667
Other, net (34,753) 19,279 (203,670)
----------- --------- --------
($1,564,360) 1,323,066 101,997
=========== ========= ========
</TABLE>
Income taxes consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current (benefit) expense ($1,347,655) 835,639 420,315
Deferred (benefit) expense (216,705) 487,427 (324,346)
Change in valuation allowance ----- ----- 6,028
----------- --------- --------
Income taxes ($1,564,360) 1,323,066 101,997
=========== ========= ========
</TABLE>
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial ac counting and tax purposes in
different periods. The sources of these differences and the tax effect of each
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- ---------
<S> <C> <C> <C>
Losses and loss adjustment expenses
incurred for financial reporting
purposes but not deductible for
tax purposes ($348,223) 70,676 (153,537)
Unearned premiums not deductible for
tax purposes 284,074 240,209 (13,954)
Deferred compensation (88,400) ----- -----
NOL Carryforward (86,660) ----- -----
Other, net 22,504 176,542 (156,855)
--------- -------- --------
($216,705) 487,427 (324,346)
========= ======== ========
</TABLE>
19
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Discounted unpaid loss reserves $1,853,219 1,504,996
Discounted unearned premium reserves 410,485 694,558
Deferred compensation payable 88,400 -----
Deferred commissions payable 26,916 26,747
Net operating loss carryforward 246,571 201,592
---------- ---------
Total gross deferred tax assets 2,625,591 2,427,893
Less valuation allowance (400,000) (400,000)
---------- ---------
Net deferred tax assets $2,225,591 2,027,893
Deferred tax liabilities:
Investments adjusted to market value (85,758) (195,532)
Deferred acquisition costs (28,747) (47,753)
Other (12,294) (12,294)
---------- ---------
Total gross deferred liabilities (126,799) (255,579)
---------- ---------
Net deferred tax asset $2,098,792 1,772,314
========== =========
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1996 and
1995 was $400,000. Based on the Company's historical earnings, future
expectations of adjusted taxable income, 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.
Cash payments for Federal income taxes were $546,983, $184,925 and
$322,926 in 1996, 1995 and 1994, respectively.
(8) EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution pension plan that covers
substantially all employees. Contributions to the plan are
discretionary, but may not exceed 15% of the participant's annual
compensation. Pension expense was approximately $178,068, $141,325 and
$106,000 in 1996, 1995 and 1994, respectively.
(9) COMMITMENTS AND CONTINGENCIES
The Company has non-cancellable operating leases for office space which
expire in June 2000. Future minimum lease payments are $106,000 in 1997,
$107,000 in 1998, $88,000 in 1999, $78,000 in 2000 and $89,000 in 2001.
The Company is involved in claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a materially adverse effect on
its financial condition or results of operations.
The Company has entered into three year employment agreements with five
executives and one key employee which include severance provisions
granting the executives the right to receive certain benefits, including
among others, their annual base salary and bonus if terminated. (As
defined in the respective agreements) within the term of the agreements.
As of December 31, 1996, the maximum contingent liability under the
severance provisions of the agreements was approximately $2,200,000.
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreements also contain a provision whereby the executives, in the
event of termination due to a change in control, would receive severance
payments in an amount 2.99 times their then current base salaries.
The Company provides a retirement plan for the chief executive
(executive) of the Company. The agreement entitles the executive or the
estate of the executive to receive an $80,000 annual annuity for ten
years upon retirement and after attainment by the executive of 70 years
of age. The Company accrued $260,000 in 1996 and will accrue the
remaining amount, approximately $300,000, in 1997.
(10) RECONCILIATION TO STATUTORY ACCOUNTING
Intermed and Interlex are required to file statutory financial statements
with state regulatory authorities. Accounting principles used to prepare
the statutory financial statements differ from financial state
ments prepared on the basis of generally accepted accounting principles.
