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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

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|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000

OR

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|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 0-25508

RTW, INC.
(Exact name of registrant as specified in its charter)

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|Minnesota                                                      |  | 41-1440870                          
|                                                               |  |                                     
|(State or other jurisdiction of incorporation
or organization) |  | (I.R.S. Employer Identification No.)

8500 Normandale Lake Boulevard, Suite 1400
Bloomington, MN 55437
(Address of principal executive offices and zip code)

Registrants telephone number, including area code: (952) 893-0403

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|Securities registered pursuant to 12(b) of the Act: |  | None                                                                    
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|Securities registered pursuant to 12(g) of the Act: |  | Common Stock, no par value Series A
Junior Participating Preferred Stock

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|      |  |   
|----- |  | --
|Yes X |  | No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: (X)

As of March 22, 2001, 10,292,839 shares of Common Stock, no par value, were
outstanding. As of March 22, 2001, assuming as fair value the last sale price
of $2.75 per share on The Nasdaq Stock Market, the aggregate fair value of
shares held by non-affiliates was approximately $24,300,000.

Documents incorporated by reference:

The Companys Proxy Statement for its annual meeting of shareholders to be held
in May 2001, a definitive copy of which will be filed with the Securities and
Exchange Commission within 120 days of December 31, 2000, is incorporated by
reference in Part III of this Report on Form 10-K.

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TABLE OF CONTENTS



|                                                         |                                                                                                |                        |  |  |  |  |  | 
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|PART I                                                  
|                                                         | ITEM 1. BUSINESS                                                                              
|                                                         | ITEM 2. PROPERTIES                                                                            
|                                                         | ITEM 3. LEGAL PROCEEDINGS                                                                     
|                                                         | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   
|                                                         | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 
|                                                         | ITEM 6. SELECTED FINANCIAL DATA                                                               
|                                                         | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS OF OPERATIONS
|                                                         | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                         | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           
|                                                         | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE  
|                                                         | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                   
|                                                         | ITEM 11. EXECUTIVE COMPENSATION                                                               
|                                                         | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       
|                                                         | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       
|                                                         | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                     
|SIGNATURES                                              
|INDEPENDENT AUDITORS REPORT ON SCHEDULES               
|                                                         | SCHEDULE I                                                                                    
|                                                         |                                                                                                | SUMMARY OF INVESTMENTS
|                                                         | SCHEDULE II                                                                                   
|Balance Sheets                                          
|Statements of Operations                                
|Statements of Cash Flows                                
|Notes to Condensed Financial Statements                 
|                                                         | SCHEDULE III                                                                                  
|SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
|                                                         | SCHEDULE IV                                                                                   
|REINSURANCE                                             
|                                                         | SCHEDULE V                                                                                    
|VALUATION AND QUALIFYING ACCOUNTS                       
|Description of the 2001 Performance Bonus Plan          
|Election form for Minnesota W.C.R.A.                    
|Credit Agreement                                        
|First Amendment to the Credit Agreement                 
|Second Amendment to the Credit Agreement                
|Statement re: Computation of Net Income (Loss)          
|Consent of Deloitte & Touche LLP                        



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TABLE OF CONTENTS

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|Item 1.  |  | Business                                                                              |  |      | 3  | 
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|         |  | Executive Officers of the Registrant                                                  |  |      | 8  | 
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|Item 2.  |  | Properties                                                                            |  |      | 9  | 
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|Item 3.  |  | Legal Proceedings                                                                     |  |      | 9  | 
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|Item 4.  |  | Submission of Matters for a Vote of Security Holders                                  |  |      | 9  | 
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|PART II 
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|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  |      | 10 | 
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|Item 6.  |  | Selected Financial Data                                                               |  |      | 10 | 
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|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results
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|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 24 | 
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|Item 8.  |  | Financial Statements and Supplementary Data                                           |  |      | 24 | 
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|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure  |  |      | 42 | 
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|PART III
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|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |      | 42 | 
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|Item 11. |  | Executive Compensation                                                                |  |      | 42 | 
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|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |      | 42 | 
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|Item 13. |  | Certain Relationships and Related Transactions                                        |  |      | 42 | 
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|PART IV 
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|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |      | 42 | 
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|         |  | Signatures                                                                            |  |      | 44 | 

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PART I




ITEM 1. BUSINESS

Overview

RTW, Inc. (the Company) provided comprehensive management products and
services to employers for their workers compensation programs in Minnesota,
Wisconsin, South Dakota, Colorado, Missouri, Illinois, Kansas, Michigan,
Indiana, Massachusetts, Connecticut, Rhode Island, New Hampshire and Maine
during 2000. The Company also had obtained licenses but was not yet operating
in Pennsylvania, Tennessee, Maryland, Arkansas, Iowa, Florida, New Jersey,
Georgia, North Carolina, Texas and Oklahoma. The Company believes its
proprietary management approach substantially reduces wage replacement costs
and medical expenses resulting from workplace injuries. The Company focuses on
controlling costs by returning injured employees to work as soon as possible
and by actively managing all participants in the workers compensation system,
including employers, employees and medical care providers, as well as legal and
judicial participants in the workers compensation system. Elements of the
Companys management approach include:



| |  |  | thorough on-site evaluation of potential customers;                                
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | active training of customers in the Companys procedures;                          
|
| |  |  | prompt identification of potentially high-cost injuries; and                       
|
| |  |  | rapid intervention in, and intensive management of, potentially high-cost injuries.

The Company has developed two proprietary management systems: (i) the RTW
SOLUTION®, designed to lower employers workers compensation
costs and return injured employees to work as soon as possible, and (ii) the
ID15® system, designed to identify those injured employees who are
likely to get stuck in the workers compensation system. In order to benefit
directly from the use of its proprietary methods, the Company combines its
management services with workers compensation insurance products underwritten
by its wholly-owned subsidiary, American Compensation Insurance Company (ACIC).
The Company also uses management techniques including designated health care
providers, medical fee schedule review, utilization review and peer review to
control medical costs.

Industry

Workers compensation benefits are mandated and regulated by individual
states, and every state requires employers to provide wage replacement and
medical benefits to work accident victims regardless of fault. Virtually all
employers in the United States are required either to purchase workers
compensation insurance from a private insurance carrier, to obtain coverage
from a state managed fund or, if permitted by their state, to be self-insured.
Workers compensation laws generally mandate two types of benefits for injured
employees: (i) indemnity payments that consist of temporary wage replacement or
permanent disability payments and (ii) medical benefits that include expenses
related to diagnosis and treatment of the injury as well as rehabilitation, if
necessary. On an industry-wide basis, indemnity payments represent
approximately 60% of benefits paid, while medical benefits account for the
remaining 40%.

Workers compensation costs grew approximately 11.5% annually from 1960 to
1990. Premium growth flattened from 1991 to 1992 and has since declined by
approximately 8% through 1998. Estimated insurance premiums totaled
approximately $26.0 billion nationwide in 1997. This $26.0 billion includes:
(i) the traditional, or private residual market, estimated at $23.2 billion,
including commercial insurers and state operated assigned risk pools
established for high risk employers and (ii) state funds, estimated at $2.8
billion, operated in states in order to increase competition and stabilize the
market.

Indemnity payments, which are established by legislative action, have
risen, in part because of higher wage levels and increased state mandated
benefits. Medical expenses have also increased due to the general rise in the
cost of health care and the statutory requirement that employers provide
coverage for all compensable medical costs, without any copayment by the
employee. The Company believes the most significant factor affecting the cost
of workers compensation, however, results from incentives in the system for
injured employees to remain away from work and to continue collecting indemnity
payments and receiving medical treatment beyond the point that is necessary.

The Company believes that workers compensation insurance companies have
not effectively controlled costs in the industry. Traditional insurance
company practices have focused on managing specific aspects of the system,
including workplace safety, and on implementing certain medical cost
containment measures.

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While traditional efforts have reduced costs in certain areas, the Company
believes these efforts have not had a significant effect on the overall system
because they have not focused effectively on controlling indemnity payments.
In addition, the Company believes traditional efforts have addressed only
certain components of the workers compensation system, and have not provided a
comprehensive management approach specifically designed for the workers
compensation system.

The Companys Management Approach

The Company seeks to control workers compensation costs through a
proprietary management approach that is specifically designed for the workers
compensation system. The Companys management strategy seeks to reduce
workers compensation costs significantly through early intervention in each
employee injury and intensive management of all participants in the system,
including employers, injured employees and medical care providers, and legal
and judicial participants in the workers compensation system. Through early
intervention, the Company promptly identifies cases that have the potential to
result in significant expenses and acts to control these expenses before they
are incurred. The Company focuses on controlling indemnity payments for lost
wages, the largest component of workers compensation costs, by quickly
returning employees to work. As part of this strategy, the Company attempts to
return an injured employee to his or her original position if the employee is
capable, or to place the employee in a transitional, light-duty position until
the employee is able to resume his or her former position. By promptly
returning an employee to work, the Company has found that not only indemnity
payments, but also medical expenses per injury, are substantially reduced. In
addition, the Company uses management techniques including designated health
care providers, medical fee schedule review, utilization review and peer review
to control medical costs.

The Company uses five-person operating teams to implement its management
approach. Each operating team handles all of the claims for a specific group
of customers and is accountable within the Company for the loss experience of
these customers. Each team generally consists of three nurses, a statutory
claims administrator, and an assistant claims administrator / clerical support
person. A teams nurses are responsible for evaluating the medical condition
of an injured employee and monitoring the employees medical treatment. The
claims administrators are responsible for determining the eligibility of
claims, paying benefits in a timely manner and following statutory requirements
for administration of claims. The operating teams meet regularly to discuss
strategies for managing difficult claims and to review strategies and
procedures that have been particularly successful in resolving disputes.

The following sections summarize the Companys approach to managing the
various participants in the system.

Employers. Generally, each customer is assigned to an operating team
responsible for managing the customer relationship. Prior to accepting an
employer as a customer, members of an operating team conduct a risk assessment
and explain the Companys methods and procedures to the employer. The risk
assessment forms a part of the Companys underwriting process and includes
evaluating the employers willingness to follow the Companys procedures. As
part of the insurance policy, the employer agrees to comply with the Companys
early intervention methods and to provide transitional, light-duty work for
injured employees until such time as they are able to resume their normal
positions. To ensure that the Companys early intervention techniques succeed,
the Company requests prompt notification from the employer of all injuries,
typically 24 to 48 hours after the employer learns of the injury.

Each operating team is responsible for implementing a workers
compensation program for the customer, training the customers personnel in the
Companys methods and procedures and managing all reported injuries for the
customer. The operating team meets with the customer, provides loss reports
showing current claims status, conducts an annual account review and maintains
active communication on open injuries. The operating team may make workplace
safety recommendations or retain a workplace safety-engineering firm to assist
its customers to remedy work conditions that the operating team determines
constitute an inappropriate risk. In addition, the operating team may
recommend to the Companys management the cancellation or non-renewal of the
policy for a customer that fails to comply with the Companys procedures.

Employees. The Company focuses on identifying injuries that have the
greatest potential to result in significant expenses and acts quickly to
control expenses resulting from these injuries. The Companys experience
has been that approximately 15% of all injuries result in 85% of all
workers compensation expenses and that early identification of, and
intervention in, these cases can lead to significant cost savings. Within 48
hours of notice of an injury, the operating team evaluates several factors,
including the type of injury, the employees history of injuries and whether
the employee is absent from work, to determine whether the injury is likely to
involve significant expenses. In potentially high-cost cases, a member of the
operating team intervenes quickly by meeting with the injured employee to
assess the injury, assisting the injured employee in obtaining medical care and
rehabilitation and developing a plan to get the employee back to work as soon
as is appropriate. If the employee cannot immediately return to his or her

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original position, the employer is required, according to the terms of the
insurance agreement, to provide a transitional light-duty job that is
consistent with the limits defined by the employees medical care provider. If
the employee refuses this transitional position, the Company may terminate
indemnity payments, but is required to continue to provide appropriate medical
benefits.

Medical Care Providers. The operating teams actively assess each injury,
monitor and manage the medical treatment and review the medical expenses of
each employees injury. Each injury report is reviewed by one of the Companys
nurses. The nurse typically contacts the physician treating employees in cases
that involve days off from work or injuries that could involve significant
expense. In these cases, the physician is asked to provide his or her
diagnosis, plan of treatment and assessment of the employees physical
capabilities for transitional work. The Company has contracts with medical
physicians to provide consulting services and assess proposed treatment plans
for injured employees to the operating teams. These physicians also discuss
injured employee treatment plans with the employees medical care providers.
The goal is to ensure both an accurate diagnosis and treatment of the injury
and an understanding of the nature and extent of the limits the diagnosis
places on the employees ability to return to work in either the original job
or a transitional, light-duty position. The operating team also monitors the
health care provided to the injured employee to ensure that the employee
receives proper treatment for the injury and that the employee does not receive
services or procedures that are excessive, unnecessary or unrelated to the
particular injury. In addition, when the operating team believes the diagnosis
of an injury or the proposed rehabilitation treatment is not appropriate, the
operating team will arrange for a second opinion with an independent medical
examiner.

The medical cost management team reviews all bills submitted by medical
care providers to determine if the amounts charged for the treatments are
appropriate according to statutory fee schedules.

In Minnesota, Illinois and many other states, the Company cannot require
that an injured employee go to a specific physician or seek treatment from a
specific provider. Nevertheless, the Company attempts to assist the injured
employee in selecting appropriate medical care providers. In Colorado,
Missouri and Michigan (for the first ten days after the injury) the Company can
require that injured employees go to a physician within a designated network of
medical care providers.

Management of Legal and Judicial Participants. The Company, through early
intervention, seeks to limit the number of disputes with injured employees. As
part of its early intervention process, the Company identifies injuries that
are not eligible for medical or indemnity payments, and denies the claim. The
Company may also deny a claim for indemnity payments when it determines that no
further payments are appropriate (for example, when an employee has been
offered transitional, light-duty work and has refused it). In these and other
sets of circumstances, the employee may engage a lawyer to represent his or her
interests. Generally, if the parties are unable to resolve the matter, the
workers compensation law mandates arbitration, subject to judicial review.
For cases that involve adversary proceedings, the Company engages one of
several lawyers who are familiar with the Companys philosophy and actively
seeks to resolve the dispute with the employees attorney. The Companys
policy is to contest all cases where the Company believes benefits are not
appropriate under applicable law.

Customers

The Company targets employers and associations that operate in industries
with relatively high workers compensation costs, including the manufacturing,
retail, wholesale, health care and hospitality industries and employers with a
history of workers compensation claim costs higher than average in their
industry.

The Companys average annual premium per policy increased to $40,500 in
2000 from $27,000 in 1999 and $21,000 in 1998 due to focused aggressive
re-underwriting in 2000 and 1999. The Companys ten largest customers
accounted for $7.9 million or 7.9% of the Companys premiums in force in 2000
compared to $6.5 million or 7.5% of the Companys premiums in force in 1999 and
$4.4 million or 5.3% of premiums in force in 1998. No customer accounted for
more than 5% of in force premiums in 2000, 1999 or 1998. The Company
renewed 66.2% of the policies scheduled to expire in 2000 whereas 65.8% and
72.5% were renewed in 1999 and 1998, respectively.

Currently, all of the Companys customers are in Minnesota, Wisconsin,
South Dakota, Colorado, Missouri, Illinois, Kansas, Michigan, Indiana,
Massachusetts, Rhode Island, Connecticut, New Hampshire and Maine. In addition
to these states, the Company is also currently licensed in Pennsylvania,
Tennessee, Maryland, Arkansas, Iowa, Florida, New Jersey, Georgia, North
Carolina, Texas and Oklahoma. The Company currently has no intention to expand
operations beyond the present states in which it is currently operating but
will reevaluate the circumstances as opportunities arise.

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Products

Substantially all of the Companys workers compensation products and
services are guaranteed-cost insurance policies. Under a guaranteed-cost
policy, the customer purchases an insurance policy underwritten by ACIC and
pays the Company a premium based on the customers aggregate payroll. The
Company assumes responsibility for all the indemnity and medical costs
associated with the customers workers compensation injuries and works closely
with the customer in managing the employers entire workers compensation
program.

The Company determines the premium to be charged a customer based on
several factors, including: (i) the expected dollar loss per $100 of payroll
for the customers industry, (ii) the customers experience modifier, a
measurement of the difference between the customers past claims experience and
its industry average, and (iii) an upward or downward adjustment to the premium
by the Company based on its assessment of the risks associated with providing
the coverage for the specific customer and on competitive market prices. A
customers expected dollar loss and experience modifier are each determined by
an independent rating agency established or adopted by its state, based on a
three-year average of the claims experience of the customer and its industry.

In addition to standard guaranteed-cost policies, the Company offers, on a
limited basis, a deductible guaranteed-cost policy under which the customer is
responsible for all medical and indemnity expenses up to a specific dollar
amount, while the Company is responsible for medical and indemnity expenses
over this level. The Company provides the same comprehensive management
services for the deductible guaranteed-cost policies and the standard
guaranteed-cost policies.

Sales and Marketing

The Company sells its workers compensation products and services through
independent insurance agencies, including several large national agencies, as
well as one- or two-person agencies. Agencies are paid a commission, which
averaged 7.9% of the Companys gross premiums earned in 2000 compared to 8.0%
of gross premiums earned in 1999 and 1998. The Companys ten highest producing
agencies accounted for $27.2 million or 27.3% of premiums in force in 2000
compared to $19.9 million or 22.8% of premiums in force in 1999 and $19.1
million or 23.2% of premiums in force in 1998. No agency accounted for more
than 6.5% of premiums in force in 2000 compared to 4.0% of premiums in force in
1999 and 3.4% of premiums in force in 1998. The Company continually markets
its products and services to its agencies to keep them aware of developments in
the Companys business. Each states underwriting team is responsible for
establishing and maintaining agency relationships.

Reinsurance

The Company shares the risks and benefits of the insurance it underwrites
through reinsurance. The Company has in effect excess of loss policies under
which a reinsurer is paid a percentage of the Companys gross premiums earned,
and the reinsurer agrees to assume all risks relating to injuries over a
specific dollar amount on a per occurrence basis. Excess of loss coverage in
Minnesota is provided by a state established organization, the Minnesota
Workers Compensation Reinsurance Association (WCRA). In non-Minnesota states,
excess of loss coverage is purchased through private reinsurers.

In 2000, 1999 and 1998, the Company selected per occurrence levels in
Minnesota under the WCRA of $310,000, $290,000 and $280,000, respectively. In
2001, Minnesota excess of loss coverage under the WCRA begins at $330,000.

In 2000, 1999 and 1998, the Company purchased non-Minnesota excess of loss
coverage primarily through General Reinsurance Corporation, rated A++
(Superior) by A.M. Best. The excess of loss policy in effect during 2000 and
1999 provided reinsurance from $300,000 per person per any one loss and up to
statutory limits per occurrence ultimate net loss. The excess of loss policy
in effect during 1998 and 1997 provided reinsurance up to
$9.5 million in excess of $500,000 per person per any one loss and up to
$40 million in excess of $10 million per occurrence ultimate net loss. This
excess of loss policy was effective January 1, 1997, and replaced excess of
loss policies that were terminated on December 31, 1996.

In 1996, the non-Minnesota excess of loss policies provided reinsurance up
to $9.5 million in excess of $500,000 per person per any one loss and up to
$49.5 million in excess of $500,000 per occurrence ultimate net loss.
Transatlantic Reinsurance Company, rated A+ (Superior) by A.M. Best, is the
only reinsurance company that received more than 15% of the premiums paid for
reinsurance coverage under the 1996 excess of loss coverage.

For claims occurring on or after July 1, 1998, the Company purchased
excess of loss coverage through GE Reinsurance Corporation, rated A++
(Superior) by A.M. Best that provides reinsurance up to $275,000 in excess of
$25,000 in all states except Minnesota where the coverage is $255,000 in excess
of $25,000 for 1998, $265,000 in

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excess of $25,000 for 1999 and $275,000 in
excess of $25,000 for 2000. This coverage was purchased to reduce risk and
volatility in the Companys operating performance. This contract was
terminated effective December 31, 2000, however the policy remains effective in
2001 for policies in force at December 31, 2000 through expiration, not to
exceed fifteen months after the effective termination date. Policies written
or renewing in 2001 will not be covered under this lower level excess of loss
reinsurance policy.

A.M. Best ratings are ratings based on a comparative analysis of the
financial condition and operating performance of insurance companies. A.M.
Best ratings are based upon factors of concern to insureds and are not directed
toward the protection of investors. See Competition.

Competition

The workers compensation industry is highly competitive. The Company
competes with large insurance companies, managed health care organizations,
state sponsored insurance pools and risk management consultants. Unlike the
Company, which offers only workers compensation products and services, these
competitors may offer additional products and services to employers, including
other forms of insurance. As a consequence, these competitors may have certain
advantages in pricing their workers compensation products. In addition,
certain of these competitors are offering a management approach similar to that
offered by the Company. Many of the Companys competitors have greater
financial and operating resources than the Company.

Competitive factors in the industry include premium rates, level of
service and ability to reduce claims expense. The Company believes that its
workers compensation insurance products are competitively priced and its
premium rates are typically lower than those for customers assigned to the
state sponsored risk pools. The Company also believes that its level of
service and its ability to reduce claims are strong competitive factors that
have enabled it to retain existing customers and attract new customers.

Large insurance companies exit and enter the workers compensation market
in different states depending on their appraisal of current market conditions.
Many insurance companies stopped underwriting workers compensation insurance
during the early 1990s due to rising costs that were not matched by reductions
in statutory benefits or higher premium rates. In the mid to late 1990s, the
Company experienced increased market pressure as new carriers, including large
insurance companies and single line workers compensation insurance companies,
entered the market. In 2000, many insurers withdrew from the markets in which
we operate as premium rates were insufficient to cover the cost of benefits
paid.

Large insurance companies compete primarily with the Company for customers
that have lower past claims experience or lower experience modifiers. As a
result, the Company experiences increased competition for the renewal of
workers compensation policies with customers that have reduced their
experience modifiers, and it expects to continue to experience increased
competition from large insurance companies.

Another competitive factor results from the fact that some employers will
not purchase workers compensation products from carriers with an A.M. Best
rating less than A. In addition, certain insurance carriers that write
umbrella policies will not provide coverage to an employer if a portion of the
employers underlying insurance policy, such as the workers compensation
portion is written by a carrier with a less than A rating. The Company
believes that its B++ letter rating from A.M. Best may make it difficult, in
certain instances, for the Company to provide its products to certain
employers. In these instances, the Company can still compete by writing these
employers using an A rated insurers paper. This process, known as fronting,
adds additional cost for ACIC but allows access to a market we may not
otherwise access.

The Companys insurance subsidiary was assigned an initial rating of B++
(Very Good) on a scale of A++ (Superior) to F (In Liquidation) on December 16,
1996. This rating was reaffirmed in June 2000 and April 1999. An A.M. Best
rating is assigned after an extensive quantitative and qualitative evaluation
of the Companys financial condition and operating performance. A.M. Best
ratings are based upon factors of concern to insureds and are not directed
toward the protection of investors. Furthermore, A.M. Best ratings are not
ratings of the Company or any of its securities. A.M. Best ratings include
Secure Ratings, consisting of A++ and A+ (Superior); A and A (Excellent); B++
and B+ (Very Good); Vulnerable Ratings, consisting of B and B (Adequate); C++
and C+ (Fair); C and C (Marginal); D (Very Vulnerable); E (Under State
Supervision) and F (In Liquidation).

Data Management

In 2000, 1999, 1998 and 1997, the Company contracted with unrelated third
parties for certain computer information systems and other software licenses.
In 1996, the Company developed and implemented its own proprietary claims
management and medical fee adjudicating systems to manage claims, audit medical
fees, pay claims, provide reports to policyholders and analyze claims data.
These systems replaced third party contracts for

7



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##### Table of Contents



claims management and medical
fee adjudicating systems. In 1995, the Company developed and implemented its
own proprietary policy management system to process insurance applications and
issue policies and endorsements. This system replaced a third party contract
for a policy management system. In 1999, the Company developed and implemented
its own proprietary billing, cash receipts, collections and agency commission
systems. These systems replaced third party software systems purchased by the
Company. The Company continues to utilize third party software to maintain
financial information, prepare accounting reports and financial statements and
pay vendors. The Company also contracts with a third party provider of payroll
services for payroll, benefit and human resource software services. The
Company utilizes other licensed software from national vendors to maintain its
financial records, file statutory statements with insurance regulators and
perform other general business.

Employees

The Company had 249 full-time employees at December 31, 2000. Of the
Companys employees, approximately 111 work in the Companys administrative and
financial functions and 138 serve on, provide service to or manage
approximately 23 different operating teams. None of the Companys employees
are subject to collective bargaining agreements. The Company believes its
employee relations are good.

Regulation

The Companys insurance subsidiary is subject to substantial regulation by
the governmental agencies in the states in which it operates, and will be
subject to such regulation in any state in which it provides workers
compensation products and services in the future. State regulatory agencies
have broad administrative power with respect to all aspects of the business of
the Company, including premium rates, benefit levels, policy forms, dividend
payments, capital adequacy and the amount and type of its investments. These
regulations are primarily intended to protect covered employees and
policyholders rather than the insurance company. Both the legislation covering
insurance companies and the regulations adopted by state agencies are subject
to change.

Workers compensation coverage is a creation of state law, subject to
change by the state legislature, and is influenced by the political processes
in each state. Several states have mandated that employers receive coverage
only from state operated funds. New laws affecting the workers compensation
system in Minnesota, Colorado, Missouri, Michigan and Massachusetts and any
other state where the Company currently operates or may operate in the future,
including laws that require all employers to participate in state sponsored
funds or that mandate premium reductions, could have a material adverse effect
on the Company.

Executive Officers of the Registrant

The following are the executive officers of the Company at March 28, 2001:

|                   |  |     |    |          |  |                                                              |  |  |  | 
|------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------ |  |  |  | 
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Carl B. Lehmann    |  |     | 46 |          |  | Chairman of the
Board, President and Chief Executive Officer
|                  
|                  
|                  
|                  
|Jeffrey B. Murphy  |  |     | 39 |          |  | Chief Financial Officer, Secretary and Treasurer            
|                  
|                  
|                  
|                  
|Anthony J. Rotondi |  |     | 55 |          |  | Chief Operations Officer                                    
|                  
|                  
|                  
|                  
|David J. LeBlanc   |  |     | 39 |          |  | Chief Underwriting Officer                                  
|                  
|                  
|                  
|                  
|Vina L. Marquart   |  |     | 49 |          |  | Vice President  Human Resources                            
|                  
|                  
|                  
|                  
|Debora S. Allen    |  |     | 43 |          |  | Chief Information Officer                                   

Carl B. Lehmann became a
Director of the Company in November 1997, was
appointed President and Chief Executive Officer in January 1998
and was named Chairman of the Board in March 2000. Mr. Lehmann
served as President of the Stored Value Group, a division of American Express
Travel Related Services, Inc. (AMEX) from 1993 to 1997. Prior to that time,
Mr. Lehmann served as Vice President of various departments at AMEX from 1987
to 1993 and Citicorp Retail Services from 1982 to 1987.

