-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lkj6KpHSyyqHaBgthE8OFGua0YxS5CPwgOHWn+jl1ZmY0Y8nrmiejni7LXjyUSGN aXf6SEGK6nVAIPcQ12mcpQ== 0000950137-97-003816.txt : 19971117 0000950137-97-003816.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950137-97-003816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENERE GROUP INC CENTRAL INDEX KEY: 0000922887 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 431675969 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26062 FILM NUMBER: 97720278 BUSINESS ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 BUSINESS PHONE: 4178620650 MAIL ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 Commission file number 0-24800 THE TENERE GROUP, INC. (Exact name of Registrant as specified in its charter) Missouri 43-1675969 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1903 E. Battlefield, Springfield, MO 65804 (Address of principal executive offices) (Zip code) 417-889-1010 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- As of September 30, 1997 there were 1,999,774 shares of Common Stock, $.01 par value, issued and outstanding. 2 THE TENERE GROUP, INC.
PAGE NO. -------- INDEX PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (unaudited) Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations - Three Months ended September 30, 1997 and 1996 4 Consolidated Statements of Operations - Nine Months ended September 30, 1997 and 1996 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION ITEM 5. Other Information 17 ITEM 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 17 EXHIBIT INDEX 18
2 3 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1997 and December 31, 1996
UNAUDITED ASSETS 1997 1996 ------------ ------------ Investments: Bond held available for sale, at market value (amortized cost - $32,641,105 in 1997; $29,117,835 in 1996) $ 33,197,873 $ 29,370,067 Common stock, at market value 7,242 340 ------------ ------------ Total investments 33,205,115 29,370,407 Other assets: Cash and cash equivalents, including interest- bearing deposits of $12,104,016 in 1997 and $14,889,744 in 1996 10,790,490 16,935,122 Premiums receivable 3,850,324 2,580,691 Reinsurance recoverable 6,658,270 7,458,298 Prepaid reinsurance premiums 288,250 750,000 Accured investment income 457,906 527,139 Deferred policy acquisition costs 165,293 84,550 Deferred income taxes 2,153,141 2,098,792 Income taxes recoverable 980,487 1,680,190 Other 942,124 1,084,992 ------------ ------------ Total other assets 26,286,285 33,199,774 ------------ ------------ Total assets $ 59,491,400 $ 62,570,181 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $ 28,030,182 $ 32,887,407 Unearned premium reserve 7,819,900 6,300,111 Reinsurance premium payable 543,636 1,256,381 Other 1,274,241 736,579 ------------ ------------ Total liabilities 37,667,959 41,180,478 Stockholders' equity: Common stock, $.01 par value; 7,000,000 shares authorized; 1,999,774 shares issued and outstanding 19,998 19,998 Contributed capital 21,940,828 21,940,828 Retained earnings (accumulated deficit) (137,385) (571,123) ------------ ------------ Total stockholders' equity 21,823,441 21,389,703 ------------ ------------ Total liabilities and stockholders' equity $ 59,491,400 $ 62,570,181 ============ ============
See notes to consolidated financial statements 3 4 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30, 1997 and 1996 UNAUDITED
1997 1996 ------------- ------------- Revenues: Direct premiums written $ 3,616,534 $ 1,827,409 Premiums ceded to reinsurers (1,202,573) (1,755,253) ------------- ------------- Net premiums written 2,413,961 72,156 (Increase) decrease in unearned premium reserve (967,482) 1,333,936 ------------- ------------- Net premiums earned 1,446,479 1,406,092 Net investment income 650,763 671,134 ------------- ------------- Total revenues 2,097,242 2,077,226 Losses and expenses: Sales and marketing expenses 446,064 309,291 Other underwriting expenses 655,148 438,065 Losses and loss adjustment expenses 315,361 4,504,681 Dividends to policyholders - 159 ------------- ------------- Total losses and expenses 1,416,573 5,252,196 Income (loss) before income taxes 680,669 (3,174,970) Income tax benefit (expense) (300,415) 1,082,713 ------------- ------------- Net income (loss) $ 380,254 $ (2,092,257) ============= ============= Net income (loss) per share $ 0.19 $ (1.05) ============= ============= Stockholders' equity: Beginning of period $ 21,131,740 $ 24,224,326 Change in unrealized investment gains 311,447 76,507 Net income (loss) 380,254 (2,092,257) ------------- ------------- End of period $ 21,823,441 $ 22,208,576 ============= =============
See notes to consolidated financial statements 4 5 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Ended September 30, 1997 and 1996