Reconciliations of statutory net income, as determined using statutory
accounting principles, to the amounts included in the accompanying
consolidated financial statements for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- --------
<C> <C> <C> <C>
Statutory net income (loss) of insurance ($2,737,211) 2,968,644 420,581
Net income of non-insurance subsidiaries (98,080) ----- -----
----------- --------- --------
Combined statutory net income ($2,835,291) 2,968,644 420,581
Increase (decrease):
Deferred policy acquisition costs (55,900) (147,172) 26,167
Deferred income taxes 216,705 (487,427) 324,346
Deferred compensation (260,000) ----- -----
Other adjustments, net ----- 175,811 25,932
----------- --------- --------
Net income (loss) as reported herein ($2,934,486) 2,509,856 797,026
=========== ========= ========
</TABLE>
Reconciliations of statutory capital and surplus, as determined using
statutory accounting principles, to stockholders' equity included in the
accompanying consolidated financial statements at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<C> <C> <C>
Statutory capital and surplus of insurance companies $24,305,304 25,558,424
Stockholder's equity in non-insurance subsidiary 196,652 500
----------- ----------
Combined capital and surplus $24,501,956 25,558,924
Increase (decrease):
Deferred policy acquisition costs 84,550 140,450
Deferred income taxes 2,098,792 1,772,314
Net unrealized gain (loss) on securities available for sale 166,473 575,094
Deferred compensation (260,000) -----
Excess statutory reserve over statement reserve ----- 1,760,000
Non-admitted assets and other adjustments, net 799,624 561,006
Consolidating eliminations and adjustments (6,001,692) (5,830,510)
----------- ----------
Stockholders' equity as reported herein $21,389,703 24,537,278
=========== ==========
</TABLE>
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) CLAIMS PAID POLICIES
The Company discontinued writing claims-paid policies effective September
1, 1995. As these policies expired over the twelve-month period ending
August 31, 1996, claims-paid policyholders were given the opportunity to
convert to claims-made coverage. Upon non-renewal or discontinuance of
the claims-paid contract the Company became liable for reported claims.
Reserves of $3,976,528, net of reinsurance, have been established as of
December 31, 1996 for all reported and open claims on those claims-paid
policies non-renewed or discontinued during the period September 1, 1995
through August 31, 1996.
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The financial statements and related information of The Tenere Group, Inc. and
Subsidiaries presented in this Report were prepared by management, which has
sole responsibility for their integrity and objectivity. The financial
statements have been prepared in conformity with generally accepted accounting
principles, applying certain estimates and judgments based upon the best
available information and management's view of current conditions and
circumstances.
Management has developed and maintains a system of internal accounting control
designed to provide reasonable assurance that the Company's assets are
protected from improper use and that accounting records provide a reliable
basis for the preparation of financial statements. This system is continually
reviewed, improved and modified in response to changing business conditions and
operations and to recommendations made by the Company's independent auditors.
While no system of internal control can provide absolute assurance that
irregularities will not take place, management believes that Tenere's internal
control system provides reasonable assurance that assets are safeguarded and
financial information is reliable.
The Company's independent auditors, KPMG Peat Marwick LLP, are engaged to
express an opinion on the fairness of presentation of the Company's
consolidated financial statements, taken as a whole. Their opinion is based on
procedures which they believe to be sufficient to provide reasonable, but not
absolute, assurance that the financial statements contain no material errors.
During the course of their examination, the independent auditors were given
unrestricted access to all financial records and related data. Management
believes that all representations made to the independent auditors were
accurate and complete.
/s/ J.D. WILLIAMS
Joseph D. Williams, CPA
Vice President-Finance
and Chief Financial Officer
Springfield, Missouri
March 27, 1997
22
<PAGE> 24
SELECTED FINANCIAL INFORMATION
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
CONSOLIDATED STATEMENTS OF 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net premiums $ 7,646 $11,901 $10,657 $ 8,154 $ 5,060
Net investment income 2,627 2,654 2,639 2,754 2,944
Net realized investment
gains (losses) (17) (36) (423) 1,318 243
-------- ------- ------- ------- --------
Total revenues 10,256 14,519 12,873 12,226 8,247
-------- ------- ------- ------- --------
Losses and loss adjustment expenses 11,226 7,676 8,197 8,503 3,000
Dividends to policyholders (14) 617 1,289 1,091 378
Amortization of net assets acquired in
excess of cost(2) -- -- -- (1,484) (1,484)
Other expenses 3,543 2,393 2,488 2,865 2,014
-------- ------- ------- ------- --------
Total expenses 14,755 10,686 11,974 10,975 3,908
Income (loss) before income taxes (4,499) 3,833 899 1,251 4,339
Income tax expense (benefit) (1,564) 1,323 102 (117) 1,002
Cumulative effect of change in
accounting for income taxes -- -- -- 67 --
-------- ------- ------- ------- --------
Net income (loss) ($2,935) $ 2,510 $ 797 $ 1,435 $ 3,337
======== ======= ======= ======= ========
Net income (loss) per common share $ (1.47) $ 1.26 N.A. N.A. N.A.
