<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 1-9640
-------------
MERCHANTS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
16-1280763
(I.R.S. Employer Identification No.)
250 MAIN STREET, BUFFALO, NEW YORK
(Address of principal executive offices)
14202
(Zip Code)
716-849-3333
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1997:
2,965,702 SHARES OF COMMON STOCK.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1996 1997
------ ------------ --------
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity at amortized cost (fair value
$19,921 in 1996 and $19,889 in 1997) $ 19,549 $ 19,586
Available for sale at fair value (amortized cost
$163,500 in 1996 and $164,457 in 1997) 163,567 163,546
Other long-term investments at fair value 10,233 12,392
Short-term investments 8,248 14,640
-------- --------
Total investments 201,597 210,164
Cash 11 2
Interest due and accrued 1,793 1,818
Premiums receivable, net of allowance for doubtful
accounts of $571 in 1996 and $577 in 1997 20,501 20,780
Deferred policy acquisition costs 12,396 12,334
Ceded reinsurance balances receivable 7,835 10,306
Prepaid reinsurance premiums 2,932 2,715
Receivable from affiliate 327 854
Federal income tax receivable 1,266 739
Deferred federal income tax benefit 6,645 6,541
Other assets 6,820 6,786
-------- --------
Total assets $262,123 $273,039
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
2
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MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands except share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ---------
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Reserve for losses and loss adjustment expenses $ 133,479 $ 136,414
Unearned premiums 49,710 49,257
Payable for securities -- 8,884
Other liabilities 13,905 13,197
--------- ---------
Total liabilities 197,094 207,752
--------- ---------
Stockholders' equity:
Common stock, 10,000,000 shares authorized, 3,220,352
shares issued at December 31, 1996 and 3,226,102
shares issued at June 30, 1997 32 32
Additional paid in capital 35,372 35,455
Treasury stock, 160,700 shares at December 31, 1996
and 235,000 shares at June 30, 1997 (2,983) (4,357)
Unrealized investment losses, net of tax (603) (296)
Accumulated earnings 33,211 34,453
--------- ---------
Total stockholders' equity 65,029 65,287
--------- ---------
Commitments and contingent liabilities -- --
Total liabilities and stockholders' equity $ 262,123 $ 273,039
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1997 1996 1997
---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 24,432 $ 24,158 $ 47,873 $ 47,158
Net investment income 2,807 3,190 5,607 6,219
Net realized investment gains (losses) 935 (4) 942 103
Other revenues (expenses) (68) 25 58 86
-------- -------- -------- --------
Total revenues 28,106 27,369 54,480 53,566
-------- -------- -------- --------
Expenses:
Net losses and loss adjustment
expenses 17,575 17,768 36,392 35,664
Amortization of deferred policy
acquisition costs 6,474 6,402 12,686 12,497
Other underwriting expenses 1,406 1,804 3,079 3,393
-------- -------- -------- --------
Total expenses 25,455 25,974 52,157 51,554
-------- -------- -------- --------
Income before income taxes 2,651 1,395 2,323 2,012
Provision for income taxes 586 336 519 472
-------- -------- -------- --------
Net income $ 2,065 $ 1,059 $ 1,804 $ 1,540
======== ======== ======== ========
Primary and fully diluted earnings per
share $ .64 $ .35 $ .56 $ .51
======== ======== ======== ========
Weighted average shares outstanding:
Primary and fully diluted 3,212 3,008 3,219 3,022
</TABLE>
See Notes to Consolidated Financial Statements
4
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1997
--------------------
<S> <C> <C>
Common stock, beginning and end $ 32 $ 32
-------- --------
Additional paid in capital:
Beginning of period 35,302 35,372
Exercise of common stock options 9 83
-------- --------
End of period 35,311 35,455
-------- --------
Treasury stock:
Beginning of period -- (2,983)
Purchase of treasury shares (441) (1,374)
-------- --------
End of period (441) (4,357)
-------- --------
Unrealized investment losses, net of tax:
Beginning of period (357) (603)
Appreciation (depreciation) (1,605) 307
-------- --------
End of period (1,962) (296)
-------- --------
Accumulated earnings:
Beginning of period 34,993 33,211
Net income 1,804 1,540
Cash dividends (321) (298)
-------- --------
End of period 36,476 34,453
-------- --------
Total stockholders' equity $ 69,416 $ 65,287
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1997
----------------------------
<S> <C> <C>
Cash flows from operations:
Collection of premiums $ 46,002 $ 44,989
Payment of losses and loss adjustment expenses (33,731) (33,564)
Payment of other underwriting expenses (17,163) (16,474)
Investment income received 5,716 6,259
Investment expenses paid (119) (154)
Income taxes recovered 510 --
Other cash receipts 58 86
-------- --------
Net cash provided by operations 1,273 1,142
-------- --------
Cash flows from investing activities:
Proceeds from fixed maturities sold or matured 28,965 42,374