UNAUDITED 1997 1996 ------------ ------------ Revenues Direct premiums written $ 8,316,828 $ 6,029,116 Premiums ceded to reinsurers (2,308,817) (3,240,592) ------------ ------------ Net premiums written 6,008,011 2,788,524 (Increase) decrease in unearned premium reserve (1,776,706) 3,253,715 ------------ ------------ Net premiums earned 4,231,305 6,042,239 Net investment income 1,936,459 2,050,991 ------------ ------------ Total revenues 6,167,764 8,093,230 Losses and expenses Sales and marketing expenses 1,234,083 795,713 Other underwriting expenses 1,639,296 1,382,975 Losses and loss adjustment expenses 2,861,880 8,729,337 Dividends to policyholders - (13,921) ------------ ------------ Total losses and expenses 5,735,259 10,894,104 Income (loss) before income taxes 432,505 (2,800,874) Income tax benefit (expense) (204,356) 971,405 ------------ ------------ Net income (loss) $ 228,149 $ (1,829,469) ============ ============ Net income (loss) per share $ 0.11 $ (.91) ============ ============ Stockholders' equity: Beginning of period $ 21,389,703 $ 24,537,278 Change in unrealized investment gains (losses) 205,589 (499,233) Net income (loss) 228,149 (1,829,469) ------------ ------------ End of period $ 21,823,441 $ 22,208,576 ============ ============
See notes to consolidated financial statements 5 6 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1997 and 1996 UNAUDITED
1997 1996 ------------- ------------- Cash flows from operating activities Premiums received from policyholders $ 6,966,187 6,656,371 Premiums paid to reinsurers (2,524,828) (2,871,976) Recoveries received from reinsurers 415,573 - Dividends paid to policyholders - (160,371) Losses and loss adjustment expenses paid (7,693,483) (8,182,123) Commissions paid (173,011) (136,393) Cash paid to suppliers and employees (2,040,825) (3,017,241) Interest received 2,177,812 2,280,186 Income taxes received 335,089 - ------------- ------------- Net cash used in operating activities (2,537,486) (5,431,547) Cash flows from investing activities Maturity of bonds held to maturity or available for sale 1,450,000 1,700,000 Purchase of bonds held to maturity or available for sale (5,014,094) (13,688,573) Redemption on stock rights 56 - Purchase of intangible asset - (400,000) Sale of furniture and equipment 695 - Purchase of furniture and equipment (43,803) (515,977) ------------- ------------- Net cash used in investing activities (3,607,146) (12,904,550) Net increase in cash and cash equivalents (6,144,632) (18,336,097) Cash and cash equivalents at beginning of period 16,935,122 31,180,925 ------------- ------------- Cash and cash equivalents at end of period $ 10,790,490 12,844,828 ============= ============= Reconciliation of net income to net cash used in operating activities Net income (loss) $ 228,149 (1,829,469) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization expense 123,248 133,783 Net change in deferred acquisition costs (80,743) 50,458 Deferred income tax (benefit) (160,258) 272,665 Net amoritization of discount on bonds 40,824 85,631 Change in operating assets and liabilities Premiums receivable (1,269,633) 1,017,784 Reinsurance balances 360,143 (3,000,354) Accrued investment income 69,233 82,542 Income taxes recoverable (payable) 699,703 (1,791,055) Other assets 60,530 198,834 Reserve for losses and loss adjustment expenses (4,857,225) 3,320,994 Unearned premium reserve 1,708,679 (3,395,219) Policyholder dividends payable - (160,371) Other liabilities 539,864 (417,770) ------------- ------------- Net cash used in operating activities $ (2,537,486) $ (5,431,547) ============= =============
See notes to consolidated financial statements 6 7 THE TENERE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission with regard to interim financial statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been made. Such adjustments consisted of only normal recurring items. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results which may occur for the full year. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 1996 Annual Report. Certain reclassifications to 1996 amounts were made to conform with 1997 presentation. Included in such reclassifications was the following material item:
As Reported As Restated Net cash used in operating activities (5,831,547) (5,431,547) Net cash used in investing activities (12,504,550) (12,904,550)
(2) INVESTMENTS The amortized cost and estimated market values of investments in bonds as of September 30, 1997 and December 31, 1996 are as follows:
September 30, 1997 Gross Gross Estimated Amortized unrealized unrealized market Type of Investment cost gains losses value - ------------------ ---- ----- ------ ----- Available-for-sale: United States government, government agencies and authorities $ 30,778,598 550,922 (43,769) 31,285,751 States, municipalities and political subdivisions 1,862,507 49,615 --- 1,912,122 ------------ ------- ------- ---------- Total available-for-sale 32,641,105 600,537 (43,769) 33,197,873 ============ ======= ======= ==========
7 8
December 31, 1996 Gross Gross Estimated Amortized unrealized unrealized market Type of Investment cost gains losses value - ------------------ ---- ----- ------ ----- 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 =========== ======= ======= ==========
The amortized cost and market values of debt securities at September 30, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay.
