-----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, SeGCLIKCR+fol/3oipQa4A+CqciEINQ+SM54Fqn41Dy8dsie7gfBI0eGl6La1Q/4 pWgNNz9/KGlpdUoBbu0BMQ== 0000950137-98-002069.txt : 19980515 0000950137-98-002069.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950137-98-002069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 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: 98619057 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 DATED MARCH 31, 1998 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. 2 THE TENERE GROUP, INC.
PAGE NO. -------- 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
2 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
UNAUDITED Assets 1998 1997 ------ ---- ---- 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 =========== ==========
See notes to consolidated financial statements 3 4 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 1998 and 1997 UNAUDITED
1998 1997 ---- ---- 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) ========== =========
See notes to consolidated financial statements 4 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
Retained Accumulated earnings/ other Common Contributed (accumulated comprehensive Comprehensive stock capital deficit) income Total income ----- ------- -------- ------ ----- ------ 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 ========= ========== ========== ======== ==========
See notes to consolidated financial statements 5 6 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1998 and 1997 UNAUDITED
1998 1997 ----------- ---------- 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) =========== ==========
See notes to consolidated financial statements 6 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.
Gross Gross Estimated Amortized unrealized unrealized fair Type of Investment basis gains losses value ------------------ ----------- --------- ------- ---------- 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 =========== ========= ======= ==========
7 8
Gross Gross Estimated Amortized unrealized unrealized fair Type of Investment basis gains losses value - ------------------ ----------- --------- ------ ---------- 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 =========== ========= ====== ==========
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.
Estimated Amortized fair cost value ---- ----- 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 =========== ==========
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 9 Net investment income for the three months ended March 31, 1998 and 1997 is comprised of the following: March 31, March 31, 1998 1997 ---- ---- 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 ======== =======
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: March 31, March 31, 1998 1997 --------- --------- 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) ======== ========
9 10 (3) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES AND REINSURANCE A summary of the reserves for losses and loss adjustment expenses follows:
March 31, December 31, 1998 1997 ---- ---- 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 =========== ===========
Following is the activity in the reserves for losses and loss adjustment expenses:
March 31, March 31, 1998 1997 ---- ---- 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 =========== ==========
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 11 Premiums and losses related to reinsurance amounts for the three months ended March 31, 1998 and 1997 are summarized as follows:
March 31, March 31, 1998 1997 ---- ---- Ceded premiums written $685,186 646,824 ======== ======= Ceded premiums earned $702,560 615,227 ======== ======= Ceded losses and loss adjustment expenses $318,728 208,420 ======== =======
(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:
March 31, March 31, 1998 1997 ---- ---- Expected tax benefit using statutory rates $(55,228) (167,146) Other, net (5,980) (6,291) -------- -------- Income tax benefit $(61,208) (173,437) ======== ========
Income taxes consist of the following at December 31:
March 31, March 31, 1998 1997 ---- ---- Current expense $ - 215 Deferred benefit (61,208) (173,652) -------- -------- Income tax benefit $(61,208) (173,437) ======== ========
11 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:
March 31, March 31, 1998 1997 ---- ---- 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) ========== ========
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:
March 31, December 31, 1998 1997 ---- ---- 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 ========== =========
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 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:
March 31, March 31, 1998 1997 ---- ---- 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) =========== ========
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:
March 31, December 31, 1998 1997 ---- ---- 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 =========== ==========
13 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:
THREE MONTHS ENDED MARCH 31: 1998 1997 CHANGE ---- ---- ------ 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%
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:
THREE MONTHS ENDED MARCH 31: 1998 1997 CHANGE ---- ---- ------ 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%
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 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 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 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: $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 ========
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 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
7 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 36,956,790 0 0 14,835 0 0 10,081,008 0 1,388,283 177,959 64,836,883 30,190,947 7,864,600 0 0 0 0 0 19,998 20,829,085 64,836,883 1,785,627 708,134 (2,204) 0 1,885,092 0 768,899 (162,434) (61,208) (101,226) 0 0 0 (101,226) (.05) (.05) 0 0 0 0 0 0 0
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