Jeffrey B. Murphy joined the Company in October 1994 as Controller and was
promoted to Chief Financial Officer in February 2000. Mr. Murphy was the
Corporate Controller and held other management positions for Midcontinent
Media, Inc. from 1989 to 1994. Prior to that time, Mr. Murphy served in
various financial audit positions with Grant Thornton LLP from 1983 to 1989.

Anthony J. Rotondi joined the Company in November 1998 as Chief Operations
Officer. Before joining RTW, Mr. Rotondi managed CompuPros Inc., a
technology-consulting firm in Dallas, Texas. Prior to that time, Mr. Rotondi
served as Senior Vice President Operations with Fortis Financial Group from
1993 to 1996. Mr. Rotondi also held several other leadership positions during
his over twenty-year tenure with Fortis Financial Group.

8



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##### Table of Contents



David J. LeBlanc joined the Company in March 1997 as the Director of
Marketing and Underwriting for the Companys Massachusetts regional office. He
held various other management positions within the Company before being
promoted to Chief Underwriting Officer in October 1999. Prior to joining the
Company, Mr. LeBlanc was a Regional Underwriting Manager from 1994 until 1997
for Liberty Mutual Insurance Company. Mr. LeBlanc also held several other
leadership positions during his thirteen years with Liberty.

Vina L. Marquart was appointed to the position of Vice President of Human
Resources in February 2000. Ms. Marquart joined RTW as a Nurse Case Manager
and has been with the Company for 15 years. Ms Marquart has held various
management positions within the Company including Operations Manager, General
Manager of the Minnesota office and National Director of Case and Claims
Management. Prior to joining RTW, Ms. Marquart was in a leadership role at a
community hospital in St. Paul.

Debora S. Allen was promoted to Chief Information Officer in April 2000.
Ms. Allen joined RTW in August 1997 and has held various management positions
including Director of Home Office Operations and Director of Service Business
Planning. Before joining RTW, Ms. Allen held several leadership positions with
MCC Behavioral Care and financial audit positions with Ernst & Young.




ITEM 2. PROPERTIES

The following is a summary of properties leased by the Company at December 31, 2000:

|                                                  |  |                  |        |             |  |                |  |  |  | 
|------------------------------------------------- |  | ---------------- | ------ | ----------- |  | -------------- |  |  |  | 
|                                                  |  | Area leased     
|Location and description                          |  | (in square feet) |        | Termination
|                                                  |  |                  |        |            
|Bloomington, Minnesota; Headquarters space        |  |                  | 35,487 |             |  | September 2002
|                                                 
|                                                 
|                                                 
|                                                 
|Brainerd, Minnesota; Minnesota satellite office   |  |                  | 3,123  |             |  | October 2005  
|                                                 
|                                                 
|                                                 
|                                                 
|Denver, Colorado; Colorado office space           |  |                  | 7,825  |             |  | May 2005      
|                                                 
|                                                 
|                                                 
|                                                 
|St. Louis, Missouri; Missouri office space        |  |                  | 6,542  |             |  | September 2005
|                                                 
|                                                 
|                                                 
|                                                 
|Overland Park, Kansas; Missouri satellite office  |  |                  | 3,604  |             |  | November 2002 
|                                                 
|                                                 
|                                                 
|                                                 
|Detroit, Michigan; Michigan office space          |  |                  | 11,008 |             |  | June 2002     
|                                                 
|                                                 
|                                                 
|                                                 
|Grand Rapids, Michigan; Michigan satellite office |  |                  | 4,631  |             |  | April 2006    
|                                                 
|                                                 
|                                                 
|                                                 
|Boston, Massachusetts; Massachusetts office space |  |                  | 12,381 |             |  | April 2002    




ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of administering its workers compensation
management program, the Company is routinely involved in the adjudication of
claims resulting from workplace injuries. The Company is not involved in any
legal or administrative claims that it believes are likely to have a material
adverse effect on the Companys operations or financial condition.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On December 19, 2000, the Company held its 2000 Annual Meeting of
Shareholders and Deloitte and Touche LLP was approved as independent public
accountants of the Company by a vote of 8,086,198 for and 1,459 against.

9



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##### Table of Contents



PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

QUARTERLY STOCK PRICE COMPARISON AND DIVIDENDS

The Companys shares are publicly traded on The Nasdaq Stock Market under
the symbol RTWI. The table below sets forth the range of high and low sales
prices for the Companys stock for each quarter during the past two years. The
Company had approximately 2,000 shareholders of its common stock at the close
of trading on March 1, 2001.

|             |  |  |      |  |  |         |        |         |  |         |        |         |  |  |        |  |  |  |        |  |  |  |  | 
|------------ |  |  | ---- |  |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  |  | ------ |  |  |  | ------ |  |  |  |  | 
|             |  |  |      |  |  | First   |        | Second  |  | Third   |        | Fourth 
|Fiscal Year: |  |  |      |  |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|             |  |  |      |  |  |         |        |         |  |         |        |        
|2000         |  |  | High |  |  |         | 6 7/32 |         |  |         | 5 3/4  |         |  |  | 5 1/32 |  |  |  | 4 1/4  | 
|            
|            
|            
|            
|             |  |  | Low  |  |  |         | 4 3/4  |         |  |         | 3 1/4  |         |  |  | 2 7/8  |  |  |  | 3 7/32 | 
|            
|            
|            
|            
|1999         |  |  | High |  |  |         | 7 7/8  |         |  |         | 6 5/8  |         |  |  | 6 9/16 |  |  |  | 6 1/4  | 
|            
|            
|            
|            
|             |  |  | Low  |  |  |         | 4 1/4  |         |  |         | 4 1/16 |         |  |  | 5      |  |  |  | 4 1/8  | 

The Company has never paid cash dividends on its common stock. The
Company currently intends to retain any and all income for use in its
business and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to payment of dividends will depend on
the financial condition and results of operations of the Company and such
other factors deemed relevant by the Board of Directors. Under the terms of
the credit agreement, the Company is prohibited from making dividend payments
without prior consent of the lender.




ITEM 6. SELECTED FINANCIAL DATA

The consolidated statements of operations data set forth below for each
of the three years in the period ended December 31, 2000, and the
consolidated balance sheet data at December 31, 2000 and 1999 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this Form 10-K. The consolidated statements
of operations data set forth below for the two years in the period ended
December 31, 1997, and the consolidated balance sheet data at December 31,
1998, 1997 and 1996, are derived from audited consolidated financial
statements not included herein. The information set forth below should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Companys consolidated financial
statements and related notes included elsewhere in this Form 10-K.

|                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         |  
|----------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- |  |  | - | ------- | -
|                                    |  | 1996                                  |         | 1997 |  | 1998 |         | 1999 |  | 2000
|                                    |  |                                       |         |      |  |      |         |      |  |     
|                                    |  | (In thousands, except per share data)
|Total revenues                      |  | $                                     | 68,725  |      |  | $    | 88,263  |      |  | $    | 90,152  |   |  | $ | 77,812  |  |  | $ | 83,299  |  
|                                   
|                                   
|                                   
|                                   
|Income (loss) from operations       |  |                                       | 14,808  |      |  |      | 9,446   |      |  |      | (10,485 | ) |  |   | 8,357   |  |  |   | (14,780 | )
|                                   
|                                   
|                                   
|                                   
|Net income (loss)                   |  |                                       | 8,982   |      |  |      | 5,799   |      |  |      | (7,081  | ) |  |   | 6,167   |  |  |   | (9,708  | )
|                                   
|                                   
|                                   
|                                   
|Basic income (loss) per share (1)   |  |                                       | 0.76    |      |  |      | 0.49    |      |  |      | (0.59   | ) |  |   | 0.50    |  |  |   | (0.89   | )
|                                   
|                                   
|                                   
|                                   
|Diluted income (loss) per share (1) |  |                                       | 0.74    |      |  |      | 0.48    |      |  |      | (0.59   | ) |  |   | 0.50    |  |  |   | (0.89   | )
|                                   
|                                   
|                                   
|                                   
|Premiums in force at year end       |  |                                       | 69,500  |      |  |      | 78,400  |      |  |      | 82,100  |   |  |   | 87,200  |  |  |   | 99,400  |  
|                                   
|                                   
|                                   
|                                   
|Total assets                        |  |                                       | 123,731 |      |  |      | 142,997 |      |  |      | 172,934 |   |  |   | 176,511 |  |  |   | 194,535 |  
|                                   
|                                   
|                                   
|                                   
|Notes payable                       |  |                                       | 6,739   |      |  |      | 4,875   |      |  |      | 2,461   |   |  |   |        |  |  |   | 7,000   |  
|                                   
|                                   
|                                   
|                                   
|Total shareholders equity          |  |                                       | 51,311  |      |  |      | 58,357  |      |  |      | 52,618  |   |  |   | 55,565  |  |  |   | 38,736  |  



---

|(1) |  | Adjusted to reflect a three-for-two stock split in May 1996. For
additional information relating to income (loss) per share, see Note 2
of Notes to Consolidated Financial Statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

The Company RTW, Inc. (RTW) and its wholly owned insurance subsidiary,
American Compensation Insurance Company (ACIC), provide disability management
services to employers. Collectively, we, our and us refers to these
entities in this Managements Discussion and Analysis of Financial Condition
and Results of Operations.

We have developed two proprietary management systems: (i) the RTW
SOLUTION®, designed to lower employers workers compensation
costs and return injured employees to work as soon as possible, and (ii) the
ID15® system, designed to identify those injured employees who are
likely to get stuck in the workers compensation system. We combine our
management system with insurance products underwritten by our insurance
subsidiary to offer services to customers. We currently provide workers
compensation management services solely to employers insured through our
insurance subsidiary. During 2000, we operated in Minnesota, Wisconsin, South
Dakota, Colorado, Missouri, Illinois, Kansas, Michigan, Indiana, Massachusetts,
Connecticut, New Hampshire, Rhode Island and Maine.

Financial Summary This financial summary presents our discussion and
analysis of the consolidated financial condition and results of operations of
RTW, Inc. This review should be read in conjunction with the Consolidated
Financial Statements.

The following table provides an overview of our key operating results (000s):

|                                    |  |                         |        |      |  |      |        |  |  |   |        |  
|----------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                    |  | Year
Ended December 31,
|                                    |  |                        
|                                    |  | 2000                    |        | 1999 |  | 1998
|                                    |  |                         |        |      |  |     
|Gross premiums earned               |  | $                       | 95,878 |      |  | $    | 89,226 |  |  | $ | 89,881 |  
|                                   
|                                   
|                                   
|                                   
|Total revenues                      |  |                         | 83,299 |      |  |      | 77,812 |  |  |   | 90,152 |  
|                                   
|                                   
|                                   
|                                   
|Claim and claim settlement expenses |  |                         | 72,429 |      |  |      | 43,323 |  |  |   | 75,294 |  
|                                   
|                                   
|                                   
|                                   
|Net (loss) income                   |  |                         | (9,708 | )    |  |      | 6,167  |  |  |   | (7,081 | )

RTW reported increased gross premiums earned of $95.9 million in 2000
compared to $89.2 million in 1999. Total revenues for 2000 were $83.3 million,
compared to total revenues of $77.8 million in 1999. Total revenues in 2000
and 1999 were significantly reduced by premiums ceded under an excess of loss
reinsurance agreement, effective for claims occurring on or after July 1, 1998,
which was entered into during the fourth quarter of 1998. Premiums ceded in
2000 include $13.4 million in premiums ceded under this reinsurance agreement,
compared to $13.3 million ceded in 1999.

We reported a net loss of $9.7 million in 2000 compared to net income of
$6.2 million in 1999, and basic and diluted net loss per share of $0.89 in 2000
versus basic and diluted net income per share of $0.50 in 1999. The primary
factors impacting our 2000 operating results included the following:



| |  |  | Our gross premiums earned increased 7.5% in 2000 from 1999 and total
revenues increased 7.1% in 2000 from 1999 due primarily to a 14.0%
increase in premiums in force to $99.4 million at December 31, 2000 from
$87.2 million at December 31, 1999;                                                                                                                                                                                                                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Claim and claim settlement expenses increased significantly to 92.7%
of premiums earned for 2000 from 60.8% for 1999 due to the following:                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | The 2000 results include a $15.9 million increase in
reserves for unpaid claim and claim settlement expenses to reflect
unfavorable development of prior period claims compared to the 1999
results which include an $8.1 million decrease in reserves for
unpaid claim and claim settlement expenses reflecting favorable
development of prior period claims.                                                                                                                                                                                                                          
|
| |  |  | We recorded estimates of ceded paid and unpaid claim and
claim settlement expenses under our $25,000 to $300,000 excess of
loss reinsurance agreement totaling $21.8 million in 2000 including
$400,000 amortized from a deferred retrospective reinsurance gain
resulting in a corresponding reduction in 2000 claim and claim
settlement expenses. These amounts differed from our 1999 results
which include an estimate of ceded paid and unpaid claim and claim
settlement expenses totaling $22.0 million and $740,000 amortized
from the deferred retrospective reinsurance gain.
|
| |  |  | We aggressively targeted policies that did not meet our
underwriting profit margin standards for non-renewal or
re-underwriting at increased rates at policy expiration in 2000 and
1999. For 2000, we                                                                                                                                                                                                                                                                                                                                                                                  

11



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | successfully priced up or non-renewed 90% of
expiring premium exhibiting poor loss characteristics, resulting in
$21.3 million of premiums renewed at higher prices as well as $17.6
million in premiums that were not renewed. In 1999, we
successfully priced up or non-renewed 67% resulting in $10.9
million of premiums renewed at higher prices and $10.8 million in
premiums that did not renew. As a result of this focus in 2000 and
1999, we experienced a decrease in claim frequency;



| |  | We increased renewal premium rates an average of 11.7% in
2000 compared to premium rates for the same periods in 1999,
reversing a trend of continued rate declines in prior years; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Inflation continues to adversely affect medical and wage
costs.                                                                                                                        

We expect to operate in an environment of continuing premium rate
increases in our markets in 2001 and expect 2001 premiums in force to grow. We
will continue to focus on improving profitability in all of our markets by (i)
aggressively managing and closing claims, (ii) improving our underwriting,
including reviewing policy profitability at renewal and removing unprofitable
accounts, and (iii) aggressively managing policy acquisition costs and general
and administrative expenses.

In the following pages, we take a look at the 2000, 1999 and 1998
operating results for items in our Consolidated Statement of Operations and
also explain key balance sheet accounts in greater detail.

RESULTS OF OPERATIONS

Total revenues:Our total revenues include premiums earned, investment income
and net realized investment (losses) gains. The following table summarizes the
components of our revenues and premiums in force (000s):

|                                        |                            |                                        |                |        |                         |        |         |        |      |        |        |        |       |        | 
|--------------------------------------- | -------------------------- | -------------------------------------- | -------------- | ------ | ----------------------- | ------ | ------- | ------ | ---- | ------ | ------ | ------ | ----- | ------ | 
|                                        |                            |                                        |                |        | Year
Ended December 31,
|                                        |                            |                                        |                |        |                        
|                                        |                            |                                        |                |        | 2000                    |        | 1999    |        | 1998
|                                        |                            |                                        |                |        |                         |        |         |        |     
|Gross premiums earned                   |                            | $                                      | 95,878         |        |                         | $      | 89,226  |        |      | $      | 89,881 |       
|                                       
|                                       
|                                       
|                                       
|Premiums ceded                          |                            |                                        | (17,724        | )      |                         |        | (18,008 | )      |      |        | (8,489 | )     
|                                        |                            |                                        |                |        |                         |        |         |        |      |        |        |       
|                                        | Premiums earned            |                                        |                | 78,154 |                         |        |         | 71,218 |      |        |        | 81,392 |      
|                                       
|                                       
|                                       
|                                       
|Investment income                       |                            |                                        | 5,752          |        |                         |        | 6,510   |        |      |        | 7,714  |       
|                                       
|                                       
|                                       
|                                       
|Net realized investment (losses) gains:
|                                       
|                                       
|                                       
|                                       
|                                        | Realized Investment gains  |                                        |                | 26     |                         |        |         | 108    |      |        |        | 1,591  |      
|                                       
|                                       
|                                       
|                                       
|                                        | Realized Investment losses |                                        |                | (633   | )                       |        |         | (24    | )    |        |        | (545   | )    
|                                       
|                                       
|                                       
|                                       
|                                        |                            | Net realized investment (losses) gains |                |        | (607                    | )      |         |        | 84   |        |        |        | 1,046 |       
|                                        |                            |                                        |                |        |                         |        |         |        |      |        |        |       
|                                        |                            |                                        | Total revenues |        | $                       | 83,299 |         |        | $    | 77,812 |        |        | $     | 90,152 | 
|                                        |                            |                                        |                |        |                         |        |         |        |      |        |        |       

|                                                 |                         |      |        |        |  |      |        |        |  |   |        |        |  |  |  |  | 
|------------------------------------------------ | ----------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  |  |  |  | 
|Premiums in force by regional office at year-end |                         | 2000 |        | 1999   |  | 1998
|                                                 |                         |      |        |        |  |     
|Minnesota                                        |                         | $    | 33,800 |        |  | $    | 31,500 |        |  | $ | 34,800 |       
|                                                
|                                                
|                                                
|                                                
|Colorado                                         |                         |      | 16,000 |        |  |      | 14,000 |        |  |   | 12,300 |       
|                                                
|                                                
|                                                
|                                                
|Missouri                                         |                         |      | 13,400 |        |  |      | 15,000 |        |  |   | 16,300 |       
|                                                
|                                                
|                                                
|                                                
|Michigan                                         |                         |      | 18,600 |        |  |      | 11,500 |        |  |   | 9,700  |       
|                                                
|                                                
|                                                
|                                                
|Massachusetts                                    |                         |      | 17,600 |        |  |      | 15,200 |        |  |   | 9,000  |       
|                                                 |                         |      |        |        |  |      |        |        |  |   |        |       
|                                                 | Total premiums in force |      | $      | 99,400 |  |      | $      | 87,200 |  |   | $      | 82,100 | 
|                                                 |                         |      |        |        |  |      |        |        |  |   |        |       

Premiums In Force and Gross Premiums Earned:Premiums on workers compensation
insurance policies are our largest source of revenue. Premiums earned are the
gross premiums earned by us on in force workers compensation policies, net of
the effects of ceded premiums under reinsurance agreements.

The premium we charge a policyholder is a function of their payroll,
industry and prior workers compensation claims experience. In underwriting a
policy, we receive policyholder payroll estimates for the ensuing year. We
record premiums written on an installment basis matching our billing to the
policyholder and earn premiums on a daily basis over the life of each insurance
policy based on the payroll estimate. We record the excess of premiums billed
over premiums earned for each policy as unearned premiums on our balance sheet.
When a policy expires, we audit employer payrolls for the policy period and
adjust the estimated payroll and the policyholders premium to its actual
value. The result is a final audit adjustment recorded to premiums earned
when the adjustment becomes known. Final audit premiums recognized during
the period include billed final audit premiums plus (or minus) the change in
estimate for premiums on unexpired and expired unaudited policies.

Our premiums in force grew 14.0% to $99.4 million at December 31, 2000
from $87.2 million at December 31, 1999 due to $13.8 million in growth in our
Minnesota, Colorado, Michigan and Massachusetts markets offset by a $1.6
million decrease in premiums in force in our Missouri market. We aggressively
targeted policies that did not

12



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##### Table of Contents



meet our underwriting profit margin standards
for non-renewal or re-underwriting at increased rates at policy expiration in
2000 and 1999. For 2000, we successfully priced up or non-renewed 90% of
expiring premium exhibiting poor loss characteristics, resulting in $21.3
million of premiums renewed at higher prices as well as $17.6 million in
premiums that were not renewed. In 1999, we successfully priced up or
non-renewed 67% resulting in $10.9 million of premiums renewed at higher prices
and $10.8 million in premiums that did not renew.

Our gross premiums earned increased 7.5% to $95.9 million in 2000 from
$89.2 million in 1999. This increase resulted from the increase in premiums in
force and an increase in final audit premiums earned to $5.5 million in 2000
from $4.7 million in 1999.

Gross premiums earned decreased slightly in 1999 to $89.2 million from
$89.9 million in 1998. This decrease resulted from a decrease in final audit
premiums earned to $4.7 million in 1999 from $7.2 million in 1998, partially
offset by the impact of an increase in premiums in force to $87.2 million in
1999 from $82.1 million in 1998.

We experienced a decline in premium rates that we charged policyholders
for several years including a 10.2% decline in premium rates on renewing
business in 1998 followed by another 6.7% decline in 1999. These declines were
due, in part, to the following:



| |  |  | Many state legislatures where we provide coverage reduced benefits
that injured employees are paid, resulting in lower loss costs of
workers compensation insurance and decreased corresponding premiums
paid by the policyholder;                                                                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As the loss cost structure of workers compensation declined, more
insurance companies entered or re-entered the workers compensation
insurance market, resulting in increased competition; and                                                                                                                                                                               
|
| |  |  | We experienced reduced pricing on renewal policies due, in part, to
our success in lowering our policyholders loss experience that, in
turn, improves their claims history, lowering the premium that they pay
for insurance. The improvement that we provide our customers also makes
them more desirable to our competition, increasing price competition on
these accounts.

Premium rates on renewal policies stabilized in the latter half of 1999
and we realized only slight pricing decreases. In 2000, we were able to
increase premium rates on renewing policies an average of 11.7%. Our ability
to increase rates in our markets is due to the following:



| |  |  | Many workers compensation insurers have withdrawn from the markets
in which we write premiums due to the declines in premium rates in those
markets discussed above;                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Reinsurance rates for workers compensation insurers have increased
due to settlements related to Unicover reinsurance treaties, resulting
in increased costs for workers compensation insurers; and
|
| |  |  | A number of workers compensation insurers financial ratings have
decreased due to reserve adjustments recorded in 2000 and 1999.                                                                   

Premiums Ceded:Reinsurance agreements allow us to share certain risks with
other insurance companies. The primary purpose of ceded reinsurance is to
protect us from potential losses in excess of the level we are willing to
accept. Our primary ceded reinsurance is excess of loss coverage that limits
our per-incident exposure. We expect the companies to which we have ceded
reinsurance to honor their obligations. In the event that these companies are
unable to honor their obligations to us, we will be required to pay these
obligations ourselves. We are not aware of any developments with respect to
any of our reinsurers that would prevent them from honoring any of their
obligations to us.

Under our excess of loss reinsurance policies, we pay reinsurers to limit
our per-incident exposure and record this cost to premiums ceded as a reduction
of gross premiums earned. In Minnesota, we are required to purchase excess of
loss coverage for our Minnesota policies from the Minnesota Workers
Compensation Reinsurance Association (WCRA). We ceded Minnesota claims
in excess of $310,000, $290,000 and $280,000 per occurrence during 2000,
1999 and 1998, respectively, to the WCRA. In our non-Minnesota states, our
per-incident exposure was $300,000 in 2000 and 1999 and $500,000 in 1998.
We purchased this non-Minnesota coverage from a single reinsurer.

For claims occurring after June 30, 1998, we further limited our per
incident exposure by purchasing excess of loss coverage for losses from $25,000
to the lesser of $300,000 or the WCRA selected retention level in Minnesota and
from $25,000 to $300,000 in other states from a single reinsurer. This
agreement was finalized after its effective date and activity occurring from
July 1, 1998 through September 30, 1998 was recorded on a retrospective basis

13



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##### Table of Contents



resulting in the deferral of a gain totaling $2.0 million at December 31, 1998.
We amortized $400,000 of the deferred gain as a reduction of claim and claim
settlement expenses in 2000 and $740,000 in 1999 resulting in an un-amortized
deferred gain of $849,000 at December 31, 2000. The deferred gain is being
amortized into income using the effective interest rate inherent in the amounts
paid to the reinsurer and the estimated timing and amounts of recoveries from
the reinsurer. Activity occurring on or after October 1, 1998 is recorded
prospectively. This contract was terminated effective December 31, 2000,
however the policy remains effective in 2001 for policies in force at December
31, 2000 through expiration, not to exceed fifteen months after the effective
termination date. Policies written or renewing in 2001 will not be covered
under this lower level excess of loss reinsurance policy.

The following table summarizes the components of premiums ceded (000s):

|                     |                                               |                |   |                         |         |      |   |         |         |   |   |        |        |  
|-------------------- | --------------------------------------------- | -------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- | - | - | ------ | ------ | -
|                     |                                               |                |   | Year Ended December 31,
|                     |                                               |                |   |                        
|                     |                                               |                |   | 2000                    |         | 1999 |   | 1998   
|                     |                                               |                |   |                         |         |      |   |        
|Premiums ceded, net:
|                    
|                    
|                    
|                    
|                     | Non-WCRA excess of loss policies              |                | $ | (15,084                 | )       |      | $ | (14,710 | )       |   | $ | (7,805 | )     
|                    
|                    
|                    
|                    
|                     | WCRA                                          |                |   | (2,640                  | )       |      |   | (3,298  | )       |   |   | (2,931 | )     
|                    
|                    
|                    
|                    
|                     | Refund from the WCRA on prior years activity |                |   |                        |         |      |   |        |         |   |   | 2,247  |       
|                     |                                               |                |   |                         |         |      |   |         |         |   |   |       
|                     |                                               | Premiums ceded |   | $                       | (17,724 | )    |   | $       | (18,008 | ) |   | $      | (8,489 | )
|                     |                                               |                |   |                         |         |      |   |         |         |   |   |       

Premiums ceded to reinsurers decreased to $17.7 million in 2000 from $18.0
million in 1999. This decreased cost resulted from an excess of loss premium
rate decrease in Minnesota in 2000 compared to 1999. This cost decrease was
partially offset by increased excess of loss costs resulting from increased
premiums earned in non-Minnesota states.

