<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-24800
THE TENERE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1675969
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1903 E. Battlefield, Springfield, MO 65804
(Address of principal executive offices) (Zip code)
417-889-1010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant 1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and 2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
As of March 31, 1998 there were 1,999,774 shares of Common Stock, $.01 par
value, issued and outstanding.
<PAGE> 2
THE TENERE GROUP, INC.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three Months ended March 31, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity
and Comprehensive Income - Periods Ended
December 31, 1997 and 1996 and March 31, 1998 5
Consolidated Statements of Cash Flows
Three Months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
UNAUDITED
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Investments:
Bonds held available for sale, at fair value (amortized cost -
$35,941,260 in 1998; $39,863,330 in 1997) $36,956,790 40,930,956
Common stock, at fair value 14,835 7,057
Short-term investments, at cost which approximates fair value 10,081,008 6,447,758
----------- ----------
Total investments 47,052,633 47,385,771
Cash, primarily compensating balances - 102,175
Premiums receivable 3,152,214 3,124,660
Reinsurance recoverable 10,027,291 10,413,593
Ceded unearned premiums 352,352 369,727
Accrued investment income 572,096 674,843
Deferred policy acquisition costs 177,959 183,253
Deferred income taxes 2,380,364 2,304,087
Income taxes recoverable 300,000 300,000
Other 821,974 867,543
----------- ----------
Total assets $64,836,883 65,725,652
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Reserves for losses and loss adjustment expenses $30,190,947 31,030,412
Unearned premium reserve 7,864,600 7,717,308
Reinsurance premiums payable 4,406,559 4,435,317
Other 1,525,694 1,563,056
----------- ----------
Total liabilities 43,987,800 44,746,093
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
Accumulated deficit (1,791,596) (1,690,370)
Accumulated other comprehensive income 679,853 709,103
----------- ----------
Total stockholders' equity 20,849,083 20,979,559
----------- ----------
Total liabilities and stockholders' equity $64,836,883 65,725,652
=========== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Direct premiums written $2,635,479 2,197,468
Premiums ceded to reinsurers (685,186) (646,824)
---------- ---------
Net premiums written 1,950,293 1,550,644
Increase in unearned premium reserve (164,666) (143,354)
---------- ---------
Net premiums earned 1,785,627 1,407,290
Net investment income 708,134 641,256
Net realized investment losses (2,204) -
---------- ---------
Total revenues 2,491,557 2,048,546
Losses and expenses:
Losses and loss adjustment expenses 1,885,092 1,595,961
General and administrative expenses 768,899 951,384
---------- ---------
Total losses and expenses 2,653,991 2,547,345
---------- ---------
Loss before income taxes (162,434) (498,799)
Income tax benefit 61,208 173,437
---------- ---------
Net loss $ (101,226) (325,362)
========== =========
Basic and diluted net loss per share $ (0.05) (0.16)
========== =========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
March 31, 1998 and December 31, 1997 and 1996
UNAUDITED
<TABLE>
<CAPTION>
Retained Accumulated
earnings/ other
Common Contributed (accumulated comprehensive Comprehensive
stock capital deficit) income Total income
----- ------- -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 19,998 21,940,828 2,196,890 379,562 24,537,278
Comprehensive income
Net loss (2,934,486) (2,934,486) (2,934,486)
Other comprehensive income, net of tax
Unrealized investment loss (213,089) (213,089) (213,089)
----------
Total comprehensive income (3,147,575)
==========
--------- ---------- ---------- -------- ----------
Balance at December 31, 1996 19,998 21,940,828 (737,596) 166,473 21,389,703
Comprehensive income
Net loss (952,774) (952,774) (952,774)
Other comprehensive income, net of tax
Unrealized investment gain 542,630 542,630 542,630
----------
Total comprehensive income (410,144)
==========
--------- ---------- ---------- -------- ----------
Balance at December 31, 1997 19,998 21,940,828 (1,690,370) 709,103 20,979,559
Comprehensive income
Net loss (101,226) (101,226) (101,226)
Other comprehensive income, net of tax
Unrealized investment gain (29,250) (29,250) (29,250)
----------
Total comprehensive income (130,476)
==========
--------- ---------- ---------- -------- ----------
Balance at March 31, 1998 $ 19,998 21,940,828 (1,791,596) 679,853 20,849,083
========= ========== ========== ======== ==========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
THE TENERE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Premiums received from policyholders $ 2,605,371 1,901,813
Premiums paid to reinsurers (697,161) (525,650)
Recoveries received from reinsurers 700,349 396