Purchase of fixed maturities (26,407) (42,210)
Net increase in other long-term investments (688) (1,679)
Net increase in short-term investments (9,951) (6,392)
Purchase of equipment, net (201) (12)
-------- --------
Net cash used in investing activities (8,282) (7,919)
-------- --------
Cash flows from financing activities:
Settlement of affiliate balances (1,029) (527)
Exercise of common stock options 9 83
Cash borrowed to purchase securities 8,786 8,884
Purchase of treasury stock (441) (1,374)
Cash dividends on common stock (321) (298)
-------- --------
Net cash provided by financing activities 7,004 6,768
-------- --------
Decrease in cash and cash equivalents (5) (9)
Cash:
Beginning of period 39 11
-------- --------
End of period $ 34 $ 2
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1997
------------------
<S> <C> <C>
Net income $ 1,804 $ 1,540
Adjustments:
Depreciation and amortization (27) 21
Realized investment gains (942) (103)
(Increase) decrease in assets:
Interest due and accrued 115 (25)
Premiums receivable (1,606) (279)
Deferred policy acquisition costs 55 62
Ceded reinsurance balances receivable (712) (2,471)
Prepaid reinsurance premiums (24) 217
Federal income tax receivable 915 527
Deferred federal income tax benefit 114 (54)
Other assets (140) (67)
Increase (decrease) in liabilities:
Reserve for losses and loss adjustment expenses 3,522 2,935
Unearned premiums (184) (453)
Other liabilities (1,617) (708)
------- -------
Net cash provided by operations $ 1,273 $ 1,142
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
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MERCHANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated balance sheet as of June 30, 1997 and the related consolidated
statements of operations, of changes in stockholders' equity and of cash flows
for the six months ended June 30, 1996 and 1997 are unaudited. In the opinion of
management, the interim financial statements reflect all adjustments necessary
for a fair presentation of financial position and results of operations. Such
adjustments consist only of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of Merchants Group,
Inc. (the "Company"), its wholly-owned subsidiary, Merchants Insurance Company
of New Hampshire, Inc. ("MNH"), and M.F.C. of New York, Inc., an inactive
premium finance company which is a wholly-owned subsidiary of MNH. The
accompanying consolidated financial statements should be read in conjunction
with the following notes and the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") which differ in some respects
from those followed in reports to insurance regulatory authorities. All
significant intercompany balances and transactions have been eliminated. Certain
1996 amounts have been reclassified to conform with 1997 presentation.
2. Related Party Transactions
--------------------------
The Company and MNH do not have any paid employees. Under a management
agreement, Merchants Mutual Insurance Company ("Mutual"), which owns 8.5% of the
Company's common stock at June 30, 1997, provides the Company and MNH with the
facilities, management and personnel required to manage their day-to-day
business. All underwriting, administrative, claims and investment expenses
incurred on behalf of Mutual and MNH are shared on an allocated cost basis,
determined as follows: for underwriting and administrative expenses, the
respective share of total direct premiums written for Mutual and MNH serves as
the basis of allocation; for claims expenses, the average number of outstanding
claims is used; investment expenses are shared based on each company's share of
total invested assets.
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3. Earnings Per Share
------------------
Primary and fully diluted earnings per share were computed by dividing net
income by the weighted average number of shares of common stock outstanding
during each period, increased by the assumed exercise of 34,250 and 48,458
shares of common stock options in 1997 and 1996, respectively, which would have
resulted in 9,275 and 11,954 additional shares outstanding, respectively,
assuming the proceeds to the Company from exercise were used to purchase shares
of the Company's common stock at its average market value per share during the
quarter.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". This
statement prescribes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 simplifies current standards for computing EPS and makes
such presentation consistent with international EPS standards.
The Company is required to adopt the requirements of SFAS No. 128 at the end of
1997. Earlier adoption is not permitted. The Company does not expect SFAS No.
128 to have a material impact on EPS.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Six Months Ended June 30, 1997 As Compared to the
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1996
- ------------------------------
Total revenues for the six months ended June 30, 1997 were $53,566,000, down 2%
from $54,480,000 for the six months ended June 30, 1996.
