<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, 1996
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 July 31, 1996, was 1,996,585.
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,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Investments:
Fixed maturities, at market (amortized cost of
$36,300,157 and $36,174,613, respectively) . . . . . $36,697,852 $37,022,064
Equity securities, at market (cost of $648,747 and
$649,278, respectively) . . . . . . . . . . . . . . 769,016 791,385
Short-term investments. . . . . . . . . . . . . . . . 2,540,386 1,462,448
----------- -----------
Total investments . . . . . . . . . . . . . . . 40,007,254 39,275,897
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . (776,585) 1,291,173
Receivables:
Insurance premiums receivable . . . . . . . . . . . . 9,184,516 8,322,717
Reinsurance recoverable . . . . . . . . . . . . . . . 5,179,868 5,214,073
----------- -----------
Total receivables . . . . . . . . . . . . . . . 14,364,384 13,536,790
Deferred policy acquisition costs. . . . . . . . . . . . 2,671,280 2,427,418
Prepaid reinsurance premiums . . . . . . . . . . . . . . 2,052,569 2,395,744
Deferred tax asset . . . . . . . . . . . . . . . . . . . 954,000 745,000
Current income tax receivable. . . . . . . . . . . . . . 326,577 -
Accrued investment income. . . . . . . . . . . . . . . . 619,744 573,303
Equipment, at cost less accumulated depreciation . . . . 459,408 594,525
Excess of cost over net assets acquired. . . . . . . . . 239,273 309,297
Other assets . . . . . . . . . . . . . . . . . . . . . . 176,293 141,896
----------- -----------
Total assets . . . . . . . . . . . . $61,094,197 $61,291,043
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses. . . $24,443,806 $24,012,866
Unearned premiums . . . . . . . . . . . . . . . . . . 17,461,074 16,632,332
Bank loan payable . . . . . . . . . . . . . . . . . . 799,000 999,000
Unearned compensation . . . . . . . . . . . . . . . . 239,999 329,999
Due to Citizens Mutual. . . . . . . . . . . . . . . . 84,933 76,616
Current income taxes payable. . . . . . . . . . . . . - 90,423
Other liabilities . . . . . . . . . . . . . . . . . . 1,685,711 2,182,897
----------- -----------
Total liabilities . . . . . . . . . . . . . . . 44,714,523 44,324,133
----------- -----------
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;
1,701,585 and 1,661,585 shares issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . . 17,016 16,616
Additional paid-in capital. . . . . . . . . . . . . . 5,230,972 5,097,360
Unearned compensation . . . . . . . . . . . . . . . . (239,999) (329,999)
Unrealized appreciation of investments in fixed
maturities and equity securities, net of related
taxes . . . . . . . . . . . . . . . . . . . . . . 341,964 652,558
Retained earnings . . . . . . . . . . . . . . . . . . 6,654,721 7,155,375
----------- -----------
Total shareholders' equity. . . . . . . . . . . 16,379,674 16,966,910
----------- -----------
Total liabilities and shareholders' equity. . . $61,094,197 $61,291,043
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Operation
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned . . . . . . . . . $8,043,316 $7,378,481 15,896,803 $15,113,385
Investment income, less related
expenses . . . . . . . 622,877 606,629 1,250,390 1,215,239
Realized gains on investments . . 5,513 37,649 4,998 46,433
Other income. . . . . . . 155,080 138,198 304,997 276,573
---------- --------- ---------- ----------
Total revenues. . . . . . 8,826,786 8,160,957 17,457,188 16,651,630
---------- --------- ---------- ----------
Losses and expenses:
Losses and loss adjustment
expenses incurred. . . . . . . 6,884,626 5,169,615 12,418,334 10,014,029
Policy acquisition costs. . . . . 1,527,626 1,347,552 2,943,304 2,697,434
Interest expense. . . . . . . . . 25,035 49,206 53,164 89,582
Other operating expenses. . . . . 1,416,732 1,293,362 2,620,134 2,396,235
---------- --------- ---------- ----------
Total losses and expenses 9,854,019 7,859,735 18,034,936 15,197,280
---------- --------- ---------- ----------
Income (loss) before
income taxes. . . . . . (1,027,233) 301,222 (577,748) 1,454,350
Income tax expense (benefit). . . . . (378,000) 87,000 (251,000) 443,000
---------- --------- ---------- ----------
Net income (loss). . . $ (649,233) $ 214,222 $ (326,748) $1,011,350
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Weighted average common and common
equivalent shares outstanding . . . 1,826,279 1,690,249 1,826,279 1,687,533
---------- --------- ---------- ----------
Earnings (loss) per common share. . . $ (.40) $ .07 $ (.27) $ .50
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</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,