Losses and loss adjustment expenses paid (3,022,511) (1,999,364)
Commissions paid (108,134) (42,825)
Cash paid to suppliers and employees (745,934) (1,148,418)
Interest received 858,012 787,296
Income taxes received - 322,713
----------- ----------
Net cash used in operating activities (410,008) (704,039)
Cash flows from investing activities:
Maturity of bonds available for sale 1,250,000 -
Sale of bonds available for sale 2,671,094 -
Purchase of furniture and equipment (3,267) (32,465)
----------- ----------
Net cash from (used in) investing activities 3,917,827 (32,465)
Net increase (decrease) in cash and short-term investments 3,507,819 (736,504)
Cash and short-term investments at beginning of period 6,549,933 16,935,122
----------- ----------
Cash and short-term investments at end of period $10,057,752 16,198,618
=========== ==========
Reconciliation of net loss to net cash used in operating activities
Net loss $ (101,226) (325,362)
Adjustments to reconcile net loss to net cash
from operating activities:
Net realized investment losses 2,204 -
Depreciation and amortization expense 31,640 39,352
Net change in deferred acquisition costs 5,294 (13,378)
Deferred income tax benefit (61,210) (173,652)
Net amortization of discount on bonds (1,228) 13,726
Change in operating assets and liabilities
Premiums receivable (27,554) (304,945)
Reinsurance balances 374,919 (34,263)
Accrued investment income 102,747 87,480
Income taxes recoverable - 335,089
Other assets 17,195 10,314
Reserve for losses and loss adjustment expenses (839,465) (384,259)
Unearned premium reserve 147,292 174,953
Other liabilities (60,616) (129,094)
----------- ----------
Net cash used in operating activities $ (410,008) $ (704,039)
=========== ==========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
THE TENERE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are prepared
in accordance with the rules and regulations of the Securities and
Exchange Commission with regard to interim financial statements. In the
opinion of management, all adjustments necessary for a fair presentation
of such financial statements have been made. Such adjustments consisted
of only normal recurring items. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results
which may occur for the full year. The accompanying unaudited financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the 1997 Annual Report.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement
130). Statement 130 requires a company to classify items of other
comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of
the statement of financial position. The change in unrealized investment
gains and losses is the most significant component of other comprehensive
income for the Company.
(2) INVESTMENTS
The amortized cost and estimated fair values of investments in bonds and
common stock as of March 31, 1998 and December 31, 1997 are presented
below. The estimated fair values presented in this footnote were
determined using quoted market prices, where available, or independent
pricing services.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
Type of Investment basis gains losses value
------------------ ----------- --------- ------- ----------
<S> <C> <C> <C> <C>
March 31, 1998
Bonds:
United State government,
government agencies and $34,084,621 968,463 (10,976) 35,042,108
authorities
State municipalities and
political subdivisions 1,856,639 58,043 - 1,914,682
----------- --------- ------- ----------
Total bonds 35,941,260 1,026,506 (10,976) 36,956,790
Common stock 284 14,551 - 14,835
Short-term investments 10,081,008 - - 10,081,008
----------- --------- ------- ----------
Total investments $46,022,552 1,041,057 (10,976) 47,052,633
=========== ========= ======= ==========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
Type of Investment basis gains losses value
- ------------------ ----------- --------- ------ ----------
<S> <C> <C> <C> <C>
December 31, 1997
Bonds:
United State government,
government agencies and $38,003,757 1,012,229 (7,020) 39,008,966
authorities
State municipalities and
political subdivisions 1,859,573 62,417 - 1,921,990
----------- --------- ------ ----------
Total bonds 39,863,330 1,074,646 (7,020) 40,930,956
Common stock 284 6,773 - 7,057
Short-term investments 6,447,758 - - 6,447,758
----------- --------- ------ ----------
Total investments $46,311,372 1,081,419 (7,020) 47,385,771
=========== ========= ====== ==========
</TABLE>
The amortized cost and estimated fair value of investments in bonds at March 31,
1998 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.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
<S> <C> <C>
Due in one year or less $ - -
Due after one year through five years 13,926,926 14,260,533
Due after five years through ten years 22,014,334 22,696,257
----------- ----------
$35,941,260 36,956,790
=========== ==========
</TABLE>
Proceeds from sales of available for sale securities for the three months ended
March 31, 1998 were $2,671,094. Gross losses on those sales were $2,204 in
1998.