======== ======= ======= ======= ========
CONSOLIDATED BALANCE SHEETS DATA
Investments $ 29,370 $22,404 $47,534 $51,284 $ 44,234
Cash and cash equivalents 16,935 31,181 1,650 1,418 7,523
Premiums receivable 2,581 3,720 4,143 3,078 2,951
Total assets 62,570 62,614 61,119 62,128 58,886
Reserve for losses and loss adjustment
expenses 32,887 26,623 26,280 25,553 25,021
Unearned premium reserve 6,300 10,447 13,747 13,379 12,082
Stockholders'/policyholders' equity 21,390 $24,537 $19,369 $20,845 $ 19,431
======== ======= ======= ======= ========
</TABLE>
(1) On January 2, 1992, Intermed acquired all of the outstanding stock of
Insurance Risks, Ltd. for $2,500,048 in cash. The acquisition was
recorded as a purchase and, accordingly, the purchase price was allocated
to the estimated fair value of assets acquired and liabilities assumed as
of the date of acquisition. The fair value of the net assets acquired in
excess of the purchase price was $2,967,008 calculated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 14,833,461
Liabilities assumed (12,973,636)
Net cash from the purchase 1,107,183
-------------
Net assets acquired in excess of cost $ 2,967,008
=============
</TABLE>
Net assets acquired in excess of cost were amortized over the estimated
period of benefit of two years. The amortization caused a favorable
non-recurring impact on net income for the years ended 1993 and 1992 in
the amount of $1,483,500. If these amounts are excluded from net income
before income taxes, 1993 net income before income tax would decrease
119% from $1,251,000 to ($232,500) and 1992 net income before income tax
would decrease 34% from $4,339,000 to $2,856,000.
The selected consolidated financial data for each of the five years in the
period ended December 31, 1996 has been derived from audited consolidated
financial statements of Tenere as of and for the years ended December 31, 1996
and 1995 and of its predecessor, RCA Mutual Insurance Company, as of and for
the years ended December 31, 1994, 1993 and 1992. These data include all
adjustments which are, in the opinion of the management of Tenere, necessary
to present a fair statement of the financial condition and results of
operations of Tenere for these periods and are of a normal and recurring
nature. The information should be read in conjunction with and is qualified by
reference to such statements and the related notes thereto.
23
<PAGE> 25
DIRECTORS AND OFFICERS
THE TENERE GROUP, INC.
INTERMED INSURANCE CO.
<TABLE>
<S> <C> <C>
THOMAS E. ASHLEY, M.D. GARY O. BAKER, D.D.S. ALBERT J. BONEBRAKE,
VICE PRESIDENT Southwest Oral Surgery, Inc. Woman's Clinic, Inc.
Springfield, Missouri St. Louis, Missouri Springfield, Missouri
RAYMOND A. CHRISTY, M.D. HARRY O. COLE, M.D. C. RICHARD GULICK, M.D.
PRESIDENT AND CHIEF CHAIRMAN OF THE BOARD OB/GYN Associates, Inc.
EXECUTIVE OFFICER Neurosurgical Associates, Inc. St. Louis, Missouri
Springfield, Missouri St. Louis, Missouri
MICHAEL D. HOEMAN, M.D. CHRISTOPHER H. JUNG, M.D. CARROLL R. WETZEL, D.O.
SECRETARY AND TREASURER Southeast Missouri ENT Wetzel Clinic, Inc.,
The Diagnostic Clinic, Inc. Consultants Clinton, Missouri
Springfield, Missouri Cape Girardeau, Missouri
INTERLEX INSURANCE CO.
ALBERT J. BONEBRAKE, M.D. LLOYD J. CARMICHAEL RAYMOND A. CHRISTY, M.D.