Premiums ceded to reinsurers increased to $18.0 million in 1999 from $8.5
million in 1998. This increased cost resulted from (i) premiums ceded under
our new excess of loss reinsurance coverage for losses over $25,000 for all of
1999 compared to ceding such risks only in the second half of 1998; (ii)
increased effective excess of loss premium rates in Minnesota in 1999 from 1998
due to premium price changes within that state, (iii) increased excess of loss
costs resulting from increased premiums earned in non-Minnesota states, and
(iv) the recognition of a refund of $2.2 million from the WCRA recorded in the
first quarter of 1998. No comparable refund was received in 1999.

2001 Outlook: The 2001 outlook for gross premiums earned and premiums ceded
include the following factors:



| |  |  | We expect that renewal premium rates will continue to increase into
2001. The ultimate increase is unknown at this time;                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We will continue to review business at policy expiration in 2001 and
non-renew or re-underwrite at increased rates, any business not meeting
our standards. We expect that this aggressive targeting of policies
will put downward pressure on premiums in force in our Minnesota and
Missouri markets; however, we expect that continued growth in premiums
in force in our Colorado, Michigan and Massachusetts markets, as well as
premium rate increases in our Minnesota and Missouri markets will lead
to growth in gross premiums earned for 2001;
|
| |  |  | We expect that premiums ceded in 2001 will decrease significantly
from premiums ceded in 2000 as our $25,000 to $300,000 excess of loss
reinsurance policy runs-off in 2001. Premiums ceded will also decrease
in 2001 as a percent of gross premiums earned as the non-Minnesota
markets, where we pay smaller reinsurance premiums, continue to grow
relative to Minnesota;                                                                                                                                                                            

Investment Income and Net Realized Investment (Losses) Gains:Our investment
income includes earnings on our investment portfolio. Net realized investment
(losses) gains include gains and losses from sales of available-for-
sale securities and are displayed separately on our Consolidated Statement of
Operations. In 2000, we invested entirely in U.S. domiciled investment grade
taxable and tax-exempt fixed maturity investments and classified our
investments as available-for-sale. In February 2001, we repositioned our
portfolio by selling our tax-exempt securities and repurchasing taxable fixed
maturity investments to increase our after-tax yield. We intend to hold our
available-for-sale investments to maturity, but may sell before maturity in
response to income tax considerations, changes in interest rates, prepayment
risk and funding sources or terms, or to address liquidity needs. Our primary
investment objective is to maintain a diversified, high-quality,
fixed-investment portfolio structured to maximize our after-tax investment
income without taking inappropriate credit risk. For further discussion of
investments, see the Investments section of this Managements Discussion and
Analysis.

14



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##### Table of Contents



Investment income decreased 11.6% to $5.8 million in 2000 from $6.5
million in 1999. Investment income decreased due to (i) reduced funds
available for investment and (ii) an increase in the percent of tax-exempt
securities held in our portfolio. Funds available for investment decreased to
$96.8 million at December 31, 2000 from $108.1 million at December 31, 1999,
due to decreased net cash provided by operating activities, resulting primarily
from (i) the difference in timing between the receipt of premiums, the payment
of premiums ceded under our reinsurance agreements, the payment of claim and
claim settlement expenses and the recovery of paid claim and claim settlement
expenses under our reinsurance programs, and (ii) net cash provided by
investment income. Tax-exempt securities, which earn lower pre-tax rates than
taxable securities but are comparable on a tax adjusted basis, increased to
57.5% of our investment portfolio at year-end 2000 compared to 56.3% at
year-end 1999. Tax-adjusted investment yields were 6.6% in 2000 and 1999. The
investment yields realized in future periods will be affected by yields
attained on new investments.

Investment income decreased 15.6% to $6.5 million in 1999 from $7.7
million in 1998. Investment income decreased due to (i) reduced funds
available for investment and (ii) an increase in the percent of tax-exempt
securities held in our portfolio. Funds available for investment decreased to
$108.1 million at December 31, 1999 from $126.6 million at December 31, 1998,
due to decreased net cash provided by operating activities and investment
income as discussed in the preceding paragraph. Tax-exempt securities
increased to 56.3% of our investment portfolio at year-end 1999 compared to
52.6% at year-end 1998 and we first began purchasing tax-exempt securities in
the second quarter of 1998. Tax-adjusted investment yields were 6.6% in 1999
and 1998.

Net realized investment losses were $607,000 in 2000 and included $500,000
for the write-down of a security whose decrease in value was deemed other than
temporary. Net realized investment gains were $84,000 in 1999 and $1.0 million
in 1998.

2001 Outlook: Barring significant changes in interest rates or operational
cash flows, we expect the 2001 pre-tax yield from our investment portfolio to
be affected by the following:



| |  |  | Funds provided by our operating cash flows and investment cash flows
have historically provided growth in our investment portfolio.
Operating cash flows consist of the excess of premiums collected over
claim and claim settlement expenses, offset by payments for reinsurance
premiums as well as other operating expenses paid. Investment cash
flows consist of income on existing investments and proceeds from sales
and maturities of investments. We have historically generated positive
net cash flows from operations due, in part, to timing differences
between the receipt of premiums and the payment of claim and claim
settlement expenses. These net cash flows decreased significantly in
2000 and 1999 as we focused on closing old claims, paying earlier to
close those claims. Additionally, as we lowered our reinsurance
retention levels to $25,000 in mid-1998, we decreased our current period
cash flows as a result of pre-funding quarterly premiums ceded under
that agreement. We expect this reduction in cash flow will reverse
itself in 2001 as we run-off the $25,000 to $300,000 excess of loss
reinsurance policy and reimbursements for loss payments to claimants
under this contract offset disbursements for premium payments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The mix of taxable and tax-exempt securities in our portfolio may
change over time to accommodate our tax situation. Fixed maturity,
tax-exempt securities may have the effect of reducing investment income
recognized and decreasing pre-tax investment yields but generally
contribute more to after-tax net income as a result of the favorable
treatment tax-exempt income receives for federal income tax purposes;
and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | In February 2001, we repositioned our portfolio by selling our
tax-exempt securities and repurchasing taxable fixed maturity
investments to increase the after-tax yield. We recognized gains
totaling $1.1 million as a result of this repositioning. Further
recognition of realized gains and losses will depend on sales of our
investments, if any, to meet our short-term cash requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Total expenses:Our expenses include claim and claim settlement expenses,
policy acquisition costs, general and administrative expenses, interest expense
and income taxes.

Claim and Claim Settlement Expenses:Claim expenses refer to medical and
indemnity amounts that we paid or expect to pay to claimants for events that
have occurred. The costs of investigating, resolving and processing these
claims are referred to as claim settlement expenses. We record these expenses,
net of amounts recoverable under reinsurance contracts, to claim and claim
settlement expenses in the Consolidated Statements of Operations.

Claim and claim settlement expenses are our largest expense and result in
our largest liability. We establish reserves that reflect our estimates of the
total claim and claim settlement expenses we will ultimately have to pay under
our workers compensation insurance policies. These include claims that have
been reported but not settled and claims that have been incurred but not yet
reported to us. For further discussion of reserve determination, see the
Unpaid Claim and Claim Settlement Expenses section of this Managements
Discussion and Analysis.

15



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##### Table of Contents



Claim and claim settlement expenses increased to $72.4 million in 2000
from $43.3 million in 1999. As a percent of premiums earned, claim and claim
settlement expenses increased to 92.7% in 2000 from 60.8% in 1999. These
changes are due to the following:



| |  |  | We recorded estimates of ceded paid and unpaid claim and claim
settlement expenses under our $25,000 to $300,000 excess of loss
reinsurance agreement totaling $21.8 million in 2000 including $400,000
amortized from a deferred retrospective reinsurance gain resulting in a
corresponding reduction in 2000 claim and claim settlement expenses.
These amounts differed from our 1999 results which include an estimate
of ceded paid and unpaid claim and claim settlement expenses totaling
$22.0 million and $740,000 amortized from the deferred retrospective
reinsurance gain;                                                                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The 2000 results include a $15.9 million increase in reserves for
unpaid claim and claim settlement expenses to reflect unfavorable
development of prior period claims compared to the 1999 results which
include an $8.1 million decrease in reserves for unpaid claim and claim
settlement expenses reflecting favorable development of prior period
claims. Our year-end actuarial review of loss reserves indicated an
increase in the cost incurred or developing in connection with older
claims, particularly in Minnesota where we have been writing policies
since 1992. Given this indication, we adjusted our actuarial
assumptions to reflect this change in loss experience resulting in the
increase in reserves;
|
| |  |  | We aggressively targeted policies that did not meet our underwriting
profit margin standards for non-renewal or re-underwriting at increased
rates at policy expiration in 2000 and 1999. For 2000, we successfully
priced up or non-renewed 90% of expiring premium exhibiting poor loss
characteristics, resulting in $21.3 million of premiums renewed at
higher prices as well as $17.6 million in premiums that were not
renewed. In 1999, we successfully priced up or non-renewed 67%
resulting in $10.9 million of premiums renewed at higher prices and
$10.8 million in premiums that did not renew. As a result of this focus
in 2000 and 1999, we experienced a decrease in claim frequency;                       
|
| |  |  | We increased renewal premium rates an average of 11.7% in 2000,
reversing a trend of continued rate declines in 1999 and prior years;
and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Claim costs continued to increase in 2000 compared to 1999 due to
increasing medical and indemnity costs. This was offset somewhat by the
effects of provider agreements that we negotiated during 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Claim and claim settlement expenses decreased to $43.3 million in 1999
from $75.3 million in 1998. As a percent of premiums earned, claim and claim
settlement expenses decreased to 60.8% in 1999 compared to 92.5% for 1998.
These changes are due to the following:



| |  |  | In 1999, we recorded an estimate of ceded paid and unpaid claim and
claim settlement expenses under our $25,000 to $300,000 excess of loss
reinsurance agreement totaling $22.0 million including $740,000
amortized from a deferred retrospective reinsurance gain resulting in a
corresponding reduction in 1999 claim and claim settlement expenses.
Our 1998 results include an estimate of ceded paid and unpaid claim and
claim settlement expenses totaling $8.6 million recorded in the fourth
quarter of 1998.                                                                                                                                                                                                                                                                                                                                                                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The 1999 results include an $8.1 million decrease in reserves for
unpaid claim and claim settlement expenses to reflect favorable
development of prior period claims compared to the 1998 results which
include an $11.0 million increase in reserves for unpaid claim and claim
settlement expenses to reflect adverse development of prior period
claims. The favorable development in 1999 is primarily the result of a
strong focus on claim closure. Our open claims decreased 9.7% to 5,252
at December 31, 1999 from
5,816 at December 31, 1998. Additionally, the 1998 results included a
$400,000 Minnesota Special Compensation Fund (SCF) adjustment recorded in
the second quarter of 1998. The SCF assesses us to cover the costs of
second injuries that are substantially greater, because of a pre-existing
physical impairment, than what would have resulted from the second injury
alone.
|
| |  |  | We aggressively targeted policies that did not meet our underwriting
profit margin standards for non-renewal or re-underwriting at increased
rates at policy expiration in 1999. For 1999, our aggressive
re-underwriting resulted in $10.9 million of premiums renewed at higher
prices as well as $10.8 million in premiums that were not renewed. No
such program existed in 1998;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Reduced premiums due to legislative changes in estimated loss costs,
increased competition and improving customer loss experience, have
continued to place upward pressure on claim and claim settlement
expenses as a percentage of premiums earned; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

16



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| |  |  | Claim costs continued to increase in 1999 compared to 1998 due to
increasing medical and indemnity costs. This was offset somewhat by the
effects of provider agreements that we negotiated during 1998.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2001 Outlook:We expect that claim and claim settlement expenses will be
affected by the following factors:



| |  |  | Continued favorable effects of ceding paid and unpaid claim and claim
settlement expenses under our $25,000 to $300,000 excess of loss
reinsurance agreements resulting in a reduction of claim and claim
settlement expenses. This reduction will decrease significantly from
the reduction recorded in 2000 as the $25,000 to $300,000 excess of loss
policy was terminated at December 31, 2000 and will only benefit claims
for policies that were in effect at December 31, 2000 and run-off in
2001;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Claim costs will continue to be affected by (i) increases in medical
and indemnity costs resulting from inflationary pressures, (ii) severity
experienced in future periods in our policy holder base, (iii) changes
resulting from increases in operating efficiency and effectiveness
realized through enhancements to our internal processes and procedures,
including changes to our proprietary computer systems, and (iv)
legislative changes in estimated loss costs;                              
|
| |  |  | Increased premium rates will result in increasing premiums earned
without a corresponding increase in claim and claim settlement expenses,
ultimately decreasing claim and claim settlement expense as a percent of
premium earned. Changes in premium rates due to legislative changes in
estimated loss costs, increased competition and improving customer loss
experience may offset rate improvements; and                                                                                           
|
| |  |  | Continued application of our claims management technology and methods
to all open claims.                                                                                                                                                                                                                                                                                                                                                                                                                 

The ultimate result of the above factors on 2001 claim and claim settlement
expenses as a percent of premiums earned, is unknown at this time.

Policy Acquisition Costs:Policy acquisition costs are costs directly related
to writing an insurance policy and consist of commissions, state premium taxes,
underwriting personnel costs and expenses, sales and marketing costs, other
underwriting expenses, and ceding commissions adjustments with our reinsurers.
Ceding commissions are amounts that reinsurers pay to us for placing
reinsurance with them. Ceding commissions represent adjustments based on
actual claim and claim settlement expenses related to premiums ceded in prior
years. Under our reinsurance agreements, ceding commission is adjusted to the
extent that actual claim and claim settlement expenses vary from levels
specified in the agreements.

The following table summarizes policy acquisition costs (000s):

|                                                                                                            |                                 |   |                         |        |      |   |       |        |  |   |       |        | 
|----------------------------------------------------------------------------------------------------------- | ------------------------------- | - | ----------------------- | ------ | ---- | - | ----- | ------ |  | - | ----- | ------ | 
|                                                                                                            |                                 |   | Year
Ended December 31,
|                                                                                                            |                                 |   |                        
|                                                                                                            |                                 |   | 2000                    |        | 1999 |   | 1998 
|                                                                                                            |                                 |   |                         |        |      |   |      
|Commission expense                                                                                          |                                 | $ | 7,537                   |        |      | $ | 7,145 |        |  | $ | 7,171 |       
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Premium tax expense                                                                                         |                                 |   | 1,933                   |        |      |   | 1,798 |        |  |   | 1,839 |       
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Other policy acquisition costs                                                                              |                                 |   | 4,207                   |        |      |   | 4,847 |        |  |   | 4,964 |       
|                                                                                                            |                                 |   |                         |        |      |   |       |        |  |   |       |       
|                                                                                                            | Direct policy acquisition costs |   |                         | 13,677 |      |   |       | 13,790 |  |   |       | 13,974 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Ceding commissions resulting from unpaid claim and claim
settlement liability adjustments from 1992 to 1994 |                                 |   | 460                     |        |      |   | 321   |        |  |   |      |       
|                                                                                                            |                                 |   |                         |        |      |   |       |        |  |   |       |       
|                                                                                                            | Policy acquisition costs        |   | $                       | 14,137 |      |   | $     | 14,111 |  |   | $     | 13,974 | 
|                                                                                                            |                                 |   |                         |        |      |   |       |        |  |   |       |       

Policy acquisition costs were $14.1 million in 2000 and 1999 and $14.0
million in 1998. As a percent of gross premiums earned, policy acquisition
costs decreased to 14.7% in 2000 from 15.8% in 1999 and 15.5% in 1998. The
decrease in 2000 reflects the following:



| |  |  | Commission expense decreased to 7.9% of gross premiums earned in 2000
from 8.0% in 1999 and 1998. The decreased commission percent in 2000 is
the result of (i) a focus on reducing commissions paid on new business
in our non-Minnesota states and (ii) increased renewal premiums on which
we pay lower commission rates in all our states. Historically, as we
entered new markets, we introduced higher commission rates to attract
business from established agents. These rates continued through early
1999, but have been reduced in the current year. We believe the
commission rates we pay are marketplace competitive in all our markets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Premium tax expense remained consistent at 2.0% of gross premiums
earned in 2000, 1999 and 1998;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

17



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| |  |  | Other policy acquisition costs decreased to 4.4% of gross premiums
earned in 2000 from 5.4% in 1999 and 5.5% in 1998. Other policy
acquisition costs decreased in 2000 from levels in 1999 and 1998 as we
focused on improving our underwriting organizational structure resulting
in (i) decreased personnel and overhead costs and (ii) decreased
spending on marketing programs; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We incurred ceding commission expense totaling $460,000 in 2000
compared to $321,000 in 1999 and no cost in 1998.                                                                                                                                                                                                                                                                      

2001 Outlook:We expect that policy acquisition costs will stabilize or trend
downward as a percent of gross premiums earned in 2001 due to the following:



| |  |  | We expect commission expense as a percent of gross premiums earned to
decrease slightly in 2001 as we manage our commission structures in our
non-Minnesota states and as our renewal premiums, where we pay lower
commission rates, increase as a percent of our total premiums in force;                                                                                                                                                                                                                                                                   
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We expect premium tax expense as a percent of gross premiums earned
to remain consistent with 2000; and                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | We expect that other policy acquisition costs will be consistent with
2000 as a percent of gross premiums earned as we continue to improve our
underwriting skills, increase premiums in force and generate additional
revenues to cover the relatively fixed policy acquisition costs. We
also expect that these costs will be offset on a limited basis from
increases in operating efficiency and effectiveness during 2001 realized
through enhancements to our internal processes and procedures, including
changes to our proprietary computer systems.

General and Administrative Expenses:Our general and administrative expenses
include personnel costs, office rent, certain state administrative charges
based on premiums and other costs and expenses not specific to claim and claim
settlement expenses or policy acquisition costs.

Our general and administrative expenses decreased to $11.5 million in 2000
from $12.0 million in 1999 and increased slightly from $11.4 million in 1998.
As a percent of gross premiums earned, general and administrative expenses
decreased to 12.0% in 2000 from 13.5% in 1999 and from 12.6% in 1998. General
and administrative expenses continue to be managed aggressively and reduced
where appropriate. General and administrative expenses for 1999 include
one-time expenses totaling $1.3 million for corporate oversight expenses
related to the efforts of the majority shareholders in seeking a buyer for
their shares and expenses related to a reorganization effected in the fourth
quarter of 1999. General and administrative expenses for 1998 include benefits
of $1.1 million recorded in the second quarter of 1998, resulting from the
reversal of 1997 accrual for assessments by the Minnesota Insurance Guarantee
Association (MIGA), an organization formed to fund Minnesota claims for
insolvent insurance companies. MIGA did not assess its members in 2000, 1999
or 1998 for workers compensation claim liabilities arising from current or
prior insolvencies resulting in the accrual reversals, however, we were
assessed $236,000 by non-Minnesota state insurance guarantee associations in
2000. After adjusting for the accrual reversals, general and administrative
expenses decreased to 11.8% in 2000 from 12.0% in 1999 and 13.9% in 1998 as a
percent of gross premiums earned. These decreases reflect:



| |  |  | General and administrative expenses continue to improve as a percent
of premiums earned, after adjusting for MIGA accrual reversals and
one-time charges. We have aggressively managed personnel and other
operating costs and expenses to bring operating expenses more in line with
revenues. All expenses continue to be managed aggressively and reduced
where appropriate.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The reorganization effected in the fourth quarter of 1999 began
earlier in 1999 and resulted in a net reduction of thirty-three
positions. This reorganization has reduced costs and centralized and
strengthened certain processes late in 1999 and throughout 2000.                                                                                                          

2001 Outlook:We expect that general and administrative expenses will be affected by the following:



| |  |  | We will continue to aggressively manage all operating costs and expenses in 2001;                                                                                                                                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have no plans to open additional state offices in 2001 and expect
that growth in premiums in force will result in additional revenues to
cover the fixed costs in all of our states; and                                                         
|
| |  |  | We expect to realize additional operational efficiency during 2001
through enhancements to our internal processes and procedures, including
changes to our operating structure as well as improvements to our
internal proprietary computer systems.

18



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Interest Expense:We incurred interest charges on our $8.0 million Term Loan
in 2000 and outstanding Senior Notes in 1999 and 1998.

We paid interest at rates ranging from 8.68% to 9.34% on the outstanding
balance of our Term Loan in 2000 compared to 9.50% on the outstanding balance
of our Senior Notes during 1999. Interest expense increased to $667,000 in
2000 from $266,000 in 1999 as we increased our Notes Payable by financing the
repurchase of shares from a group headed by our majority shareholder and former
Chairman, David C. Prosser through an $8.0 million Term Loan and a $2.0 million
Revolving Credit Facility with a bank. The Senior Notes were paid in full in
December 1999. No amounts were outstanding under the Revolving Credit Facility
in 2000.

We paid interest at 9.50% on the outstanding balance on our Senior Notes
during 1999, and at rates ranging from 9.25% to 9.50 % on Senior Notes in 1998.
Interest expense decreased to $266,000 in 1999 from $546,000 in 1998 due to
principal payments on the Senior Notes in December 1998.

2001 Outlook:We expect to incur interest charges in 2001 on the outstanding
balance of the Term Loan totaling approximately $500,000, decreasing from
$667,000 in 2000 as a result of principal payments of $1.0 million in 2000,
$1.0 million in January 2001 and an additional $1.0 million through the
remainder of 2001 and a decrease in the interest rate to under 9.00%.

Income Taxes:We incur federal income taxes on our combined service
organization (RTW) operations and insurance (ACIC) operations. We incur state
income taxes on the results of our service organizations operations and incur
premium taxes in lieu of state income taxes for substantially all of our
insurance operations. In certain instances, we may incur state income taxes on
our insurance operations. Additionally, certain provisions of the Internal
Revenue Code adversely affect our taxable income by accelerating recognition
and payment of income taxes. Adjustments to book income generating current tax
liabilities include limitations on the deductibility of unpaid claim and claim
settlement expenses, limitations on the deductibility of unearned premium
reserves and limitations on deductions for bad debt reserves.

Income taxes provided a benefit of $5.7 million in 2000 compared to an
expense of $1.9 million in 1999 and a benefit of $4.0 million in 1998. As a
percent of (loss) income before income taxes, the income tax (benefit) expense
was 37.2% of the loss before income taxes in 2000 compared to 23.8% of income
before income taxes in 1999 and 35.8% of the loss before income taxes in 1998.
The income tax benefit percent in 2000 has been affected by (i) our loss from
operations, (ii) increased taxable net income from the service organization
(RTW) which is subject to both federal and state income taxes, and (iii)
tax-exempt municipal income.

2001 Outlook:Income tax expense will vary based on (i) the income from
operations we recognize for 2001, and will (ii) increase as a percent of income
before taxes relative to the statutory effective rate as a result of
repositioning our portfolio by selling tax-exempt municipal fixed investments
in February 2001 and reinvested the proceeds in taxable securities. The
ultimate change is unknown at this time.

INVESTMENTS

Our portfolio of fixed maturity securities at December 31, 2000 included
tax-exempt municipal securities (57.5%), U.S. government securities (15.4%),
corporate securities (10.6%), mortgage-backed securities (14.4%), and asset-
backed securities (2.1%). Our portfolio is managed by an independent
investment manager to maximize our after-tax investment income without taking
inappropriate credit risk. In February 2001, we repositioned our portfolio by
selling our tax-exempt securities and repurchasing taxable fixed maturity
investments to increase our after-tax yield. We recognized gains totaling $1.1
million as a result of this repositioning. We conservatively manage our fixed
maturity portfolio, investing only in investment grade (BBB or better rating
from Standard and Poors) securities of U.S. domiciled issuers. We do not
invest in derivative securities.

Funds provided by our operating cash flows and investment cash flows have
historically provided growth in our investment portfolio. Operating cash flows
consist of the excess of premiums collected over claim and claim settlement
expenses reduced by payments for reinsurance premiums as well as other
operating expenses paid. Investment cash flows consist of income on existing
investments and proceeds from sales and maturities of investments. We have
historically generated positive net cash flows from operations due, in part, to
timing differences between the receipt of premiums and the payment of claim and
claim settlement expenses. These net cash flows decreased significantly in
2000 and 1999 as we focused on closing old claims, paying earlier to close
claims. Combined with relatively flat premiums in force since December 1998,
our cash flows from timing on claims payments have decreased. Additionally, as
we lowered our reinsurance retention levels to $25,000 in mid-1998, we
decreased our current period cash flows as a result of pre-funding quarterly
premiums under that

19



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##### Table of Contents



agreement. We expect this reduction in cash flow will
reverse itself in 2001 as we run-off the $25,000 to $300,000 excess of loss
reinsurance policy and reimbursements for loss payments to claimants under this
contract offset disbursements for premium payments. Our investment portfolio
decreased 10.4% or $11.3 million to $96.8 million at December 31, 2000, from
$108.1 million at December 31, 1999, as a result of these factors.

We record investments on our balance sheet at fair value, with the
corresponding appreciation or depreciation from amortized cost recorded in
shareholders equity, net of taxes. Because value is based on the relationship
between the portfolios stated yields and prevailing market yields at any given
time, interest rate fluctuations can have a swift and significant impact on the
carrying value of these securities. As a result of classifying our securities
as available-for-sale, and thus carried at fair value, we expect to encounter
adjustments in shareholders equity as market interest rates and other factors
change. In 2000, we recorded a $500,000 write-down of a security held in our
portfolio as we deemed its decline in fair value to be other than temporary in
nature. Prevailing market interest rates decreased in 2000 resulting in a
$309,000 unrealized gain on investments compared to a $4.3 million unrealized
loss in 1999.

UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES

Our unpaid claim and claim settlement expenses represent established, reserves
for the estimated total unpaid cost of claim and claim settlement expenses,
which cover events that occurred in 2000 and prior years. The reserves are
primarily undiscounted; however, we discount reserves for selected claims that
have fixed and determinable future payments at 8.0%. These reserves reflect
our estimates of the total costs of claims that were reported, but not yet
paid, and the cost of claims incurred but not yet reported (IBNR). For
reported claims, we establish reserves on a case basis. For IBNR claims, we
estimate reserves using established actuarial methods. Both our case and IBNR
reserve estimates reflect such variables as past claims experience, current
claim trends and prevailing social, economic and legal environments. Due to
our commencing operations in 1992, we have limited historical data to estimate
our reserves for unpaid claim and claim settlement expenses and, accordingly,
we supplement our experience with external industry data, as adjusted, to
reflect anticipated differences between our results and the industry. We
reduce the unpaid claim and claim settlement expenses for estimated amounts of
subrogation.