8
<PAGE> 9
Net investment income for the three months ended March 31, 1998 and 1997 is
comprised of the following:
<TABLE>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Investment income:
Interest on short-term investments $112,417 210,287
Interest on bonds 644,075 475,804
-------- -------
Gross investment income 756,492 686,091
Investment expenses (48,358) (44,835)
-------- -------
Net investment income $708,134 641,256
======== =======
</TABLE>
Bonds with an estimated fair value of $1,872,526 at March 31, 1998 and
$1,878,081 at December 31, 1997 were on deposit with the Missouri Department of
Insurance.
The net changes in unrealized investment gains (losses) are as follows:
<TABLE>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net unrealized investment losses $(44,318) (696,194)
Federal income tax benefit at 34% 15,068 236,706
-------- --------
Net unrealized investment losses $(29,250) (459,488)
======== ========
</TABLE>
9
<PAGE> 10
(3) RESERVE FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES AND REINSURANCE
A summary of the reserves for losses and loss adjustment expenses follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Undiscounted reserves for losses and loss
adjustment expenses $31,017,593 $31,990,412
Less discount (826,646) (960,000)
----------- -----------
Discounted reserves for losses and loss
adjustment expenses $30,190,947 $31,030,412
=========== ===========
</TABLE>
Following is the activity in the reserves for losses and loss adjustment
expenses:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Balance at January 1 $31,030,412 32,887,407
Less reinsurance recoverable on reserves for
losses and loss adjustment expenses (9,950,512) (7,099,463)
----------- ----------
21,079,900 25,787,944
----------- ----------
Incurred related to:
Current year 1,726,005 1,495,656
Prior Year 159,087 100,305
----------- ----------
Total incurred 1,885,092 1,595,961
----------- ----------
Paid related to:
Current year 20,500 93,817
Prior Year 1,392,554 2,094,823
----------- ----------
Total paid 1,413,054 2,188,640
----------- ----------
Net balance at March 31 21,551,938 25,195,265
Plus reinsurance recoverable on reserves for
losses and loss adjustment expenses 8,639,009 7,307,883
----------- ----------
Balance at March 31 $30,190,947 32,503,148
=========== ==========
</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.
