We have developed two proprietary management systems: (i) the RTW SOLUTION(R), designed to lower employers’ workers’ compensation costs and return injured employees to work as soon as possible, and (ii) the ID15(R) system, designed to identify those injured employees who are likely to get stuck in the workers’ compensation system. We combine our management systems 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 1999, we operated in Minnesota, Wisconsin, South Dakota, Colorado, Missouri, Illinois, Kansas, Michigan, Indiana, Massachusetts, Connecticut, New Hampshire and Rhode Island.
The following table provides an overview of our key operating results (000’s):
RTW reported gross premiums earned of $89.2 million in 1999 compared to $89.9 million in 1998. Total revenues for 1999 were $77.8 million, a 13.7 percent decrease from total revenues of $90.2 million reported for 1998. Total revenues in 1999 and 1998 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 1999 include $13.3 million representing a full year of premiums ceded under this reinsurance agreement, compared to 1998, which included $6.6 million in premiums ceded for the period from July 1, 1998 to December 31, 1998. Additionally, premiums ceded were favorably affected by refunds from the Minnesota Workers’ Compensation Reinsurance Association (WCRA) of $2.3 million in 1998; no such refund was recorded in 1999. Excluding the effects of reinsurance and refunds, adjusted total revenues decreased 3.6 percent in 1999 versus the reported decrease of 13.7 percent, primarily the result of a $1.2 million decrease in investment income and a $1.0 million decrease in realized investment gains.
We reported net income of $6.2 million in 1999 compared to a net loss of $7.1 million in 1998, and basic and diluted net income per share of $0.50 in 1999 versus basic and diluted net loss per share of ($0.59) in 1998, due primarily to the following factors:
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.
We aggressively targeted selected policies for non-renewal or re-underwriting at more favorable rates during 1999 at policy expiration. 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. We will continue to review business at policy expiration in 2000 and non-renew or re-underwrite at more favorable rates, any business not meeting our standards;
In the following pages, we take a look at the 1999, 1998 and 1997 operating results for items in our Consolidated Statement of Operations and also explain key balance sheet accounts in greater detail.
Total revenues: Our total revenues include premiums earned, investment income and net realized investment gains.
Our premiums in force grew 6.2% to $87.2 million at December 31, 1999 from $82.1 million at December 31, 1998 due to $9.7 million in growth in our Colorado, Michigan and Massachusetts markets offset by a $4.6 million
Our gross premiums earned decreased slightly to $89.2 million in 1999 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 premiums earned from our increase in premiums in force to $87.2 million in 1999 from $82.1 million in 1998. 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.
The premium rate that we charge policyholders per payroll dollar has declined for several years; however, in 1999, we have seen indications that pricing may be firming. The historical decline in rates is due, in part, to the following:
As the loss cost structure of workers’ compensation has declined, more insurance companies have entered or re-entered the workers’ compensation insurance market, resulting in increased competition; and
We expect that our aggressive targeting of policies for non-renewal or re-underwriting during 2000 will put downward pressure on premiums in force in our Minnesota and Missouri markets; however, we expect continued growth in premiums in force in our Colorado, Michigan and Massachusetts markets, as well as new business in our Minnesota and Missouri markets will lead to moderate growth in gross premiums earned for 2000. In Massachusetts, our premium growth rate will be tempered by an unexpected decision by the Massachusetts Department of Insurance to reduce premium rates effective September 1, 1999. We are encouraged by a favorable trend in premium rates. In 1998, our book of business saw a 10.2% decline in premium rates. This was followed by another 6.7% decline in 1999. In the fourth quarter of 1999, however, premium rates declined just one 0.5%. In January, 2000, we were able to achieve a 8.5% increase in rate in our January 2000 renewal business;
We expect that premiums ceded in 2000 will be consistent with premiums ceded in 1999. Premiums ceded may decrease slightly in 2000 as a percent of gross premiums earned as the non-Minnesota markets, where we pay smaller reinsurance premiums, continue to grow relative to Minnesota;
We believe the recent events within the workers’ compensation reinsurance market will have no impact on our reinsurance program for 2000.
