The following is a summary of properties leased by the Company at December 31, 1997:
The consolidated statements of income data set forth below for each of the three years in the period ended December 31, 1997, and the consolidated balance sheet data at December 31, 1997 and 1996, 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 income data set forth below for each of the two years in the period ended December 31, 1994, and the consolidated balance sheet data at December 31, 1995, 1994 and 1993, 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.
OPERATING RESULTS - The following table provides an overview of our key operating results (000's):
INVESTMENT INCOME - Our investment income includes earnings on our investment portfolio and realized capital gains and losses from sales of investments.
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 and other underwriting expenses, offset by ceding commissions received from 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 reinsurance agreements, our ceding commission is adjusted to the extent that actual claim and claim settlement expenses vary from levels specified in the agreement.
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.
INTEREST EXPENSE - We incurred interest charges on our Senior Notes and our Series 1991A and 1991B Notes. The Series 1991A and 1991B Notes were paid in full in December 1996. The Senior Notes mature in series during the years 1995 through 1999.
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.
In the following pages, we take a look at the 1997, 1996 and 1995 results for these areas and also explain key balance sheet accounts in greater detail.
The following table summarizes the components of our revenues and premiums in force (000's):
Premiums ceded to reinsurers decreased 66.8% to a cost of $697,000 in 1996 from a cost of $2.1 million in 1995. The decrease in premiums ceded to reinsurers resulted from (i) the increase to approximately $1.0 million in 1996 from $450,000 in 1995 in the Minnesota retention level under the WCRA excess of loss reinsurance coverage, (ii) reduced rates charged for excess of loss reinsurance in Minnesota during 1996, (iii) the recognition of a benefit of $251,000 in the second quarter of 1996 due to an over-estimate of ceded premiums at December 31, 1995, and (iv) the decrease in ceded premium cost in other states due to exceeding the minimum premium threshold.
- We expect continued downward pressure on the amount we charge for our products and services; and
INVESTMENT INCOME: We currently invest entirely in fixed maturity investments and classify our investments as available-for-sale. 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 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.
Investment income increased 27.4% to $7.2 million in 1997 from $5.7 million in 1996, due to increased funds available for investment and net capital gains totaling $399,000 realized on securities sold. Funds available for investment increased to $112.3 million at December 31, 1997 from $89.8 million at December 31, 1996, 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. Investment yields increased to 6.3% in 1997 from 6.2% in 1996 due to portfolio diversification during 1997. The investment yield realized in future periods will be affected by yields attained on new investments.
1998 OUTLOOK: In December 1997, we reclassified our entire held-to-maturity portfolio, invested in U.S. government securities to available-for-sale investments. We reclassified these securities to enable us to more actively manage our investment yield and overall portfolio risk. The held-to-maturity portfolio had a net unrealized gain of approximately $900,000 at December 31, 1997 while the total portfolio net unrealized gain at December 31, 1997 was $1.4 million. Barring significant changes in interest rates or operational cash flows, we expect that the 1998 after-tax yield from our investment portfolio will be affected by the following:
- Realized gains may increase as we diversify the previously classified held-to-maturity securities from U.S. government securities to other fixed maturity securities; and
- We will broaden our investment portfolio in 1998 to include fixed maturity tax-exempt securities to increase after-tax yields. Fixed maturity tax-exempt securities may have the effect of reducing investment income recognized but are expected to contribute more to after-tax net income as a result of the treatment they receive for federal tax purposes.
- Premiums earned increased to $63.1 million in 1996 from $45.4 million in 1995 resulting in increased claim and claim settlement expenses as we provided coverage for more employers;
- Operating results for 1996 claim and claim settlement expenses in Colorado were higher than expected;
- Average claim cost decreased in 1996 from 1995 due to realized operating efficiencies and effectiveness and legislative changes in benefits to claimants; and
- During 1996, we reduced our estimate of the pre-1996 liability for unpaid claim and claim settlement expenses by $8.1 million as a result of favorable claims experience for those periods. This reduction was $6.6 million greater than the reduction that we recorded in 1995.