We believe our reserves for unpaid claim and claim settlement expenses are
adequate to cover the ultimate costs of claim and claim settlement expenses.
The ultimate cost of claim and claim settlement expenses may differ from the
established reserves, particularly when claims may not be settled for many
years. Reserves for unpaid claim and claim settlement expenses and assumptions
used in their development are continually reviewed. We record adjustments to
prior estimates of unpaid claim and claim settlement expenses to operations in
the year in which the adjustments are made. See Notes 1 and 5 of Notes to
Consolidated Financial Statements. The following two tables reconcile the
beginning and ending insurance reserves, displayed individually for each of the
last three years.

The following table sets forth reserves on a gross (before reinsurance) basis (000s):

|                                                        |                                                                           |              |                 |         |                         |         |      |        |         |        |   |        |        |        | 
|------------------------------------------------------- | ------------------------------------------------------------------------- | ------------ | --------------- | ------- | ----------------------- | ------- | ---- | ------ | ------- | ------ | - | ------ | ------ | ------ | 
|                                                        |                                                                           |              |                 |         | Year
Ended December 31,
|                                                        |                                                                           |              |                 |         |                        
|                                                        |                                                                           |              |                 |         | 2000                    |         | 1999 |        | 1998   
|                                                        |                                                                           |              |                 |         |                         |         |      |        |        
|Gross Reserves for Claim and Claim Settlement Expenses:
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Gross reserves for claim and claim settlement expenses,
beginning of year |              | $               | 99,831  |                         |         | $    | 97,269 |         |        | $ | 61,069 |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Provision increases (decreases) for claim and claim
settlement expenses: 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                                           | Current year |                 |         | 87,202                  |         |      |        | 79,333  |        |   |        | 78,520 |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                                           | Prior years  |                 |         | 17,930                  |         |      |        | (11,868 | )      |   |        | 11,444 |       
|                                                        |                                                                           |              |                 |         |                         |         |      |        |         |        |   |       
|                                                        |                                                                           |              | Total provision |         |                         | 105,132 |      |        |         | 67,465 |   |        |        | 89,964 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Payments for claim and claim settlement expenses:                        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                                           | Current year |                 |         | 30,189                  |         |      |        | 27,841  |        |   |        | 25,448 |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                                           | Prior years  |                 |         | 45,933                  |         |      |        | 37,062  |        |   |        | 28,316 |       
|                                                        |                                                                           |              |                 |         |                         |         |      |        |         |        |   |       
|                                                        |                                                                           |              | Total payments  |         |                         | 76,122  |      |        |         | 64,903 |   |        |        | 53,764 | 
|                                                        |                                                                           |              |                 |         |                         |         |      |        |         |        |   |       
|                                                        | Gross reserves for claim and claim settlement expenses,
end of year       |              | $               | 128,841 |                         |         | $    | 99,831 |         |        | $ | 97,269 |       
|                                                        |                                                                           |              |                 |         |                         |         |      |        |         |        |   |       

20



---



##### Table of Contents



The following table sets forth reserves on a net (after reinsurance) basis (000s):

|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |        |        |        |        | 
|----------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------ | ------------------------------------------------------- | --------------- | ------ | ----------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                                                  |                                                                          |              |                                                         |                 |        | Year
Ended December 31,
|                                                                  |                                                                          |              |                                                         |                 |        |                        
|                                                                  |                                                                          |              |                                                         |                 |        | 2000                    |        | 1999   |        | 1998  
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |       
|Net Reserves for Claim and Claim Settlement Expenses:            
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Net reserves for claim and claim settlement expenses,
beginning of year  |              | $                                                       | 58,652          |        |                         | $      | 75,866 |        |        | $      | 55,695 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Plus: Deferred retrospective reinsurance gain, beginning of year         |              |                                                         | 1,249           |        |                         |        | 1,989  |        |        |        |       |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Provision increases (decreases) for claim and claim
settlement expenses:
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                          |              | Current year                                            |                 |        | 56,900                  |        |        |        | 52,176 |        |        |        | 64,315 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                          |              | Prior years                                             |                 |        | 15,929                  |        |        |        | (8,113 | )      |        |        | 10,979 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                          |              | Amortization of deferred retrospective reinsurance gain |                 |        | (400                    | )      |        |        | (740   | )      |        |        |       |       
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |       
|                                                                  |                                                                          |              |                                                         | Total provision |        |                         | 72,429 |        |        |        | 43,323 |        |        |        | 75,294 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Payments for claim and claim settlement expenses:                       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                          | Current year |                                                         |                 | 28,154 |                         |        |        | 26,897 |        |        |        | 25,397 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                          | Prior years  |                                                         |                 | 36,331 |                         |        |        | 34,380 |        |        |        | 27,737 |       
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |       
|                                                                  |                                                                          |              |                                                         | Total payments  |        |                         | 64,485 |        |        |        | 61,277 |        |        |        | 53,134 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Less: Deferred retrospective reinsurance gain, end of year               |              |                                                         | (849            | )      |                         |        | (1,249 | )      |        |        | (1,989 | )     
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |       
|Net reserves for claim and claim settlement expenses,
end of year |                                                                          | $            | 66,996                                                  |                 |        | $                       | 58,652 |        |        | $      | 75,866 |       
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |       

The following loss reserve development table sets forth the change, over
time, of reserves established for claim and claim settlement expenses at the
end of the last eight years. The following loss reserve development table is
cumulative and, therefore, ending balances should not be added since the amount
at the end of each calendar year includes activity for both current and prior
years (000s):

|                                                                |                                                               |                   |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |        |        |  
|--------------------------------------------------------------- | ------------------------------------------------------------- | ----------------- | - | ------------ | ------ | ---- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | -- | ------ | ------ | ------ | -- | ----- | ------ | ------ | - | ----- | ------ | ------ | -
|                                                                |                                                               |                   |   | December
31,
|                                                                |                                                               |                   |   |             
|                                                                |                                                               |                   |   | 2000         |        | 1999 |         | 1998   |        | 1997 |        | 1996   |        | 1995 |         | 1994  
|                                                                |                                                               |                   |   |              |        |      |         |        |        |      |        |        |        |      |         |       
|Loss Reserve Development:                                      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Gross reserves for unpaid
claim and claim
settlement expenses |                   | $ | 128,841      |        |      | $       | 99,831 |        |      | $      | 97,269 |        |      | $       | 61,069 |        |    | $      | 49,256 |        |    | $     | 37,138 |        |   | $     | 28,165 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Reinsurance recoverables                                      |                   |   | 61,845       |        |      |         | 41,179 |        |      |        | 21,403 |        |      |         | 5,374  |        |    |        | 6,183  |        |    |       | 8,312  |        |   |       | 13,902 |       
|                                                                |                                                               |                   |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |       
|                                                                | Net reserves for unpaid
claim and claim
settlement expenses   |                   | $ | 66,996       |        |      | $       | 58,652 |        |      | $      | 75,866 |        |      | $       | 55,695 |        |    | $      | 43,073 |        |    | $     | 28,826 |        |   | $     | 14,263 |       
|                                                                |                                                               |                   |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |       
|                                                                | Paid (cumulative) as of:                                     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | One year later    |   |              |        |      |         | $      | 35,932 |      |        | $      | 34,380 |      |         | $      | 27,737 |    |        | $      | 19,439 |    |       | $      | 8,595  |   |       | $      | 4,639  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Two years later   |   |              |        |      |         |        |        |      |        |        | 49,958 |      |         |        | 42,046 |    |        |        | 28,173 |    |       |        | 12,894 |   |       |        | 6,476  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Three years later |   |              |        |      |         |        |        |      |        |        |        |      |         |        | 49,671 |    |        |        | 33,438 |    |       |        | 15,521 |   |       |        | 7,863  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Four years later  |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        | 36,904 |    |       |        | 16,869 |   |       |        | 8,569  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Five years later  |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        | 18,020 |   |       |        | 9,046  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Six years later   |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |        | 9,396  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Seven years later |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |        |        |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Eight years later |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |        |        |  
|                                                               
|                                                               
|                                                               
|                                                               
|Reserves re-estimated as of:                                   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | End of year       |   | $            | 66,996 |      |         | $      | 58,652 |      |        | $      | 75,866 |      |         | $      | 55,695 |    |        | $      | 43,073 |    |       | $      | 28,826 |   |       | $      | 14,263 |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | One year later    |   |              |        |      |         |        | 74,181 |      |        |        | 67,753 |      |         |        | 66,674 |    |        |        | 39,988 |    |       |        | 20,751 |   |       |        | 12,789 |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Two years later   |   |              |        |      |         |        |        |      |        |        | 77,205 |      |         |        | 61,075 |    |        |        | 43,484 |    |       |        | 18,469 |   |       |        | 9,318  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Three years later |   |              |        |      |         |        |        |      |        |        |        |      |         |        | 68,065 |    |        |        | 41,451 |    |       |        | 19,796 |   |       |        | 8,984  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Four years later  |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        | 45,959 |    |       |        | 19,389 |   |       |        | 9,669  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Five years later  |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        | 21,254 |   |       |        | 9,692  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Six years later   |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |        | 10,330 |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Seven years later |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |        |        |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Eight years later |   |              |        |      |         |        |        |      |        |        |        |      |         |        |        |    |        |        |        |    |       |        |        |   |       |        |        |  
|                                                               
|                                                               
|                                                               
|                                                               
|Initial reserves in excess
of (less than) re-estimated
reserves |                                                               |                   |   |              |        | $    | (15,529 | )      |        | $    | (1,339 | )      |        | $    | (12,370 | )      |        | $  | (2,886 | )      |        | $  | 7,572 |        |        | $ | 3,933 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Amount Percent    |   |              |        |      |         |        | (26.5  | )%   |        |        | (1.8   | )%   |         |        | (22.2  | )% |        |        | (6.7   | )% |       |        | 26.3   | % |       |        | 27.6   | %

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                |                                                               |                   |     |              |       |      |      |       |       |   
|--------------------------------------------------------------- | ------------------------------------------------------------- | ----------------- | --- | ------------ | ----- | ---- | ---- | ----- | ----- | --
|                                                                |                                                               |                   |     | December 31,
|                                                                |                                                               |                   |     |             
|                                                                |                                                               |                   |     | 1993         |       | 1992
|                                                                |                                                               |                   |     |              |       |     
|Loss Reserve Development:                                      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Gross reserves for unpaid
claim and claim
settlement expenses |                   | $   | 13,279       |       |      | $    | 2,688 |      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Reinsurance recoverables                                      |                   |     | 9,593        |       |      |      | 1,886 |      
|                                                                |                                                               |                   |     |              |       |      |      |      
|                                                                | Net reserves for unpaid
claim and claim
settlement expenses   |                   | $   | 3,686        |       |      | $    | 802   |      
|                                                                |                                                               |                   |     |              |       |      |      |      
|                                                                | Paid (cumulative) as of:                                     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | One year later    |     | $            | 1,436 |      |      | $     | 583   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Two years later   |     |              | 2,150 |      |      |       | 678   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Three years later |     |              | 2,348 |      |      |       | 815   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Four years later  |     |              | 2,654 |      |      |       | 856   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Five years later  |     |              | 2,816 |      |      |       | 925   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Six years later   |     |              | 2,847 |      |      |       | 951   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Seven years later |     |              | 2,932 |      |      |       | 920   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Eight years later |     |              |       |      |      |       | 928   |   
|                                                               
|                                                               
|                                                               
|                                                               
|Reserves re-estimated as of:                                   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | End of year       |     | $            | 3,686 |      |      | $     | 802   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | One year later    |     |              | 3,784 |      |      |       | 1,075 |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Two years later   |     |              | 3,416 |      |      |       | 1,008 |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Three years later |     |              | 2,782 |      |      |       | 950   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Four years later  |     |              | 2,861 |      |      |       | 912   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Five years later  |     |              | 2,972 |      |      |       | 949   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Six years later   |     |              | 2,927 |      |      |       | 964   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Seven years later |     |              | 3,106 |      |      |       | 926   |   
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Eight years later |     |              |       |      |      |       | 945   |   
|                                                               
|                                                               
|                                                               
|                                                               
|Initial reserves in excess
of (less than) re-estimated
reserves |                                                               | $                 | 580 |              |       | $    | (143 | )    
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                               | Amount Percent    |     |              | 15.7  | %    |      |       | (17.8 | )%

21



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##### Table of Contents



The following table is derived from the loss reserve development table and
summarizes the effect of reserve re-estimates, net of reinsurance, on calendar
year operations for the same eight-year period ended December 31, 2000. The
total of each column details the amount of reserve re-estimates made in the
indicated calendar year and shows the accident years to which the re-estimates
are applicable. The amounts in the total accident year column represent the
cumulative reserve re-estimates for the indicated accident year (000s):

|               |       |  |                                                             |         |          |  |      |       |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              |        |   |  |  |  | 
|-------------- | ----- |  | ----------------------------------------------------------- | ------- | -------- |  | ---- | ----- | ---- |  | ---- | ------- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ---- | - |  | - | ---- | - |  | ------------ | ------ | - |  |  |  | 
|               |       |  |                                                             |         |          |  |      |       |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  | Cumulative  
|               |       |  |                                                             |         |          |  |      |       |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  | Re-estimates
|               |       |  |                                                             |         |          |  |      |       |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  | for each    
|               |       |  | Effect of Reserve re-estimates on Calendar Year Operations: |         | Accident
|               |       |  | 2000                                                        |         | 1999     |  | 1998 |       | 1997 |  | 1996 |         | 1995 |  | 1994 |       | 1993 |  | Year
|               |       |  |                                                             |         |          |  |      |       |      |  |      |         |      |  |      |       |      |  |     
|Accident Year:
|              
|              
|              
|              
|               | 1992  |  | $                                                           | (19     | )        |  | $    | 38    |      |  |      | (15     | )    |  | $    | (37   | )    |  | $    | 38    |  |  | $ | 58    |  |  | $ | 67   |   |  | $ | (273 | ) |  | $            | (143   | )
|              
|              
|              
|              
|               | 1993  |  |                                                             | (160    | )        |  |      | 7     |      |  |      | (96     | )    |  |      | (42   | )    |  |      | 596   |  |  |   | 310   |  |  |   | (165 | ) |  |   |      |   |  |              | 450    |  
|              
|              
|              
|              
|               | 1994  |  |                                                             | (459    | )        |  |      | (68   | )    |  |      | (574    | )    |  |      | 413   |      |  |      | 2,837 |  |  |   | 1,106 |  |  |   |      |   |  |   |      |   |  |              | 3,255  |  
|              
|              
|              
|              
|               | 1995  |  |                                                             | (1,227  | )        |  |      | 430   |      |  |      | (642    | )    |  |      | 1,948 |      |  |      | 4,604 |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              | 5,113  |  
|              
|              
|              
|              
|               | 1996  |  |                                                             | (2,643  | )        |  |      | 1,626 |      |  |      | (2,169  | )    |  |      | 803   |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              | (2,383 | )
|              
|              
|              
|              
|               | 1997  |  |                                                             | (2,482  | )        |  |      | 3,566 |      |  |      | (7,483  | )    |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              | (6,399 | )
|              
|              
|              
|              
|               | 1998  |  |                                                             | (2,462  | )        |  |      | 2,514 |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              | 52     |  
|              
|              
|              
|              
|               | 1999  |  |                                                             | (6,077  | )        |  |      |       |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              | (6,077 | )
|               |       |  |                                                             |         |          |  |      |       |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              |       
|               | Total |  | $                                                           | (15,529 | )        |  | $    | 8,113 |      |  | $    | (10,979 | )    |  | $    | 3,085 |      |  | $    | 8,075 |  |  | $ | 1,474 |  |  | $ | (98  | ) |  | $ | (273 | ) |  | $            | (6,132 | )
|               |       |  |                                                             |         |          |  |      |       |      |  |      |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      |   |  |   |      |   |  |              |       

Liquidity and Capital Resources

Liquidity refers to our ability to generate sufficient cash flows to meet the
short- and long-term cash requirements of our operations. Capital resources
represent those funds deployed or available to be deployed to support our
business operations.

Our primary sources of cash from operations are premiums collected and
investment income. Our investment portfolio is also a source of liquidity,
through the sale of readily marketable fixed maturity investments. Our primary
cash requirements consist of payments for (i) reinsurance, (ii) claim and claim
settlement expenses, (iii) policy acquisition costs, (iv) general and
administrative expenses, (v) capital expenditures, (vi) income taxes, and (vii)
debt service or principal repayment on our Term Loan. We have historically
generated positive net cash from operations due, in part, to timing differences
between the receipt of premiums and the payment of claim and claim settlement
expenses. As we lowered our reinsurance retention levels to $25,000 in
mid-1998, we decreased our current period cash flows as a result of
pre-funding quarterly premiums under that agreement. We expect this
reduction in cash flow will reverse itself in 2001 as we run-off the $25,000 to
$300,000 excess of loss reinsurance policy and reimbursements for loss payments
to claimants under this contract offset disbursements for premium payments.
Cash generated is either invested in short-term cash and cash equivalents or
longer term available-for-sale securities pending future payments for such
expenses as indemnity, medical benefits and other operating expenses. Cash and
cash equivalents consist of U.S. government securities acquired under
repurchase agreements, tax-exempt municipal securities and corporate securities
all with maturities of 90 days or less, with the remaining balances in cash and
a money market fund that invests primarily in short-term government securities.

Cash used in operating activities in 2000 was $8.9 million. This is
primarily a result of an increase of $20.6 million in amounts due from
reinsurers, our net loss of $9.7 million, an increase in our deferred income
tax asset of $1.4 million, a decrease of $1.0 million in unearned premiums, net
of premiums receivable, offset by an increase of $29.0 million in unpaid claim
and claim settlement expenses, which are non-cash accruals for future claims
and depreciation and amortization expense of $1.4 million. Net cash provided
by investing activities was $14.1 million, primarily the result of $14.6
million in proceeds from sales of securities and maturities of $510,000 of
investments offset by $964,000 in purchases of furniture and equipment. Net
cash used in financing activities was $3.1 million due to $10.3 million in
retirement of common stock and payments on notes payable of $1.0 million offset
by $8.0 million in proceeds from notes payable and $125,000 resulting from the
issuance of common stock under our Employee Stock Purchase Plan.

Our need for additional capital is primarily the result of regulations
that require certain ratios of capital to premiums written. In the future, we
expect that our need for additional capital will be primarily related to the
growth of our insurance subsidiary and the need to maintain appropriate premium
to surplus ratios as defined by state regulatory bodies. As an alternative to
raising additional capital, we believe we could secure quota-share or other
additional reinsurance that would have the effect of reducing the ratio of
premiums to capital and could be used to satisfy state regulatory requirements.

22



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##### Table of Contents



State insurance regulations limit distributions, including dividends, from
our insurance subsidiary to us. The maximum amount of dividends that can be
paid by ACIC to us in any year is equal to the greater of: (i) 10% of ACICs
statutory surplus as of the end of the previous fiscal year, or (ii) the
statutory net gain from operations (not including realized capital gains) of
ACIC in its most recent fiscal year. Based on this limitation, the maximum
dividend that ACIC could pay to us in 2001, without regulatory approval, is
approximately $2.9 million. (See Note 9 of Notes to Consolidated Financial
Statements.) ACIC has never paid a dividend to us and we intend to retain
capital in the insurance subsidiary.

On September 15, 1998, our Board of Directors approved a share repurchase
program authorizing us to repurchase, from time to time, up to $4,000,000 of
RTW, Inc. common stock. Through 1999 we had repurchased 19,500 shares for
approximately $87,000. We repurchased an additional 640,000 shares in 2000 for
approximately $2.6 million. We repurchased these shares on the open market or
through private transactions based upon market conditions and availability.
The repurchased shares will be used for employee stock option and purchase
plans and other corporate purposes.

We believe that cash flow generated by our operations and our cash and
investment balances will be sufficient to fund continuing operations, principal
and interest payments and capital expenditures for the next 12 months.

INTEREST RATE RISK

Our fixed maturity investments are subject to interest rate risk. Increases
and decreases in prevailing interest rates generally translate into decreases
and increases in the fair value of these instruments. Also, fair values of
interest rate sensitive instruments may be affected by the credit worthiness of
the issuer, prepayment options, relative values of alternative instruments, the
liquidity of the instrument and other general market conditions. We regularly
evaluate interest rate risk in order to evaluate the appropriateness of our
investments.

An increase of 100 basis points in prevailing interest rates would reduce
the fair value of our interest rate sensitive instruments by approximately $4.5
million.

The effect of interest rate risk on potential near-term fair value was
determined based on commonly used models. The models project the impact of
interest rate changes on factors such as duration, prepayments, put options and
call options. Fair value was determined based on the net present value of cash
flows or duration estimates, using a representative set of likely future
interest rate scenarios.

IMPACT OF THE YEAR 2000 ON COMPUTER APPLICATIONS

We had no instances of system failure or interrupted operations resulting from
our systems or system failures of our significant vendors in 2000 and expect no
future problems.

NAIC RISK-BASED CAPITAL STANDARDS

The National Association of Insurance Commissioners (NAIC) has risk-based
capital standards to determine the capital requirements of a property and
casualty insurance carrier based upon the risks inherent in its operations.
These standards require computing a risk-based capital amount that is compared
to a carriers actual total adjusted capital. The computation involves
applying factors to various financial data to address four primary risks: asset
risk, insurance underwriting risk, credit risk and off-balance sheet risk.
These standards provide for regulatory intervention when the percent of total
adjusted capital to authorized control level risk-based capital is below
certain levels. Based upon the risk-based capital standards, our percent of
total adjusted capital is substantially in excess of authorized control level
risk-based capital.

REGULATION

Our insurance subsidiary is subject to substantial regulation by governmental
agencies in the states in which we operate, and will be subject to such
regulation in any state in which we provide workers compensation products and
services in the future. State regulatory agencies have broad administrative
power with respect to all aspects of our business, including premium rates,
benefit levels, policy forms, dividend payments, capital adequacy and the
amount and type of investments. These regulations are primarily intended to
protect covered employees and policyholders rather than the insurance company.
Both the legislation covering insurance companies and the regulations adopted
by state agencies are subject to change. At December 31, 2000, our insurance
subsidiary was licensed to do business in Minnesota, South Dakota, Wisconsin,
Colorado, Missouri, Illinois, Kansas, Michigan,
Indiana, Massachusetts, Connecticut, Rhode Island, Pennsylvania, Tennessee,
Maryland, Arkansas, Iowa, Florida, Georgia, New Jersey, North Carolina, Texas
and Oklahoma.

23



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##### Table of Contents



In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (the Codification). The
Codification is intended to standardize regulatory accounting and reporting to
state insurance departments and is effective January 1, 2001. Statutory
accounting principles, however, will continue to be established by individual
state laws and permitted practices. The state of Minnesota requires adoption
of the Codification for preparing statutory financial statements for financial
periods occurring on or after January 1, 2001. We estimate that adoption of
the Codification will increase our statutory capital and surplus by
approximately $2.9 million on January 1, 2001.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is effective January 1, 2001 (as amended by SFAS No.
137). SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivative
instruments are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction, and if it is, the type of hedge transaction. We expect that
adoption of the new standard will not affect our results of operations or
financial position.

FORWARD LOOKING STATEMENTS

Information included in this annual report which can be identified by the use
of forward-looking terminology such as may, will, expect, anticipate,
estimate, or continue or the negative thereof or other variations thereon
or comparable terminology constitutes forward-looking information. The
following important factors, among others, in some cases have affected and in
the future could affect our actual results and could cause our actual financial
performance to differ materially from that expressed in any forward-looking
statement: (i) our ability to accurately predict claim development; (ii) our
ability to manage both our existing claims and new claims in an effective
manner; (iii) our experience with claims frequency and severity; (iv) our
ability to retain our existing customers at favorable premium rates when their
policies renew; (v) competition from traditional workers compensation
insurance carriers; (vi) our ability to further penetrate our existing markets;
(vii) general economic and business conditions; (viii) our ability to maintain
our A.M. Best rating; (ix) changes in workers compensation regulation by
states, including changes in mandated benefits or insurance company regulation;
and (x) interest rate changes. This discussion of uncertainties is by no means
exhaustive but is designed to highlight important factors that may impact our
future performance.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information with respect to Disclosures about Market Risk is contained in
the Section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Interest Rate Risk under Item 7 of this
Report of Form 10-K and is incorporated herein by reference.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

|                                                                                              |  |      |    | 
|--------------------------------------------------------------------------------------------- |  | ---- | -- | 
|FINANCIAL STATEMENTS                                                                          |  | Page
|Independent Auditors Report                                                                  |  |      | 25 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated Balance Sheets December 31, 2000 and 1999                                       |  |      | 26 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated Statements of Operations Years Ended December 31, 2000, 1999 and 1998           |  |      | 27 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated
Statements of Shareholders Equity Years Ended December 31, 2000, 1999 and 1998 |  |      | 28 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998           |  |      | 29 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998      |  |      | 30 | 

24



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheets of RTW, Inc.
and subsidiary (the Company) as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As described in Note 5, the establishment of claim and claim settlement
expense reserves is an inherently uncertain process.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
February 9, 2001
(March 28, 2001 as to Note 6)

25



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##### Table of Contents



RTW, INC.
Consolidated Balance Sheets
December 31, 2000 and 1999
(In Thousands, Except Share Data)

|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |         |        |         |  | 
|----------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------------------ | ------ | ------- | - | ------- | ------ | ------- |  | 
|                                                                  |                                                                                                                    |                                            |                                      |        | 2000    |   | 1999   
|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |        
|                                                                  |                                                                                                                    |                                            | ASSETS                              
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Investments at fair value, amortized cost of $96,521 and $112,334 |                                                                                                                    | $                                          | 96,830                               |        |         | $ | 108,064 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cash and cash equivalents                                         |                                                                                                                    |                                            | 2,427                                |        |         |   | 302     |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Accrued investment income                                         |                                                                                                                    |                                            | 1,266                                |        |         |   | 1,475   |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Premiums receivable, less allowance of $569 and $519              |                                                                                                                    |                                            | 10,126                               |        |         |   | 9,435   |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Reinsurance recoverables:                                        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | On unpaid claim and claim settlement expenses                                                                      |                                            |                                      | 61,845 |         |   |         | 41,179 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | On paid claim and claim settlement expenses                                                                        |                                            |                                      | 2,295  |         |   |         | 2,323  |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Deferred policy acquisition costs                                 |                                                                                                                    |                                            | 1,351                                |        |         |   | 1,487   |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Furniture and equipment, net                                      |                                                                                                                    |                                            | 3,590                                |        |         |   | 3,881   |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Other assets                                                      |                                                                                                                    |                                            | 14,805                               |        |         |   | 8,365   |       
|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |         |       
|                                                                  |                                                                                                                    | Total assets                               |                                      | $      | 194,535 |   |         | $      | 176,511 | 
|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |         |       
|                                                                  |                                                                                                                    |                                            | LIABILITIES AND SHAREHOLDERS EQUITY
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Unpaid claim and claim settlement expenses                        |                                                                                                                    | $                                          | 128,841                              |        |         | $ | 99,831  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Unearned premiums                                                 |                                                                                                                    |                                            | 12,455                               |        |         |   | 12,766  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Accrued expenses and other liabilities                            |                                                                                                                    |                                            | 7,503                                |        |         |   | 8,349   |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Notes payable                                                     |                                                                                                                    |                                            | 7,000                                |        |         |   |        |       
|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |         |       
|                                                                  |                                                                                                                    | Total liabilities                          |                                      |        | 155,799 |   |         |        | 120,946 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Shareholders equity:                                            
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Undesignated stock, no par value; authorized 4,750,000 shares;
none issued or outstanding                          |                                            |                                      |       |         |   |         |       |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Series A Junior Participating Preferred Stock, no par value;
authorized 250,000 shares; none issued or outstanding |                                            |                                      |       |         |   |         |       |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding 10,293,000 and 12,312,000 shares  |                                            |                                      | 20,665 |         |   |         | 30,808 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Retained earnings                                                                                                  |                                            |                                      | 17,867 |         |   |         | 27,575 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Accumulated other comprehensive income (loss)                                                                      |                                            |                                      | 204    |         |   |         | (2,818 | )      
|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |         |       
|                                                                  |                                                                                                                    | Total shareholders equity                 |                                      |        | 38,736  |   |         |        | 55,565  | 
|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |         |       
|                                                                  |                                                                                                                    | Total liabilities and shareholders equity |                                      | $      | 194,535 |   |         | $      | 176,511 | 
|                                                                  |                                                                                                                    |                                            |                                      |        |         |   |         |       

See notes to consolidated financial statements.

