<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 MARCH 31, 1998
COMMISSION FILE NUMBER 1-9640
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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 May 1, 1998:
2,908,852 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, March 31,
Assets 1997 1998
------ ------------ ----------
(unaudited)
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity at amortized cost (fair value
$20,327 in 1997 and $19,730 in 1998) $ 19,631 $ 18,987
Available for sale at fair value (amortized cost
$172,966 in 1997 and $171,596 in 1998) 174,927 171,599
Preferred stock at fair value 10,582 10,657
Other long-term investments at fair value 634 649
Short-term investments 4,470 20,276
-------- --------
Total investments 210,244 222,168
Cash 10 2
Interest due and accrued 1,858 1,626
Premiums receivable, net of allowance for doubtful
accounts of $543 in 1997 and $493 in 1998 21,084 20,421
Deferred policy acquisition costs 12,597 12,109
Ceded reinsurance balances receivable 11,132 10,681
Prepaid reinsurance premiums 2,871 2,774
Receivable from affiliate 527 --
Deferred federal income taxes 6,319 6,218
Other assets 7,332 7,406
-------- --------
Total assets $273,974 $283,405
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements
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MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C>
Liabilities:
Reserve for losses and loss adjustment expenses $ 141,205 $ 140,645
Unearned premiums 50,406 48,470
Payable for securities -- 10,182
Payable to affiliate -- 1,355
Other liabilities 14,901
--------- ---------
13,823
Total liabilities 206,512 214,475
--------- ---------
Stockholders' equity:
Common stock, 10,000,000 shares authorized, 3,226,102
shares issued at December 31, 1997 and 3,229,352
shares issued at March 31, 1998 32 32
Additional paid in capital 35,455 35,503
Treasury stock, 319,600 shares at December 31, 1997
and 320,500 shares at March 31, 1998 (5,906) (5,924)
Accumulated other comprehensive income 1,061 1,298
Accumulated earnings 36,820 38,021
--------- ---------
Total stockholders' equity 67,462 68,930
--------- ---------
Commitments and contingent liabilities -- --
Total liabilities and stockholders' equity $ 273,974 $ 283,405
========= =========
</TABLE>
See Notes to the Consolidated Financial Statements
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1998
---- ----
(unaudited)
<S> <C> <C>
Revenues:
Net premiums earned $23,000 $23,740
Net investment income 3,029 3,290
Net realized investment gains 107 --
Other revenues 61 42
------- -------
Total revenues 26,197 27,072
------- -------
Expenses:
Net losses and loss adjustment expenses 17,896 16,847
Amortization of deferred policy acquisition costs 6,095 6,291
Other underwriting expenses 1,589 2,088
------- -------
Total expenses 25,580 25,226
------- -------
Income before income taxes 617 1,846
Income tax provision 136 500
------- -------
Net income $ 481 $ 1,346
======= =======
Basic and diluted earnings per share $ .16 $ .46
======= =======
Weighted average shares outstanding:
Basic 3,027 2,907
Diluted 3,035 2,916
</TABLE>
See Notes to the Consolidated Financial Statements
4
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1998
------- -------
(unaudited)
<S> <C> <C>
Net income $ 481 $ 1,346
------- -------
Other comprehensive income before tax:
Unrealized gains (losses)
on securities (1,969) 359
Less: reclassification adjustment
for gains and losses included
in net income (113) --
------- -------
Other comprehensive income (loss)
before tax (2,082) 359
Income tax provision (benefit) related to
items of other comprehensive income (708) 122
------- -------
Other comprehensive income, net of tax (1,374) 237
------- -------
Comprehensive income ($ 893) $ 1,583
======= =======
</TABLE>
See Notes to the Consolidated Financial Statements
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1998
-------- --------
(unaudited)
<S> <C> <C>
Common stock, beginning and end $ 32 $ 32
-------- --------
Additional paid in capital:
Beginning of period 35,372 35,455
Exercise of common stock options 83 48
-------- --------
End of period 35,455 35,503
-------- --------
Treasury stock:
Beginning of period (2,983) (5,906)
Purchase of treasury shares (1,194) (18)
-------- --------
End of period (4,177) (5,924)
-------- --------
Accumulated other comprehensive income:
Beginning of period (603) 1,061
Appreciation (depreciation), net (1,374) 237
-------- --------
End of period (1,977) 1,298
-------- --------
Accumulated earnings:
Beginning of period 33,211 36,820
Net income 481 1,346
Cash dividends (147) (145)
-------- --------
End of period 33,545 38,021
-------- --------
Total stockholders' equity $ 62,878 $ 68,930
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1998
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operations:
Collection of premiums $ 22,570 $ 22,585
Payment of losses and loss adjustment expenses (16,905) (16,936)
Payment of other underwriting expenses (8,530) (9,262)
Investment income received 3,294 3,511
Investment expenses paid (72) (79)
Income taxes paid -- (336)
Other cash receipts 61 42
-------- --------
Net cash provided by (used in) operations 418 (475)
-------- --------
Cash flows from investing activities:
Proceeds from fixed maturities sold or matured 20,157 19,988
Purchase of fixed maturities (19,083) (15,642)
Net increase in preferred stock (2,067) --
Net (increase) decrease in other long-term investments 348 (15)
Net increase in short-term investments (6,512) (15,806)
Purchase of equipment, net (5) (7)
-------- --------
Net cash used in investing activities (7,162) (11,482)
-------- --------
Cash flows from financing activities:
Settlement of affiliate balances (819) 1,882
Proceeds from exercise of common stock options 84 48
Cash borrowed to purchase securities 8,820 10,182
Purchase of treasury stock (1,194) (18)
Cash dividends (150) (145)
-------- --------
Net cash provided by financing activities 6,741 11,949
-------- --------
Decrease in cash and cash equivalents (3) (8)
Cash:
Beginning of period 11 10
-------- --------
End of period $ 8 $ 2
======== ========
</TABLE>
See Notes to the 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>
Three Months
Ended March 31,
1997 1998
-------- -------
(unaudited)
<S> <C> <C>
Net income $ 481 $ 1,346
Adjustments:
Depreciation and amortization 31 (36)
Realized investment gains (107) --
(Increase) decrease in assets:
Interest due and accrued 218 232
Premiums receivable 1,142 663
Deferred policy acquisition costs 525 488
Ceded reinsurance balances receivable (19) 451
Prepaid reinsurance premiums 150 97
Federal income tax receivable 163 --
Deferred federal income taxes (28) (20)
Other assets (148) (122)
Increase (decrease) in liabilities:
Reserve for losses and loss adjustment expenses 1,401 (560)
Unearned premiums (2,132) (1,936)
Other liabilities (1,259) (1,078)
------- -------
Net cash provided by (used in) operations $ 418 $ (475)
======= =======
</TABLE>
See Notes to the Consolidated Financial Statements
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MERCHANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation, Basis of Presentation and New Accounting
---------------------------------------------------------------------
Pronouncements
--------------
The consolidated balance sheet as of March 31, 1998 and the related consolidated
statements of operations, of comprehensive income, of changes in stockholders'
equity and of cash flows for the three months ended March 31, 1997 and 1998 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, 1997.
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.
During 1998, the Company adopted Statement of Financial Accounting Standards,
No. 130 ("SFAS No. 130") "Reporting Comprehensive Income" and restated prior
period financial statements to conform to the new standard. SFAS No. 130
establishes standards for reporting comprehensive income in a full set of
general purpose financial statements. Comprehensive income includes all changes
to stockholders' equity during a period except those resulting from investments
by and distributions to owners. The adoption of SFAS No. 130 resulted in revised
and additional disclosures but had no effect on financial position, results of
operations or liquidity of the Company.
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 8.8% of the
Company's common stock at March 31, 1998, 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
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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.
3. Earnings Per Share
--------------------
Basic and 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 25,915 and 34,250 shares of common
stock options in 1998 and 1997, respectively, which would have resulted in 8,757
and 7,770 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.
Options to purchase 45,000 shares of the Company's common stock at $21.00 were
outstanding at March 31, 1998. These options were not considered in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the Company's common shares during
1998. Of these options, 22,500 were exercisable at March 31, 1998.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three Months Ended March 31, 1998 As Compared to
- ------------------------------------------------------------------------------
the Three Months Ended March 31, 1997
- -------------------------------------
Total revenues for the three months ended March 31, 1998 were $27,072,000, up 3%
from $26,197,000 for the three months ended March 31, 1997.
Net premiums earned for the three months ended March 31, 1998 were $23,740,000,
an increase of $740,000 or 3% from $23,000,000 for the three months ended March
31, 1997. The increase in net premiums earned resulted primarily from a 5%
increase in direct premiums written. Direct premiums written for the three
months ended March 31, 1998 were $23,600,000, an increase of $1,058,000 from
$22,542,000 for the three months ended March 31, 1997.
Voluntary personal lines direct premiums written for the three months ended
March 31, 1998 were $9,317,000, an increase of 2% from $9,139,000 for the three
months ended March 31, 1997. Private passenger automobile ("PPA") and homeowners
direct premiums written increased 1% and 6%, respectively, from the year earlier
period. Voluntary personal lines direct premiums written represented 42% and 44%
of total voluntary direct premiums written for the three months ended March 31,
1998 and 1997, respectively.