Amortized Market cost value ---- ----- Due in one year or less $ 50,272 50,469 Due after one year through five years 6,454,453 6,528,972 Due after five years through ten years 26,136,380 26,618,432 ----------- ---------- $32,641,105 33,197,873 =========== ==========
Net investment income for the nine months ended September 30, 1997 and 1996 is comprised of the following:
September 30 September 30 1997 1996 ---- ---- Investment income: Interest on cash equivalents and repurchase agreements $ 639,047 926,208 Interest on bonds 1,428,707 1,185,804 ---------- ---------- Gross investment income 2,067,754 2,112,012 Investment expenses (131,295) (61,021) ---------- ---------- Net investment income $1,936,459 2,050,991 ========== =========
Bonds with an amortized cost of $1,803,682 at September 30, 1997 and $1,790,138 at December 31, 1996 were on deposit with the Department of Insurance of the State of Missouri. These bonds and the interest income thereon are included in the above amounts. The net change in unrealized investment gains/losses are as follows:
September 30, September 30, 1997 1996 ---- ---- Net unrealized investment gains/losses $ 311,497 (756,413) Federal income (taxes) benefit (105,908) 257,180 --------- -------- $ 205,589 (499,233) ========= ========
8 9 (3) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES AND REINSURANCE A summary of the reserves for losses and loss adjustment expenses follows:
September 30, December 31, 1997 1996 ---- ---- Undiscounted reserve for losses and loss adjustment expenses 29,275,778 35,051,777 Less discount (1,245,596) (2,164,370) ----------- ---------- Discounted reserve for losses and loss adjustment expenses $28,030,182 32,887,407 =========== ==========
Premiums, premium related reinsurance amounts and reinsurance recoveries for the nine months ended September 30, 1997 and 1996 are summarized as follows:
September 30, September 30, 1997 1996 ---- ---- Ceded premiums earned $2,283,985 3,386,408 ========== ========= Ceded loss and loss adjustment expenses (25,620) 3,893,257 ========== =========
Activity in the reserve for loss and loss adjustment expenses during the periods ended September 30, 1997 and 1996 was:
September 30, September 30, 1997 1996 ------------- ------------- Balance at January 1 $32,887,407 26,623,138 Less reinsurance recoverable on unpaid loss and loss adjustment expenses 7,099,463 1,162,495 ----------- ---------- 25,787,944 25,460,643 Incurred related to: Current year 4,566,620 7,148,697 Prior year (1,704,740) 1,580,640 ----------- ---------- Total incurred 2,861,880 8,729,337 ----------- ---------- Paid related to: Current year 359,378 1,983,046 Prior year 6,751,834 6,805,282 ----------- ---------- Total paid 7,111,212 8,788,328 ----------- ---------- 21,538,612 25,401,652 Plus reinsurance recoverable on unpaid loss and loss adjustment expenses 6,491,570 4,562,635 ----------- ---------- Balance at September 30 $28,030,182 29,964,287 =========== ==========
9 10 (4) FEDERAL INCOME TAXES The Company files a consolidated federal income tax return. Income tax expense (benefit) varies from the amount which would be provided by applying the federal income tax rates to income (loss) before income taxes. The following reconciles the expected income tax expense (benefit) using the federal statutory tax rate of 34% to the income tax expense (benefit) reported herein for the nine months ended September 30, 1997 and 1996:
September 30, September 30, 1997 1996 ---- ---- Expected tax expense (benefit) using statutory rates $147,052 (952,298) Other, net 57,304 (19,107) -------- -------- $204,356 (971,405) ======== ========
Income taxes consist of the following at September 30, 1997 and 1996:
September 30, September 30, 1997 1996 ---- ---- Current expense (benefit) $ 364,614 (1,244,070) Deferred expense (benefit) (160,258) 272,665 --------- ---------- Income taxes (benefit) $ 204,356 (971,405) ========= ==========
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:
September 30, September 30, 1997 1996 ------------- ------------- Losses and loss adjustment expenses incurred for financial reporting purposes but not deductible for tax purposes $ 61,670 (26,656) Unearned premiums not deductible for tax purposes (120,817) (221,252) Deferred compensation (102,642) ----- Accrued retirement (100,623) ----- Net operating loss carryforward 105,163 ----- Other, net (3,009) (24,757) -------- -------- $(160,258) (272,665) ========= ========
10 11 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1997 and December 31, 1996 are presented below:
September 30, December 31, 1997 1996 -------------- ------------ Deferred tax assets: Discounted unpaid loss reserves $ 1,791,549 1,853,219 Discounted unearned premum reserves 531,302 410,485 Deferred commissions payable 47,777 26,916 Deferred compensation 191,042 88,400 Accrued retirement benefits 100,623 --- Net operating loss carryforward 141,408 246,571 ----------- --------- Total gross deferred tax assets 2,803,701 2,625,591 Less valuation allowance (390,400) (400,000) ----------- --------- Net deferred tax assets 2,413,301 2,225,591 Deferred tax liabilities: Investments adjusted to market value (191,667) (85,758) Deferred acquisition costs (56,199) (28,747) Other (12,294) (12,294) ---------- --------- Total gross deferred liabilities (260,160) (126,799) ---------- --------- Net deferred tax asset $2,153,141 2,098,792 ========== =========
The valuation allowance for deferred tax assets at September 30, 1997 was $390,400. Based on the Company's historical earnings, future expectations of adjusted taxable income and the Company's ability to change its investment strategy, as well as reversing gross deferred tax liabilities, management believes it is more likely than not that the Company will fully realize the gross deferred tax assets less the valuation allowance. However, there can be no assurances that the Company will generate the necessary adjusted taxable income in any future period. (5) RECONCILIATION TO STATUTORY ACCOUNTING The Company's two wholly-owned insurance subsidiaries, Intermed Insurance Co. and Interlex Insurance Co., are required to file statutory financial statements with state regulatory authorities. Accounting principles used to prepare the statutory financial statements differ from financial statements prepared on the basis of generally accepted accounting principles. Reconciliations of statutory net income (loss), as determined using statutory accounting principles, to the amounts included in the accompanying consolidated financial statements for the nine months ended September 30, 1997 and 1996 are as follows:
September 30, September 30, 1997 1996 ---- ---- Net income (loss) of insurance companies $ 658,544 (1,457,798) Increase (decrease): Deferred policy acquisition costs 80,743 (50,458) Deferred income taxes 160,258 (272,665) Deferred compensation (301,887) --- Accrued retirement benefits (295,951) --- Other adjustments, net (73,558) (48,548) --------- ---------- Net income (loss) as reported herein $ 228,149 (1,829,469) ========= ==========
11 12 Reconciliations of statutory capital and surplus, as determined using statutory accounting principles, to stockholders' equity included in the accompanying consolidated financial statements at September 30, 1997 and December 31, 1996 are as follows:
September 30, December 31, 1997 1996 ------------- ------------ Statutory capital and surplus of insurance companies $24,979,703 24,305,304 Stockholder's equity in non-insurance subsidiary 33,846 196,652 ----------- ----------- Combined capital and surplus 25,013,549 24,501,956 Increase (decrease): Deferred policy acquisition costs 165,293 84,550 Deferred income taxes 2,153,141 2,098,792 Net unrealized gain (loss) on investments booked at market 563,726 166,473 Deferred compensation (561,887) (260,000) Accured retirement (295,951) --- Non-admitted assets and other adjustments, net 864,376 799,624 Consolidating eliminations and adjustments (6,078,806) (6,001,692) ----------- ----------- Stockholders' equity as reported herein $21,823,441 21,389,703 =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Direct premiums written in the three months ended September 30, 1997 were $3.6 million, an increase of $1.8 million or 98% over the comparable period in 1996:
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES --------------------------- ---- ---- ------- Medical malpractice $3,373,000 1,700,000 +98% Legal malpractice 244,000 127,000 +92% ---------- --------- ---- Total direct premiums written $3,617,000 1,827,000 +98%
Medical malpractice premiums written in Missouri and Kansas were approximately 56% above the prior year level, but this was primarily due to the timing of renewals. Year-to-date premiums written in these two states were only 1% above the prior year level. Medical malpractice premiums written in the State of Texas through a purchasing group, Intermedical of Texas, Inc., totaled $764,000 in the third quarter of 1997 compared to $26,000 in the third quarter of 1996. The increase in legal malpractice premiums written was due to the addition of a marketing representative to the Home Office marketing staff in early 1997. Net premiums written after cessions to reinsurers were $2.4 million, an increase of $2.3 million over the third quarter of 1996:
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES --------------------------- ---- ---- ------- Medical Malpractice $2,248,000 (19,500) +2,267,500 Legal Malpractice 166,000 91,500 +74,500 ---------- ------- ---------- Total net premiums written $2,414,000 72,000 +2,342,000
12 13 Premiums ceded to reinsurers in the third quarter of 1997 were $553,000 or 31% below the prior year period due to a reduction in losses ceded under the Company's primary excess of loss treaty for medical malpractice coverage. Net premiums written in the three month period ended September 30, 1996 were significantly reduced by premiums ceded to reinsurers in the quarter. There was a $967,000 increase in the unearned premium reserve (UPR) in the three month period ended September 30, 1997 compared to a decrease of $1.3 million in the comparable period of 1996. The increase in the 1997 period was attributable to the sharp increase in premiums written compared to a decrease in the 1996 period. Net premiums written of $1.4 million in the third quarter of 1997 were approximately 3% higher than net premiums written in the three month period ended September 30, 1996. Net investment income was $651,000 in the three months ended September 30, 1997, $20,000 or 3% below net investment income in the comparable period of 1996. The decrease was due to a reduction of $2.3 million in cash and invested assets over the twelve month period ended September 30, 1997 as a result of the negative cash flow from operations. Reasons for the negative cash flow from operations are discussed more fully under Liquidity and Capital Resources. Total revenues were $2.1 million in the third quarters of both 1997 and 1996. Sales, marketing and other underwriting expenses totaled $1.1 million in the three month period ended September 30, 1997, an increase of $354,000 or 47% above the comparable period of 1996. However, increased production in the 1997 period resulted in an Expense Ratio of approximately 30% for the quarter compared to approximately 41% in the prior year period. Losses and loss adjustment expenses (LAE) totaled $315,000 in the current quarter compared to $4.5 million in the three months ended September 30, 1996. The significant reduction was primarily due to a release of $1.7 million in prior year medical malpractice loss reserves offset by incurred medical malpractice losses of $2.1 million in the current year period. The release from prior year loss reserves was primarily the result of an in-depth analysis of reserves at September 30, 1997 by the Company's consulting actuaries, which indicated significant redundancies in prior year reserves. Primarily as a result of the change in prior year loss reserves, total losses and expenses for the quarter ended September 30, 1997 totaled $1.4 million compared to $5.3 million in the comparable quarter of 1996. Income before income taxes was $681,000 in the three months ended September 30, 1997, compared to a loss before income taxes of $3.2 million in the prior year period. Income tax expense in the third quarter of 1997 was $300,000 compared to an income tax benefit of $1.1 million in the third quarter of 1996. 13 14 Net income in the three months ended September 30, 1997 was $380,000 or $.19 per share compared to a net loss of $2.1 million or $1.05 per share in the three month period ended September 30, 1996. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Direct premiums written in the nine months ended September 30, 1997 were $8.3 million, an increase of $2.3 million or approximately 38% over the comparable period of 1996.
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES --------------------------- ---- ---- ------- Medical malpractice $7,527,000 $5,679,000 +33% Legal malpractice 790,000 350,000 +126% ---------- ---------- ---- Total direct premiums written $8,317,000 $6,029,000 +38%
Premiums written in the States of Missouri and Kansas increased approximately 1% in the nine months ended September 30, 1997. Premiums written in the State of Texas through Intermedical of Texas, Inc., a purchasing group, increased from $26,000 in the first nine months of 1996 to $1.8 million in the nine months ended September 30, 1997. Net premiums written after cessions to reinsurers were $6.0 million in the nine months ended September 30, 1997 compared to $2.8 million in the prior year period, an increase of $3.2 million or 115%.