---------------------------
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . $ (326,748) $ 1,011,350
Adjustments to reconcile net income to net cash
provided by (used in) operating activites:
Change in:
Insurance premiums receivable. . . . . (861,799) (949,346)
Reinsurance recoverable. . . . . . . . (37,752) (1,282,814)
Due from / payable to Citizens Mutual. 8,317 (332,331)
Prepaid reinsurance premiums . . . . . 343,175 4,498
Deferred policy acquisition costs. . . (243,862) (7,521)
Deferred income taxes. . . . . . . . . (48,000) (192,000)
Reserves for losses and loss adjustment
expense. . . . . . . . . . . . . . . 430,941 2,001,611
Unearned premiums. . . . . . . . . . . 828,742 349,594
Income tax payable / receivable. . . . (417,000) 35,000
Other liabilities. . . . . . . . . . . (425,229) (518,614)
Depreciation and amortization . . . . . . 242,402 98,082
Realized gains. . . . . . . . . . . . . . (4,998) (46,433)
Other, net. . . . . . . . . . . . . . . . (144,446) (39,570)
---------- ---------
Net cash provided by (used in)
operating activities . . . . . . . . (656,257) 131,506
---------- ---------
Cash flows from investing activities:
Proceeds from fixed maturities called or
matured. . . . . . . . . . . . . . . . . . . 3,696,504 1,215,074
Proceeds from fixed maturities sold. . . . . . 200,031 4,881,583
Proceeds from equity securities. . . . . . . . 555 -
Cost of fixed maturities acquired. . . . . . . (3,956,916) (6,523,769)
Cost of equity securities acquired . . . . . . - (10,605)
Cost of equipment acquired . . . . . . . . . . (33,843) (50,525)
---------- ---------
Net cash used in investing activities. (93,669) (488,242)
---------- ---------
Cash flows from financing activities:
Exercise of common stock options . . . . . . . 134,012 -
Repayment of bank loan . . . . . . . . . . . . (200,000) (200,000)
Series A preferred stock dividends . . . . . . (173,906) (173,906)
---------- ---------
Net cash used in financing activities. (239,894) (373,906)
---------- ---------
Net increase (decrease) in cash and short-term
investments . . . . . . . . . . . . . . . . . . (989,820) (730,642)
Cash and short-term investments at beginning of
period. . . . . . . . . . . . . . . . . . . . . 2,753,621 2,721,351
---------- ----------
Cash and short-term investments at end of period. $1,763,801 $1,990,709
----------- ----------
</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,
1996 1995
------------ ------------
<S> <C> <C>
Preferred stock, beginning of period. . . . . $ 4,375,000 $ 4,375,000
----------- ------------
Preferred stock, end of period. . . . . 4,375,000 4,375,000
----------- ------------
Common stock, beginning of period . . . . . . 16,616 16,616
Exercise of common stock options . . . . . 400 -
----------- ------------
Common stock, end of period . . . . . . . 17,016 16,616
----------- ------------
Additional paid-in capital, beginning of
period. . . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Exercise of common stock options . . . . . 133,612 -
----------- ------------
Additional paid-in capital, end of
period . . . . . . . . . . . . . . . . 5,230,972 5,097,360
----------- ------------
Unearned compensation, beginning of period. . (329,999) (509,999)
ESOP principal payments. . . . . . . . . . 90,000 180,000
----------- ------------
Unearned compensation, end of period. . (239,999) (329,999)
----------- ------------
Unrealized appreciation (depreciation),
beginning of period . . . . . . . . . . . . 652,558 (1,492,563)
Change in unrealized appreciation
(depreciation), net of taxes . . . . . . . (310,594) 2,145,121
----------- ------------
Unrealized appreciation, end of period. 341,964 652,558
----------- ------------
Retained earnings, beginning of period. . . . 7,155,375 6,062,664
Net income (loss). . . . . . . . . . . . . (326,748) 1,440,523
Series A preferred stock dividend. . . . . (173,906) (347,812)
----------- ------------
Retained earnings, end of period. . . . 6,654,721 7,155,375
----------- ------------
Total shareholders' equity. . . . . . . $16,379,674 $16,966,910
------------ ------------
------------ ------------
</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, 1996 and 1995
(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 ("Citizens Fund") and Insurance
Company of Ohio ("ICO"), 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, 1996, the related Consolidated
Statements of Operation and Cash Flows for the three and six months ended
June 30, 1996 and 1995, the Consolidated Statements of Changes in Equity for
the six months ended June 30, 1996 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 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 on Form 10-K for the year ended December 31, 1995.