Net premiums earned for the six months ended June 30, 1997 were $47,158,000, a
decrease of $715,000, or 2%, from $47,873,000 for the six months ended June 30,
1996. The decrease in net premiums earned primarily resulted from a 2% decrease
in net premiums written. Direct premiums written for the six months ended June
30, 1997 were $48,763,000, a decrease of 3% from $50,152,000 for the six months
ended June 30, 1996.
Voluntary personal lines direct premiums written for the six months ended June
30, 1997 were $19,162,000, an increase of 7% from $17,862,000 for the six months
ended June 30, 1996, primarily due to private passenger automobile ("PPA")
direct premiums written, which increased 8% from the year earlier period. This
increase in PPA business resulted from a 4% increase in policies in force and a
4% increase in average premium per policy. Voluntary personal lines direct
premiums written represented 39% and 36% of total voluntary direct premiums
written for the six months ended June 30, 1997 and 1996, respectively.
Voluntary commercial lines direct premiums written for the six months ended June
30, 1997 were $25,058,000, a decrease of 11% from $28,097,000 for the six months
ended June 30, 1996. This decrease resulted primarily from a 35% reduction in
workers' compensation premiums written, as the Company discontinued writing
several classes of this line of business during the fourth quarter of 1996 and
the first quarter of 1997 due to their lack of profitability.
Involuntary direct premiums written, primarily PPA insurance, which comprised 9%
and 8%, of all direct premiums written during the six months ended June 30, 1997
and 1996, increased by 8% to $4,543,000 in the six months ended June 30, 1997
from $4,193,000 for the six months ended June 30, 1996.
Net investment income was $6,219,000 for the six months ended June 30, 1997, an
increase of 11% from $5,607,000 for the six months ended June 30, 1996. Average
invested assets during the six months ended June 30, 1997 increased 4% compared
to the same period 1996. On a taxable equivalent basis using statutory tax
rates, net investment income increased 7%. The percentage increase in net
investment income on a taxable equivalent basis was lower than the percentage
increase in net investment income, due to a reduction in the percentage of
invested assets allocated to tax exempt investments compared to the prior
period.
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Net realized gains on the sale of investments were $103,000 for the six months
ended June 30, 1997, a decrease of $839,000 from $942,000 for the six months
ended June 30, 1996. Realized gains of $942,000 recorded during the six months
ended June 30, 1996 included a $900,000 gain on the sale of the Company's
investment in Signet Group, PLC.
Other revenues of $86,000 for the six months ended June 30, 1997 were
substantially unchanged from $58,000 for the six months ended June 30, 1996.
Losses and loss adjustment expenses ("LAE") were $35,664,000 for the six months
ended June 30, 1997, a decrease of $728,000 or 2% from $36,392,000 for the six
months ended June 30, 1996. The loss and LAE ratio decreased to 75.6% for the
six months ended June 30, 1997 from 76.0% for the six months ended June 30,
1996. Losses and LAE in the six months ended June 30, 1996 included $2,200,000
of losses related to unusually severe winter weather that affected the
northeastern United States during that period. These higher than normal weather
related losses increased the loss and LAE ratio in the six months ended June 30,
1996 by 4.6 percentage points.
The ratio of amortized deferred policy acquisition costs and other underwriting
expenses to net premiums earned increased to 33.7% for the six months ended June
30, 1997 from 32.9% for the six months ended June 30, 1996, primarily due to
higher expenses associated with premiums assumed from involuntary market pools.
Commissions, premium taxes and other state assessments that vary directly with
the Company's premium volume represented 21.4% of net premiums earned in the six
months ended June 30, 1997 compared to 20.3% of net premiums earned in the six
months ended June 30, 1996, primarily due to the higher expenses from
involuntary market pools.
The Company's effective federal income tax rate for the six months ended June
30, 1997 was 23.5%. This rate was calculated based upon the Company's estimate
of its effective federal income tax rate for all of 1997. Non-taxable investment
income, primarily tax-exempt bond income, reduced the Company's effective tax
rate by 10 percentage points.
Results of Operations for the Three Months Ended June 30, 1997 As Compared to
- -----------------------------------------------------------------------------
the Three Months Ended June 30, 1996
- ------------------------------------
Total revenues for the three months ended June 30, 1997 were $27,369,000, a
decrease of $737,000, or 3%, from $28,106,000 for the three months ended June
30, 1996.