1998 OUTLOOK: We expect that claim and claim settlement expenses will be affected by the following factors:
- Inflation will put pressure on the medical and indemnity components of claim and claim settlement expenses; and
POLICY ACQUISITION COSTS. The following table summarizes policy acquisition costs (000's):
Policy acquisition costs increased to $11.7 million in 1997 from $6.3 million in 1996 and $2.7 million in 1995. As a percent of gross premiums earned, policy acquisition costs increased to 14.3% in 1997 from 9.9% in 1996 and 5.7% in 1995. These increases reflect the following:
- - Commission expense increased to 7.8% of gross premiums earned in 1997 from 7.3% in 1996 and 5.1% in 1995. The increased commission percent is the result of marketing programs we initiated during 1995 and the first quarter of 1996, 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;
1998 OUTLOOK: We expect that policy acquisition costs as a percent of gross premiums earned will stabilize or remain relatively constant as a percent of gross premiums earned during 1998 due to the following:
- - We expect premium tax expense as a percent of gross premiums earned in 1998 to remain consistent with 1997; and
- - We expect that other policy acquisition costs will decrease as a result of increases in operating efficiency and effectiveness in 1998 realized through enhancements to our internal processes and procedures, including changes to our propriety computer systems. We also expect that these costs will decrease as a percent of gross premiums
earned as we increase premiums in force and generate additional revenues to cover the relatively fixed policy acquisition costs.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses increased to $11.6 million in 1997 from $8.5 million in 1996 and $6.1 million in 1995. As a percent of gross premiums earned, general and administrative expenses increased to 14.3% in 1997 from 13.3% in 1996 and 12.9% in 1995. These increases reflect:
1998 OUTLOOK: We expect that general and administrative expenses will be affected by the following:
- We expect to aggressively manage general and administrative expenses, specifically legal and consulting expenses to decrease relative costs during 1998;
- We have no plans to open new state offices in 1998 and expect growth in premiums in force in Michigan and Massachusetts will result in additional revenues to cover the fixed costs in those states;
- We expect to increase operational efficiency during 1998 through enhancements to our internal processes and procedures, including changes to our internal propriety computer systems; and
1998 OUTLOOK: We expect that the provision for income taxes will continue to decrease as a percent of income before taxes during 1998 as we include non-taxable municipal fixed investments in our investment portfolio. The ultimate decrease is unknown at this time.
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.
Our "unpaid claim and claim settlement expenses" represent established, undiscounted reserves for the estimated total unpaid cost of claim and claim settlement expenses, which cover events that occurred in 1997 and prior years. 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 commencing operations in 1992, we have limited historical data to estimate our reserves for unpaid claim and claim settlement expenses and accordingly 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.
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 six-year period ended December 31, 1997. 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).
Cash provided by operating activities in 1997 was $20.4 million. This is primarily a result of our net income of $5.8 million, an increase of $11.8 million in unpaid claim and claim settlement expenses which are non-cash accruals for future claims, and an decrease of $2.6 million in amounts due from reinsurers. Net cash used in investing activities was $23.3 million, primarily the result of purchases of $62.4 million of available-for-sale investments, $2.4 million in purchases of furniture and equipment offset by proceeds from sales of available-for-sale investments of $39.1 million and maturities of $2.5 million of held-to-maturity investments. Net cash used in financing activities was $1.7 million, primarily due to payments totaling $2.0 million on outstanding Senior Notes in December 1997.