On July 31, 1996, the Company was acquired by Meridian Insurance Group, Inc.
("Meridian") (the "Meridian Acquisition"). In the Meridian Acquisition, each
holder of shares of Common Stock of the Company received $12.50 per share of
Common Stock in cash (an aggregate of approximately $25.0 million), and
Citizens Security Mutual Insurance Company ("Citizens Mutual"), as the sole
holder of shares of the Company's 7.95% Series A Preferred Stock (the
"Preferred Stock"), received $3.50 per share of Preferred Stock in cash (an
aggregate of approximately $4.4 million).
In connection with the Meridian Acquisition, Meridian assumed control of the
Citizens Mutual Board of Directors. In addition, Citizens Mutual, Citizens
Fund, ICO and the insurance companies affiliated with Meridian entered into a
new reinsurance pooling arrangement under which they combined all of the
respective insurance business.
(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 by dividends on the Company's Series A preferred stock. Declared
preferred stock dividends were $173,906 for the six months ended June 30,
1996 and 1995.
Page 6
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
(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. Estimated
market value is based on quoted market prices where available. Where quoted
market prices are not available, market value is estimated using values
obtained from independent pricing services.
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. The carrying amount
reported in the balance sheets for cash and short-term investments
approximate their fair value.
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.
Realized gains on investments were as follows:
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1996 1995 1996 1995
-------- ------- -------- --------
Fixed maturities. . . . . $ 5,513 $ 37,649 $ 4,998 $ 46,433
-------- -------- -------- --------
Realized gains on
investments. . . . . . $ 5,513 $ 37,649 $ 4,998 $ 46,433
-------- -------- -------- --------
-------- -------- -------- --------
Change in unrealized appreciation (depreciation) is summarized as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------
1996 1995 1996 1995
-------- -------- --------- ---------
Equity securities . . . . $(12,030) $ 16,592 $ (21,838) $ 18,119
Fixed maturities. . . . . 397,374 1,182,830 (449,756) 2,322,492
-------- ---------- --------- ----------
Total change in
unrealized
appreciation
(depreciation). . . . $385,344 $1,199,422 $(471,594) $2,340,611
-------- ---------- --------- ----------
-------- ---------- --------- ----------
(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.
Page 7
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
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:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- --------------------
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Statements of Operation
Income tax attributable to operations . . . . $(378,000) $87,000 $(251,000) $443,000
Shareholders' Equity
Income tax attributable to unrealized
appreciation (depreciation)
of investments. . . . . . . . . . . . . . 131,000 407,000 (161,000) 795,000
--------- -------- --------- --------
$(247,000) $494,000 $ (412,000) $1,238,000
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
The components of income tax expense (benefit) related to the operations are
as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- --------------------
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Federal current . . . . . . . . . . . . . . . $(255,000) $232,000 $(204,000) $ 613,000
Federal deferred. . . . . . . . . . . . . . . (123,000) (156,000) (49,000) (192,000)
State . . . . . . . . . . . . . . . . . . . . - 11,000 2,000 22,000
--------- --------- -------- ---------
Total income tax expense (benefit). . . . (378,000) $ 87,000 $(251,000) $443,000
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
Federal income tax expense (benefit) is less than the U.S. Federal income tax
rate of 34 percent applied to income (loss) 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,
---------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Tax expense (benefit) calculated
at the Federal rate . . . . . . . . . . $(349,259) $102,415 $(196,434) $494,479
Reduction attributable to nontaxable
investment income (municipal bond
interest and domestic dividends) (32,697) (32,538) (62,794) (71,098)
State tax expense . . . . . . . . . . . . . - 7,260 1,320 14,520
Other . . . . . . . . . . . . . . . . . . . 3,956 9,863 6,908 5,099
--------- -------- --------- --------
Total income tax expense (benefit). . . . . $(378,000) $ 87,000 $(251,000) $443,000
--------- -------- --------- --------
--------- -------- --------- --------
</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:
June 30, December 31,
1996 1995
---------- ------------
DEFERRED TAX ASSETS
Loss reserves . . . . . . . . . . . . . . $1,136,457 $ 1,108,125
Unearned premium reserves . . . . . . . . 1,047,778 968,087
Other . . . . . . . . . . . . . . . . . . 12,765 10,788
---------- ------------
Total gross deferred tax assets. . . . 2,197,000 2,087,000
---------- ------------
DEFERRED TAX LIABILITIES
Deferred acquisition costs. . . . . . . . 908,236 825,322
Excess of cost over net assets acquired . 79,505 101,464
Unrealized appreciation of investments. . 176,108 336,450
Prepaid expenses. . . . . . . . . . . . . 35,121 37,279
Other . . . . . . . . . . . . . . . . . . 44,030 41,485
---------- ------------
Total gross deferred tax liabilities . 1,243,000 1,342,000
---------- ------------
Net deferred tax assets. . . . . . . . $ 954,000 $ 745,000
---------- ------------
---------- ------------
The Company has determined it is not necessary to establish a valuation
allowance for the deferred tax asset as it is more likely than not the
deferred tax asset will be realized principally through future reversal of
existing taxable temporary differences and future taxable income.