26



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##### Table of Contents



RTW, INC.
Consolidated Statements of Operations
Years Ended December 31, 2000, 1999 and 1998
(In Thousands, Except Share and Per Share Data)

|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |            |         |         |  
|------------------------------------ | --------------------------------------- | -------------------------- | -------------------------------------- | ---------- | ------ | ------- | ----- | ---------- | ------ | ----- | ------ | ---------- | ------- | ------- | -
|                                     |                                         |                            |                                        |            | 2000   |         | 1999  |            | 1998  
|                                     |                                         |                            |                                        |            |        |         |       |            |       
|Revenues:                           
|                                    
|                                    
|                                    
|                                    
|                                     | Gross premiums earned                   |                            | $                                      | 95,878     |        |         | $     | 89,226     |        |       | $      | 89,881     |        
|                                    
|                                    
|                                    
|                                    
|                                     | Premiums ceded                          |                            |                                        | (17,724    | )      |         |       | (18,008    | )      |       |        | (8,489     | )      
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     |                                         | Premiums earned            |                                        |            | 78,154 |         |       |            | 71,218 |       |        |            | 81,392  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Investment income                       |                            |                                        | 5,752      |        |         |       | 6,510      |        |       |        | 7,714      |        
|                                    
|                                    
|                                    
|                                    
|                                     | Net realized investment (losses) gains:
|                                    
|                                    
|                                    
|                                    
|                                     |                                         | Realized investment gains  |                                        |            | 26     |         |       |            | 108    |       |        |            | 1,591   |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                         | Realized investment losses |                                        |            | (633   | )       |       |            | (24    | )     |        |            | (545    | )      
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     |                                         |                            | Net realized investment (losses) gains |            |        | (607    | )     |            |        | 84    |        |            |         | 1,046   |  
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     |                                         | Total revenues             |                                        |            | 83,299 |         |       |            | 77,812 |       |        |            | 90,152  |        
|                                    
|                                    
|                                    
|                                    
|Expenses:                           
|                                    
|                                    
|                                    
|                                    
|                                     | Claim and claim settlement expenses     |                            |                                        | 72,429     |        |         |       | 43,323     |        |       |        | 75,294     |        
|                                    
|                                    
|                                    
|                                    
|                                     | Policy acquisition costs                |                            |                                        | 14,137     |        |         |       | 14,111     |        |       |        | 13,974     |        
|                                    
|                                    
|                                    
|                                    
|                                     | General and administrative expenses     |                            |                                        | 11,513     |        |         |       | 12,021     |        |       |        | 11,369     |        
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     |                                         | Total expenses             |                                        |            | 98,079 |         |       |            | 69,455 |       |        |            | 100,637 |        
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     |                                         |                            | (Loss) income from operations          |            |        | (14,780 | )     |            |        | 8,357 |        |            |         | (10,485 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Interest expense                        |                            |                                        | 667        |        |         |       | 266        |        |       |        | 546        |        
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     | (Loss) income before income taxes       |                            |                                        | (15,447    | )      |         |       | 8,091      |        |       |        | (11,031    | )      
|                                    
|                                    
|                                    
|                                    
|                                     | Income tax (benefit) expense            |                            |                                        | (5,739     | )      |         |       | 1,924      |        |       |        | (3,950     | )      
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|Net (loss) income                    |                                         | $                          | (9,708                                 | )          |        | $       | 6,167 |            |        | $     | (7,081 | )         
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|(Loss) income per share:            
|                                    
|                                    
|                                    
|                                    
|                                     | Basic (loss) income per share           |                            | $                                      | (0.89      | )      |         | $     | 0.50       |        |       | $      | (0.59      | )      
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     | Diluted (loss) income per share         |                            | $                                      | (0.89      | )      |         | $     | 0.50       |        |       | $      | (0.59      | )      
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|Weighted average shares outstanding:
|                                    
|                                    
|                                    
|                                    
|                                     | Basic shares outstanding                |                            |                                        | 10,855,000 |        |         |       | 12,291,000 |        |       |        | 11,927,000 |        
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           
|                                     | Diluted shares outstanding              |                            |                                        | 10,855,000 |        |         |       | 12,360,000 |        |       |        | 11,927,000 |        
|                                     |                                         |                            |                                        |            |        |         |       |            |        |       |        |           

See notes to consolidated financial statements.

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##### Table of Contents



RTW, INC.
Consolidated Statements of Shareholders Equity
Years Ended December 31, 2000, 1999 and 1998
(In Thousands)

|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |               |        |               |   |             |        |  |         |        |   |  |  |  |  | 
|---------------------------- | --------------------- | --------------------------------------- | -------------------------------------- | -------------------- | ------- | ------ |  | ------ | ------ | ------------- | ------ | ------ | ------ | ------------- | ------ | ------------- | - | ----------- | ------ |  | ------- | ------ | - |  |  |  |  | 
|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |               |        |               |   | Accumulated
|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |               |        |               |   | Other      
|                             |                       |                                         |                                        |                      |         |        |  |        |        | Comprehensive |        |        |        |               |        | Comprehensive |   | Total      
|                             |                       |                                         |                                        |                      |         | Common |  | Income |        | Retained      |        | Income |        | Shareholders'
|                             |                       |                                         |                                        |                      |         | Stock  |  | (Loss) |        | Earnings      |        | (Loss) |        | Equity       
|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |              
|Balance at January 1, 1998   |                       | $                                       | 28,976                                 |                      |         |        |  |        |        | $             | 28,489 |        |        | $             | 892    |               |   | $           | 58,357 | 
|                            
|                            
|                            
|                            
|                             | Comprehensive loss:  
|                            
|                            
|                            
|                            
|                             |                       | Net loss                                |                                        |                      |        |        |  | $      | (7,081 | )             |        |        | (7,081 | )             |        |               |  |             |        |  | (7,081  | )     
|                            
|                            
|                            
|                            
|                             |                       | Other comprehensive income, net of tax:
|                            
|                            
|                            
|                            
|                             |                       |                                         | Change in unrealized investment gains  |                      |         |       |  |        |        | 867           |        |        |        |              |        |               |   | 867         |        |  |         | 867    |  
|                             |                       |                                         |                                        |                      |         |        |  |       
|                             |                       |                                         |                                        | Comprehensive loss   |         |        |  |        |        | $             | (6,214 | )     
|                             |                       |                                         |                                        |                      |         |        |  |       
|                             |                       | Non-qualified stock options exercised   |                                        |                      | 167     |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 167     |       
|                            
|                            
|                            
|                            
|                             |                       | Incentive stock options exercised       |                                        |                      | 166     |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 166     |       
|                            
|                            
|                            
|                            
|                             |                       | Issuance of common shares               |                                        |                      | 30      |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 30      |       
|                            
|                            
|                            
|                            
|                             |                       | Issuance of shares under ESPP           |                                        |                      | 199     |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 199     |       
|                            
|                            
|                            
|                            
|                             |                       | Retirement of common stock              |                                        |                      | (87     | )      |  |        |        |               |        |        |       |               |        |               |  |             |        |  | (87     | )     
|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |               |        |               |   |             |        | 
|Balance at December 31, 1998 |                       |                                         | 29,451                                 |                      |         |        |  |        |        |               | 21,408 |        |        |               | 1,759  |               |   |             | 52,618 | 
|                            
|                            
|                            
|                            
|                             | Comprehensive income:
|                            
|                            
|                            
|                            
|                             |                       | Net income                              |                                        |                      |        |        |  | $      | 6,167  |               |        |        | 6,167  |               |        |               |  |             |        |  | 6,167   |       
|                            
|                            
|                            
|                            
|                             |                       | Other comprehensive loss, net of tax:  
|                            
|                            
|                            
|                            
|                             |                       |                                         | Change in unrealized investment losses |                      |         |       |  |        |        | (4,577        | )      |        |        |               |        |               |   | (4,577      | )      |  |         | (4,577 | )
|                             |                       |                                         |                                        |                      |         |        |  |       
|                             |                       |                                         |                                        | Comprehensive income |         |        |  |        |        | $             | 1,590  |       
|                             |                       |                                         |                                        |                      |         |        |  |       
|                             |                       | Non-qualified stock options exercised   |                                        |                      | 1,172   |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 1,172   |       
|                            
|                            
|                            
|                            
|                             |                       | Incentive stock options exercised       |                                        |                      | 80      |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 80      |       
|                            
|                            
|                            
|                            
|                             |                       | Issuance of shares under ESPP           |                                        |                      | 105     |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 105     |       
|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |               |        |               |   |             |        | 
|Balance at December 31, 1999 |                       |                                         | 30,808                                 |                      |         |        |  |        |        |               | 27,575 |        |        |               | (2,818 | )             |   |             | 55,565 | 
|                            
|                            
|                            
|                            
|                             | Comprehensive income:
|                            
|                            
|                            
|                            
|                             |                       | Net loss                                |                                        |                      |        |        |  | $      | (9,708 | )             |        |        | (9,708 | )             |        |               |  |             |        |  | (9,708  | )     
|                            
|                            
|                            
|                            
|                             |                       | Other comprehensive income, net of tax:
|                            
|                            
|                            
|                            
|                             |                       |                                         | Change in unrealized investment gains  |                      |         |       |  |        |        | 3,022         |        |        |        |               |        |               |   | 3,022       |        |  |         | 3,022  |  
|                             |                       |                                         |                                        |                      |         |        |  |       
|                             |                       |                                         |                                        | Comprehensive loss   |         |        |  |        |        | $             | (6,686 | )     
|                             |                       |                                         |                                        |                      |         |        |  |       
|                             |                       | Retirement of common stock              |                                        |                      | (10,268 | )      |  |        |        |               |        |        |       |               |        |               |  |             |        |  | (10,268 | )     
|                            
|                            
|                            
|                            
|                             |                       | Issuance of shares under ESPP           |                                        |                      | 125     |        |  |        |        |               |        |        |       |               |        |               |  |             |        |  | 125     |       
|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |               |        |               |   |             |        | 
|Balance at December 31, 2000 |                       | $                                       | 20,665                                 |                      |         |        |  |        |        | $             | 17,867 |        |        | $             | 204    |               |   | $           | 38,736 | 
|                             |                       |                                         |                                        |                      |         |        |  |        |        |               |        |        |        |               |        |               |   |             |        | 

See notes to consolidated financial statements.

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##### Table of Contents



RTW, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
(In Thousands)

|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |         |        |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------- | --------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | -
|                                                     |                                                                                          |                                        |                                                     |         | 2000   |         | 1999 |         | 1998  
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |       
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net (loss) income                                                                        |                                        | $                                                   | (9,708  | )      |         | $    | 6,167   |        |         | $      | (7,081  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Net realized investment losses (gains) |                                                     |         | 607    |         |      |         | (84    | )       |        |         | (1,046 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Depreciation and amortization          |                                                     |         | 1,397  |         |      |         | 1,382  |         |        |         | 1,341  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Deferred income taxes                  |                                                     |         | (1,371 | )       |      |         | 764    |         |        |         | (2,239 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Changes in assets and liabilities:    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                        | Amounts due from reinsurers                         |         |        | (20,638 | )    |         |        | (21,232 | )      |         |        | (14,164 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                        | Unpaid claim and claim settlement expenses          |         |        | 29,010  |      |         |        | 2,562   |        |         |        | 36,200  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                        | Unearned premiums, net of premiums receivable       |         |        | (1,002  | )    |         |        | (3,142  | )      |         |        | (1,344  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                        | Other, net                                          |         |        | (7,167  | )    |         |        | 3,313   |        |         |        | (1,849  | )
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        
|                                                     |                                                                                          |                                        | Net cash (used in) provided by
operating activities |         |        | (8,872  | )    |         |        | (10,270 | )      |         |        | 9,818   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Maturities of investments                                                                |                                        |                                                     | 510     |        |         |      | 1,915   |        |         |        | 2,000   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of available-for-sale investments                                              |                                        |                                                     |        |        |         |      | (11,239 | )      |         |        | (77,594 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales of available-for-sale investments                                    |                                        |                                                     | 14,594  |        |         |      | 20,912  |        |         |        | 63,522  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of furniture and equipment                                                     |                                        |                                                     | (964    | )      |         |      | (573    | )      |         |        | (819    | )     
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        
|                                                     |                                                                                          |                                        | Net cash provided by (used in)
investing activities |         |        | 14,140  |      |         |        | 11,015  |        |         |        | (12,891 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from notes payable                                                              |                                        |                                                     | 8,000   |        |         |      |        |        |         |        |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments on notes payable                                                                |                                        |                                                     | (1,000  | )      |         |      | (2,500  | )      |         |        | (2,500  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Stock options and warrants exercised                                                     |                                        |                                                     |        |        |         |      | 1,252   |        |         |        | 333     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of common stock under ESPP                                                      |                                        |                                                     | 125     |        |         |      | 105     |        |         |        | 199     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of common stock                                                                 |                                        |                                                     |        |        |         |      |        |        |         |        | 30      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Retirement of common stock                                                               |                                        |                                                     | (10,268 | )      |         |      |        |        |         |        | (87     | )     
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        
|                                                     |                                                                                          |                                        | Net cash used in financing activities               |         |        | (3,143  | )    |         |        | (1,143  | )      |         |        | (2,025  | )
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        
|Net increase (decrease) in cash and cash equivalents |                                                                                          |                                        | 2,125                                               |         |        |         | (398 | )       |        |         | (5,098 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of year       |                                                                                          |                                        | 302                                                 |         |        |         | 700  |         |        |         | 5,798  |        
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        
|Cash and cash equivalents at end of year             |                                                                                          | $                                      | 2,427                                               |         |        | $       | 302  |         |        | $       | 700    |        
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        
|Supplemental disclosure of cash flow information:   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid (received) during the year for:                                               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Interest                               |                                                     | $       | 458    |         |      | $       | 238    |         |        | $       | 546    |        
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        
|                                                     |                                                                                          | Income tax payments (refunds)          |                                                     | $       | 802    |         |      | $       | (1,312 | )       |        | $       | 488    |        
|                                                     |                                                                                          |                                        |                                                     |         |        |         |      |         |        |         |        |        

See notes to consolidated financial statements.

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##### Table of Contents



RTW, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999, and 1998

Note 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OrganizationRTW, Inc. (RTW) provides workers compensation insurance
coverage to employers through its wholly owned insurance subsidiary, American
Compensation Insurance Company (ACIC). Collectively, we, our and us will
refer to these entities in these Notes to Consolidated Financial Statements.

We benefit from our ability to reduce workers compensation costs and
provide employers the ability to control their workers compensation programs.
We are domiciled in Minnesota and were licensed in Minnesota, Colorado,
Missouri, Michigan, Massachusetts, Illinois, Kansas, Connecticut, Wisconsin,
Rhode Island, Florida, Iowa, Indiana, Arkansas, Pennsylvania, Tennessee, South
Dakota, Maryland, Georgia, New Jersey, North Carolina, Texas and Oklahoma at
December 31, 2000. We are also licensed to write workers compensation
insurance coverage for companies covered under the Longshoremans Act. We
wrote policies primarily in Minnesota, Colorado, Missouri, Illinois, Kansas,
Michigan, Massachusetts, Connecticut and Wisconsin during 2000. We
operate in a single business segment, workers compensation insurance.

The following explain the accounting policies we use to arrive at some of
the more significant amounts in our financial statements.

Accounting PrinciplesWe prepare our financial statements in accordance with
accounting principles generally accepted in the United States of America
(GAAP).

ConsolidationOur consolidated financial statements include RTW and ACIC. We
eliminate all inter-company accounts and transactions in consolidation.

Use of EstimatesWe make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the financial statement date and the recorded amounts of
revenues and expenses during the reporting period. Our most significant
estimates are those relating to our unpaid claim and claim settlement expenses
and accrual for premium adjustments. We continually review our estimates and
assumptions and make adjustments as necessary, but actual results could vary
significantly from these estimates.

InvestmentsWe invest entirely in fixed maturity investments and classify our
investments as available-for-sale in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities.

Available-for-Sale Investments:We intend to hold our available-for-sale
investments to maturity, but may sell before maturity in response to income tax
considerations, changes in interest rates, prepayment risk and funding sources
or terms, or to address liquidity needs. Our available-for-sale investments
are carried at fair value with changes in unrealized gains or losses, net of
deferred taxes, reported as other comprehensive income or loss. The fair
values of our investments are determined based upon quoted market prices as
obtained through commercial pricing services or brokers who provide estimated
fair values.

Realized Investment Gains and Losses:Net realized investment gains and losses
are identified separately in our Consolidated Statements of Operations. Cost
of investments sold is determined by the specific identification method.

We continually monitor the difference between investment cost and fair
value for each of our securities. If any security experienced a decline in
value that is determined to be other than temporary, we would reduce the
securitys carrying value for the decline and record a realized loss in the
Consolidated Statements of Operations. We recorded $500,000 against a security
whose decline in value was determined to be other than temporary in 2000. No
securities were reduced for declines in fair value in 1999 or 1998.

Cash and Cash EquivalentsWe consider all highly liquid investments with
maturities of three months or less when purchased to be cash equivalents.

Fair Value of Financial InstrumentsA
number of our significant assets and liabilities (including deferred
policy acquisition costs, reinsurance recoverables, furniture and
equipment, and unpaid claim and claim settlement expenses) are not
considered financial instruments for disclosure purposes. Our
premiums receivable and other assets and liabilities which are
considered financial instruments are generally of a short term
nature. Our term loan bears a floating interest rate. The carrying
values of these instruments approximate their fair values. The
carrying values and fair values of investments are disclosed in Note
3.

Deferred Policy Acquisition CostsThe costs directly related to writing an
insurance policy are referred to as policy acquisition costs and consist of
commissions, state premium taxes and other direct underwriting expenses.
Although these costs arise when we issue a policy, we defer certain costs,
principally commissions and state premium taxes, and amortize these costs to
expense as premium revenue is recognized.

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##### Table of Contents



If deferred policy acquisition costs were to exceed the sum of unearned
premiums and related anticipated investment income less expected claim and
claim settlement expenses, we would immediately expense the excess costs.

DepreciationWe depreciate furniture and equipment on a straight-line basis
over the estimated useful lives of the assets (five to ten years). Accumulated
depreciation was $5,100,000 at December 31, 2000 and $3,879,000 at December 31,
1999.

Unpaid Claim and Claim Settlement ExpensesClaim expenses refer to amounts
that we paid or expect to pay to claimants for events that have occurred. The
costs of investigating, resolving and processing these claims are referred to
as claim settlement expenses. We record these expenses, net of amounts
recoverable under reinsurance contracts, as Claim and claim settlement
expenses in the Consolidated Statements of Operations.

Our Unpaid claim and claim settlement expenses represent reserves
established for the estimated total unpaid cost of claim and claim settlement
expenses that cover events that occurred on or prior to each balance sheet
date. The reserves are primarily undiscounted; however, we discounted selected
claims that have fixed or determinable future payments by $1,441,000 in 2000
and $2,873,000 in 1999 after applying an 8% discount factor. These reserves
reflect our estimates of the total costs of claims that were reported, but not
yet paid, and the cost of claims incurred but not yet reported. Our estimates
consider such variables as past loss experience, current claim trends and
prevailing social, economic and legal environments. We have limited historical
data to estimate our reserves for unpaid claim and claim settlement expenses
due to commencing operations in 1992 and supplement our experience with
external industry data, as adjusted to reflect anticipated differences between
our results and the industry. We reduce the unpaid claim and claim settlement
expenses for estimated amounts of subrogation.

We believe our reserves for unpaid claim and claim settlement expenses are
adequate to cover the ultimate costs of claim and claim settlement expenses.
The ultimate cost of claim and claim settlement expenses may differ from the
established reserves, particularly when claims may not be settled for many
years. Reserves for unpaid claim and claim settlement expenses and assumptions
used in their development are continually reviewed. We record adjustments to
prior estimates of unpaid claim and claim settlement expenses to operations in
the year in which the adjustments are made.

Premiums EarnedPremiums on workers compensation insurance policies are our
largest source of revenue. We record premiums written on an installment basis,
matching billing to the policyholder, and earn premiums on a daily basis over
the life of each insurance policy. We record the excess of premiums billed
over premiums earned for each policy as unearned premiums on our balance sheet.
When a policy expires, we audit employer payrolls for the policy period and
adjust the estimated payroll to its actual value. The result is a final
audit adjustment recorded to premiums earned when the adjustment becomes
known. Final audit premiums recognized during the period include billed final
audit premiums plus (or minus) the change in estimate for premiums on unexpired
and expired unaudited policies.

Effect of Recent Accounting PronouncementsThe Financial Accounting
Standards Board has issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which
is effective January 1, 2001 (as amended by SFAS No. 137). SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivative instruments are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction, and if it
is, the type of hedge transaction. We expect that adoption of the new
standard will not affect our results of operations or financial position.

Note 2  INCOME PER SHARE

We apply SFAS No. 128, Earnings Per Share, which requires dual presentation
of a basic income (loss) per share (IPS), which excludes dilution, and a
diluted IPS, which reflects the potential dilution that could occur if actions
taken with respect to dilutive securities resulted in the issuance of common
stock. Dilutive securities consist of stock options. Basic IPS is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted IPS is computed by dividing net income
(loss) by the weighted average number of common shares and dilutive securities
outstanding for the period. Dilutive securities are considered outstanding
from the date of grant, after applying the treasury stock method for
determining the dilutive effect.

31



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The following is a reconciliation of the numerators and denominators of basic and diluted (loss) income per share:

|                                            |                                  |   |            |   |      |   |            |        |  |   |            |   | 
|------------------------------------------- | -------------------------------- | - | ---------- | - | ---- | - | ---------- | ------ |  | - | ---------- | - | 
|                                            |                                  |   | 2000       |   | 1999 |   | 1998      
|                                            |                                  |   |            |   |      |   |            |        |  |   |            |  
|Net (loss) income (000s)                   |                                  | $ | (9,708     | ) |      | $ | 6,167      |        |  | $ | (7,081     | )
|                                            |                                  |   |            |   |      |   |            |        |  |   |            |  
|Basic weighted average shares outstanding   |                                  |   | 10,855,000 |   |      |   | 12,291,000 |        |  |   | 11,927,000 |  
|                                           
|                                           
|                                           
|                                           
|                                            | Effect of dilutive stock options |   |            |  |      |   |            | 69,000 |  |   |            |  | 
|                                            |                                  |   |            |   |      |   |            |        |  |   |            |  
|Diluted weighted average shares outstanding |                                  |   | 10,855,000 |   |      |   | 12,360,000 |        |  |   | 11,927,000 |  
|                                            |                                  |   |            |   |      |   |            |        |  |   |            |  
|Basic (loss) income per share               |                                  | $ | (0.89      | ) |      | $ | 0.50       |        |  | $ | (0.59      | )
|                                            |                                  |   |            |   |      |   |            |        |  |   |            |  
|Diluted (loss) income per share             |                                  | $ | (0.89      | ) |      | $ | 0.50       |        |  | $ | (0.59      | )
|                                            |                                  |   |            |   |      |   |            |        |  |   |            |  

Options to purchase 1,168,000 shares of common stock at prices ranging
from $2.67 to $19.33 were outstanding during 2000 but excluded from the
computation of diluted IPS due to our 2000 net loss. Diluted weighted average
shares outstanding would have increased by 16,000 shares had these shares not
been anti-dilutive in the computation.

Options to purchase 1,895,000 shares of common stock at prices ranging
from $2.00 to $28.75 were outstanding during 1998 but excluded from the
computation of diluted IPS due to our 1998 net loss. Diluted weighted average
shares outstanding would have increased by 219,000 shares had these shares not
been anti-dilutive in the computation.

