<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] 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 0-15421
CITIZENS SECURITY GROUP INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1564371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
406 Main Street, Red Wing, Minnesota 55066
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-388-7171
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
----- -----
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on August 14, 1995, was 1,661,585.
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1995 1994
------------ ------------
Assets
------
<S> <C> <C>
Investments:
Fixed maturities, at market (amortized cost of $34,780,651
and $34,153,963, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,800,089 $31,850,909
Equity securities, at market (cost of $657,203 and
$646,597, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717,813 689,088
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,855,229 1,621,674
----------- -----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,373,131 34,161,671
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,480 1,099,677
Receivables:
Insurance premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,187,794 7,238,448
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,109,258 3,826,444
Due from Citizens Mutual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,481 -
----------- -----------
Total receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,413,533 11,064,892
Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,306,224 2,298,703
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,295,151 2,299,649
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,081,000 1,684,000
Equipment, at cost less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 722,189 840,625
Accrued investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549,113 494,943
Excess of cost over net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380,406 451,517
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,505 206,259
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,436,732 $54,601,936
----------- -----------
----------- -----------
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Reserves for losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . . . . . . . . $22,991,347 $20,989,736
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,022,542 15,672,948
Bank loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,318,920 1,518,920
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419,999 509,999
Due to Citizens Mutual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 215,850
Current income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,229 118,229
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,508,562 2,027,176
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,414,599 41,052,858
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par value; 7.95% Series A; 1,250,000
shares authorized, issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,375,000 4,375,000
Common stock, $.01 par value; 10,000,000 shares authorized;
1,661,585 shares issued and outstanding, respectively. . . . . . . . . . . . . . . . . . . . . . 16,616 16,616
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (419,999) (509,999)
Unrealized appreciation (depreciation) of investments in fixed
maturities and equity securities, net of related taxes. . . . . . . . . . . . . . . . . . . . . 53,048 (1,492,563)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,900,108 6,062,664
----------- -----------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,022,133 13,549,078
----------- -----------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . $58,436,732 $54,601,936
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ --------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . $7,378,481 $6,706,933 $15,113,385 $13,148,400
Investment income, less related
expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 606,629 531,235 1,215,239 1,049,303
Realized gains (losses) on
investments . . . . . . . . . . . . . . . . . . . . . . . . . 37,649 (404) 46,433 16,380
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 138,198 131,449 276,573 234,677
---------- ---------- ----------- -----------
Total revenues . . . . . . . . . . . . . . . . . . . . . 8,160,957 7,369,213 16,651,630 14,448,760
---------- ---------- ----------- -----------
Losses and expenses:
Losses and loss adjustment
expenses incurred . . . . . . . . . . . . . . . . . . . . . . 5,169,615 4,259,929 10,014,029 8,645,721
Policy acquisition costs . . . . . . . . . . . . . . . . . . . . 1,347,552 1,301,257 2,697,434 2,545,207
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 49,206 66,867 89,582 128,884
Other operating expenses . . . . . . . . . . . . . . . . . . . . 1,293,362 963,295 2,396,235 1,917,900
---------- ---------- ----------- -----------
Total losses and expenses. . . . . . . . . . . . . . . . 7,859,735 6,591,348 15,197,280 13,237,712
---------- ---------- ----------- -----------
Income before income taxes . . . . . . . . . . . . . . . 301,222 777,865 1,454,350 1,211,048
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . 87,000 220,000 443,000 319,000
---------- ---------- ----------- -----------
Net income. . . . . . . . . . . . . . . . . . . . $ 214,222 $ 557,865 $ 1,011,350 $ 892,048
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average common and common
equivalent shares outstanding . . . . . . . . . . . . . . . . . . 1,690,249 1,674,589 1,687,533 2,287,286
---------- ---------- ----------- -----------
Earnings per common share. . . . . . . . . . . . . . . . . . . . . . $ .07 $ .28 $ .50 $ .35
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Six months ended
June 30,
---------------------------
1995 1994
----------- ------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,011,350 $ 892,048
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in:
Insurance premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (949,346) (823,950)
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,282,814) (826,918)
Due from Citizens Mutual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (332,331) (115,224)
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,498 (33,626)
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,521) (19,315)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (192,000) (106,000)
Reserves for losses and loss adjustment expense. . . . . . . . . . . . . . . . . . . . . 2,001,611 1,570,536
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,594 909,337