Our need for additional capital is primarily the result of regulations which require certain ratios of capital to premiums written. As we grew, additional capital was required to support the higher premium levels. As a result, we raised approximately $27.0 million in April 1995 through an initial public offering and contributed $18.0 million in 1995 to our insurance subsidiary. 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 capital to premium ratios as defined by state regulatory bodies. As an alternative to raising additional capital, we believe we could secure quota-share or other reinsurance which would have the effect of reducing the ratio of premiums to capital and could be used to satisfy state regulatory requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income, and Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures About Segments of an Enterprise and Related Information. SFAS 130 and SFAS 131 are effective for years beginning after December 15, 1997. We do not expect these standards to have an impact on our Consolidated Financial Statements
The year 2000 is a critical year for computer applications. Many computer programs were historically 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 operations began in 1992. Since 1992, we have developed our own internal computer systems to manage our claims and related claim settlement expenses and administer our policy information. These computer systems are year 2000 compliant. Additionally, during 1998 we will implement third party provided general ledger and accounts payable software and develop internally a billing and cash receipt system which will be year 2000 compliant. These system replacements and software development are occurring as a part our ongoing operations and are not specifically occurring as a result of the year 2000 issue. We anticipate that our computer hardware and software systems will be fully year 2000 compliant in 1998 and we are taking steps to ensure that our significant vendors are compliant during 1999.
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 the computation of a risk-based capital amount which is then 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.
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, 1997, our insurance subsidiary was licensed to do business in Minnesota,
The NAIC is in the process of codifying statutory accounting principles. The ultimate completion date is expected in 1999 and impact of this project on current statutory policies and practices is unknown.
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) competition from traditional workers' compensation insurance carriers, (ii) our ability to manage both our existing claims and our new claims in an effective manner, (iii) our ability to further penetrate our existing markets, (iv) changes in workers' compensation regulation by states, including changes in mandated benefits or insurance company regulation, (v) our ability to retain our existing customers at favorable beneficial premium rates when their policies renew, and (vi) our ability to expand into new states and attract customers in those states, and (vii) our ability to successfully introduce new products and services.
Independent Auditors' Report 23 Consolidated Balance Sheets - December 31, 1997 and 1996 24 Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995 25 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995 26 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 27 Notes to Consolidated Financial Statements - Years Ended December 31, 1997, 1996 and 1995 28
We have audited the accompanying consolidated balance sheets of RTW, Inc. and subsidiary (the Company) as of December 31, 1997 and 1996 and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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.
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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
RTW, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RTW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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".
In April 1995, we raised $27,039,000 (net of underwriting discounts and other offering expenses totaling $2,861,000) through an initial public offering of 3,450,000 shares of common stock at $8.67 per share. We contributed $18,000,000 of the net proceeds of the offering to ACIC to expand operations to other states, as well as to support the increase of premium in Minnesota. We retained the remaining net proceeds for working capital and general corporate purposes in RTW, including, if appropriate, additional future contributions to ACIC.
ACCOUNTING PRINCIPLES - We prepare our financial statements in accordance with general accepted accounting principles (GAAP). We follow the accounting standards established by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants.
HELD-TO-MATURITY INVESTMENTS: Our held-to-maturity investments in 1996 consisted solely of U.S. government securities and were carried at amortized cost. In December 1997, we reclassified our entire held-to-maturity portfolio, invested in U.S. government securities with a historical cost, net of amortization of $53.8 million and a fair value of $54.7 million, to available-for-sale investments. We reclassified these securities to enable us to more actively manage our investment yield and overall portfolio risk.
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.
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 in 1997 and 1996 was $2,309,000 and $1,366,000, respectively.
Our "Unpaid claim and claim settlement expenses" represent established, undiscounted reserves for the estimated total unpaid cost of claim and claim settlement expenses, which cover events that occurred in 1997 and prior years. 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.
DEBT ISSUE COSTS - We report debt issue costs associated with the Senior Notes payable as a reduction in notes payable and amortize the cost over the term of the Senior Notes.
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 $2,828,000 and $2,073,000 in 1997 and 1996, respectively.
FIXED MATURITIES BY MATURITY DATE - The following table presents the amortized cost and fair value of investments by contractual maturity in 1997. Actual maturities may differ from those stated as a result of calls and prepayments (000's):
INVESTMENT INCOME -- Investment income includes income from the following sources (000's):
There were no significant investment expenses associated with the above investment income in 1997 or 1996 and there were no sales of securities during 1996 or 1995.