Net premiums earned for the three months ended June 30, 1997 were $24,158,000, a
decrease of $274,000, or 1%, from $24,432,000 for the three months ended June
30, 1996. The decrease in net premiums earned resulted primarily from a 1%
decrease in net premiums written to $25,903,000 for the three months ended June
30, 1997 from $26,209,000 for the three months ended June 30, 1996.
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Net investment income was $3,190,000 for the three months ended June 30, 1997,
an increase of 14% from $2,807,000 for the same period in 1996. Average invested
assets during the three months ended June 30, 1997 increased 4% compared to the
three months ended June 30, 1996. On a taxable equivalent basis, calculated
using statutory rates, net investment income increased 9%.
Losses and LAE were $17,768,000 for the three months ended June 30, 1997, an
increase of $193,000, or 1%, from $17,575,000 for the three months ended June
30, 1996. The loss and LAE ratio increased to 73.5% for the three months ended
June 30, 1997 from 71.9% for the three months ended June 30, 1996.
The ratio of the amortization of deferred policy acquisition costs and other
underwriting expenses to net premiums earned increased to 34.0% for the three
months ended June 30, 1997 from 32.3% for the three months ended June 30, 1996
primarily due to higher expenses associated with premiums assumed from
involuntary market pools.
Liquidity and Capital Resources
- -------------------------------
In developing its investment strategy, the Company determines a level of cash
and short-term investments which, when combined with expected cash flow, is
estimated to be adequate to meet expected cash obligations. Historically, the
excess of premiums collected over payments on claims, combined with cash flow
from investments, has provided the Company with short-term funds in excess of
normal operating demands for cash.
Net cash provided by operations decreased $131,000 to $1,142,000 in the six
months ended June 30, 1997 from $1,273,000 in the six months ended June 30,
1996.
Net cash used in investing activities decreased $363,000 to $7,919,000 in the
six months ended June 30, 1997 from $8,282,000 in the six months ended June 30,
1996. This decrease in net cash used in investing activities resulted primarily
from a $2,394,000 decrease in net cash provided by the purchase and sale of
investments in fixed maturities, a $3,559,000 decrease in net cash used to
acquire short-term investments and a $991,000 increase in net cash used to
acquire other long-term investments.
Net cash provided by financing activities decreased $236,000 to $6,768,000 in
the six months ended June 30, 1997 from $7,004,000 in the six months ended June
30, 1996, primarily due to a $933,000 increase in cash used to repurchase the
Company's common stock which was partially offset by a $502,000 decrease in cash
paid to Mutual as settlement of affiliate balances.
The Company has several objectives with respect to its investment portfolio,
which include maximizing total return while protecting policyholders' surplus,
maintaining flexibility and liquidity, and maintaining a reasonable duration
match between assets and liabilities. Like other property and casualty insurers,
the Company relies on premiums as a major source of cash, and therefore
liquidity. Cash flows from the Company's investment portfolio, either in the
form of interest or principal payments, are an additional source of liquidity.
Because the duration of the Company's
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investment portfolio and liabilities are closely managed, increases or decreases
in market interest rates are not expected to have a material effect on the
Company's liquidity, or its results of operations.
The Company generally designates newly acquired fixed maturity investments as
available for sale and carries these investments at fair value. Unrealized gains
and losses related to the Company's investments are recorded as a component of
stockholders' equity. During the six months ended June 30, 1997 the Company
recorded a $307,000 decrease in unrealized losses, net of tax. At June 30,
1997, the Company had recorded $296,000 of unrealized losses, net of tax,
associated with its investment portfolio.
At June 30, 1997, the Company's portfolio of fixed maturities represented 87.1%
of invested assets. Management believes that this level of bond holdings will
not adversely affect the Company's liquidity because it expects that cash
receipts from net premiums written and investment income will be sufficient to
enable the Company to satisfy its cash obligations in 1997. Furthermore, a
portion of the Company's bond portfolio is invested in mortgage-backed and other
asset-backed securities which, in addition to interest income, provide monthly
paydowns of bond principal.
At June 30, 1997, $115,034,000 or 55% of the Company's investment portfolio was
invested in mortgage-backed and other asset-backed securities. The Company
invests in a variety of collateralized mortgage obligation ("CMO") products but
has not invested in the more volatile types of CMO products such as interest
only, principal only or inverse floating rate securities. All of the Company's
CMO investments have an active secondary market and their effect on the
Company's liquidity does not differ from that of other fixed maturity
investments. The Company does not own any other derivative financial
instruments.