10
<PAGE> 11
Premiums and losses related to reinsurance amounts for the three months
ended March 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Ceded premiums written $685,186 646,824
======== =======
Ceded premiums earned $702,560 615,227
======== =======
Ceded losses and loss adjustment expenses $318,728 208,420
======== =======
</TABLE>
(4) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. Income tax
expense (benefit) varies from the amount which would be provided by
applying the federal income tax rates to income (loss) before income
taxes. The following reconciles the expected provision for income tax
expense (benefit) using the federal statutory tax rate of 34% to the
provision for income tax expense (benefit) reported herein for the three
months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Expected tax benefit using statutory rates $(55,228) (167,146)
Other, net (5,980) (6,291)
-------- --------
Income tax benefit $(61,208) (173,437)
======== ========
</TABLE>
Income taxes consist of the following at December 31:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Current expense $ - 215
Deferred benefit (61,208) (173,652)
-------- --------
Income tax benefit $(61,208) (173,437)
======== ========
</TABLE>
11
<PAGE> 12
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. The sources of these differences and the
tax effect of each are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Losses and loss adjustment expenses
incurred for financial reporting
purposes but not deductible for
tax purposes $ 26,068 78,005
Unearned premiums not deductible
for tax purposes (11,675) (9,589)
Deferred compensation 7,424 (55,097)
Net operating loss carryforward (81,225) (188,461)
Other, net (1,800) 1,705
---------- --------
Deferred tax benefit $ (61,208) (173,437)
========== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March
31, 1998 and December 31, 1997 are presented below:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Discounted unpaid loss reserves $1,053,982 1,080,048
Discounted unearned premium reserves 510,832 499,158
Deferred compensation 191,042 191,042
Deferred retirement benefit 201,246 201,246
Deferred commissions payable 40,041 47,465
Net operating loss carryforward 1,196,648 1,115,423
---------- ---------
Total gross deferred tax assets 3,193,791 3,134,382
Less valuation allowance (390,400) (390,400)
---------- ---------
Net deferred tax assets 2,803,391 2,743,982
Deferred tax liabilities:
Investments adjusted to market value (350,226) (365,295)
Deferred acquistion costs (60,507) (62,306)
Other (12,294) (12,294)
---------- ---------
Total gross deferred tax liabilities (423,027) (439,895)
---------- ---------
Net deferred tax asset $2,380,364 2,304,087
========== =========
</TABLE>
The valuation allowance for deferred tax assets at March 31, 1998 was
$390,400. 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.
12
<PAGE> 13
(5) STATUTORY ACCOUNTING
Intermed and its subsidiary Interlex are domiciled in Missouri and
prepare their statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by the Missouri Department
of Insurance. "Prescribed" statutory accounting practices include state
laws, regulations and general administrative rules, as well as a variety
of publications of the NAIC. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to
company within a state, and may change in the future. Intermed and its
subsidiary Interlex have no significant permitted accounting practices
that vary from prescribed accounting practices, except for discounting of
loss reserves.
Reconciliations of statutory net income (loss), as determined using
statutory accounting principles, to the amounts included in the
accompanying consolidated financial statements for the three months ended
March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Net loss of insurance subsidiaries $ ( 132,621) (325,822)
Increase (decrease):
Deferred policy acquisition costs (5,294) 13,372
Deferred income taxes 61,208 173,652
Deferred compensation - (162,050)
Other adjustments, net (24,519) (24,514)
----------- --------
Net loss as reported herein $ (101,226) (325,362)
=========== ========
</TABLE>
Reconciliations of statutory capital and surplus, as determined using
statutory accounting principles, to stockholders' equity included in the
accompanying consolidated financial statements at March 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Statutory capital and surplus of insurance companies $23,583,611 23,691,554
Stockholder's equity of noninsurance subsidiaries 500 500
----------- ----------
Combined capital and surplus 23,584,111 23,692,054
Increase (decrease)
Deferred policy acquisition costs 177,959 183,253
Deferred income taxes 2,380,364 2,304,087
Net unrealized gain on investments booked at market 1,015,530 1,067,627
Deferred compensation (561,887) (561,887)
Accrued retirement (591,901) (591,901)
Non-admitted assets and other adjustments, net 705,036 747,976
Consolidating eliminations and adjustments (5,860,129) (5,861,650)
----------- ----------
Stockholders' equity as reported herein $20,849,083 20,979,559
=========== ==========
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AT MARCH 31, 1998 AND RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1998
RESULTS OF OPERATIONS
Direct premiums written in the three months ended March 31, 1998 totaled $2.6
million, an increase of $438,000 or approximately 20% over the comparable
period of 1997. Sales of both medical and legal malpractice insurance for the
three months ended March 31, 1998 were ahead of the prior year period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31:
1998 1997 CHANGE
---- ---- ------
<S> <C> <C> <C>
Medical $2,259,589 1,874,585 +20.5%
Legal 375,890 322,883 +16.4%
------- --------- ------
Total $2,635,479 2,197,468 +19.9%
</TABLE>
Employed marketing representatives produced 56% of the new business written by
Intermed Insurance Co., the Company's medical malpractice insurer, and 91% of
the new business written by marketing representatives of Interlex Insurance
Co., the Company's legal malpractice insurer. Brokers produced the remainder
of the increase.