Income tax payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 125,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (518,614) 252,338
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,082 317,841
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46,433) (16,380)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,570) (199,236)
----------- ------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . 131,506 1,926,451
----------- ------------
Cash flows used in investing activities:
Proceeds from fixed maturities called or matured. . . . . . . . . . . . . . . . . . . . . . . . . 1,215,074 1,633,458
Proceeds from fixed maturities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,881,583 2,956,346
Proceeds from equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 5,550
Cost of fixed maturities acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,523,769) (5,328,162)
Cost of equity securities acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,605) -
Cost of equipment acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,525) (44,593)
----------- ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (488,242) (777,401)
----------- ------------
Cash flows used in financing activities:
Cost of issuance of Series A preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . - (149,814)
Repayment of bank loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (200,000) (200,000)
Series A preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (173,906) (86,953)
----------- ------------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (373,906) (436,767)
----------- ------------
Net increase (decrease) in cash and short-term investments . . . . . . . . . . . . . . . . . . . . . (730,642) 712,283
Cash and short-term investments at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 2,721,351 2,558,277
----------- ------------
Cash and short-term investments at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $1,990,709 $3,270,560
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
(Unaudited)
Six
months ended Year ended
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Preferred stock, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,375,000 $ -
Issuance of 7.95% Series A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,375,000
----------- ------------
Preferred stock, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,375,000 4,375,000
----------- ------------
Common stock, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,616 29,116
Common stock exchanged. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (12,500)
----------- ------------
Common stock, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,616 16,616
----------- ------------
Additional paid-in capital, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,097,360 9,609,674
Common stock exchanged. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (4,512,314)
----------- ------------
Additional paid-in capital, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
----------- ------------
Unearned compensation, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (509,999) (689,998)
ESOP principal payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 179,999
----------- ------------
Unearned compensation, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (419,999) (509,999)
----------- ------------
Unrealized appreciation (depreciation), beginning of period. . . . . . . . . . . . . . . . . . . . . (1,492,563) 641,691
Change in unrealized appreciation (depreciation),
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,545,611 (2,134,254)
----------- ------------
Unrealized appreciation (depreciation), end of period. . . . . . . . . . . . . . . . . . . . . 53,048 (1,492,563)
----------- ------------
Retained earnings, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,062,664 4,941,985
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011,350 1,381,538
Series A preferred stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (173,906) (260,859)
----------- ------------
Retained earnings, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,900,108 6,062,664
----------- ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,022,133 $13,549,078
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Unaudited
June 30, 1995 and 1994
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Citizens
Security Group Inc. (the "Company") and the Company's wholly owned
subsidiaries, Citizens Fund Insurance Company and Insurance Company of Ohio,
and have been prepared in conformity with generally accepted accounting
principles. All significant intercompany balances have been eliminated in
consolidation.
The Consolidated Balance Sheet as of June 30, 1995, the related Consolidated
Statements of Income for the three and six months ended June 30, 1995 and 1994,
the related Consolidated Statements of Cash Flows for the six months ended June
30, 1995 and 1994, and the related Consolidated Statement of Changes in Equity
for the six months ended June 30, 1995, are unaudited. In the opinion of
management, all necessary adjustments for a fair presentation of such financial
statements have been included. The operating results for the periods ended June
30, 1995 are not necessarily indicative of the results to be expected for the
entire year.
The consolidated financial statements and notes should be read in conjunction
with the financial statements and notes contained in the Company's Annual Report
to Shareholders for the year ended December 31, 1994.
(2) EARNINGS PER COMMON SHARE
Earnings per common share are calculated based on the weighted average number of
common and common equivalent shares outstanding and after net income is reduced
for the amount of dividends declared on the Company's Series A preferred stock.
Declared preferred stock dividends were $173,906 and $86,953 for the six months
ended June 30, 1995 and 1994, respectively.
(3) INVESTMENTS
The Company classifies its entire fixed maturity and equity investment
portfolios as "available-for-sale." Accordingly, these investments are reported
at estimated market value with unrealized gains and losses, net of deferred
taxes, recorded in shareholders' equity. Classifying these portfolios as
"available-for-sale" does not impact net income.
Short-term investments include investments maturing within one year, money
market instruments and mutual funds. Short-term investments with original
maturities of three months or less are considered cash equivalents for purposes
of the Consolidated Statements of Cash Flows.