THREE MONTHS ENDED SEPT. 30 1997 1996 CHANGES --------------------------- ---- ---- ------- Medical malpractice $5,542,000 $2,559,000 +117% Legal malpractice 466,000 230,000 +103% ---------- ---------- ---- Total net premiums written $6,008,000 $2,789,000 +115%
The decrease of $932,000 in premiums ceded to reinsurers is attributable to a decrease in losses ceded under the Company's primary excess of loss treaty for medical malpractice coverage. There was an increase of $1.8 million in the unearned premium reserve (UPR) in the first nine months of 1997 compared to a release of $3.3 million in the prior year period. Premiums written in the 1997 period increased over the prior year compared to a decrease in premium written in 1996 compared to 1995. The primary factor in the 1996 period was, however, a release of $2.3 from the death, disability and retirement (DD&R) component of the UPR resulting from the conversion of claims-paid policyholders to claims-made policies. Net premiums earned were $4.2 million in the first nine months of 1997 compared to $6.0 million in the comparable period of 1996 due to the change in the UPR discussed above. Net investment income was $1.9 million in the nine months ended September 30, 1997 compared to $2.0 million in the 1996 period. The decrease of $115,000 was due to the decrease in invested assets as a result of a negative cash flow from operations. 14 15 Total revenues of the Company were $6.2 million in the nine month period ended September 30, 1997 compared to $8.1 million in the first nine months of 1996. Sales, marketing and other underwriting expenses totaled $2.9 million in the nine month period ended September 30, 1997 compared to $2.2 million in the same period of 1996, an increase of $695,000 or 32%. However, due to the significant increase in premiums written, the Expense Ratio in the nine months ended September 30, 1997 was 34.5% compared to 36% in the prior year period. The Company's long-term objective is an Expense Ratio of under 20%. This will be attained through continued growth in premiums written coupled with an effective expense control program. Losses and loss adjustment expenses totaled $2.9 million in the nine months ended September 30, 1997 compared to $8.7 million in the same period of 1996. The 1997 period benefited from a release of $1.7 million in prior year medical malpractice reserves offset by incurred medical malpractice losses of $4.3 million in the current accident year. Total losses and expenses totaled $5.7 million in the nine month period ended September 30, 1997 compared to $10.9 million in the nine months ended September 30, 1996. Income before income taxes in the nine month period ended September 30, 1997 was $432,500 compared to a loss before income taxes of $2.8 million in the prior year period. Income tax expense of $204,000 resulted in net income for the 1997 period to $228,000 or $.011 per share. An income tax benefit of $971,000 resulted in net loss for the nine month period ended September 30, 1996 to $1.8 million or $.91 per share. FINANCIAL CONDITION ASSETS: Total assets declined $3.1 million or approximately 5% in the nine months ended September 30, 1997. Cash and invested assets declined $2.3 million or approximately 5% in the same period. The declines in total assets and cash and invested assets were primarily due to a negative cash flow from operations of $2.5 million in the nine month period ended September 30, 1997. Reasons for the negative cash flow are discussed below under Liquidity and Capital Resources. There was a $3.8 million increase in the Company's bond portfolio in the first nine months of 1997 due to the purchase of bonds with a par value of $5.0 million offset by the maturity of a bond with a par value of $1.45 million. The new purchases had a yield-to-maturity of approximately 7.2%. The average yield-to-maturity of the investment portfolio (including short-term investments) at September 30, 1997 was approximately 6.5%. There was an unrealized gain of $557,000 in the bond portfolio at September 30, 1997 compared to an unrealized gain of $252,000 at December 31, 1996. Since the bond portfolio is classified as available-for-sale, changes in unrealized gains or losses are reflected in the equity account net of federal income taxes. 15 16 Approximately $8.0 million currently invested in cash equivalents will be reinvested long-term when interest rates increase above current levels. Future purchases will be concentrated in one through five year maturities. The principle components of other assets at September 30, 1997 were goodwill ($123,000), furniture and fixtures ($152,000) and software ($456,000). LIABILITIES: Reserves for losses and loss adjustment expenses decreased by $4.9 million in the nine month period ended September 30, 1997 from $32.9 million at the prior year end to $28.0 million. The decrease was primarily due to an actuarial re-evaluation of prior year loss reserves discussed more fully under Results of Operations. Premiums are earned over the twelve month lives of policies written. The unearned premium reserve (UPR) increased from $6.3 million at December 31, 1996 to $7.8 million at September 30, 1997, an increase of $1.5 million. The significant increase was due to increased writings in the nine month period ended September 30, 1997 compared to the prior year period. Other liabilities at September 30, 1997 consisted primarily of deferred compensation ($562,000), accrued retirement benefits ($296,000), and salaries, commissions, taxes and accounts payable. EQUITY: Stockholders' equity increased from $21.4 million at December 31, 1996 to $21.8 million at September 30, 1997 due to net income of $228,000 and an increase of $206,000 in net unrealized gains in the bond portfolio. Stockholders' equity at September 30, 1997 was $10.91 per share, an increase of $.21 per