Investment income decreased 15.6% to $6.5 million in 1999 from $7.7 million in 1998. Investment income decreased due to reduced funds available for investment as funds were used to pay reinsurance premiums on our $25,000 to $300,000 reinsurance policy. Additionally, tax-exempt municipal securities, which earn lower pre-tax rates than taxable securities but are comparable on a tax adjusted basis, increased to 56.3% of our investment
portfolio at year-end 1999 compared to 52.6% at year end 1998 and none at year end 1997. We first began purchasing tax-exempt securities in the second quarter of 1998. 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, 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-adjusted investment yields were 6.6% in 1999 and 1998. The investment yields realized in future periods will be affected by yields attained on new investments.
Net realized investment gains were $84,000 in 1999 compared to $1.0 million realized in 1998. The reduced investment activity in 1999 is mainly due to portfolio restructuring completed in the second and third quarters of 1998 that resulted in the significant net realized investment gains. No such restructuring has occurred in 1999.
Investment income and net realized investment gains increased 21.3% to $8.8 million in 1998 from $7.2 million in 1997, due to increased funds available for investment and increased net realized investment gains totaling $1.0 million in 1998 compared to $399,000 realized in 1997. Investment income has been significantly affected by growth of tax-exempt municipal securities included in our portfolio that earn lower pre-tax yields than taxable securities but earn higher comparable yields on a tax-adjusted basis. Funds available for investment increased to $126.6 million at December 31, 1998, from $112.3 million at December 31, 1997, due to increased net cash provided by operating activities resulting primarily from (i) the difference in timing between the receipt of premiums and the payment of claim and claim settlement expenses and (ii) net cash provided by investment income. Pre-tax investment yields decreased to 6.0% in 1998 from 6.3% in 1997 due to purchasing tax-exempt municipal securities, which have lower yields on a pre-tax basis offset by portfolio diversification during 1998 and 1997.
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 have decreased significantly as we have focused on closing older claims, paying earlier to close those claims. Combined with relatively flat premiums in force since December 1998, our cash flow from timing on claims payments has 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 agreement. We expect this reduction in quarterly cash flow will continue until reimbursements for loss payments to claimants under these contracts equal disbursements for premium payments;
We will continue to include fixed maturity tax-exempt securities in our investment portfolio to increase after-tax yields. 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 decrease pre-tax investment yields but are expected to contribute more to after-tax net income as a result of the favorable treatment tax-exempt municipal income receives for federal income tax purposes.
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 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
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:
We aggressively targeted selected policies for non-renewal or re-underwriting at more favorable rates during 1999 at policy expiration if the profitability of the policy did not meet our underwriting profit margin standards. 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. We will continue to review business at policy expiration in 2000 and non-renew or re-underwrite at more favorable rates, any business not meeting our standards;
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.
Gross premiums earned increased to $89.9 million in 1998 from $81.4 million in 1997 resulting in increased claim and claim settlement expenses as we provided coverage for more employers;
During 1998, we increased our estimate of the pre-1998 liability for unpaid claim and claim settlement expenses by $11.0 million as a result of unfavorable claims experience for those periods. This increase was $14.1 million more than the $3.1 million reduction that we recorded in 1997. Additionally, we increased our estimate for the 1998 liability for unpaid claim and claim settlement expenses as a result of the 1997 and prior year adjustment. At December 31, 1998, we had gross reserves for unpaid claim and claim settlement expenses of $97.3 million including $53.2 million for 1998 claims and $44.1 million for claims relating to years prior to 1998;
Reduced premiums due to legislative changes in estimated loss costs, increased competition and improving customer loss experience, have resulted in an increase in claim and claim settlement expenses as a percentage of premiums earned; and
Continued pricing pressure due to legislative changes in estimated loss costs, increased competition and improving customer loss experience may result in reduced premiums, ultimately increasing claim and claim settlement expense as a percent of premium earned; and
Continued application of our claims management technology and methods to all open claims.