Income tax payments totaled $215,000 and $600,000 in the first six months of
1996 and 1995, 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.
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, 1995, approximately 74 percent of the Company's prepaid reinsurance
premiums was with Mutual Reinsurance Bureau ("MRB"). All business written
with MRB is automatically assumed on an equal and joint basis by its six
owner/assuming companies. The six companies are rated from "A" to "A++" by
A.M. Best Company. As of December 31, 1995, approximately 54 percent of the
Company's total reinsurance recoverable was with Swiss Reinsurance America
Corporation, formerly known as North American Reinsurance Corporation. Swiss
Reinsurance America Corporation is rated "A" by A.M. Best Company and "AAA"
by Standard and Poor's for its property/liability claims-paying ability.
Page 9
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
In 1994, the Company received refunds of $592,398 of excess ceded reinsurance
premiums from the Minnesota Workers' Compensation Reinsurance Association.
These refunds were required to be distributed to certain workers'
compensation policyholders under legislation passed by the State of Minnesota
in 1992. This legislation was challenged by a group of insurers and on
January 31, 1995 the U.S. Court of Appeals for the Eighth Circuit upheld a
lower court ruling that found the legislation to be unconstitutional. At
December 31, 1994 the Company recorded the refund as a reduction of ceded
written premium and ceded unearned premium, with no effect on earned premium.
The Company recorded these refunds as premiums earned in 1995.
The effect of assumed and 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,
---------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Premiums written:
Direct . . . . . . . . . . . . . . . . . $10,682,059 $9,660,377 $19,883,049 $18,520,096
Ceded. . . . . . . . . . . . . . . . . . 1,692,329 1,651,996 2,814,329 3,052,619
----------- ---------- ----------- -----------
Net premiums written . . . . . . . . $ 8,989,730 $8,008,381 $17,068,720 $15,467,477
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Premiums earned:
Direct . . . . . . . . . . . . . . . . . $ 9,660,072 $8,923,313 $19,054,307 $17,578,104
Ceded. . . . . . . . . . . . . . . . . . 1,616,756 1,544,832 3,157,504 2,464,719
----------- ---------- ----------- -----------
Net premiums earned. . . . . . . . . $ 8,043,316 $7,378,481 $15,896,803 $15,113,385
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Losses and loss
adjustment expenses:
Direct . . . . . . . . . . . . . . . . . $ 9,221,844 $6,505,713 $15,661,393 $12,302,645
Ceded. . . . . . . . . . . . . . . . . . 2,337,218 1,336,098 3,243,059 2,288,616
----------- ---------- ----------- -----------
Net losses and
loss adjustment expenses. . . . . . $ 6,884,626 $5,169,615 $12,418,334 $10,014,029
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</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 1996 over
1995 for the three and six month periods ended June 30, respectively.
Premiums earned for the three and six month periods rose 10.0 percent and
15.0 percent, respectively, over the comparable 1995 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").