At June 30, 1997, $2,344,000, or 1.1%, of the Company's investment portfolio was
invested in non-investment grade securities.
During the six months ended June 30, 1997, the Company repurchased 74,300 shares
of its common stock at an average price of $18.49 per share. As of July 31,
1997, the Company had repurchased 35,400 of the 100,000 shares of its common
stock authorized by its Board of Directors on March 10, 1997. The Company was
holding 260,400 shares of its common stock in treasury at July 31, 1997.
As a holding company, the Company is dependent on cash dividends from MNH to
meet its obligations and pay any cash dividends. MNH is subject to New Hampshire
insurance laws which place certain restrictions on its ability to pay dividends
without the prior approval of state regulatory authorities. These restrictions
limit dividends to those that, when added to all other dividends paid within the
preceding twelve months, would not exceed 10% of the insurer's statutory
policyholders' surplus as of the preceding December 31. The maximum amount of
dividends that MNH could pay during any twelve month period ending in 1997
without the prior approval of the New Hampshire Insurance Commissioner is
$4,391,000. MNH paid $800,000 in
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dividends to the Company during the six months ended June 30, 1997. On July 24,
1997, MNH declared an additional $1,000,000 cash dividend to the Company to be
paid on August 15, 1997.
Under a management agreement, Mutual provides employees, services and facilities
for MNH to conduct its insurance business on a cost reimbursed basis. The
balance in the receivable from affiliate account represents the amount owed by
Mutual to the Company for the difference between premiums collected and payments
made for losses, employees, services and facilities by Mutual on behalf of MNH.
MNH, like many other property-casualty insurance companies, is subject to
environmental damage claims asserted by or against its insureds. Management of
the Company is of the opinion that based on various court decisions throughout
the country, such claims should not be recoverable under the terms of MNH's
insurance policies because of either specific or general coverage exclusions
contained in the policies. However, there is no assurance that the courts will
agree with MNH's position in every case, nor can there be assurance that
material claims will not be asserted under policies which a court will find do
not explicitly or implicitly exclude claims for environmental damages.
Management, however, is not aware of any pending claim or group of claims which
would result in a liability that would have a material adverse effect on the
financial condition of the Company or MNH.
Industry and regulatory guidelines suggest that the ratio of a property-casualty
insurer's annual net premiums written to its statutory surplus should not exceed
3 to 1. MNH has consistently followed a business strategy that would allow it to
meet this 3 to 1 regulatory guideline. For the first six months of 1997 MNH's
ratio of net premiums written to statutory surplus, annualized for a full year,
was 2.0 to 1.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Channing T. Lushbough vs. Merchants Group, Inc., et al.
- -------------------------------------------------------
On March 31, 1997, the New York State Supreme Court in New York City dismissed a
shareholder derivative lawsuit brought against the Company, MNH, Mutual and
certain directors of the Company and Mutual (collectively, the "defendants").
The court held that the complaint failed to state a cause of action against any
of the defendants. The lawsuit was originally filed in 1993 as a purported class
action and was amended in 1995 to a derivative action after the court held that
the plaintiff's claims were derivative in nature. The plaintiff alleged that the
defendants breached their fiduciary obligations to the then minority
shareholders of the Company and defrauded the minority shareholders by causing
MNH to purchase from the Federal Deposit Insurance Corporation (the "FDIC") a
surplus note issued by Mutual and simultaneously reducing the principal amount
plus accrued return on such surplus note to $1,350,000, which is the amount MNH
paid to the FDIC for the note, and by approving the public sale of the Company's
common stock in July 1993 at what the plaintiff alleged was an inadequate price.
After the lawsuit was amended to a derivative action, the Company's Board of
Directors appointed a special committee composed of disinterested directors to
review the merits of the case. That committee determined that the Company's
Board had acted reasonably in approving the note restructuring and the public
offering, and decided that the plaintiff's lawsuit should be dismissed. The
court held that the case should be dismissed because the determination of the
special committee to discontinue the lawsuit was valid and appropriate under
Delaware law. The plaintiff has appealed the court's position and has also filed
a motion with the court for permission to renew and reargue the defendants'
motion to dismiss. The plaintiff's motion was argued on July 28, 1997 and the
court has it under consideration.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 7, 1997 the Company held its annual meeting of stockholders. During
the meeting, Henry P.Semmelhack and Robert M. Zak were re-elected Directors of
the Company for three year terms to expire at the annual meeting in 2000. Brent
D. Baird, Frank J. Colantuono and Richard E. Garman are Directors of the Company
whose terms of office as Director continue beyond the date of the meeting. Mr.