Realized gains or losses on sales of investments, based on specific
identification of the investments sold, are credited or charged to income.
Changes in unrealized appreciation or depreciation resulting from changes in the
market value of investments are credited or charged to shareholders' equity, net
of deferred income taxes, if any.
Page 6
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------
1995 1994 1995 1994
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Fixed maturities . . . . . . . . $ 37,649 $ (404) $ 46,433 $ 10,830
Equity securities. . . . . . . . - - - 5,550
--------- -------- --------- ---------
Realized gains (losses) on
investments. . . . . . $ 37,649 $ (404) $ 46,433 $ 16,380
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
Change in unrealized appreciation (depreciation) is summarized as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- ------------------------
1995 1994 1995 1994
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Equity securities. . . . . . . . . . . $ 16,592 $ (8,102) $ 18,119 $ (25,827)
Fixed maturities . . . . . . . . . . . 1,182,830 (644,075) 2,322,492 (1,767,872)
---------- ---------- --------- -----------
Total change in unrealized
appreciation (depreciation) . $1,199,422 $(652,177) $2,340,611 $(1,793,699)
---------- ---------- --------- -----------
---------- ---------- --------- -----------
</TABLE>
(4) FEDERAL INCOME TAXES
The primary objective under the Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," is to ensure the deferred tax
asset or liability on the balance sheet properly reflects the amount due to or
from the government in the future. As a consequence, the portion of the tax
expense resulting from the change in the deferred tax asset or liability may not
always be consistent with the income reported in the Consolidated Statements of
Income.
Some items of revenue and expense included in the Consolidated Statements of
Income may not be currently taxable or deductible on income tax returns.
Therefore, the income tax assets and liabilities are divided into a current
portion, which is the amount attributable to the current year's tax return, and
a deferred portion, which is the amount attributable to another year's tax
return. The revenue and expense items not currently taxable or deductible are
called temporary differences. Income tax expense or benefits are recorded in
various places in the Company's financial statements. A summary of these
amounts is as follows:
Page 7
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -------------------------
1995 1994 1995 1994
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Income tax attributable to operations. . . . . . . . . . . . . $ 87,000 $220,000 $ 443,000 $ 319,000
SHAREHOLDERS' EQUITY
Income tax attributable to unrealized
appreciation (depreciation)
of investments . . . . . . . . . . . . . . . . . . . . . . 407,000 (222,000) 795,000 (611,000)
--------- -------- ---------- --------
$494,000 $ (2,000) $1,238,000 $(292,000)
--------- -------- ---------- --------
--------- -------- ---------- --------
</TABLE>
The components of income tax expense related to the operations are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal current. . . . . . . . . . . . . . . . . . . . . . . . $232,000 $277,000 $613,000 $411,000
Federal deferred . . . . . . . . . . . . . . . . . . . . . . . (156,000) (65,000) (192,000) (107,000)
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 8,000 22,000 15,000
-------- -------- -------- --------
Total income tax expense . . . . . . . . . . . . . . . . . $ 87,000 $220,000 $443,000 $319,000
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Federal income tax expense is less than the U.S. Federal income tax rate of 34
percent applied to income before income taxes. The reasons for this difference
and the related tax effects are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Tax expense calculated at
the Federal rate . . . . . . . . . . . . . . . . . . . . . $102,415 $264,475 $494,479 $411,757
Reduction attributable to nontaxable
investment income (municipal bond
interest and domestic dividends) . . . . . . . . . . . . . (32,538) (46,817) (71,098) (91,896)
State tax expense. . . . . . . . . . . . . . . . . . . . . . . 7,260 4,950 14,520 9,900
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,863 (2,608) 5,099 (10,761)
-------- ------- -------- --------
Total income tax expense . . . . . . . . . . . . . . . . . . . $ 87,000 $220,000 $443,000 $319,000
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
Page 8
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- -------------
<S> <C> <C>
DEFERRED TAX ASSETS
Loss reserves $1,050,091 $ 1,009,292
Unearned premium reserves 933,463 909,384
Unrealized depreciation of investments - 768,591
Market discount accrual 85,705 -
Other 18,741 14,733
---------- -------------
Total gross deferred tax assets 2,088,000 2,702,000
---------- -------------
DEFERRED TAX LIABILITIES
Deferred acquisition costs 784,116 781,559
Excess of cost over net assets acquired 123,424 145,383
Prepaid expenses 35,499 38,084
Unrealized appreciation of investments 27,216 -
Other 36,745 52,974
---------- -------------
Total gross deferred tax liabilities 1,007,000 1,018,000
---------- -------------
Net deferred tax assets $1,081,000 $ 1,684,000
---------- -------------
---------- -------------
</TABLE>
If the Company believes that all of its deferred tax assets will not result
in future tax benefits, the Company must establish a "valuation allowance"
for the portion of these assets that it thinks will not be realized. Based
upon review of the Company's refundable taxes, anticipated future earnings,
and all other available evidence, both positive and negative, the Company has
concluded it is "more likely than not" that its net deferred tax assets will
be realized.