Premiums ceded to reinsurers during the current period were $685,000, an
increase of $38,000 or approximately 6% over premiums ceded in the prior year
period.
Net premiums written in the three months ended March 31, 1998 increased
approximately 26% over the comparable period of 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31:
1998 1997 CHANGE
---- ---- ------
<S> <C> <C> <C>
Medical $1,714,606 1,376,630 +24.6%
Legal 235,687 174,014 +35.4%
------- ------- ------
Total $1,950,293 1,550,644 +25.8%
</TABLE>
Due to the increase in premiums written in the current period, there was an
increase of $165,000 in the unearned premium reserve (UPR) as compared to an
increase of $143,000 in the prior year period.
14
<PAGE> 15
Net premiums earned were $1.8 million in the three months ended March 31, 1998
compared to $1.4 million in the comparable period of 1997, an increase of
$378,000 or 26.8%.
Net investment income in the 1998 period was $708,000, an increase of $67,000
or approximately 10.4% over the prior year period. The increase was primarily
due to the reinvestment of funds in higher-yielding long-term bonds in 1997 and
improved yields on short-term investments.
Total revenues were $2.5 million in the quarter ended March 31, 1998, an
increase of $443,000 or approximately 22% over the prior year period.
Losses and loss adjustment expenses totaled $1.9 million in the three months
ended March 31, 1998 compared to $1.6 million in the 1997 period. The increase
of $289,000 or approximately 18% was due to a reduction in discount rates from
2% to 1% as directed by the Missouri Department of Insurance and an increase in
exposures due to the increase in premiums written in the current quarter. An
expected loss ratio of 80% was utilized for both medical and legal in the
current period compared to 90% for medical and 75% for legal in the prior year
period. Expected 1998 accident year loss ratios will be re-evaluated each
quarter using current experience. As a result of the change in expected loss
ratios, the calendar year loss ratio (losses and loss adjustment
expenses/premiums earned) for 1998 year-to-date was 105.6% compared to 113.4%
in the 1997 period.
General and administrative expenses were $769,000 in the quarter ended March
31, 1998, a decrease of $182,000 or approximately 19% from the prior year
period. Timing was a significant factor in the decrease, although management
expects that expenses for the year will not exceed the prior year level. The
expense ratio (general and administrative expenses/direct premiums written) was
29.2% in the current period compared to 43.3% in the prior year period. The
improvement was due to both the increase in premiums written and the reduction
in expenses from period to period.
Total losses and expenses were $2.7 million in the 1998 period compared to $2.5
million in 1997. The increase in losses and loss adjustment expenses was
partially offset by the decrease in general and administrative expenses.
The loss before income taxes in the three months ended March 31, 1998 was
$162,000, an improvement of $336,000 over the prior year period. The
improvement was primarily due to the $378,000 increase in premiums earned and
the $182,000 reduction in general and administrative expenses partially offset
by the $289,000 increase in losses and loss adjustment expenses.
The net loss for the current year period was $101,000, or $.05 per share, an
improvement of $224,000 over the prior year period. The 1998 period had an
income tax benefit of $61,000 compared to a benefit of $173,000 in the quarter
ended March 31, 1997.
15
<PAGE> 16
FINANCIAL CONDITION
ASSETS:
Total investments decreased from $47.4 million at December 31, 1997 to $47.1
million at March 31, 1998. The decrease was primarily attributable to a
negative cash flow from operations of $410,000. Reasons for the negative cash
flow are discussed below under Liquidity and Capital Resources.
- - The Company's investment in bonds decreased from $40.9 million at December
31, 1997 to approximately $37.0 million at March 31, 1998 due to the sale of
a low-yielding bond with a par value of $2.5 million, the call of a bond
with a par value of $1.2 million and the maturity of a bond with a par value
of $50,000.