Note 3  INVESTMENTS

Valuation of Investments- The following tables present amortized cost, gross
unrealized gains and losses and estimated fair values of our available-for-sale
securities (000s):

|                                |                   |      |           |        |            |        |            |       |       |   |           |      |   |   |        |        | 
|------------------------------- | ----------------- | ---- | --------- | ------ | ---------- | ------ | ---------- | ----- | ----- | - | --------- | ---- | - | - | ------ | ------ | 
|                                |                   |      |           |        |            |        | Gross      |       | Gross |   | Estimated
|                                |                   |      | Amortized |        | Unrealized |        | Unrealized |       | Fair 
|2000                            |                   | Cost |           | Gains  |            | Losses |            | Value
|                                |                   |      |           |        |            |        |            |      
|Tax-exempt municipal securities |                   | $    | 55,450    |        |            | $      | 377        |       |       | $ | (147      | )    |   | $ | 55,680 |       
|                               
|                               
|                               
|                               
|U.S. government securities      |                   |      | 14,568    |        |            |        | 326        |       |       |   |          |      |   |   | 14,894 |       
|                               
|                               
|                               
|                               
|Corporate securities            |                   |      | 10,514    |        |            |        | 11         |       |       |   | (210      | )    |   |   | 10,315 |       
|                               
|                               
|                               
|                               
|Asset-backed securities         |                   |      | 2,000     |        |            |        | 3          |       |       |   |          |      |   |   | 2,003  |       
|                               
|                               
|                               
|                               
|Mortgage-backed securities      |                   |      | 13,989    |        |            |        | 86         |       |       |   | (137      | )    |   |   | 13,938 |       
|                                |                   |      |           |        |            |        |            |       |       |   |           |      |   |   |        |       
|                                | Total investments |      | $         | 96,521 |            |        | $          | 803   |       |   | $         | (494 | ) |   | $      | 96,830 | 
|                                |                   |      |           |        |            |        |            |       |       |   |           |      |   |   |        |       

|                                |                   |      |           |         |            |        |            |       |       |   |           |        |   |   |        |         | 
|------------------------------- | ----------------- | ---- | --------- | ------- | ---------- | ------ | ---------- | ----- | ----- | - | --------- | ------ | - | - | ------ | ------- | 
|                                |                   |      |           |         |            |        | Gross      |       | Gross |   | Estimated
|                                |                   |      | Amortized |         | Unrealized |        | Unrealized |       | Fair 
|1999                            |                   | Cost |           | Gains   |            | Losses |            | Value
|                                |                   |      |           |         |            |        |            |      
|Tax-exempt municipal securities |                   | $    | 63,104    |         |            | $      | 17         |       |       | $ | (2,267    | )      |   | $ | 60,854 |        
|                               
|                               
|                               
|                               
|U.S. government securities      |                   |      | 15,665    |         |            |        | 19         |       |       |   | (578      | )      |   |   | 15,106 |        
|                               
|                               
|                               
|                               
|Corporate securities            |                   |      | 15,462    |         |            |        | 3          |       |       |   | (845      | )      |   |   | 14,620 |        
|                               
|                               
|                               
|                               
|Asset-backed securities         |                   |      | 2,000     |         |            |        |           |       |       |   | (20       | )      |   |   | 1,980  |        
|                               
|                               
|                               
|                               
|Mortgage-backed securities      |                   |      | 16,103    |         |            |        |           |       |       |   | (599      | )      |   |   | 15,504 |        
|                                |                   |      |           |         |            |        |            |       |       |   |           |        |   |   |        |        
|                                | Total investments |      | $         | 112,334 |            |        | $          | 39    |       |   | $         | (4,309 | ) |   | $      | 108,064 | 
|                                |                   |      |           |         |            |        |            |       |       |   |           |        |   |   |        |        

Statutory DepositsIncluded in investments are U.S. government securities on
deposit with various regulatory authorities, as required by law, with a fair
value of $12,223,000 and $3,452,000 at December 31, 2000 and 1999,
respectively.

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Fixed Maturities by Maturity DateThe following table presents the amortized
cost and fair value of investments by contractual maturity at December 31,
2000. Actual maturities may differ from those stated as a result of calls and
prepayments (000s):

|                                                   |                   |      |           |        |      |   |           |        | 
|-------------------------------------------------- | ----------------- | ---- | --------- | ------ | ---- | - | --------- | ------ | 
|                                                   |                   |      |           |        |      |   | Estimated
|                                                   |                   |      | Amortized |        | Fair
|Maturing:                                          |                   | Cost |           | Value 
|                                                   |                   |      |           |       
|One year or less                                   |                   | $    | 1,464     |        |      | $ | 1,466     |       
|                                                  
|                                                  
|                                                  
|                                                  
|Over one year through five years                   |                   |      | 53,741    |        |      |   | 54,106    |       
|                                                  
|                                                  
|                                                  
|                                                  
|Over five years through ten years                  |                   |      | 9,735     |        |      |   | 9,621     |       
|                                                  
|                                                  
|                                                  
|                                                  
|Over ten years                                     |                   |      | 17,592    |        |      |   | 17,699    |       
|                                                  
|                                                  
|                                                  
|                                                  
|Mortgage-backed securities with various maturities |                   |      | 13,989    |        |      |   | 13,938    |       
|                                                   |                   |      |           |        |      |   |           |       
|                                                   | Total investments |      | $         | 96,521 |      |   | $         | 96,830 | 
|                                                   |                   |      |           |        |      |   |           |       

Investment Income- Investment income includes income from the following sources (000s):

|                           |                   |   |       |       |      |   |       |       |  |   |       |       | 
|-------------------------- | ----------------- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                           |                   |   | 2000  |       | 1999 |   | 1998 
|                           |                   |   |       |       |      |   |       |       |  |   |       |      
|Fixed maturity investments |                   | $ | 5,519 |       |      | $ | 6,318 |       |  | $ | 6,995 |      
|                          
|                          
|                          
|                          
|Short-term investments     |                   |   | 185   |       |      |   | 133   |       |  |   | 506   |      
|                          
|                          
|                          
|                          
|Other                      |                   |   | 48    |       |      |   | 59    |       |  |   | 213   |      
|                           |                   |   |       |       |      |   |       |       |  |   |       |      
|                           | Investment income |   | $     | 5,752 |      |   | $     | 6,510 |  |   | $     | 7,714 | 
|                           |                   |   |       |       |      |   |       |       |  |   |       |      

Note 4  REINSURANCE

Our financial statements reflect the effects of ceded reinsurance transactions.
The primary purpose of ceded reinsurance is to protect us from potential
losses in excess of the level that we are willing to accept.

We report reinsurance related balances on a gross basis on the balance
sheet, resulting in reinsurance recoverable amounts on paid and unpaid claim
and claim settlement expenses recorded as assets. We estimate amounts
recoverable from reinsurers in a manner consistent with the claim liability
associated with the reinsured policy.

We ceded Minnesota claims in excess of $310,000, $290,000 and $280,000 per
occurrence during 2000, 1999 and 1998, respectively, to the Minnesota Workers
Compensation Reinsurance Association (WCRA). In our non-Minnesota states, our
per-incident exposure was $300,000 in 2000 and 1999 and $500,000 in 1998. We
purchased this non-Minnesota coverage from a single reinsurer.

For claims occurring after June 30, 1998, we further limited our per
incident exposure by purchasing excess of loss coverage for losses from $25,000
to the lesser of $300,000 or the WCRA selected retention level in Minnesota and
from $25,000 to $300,000 in other states from a single reinsurer. This
agreement was finalized after its effective date and activity occurring from
July 1, 1998 through September 30, 1998 was recorded on a retrospective basis
resulting in the deferral of a gain totaling $2.0 million at December 31, 1998.
We amortized $400,000 of the deferred gain as a reduction of claim and claim
settlement expenses in 2000 and $740,000 in 1999 resulting in an un-amortized
deferred gain of $849,000 at December 31, 2000. The deferred gain is being
amortized into income using the effective interest rate inherent in the amounts
paid to the reinsurer and the estimated timing and amounts of recoveries from
the reinsurer. Activity occurring on or after October 1, 1998 is recorded
prospectively. This contract was terminated effective December 31, 2000;
however the policy remains effective in 2001 for policies in force at December
31, 2000 through expiration, not to exceed fifteen months after the effective
termination date. Policies written or renewing in 2001 will not be covered
under this lower level excess of loss reinsurance policy.

Reinsurance contracts do not relieve us from our obligations to
policyholders. We expect reinsurers to which we have ceded reinsurance to
honor their obligations. Failure of these reinsurers to honor their
obligations could result in losses to us. We do not anticipate any such losses
and accordingly, no provision for amounts deemed uncollectible are included in
our financial statements. We attempt to minimize our exposure to significant
losses from reinsurer insolvency by monitoring the financial condition of our
reinsurers. The reinsurance recoverable on unpaid claim and claim settlement
expenses associated with reinsurers are as follows (000s):

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|                                                                    |                                                                       |   |        |        |      |   |        |        | 
|------------------------------------------------------------------- | --------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                                                    |                                                                       |   | 2000   |        | 1999
|                                                                    |                                                                       |   |        |        |      |   |        |       
|Excess of loss reinsurance through various reinsurers               |                                                                       | $ | 61,223 |        |      | $ | 40,830 |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Quota-share reinsurance for 1992 to 1994 through a single reinsurer |                                                                       |   | 622    |        |      |   | 349    |       
|                                                                    |                                                                       |   |        |        |      |   |        |       
|                                                                    | Reinsurance recoverable on unpaid claim and claim settlement expenses |   | $      | 61,845 |      |   | $      | 41,179 | 
|                                                                    |                                                                       |   |        |        |      |   |        |       

The effect of ceded reinsurance on premiums written and claim and claim
settlement expenses are as follows (000s):

|                                     |        |                                         |   |         |        |      |   |         |        |  |   |         |        | 
|------------------------------------ | ------ | --------------------------------------- | - | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                     |        |                                         |   | 2000    |        | 1999 |   | 1998   
|                                     |        |                                         |   |         |        |      |   |         |        |  |   |        
|Premiums written:                   
|                                    
|                                    
|                                    
|                                    
|                                     | Direct |                                         | $ | 95,566  |        |      | $ | 88,966  |        |  | $ | 89,328  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Ceded  |                                         |   | (17,724 | )      |      |   | (18,008 | )      |  |   | (8,489  | )     
|                                     |        |                                         |   |         |        |      |   |         |        |  |   |        
|                                     |        | Net premiums written                    |   | $       | 77,842 |      |   | $       | 70,958 |  |   | $       | 80,839 | 
|                                     |        |                                         |   |         |        |      |   |         |        |  |   |        
|Claim and claim settlement expenses:
|                                    
|                                    
|                                    
|                                    
|                                     | Direct |                                         | $ | 105,133 |        |      | $ | 67,465  |        |  | $ | 90,011  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Ceded  |                                         |   | (32,704 | )      |      |   | (24,142 | )      |  |   | (14,717 | )     
|                                     |        |                                         |   |         |        |      |   |         |        |  |   |        
|                                     |        | Net claim and claim settlement expenses |   | $       | 72,429 |      |   | $       | 43,323 |  |   | $       | 75,294 | 
|                                     |        |                                         |   |         |        |      |   |         |        |  |   |        

The reinsurance recoverable on paid claim and claim settlement expenses
consists primarily of receivables from paid claim and claim settlement expenses
at December 31, 2000 and 1999.

Note 5  UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES

As described in Note 1, we establish unpaid claim and claim settlement expense
reserves on reported and unreported claims for insured losses. The
establishment of appropriate reserves is an inherently uncertain process.
Furthermore, estimating ultimate reserves is difficult due to our relatively
limited historical claim data and small claim population. Estimates are
further complicated by the extended periods of time, which elapse between the
date the loss occurs and the date the loss is reported and ultimately settled.
Reserve estimates are regularly reviewed and updated, using the most current
information available. Any resulting adjustments, which may be material, are
reflected in current operations.

The following table represents a reconciliation of beginning and ending
unpaid claim and claim settlement expense reserves for each of the last three
years (000s):

|                           |                                                         |                |         |         |        |      |        |         |        |   |        |        |        | 
|-------------------------- | ------------------------------------------------------- | -------------- | ------- | ------- | ------ | ---- | ------ | ------- | ------ | - | ------ | ------ | ------ | 
|                           |                                                         |                |         | 2000    |        | 1999 |        | 1998   
|                           |                                                         |                |         |         |        |      |        |         |        |   |        |       
|Balance at January 1       |                                                         | $              | 99,831  |         |        | $    | 97,269 |         |        | $ | 61,069 |       
|                          
|                          
|                          
|                          
|                           | Less reinsurance recoverables                           |                |         | (41,179 | )      |      |        | (21,403 | )      |   |        | (5,374 | )     
|                          
|                          
|                          
|                          
|                           | Plus deferred gain on retrospective reinsurance         |                |         | 1,249   |        |      |        | 1,989   |        |   |        |       |       
|                           |                                                         |                |         |         |        |      |        |         |        |   |        |       
|Net balance at January 1   |                                                         |                | 59,901  |         |        |      | 77,855 |         |        |   | 55,695 |       
|                          
|                          
|                          
|                          
|Incurred related to:      
|                          
|                          
|                          
|                          
|                           | Current year                                            |                |         | 56,900  |        |      |        | 52,176  |        |   |        | 64,315 |       
|                          
|                          
|                          
|                          
|                           | Prior years                                             |                |         | 15,929  |        |      |        | (8,113  | )      |   |        | 10,979 |       
|                          
|                          
|                          
|                          
|                           | Amortization of deferred retrospective reinsurance gain |                |         | (400    | )      |      |        | (740    | )      |   |        |       |       
|                           |                                                         |                |         |         |        |      |        |         |        |   |        |       
|                           |                                                         | Total incurred |         |         | 72,429 |      |        |         | 43,323 |   |        |        | 75,294 | 
|                          
|                          
|                          
|                          
|Paid related to:          
|                          
|                          
|                          
|                          
|                           | Current year                                            |                |         | 28,154  |        |      |        | 26,897  |        |   |        | 25,397 |       
|                          
|                          
|                          
|                          
|                           | Prior years                                             |                |         | 36,331  |        |      |        | 34,380  |        |   |        | 27,737 |       
|                           |                                                         |                |         |         |        |      |        |         |        |   |        |       
|                           |                                                         | Total paid     |         |         | 64,485 |      |        |         | 61,277 |   |        |        | 53,134 | 
|                           |                                                         |                |         |         |        |      |        |         |        |   |        |       
|Net balance at December 31 |                                                         |                | 67,845  |         |        |      | 59,901 |         |        |   | 77,855 |       
|                          
|                          
|                          
|                          
|                           | Plus reinsurance recoverables                           |                |         | 61,845  |        |      |        | 41,179  |        |   |        | 21,403 |       
|                          
|                          
|                          
|                          
|                           | Plus deferred gain on retrospective reinsurance         |                |         | (849    | )      |      |        | (1,249  | )      |   |        | (1,989 | )     
|                           |                                                         |                |         |         |        |      |        |         |        |   |        |       
|Balance at December 31     |                                                         | $              | 128,841 |         |        | $    | 99,831 |         |        | $ | 97,269 |       
|                           |                                                         |                |         |         |        |      |        |         |        |   |        |       

Changes in estimates of unpaid claim and claim settlement expenses for
prior years increased the provision for claim and claim settlement expenses by
$15,929,000 in 2000, decreased the provision for claim and claim settlement
expenses by $8,113,000 in 1999 and increased the provision for claim and claim
settlement expenses by $10,979,000 in 1998.

34



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##### Table of Contents



Note 6  NOTES PAYABLE

In March 2000, we borrowed $8,000,000 under a term loan agreement to fund the repurchase of
common stock from certain shareholders of the company and simultaneously
entered into a $2,000,000 revolving credit facility to be used for general
corporate purposes. We paid $1,000,000 in principal on the term loan in 2000.
The term loan accrues interest, payable quarterly. We may elect to pay an
adjusted LIBOR or bank reference rate on the term loan (adjusted LIBOR was
9.34% at December 31, 2000).

At December 31, 2000, we failed to meet certain financial covenants
related to the term loan and credit facility. The term loan and revolving
credit facility agreement was amended in March 2001. Under the amendment, term
loan principal payments were accelerated and the revolving credit facility was
terminated in return for waivers of and amendments to the financial covenants
under the term loan agreement. As a result, we paid an additional $1,000,000
in principal on January 31, 2001. We believe that we will be in compliance
with the amended financial covenants throughout 2001. No funds were
outstanding under the revolving credit facility during 2000.

The amended term loan requires principal payments as follows (000s):

|             |  |   |       | 
|------------ |  | - | ----- | 
|December 31,
|2001         |  | $ | 2,000 | 
|            
|            
|            
|            
|2002         |  |   | 2,400 | 
|            
|            
|            
|            
|2003         |  |   | 2,600 | 

The amended term loan is collateralized by the stock of ACIC and is
subject to restrictive financial covenants that require maintaining minimum
financial ratios, including (i) debt coverage, (ii) net worth, (iii)
statutory surplus, (iv) net earnings, (v) risk based capital, (vii) A.M. Best
Rating, and (viii) investment grade ratios. The agreement also restricts
dividends, purchases, and redemptions or retirements of common stock.

We paid our outstanding unsecured Senior Notes in full in December 1999.
Interest was paid monthly at 9.5% in 1999 and at rates ranging from 9.25% to
9.5% in 1998.

Note 7  INCOME TAXES

We compute our deferred tax provision under the liability method, whereby
deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using presently enacted tax rates.
Deferred tax assets are recognized for tax credit and net operating loss
carry-forwards, reduced by a valuation allowance which is established when it
is more likely than not that some portion or all of the deferred tax assets
will not be realized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Income tax (benefit) expense consists of the following (000s):

|          |         |                                      |   |        |        |      |   |       |       |  |   |        |        |  
|--------- | ------- | ------------------------------------ | - | ------ | ------ | ---- | - | ----- | ----- |  | - | ------ | ------ | -
|          |         |                                      |   | 2000   |        | 1999 |   | 1998 
|          |         |                                      |   |        |        |      |   |       |       |  |   |       
|Current: 
|         
|         
|         
|         
|          | Federal |                                      | $ | (320   | )      |      | $ | 1,056 |       |  | $ | (1,568 | )     
|         
|         
|         
|         
|          | State   |                                      |   | 100    |        |      |   | 104   |       |  |   | (143   | )     
|          |         |                                      |   |        |        |      |   |       |       |  |   |       
|          |         | Total current tax (benefit) expense  |   |        | (220   | )    |   |       | 1,160 |  |   |        | (1,711 | )
|         
|         
|         
|         
|Deferred:
|         
|         
|         
|         
|          | Federal |                                      |   | (5,558 | )      |      |   | 1,031 |       |  |   | (2,218 | )     
|         
|         
|         
|         
|          | State   |                                      |   | 39     |        |      |   | (267  | )     |  |   | (21    | )     
|          |         |                                      |   |        |        |      |   |       |       |  |   |       
|          |         | Total deferred tax (benefit) expense |   |        | (5,519 | )    |   |       | 764   |  |   |        | (2,239 | )
|          |         |                                      |   |        |        |      |   |       |       |  |   |       
|          |         | Income tax (benefit) expense         |   | $      | (5,739 | )    |   | $     | 1,924 |  |   | $      | (3,950 | )
|          |         |                                      |   |        |        |      |   |       |       |  |   |       

Our income tax (benefit) expense differs from the federal statutory rate as follows (000s):

|                                                                     |                                                       |                              |        |      |        |      |       |      |       |   |        |      |        |  
|-------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------- | ------ | ---- | ------ | ---- | ----- | ---- | ----- | - | ------ | ---- | ------ | -
|                                                                     |                                                       |                              |        | 2000 |        | 1999 |       | 1998
|                                                                     |                                                       |                              |        |      |        |      |       |      |       |   |        |     
|Federal income tax (benefit) expense at 35%                          |                                                       | $                            | (5,406 | )    |        | $    | 2,832 |      |       | $ | (3,861 | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Increase (reduction) in income tax (benefit) expense resulting from:
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | State income taxes, net of federal income tax benefit |                              |        | 58   |        |      |       | 23   |       |   |        | 8    |       
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Tax-exempt investment income                          |                              |        | (814 | )      |      |       | (930 | )     |   |        | (486 | )     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Prior year tax return adjustments                     |                              |        |     |        |      |       |     |       |   |        | 301  |       
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Other                                                 |                              |        | 423  |        |      |       | (1   | )     |   |        | 88   |       
|                                                                     |                                                       |                              |        |      |        |      |       |      |       |   |        |     
|                                                                     |                                                       | Income tax (benefit) expense |        | $    | (5,739 | )    |       | $    | 1,924 |   |        | $    | (3,950 | )
|                                                                     |                                                       |                              |        |      |        |      |       |      |       |   |        |     

35



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##### Table of Contents



Differences between the tax basis of assets and liabilities and their
reported amounts in the Consolidated Financial Statements that will result in
taxable or deductible amounts in future years are called temporary differences.
The tax effects of temporary differences that gave rise to net deferred tax
asset balances, included within other assets, are as follows (000s):

|                                           |                          |   |       |        |      |   |       |       |  
|------------------------------------------ | ------------------------ | - | ----- | ------ | ---- | - | ----- | ----- | -
|                                           |                          |   | 2000  |        | 1999
|                                           |                          |   |       |        |      |   |       |      
|Unpaid claim and claim settlement expenses |                          | $ | 4,465 |        |      | $ | 3,739 |      
|                                          
|                                          
|                                          
|                                          
|Net operating loss carry-forward           |                          |   | 4,148 |        |      |   |      |      
|                                          
|                                          
|                                          
|                                          
|Unrealized loss on securities              |                          |   |      |        |      |   | 1,452 |      
|                                          
|                                          
|                                          
|                                          
|Accrued second injury funds                |                          |   | 1,466 |        |      |   | 1,165 |      
|                                          
|                                          
|                                          
|                                          
|Unearned premiums                          |                          |   | 1,309 |        |      |   | 894   |      
|                                          
|                                          
|                                          
|                                          
|Retrospective reinsurance                  |                          |   | 297   |        |      |   | 437   |      
|                                          
|                                          
|                                          
|                                          
|AMT credit carry-forward                   |                          |   | 56    |        |      |   | 280   |      
|                                          
|                                          
|                                          
|                                          
|Other                                      |                          |   | 504   |        |      |   | 305   |      
|                                           |                          |   |       |        |      |   |       |      
|                                           | Deferred tax assets      |   |       | 12,245 |      |   |       | 8,272 |  
|                                          
|                                          
|                                          
|                                          
|Unrealized gain on securities              |                          |   | (105  | )      |      |   |      |      
|                                          
|                                          
|                                          
|                                          
|Deferred policy acquisition costs          |                          |   | (473  | )      |      |   | (521  | )    
|                                          
|                                          
|                                          
|                                          
|Depreciation                               |                          |   | (408  | )      |      |   | (454  | )    
|                                           |                          |   |       |        |      |   |       |      
|                                           | Deferred tax liabilities |   |       | (986   | )    |   |       | (975  | )
|                                           |                          |   |       |        |      |   |       |      
|                                           | Net deferred tax assets  |   | $     | 11,259 |      |   | $     | 7,297 |  
|                                           |                          |   |       |        |      |   |       |      

We have net operating loss carry-forwards available totaling approximately
$12.2 million, which expire in 2020. No valuation allowance was provided
against the deferred tax assets recorded in 2000 or 1999, as we expect to
generate sufficient taxable income in the future to offset reversing temporary
differences.

Income taxes receivable at December 31, 2000 and 1999 were approximately
$1,715,000 and $674,000, respectively.

Note 8  EMPLOYEE BENEFITS AND PLANS

Stock Based CompensationWe account for our stock-based compensation plans,
the RTW, Inc. 1995 Employee Stock Purchase Plan and Trust (ESPP) and the 1994
Stock Plan, using Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related Interpretations. Under
APB 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of our stock at the date of the grant over the
amount an employee must pay to acquire the stock.

1995 Employee Stock Purchase PlanThe ESPP provides employees the opportunity
to purchase shares of our stock at 85% of the fair value based on the lesser of
the beginning or ending share price for each plan year as set forth in the
plan. In May 1998, the shares reserved for distribution under the plan were
increased from 75,000 to 200,000 shares. The ESPP terminates in ten years and
will be carried out in phases, each consisting of one year or a different
period of time approved by the Board of Directors. Any employee completing two
weeks of service prior to commencing a phase of the plan may participate.
Employees may elect to contribute from $10 to 10% of monthly salary to the plan
through payroll withholdings. The following summarizes shares purchased and
purchase prices for each phase in the most recent three years completed through
2000:

|                                          |  |           |        |          |  |   |      | 
|----------------------------------------- |  | --------- | ------ | -------- |  | - | ---- | 
|                                          |  | Shares    |        | Purchase
|Phase:                                    |  | Purchased |        | Price   
|                                          |  |           |        |         
|Beginning April 1997, expiring April 1998 |  |           | 28,139 |          |  | $ | 7.07 | 
|                                         
|                                         
|                                         
|                                         
|Beginning April 1998, expiring April 1999 |  |           | 27,143 |          |  | $ | 3.88 | 
|                                         
|                                         
|                                         
|                                         
|Beginning April 1999, expiring April 2000 |  |           | 39,154 |          |  | $ | 3.19 | 

The fifth one-year phase began in April 2000 and expires in April 2001.

Our liability for employee contributions withheld at December 31, 2000 and
1999 for the purchase of shares in April 2001 and April 2000 under the ESPP was
$72,000 and $145,000, respectively.

1994 Stock PlanThe 1994 Stock Plan provides for awards of qualified and
non-qualified stock options. In July 1998, the Board of Directors increased
the shares reserved for distribution under the plan to 2,000,000. Option
price, option term, vesting provisions and other limits and restrictions are
determined at the time of grant by the
Board of Directors or, if established, by a separate committee. The exercise
price for all options granted was the market price of the common stock at the
date of grant.