Income tax payments in the first six months of 1995 and 1994 were $600,000 and
$301,000, respectively.
(5) PROPERTY-LIABILITY REINSURANCE AND RELATED RESERVES
Ceded reinsurance involves having other insurance companies agree to share
certain risks with the Company. The primary purpose of ceded reinsurance is to
protect the Company from potential losses in excess of the amount it is prepared
to accept. Reinsurance may be on an individual policy basis or to protect
against catastrophic losses.
SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," requires the Company to report balances pertaining to
reinsurance transactions "gross" on the balance sheet. The Company now records
reinsurance recoverables on unpaid losses and ceded unearned premiums as assets
in contrast to the Company's prior practice of netting these amounts against the
corresponding liabilities.
Page 9
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
The Company expects the companies with whom reinsurance is placed to honor their
obligations to the Company. In the event these companies are unable to honor
their obligations, the Company will pay these amounts. As of December 31, 1994,
approximately 66 percent and 77 percent of the total reinsurance recoverable and
prepaid reinsurance premiums, respectively, were with the North American
Reinsurance Corporation. That company is rated "A" by A.M. Best Company and
"AAA" by Standard and Poor's for its property/liability claims-paying ability.
The effect of ceded reinsurance on premiums written, premiums earned and
insurance losses and loss adjustment expenses is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ -------------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Premiums written:
Direct. . . . . . . . . . . . . . . . . . . . . . . . $9,660,377 $8,812,755 $18,520,096 $16,793,775
Ceded . . . . . . . . . . . . . . . . . . . . . . . . 1,651,996 1,553,969 3,052,619 2,769,664
---------- ---------- ----------- -----------
Net premiums written. . . . . . . . . . . . . . . $8,008,381 $7,258,786 $15,467,477 $14,024,111
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Premiums earned:
Direct. . . . . . . . . . . . . . . . . . . . . . . . $8,923,313 $8,120,258 $17,578,104 $15,884,438
Ceded . . . . . . . . . . . . . . . . . . . . . . . . 1,544,832 1,413,325 2,464,719 2,736,038
---------- ---------- ----------- -----------
Net premiums earned . . . . . . . . . . . . . . . $7,378,481 $6,706,933 $15,113,385 $13,148,400
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Losses and loss
adjustment expenses:
Direct. . . . . . . . . . . . . . . . . . . . . . . . $6,505,713 $4,921,336 $12,302,645 $10,664,461
Ceded . . . . . . . . . . . . . . . . . . . . . . . . 1,336,098 661,407 2,288,616 2,018,740
---------- ---------- ----------- -----------
Net losses and
loss adjustment expenses . . . . . . . . . . . . $5,169,615 $4,259,929 $10,014,029 $ 8,645,721
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The consolidated financial statements and the related notes should be read in
conjunction with the following discussion, since they contain important
information for evaluation of the Company's financial condition and operating
results.
RESULTS OF OPERATIONS
Direct premiums written increased 9.6 percent and 10.3 percent in 1995 over
1994 for the three and six month periods ended June 30, respectively,
primarily because of business growth in Ohio and Wisconsin. The growth is
mainly attributable to an increase in policies written for personal
automobile and larger commercial accounts.
Premiums earned for the three and six month periods rose 10.0 percent and
15.0 percent, respectively, over the comparable 1994 amounts. The 1995 earned
premiums were positively affected by a $592,398 refund of excess ceded
premiums received from the Minnesota Workers' Compensation Reinsurance
Association ("MWCRA").
The property and casualty insurance market continues to be competitive.
Although revenues from the Company's association business grew 36.5 percent
from association revenues during the first six months of 1994, commercial
business in Minnesota and Wisconsin is intensely competitive in the workers'
compensation line. The Company's current strategy is to strive to maintain rate
adequacy in order not to jeopardize underwriting results.