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 transactions on a "gross" basis on the balance sheet, resulting in reinsurance receivable amounts on 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.
Ceding commissions earned, which is based upon final settlement of claim and claim settlement expenses, will range between 10% and 48% during accident years 1994 and 1993 and 15% and 25% during accident year 1992. Ceding commissions earned of $1,871,000, and $1,733,000 for fiscal years 1996 and 1995, respectively, are reported as a reduction in policy acquisition costs in the Consolidated Statements of Income.
We compute the provision for income taxes under the liability method. This means deferred income taxes reflect the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the carrying value of assets and liabilities for income tax purposes.
Our provision for income taxes differs from the statutory rate of 35% of pretax income as follows (000's):
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.
Our liability for employee contributions withheld at December 31, 1997 and 1996 for the purchase of shares in April 1998 and April 1997 under the ESPP were approximately $202,000 and $154,000, respectively.
For the remaining outstanding non-qualified stock options, we are permitted a tax deduction equal to the difference between the 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 1996, we recorded a reduction in income taxes payable and increased common stock by $510,000 to reflect exercises during the year. No exercises occurred in 1997. Future exercises of these non-qualified options will reduce future taxes payable based on the fair value of the options on the date of exercise.
The weighted average fair value of options granted under the ESPP and 1994 Stock Plan during 1997, 1996 and 1995 is estimated at $4.06, $12.36 and $5.29, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield; volatility of 76.1% in 1997 and 65.3% in 1996 and 1995; risk-free interest rates ranging from 5.41% to 7.70%; and an expected life of 1 to 5 years.
EMPLOYEE CONTRACTS -- We entered into a three-year employment agreement with our new President and Chief Executive Officer (CEO) 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 this individual with health, dental, life and disability insurance consistent with that provided other officers. Under this agreement, we have agreed to indemnify him for his actions on behalf of us. In the event of termination without cause or resignation for good reason, we are obligated to continue to pay his then-current base salary and bonuses for the remaining term of the agreement or twelve months, whichever is shorter.
We entered into an Employment and Salary Continuation Agreement with our former President and CEO beginning November 1993 and ending November 1998. Under this agreement, he receives a base salary of $357,500, which is increased each year by a cost of living adjustment or other amount as determined by our board of directors. In addition to base salary, he is eligible for bonuses, reimbursements and fringe benefits including the use of and insurance for an automobile. We also provide him with health and dental insurance. Under this agreement, we have agreed to indemnify him for his actions on behalf of us. In the event of his disability, we are obligated to continue to pay his then-current base salary and bonuses consistent with other officers for the remaining term of the Agreement.
401(K) RETIREMENT PLAN -- We sponsor a defined contribution retirement plan under Section 401(K) of the Internal Revenue Code for eligible employees. Employees become eligible to participate in the 401(K) on the first day of the calendar quarter after completing of 3 months service and attaining age 21. Our contributions to the plan are
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.
Minnesota Department of Commerce (CMDC), 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 which is attributable to unrealized capital gains. Further, without approval of the CMDC, 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 1998, dividends in excess of $4,537,000 would require prior consent of the CMDC.
STATUTORY SURPLUS AND STATUTORY NET INCOME - 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 which differ from GAAP. Statutory policyholders' surplus in 1997 and 1996, and statutory net income for 1997, 1996 and 1995 are as follows (000's):
1998 $ 1,454 1999 1,353 2000 717 2001 530 2002 249 -------- $ 4,303 -------- --------
Rent expense, including contingent rentals, was $1,776,000, $1,063,000 and $803,000 for 1997, 1996 and 1995, respectively.
The following tables present unaudited quarterly results of operations for the eight quarters ended December 31, 1997:
Our premiums in force have increased in each of the last eight quarters. 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. In addition, our quarterly results for 1997 and 1996 were affected favorably by adjustments to the liability for unpaid claim and claim settlement expenses and ceding commissions relating to those years and prior years as follows (000's):