36



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##### Table of Contents



Options granted, exercised, canceled and outstanding under the 1994 Stock Plan are as follows:

|                           |           |  |           |          |               |   |          |       |          |  |         |         |          |   |      |      | 
|-------------------------- | --------- |  | --------- | -------- | ------------- | - | -------- | ----- | -------- |  | ------- | ------- | -------- | - | ---- | ---- | 
|                           |           |  | Qualified |          | Non-Qualified
|                           |           |  |           |          |              
|                           |           |  |           |          |               |   | Weighted |       |          |  |         |         | Weighted
|                           |           |  |           |          |               |   | Average  |       |          |  |         |         | Average 
|                           |           |  | Option    |          | Exercise      |   | Option   |       | Exercise
|                           |           |  | Shares    |          | Price         |   | Shares   |       | Price   
|                           |           |  |           |          |               |   |          |       |         
|Balance, January 1, 1998   |           |  | 319,250   |          |               | $ | 10.21    |       |          |  | 513,750 |         |          | $ | 6.90 |     
|                          
|                          
|                          
|                          
|                           | Granted   |  |           | 974,122  |               |   |          | 6.53  |          |  |         |        |          |   |      |     | 
|                          
|                          
|                          
|                          
|                           | Exercised |  |           | (37,650  | )             |   |          | 2.69  |          |  |         |        |          |   |      |     | 
|                          
|                          
|                          
|                          
|                           | Canceled  |  |           | (151,806 | )             |   |          | 12.22 |          |  |         | (42,855 | )        |   |      | 6.75 | 
|                           |           |  |           |          |               |   |          |       |          |  |         |         |          |   |      |     
|Balance, December 31, 1998 |           |  | 1,103,916 |          |               |   | 6.94     |       |          |  | 470,895 |         |          |   | 6.91 |     
|                          
|                          
|                          
|                          
|                           | Granted   |  |           | 187,672  |               |   |          | 6.28  |          |  |         | 55,556  |          |   |      | 4.50 | 
|                          
|                          
|                          
|                          
|                           | Exercised |  |           | (30,000  | )             |   |          | 2.67  |          |  |         |        |          |   |      |     | 
|                          
|                          
|                          
|                          
|                           | Canceled  |  |           | (238,052 | )             |   |          | 8.08  |          |  |         |        |          |   |      |     | 
|                           |           |  |           |          |               |   |          |       |          |  |         |         |          |   |      |     
|Balance, December 31, 1999 |           |  | 1,023,536 |          |               |   | 6.68     |       |          |  | 526,451 |         |          |   | 6.66 |     
|                          
|                          
|                          
|                          
|                           | Granted   |  |           | 155,500  |               |   |          | 5.13  |          |  |         |        |          |   |      |     | 
|                          
|                          
|                          
|                          
|                           | Canceled  |  |           | (537,583 | )             |   |          | 6.71  |          |  |         |        |          |   |      |     | 
|                           |           |  |           |          |               |   |          |       |          |  |         |         |          |   |      |     
|Balance, December 31, 2000 |           |  | 641,453   |          |               | $ | 6.28     |       |          |  | 526,451 |         |          | $ | 6.66 |     
|                           |           |  |           |          |               |   |          |       |          |  |         |         |          |   |      |     

Each of the qualified stock options expires ten years from the date of
grant and substantially all are subject to continued employment with us. Each
of the non-qualified options expires ten years from the date of grant. Certain
of the options are subject to vesting provisions that restrict exercise of the
option.

The following table summarizes the options outstanding and exercisable at December 31, 2000:

|                             |                   |                 |  |                     |         |                     |  |                  |          |         |   |          |      |          |  |         |         |  |   |       |      | 
|---------------------------- | ----------------- | --------------- |  | ------------------- | ------- | ------------------- |  | ---------------- | -------- | ------- | - | -------- | ---- | -------- |  | ------- | ------- |  | - | ----- | ---- | 
|                             |                   |                 |  | Options Outstanding |         | Options Exercisable
|                             |                   |                 |  |                     |         |                    
|                             |                   |                 |  |                     |         |                     |  | Weighted Average |          |         |   |          |      | Weighted
|                             |                   |                 |  | Number              |         |                     |  | Number           |          | Average
|                             |                   |                 |  | of                  |         | Contractual         |  | Exercise         |          | of      |   | Exercise
|Exercise Price Range         |                   | Options         |  | Life                |         | Price               |  | Options          |          | Price  
|                             |                   |                 |  |                     |         |                     |  |                  |          |        
|Qualified stock options:    
|                            
|                            
|                            
|                            
|                             | $  4.38 - $  5.44 |                 |  | 340,944             |         |                     |  | 8.6years         |          |         | $ | 4.85     |      |          |  | 85,999  |         |  | $ | 4.57  |     
|                            
|                            
|                            
|                            
|                             |                   | 7.00 -     9.00 |  |                     | 280,259 |                     |  |                  | 7.2years |         |   |          | 7.55 |          |  |         | 211,468 |  |   |       | 7.63 | 
|                            
|                            
|                            
|                            
|                             | 10.75 -   19.33   |                 |  | 20,250              |         |                     |  | 5.8years         |          |         |   | 12.78    |      |          |  | 13,500  |         |  |   | 13.31 |     
|                             |                   |                 |  |                     |         |                     |  |                  |          |         |   |          |      |          |  |         |         |  |   |      
|                             | $  4.38 - $19.33  |                 |  | 641,453             |         |                     |  | 7.9years         |          |         | $ | 6.28     |      |          |  | 310,967 |         |  | $ | 7.03  |     
|                             |                   |                 |  |                     |         |                     |  |                  |          |         |   |          |      |          |  |         |         |  |   |      
|Non-qualified stock options:
|                            
|                            
|                            
|                            
|                             | $  2.67 - $  4.50 |                 |  | 59,306              |         |                     |  | 8.0years         |          |         | $ | 4.38     |      |          |  | 37,084  |         |  | $ | 4.31  |     
|                            
|                            
|                            
|                            
|                             |                   | 6.75 -   15.88  |  |                     | 467,145 |                     |  |                  | 6.9years |         |   |          | 6.95 |          |  |         | 467,145 |  |   |       | 6.95 | 
|                             |                   |                 |  |                     |         |                     |  |                  |          |         |   |          |      |          |  |         |         |  |   |      
|                             | $  2.67 - $15.88  |                 |  | 526,451             |         |                     |  | 7.0years         |          |         | $ | 6.66     |      |          |  | 504,229 |         |  | $ | 6.75  |     
|                             |                   |                 |  |                     |         |                     |  |                  |          |         |   |          |      |          |  |         |         |  |   |      

Non-Qualified Common Stock Options-Certain non-qualified options were issued
prior to the onset of the 1994 Stock Plan. Non-qualified options exercised and
outstanding are as follows:

|                                    |                   |  |         |          |          |   |          |      |  |   |          |      | 
|----------------------------------- | ----------------- |  | ------- | -------- | -------- | - | -------- | ---- |  | - | -------- | ---- | 
|                                    |                   |  |         |          |          |   |          |      |  |   | Weighted
|                                    |                   |  |         |          |          |   |          |      |  |   | Average 
|                                    |                   |  | Option  |          | Exercise |   | Exercise
|                                    |                   |  | Shares  |          | Price    |   | Price   
|                                    |                   |  |         |          |          |   |         
|Balance, January 1, 1998            |                   |  | 363,500 |          |          | $ | 2.00     |      |  | $ | 2.00     |     
|                                   
|                                   
|                                   
|                                   
|                                    | Exercised in 1998 |  |         | (43,500  | )        |   |          | 2.00 |  |   |          | 2.00 | 
|                                    |                   |  |         |          |          |   |          |      |  |   |          |     
|Balance, December 31, 1998          |                   |  | 320,000 |          |          |   | 2.00     |      |  |   | 2.00     |     
|                                   
|                                   
|                                   
|                                   
|                                    | Exercised in 1999 |  |         | (320,000 | )        |   |          | 2.00 |  |   |          | 2.00 | 
|                                    |                   |  |         |          |          |   |          |      |  |   |          |     
|Balance, December 31, 1999 and 2000 |                   |  |        |          |          |   |         |      |  |   |         |     
|                                    |                   |  |         |          |          |   |          |      |  |   |          |     

We are permitted a tax deduction equal to the difference between the
non-qualified option exercise price and the fair value on the option exercise
date. Upon exercise, the proceeds and the amount of the deduction are recorded
to common stock. In 1999 and 1998, we recorded reductions of income taxes
payable and increased common stock by $532,000 and $80,000, respectively, to
reflect the exercises.

37



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##### Table of Contents



Pro Forma Information-Had we calculated compensation expense for our option
grants under the 1994 Stock Plan and stock issuances under the ESPP based on
the fair value method described in SFAS No. 123, Accounting for Stock-Based
Compensation, our net income (loss) and basic and dilutive net income (loss)
per share would approximate the following pro forma amounts (in 000s, except
per share data):

|                                      |             |  |      |         |      |  |      |       |  |  |   |        |  
|------------------------------------- | ----------- |  | ---- | ------- | ---- |  | ---- | ----- |  |  | - | ------ | -
|                                      |             |  | 2000 |         | 1999 |  | 1998
|                                      |             |  |      |         |      |  |      |       |  |  |  
|Net (loss) income:                   
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |  | $    | (9,708  | )    |  | $    | 6,167 |  |  | $ | (7,081 | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |  | $    | (10,507 | )    |  | $    | 5,060 |  |  | $ | (7,995 | )
|                                     
|                                     
|                                     
|                                     
|Basic (loss) net income per share:   
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |  | $    | (0.89   | )    |  | $    | 0.50  |  |  | $ | (0.59  | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |  | $    | (0.97   | )    |  | $    | 0.41  |  |  | $ | (0.67  | )
|                                     
|                                     
|                                     
|                                     
|Dilutive (loss) net income per share:
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |  | $    | (0.89   | )    |  | $    | 0.50  |  |  | $ | (0.59  | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |  | $    | (0.97   | )    |  | $    | 0.41  |  |  | $ | (0.67  | )

The weighted average fair value of options granted under the ESPP and 1994
Stock Plan during 2000, 1999 and 1998 is estimated at $2.24, $2.53 and $3.14,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: no dividend yield; volatility of 64.6% in
2000, 64.3% in 1999 and 71.0% in 1998; risk-free interest rates ranging from
4.51% to 7.70%; and an expected life of 1 to 5 years.

Employee Contract-We entered into a three-year employment agreement with our
President and Chief Executive Officer beginning January 15, 1998. Under this
agreement, he receives a base salary of $400,000, subject to review annually
for increase by our Board of Directors. In addition to base salary, he is
eligible for bonuses, reimbursements and fringe benefits including a $1,000,000
term life insurance policy and an additional payment sufficient to reimburse
him for a long-term disability policy paying monthly benefits of $5,000. We
also provide him with health, dental, life and disability insurance consistent
with that provided to other officers and employees. Under this agreement, we
have agreed to indemnify him for his actions on behalf of us. In October 2000,
we entered into a supplemental agreement with him under which he agreed to
continue to serve in his current capacities until June 30, 2001 and we agreed
to pay him stay bonuses of $200,000 on January 15, 2001 and $100,000 on June
30, 2001.

Combined Retirement Plan- In January 1998, we combined our 401(K) Retirement
Plan and Employee Stock Ownership Plan (ESOP) into a single retirement plan,
the KSOP. The KSOP retains the features of each separate component except for
eligibility and vesting provisions. Under the plan, employees become eligible
to participate in the plan on the first day of the month after beginning
employment and attaining age 21.



| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 401(K) Retirement ComponentWe sponsor a defined contribution retirement
component under Section 401(K) of the Internal Revenue Code for eligible
employees. Our contributions are discretionary and are based on
contributions made by employees. Expense recognized for 2000, 1999 and 1998
was $152,000, $151,000 and $140,000, respectively.



| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Employee Stock Ownership ComponentWe maintain an ESOP for our qualified
employees. Our contributions are discretionary. We may contribute cash or
shares of our common stock. No expense was recorded in 2000, 1999 or 1998.

Other Employee Benefit Plans- We maintained bonus plans in 2000, 1999 and 1998
under which all employees, including officers, were eligible for a
bonus based, in part, on our operating results. These bonuses aggregated $951,000, $544,000 and
$267,000 in 2000, 1999 and 1998, respectively.

Note 9  SHAREHOLDERS EQUITY

On September 15, 1998, our Board of Directors approved a share repurchase
program authorizing the repurchase of up to $4,000,000 of RTW, Inc. common
stock. We may repurchase shares on the open market or through private
transactions depending upon market conditions and availability. Through
December 31, 2000 we had repurchased 659,500 shares for $2,660,000. We will
use the repurchased shares for employee stock option and purchase plans and
other corporate purposes.

On March 28, 2000, we repurchased 1,418,570 shares from a group consisting
of David C. Prosser, RTWs founder and a director, certain members of his
family, and J. Alexander Fjelstad, a former director and former
executive of RTW (together, the Prosser Selling Group). We paid $5.19
per share, as well as legal and other costs,

38



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##### Table of Contents



totaling approximately $7.7
million to repurchase the shares. After completing the transaction, the
combined ownership of Mr. Prosser, members of his family and Mr. Fjelstad was
reduced from approximately 52% to 46%.

In connection with the repurchase, Mr. Prosser retired from the Company,
resigned as Chairman and was paid $225,000 as a termination benefit. He is
expected to remain as a member of our Board of Directors. Additionally, at
closing, each member of the Prosser Selling Group entered into a two year
standstill and voting agreement under which each agreed, among other things,
not to acquire additional securities of RTW and not to initiate or support
certain initiatives designed to effect fundamental changes in RTW policy or
structure.

Shareholder Rights Plan-In April 1997, we adopted a shareholder rights plan
and declared a dividend of one right for each outstanding share of common stock
to shareholders of record at the close of business on June 30, 1997. The
rights become exercisable only after any person or group (the Acquiring
Person) becomes the beneficial owner of 15% or more of the voting power of our
common stock. Certain shares held by our former Chairman and his wife are
excluded from the computation for determining whether a person is an Acquiring
Person. Each right entitles its registered holder to purchase from us one
one-hundredth share of a new Series A Junior Participating Preferred Stock, no
par value, at a price of $85 per one one-hundredth share, subject to
adjustment. If any Acquiring Person acquires beneficial ownership of 15% or
more of our voting power, each right will entitle its holder (other than such
Acquiring Person) to purchase, at the then current purchase price of the right,
that number of shares of our common stock having a market value of two times
the purchase price of the right, subject to certain possible adjustments. In
addition, if we are acquired in a merger or other business combination
transaction, each right will entitle its holder to purchase, at the then
current purchase price of the right, that number of common shares of the
acquiring company having a market value of two times the purchase price of the
right. Following the acquisition of a beneficial ownership of 15% or more of
our outstanding common stock by any Acquiring Person and prior to an
acquisition by any Acquiring Person of 50% or more of our outstanding common
stock, our Board of Directors may exchange the outstanding rights (other than
rights owned by such Acquiring Person), in whole or in part, at an exchange
ratio of one share of common stock, or one one-hundredth share of Preferred
Stock (or equivalent securities) per right, subject to adjustment. We may
redeem the rights, in whole, at $.001 per right, at any time prior to an
acquisition by any Acquiring Person of 15% or more of our outstanding common
stock and prior to the expiration of the rights. The rights expire on April
17, 2007, unless extended or earlier redeemed by us.

Dividend Restrictions-Dividends are paid as determined by our Board of
Directors. No dividends have ever been paid by us.

Our ability to pay cash dividends to shareholders may depend upon the
amount of dividends received from our insurance subsidiary. ACICs ability to
pay dividends is restricted by law or subject to approval of the insurance
regulatory authorities of Minnesota.

Under Minnesota insurance law regulating the payment of dividends by ACIC,
any such payments must be an amount deemed prudent by ACICs Board of Directors
and, unless otherwise approved by the Commissioner of the Minnesota Department
of Commerce (Commissioner), must be paid solely from the adjusted earned
surplus of ACIC. Adjusted earned surplus means the earned surplus as
determined in accordance with statutory accounting practices (unassigned
funds), less 25% of the amount of such earned surplus that is attributable to
unrealized capital gains. Further, without approval of the Commissioner, ACIC
may not pay a dividend in any calendar year which, when combined with dividends
paid in the preceding twelve months, exceeds the greater of (i) 10% of ACICs
statutory capital and surplus at the prior year end or (ii) 100% of ACICs
statutory net gain from operations (not including realized capital gains) for
the prior calendar year. For 2001, dividends in excess of $2,930,000 would
require prior consent of the Commissioner.

Statutory Surplus and Statutory Net Income (Loss)Our insurance subsidiary is
required to file financial statements with state regulatory agencies. The
accounting principles used to prepare the statutory financial statements follow
prescribed accounting practices that differ from GAAP. Statutory
policyholders surplus at December 31, 2000 and 1999, and statutory net (loss)
income for the years ended December 31, 2000, 1999 and 1998 are as follows
(000s):

|     |  |                |        |               |  |   |         |  
|---- |  | -------------- | ------ | ------------- |  | - | ------- | -
|     |  | Statutory      |        | Statutory Net
|     |  | Policyholders' |        | Income       
|     |  | Surplus        |        | (Loss)       
|     |  |                |        |              
|2000 |  | $              | 29,303 |               |  | $ | (16,600 | )
|    
|    
|    
|    
|1999 |  |                | 46,048 |               |  |   | 5,544   |  
|    
|    
|    
|    
|1998 |  |                |        |               |  |   | (6,767  | )

In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (the Codification). The
Codification is intended to standardize regulatory accounting and

39



---



##### Table of Contents



reporting to
state insurance departments and is effective January 1, 2001. Statutory
accounting principles, however, will continue to be established by individual
state laws and permitted practices. The state of Minnesota requires adoption
of the Codification for preparing statutory financial statements for financial
periods occurring on or after January 1, 2001. We estimate that adoption of
the Codification will increase our statutory capital and surplus by
approximately $2.9 million on January 1, 2001.

Note 10  COMMITMENTS AND CONTINGENCIES

Operating LeasesWe conduct our operations in leased office facilities under
operating lease agreements. The agreements provide for monthly base lease
payments plus contingent rentals based on an allocable portion of certain
operating expenses incurred by the lessor.

Future minimum (base) rental payments required under the leases, as of December 31, 2000, are as follows (000s):

|           |      |   |       |       | 
|---------- | ---- | - | ----- | ----- | 
|           | 2001 |   | $     | 1,364 | 
|          
|          
|          
|          
|           | 2002 |   |       | 1,078 | 
|          
|          
|          
|          
|           | 2003 |   |       | 432   | 
|          
|          
|          
|          
|           | 2004 |   |       | 443   | 
|          
|          
|          
|          
|           | 2005 |   |       | 311   | 
|          
|          
|          
|          
|Thereafter |      |   | 27    |      
|           |      |   |       |      
|           |      | $ | 3,655 |      
|           |      |   |       |      

Rent expense, including contingent rentals, was $2,118,000, $2,124,000 and
$2,181,000 for 2000, 1999 and 1998, respectively.

In the ordinary course of administering our workers compensation
management program, we are routinely involved in the adjudication of claims
resulting from workplace injuries. We are not involved in any legal or
administrative claims that we believe are likely to have a material adverse
effect our financial condition or results of operations.

In certain locations, we have an agreement under which another insurance
company writes policies on our behalf and cedes 100% of the risk to us through
a reinsurance treaty. In connection with this agreement, in February 2001 we
provided this insurer with an irrevocable letter of credit totaling $2,118,000
to indemnify them for incurred losses.

Note 11  ACCUMULATED OTHER COMPREHENSIVE INCOME

Our comprehensive (loss) income includes only unrealized gains and losses on
investments classified as available-for-sale. Changes in accumulated other
comprehensive (loss) income and other comprehensive (loss) income were as
follows (000s):

|                                                                 |                                                             |                                                    |                                                |       |       |       |        |        |        |        |       |       |       |     | 
|---------------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------- | ----- | ----- | ----- | ------ | ------ | ------ | ------ | ----- | ----- | ----- | --- | 
|                                                                 |                                                             |                                                    |                                                |       | 2000  |       | 1999   |        | 1998  
|                                                                 |                                                             |                                                    |                                                |       |       |       |        |        |        |        |       |      
|Accumulated other comprehensive (loss) income, beginning of year |                                                             | $                                                  | (2,818                                         | )     |       | $     | 1,759  |        |        | $      | 892   |      
|                                                                
|                                                                
|                                                                
|                                                                
|Changes in comprehensive (loss) income arising during the year: 
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Unrealized investment gains (losses)                        |                                                    |                                                | 3,972 |       |       |        | (6,893 | )      |        |       | 2,339 |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Less: Adjustment for net realized investment (losses) gains |                                                    |                                                | (607  | )     |       |        | 84     |        |        |       | 1,046 |      
|                                                                 |                                                             |                                                    |                                                |       |       |       |        |        |        |        |       |      
|                                                                 |                                                             | Change in net unrealized investment gains (losses) |                                                |       | 4,579 |       |        |        | (6,977 | )      |       |       | 1,293 |    
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                                                             | Income tax expense (benefit)                       |                                                |       | 1,557 |       |        |        | (2,400 | )      |       |       | 426   |    
|                                                                 |                                                             |                                                    |                                                |       |       |       |        |        |        |        |       |      
|                                                                 |                                                             |                                                    | Other comprehensive income (loss) for the year |       |       | 3,022 |        |        |        | (4,577 | )     |       |       | 867 | 
|                                                                 |                                                             |                                                    |                                                |       |       |       |        |        |        |        |       |      
|Accumulated other comprehensive income (loss), end of year       |                                                             | $                                                  | 204                                            |       |       | $     | (2,818 | )      |        | $      | 1,759 |      
|                                                                 |                                                             |                                                    |                                                |       |       |       |        |        |        |        |       |      

40



---



##### Table of Contents



Note 12  QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following tables present unaudited quarterly results of operations for the eight quarters ended December 31, 2000:

|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |        |        | 
|------------------------------- | ----------------------------------- | ------------------------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                |                                     |                                       |        | First   |        | Second  |        | Third   |        | Fourth 
|                                |                                     |                                       |        | Quarter |        | Quarter |        | Quarter |        | Quarter
|                                |                                     |                                       |        |         |        |         |        |         |        |        
|2000                            |                                     | (In thousands, except per share data)
|Premiums in force               |                                     | $                                     | 90,500 |         |        | $       | 88,600 |         |        | $       | 88,900 |        |        | $ | 99,400  |       
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|Revenues:                      
|                               
|                               
|                               
|                               
|                                | Gross premiums earned               |                                       | $      | 23,135  |        |         | $      | 25,222  |        |         | $      | 22,563 |        |   | $       | 24,958 |       
|                               
|                               
|                               
|                               
|                                | Premiums ceded                      |                                       |        | (4,478  | )      |         |        | (4,410  | )      |         |        | (4,309 | )      |   |         | (4,527 | )     
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|                                |                                     | Premiums earned                       |        |         | 18,657 |         |        |         | 20,812 |         |        |        | 18,254 |   |         |        | 20,431 | 
|                               
|                               
|                               
|                               
|                                | Investment income                   |                                       |        | 1,527   |        |         |        | 1,454   |        |         |        | 1,413  |        |   |         | 1,358  |       
|                               
|                               
|                               
|                               
|                                | Net realized investment losses      |                                       |        | (26     | )      |         |        | (536    | )      |         |        | (45    | )      |   |         |       |       
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|                                |                                     | Total revenues                        |        |         | 20,158 |         |        |         | 21,730 |         |        |        | 19,622 |   |         |        | 21,789 | 
|                               
|                               
|                               
|                               
|Expenses:                      
|                               
|                               
|                               
|                               
|                                | Claim and claim settlement expenses |                                       |        | 11,414  |        |         |        | 12,586  |        |         |        | 11,446 |        |   |         | 36,983 |       
|                               
|                               
|                               
|                               
|                                | Policy acquisition costs            |                                       |        | 3,629   |        |         |        | 3,645   |        |         |        | 2,911  |        |   |         | 3,952  |       
|                               
|                               
|                               
|                               
|                                | General and administrative expenses |                                       |        | 2,928   |        |         |        | 2,927   |        |         |        | 2,490  |        |   |         | 3,168  |       
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|                                |                                     | Total expenses                        |        |         | 17,971 |         |        |         | 19,158 |         |        |        | 16,847 |   |         |        | 44,103 | 
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|Income (loss) from operations   |                                     | $                                     | 2,187  |         |        | $       | 2,572  |         |        | $       | 2,775  |        |        | $ | (22,314 | )     
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|Net income (loss)               |                                     | $                                     | 1,597  |         |        | $       | 1,791  |         |        | $       | 1,879  |        |        | $ | (14,975 | )     
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|Basic income (loss) per share   |                                     | $                                     | 0.13   |         |        | $       | 0.17   |         |        | $       | 0.18   |        |        | $ | (1.45   | )     
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       
|Diluted income (loss) per share |                                     | $                                     | 0.13   |         |        | $       | 0.17   |         |        | $       | 0.18   |        |        | $ | (1.45   | )     
|                                |                                     |                                       |        |         |        |         |        |         |        |         |        |        |        |   |         |       

|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |        |        | 
|------------------------ | -------------------------------------- | ------------------------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                         |                                        |                                       |        | First   |        | Second  |        | Third   |        | Fourth 
|                         |                                        |                                       |        | Quarter |        | Quarter |        | Quarter |        | Quarter
|                         |                                        |                                       |        |         |        |         |        |         |        |        
|1999                     |                                        | (In thousands, except per share data)
|Premiums in force        |                                        | $                                     | 81,900 |         |        | $       | 85,900 |         |        | $       | 85,700 |        |        | $ | 87,200 |       
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|Revenues:               
|                        
|                        
|                        
|                        
|                         | Gross premiums earned                  |                                       | $      | 21,314  |        |         | $      | 21,798  |        |         | $      | 22,254 |        |   | $      | 23,860 |       
|                        
|                        
|                        
|                        
|                         | Premiums ceded                         |                                       |        | (4,160  | )      |         |        | (4,609  | )      |         |        | (4,682 | )      |   |        | (4,557 | )     
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|                         |                                        | Premiums earned                       |        |         | 17,154 |         |        |         | 17,189 |         |        |        | 17,572 |   |        |        | 19,303 | 
|                        
|                        
|                        
|                        
|                         | Investment income                      |                                       |        | 1,686   |        |         |        | 1,640   |        |         |        | 1,588  |        |   |        | 1,596  |       
|                        
|                        
|                        
|                        
|                         | Net realized investment gains (losses) |                                       |        | 37      |        |         |        | 65      |        |         |        | (18    | )      |   |        |       |       
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|                         |                                        | Total revenues                        |        |         | 18,877 |         |        |         | 18,894 |         |        |        | 19,142 |   |        |        | 20,899 | 
|                        
|                        
|                        
|                        
|Expenses:               
|                        
|                        
|                        
|                        
|                         | Claim and claim settlement expenses    |                                       |        | 10,804  |        |         |        | 10,448  |        |         |        | 11,082 |        |   |        | 10,989 |       
|                        
|                        
|                        
|                        
|                         | Policy acquisition costs               |                                       |        | 3,486   |        |         |        | 3,523   |        |         |        | 3,016  |        |   |        | 4,086  |       
|                        
|                        
|                        
|                        
|                         | General and administrative expenses    |                                       |        | 2,987   |        |         |        | 2,931   |        |         |        | 2,879  |        |   |        | 3,224  |       
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|                         |                                        | Total expenses                        |        |         | 17,277 |         |        |         | 16,902 |         |        |        | 16,977 |   |        |        | 18,299 | 
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|Income from operations   |                                        | $                                     | 1,600  |         |        | $       | 1,992  |         |        | $       | 2,165  |        |        | $ | 2,600  |       
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|Net income               |                                        | $                                     | 1,233  |         |        | $       | 1,487  |         |        | $       | 1,611  |        |        | $ | 1,836  |       
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|Basic income per share   |                                        | $                                     | 0.10   |         |        | $       | 0.12   |         |        | $       | 0.13   |        |        | $ | 0.15   |       
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       
|Diluted income per share |                                        | $                                     | 0.10   |         |        | $       | 0.12   |         |        | $       | 0.13   |        |        | $ | 0.15   |       
|                         |                                        |                                       |        |         |        |         |        |         |        |         |        |        |        |   |        |       

Quarterly revenues are affected by (i) premiums in force at the beginning of
the quarter, (ii) new policies written in the quarter, (iii) final audit
premiums recognized during the quarter, and (iv) our policy renewal rate in the
quarter. Historically, a majority of new policies written and policy renewals
have occurred in the first, second and fourth quarters.