Net investment income was $622,877 for the second quarter of 1996 compared to
$606,629 for the second quarter of 1995. For the first six months of 1996,
net investment income was $1,250,390 compared to $1,215,239 in 1995. Such
increases over 1995 results were primarily a result of an increase in
invested assets. The Company experienced a realized gain on investments of
$5,513 in the second quarter of 1996 compared to $37,649 in the same period
in 1995. For the first six months of 1996, realized gains on investments
were $4,998 compared to $46,433 in 1995.
The Company's loss ratio (loss and loss adjustment expenses incurred to
premiums earned) was 85.6 percent for the second quarter of 1996 compared to
70.1 percent in the second quarter of 1995. The Company experienced an
increase in the severity of claims during 1996. For the six months ended
June 30, 1996, the loss ratio was 78.1 percent compared to 66.3 percent for
the same period in 1996.
Effective January 1, 1996, Citizens Fund, ICO and Citizens Mutual entered
into an aggregate excess of loss contract which reinsures losses and
allocated loss adjusting expenses in excess of 62 percent in any accident
year. The reinsurer's obligation is limited to 5 percent of accident year
subject net earned premium. Losses and allocated adjusting expenses in
excess of 67 percent are retained by Citizens Fund, ICO and Citizens Mutual.
In 1996, the Company's loss ratio was positively effected by the 5 percent
benefit of the excess of loss contract.
The Company's expense ratio (total operating expenses to premiums earned) for
the second quarter of 1996 was 36.9 percent as compared to 36.5 percent for
the second quarter of 1995. The expense ratio for the six months ended June
30, 1996 increased 1 percentage point as compared to the same period a year
ago.
For the second quarter of 1996, the Company experienced a net loss of
$649,233, or a loss of $.40 per common share, compared to net income of
$214,222, or $.07 per common share, for the second quarter of 1995. For the
first six months of 1996, the net loss was $326,748, or $.27 per common
share, versus net income of $1,011,350, or $.50 per common share, for the
same period in 1995. 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.
Page 11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for Citizens Fund and ICO 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, 1996, the Company and its subsidiaries held cash and short-term
investments of $1,763,801. 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 purchased
on November 9, 1995 by Goodhue County National Bank, Red Wing, Minnesota.
The principal balance of the bank loan remaining to be paid as of June 30,
1996 was $799,000. The current interest rate is 8.75 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 Citizens Fund and
ICO and fees payable under a Capital Access Fee Agreement to provide funds
for bank loan payments, Preferred Stock dividends and other operating
expenses.
As of June 30, 1996, the Company had no material commitments for capital
expenditures.
On February 8, 1996, the Company announced that the Company and Citizens
Mutual entered into an Acquisition and Affiliation Agreement with Meridian
providing for the acquisition of the Company by Meridian and the affiliation
of Citizens Mutual and Merdian. A definitive acquisition agreement was
executed effective March 20, 1996 and the subsequent transactions were closed
on July 31, 1996.
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.
The Company held a special meeting of shareholders on July 31, 1996. A
proposal to approve and adopt an Acquisition and Affiliation Agreement, dated
as of March 20, 1996, by and among the Company, Citizens Mutual and Meridian,
and the related Plan of Merger was submitted to a vote of security holders.
Of the 1,223,808 shares represented at the meeting, 1,220,865 shares were
voted in favor of the proposal, 2,507 shares were voted against the proposal,
and 438 shares abstained from voting on the proposal.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
------ ---------------------------------------
(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: July 31, 1996 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
- ------- -------------------------------------------- ------
(27) Financial Data Schedule
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 36,697,852
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 769,016
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 40,007,254
<CASH> (776,585)
<RECOVER-REINSURE> 5,179,868
<DEFERRED-ACQUISITION> 2,671,280
<TOTAL-ASSETS> 61,094,197
<POLICY-LOSSES> 24,443,806
<UNEARNED-PREMIUMS> 17,461,074
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 799,000
0
4,375,000
<COMMON> 17,016
<OTHER-SE> 11,987,658
<TOTAL-LIABILITY-AND-EQUITY> 61,094,197
15,896,803
<INVESTMENT-INCOME> 1,250,390
<INVESTMENT-GAINS> 4,998
<OTHER-INCOME> 304,997
<BENEFITS> 12,418,334
<UNDERWRITING-AMORTIZATION> 2,943,304
<UNDERWRITING-OTHER> 2,673,298
<INCOME-PRETAX> (577,748)
<INCOME-TAX> (251,000)
<INCOME-CONTINUING> (326,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (326,748)
<EPS-PRIMARY> (.27)
<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>