Baird's and Mr. Garman's terms expire in 1998, and Mr. Colantuono's term expires
in 1999.
A summary of stockholder voting with respect to the election of Directors
follows:
<TABLE>
<CAPTION>
Election Election
of of
H. Semmelhack R. Zak
------------- --------
<S> <C> <C>
For 2,666,678 2,666,478
Withheld 6,037 6,237
</TABLE>
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(11) Statement re computation of per share earnings (filed
herewith).
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period for
which this report is filed.
* * * * * * * *
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain statements made in this Quarterly Report on Form 10-Q
constitute forward-looking statements and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve certain assumptions, risks and uncertainties
that could cause actual results to differ materially from those included in or
contemplated by the statements. These assumptions, risks and uncertainties
include, but are not limited to, those associated with factors affecting the
property-casualty insurance industry generally, including price competition,
size and frequency of claims, increasing crime rates, escalating damage awards,
natural disasters, fluctuations in interest rates and general business
conditions; the Company's dependence on investment income; the geographic
concentration of the Company's business in the Northeastern United States and in
particular in New York, New Hampshire, New Jersey, Rhode Island, Pennsylvania
and Massachusetts; the adequacy of the Company's loss reserves; government
regulation of the insurance industry; exposure to environmental claims;
dependence of the Company on its relationship with Mutual; and the other risks
and uncertainties discussed or indicated in all documents filed by the Company
with the Commission. The Company expressly disclaims any obligation to update
any forward-looking statements as a result of developments occurring after the
filing of this report.
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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.
MERCHANTS GROUP, INC.
(Registrant)
Date: August 7, 1997 By: /s/ Kenneth J. Wilson
---------------------
Kenneth J. Wilson
Chief Financial Officer and
Treasurer (duly authorized
officer of the registrant and
chief accounting officer)
17
<PAGE> 1
EXHIBIT 11
MERCHANTS GROUP, INC.
Computation of Income Per Share
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1997 1996 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Net income for computing earnings per common
share - without dilution and fully diluted $2,065 $1,059 $1,804 $1,540
====== ====== ====== ======
Weighted average number of common shares
outstanding - without dilution 3,200 2,999 3,207 3,013
Addition from assumed exercise as of the beginning of
the period, of common stock options outstanding as
of the end of the period, reduced by the number of
shares assumed to have been repurchased by the
company with the proceeds from exercise, at the
average market value per share during the period 12 9 12 9
------ ------ ------ ------
Weighted average number of common shares and
common share equivalents outstanding, primary
and fully diluted 3,212 3,008 3,219 3,022
====== ====== ====== ======
Primary and fully diluted earnings per share $ .64 $ .35 $ .56 $ .51
====== ====== ====== ======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 163,546,000
<DEBT-CARRYING-VALUE> 19,586,000
<DEBT-MARKET-VALUE> 19,889,000
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 210,164,000
<CASH> 2,000
<RECOVER-REINSURE> 10,306,000
<DEFERRED-ACQUISITION> 12,334,000
<TOTAL-ASSETS> 273,039,000
<POLICY-LOSSES> 136,414,000
<UNEARNED-PREMIUMS> 49,257,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 32,000
0
0
<OTHER-SE> 65,255,000
<TOTAL-LIABILITY-AND-EQUITY> 273,039,000
47,158,000
<INVESTMENT-INCOME> 6,219,000
<INVESTMENT-GAINS> 103,000
<OTHER-INCOME> 86,000
<BENEFITS> 35,664,000
<UNDERWRITING-AMORTIZATION> 12,497,000
<UNDERWRITING-OTHER> 3,393,000
<INCOME-PRETAX> 2,012,000
<INCOME-TAX> 472,000
<INCOME-CONTINUING> 1,540,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,540,000
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<RESERVE-OPEN> 126,260,000
<PROVISION-CURRENT> 33,351,000
<PROVISION-PRIOR> 2,313,000
<PAYMENTS-CURRENT> 14,270,000
<PAYMENTS-PRIOR> 19,294,000
<RESERVE-CLOSE> 128,360,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