Commission expense increased to 8.0% of gross premiums earned in 1999 and 1998 from 7.8% in 1997. The increased commission percent is the result of marketing programs initiated in prior years, including volume based incentive programs and higher commissions for new business that increased commission rates to agents resulting in increased average commissions and increased commission expense. Additionally, as we entered new markets, we introduced higher commission rates to attract business from established agents. These rates have continued into current policy periods and will have a greater impact on the commission expense percent as the non-Minnesota states continue to grow relative to Minnesota. In all of our markets, we believe the commission rates we pay are marketplace competitive;
2000 Outlook: We expect that policy acquisition costs will stabilize or trend downward as a percent of gross premiums earned in 2000 due to the following:
We expect commission expense as a percent of gross premiums earned to decrease slightly in 2000 as we manage our commission structures in our non-Minnesota states;
Our general and administrative expenses increased to $12.0 million in 1999 from $11.4 million in 1998 and $11.6 million in 1997. As a percent of gross premiums earned, general and administrative expenses increased to 13.5% in 1999 from 12.6% in 1998 and decreased from 14.3% in 1997. 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 and 1997 include benefits of $1.1 million recorded in the second quarter of 1998 and $842,000 recorded in the third quarter of 1997, resulting from the reversal of 1997 and 1996 accruals 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 1999, 1998 or 1997 for workers’ compensation claim liabilities arising from current or prior insolvencies resulting in the accrual reversals and we do not expect an assessment in 1999 payable in 2000. After adjusting for the accrual reversals, general and administrative expenses decreased to 12.0% in 1999 from 13.9% in 1998 and 14.0% in 1997 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.
2000 Outlook: We expect that general and administrative expenses will be affected by the following:
We expect that the reorganization effected in the fourth quarter of 1999 will result in further personnel cost reductions in 2000.
We have no plans to open additional state offices in 2000 and expect that growth in premiums in force will result in additional revenues to cover the fixed costs in all of our states; and
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.
2000 Outlook: Income tax expense (benefit) will vary based on (i) the income (loss) from operations we recognize for 2000, and will (ii) decrease as a percent of income (loss) before taxes relative to the statutory effective rate as we purchase additional tax-exempt municipal fixed investments for our investment portfolio. The ultimate change is unknown at this time.
million to $108.1 million at December 31, 1999, from $126.6 million at December 31, 1998, 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 the increased holdings in securities classified as available-for-sale, and thus carried at fair value, we expect to encounter larger adjustments in shareholders’ equity as market interest rates and other factors change. Prevailing market interest rates increased in 1999 resulting in a $4.3 million unrealized loss on investments compared to a $2.7 million unrealized gain in 1998.
Gross reserves for claim and claim settlement expenses, end of year
Net reserves for claim and claim settlement expenses, beginning of year
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):
Cash used in operating activities in 1999 was $10.3 million. This is primarily a result of an increase of $21.2 million in amounts due from reinsurers, a decrease of $3.1 million in premiums receivable, net of unearned premiums, offset by our net income of $6.2 million, an increase of $2.6 million in unpaid claim and claim settlement expenses, which are non-cash accruals for future claims, depreciation and amortization expense of $1.4 million and an increase in our deferred income tax asset of $764,000. Net cash provided by investing activities was $11.0 million, primarily the result of $20.9 million in proceeds from sales of securities and maturities of $1.9 million of investments offset by $11.2 million in purchases of securities and $573,000 in purchases of fixed assets. Net cash used in financing activities was $1.1 million due to payments on notes payable of $2.5 million offset by $1.3 million in proceeds from the exercise of stock options and $105,000 resulting from the issuance of common stock under our Employee Stock Purchase Plan.
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.
On November 2, 1999, we announced that a group consisting of David C. Prosser, Chairman, members of his family, and another of our directors retained an investment banker to explore a sale of the group’s shares to new strategic investors. The group held approximately 6,383,000 shares, representing 52% of all outstanding shares. In conjunction with the process, our Board of Directors appointed a Special Committee of independent directors to evaluate any proposed transaction.
Under the terms of the agreement, we borrowed $6.0 million under a 90-day term loan agreement with a bank and advanced the proceeds to the Prosser Selling Group for a security interest in the shares owned by the group. This term loan is subject to interest at a LIBOR adjusted rate (8.31% at February 29, 2000). We expect to replace the 90-day term loan with an $8.0 million term loan agreement and $2.0 million revolving credit facility to be used for general corporate purposes. We expect the term loan will accrue interest, payable quarterly, at an adjusted LIBOR rate and expect principal maturities due as follows (000’s):
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.
The year 2000 is a critical year for computer applications. Historically, many computer programs were written using two digits rather than four to define the appropriate year. As a result, many computer programs that have date sensitive fields may recognize a date using “00” as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in other critical business activities.