Net investment income was $606,629 for the second quarter of 1995 compared to
$531,235 for the second quarter of 1994. For the first six months of 1995, net
investment income was $1,215,239 compared to $1,049,303 in 1994. Such increases
over 1994 results were primarily a result of an increase in invested assets.
The Company experienced realized gains on investments of $37,649 in the second
quarter of 1995 compared to a realized loss of $404 in the same period in 1994.
For the first six months of 1995, realized gains on investments were $46,433
compared to $16,380 in 1994. The Company continued to shorten the duration of
the investment portfolio in order to decrease its exposure to interest rate
volatility.
The Company's loss ratio (loss and loss adjustment expenses incurred to premiums
earned) was 70.1 percent for the second quarter of 1995 compared to 63.5 percent
in the second quarter of 1994. The Company experienced an increase in the
severity of claims during 1995. The majority of the increase in severity
occurred in the homeowners line of business as a result of storms occurring in
May 1995, and in the personal automobile line of business due to major
accidents occurring during the second quarter. For the six months ended June
30, 1995, the loss ratio was 66.3 percent compared to 65.8 percent for the same
period in 1995.
The Company's expense ratio (total operating expenses to premiums earned) for
the second quarter of 1995 was 36.5 percent as compared to 34.8 percent for the
second quarter of 1994. The increase was primarily due to an increase in
dividends paid to associations and pursuant to Wisconsin workers' compensation
policies. The expense ratio for the six months ended June 30, 1995 decreased .6
percent as compared to the same period a year ago.
Page 11
<PAGE>
For the second quarter of 1995, net income was $214,222, or $.07 per common
share, compared to net income of $557,865, or $.28 per common share, for the
second quarter of 1994. For the first six months of 1995, net income was
$1,011,350, or $.50 per common share, versus $892,048, or $.35 per common share,
for the same period in 1994. The MWCRA refund, in addition to accrued interest
income associated with such refund, accounted for net income of approximately
$410,000, or $.25 per common share, in the first quarter of 1995.
The Company's results of operations are affected by seasonal weather variations.
Accordingly, results reflected for any interim period are not necessarily
indicative of those to be expected for the entire year.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for the Company's subsidiaries are funds
generated from insurance premiums and net investment income. The Company's
subsidiaries' funds are generally invested in fixed maturity securities. At
June 30, 1995, the Company and its subsidiaries held cash and short-term
investments of $1,990,709. Management believes that these funds provide
adequate liquidity for the payment of claims and other short-term cash needs.
On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan
from First Bank National Association, which has subsequently been amended. The
principal balance of the bank loan remaining to be paid as of June 30, 1995 was
$1,318,920. The current interest rate is 9.25 percent, but the rate is variable
and is tied to the prime rate. The Company agreed to certain restrictive
covenants which limit the amount of subsequent indebtedness, capital
expenditures and business acquisitions.
As a holding company, the Company depends on dividends from its subsidiaries and
fees payable under the Capital Access Fee Agreement to provide funds for bank
loan payments, preferred stock dividends and other operating expenses.
As of June 30, 1995, the Company had no material commitments for capital
expenditures.
Page 12
<PAGE>
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
------ ------------------------------------------------------------------
(10) Sublease Agreement dated July 5, 1995 between Insurance Company of
Ohio and Tom Witkowski
(27) Financial Data Schedule
(b) Reports on Form 8-K.
None
Page 13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS SECURITY GROUP INC.
(Registrant)
Date: August 14, 1995 By: /s/ Scott S. Broughton
---------------------------
Scott S. Broughton
President, Chief Operating Officer
(duly authorized officer) and Chief
Financial Officer (principal
financial and accounting officer)
Page 14
<PAGE>
EXHIBIT INDEX
Page
Exhibit Description Number
------- ---------------------------------------------------------- ------
(10) Sublease Agreement dated July 5, 1995 between Insurance
Company of Ohio and Tom Witkowski
(27) Financial Data Schedule
Page 15
<PAGE>
SUBLEASE AGREEMENT
This lease made this 5th day of July, 1995, by and between Insurance Company of
Ohio, herein called "Lessor" and Tom Witkowski, herein called "Lessee".
This sublease agreement refers to the attached lease dated September 16,1993, by
and between Engwiller Properties, Inc., and Insurance Company of Ohio ("Original
Lease").