Voluntary commercial lines direct premiums written for the three months ended
March 31, 1998 were $12,652,000, an increase of 8% from $11,672,000 for the
three months ended March 31, 1997. This increase resulted from a 30% increase in
commercial lines new business policies. Commercial retention rates were
relatively unchanged.
Involuntary direct premiums written, primarily PPA insurance, which comprised 7%
and 8% of all direct premiums written during the three months ended March 31,
1998 and 1997, respectively, decreased by 6% to $1,631,000 in the three months
ended March 31, 1998 from $1,731,000 for the three months ended March 31, 1997.
Net investment income was $3,290,000 for the three months ended March 31, 1998,
an increase of 9% from $3,029,000 for the three months ended March 31, 1997, due
to a 5% increase in average invested assets and a 13 basis point increase in
average portfolio yield.
There were no net realized gains on the sale of investments for the three months
ended March 31, 1998 compared to $107,000 of net realized gains for the three
months ended March 31, 1997.
Losses and loss adjustment expenses ("LAE") were $16,847,000 for the three
months ended March 31, 1998, a decrease of $1,049,000 or 6% from $17,896,000 for
the three months ended March 31, 1997. The loss and LAE ratio decreased to 71.0%
for the three months ended March 31, 1998 from 77.8% for the three months ended
March 31, 1997, due to a lower accident year loss ratio in 1998 compared to 1997
and the fact that in 1998 there were no increases recorded in reserves for prior
accident year losses.
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The ratio of amortized policy acquisition costs and other underwriting expenses
to net premiums earned increased to 35.3% for the three months ended March 31,
1998 from 33.4% for the three months ended March 31, 1997, primarily due to
increased agency incentive commissions related to the improved underwriting
results. Commissions, premium taxes and other state assessments that vary
directly with the Company's premium volume represented 22.2% of net premiums
earned in the three months ended March 31, 1998 compared to 21.0% of net
premiums earned in the three months ended March 31, 1997.
The Company's effective federal income tax rate for the three months ended March
31, 1998 was 27.1%. This rate was calculated based upon the Company's estimate
of its effective federal income tax rate for all of 1998. Non-taxable investment
income, primarily tax-exempt bond income, reduced the Company's effective tax
rate by approximately 7 percentage points.
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 $893,000 from a $418,000 source of
cash in the three months ended March 31, 1997 to a $475,000 use of cash in the
three months ended March 31, 1998. This decrease was primarily due to a $732,000
increase in the payment of other underwriting expenses.
Net cash used in investing activities increased $4,320,000 from $7,162,000 in
the three months ended March 31, 1997 to $11,482,000 in the three months ended
March 31, 1998. This increase in net cash used in investing activities resulted
primarily from a $3,272,000 increase in net cash provided by investments in
fixed maturities and a $2,067,000 decrease in cash used to acquire preferred
stock, which were offset by a $9,294,000 increase in net cash used to acquire
short-term investments.
Net cash provided by financing activities increased $5,208,000 from $6,741,000
in the three months ended March 31, 1997 to $11,949,000 in the three months
ended March 31, 1998, due primarily to a $1,362,000 increase in cash borrowed to
purchase securities, and a $2,701,000 increase in the amount owed to Mutual and
a $1,176,000 decrease in cash used to purchase treasury stock.
The Company's objectives with respect to its investment portfolio 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 investment portfolio and
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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 these investments are recorded as a component of other
comprehensive income within stockholders' equity. During the three months ended
March 31, 1998 the Company recorded $237,000 of unrealized gains, net of tax
associated with its fixed maturity investments. At March 31, 1998, the Company
recorded $1,298,000 of unrealized gains, net of tax, as accumulated other
comprehensive income related to its investment portfolio.
At March 31, 1998, the Company's portfolio of fixed maturities represented 85.8%
of invested assets. Management believes that this level of bond holdings is
consistent with the Company's liquidity needs because it anticipates that cash
receipts from net premiums written and investment income will enable the Company
to satisfy its cash obligations. 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 March 31, 1998, $120,789,000 or 63.4% of the Company's fixed maturity
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 derivative type 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 March 31, 1998, $2,318,000, or 1.0%, of the Company's investment portfolio
was invested in non-investment grade securities.
During the three months ended March 31, 1998, the Company repurchased 900 shares
of its common stock. The Company is holding 320,500 shares of its common stock
in treasury at March 31, 1998.
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 1998
without the prior approval of the New Hampshire Insurance Commissioner is
$4,601,000. MNH paid $1,000,000 in dividends to the Company during the three
months ended March 31, 1998.