share over book value at December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations in the nine month period ended September 30, 1997 was a negative $2.5 million compared to a negative $5.4 million in the comparable period of 1996. The $2.9 million improvement in cash flow over the prior year period was attributable to the following: $ 310,000 increase in premiums received 347,000 decrease in premium paid to reinsurers 416,000 recovery from reinsurers 489,000 decrease in losses and loss adjustment expenses paid 976,000 decrease in operating expenses paid 335,000 income tax refund received 160,000 reduction in dividends paid to policyholders (102,000) decrease in interest received ---------- $2,931,000 improvement in cash flow from operations 16 17 The Company anticipates that net investment income of $2.6 million in 1997 and a cash position of $10.8 million at September 30, 1997 will provide sufficient liquidity to fund operations without the necessity of liquidating investments or obtaining alternative financing to meet cash requirements. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION The FASB has issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which is effective for periods ending after December 15, 1997, including interim periods. SFAS 128 establishes standards for computing and presenting earnings per share and applies to all entities with publicly held common stock or potential common stock. The Company will implement the statement in the required period. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TENERE GROUP, INC. (Registrant) November 12, 1997 /s/ J D Williams - ---------------- ----------------- Date Joseph D. Williams, CPA Vice President - Finance Chief Financial Officer and Principal Accounting Officer 17 18 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 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.
18 19
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.7 Reinsurance Cover Note: 95/1212/RM(A) to Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, dated October 16, 1995, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.8 Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, commencing February 1, 1995, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London including Amendment No. 1, effective April 27, 1995, filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.9 Reinsurance Cover Note: 95/1249/IP to Lawyers' Professional Liability Primary Excess of Loss Reinsurance Treaty, dated October 16, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.10 Lawyers' Professional Liability Primary Excess of Loss Reinsurance Contract, commencing July 1, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.11 Reinsurance Cover Note: 95/1250/IP to Prior Agreement Excess of Loss Reinsurance Contract, dated October 16, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.12 Prior Agreement Excess of Loss Reinsurance Contract, commencing July 1, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.13 Draft Reinsurance Slip by and between Intermed Insurance Company and American Re-Insurance Company filed as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1996, is incorporated herein by reference. 10.14 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Raymond A. Christy, M.D., President and Chief Executive officer, filed as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.15 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Andrew K. Bennett, Vice President-Claims and General Counsel, filed as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference.
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EXHIBIT NO. DESCRIPTION - ------- ----------- 10.16 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Andrew C. Fischer, Vice President-Underwriting and Policy Services, filed as Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.17 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing, filed as Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.18 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Joseph D. Williams, Vice President-Finance, Chief Financial Officer and Assistant Treasurer filed as Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.19 The Tenere Group, Inc. Retirement Plan for Directors effective May 17, 1996, filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.20 The Tenere Group, Inc. 1996 Long Term Incentive Plan effective April 17, 1996 filed as Annex A to the Registrant's definitive proxy statements for the 1996 Annual Meeting of Shareholders, is incorporated herein by reference. 10.21 Amendment No. 1 to Employment Agreement, dated February 28, 1997, between The Tenere Group, Inc. and Raymond A. Christy, M.D., President and Chief Executive Officer, filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.22 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Andrew K. Bennett, Vice President-Claims and General Counsel, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.23 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Andrew C. Fischer, Vice President-Underwriting and Policy Services, filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.24 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing, filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.25 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Joseph D. Williams, Vice President-Finance, Chief Financial Officer and Assistant Treasurer, filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 27 Financial Data Schedules
20 EX-27 2 FDS
7 3-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 33,197,873 0 0 7,242 0 0 33,205,115 10,790,490 166,700 165,293 59,491,400 28,030,182 7,819,900 0 0 0 0 0 19,998 21,803,443 59,491,400 4,231,305 1,936,459 0 0 2,861,880 1,234,083 1,639,296 432,505 204,356 228,149 0 0 0 228,149 .11 .11 0 0 0 0 0 0 0
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