- - Short-term investments increased from $6.4 million at December 31, 1997 to
$10.1 million at March 31, 1998 due to the sale, call and maturity discussed
above. Approximately $6.0 million currently held in short-term investments
will be re-invested long-term when interest rates improve above current
levels.
- - There was an unrealized gain of $1.0 million in the portfolio at March 31,
1998 compared to an unrealized gain of $1.1 million at the beginning of the
year. Changes in unrealized gains or losses are reflected, net of income
taxes, as other comprehensive income in the Stockholders' Equity section of
the Company's financial statements.
Total assets decreased $889,000 in the three months ended March 31, 1998
primarily due to a negative cash flow from operations of $410,000 and a decrease
of $386,000 in the reinsurance recoverable. Net recoveries from reinsurers of
$528,000 were received in the quarter ended March 31, 1998.
LIABILITIES:
Reserves for losses and loss adjustment expenses decreased from $31.0 million
at December 31, 1997 to $30.2 million at March 31, 1998 due primarily to the
settlement of prior year claims.
The unearned premium reserve increased from $7.7 million at the prior year end
to $7.9 million at the end of the past quarter due to the increase in premiums
written discussed above.
Total liabilities decreased by $758,000 due primarily to the decrease in loss
reserves discussed above.
16
<PAGE> 17
EQUITY:
Stockholders' equity declined from approximately $21.0 million at the beginning
of the year to $20.8 million at March 31, 1998 due to the net loss of $101,000
and a decrease of $29,000 (net of income taxes) in the unrealized gain on
investments.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow from operations was a negative $410,000 in the three months ended
March 31, 1998 compared to a negative $704,000 in the comparable period of
1997. The improvement was primarily due to:
<TABLE>
<S> <C>
$704,000 increase in premiums received
71,000 increase in interest received
528,000 net recoveries from reinsurer
337,000 decrease in general and administrative expenses
(1,023,000) increase in losses and loss adjustment expenses
(323,000) decrease in recoveries of federal income taxes
--------
$294,000 improvement in cash flow from operations
========
</TABLE>
In light of the Company's short-term investments of $10.1 million at March 31,
1998, management does not currently anticipate that assets will have to be sold
to meet unexpected cash demands in 1998.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE TENERE GROUP, INC.
(Registrant)
May 14, 1998 /s/ J D Williams
- ------------ -----------------
Date Joseph D. Williams, CPA
Vice President - Finance
Chief Financial Officer and
Principal Accounting Officer
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO.
3.1 Articles of Incorporation of the Registrant, filed as Exhibit 3.1 to
the Registrant's Registration Statement on Forms S-1 (Reg. No.
33-78702) is incorporated herein by this reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-78702) is
incorporated herein by this reference.
4.1 Form of common stock certificate, filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-78702)
is incorporated herein by this reference.
10.1 Management Contract, dated July 8, 1994, by and between RCA Mutual
Insurance Company, Interlex Insurance Co. and Insurance Services,
Inc., filed as Exhibit 10.1 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995, is incorporated herein by
reference.
10.2 Lease Agreement, dated December 7, 1994, by and between Georgetown
Square II, Ltd. and Insurance Services, Inc., filed as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1995, is incorporated herein by reference.
10.3 Medical Practitioners' Liability Primary Excess of Loss Reinsurance
Contract, dated October 1, 1993, by and between RCA Mutual Insurance
Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the nine
months ended September 30, 1995, is incorporated herein by reference.
10.4 Addendum No. 1 to Medical Practitioners' Liability Primary Excess of
Loss Reinsurance Contract, dated February 1, 1995, by and between RCA
Mutual Insurance Company and Certain Reinsurers of Lloyd's of London,
filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q for the nine months ended September 30, 1995, is incorporated
herein by reference.
10.5 Addendum No. 2 to Medical Practitioners' Liability Primary Excess of
Loss Reinsurance Contract, effective April 27, 1995, by and between
RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the nine months ended September 30, 1995, is
incorporated herein by reference.