41



---



##### Table of Contents






ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors is contained in the Section entitled
Election of Directors in the Companys 2001 Proxy Statement and is
incorporated herein by reference.

Information with respect to Executive Officers is included in PART I of this Report on Form 10-K.




ITEM 11. EXECUTIVE COMPENSATION

Information required under this item is contained in the Section
entitled Executive Compensation and Other Information in the Companys 2001
Proxy Statement and is incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required under this item is contained in the Section entitled
Security Ownership of Principal Shareholders and Management in the Companys
2001 Proxy Statement and is incorporated herein by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required under this item is contained in the Section entitled
Certain Transactions in the Companys 2001 Proxy Statement and is
incorporated herein by reference.

PART IV




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as Part of this Report



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Financial Statements. The following consolidated financial statements
of the Company are set forth on pages 25 through 41 of Part II, Item 8 of this Report.

|                                                                                             
|---------------------------------------------------------------------------------------------
|Independent Auditors Report                                                                 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated Balance Sheets December 31, 2000 and 1999                                      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated Statements of Operations Years Ended December 31, 2000, 1999 and 1998          
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated Statements of Shareholders Equity Years Ended December 31, 2000, 1999 and 1998
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998          
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998     



| |                                                                              
| | -----------------------------------------------------------------------------
| | (2) Financial Statement Schedules for the Three Years Ended December 31,
2000

|                                                                                               |  |     
|---------------------------------------------------------------------------------------------- |  | ----
|                                                                                               |  | Page
|                                                                                               |  |     
|Independent Auditors Report on Schedules for the Years Ended
December 31, 2000, 1999 and 1998 |  | S-1 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Schedule I  Summary of Investments                                                            |  | S-2 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Schedule II  Condensed Financial Information (Parent Company)                                 |  | S-3 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Schedule III  Supplemental Information Concerning Insurance Operations                        |  | S-7 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Schedule IV  Reinsurance                                                                      |  | S-8 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Schedule V  Valuation and Qualifying Accounts                                                 |  | S-9 



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules are omitted because they are not applicable or the
required information is presented in the Financial Statements or the notes
thereto.

42



---



##### Table of Contents



(b) Reports on Form 8-K



| |      
| | -----
| | None.

(c) Listing of Exhibits (*indicates compensatory plan)

|        |  |                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|3.1     |  | Amended Articles of Incorporation (1)                                                                                                        
|       
|       
|       
|       
|3.2     |  | Amended Bylaws (1)                                                                                                                           
|       
|       
|       
|       
|4.1     |  | Form of Rights Agreement dated April 17, 1997 between RTW, Inc. and
Norwest Bank Minnesota National Association (2)                          
|       
|       
|       
|       
|10.1*   |  | Employment Agreement Letter dated November 24, 1997 between RTW and Carl B. Lehmann (3)                                                      
|       
|       
|       
|       
|10.2*   |  | Non-Qualified Stock Option Agreement dated November 24, 1997 between RTW and Carl B. Lehmann (3)                                             
|       
|       
|       
|       
|10.3*   |  | Letter Agreement dated January 15, 1998 Amending the Non-Qualified Stock
Option Agreement between RTW and Carl B. Lehmann (3)                
|       
|       
|       
|       
|10.4*   |  | Incentive Stock Option Agreement dated January 15, 1998 between RTW and Carl B. Lehmann (3)                                                  
|       
|       
|       
|       
|10.5*   |  | Amended RTW, Inc. 1994 Stock Plan (4)                                                                                                        
|       
|       
|       
|       
|10.6    |  | Contract between RTW and ACIC dated January 1, 1992 (5)                                                                                      
|       
|       
|       
|       
|10.7    |  | Service Agreement between RTW and ACIC dated February 1, 1992 (5)                                                                            
|       
|       
|       
|       
|10.8*   |  | Description of the 2001 Performance Bonus Plan                                                                                               
|       
|       
|       
|       
|10.9    |  | Reinsurance contract between ACIC and First Excess and Reinsurance
Corporation (GE Reinsurance Corporation) effective July 1, 1998 (3)       
|       
|       
|       
|       
|10.10   |  | Endorsement No. 2 to the reinsurance contract between ACIC and General Reinsurance Corporation (3)                                           
|       
|       
|       
|       
|10.11   |  | Minnesota Workers Compensation Reinsurance Association reinsurance agreement (3)                                                            
|       
|       
|       
|       
|10.12   |  | Election form for Minnesota Workers Compensation Reinsurance Association reinsurance agreement for 2001                                     
|       
|       
|       
|       
|10.13   |  | Standstill and Voting Agreement dated March 6, 2000 between RTW, Inc. and Certain RTW, Inc. shareholders (6)                                 
|       
|       
|       
|       
|10.14   |  | Credit Agreement by and between RTW, Inc. and U.S. Bank National Association dated March 31, 2000.                                           
|       
|       
|       
|       
|10.14.1 |  | First Amendment to the Credit Agreement by and between RTW, Inc. and U.S. Bank National
Association dated May 4, 2000.                       
|       
|       
|       
|       
|10.14.2 |  | Second Amendment to the Credit Agreement by and between RTW, Inc. and U.S. Bank National Association
dated March 28, 2001.                   
|       
|       
|       
|       
|11      |  | Statement, re: Computation of Net Income (Loss) Per Share                                                                                    
|       
|       
|       
|       
|21      |  | Subsidiaries of the Registrant:
The Company has one wholly-owned subsidiary, American Compensation
Insurance Company, a Minnesota corporation
|       
|       
|       
|       
|23      |  | Consent of Deloitte & Touche LLP                                                                                                             
|       
|       
|       
|       
|24      |  | Power of Attorney, included in Signature page                                                                                                



---

|(1) |  | Incorporated by reference to the Companys Registration Statement on Form
S-1 (Reg. No. 33-89164).                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to the Companys Registration Statement on Form
8-A filed April 25, 1997 (File No. 0-25508).
|   
|   
|   
|   
|(3) |  | Incorporated by reference to the Companys 1998 Report on Form 10-K.                                                  
|   
|   
|   
|   
|(4) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 (Reg. No. 333-28585).                   
|   
|   
|   
|   
|(5) |  | Incorporated by reference to the Companys Registration Statement on Form
SB-2 (Reg. No. 33-2002C).                   
|   
|   
|   
|   
|(6) |  | Incorporated by reference to the Companys 1999 Report on Form 10-K.                                                  

43



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) or 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.

|      |                |  |  |  |  |                                                
|----- | -------------- |  |  |  |  | -----------------------------------------------
|      |                |  |  |  |  | RTW, INC.                                      
|Date: | March 28, 2001 |  |  |  |  | By /s/ Carl B. Lehmann                         
|      |               
|      |                |  |  |  |  | Carl B. Lehmann                                
|      |                |  |  |  |  | Chairman, President and Chief Executive Officer
|     
|     
|     
|     
|      |                |  |  |  |  | (Principal Executive Officer)                  

Signatures and Power of Attorney

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities, and on the dates, indicated. Each person whose signature
appears below constitutes and appoints Carl B. Lehmann and Jeffrey B. Murphy as
his true and lawful attorney-in-fact and agents, each acting alone, with full
power of substitutions and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with the exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission.

|               |  |                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------
|Date           |  | Signature and Title                                                                                            
|               |  |                                                                                                                
|March 28, 2001 |  | By /s/ Carl B. Lehmann                                                                                         
|               | 
|               |  | Carl B. Lehmann
Chairman, President and Chief Executive Officer
(Principal Executive Officer)                  
|              
|March 28, 2001 |  | By /s/ Jeffrey B. Murphy                                                                                       
|               | 
|               |  | Jeffrey B. Murphy
Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
|              
|March 28, 2001 |  | By /s/ David C. Prosser                                                                                        
|               |  | David C. Prosser
Director                                                                                      
|              
|March 28, 2001 |  | By /s/  David R. Hubers                                                                                        
|               |  | David R. Hubers
Director                                                                                       
|              
|March 28, 2001 |  | By /s/  Mark E. Hegman                                                                                         
|               |  | Mark E. Hegman
Director                                                                                        
|              
|March 28, 2001 |  | By /s/  Steven M. Rothschild                                                                                   
|               |  | Steven M. Rothschild
Director                                                                                  

44



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota

We have audited the consolidated financial statements of RTW, Inc. and
subsidiary (the Company) as of December 31, 2000 and 1999 and for each of the
three years in the period ended December 31, 2000, and have issued our report
thereon dated February 9, 2001 (March 28, 2001 as to Note 6). Our audits also included the consolidated
financial statement schedules listed in Item 14(a)(2) of this Report on Form
10-K. These consolidated financial statement schedules are the responsibility of
the Companys management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
February 9, 2001

S-1



---



##### Table of Contents






SCHEDULE I






|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |   |             |        | 
|------------------ | ------------------- | ------------------------------------------------------------- | ----------------- | ----- | --------- | ------ | ---- | - | -------------- | ------ |  | - | ----------- | ------ | 
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |   | Amount at  
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |   | which shown
|                   |                     |                                                               |                   |       | Amortized |        | Fair |   | in the balance
|Type of investment |                     | Cost                                                          |                   | Value |           | sheet 
|                   |                     |                                                               |                   |       |           |       
|Fixed maturities: 
|                  
|                  
|                  
|                  
|                   | Available-for-sale:
|                  
|                  
|                  
|                  
|                   |                     | Tax-exempt municipal securities                               |                   | $     | 55,450    |        |      | $ | 55,680         |        |  | $ | 55,680      |       
|                  
|                  
|                  
|                  
|                   |                     | Corporate securities                                          |                   |       | 10,514    |        |      |   | 10,315         |        |  |   | 10,315      |       
|                  
|                  
|                  
|                  
|                   |                     | Mortgage / asset-backed securities                            |                   |       | 15,989    |        |      |   | 15,941         |        |  |   | 15,941      |       
|                  
|                  
|                  
|                  
|                   |                     | United States government, government agencies and authorities |                   |       | 14,568    |        |      |   | 14,894         |        |  |   | 14,894      |       
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |  
|                   |                     |                                                               | Total Investments |       | $         | 96,521 |      |   | $              | 96,830 |  |   | $           | 96,830 | 
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |  

S-2



---



##### Table of Contents






SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant




|                                         |                   |   |        |        |  |      |        |       |  | 
|---------------------------------------- | ----------------- | - | ------ | ------ |  | ---- | ------ | ----- |  | 
|                                         |                   |   |        | 2000   |  | 1999
|                                         |                   |   |        |        |  |     
|ASSETS                                  
|                                        
|                                        
|                                        
|                                        
|Cash and cash equivalents                |                   | $ | 328    |        |  | $    | 2      |      
|                                        
|                                        
|                                        
|                                        
|Furniture and equipment, net             |                   |   | 3,590  |        |  |      | 3,881  |      
|                                        
|                                        
|                                        
|                                        
|Investment in and advances to subsidiary |                   |   | 44,757 |        |  |      | 53,279 |      
|                                        
|                                        
|                                        
|                                        
|Income tax receivable                    |                   |   |       |        |  |      | 22     |      
|                                        
|                                        
|                                        
|                                        
|Other assets                             |                   |   | 451    |        |  |      | 339    |      
|                                         |                   |   |        |        |  |      |        |      
|                                         |                   | $ | 49,126 |        |  | $    | 57,523 |      
|                                         |                   |   |        |        |  |      |        |      
|LIABILITIES AND SHAREHOLDERS EQUITY    
|                                        
|                                        
|                                        
|                                        
|Accrued expenses and other liabilities   |                   | $ | 3,112  |        |  | $    | 1,628  |      
|                                        
|                                        
|                                        
|                                        
|Deferred income taxes                    |                   |   | 278    |        |  |      | 330    |      
|                                        
|                                        
|                                        
|                                        
|Notes payable                            |                   |   | 7,000  |        |  |      |       |      
|                                         |                   |   |        |        |  |      |        |      
|                                         | Total liabilities |   |        | 10,390 |  |      |        | 1,958 | 
|                                        
|                                        
|                                        
|                                        
|Shareholders equity                     |                   |   | 38,736 |        |  |      | 55,565 |      
|                                         |                   |   |        |        |  |      |        |      
|                                         |                   | $ | 49,126 |        |  | $    | 57,523 |      
|                                         |                   |   |        |        |  |      |        |      

See notes to condensed financial statements.

S-3



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##### Table of Contents



SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant




|                                                                                              |                                     |                               |         |        |        |      |       |        |        |   |        |        |        |  
|--------------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------------- | ------- | ------ | ------ | ---- | ----- | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                              |                                     |                               |         | 2000   |        | 1999 |       | 1998  
|                                                                                              |                                     |                               |         |        |        |      |       |       
|Revenues:                                                                                    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Intercompany fee income             |                               | $       | 27,929 |        |      | $     | 25,762 |        |   | $      | 25,262 |       
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Investment income                   |                               |         | 24     |        |      |       | 15     |        |   |        | 28     |       
|                                                                                              |                                     |                               |         |        |        |      |       |        |        |   |        |       
|                                                                                              |                                     | Total revenues                |         |        | 27,953 |      |       |        | 25,777 |   |        |        | 25,290 |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Expenses:                                                                                    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | General and administrative expenses |                               |         | 24,180 |        |      |       | 25,044 |        |   |        | 25,526 |       
|                                                                                              |                                     |                               |         |        |        |      |       |        |        |   |        |       
|                                                                                              |                                     | Income (loss) from operations |         |        | 3,773  |      |       |        | 733    |   |        |        | (236   | )
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Interest expense                                                                              |                                     |                               | 667     |        |        |      | 266   |        |        |   | 546    |       
|                                                                                              |                                     |                               |         |        |        |      |       |        |        |   |        |       
|Income (loss) before income taxes and equity in
undistributed net income (loss) of subsidiary |                                     |                               | 3,106   |        |        |      | 467   |        |        |   | (782   | )     
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Income tax expense (benefit)        |                               |         | 1,367  |        |      |       | (246   | )      |   |        | (263   | )     
|                                                                                              |                                     |                               |         |        |        |      |       |        |        |   |        |       
|Income (loss) before equity in undistributed net (loss)
income of subsidiary                  |                                     |                               | 1,739   |        |        |      | 713   |        |        |   | (519   | )     
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Equity in undistributed net (loss) income of subsidiary                                       |                                     |                               | (11,447 | )      |        |      | 5,454 |        |        |   | (6,562 | )     
|                                                                                              |                                     |                               |         |        |        |      |       |        |        |   |        |       
|Net (loss) income                                                                             |                                     | $                             | (9,708  | )      |        | $    | 6,167 |        |        | $ | (7,081 | )     
|                                                                                              |                                     |                               |         |        |        |      |       |        |        |   |        |       

See notes to condensed financial statements.

S-4



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##### Table of Contents



SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant




|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |        |        |       |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------- | --------------------------------------------------- | ------ | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ------ | ----- | ------ | -
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        | 2000   |        | 1999   |       | 1998  
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |       
|CASH FLOWS FROM OPERATING ACTIVITIES:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Reconciliation of net (loss) income to net cash provided
by operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Net (loss) income                                                                        |                                             | $                                                   | (9,708 | )      |        | $      | 6,167 |        |        | $      | (7,081 | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                                                          | Depreciation and amortization               |                                                     |        | 1,295  |        |        |       | 1,296  |        |        |        | 1,267 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                                                          | Equity in net loss (income) from subsidiary |                                                     |        | 11,447 |        |        |       | (5,454 | )      |        |        | 6,562 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                                                          | Deferred income taxes                       |                                                     |        | (52    | )      |        |       | (16    | )      |        |        | 34    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                                                          | Changes in assets and liabilities:         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                                                          |                                             | Accrued expenses and other liabilities              |        |        | 1,483  |        |       |        | (141   | )      |        |       | 428    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                                                          |                                             | Other, net                                          |        |        | 2,892  |        |       |        | (4,190 | )      |        |       | 1,359  |  
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       
|                                                     |                                                                                   |                                                                                          |                                             | Net cash provided by (used in) operating activities |        |        | 7,357  |        |       |        | (2,338 | )      |        |       | 2,569  |  
|                                                    
|                                                    
|                                                    
|                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investment in and advances to subsidiary                                          |                                                                                          |                                             | (2,924                                              | )      |        |        | 3,843  |       |        |        | (448   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of furniture and equipment                                              |                                                                                          |                                             | (964                                                | )      |        |        | (573   | )     |        |        | (819   | )     
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       
|                                                     |                                                                                   |                                                                                          |                                             | Net cash (used in) provided by investing activities |        |        | (3,888 | )      |       |        | 3,270  |        |        |       | (1,267 | )
|                                                    
|                                                    
|                                                    
|                                                    
|CASH FLOWS FROM FINANCING ACTIVITIES:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from notes payable                                                       |                                                                                          |                                             | 8,000                                               |        |        |        |       |       |        |        |       |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments on notes payable                                                         |                                                                                          |                                             | (1,000                                              | )      |        |        | (2,500 | )     |        |        | (2,500 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Stock options and warrants exercised                                              |                                                                                          |                                             |                                                    |        |        |        | 1,252  |       |        |        | 333    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of common stock under ESPP                                               |                                                                                          |                                             | 125                                                 |        |        |        | 105    |       |        |        | 199    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales of common stock                                               |                                                                                          |                                             |                                                    |        |        |        |       |       |        |        | 30     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Retirement of common stock                                                        |                                                                                          |                                             | (10,268                                             | )      |        |        |       |       |        |        | (87    | )     
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       
|                                                     |                                                                                   |                                                                                          |                                             | Net cash (used in) financing activities             |        |        | (3,143 | )      |       |        | (1,143 | )      |        |       | (2,025 | )
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                   |                                                                                          | 326                                         |                                                     |        |        | (211   | )      |       |        | (723   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR       |                                                                                   |                                                                                          | 2                                           |                                                     |        |        | 213    |        |       |        | 936    |       
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       
|CASH AND CASH EQUIVALENTS AT END OF YEAR             |                                                                                   | $                                                                                        | 328                                         |                                                     |        | $      | 2      |        |       | $      | 213    |       
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid (received) during the year for:                                        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Interest                                                                                 |                                             | $                                                   | 458    |        |        | $      | 238   |        |        | $      | 546    |      
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       
|                                                     |                                                                                   | Income tax payments (refunds)                                                            |                                             | $                                                   | 73     |        |        | $      | (97   | )      |        | $      | 16     |      
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |        |        |        |        |       |        |        |       

See notes to condensed financial statements.

S-5



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##### Table of Contents



SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant




NOTE 1  ACCOUNTING POLICIES

The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the RTW, Inc.
2000 Annual Report.

NOTE 2  RELATED PARTY TRANSACTIONS

RTW provides American Compensation Insurance Company (ACIC) with management
services, including preparing and submitting filings, maintaining books and
records, collecting premiums, administering and adjudicating claims, and
performing other administrative services. RTW receives 10% of ACICs gross
premiums earned each month for these services, which amounted to $9,743,000,
$8,934,000 and $8,908,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. In addition, RTW receives 15% of ACICs gross premiums earned
for claims administration during the year in which the premiums are earned and
a total of 4% of gross premiums earned in subsequent years which amounted to
$18,142,000, $16,771,000 and $16,289,000 for the years ended December 31, 2000,
1999 and 1998, respectively.

RTW files a consolidated federal tax return with ACIC. Taxes are allocated
between the companies based on a tax allocation agreement under which
allocation is made primarily on a separate return basis for taxes incurred with
current credit for any net operating losses or other items utilized in the
consolidated tax return. This allocation is settled annually after completing
and filing the federal tax return.

Amounts due from (to) ACIC related to the above transactions are included in
the balance sheet account caption Investment in and advances to subsidiary
and totaled approximately $4,591,000 and ($1,259,000) at December 31, 2000 and
1999, respectively.

S-6



---



##### Table of Contents






SCHEDULE III

RTW, INC.




|     |  |             |       |              |  |              |         |          |  |          |       |            |  |   |        |              |  |   |        |            |  |   |       | 
|---- |  | ----------- | ----- | ------------ |  | ------------ | ------- | -------- |  | -------- | ----- | ---------- |  | - | ------ | ------------ |  | - | ------ | ---------- |  | - | ----- | 
|     |  |             |       |              |  | (Column C)  
|     |  |             |       |              |  | Reserves for |         |          |  |          |       |            |  |   |        |              |  |   |        | Investment
|     |  | Deferred    |       | unpaid claim |  | Discount,    |         |          |  |          |       |            |  |   |        | income and  
|     |  | policy      |       | and claim    |  | if any,      |         |          |  |          |       |            |  |   |        | net realized
|     |  | acquisition |       | settlement   |  | deducted in  |         | Unearned |  | Earned   |       | investment
|Year |  | costs       |       | expenses     |  | column C     |         | premiums |  | premiums |       | gains     
|     |  |             |       |              |  |              |         |          |  |          |       |           
|2000 |  | $           | 1,351 |              |  | $            | 128,841 |          |  | $        | 1,441 |            |  | $ | 12,455 |              |  | $ | 78,154 |            |  | $ | 5,077 | 
|    
|    
|    
|    
|1999 |  | $           | 1,487 |              |  | $            | 99,831  |          |  | $        | 2,873 |            |  | $ | 12,766 |              |  | $ | 71,218 |            |  | $ | 6,521 | 
|    
|    
|    
|    
|1998 |  | $           | 1,501 |              |  | $            | 97,269  |          |  | $        |      |            |  | $ | 13,027 |              |  | $ | 81,392 |            |  | $ | 8,732 | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|     |  |                      |        |              |  |             |        |            |  |          |        |  |  |   |        |  |  |   |        | 
|---- |  | -------------------- | ------ | ------------ |  | ----------- | ------ | ---------- |  | -------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|     |  | Claim and claim     
|     |  | settlement expenses  |        | Amortization
|     |  | incurred related to: |        | of deferred  |  | Paid claim 
|     |  |                      |        | policy       |  | and claim  
|     |  | Current              |        | Prior        |  | acquisition |        | settlement |  | Premiums
|Year |  | year                 |        | years        |  | costs       |        | expenses   |  | written 
|     |  |                      |        |              |  |             |        |            |  |         
|2000 |  | $                    | 56,900 |              |  | $           | 15,529 |            |  | $        | 14,137 |  |  | $ | 64,485 |  |  | $ | 77,842 | 
|    
|    
|    
|    
|1999 |  | $                    | 51,436 |              |  | $           | (8,113 | )          |  | $        | 14,111 |  |  | $ | 61,277 |  |  | $ | 70,958 | 
|    
|    
|    
|    
|1998 |  | $                    | 64,315 |              |  | $           | 10,979 |            |  | $        | 13,974 |  |  | $ | 53,134 |  |  | $ | 80,839 | 

S-7



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##### Table of Contents






SCHEDULE IV

RTW, INC.




|            |                                  |        |   |           |  |            |                 |        |            |        |   |   |  |  |           |        |  |  |  |      |  
|----------- | -------------------------------- | ------ | - | --------- |  | ---------- | --------------- | ------ | ---------- | ------ | - | - |  |  | --------- | ------ |  |  |  | ---- | -
|            |                                  |        |   |           |  |            | Premiums earned
|            |                                  |        |   |           |  | Percentage
|            |                                  |        |   |           |  |            | Ceded to        |        | Assumed    |        |   |   |  |  | of amount
|            |                                  |        |   |           |  |            | other           |        | from other |        |   |   |  |  | assumed  
|Description |                                  | Direct |   | companies |  | companies  |                 | Net    |            | to net
|            |                                  |        |   |           |  |            |                 |        |            |       
|2000       
|           
|           
|           
|           
|            | PREMIUMS - Workers Compensation |        | $ | 95,878    |  |            | $               | 17,724 |            |        | $ |  |  |  | $         | 78,154 |  |  |  | 0.00 | %
|           
|           
|           
|           
|1999       
|           
|           
|           
|           
|            | PREMIUMS - Workers Compensation |        | $ | 89,226    |  |            | $               | 18,008 |            |        | $ |  |  |  | $         | 71,218 |  |  |  | 0.00 | %
|           
|           
|           
|           
|1998       
|           
|           
|           
|           
|            | PREMIUMS - Workers Compensation |        | $ | 89,881    |  |            | $               | 8,489  |            |        | $ |  |  |  | $         | 81,392 |  |  |  | 0.00 | %

S-8



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##### Table of Contents






SCHEDULE V

RTW, INC.




|            |                                 |           |            |          |            |          |            |            |  |           |   |   |            |  |   |     |  |  |   |     | 
|----------- | ------------------------------- | --------- | ---------- | -------- | ---------- | -------- | ---------- | ---------- |  | --------- | - | - | ---------- |  | - | --- |  |  | - | --- | 
|            |                                 |           |            |          |            |          | Additions 
|            |                                 |           |            |          |            |          |           
|            |                                 |           | Balance at |          | Charged to |          | Charged to |            |  |           |   |   | Balance at
|            |                                 |           | beginning  |          | costs and  |          | other      |            |  |           |   |   | end       
|Description |                                 | of period |            | expenses |            | accounts |            | Write-offs |  | of period
|            |                                 |           |            |          |            |          |            |            |  |          
|2000       
|           
|           
|           
|           
|            | Allowance for Doubtful Accounts |           | $          | 519      |            |          | $          | 599        |  |           | $ |  |            |  | $ | 549 |  |  | $ | 569 | 
|           
|           
|           
|           
|1999       
|           
|           
|           
|           
|            | Allowance for Doubtful Accounts |           | $          | 417      |            |          | $          | 163        |  |           | $ |  |            |  | $ | 61  |  |  | $ | 519 | 
|           
|           
|           
|           
|1998       
|           
|           
|           
|           
|            | Allowance for Doubtful Accounts |           | $          | 182      |            |          | $          | 379        |  |           | $ |  |            |  | $ | 144 |  |  | $ | 417 | 

S-9