PREMISES 1. Lessee hereby leases to Lessor, and Lessor hereby leases
from Lessee, the premises at 105-109 North Main St. (Suite
205, Second Floor), Mansfield Ohio, the leased premises
described in paragraph two under section 1. PREMISES, of
Original Lease.
TERM 2. The term of this lease shall be for eighteen (18) months
commencing on or before August 1, 1995.
RENT 3. (a) Lessor shall pay monthly rent of Five Hundred Dollars
($500) on or before the first day of each month during the
lease term. Rent received later than the 7th day of the
month due will be increased by 10 percent.
3. (b) Lessor shall pay a Common Area Charge of One Hundred
Thirty-Five Dollars and Seventy-One Cents ($135.71) per
month payable on or before the first day of each month
during the least term. Payment received later than the
7th day of the month due will be increased by 10 percent.
3. (c) Tenant shall pay a deposit to Lessor before the
commencement of the lease term equivalent to the rent for
one month, which deposit shall be used to secure the
performance of Lessee under the lease. The deposit may
not be used by Lessee as a substitute for any portion of
the rental obligation and shall be returned to Lessee at
the end of the lease term, less deductions, if any, on
account of violation of any provision of the lease.
3. (d) Parking will be added to the base rent charge at the
rate of $20.00 per month, per space reserved.
SPECIAL 4. Refer to section 4. SPECIAL PROVISION of Original Lease
PROVISION replacing "Tenant" with "Lessee".
Page 1 of 4
<PAGE>
UTILITIES 5. The parties agree to furnish and pay utilities and real
AND REAL estate taxes indicated below and as may be referred to in
ESTATE TAXES subsequent provisions of the lease.
(a)Heat, by Lessee.
(b)Electricity, by Lessee.
(c)Water and sewer, by Lessee.
(d)Telephone, by Lessee.
(e)Real estate taxes and assessments, by Lessee.
(f)Fire and extended coverage insurance as to the
building, by Landlord.
(g)Fire and extended coverage insurance as to the
contents of the building and liability by the
Lessee.
(h)Security system monitoring fee due for 1996, by
Lessee.
Refer to last paragraph, section 5. UTILITIES and REAL ESTATE
TAXES of Original Lease replacing "Tenant" with "Lessee".
USE 6. Refer to section 6. USE of Original Lease replacig
"Tenant" with "Lessee".
SIGNS 7. Lessee may install such signs and window lettering as may
reasonably be necessary to Lessee's business, provided
they comply with all local ordinances and are reasonable
in size and attractive in appearance and are subject to
other restrictions, if any, contained in the lease. All
signage is subject to Landlord's approval. Drawings and
color scheme to be submitted to Landlord for approval
prior to fabrication of sign.
NOTICES 8. Notices and payments to the Lessor shall be addressed to
Lessor at P.O. Box 3500, Red Wing, MN 55066. All notices
to Lessee shall be addressed to: Tom Witkowski, 105 North
Main Street, Suite 205, Mansfield, OH 44902.
SURRENDER 9. Refer to section 9. SURRENDER of Original Lease agreement
replacing "Tenant" with "Lessee" and "Landlord" with
"Lessor".
ASSIGNMENT 10. Lessee may not assign this lease or sublet all or part of
the premises.
LESSOR'S 11. Lessor may terminate this lease and take possession of the
REMEDIES premises without waiving any rights which they may have at
law, without further notice following either of these
events: (a) That Lessee fails to pay the rent due under
this lease within 15 days following written notice of
default; (b) That Lessee fails to commence the
correction of any other violation of its covenants within
15 days after written notice, or having commenced to
correct the same, should fail to carry the same to
conclusion with due diligence; (c) That Lessee makes an
assignment for the benefit of creditors or is adjudicated
a bankrupt.
LESSEE'S 12. In the event the Lessor is in default under this lease and
REMEDIES shall fail to commence to correct such default within 15
days after receiving notice of such default from Lessor,
Lessee may, at its option, correct the default on the
account of the Lessor and make appropriate reduction in
rent payments if expenses are incurred by Lessee in
correcting the default.
Page 2 of 4
<PAGE>
REPAIRS 13. Refer to section 13. REPAIRS of Original Lease replacing
"Tenant" with "Lessee" and "Landlord" with "Lessor".