10.6 Reinsurance Cover Note: 95/1146/RM to Medical Practitioners'
Liability Primary Excess of Loss Reinsurance Contract, dated October
16, 1995, by and between RCA Mutual Insurance Company and Certain
Reinsurers of Lloyd's of London, filed as Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the nine months ended
September 30, 1995, is incorporated herein by reference.
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
19
<PAGE> 20
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
March 31, 1996, is incorporated herein by reference.
10.14 Employment Agreement dated May 6, 1996 between The Tenere Group,
Inc. and Raymond A. Christy, M.D., President and Chief Executive
Officer, filed as Exhibit 10.14 to the Registrant's Quarterly Report
on Form 10-Q for the nine months ended September 30, 1996, is
incorporated herein by reference.
10.15 Employment Agreement dated May 6, 1996 between The Tenere
Group, Inc. and Andrew K. Bennett, Vice President-Claims and General
Counsel, filed as Exhibit 10.15 to the Registrant's Quarterly Report
on Form 10-Q for the nine months ended September 30, 1996, is
incorporated herein by reference.
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.
20
<PAGE> 21
10.17 Employment Agreement dated May 6, 1996 between The Tenere Group,
Inc. and Clifton R. Stepp, Vice President-Marketing, filed as
Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q for
the nine months ended September 30, 1996, is incorporated herein by
reference.
10.18 Employment Agreement dated May 6, 1996 between The Tenere Group,
Inc. and Joseph D. Williams, Vice President-Finance, Chief Financial
Officer and Assistant Treasurer filed, as Exhibit 10.18 to the
Registrant's Quarterly Report on Form 10-Q for the nine months ended
September 30, 1996, is incorporated herein by reference.
10.19 The Tenere Group, Inc. Retirement Plan for Directors effective
May 17, 1996, filed as Exhibit 10.19 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1996, is
incorporated herein by reference.
10.20 The Tenere Group, Inc. 1996 Long Term Incentive Plan effective
April 17, 1996, filed as Annex A to the Registrant's definitive
proxy statements for the 1996 Annual Meeting of Shareholders, is
incorporated herein by reference.
10.21 Amendment No. 1 to Employment Agreement, dated February 28, 1997,
between The Tenere Group, Inc. and Raymond A. Christy, M.D.,
President and Chief Executive Officer, filed as Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, is incorporated herein by reference.
10.22 Amendment No. 1 to Employment Agreement, dated February 28, 1997,
between The Tenere Group, Inc. and Andrew K. Bennett, Vice
President-Claims and General Counsel, filed as Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, is incorporated herein by reference.
10.23 Amendment No. 1 to Employment Agreement, dated February 28, 1997,
between The Tenere Group, Inc. and Andrew C. Fischer, Vice President
- Underwriting and Policy Services, filed as Exhibit 10.23 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, is incorporated herein by reference.
10.24 Amendment No. 1 to Employment Agreement dated February 28, 1997,
between The Tenere Group, Inc. and Clifton R. Stepp, Vice
President-Marketing, filed as Exhibit 10.24 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
10.25 Amendment No. 1 to Employment Agreement dated February 28, 1997,
between The Tenere Group, Inc. and Joseph D. Williams, Vice
President-Finance, Chief Financial Officer and Assistant Treasurer,
filed as Exhibit 10.25 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, is incorporated herein by
reference.
10.26 Reinsurance Cover Note: 96/1212/RM to Catastrophe "Awards Made"
Excess of Loss Reinsurance Contract, effective October 1, 1996, by
and between Intermed Insurance Company and/or Interlex Insurance
Company and certain Reinsurers of Lloyd's of London, filed as
Exhibit 10.26 to the Registrant's
21
<PAGE> 22
Annual Report on Form 10-K for the year ended December 31, 1997, is
incorporated herein by reference.
10.27 Addendum No. 2 to Catastrophe "Awards Made" Excess of Loss
Reinsurance Contract, effective October 1, 1996, by and between
Intermed Insurance Company and/or Interlex Insurance Company and
certain Reinsurers of Lloyd's of London, filed as Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, is incorporated herein by reference.