Woman's Clinic, Inc., Carmichael, Gardner & Clark PRESIDENT AND CHIEF
Springfield, Missouri Springfield, Missouri EXECUTIVE OFFICER
Springfield, Missouri
B. H. CLAMPETT MARILYN P. DUNN MAX W. LILLEY
Springfield, Missouri SECRETARY CHAIRMAN OF THE BOARD
Foley & Lardner Springfield, Missouri
Chicago, Illinois
PETER F. SPATARO CARROLL R. WETZEL, D.O. STEVEN W. WHITE
VICE PRESIDENT Wetzel Clinic, Inc. White, Allinder & Graham
Moser & Marsalek Clinton, Missouri Independence, Missouri
St. Louis, Missouri
OFFICERS
ANDREW K. BENNETT SAM T. BRANHAM ANDREW C. FISCHER
VICE PRESIDENT-CLAIMS VICE PRESIDENT-TEXAS VICE PRESIDENT-
AND GENERAL COUNSEL UNDERWRITING AND POLICY
SERVICES
CLIFTON R. STEPP JOSEPH D. WILLIAMS, CPA JULIE D. WROBLESKI
VICE PRESIDENT-MARKETING VICE PRESIDENT-FINANCE ASSISTANT SECRETARY
AND CHIEF FINANCIAL OFFICER
</TABLE>
25
<PAGE> 26
CORPORATE INFORMATION
CORPORATE HEADQUARTERS:
1903 E. Battlefield
Springfield, MO 65804
Tel: 417-889-1010
800-865-0650
417-889-1099 (FAX)
INDEPENDENT ACCOUNTANTS:
KPMG Peat Marwick LLP
Houston, TX
CORPORATE COUNSEL:
Thompson Coburn
St. Louis, MO
CONSULTING ACTUARIES:
Tillinghast - Towers Perrin
St. Louis, MO
INVESTMENT MANAGER:
Boatmen's Trust Company
St. Louis, MO
ADVERTISING AGENCY:
Schilling/Sellmeyer & Associates, Inc.
Springfield, MO
TRANSFER AGENT AND REGISTRAR:
Boatmen's Trust Company
P.O. Box 14737
St. Louis, MO 63178
Tel: 314-466-1357
MARKET INFORMATION:
The Company's Common Stock is not listed on any securities exchange or quoted
on any automated quotation system. There has been no independent market
established for the stock. As of March 18, 1997 there were 1143 holders of
Common Stock. No dividends have been declared on Common Stock.
STOCKHOLDER INFORMATION:
The Tenere Group, Inc.'s Annual Report on Form 10-K as filed with the
Securities and Exchange Commission is available at no cost by writing to:
Chief Financial Officer
The Tenere Group, Inc.
1903 E. Battlefield
Springfield, MO 65804
ANNUAL MEETING:
The 1997 Annual Meeting will be held at the Company's Corporate Headquarters at
10 a.m. on Friday, May 16, 1997.
26
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 29,370,067
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 340
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 29,370,407
<CASH> 16,935,122
<RECOVER-REINSURE> 98,438
<DEFERRED-ACQUISITION> 84,550
<TOTAL-ASSETS> 62,570,181
<POLICY-LOSSES> 32,887,407
<UNEARNED-PREMIUMS> 6,300,111
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> (9,291)
<NOTES-PAYABLE> 0
0
0
<COMMON> 19,998
<OTHER-SE> 21,369,705
<TOTAL-LIABILITY-AND-EQUITY> 62,570,181
7,646,482
<INVESTMENT-INCOME> 2,626,983
<INVESTMENT-GAINS> (17,135)
<OTHER-INCOME> 0
<BENEFITS> 11,226,461
<UNDERWRITING-AMORTIZATION> 1,758,312
<UNDERWRITING-OTHER> 1,784,324
<INCOME-PRETAX> (4,498,846)
<INCOME-TAX> (1,564,360)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,954,486)
<EPS-PRIMARY> ($1.47)
<EPS-DILUTED> ($1.47)
<RESERVE-OPEN> 25,460,643
<PROVISION-CURRENT> 9,812,694
<PROVISION-PRIOR> 1,413,767
<PAYMENTS-CURRENT> 2,498,788
<PAYMENTS-PRIOR> 8,399,372
<RESERVE-CLOSE> 25,787,944
<CUMULATIVE-DEFICIENCY> 1,725,000
</TABLE>