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 payable to or
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receivable from affiliate account represents the amount owing to or 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.
The Company relies to a significant degree on computer technology to operate its
insurance business. Mutual is currently preparing all of its computer systems to
be year 2000 compliant. Year 2000 compliance means that computer systems are
able to distinguish date data between the twentieth and twenty first centuries.
As part of this process, Mutual is replacing some of its systems and upgrading
others, and is working to assess the status of its vendors' and customers' year
2000 compliance. The Company's share of the costs that have been incurred to
upgrade these systems has not had a material adverse impact on the Company's
financial position, results of operations or cash flows. However, Mutual's
inability or the inability of the Company's vendors or customers to resolve year
2000 issues could result in material financial risk. The Company has been
advised by Mutual that it is devoting appropriate resources to address year 2000
issues and anticipates that its computer systems will be in compliance by the
end of 1998. The Company does not know with certainty the extent of its share of
the future costs that Mutual will incur in this regard, but it does not believe
these costs will have a material adverse impact on the Company's results of
operations or financial condition.
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 three months of 1998 MNH's
ratio of net premiums written to statutory surplus, annualized for a full year,
was 1.9 to 1.
Possible Change in Relationship with Mutual
- -------------------------------------------
On March 31, 1998, Mutual filed a Schedule 13D with the Securities and Exchange
Commission in which it reported that it is considering whether it would be
advisable and, if so, whether Mutual could obtain the regulatory approvals and
financing necessary, to purchase all or substantially all of the stock of the
Company or of its wholly owned subsidiary, MNH. To date, Mutual has not
presented any such proposal to the Company, and there can be no assurance that
Mutual will present any proposal or as to whether Mutual will be able to secure
financing and regulatory approvals necessary to complete any such proposal.
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The Company is studying what alternatives, if any, are available to it should
Mutual either not present a proposal or present a proposal which is unacceptable
to the Company. Among the alternatives being considered by the Company are the
possible sale or merger of the Company or MNH. There can be no assurance that
any of the alternatives being considered by the Company can be implemented on
terms acceptable to the Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Channing T. Lushbough vs. Merchants Group, Inc., et al.
- -------------------------------------------------------
During 1997, the New York State Supreme Court dismissed a shareholder derivative
lawsuit brought against the Company, Mutual, MNH and certain directors of the
Company and Mutual (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 decision 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 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.
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* * * * * * * *
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
With the exception of historical information, the matters and
statements discussed, made or incorporated by reference in this Quarterly Report
on Form 10-Q constitute forward-looking statements and are discussed, made or
incorporated by reference, as the case may be, 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: May 13, 1998 By:/s/ Kenneth J. Wilson
----------------------
Kenneth J. Wilson
Chief Financial Officer and
Treasurer (duly authorized
officer of the registrant and
chief accounting officer)
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EXHIBIT 11
MERCHANTS GROUP, INC.
Computation of Income Per Share
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1998
----------------------------
<S> <C> <C>
Net income (loss) for computing earnings per common
share - without dilution and fully diluted $ 481 $1,346
====== ======
Weighted average number of common shares
outstanding - without dilution 3,027 2,907
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 8 9
------ ------
Weighted average number of common shares and
common share equivalents outstanding, basic
and diluted 3,035 2,916
====== ======
Basic and diluted earnings per share $ .16 $ .46
====== ======
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 171,599,000
<DEBT-CARRYING-VALUE> 18,987,000
<DEBT-MARKET-VALUE> 19,730,000
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 222,168,000
<CASH> 2,000
<RECOVER-REINSURE> 10,681,000
<DEFERRED-ACQUISITION> 12,109,000
<TOTAL-ASSETS> 283,405,000
<POLICY-LOSSES> 140,645,000
<UNEARNED-PREMIUMS> 48,470,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 32,000
<OTHER-SE> 68,898,000
<TOTAL-LIABILITY-AND-EQUITY> 283,405,000
23,740,000
<INVESTMENT-INCOME> 3,290,000
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 42,000
<BENEFITS> 16,847,000
<UNDERWRITING-AMORTIZATION> 6,291,000
<UNDERWRITING-OTHER> 2,088,000
<INCOME-PRETAX> 1,846,000
<INCOME-TAX> 500,000
<INCOME-CONTINUING> 1,346,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,346,000
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<RESERVE-OPEN> 130,833,000
<PROVISION-CURRENT> 16,100,000
<PROVISION-PRIOR> 747,000
<PAYMENTS-CURRENT> 6,791,000
<PAYMENTS-PRIOR> 10,145,000
<RESERVE-CLOSE> 130,744,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