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, 1999, 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 and Texas.
In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (Codification). The Codification, which is intended to standardize regulatory accounting and reporting for the insurance industry, is proposed to be effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices and it is uncertain when, or if, the state of Minnesota will require adoption of Codification for preparing statutory financial statements. We have not quantified the effect Codification may have on our statutory financial statements.
Consolidated Statements of Operations - Years Ended December 31, 1999, 1998 and 1997
Shareholders’ Equity - Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements - Years Ended December 31, 1999, 1998 and 1997
Consolidation - Our consolidated financial statements include RTW and ACIC. We eliminate all intercompany accounts and transactions in consolidation.
Available-for-Sale Investments: We intend to hold our available-for-sale investments to maturity, but may sell before maturity in response to 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 (loss) income. 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.
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. No securities were reduced for declines in fair value in 1999, 1998 or 1997.
Our “Unpaid claim and claim settlement expenses” represent established, reserves for the estimated total unpaid cost of claim and claim settlement expenses that cover events that occurred in 1999 and prior years. The reserves are primarily undiscounted, however, we discounted selected claims that have fixed or determinable future payments by $2,873,000 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.
Reclassifications - Certain 1998 and 1997 amounts have been reclassified to conform to the consolidated financial statement presentation in 1999.
The following is a reconciliation of the numerators and denominators of basic and diluted income (loss) per share:
Options to purchase 1,894,811 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.
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 $3,452,000 and $2,931,000 in 1999 and 1998, respectively.
Net Realized Investment Gains - Net realized investment gains includes gross realized investment gains net of gross realized investment losses as follows (000’s):
We report reinsurance transactions 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 paid our 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. Debt issue costs associated with the Senior Notes totaling $39,000 at December 31, 1998 was recorded as a reduction in notes payable and amortized over the term of the Senior Notes.
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 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 completed through 1999:
The fourth one-year phase began in April 1999 and expires in April 2000.
Our liability for employee contributions withheld at December 31, 1999 and 1998 for the purchase of shares in April 2000 and April 1999 under the ESPP was $145,000 and $158,000, respectively.
1994 Stock Plan - The 1994 Stock Plan provides for awards of qualified and non-qualified stock options. In January 1997 the shares reserved for distribution under the plan were increased to 1,500,000. 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.
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):
The pro forma effect on net income (loss) for 1999, 1998 and 1997 is not representative of the pro forma effect on net income (loss) in future years because it does not include pro forma compensation expense related to pre-1995 option grants.
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 1999, 1998 and 1997 was $151,000, $140,000 and $94,000, respectively.
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, 1999 we had repurchased 19,500 shares for $87,000. We will use the repurchased shares for employee stock option and purchase plans and other corporate purposes.
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 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.
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 2000, dividends in excess of $4,605,000 would require prior consent of the Commissioner.
Future minimum (base) rental payments required under the leases, as of December 31, 1999, are as follows (000’s):
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. Additionally, our quarterly results for 1998 were affected by refunds from the Minnesota Workers’ Compensation Reinsurance Corporation (included in premiums earned), adjustments to the liability for unpaid claim and claim settlement expenses for prior years and adjustments to reverse liabilities accrued for the Minnesota Insurance Guarantee Association (included in general and administrative expenses) as follows (000’s):
On February 2, 2000, we entered into an agreement with participating members of the group (together, the “Prosser Selling Group”). Under the agreement, we agreed to repurchase from individual members of the Prosser Selling Group shares totaling approximately $7.8 million. Based on the market formula contained in the agreement, we expect to repurchase approximately 1,493,000 shares at $5.19 per share. This transaction is expected to close in March 2000. In addition, we expect David C. Prosser to retire and resign as Chairman and expect to pay him $225,000 as a termination benefit in conjunction with the closing. He is expected to remain as a member of our Board of Directors.
We expect the revolving credit facility will accrue interest, payable quarterly, at an adjusted LIBOR rate and mature in March 2001. We expect that the revolving credit facility will be renewable annually at the discretion of the bank.
We expect to collateralize the term loan by stock of ACIC and expect that we will be 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. We expect the agreement to also restrict dividends, purchases, redemptions or retirements of stock.