10.28 Reinsurance Cover Note: 97/1212/RM to Catastrophe "Awards Made"
Excess of Loss Reinsurance Contract, effective October 1, 1997, by
and between Intermed Insurance Company and/or Interlex Insurance
Company and certain Reinsurers of Lloyd's of London, filed as
Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997, is incorporated herein by reference.
10.29 Addendum No. 3 to Catastrophe "Awards Made" Excess of Loss
Reinsurance Contract, effective October 1, 1997, by and between
Intermed Insurance Company and/or Interlex Insurance Company and
certain Reinsurers of Lloyd's of London, filed as Exhibit 10.29 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, is incorporated herein by reference.
10.30 Reinsurance Cover Note: 94/1146/RM to Medical Practitioners'
Liability Primary Excess of Loss Reinsurance Contract, effective
October 1, 1994, by and between Intermed Insurance Company and
Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.30 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, is incorporated herein by reference.
10.31 Medical Practitioners' Liability Primary Excess of Loss Reinsurance
Contract, effective October 1, 1996, by and between Intermed
Insurance Company and Certain Reinsurers of Lloyd's of London, filed
as Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, is incorporated herein by
reference.
10.32 Addendum No. 1 to Medical Practitioners' Liability Combined
Reinsurance Contract (formerly the Primary Excess of Loss
Reinsurance Contract), effective October 1, 1996, by and between
Intermed Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.32 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, is incorporated
herein by reference.
10.33 Addendum No. 2 to Medical Practitioners' Liability Combined
Reinsurance Contract (formerly the Primary Excess of Loss
Reinsurance Contract), effective October 1, 1997, by and between
Intermed Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.33 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, is incorporated
herein by reference.
10.34 Reinsurance Cover Note: 97/1146/RM to Medical Practitioners'
Liability Combined Reinsurance Contract (formerly the Primary Excess
of Loss Reinsurance Contract), effective October 1, 1997, by and
between Intermed Insurance Company and Certain Reinsurers of Lloyd's
of London, filed as Exhibit 10.34 to the Registrant's Annual Report
on Form 10-K for the year ended De-
22
<PAGE> 23
cember 31, 1997, is incorporated herein by reference.
10.35 Lawyers' Professional Liability Primary Excess of Loss Reinsurance
Contract, effective October 1, 1996, by and between Interlex
Insurance Company and Certain Reinsurers of Lloyd's of London, filed
as Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, is incorporated herein by
reference.
10.36 Lawyers' Professional Liability Primary Excess of Loss Reinsurance
Contract, effective October 1, 1997, by and between Interlex
Insurance Company and Certain Reinsurers of Lloyd's of London, filed
as Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, is incorporated herein by
reference.
10.37 Lawyers' Professional Liability Prior Agreement Excess Reinsurance
Contract, effective October 1, 1996, by and between Interlex
Insurance Company and Certain Reinsurers of Lloyd's of London, filed
as Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, is incorporated herein by
reference.
10.38 Lawyers' Professional Liability Prior Agreement Excess Reinsurance
Contract, effective October 1, 1997, by and between Interlex
Insurance Company and Certain Reinsurers of Lloyd's of London, filed
as Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, is incorporated herein by
reference.
27 Financial Data Schedules
23
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 36,956,790
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,835
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,081,008
<CASH> 0
<RECOVER-REINSURE> 1,388,283
<DEFERRED-ACQUISITION> 177,959
<TOTAL-ASSETS> 64,836,883
<POLICY-LOSSES> 30,190,947
<UNEARNED-PREMIUMS> 7,864,600
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 19,998
<OTHER-SE> 20,829,085
<TOTAL-LIABILITY-AND-EQUITY> 64,836,883
1,785,627
<INVESTMENT-INCOME> 708,134
<INVESTMENT-GAINS> (2,204)
<OTHER-INCOME> 0
<BENEFITS> 1,885,092
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 768,899
<INCOME-PRETAX> (162,434)
<INCOME-TAX> (61,208)
<INCOME-CONTINUING> (101,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (101,226)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