RESTORATION 14. Refer to section 14. RESTORATION of Original Lease
replacing "Tenant" with "Lessee" and "Landlord" with
"Lessor".
ENTRY 15. (a) Refer to section 15. ENTRY of Original Lease
replacing "Tenant" with "Lessee".
(b) Upon 24 hour verbal notice to the Lessee, the
Landlord may show the facility to prospective tenants.
HOLDOVER 16. This lease does not contain a holdover clause.
QUIET 17. Refer to section 17. QUIET ENJOYMENT of Original Lease
ENJOYMENT replacing"Tenant" with "Lessee".
ALTERATIONS 18. (a) Refer to section 18. ALTERATIONS of Original Lease
replacing "Tenant" with "Lessee".
(b) All partitions must be freestanding in nature.
Physical attachment to the floor, walls, or ceilings are
not permitted.
INSURANCE 19. Refer to section 19. INSURANCE and INDEMNIFICATION of
AND Original Lease replacing "Tenant" with "Lessee".
INDEMNIFICATION
EMINENT 20. Refer to section 20. EMINENT DOMAIN of Original Lease
DOMAIN replacing "Tenant"with "Lessee".
MORTGAGES 21. Refer to section 21. MORTGAGES SUBORDINATION of Original
SUBORDINATION Lease replacig "Tenant" with "Lessee".
COMMUNITY 22. Upon one week prior written notice, the Landlord may
BETTERMENT exercise its right to use the balcony area for functions
contributing to the betterment of the community and
historic district. The Landlord is held liable for any
property damage or legal liability resulting from its use
of the facility.
SUCCESSION 23. This lease shall benefit and be binding upon the Lessor
and Lessee and their respective heirs, representatives,
successors and assigns.
MEMORANDUM 24. Upon request of either party, the parties shall execute a
memorandum of lease suitable for recording, which shall be
recorded in Richland County, Ohio, by either party.
Page 3 of. 4
<PAGE>
IN WITNESS WHEREOF, this lease has been duly executed as of the first date above
written.
In presence of:
/s/ Cheryl R. Johnson INSURANCE COMPANY OF OHIO
--------------------------
/s/ Anita Gadient By /s/ Cheri S. Anderson
----------------------------- ---------------------
LESSOR
TOM WITKOWSKI
By /s/ Tom Witkowski
-----------------
LESSEE
STATE of OHIO
COUNTY OF RICHLAND, SS:
Before me a Notary Public in and for said County and State, personally appeared
Tom Witkowski, of Witkowski & Associates, who acknowledged that he signed the
foregoing instrument and the fully authorized officer of said Business and that
the same is his free act and deed as such officer and the free act and deed of
said Business.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal at Mansfield,
Ohio, this 31st day of July , 1995.
-------- ------------
By /s/ Nancy A. Shutt
------------------------------------
Notary Public
STATE of MINNESOTA
COUNTY OF GOODHUE, SS:
Before me a Notary Public in and for said County and State, personally appeared
Cheri S. Anderson, of Insurance Company of Ohio, who acknowledged that she
signed the foregoing instrument and the fully authorized officer of Insurance
Company of Ohio and that the same is her free act and deed as such officer and
the free act and deed of said Business.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal at Red Wing,
Minnesota, this 26th day of July , 1995.
---------- ------------
By /s/ Mary B. Plein
-----------------
Notary Public
Page 4 of 4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 34,800,089
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 717,813
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 37,373,131
<CASH> 135,480
<RECOVER-REINSURE> 5,109,258
<DEFERRED-ACQUISITION> 2,306,224
<TOTAL-ASSETS> 58,436,732
<POLICY-LOSSES> 22,991,347
<UNEARNED-PREMIUMS> 16,022,542
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,318,920
<COMMON> 16,616
0
4,375,000
<OTHER-SE> 11,630,517
<TOTAL-LIABILITY-AND-EQUITY> 58,436,732
15,113,385
<INVESTMENT-INCOME> 1,215,239
<INVESTMENT-GAINS> 46,433
<OTHER-INCOME> 276,573
<BENEFITS> 10,014,029
<UNDERWRITING-AMORTIZATION> 2,697,434
<UNDERWRITING-OTHER> 2,485,817
<INCOME-PRETAX> 1,454,350
<INCOME-TAX> 443,000
<INCOME-CONTINUING> 1,011,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,011,350
<EPS-PRIMARY> .50
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
