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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarter ended Commission file number 0-20754
September 30, 1996
MIDLAND FINANCIAL GROUP, INC.
(Exact name of registrant as specified in
its charter)
Tennessee 62-1104818
(State of Incorporation) (I.R.S. Employer Identification No.)
825 Crossover Lane, Suite 112
Memphis, Tennessee 38117
(address of principal executive offices) (Zip Code)
Registrants telephone number including area code: (901) 680-9100
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. X Yes No
------ ------
As of November 13, 1996 there were 5,550,198 shares of Common Stock
outstanding.
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Part I
Item 1. Financial Statements
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
ASSETS September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Cash and short term investments $ 1,014 $ 12,479
Investments held for resale 151,652 162,324
-------- --------
152,666 174,803
Agent and direct bill receivables 32,372 39,741
Finance contracts receivable 227 365
Reinsurance recoverable 37,059 17,819
Prepaid reinsurance premium 30,690 21,207
Accrued interest receivable 2,073 2,296
Deferred policy acq. costs 8,420 9,617
Furniture, equip, fixtures, net 3,562 3,398
Intangibles, net 2,621 571
Notes receivable 2,432 2,158
Subsidiary investments 324 293
Income taxes recoverable 8,589 9,227
Other assets 4,209 2,036
-------- --------
Total Assets $285,244 $283,531
======== ========
LIABILITIES
Unpaid losses and loss adjustment expense $115,235 $104,516
Unearned premiums and fees 74,502 82,473
Due to reinsurers 18,951 7,946
Notes payable 23,000 27,000
Accrued premium taxes and other expenses 6,634 12,751
-------- --------
Total Liabilities 238,322 234,686
-------- --------
EQUITY
Common stock 41,623 39,420
Additional paid-in capital 1,887 1,887
Retained earnings 3,308 5,796
Unrealized appreciation on equity securities 104 1,742
-------- --------
Total Equity 46,922 48,845
-------- --------
Total Liabilities and Equity $285,244 $283,531
======== ========
</TABLE>
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MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross premiums written $ 42,907 $57,761 $146,668 $164,420
-------- ------- -------- --------
Net premiums written $ 14,049 $34,327 $ 90,494 $138,408
-------- ------- -------- --------
Income:
Premiums earned $ 29,919 $48,983 $107,948 $132,848
Policy fees 2,618 2,998 8,948 7,755
Investment income 2,317 2,998 6,811 7,815
Net realized investment gains (losses) (84) 302 363 308
Other income 17 40 57 156
-------- ------- -------- --------
34,787 55,321 124,127 148,882
-------- ------- -------- --------
Expenses:
Losses & loss adjustment exp. 32,557 46,421 97,297 108,381
Policy acquisition costs 7,166 15,134 26,116 36,156
Operating expenses 1,387 2,388 4,771 4,973
Interest 527 576 1,738 1,356
Amort. of intangible assets 290 35 364 103
-------- ------- -------- --------
41,927 64,554 130,286 150,969
-------- ------- -------- --------
Income before provision for income
taxes and equity interest (7,140) (9,233) (6,159) (2,087)
Income tax provision (benefit) (3,210) (3,585) (3,662) (1,966)
-------- ------- -------- --------
Income before equity interests (3,930) (5,648) (2,497) (121)
Equity interests 25 (75) 10 (199)
-------- ------- -------- --------
Net income $ (3,905) $(5,723) $ (2,487) $ (320)
-------- ------- -------- --------
Net income per common share $ (.70) $ (1.05) $ (.45) $ (.06)
======== ======= ======== ========
Weighted average common shares 5,547 5,471 5,547 5,458
outstanding ======== ======= ======== ========
</TABLE>
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MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net cash flows from operating activities $ (6,204) $ 9,289 $(15,807) $ 30,674
-------- -------- -------- --------
Cash flows investing activities:
Sales of investments 31,808 16,462 69,442 18,050
Purchase of investments (20,864) (22,210) (61,949) (39,873)
Other 194 (631) 528 (952)
-------- -------- -------- --------
Net cash used by investing activities 11,138 (6,379) 8,021 (22,775)
Cash flows from financing activities:
Exercise of warrants and options -0- -0- -0- 153
Bank credit facility transactions (3,000) (1,000) (4,000) (12,000)
Other 889 (269) 321 (1,134)
-------- -------- -------- --------
Net cash provided (used) by (2,111) (1,269) (3,679) (12,981)
-------- -------- -------- --------
financing activity and options
Cash, beginning of period (1,809) 22,473 12,479 29,196
-------- -------- -------- --------
Cash, end of period $ 1,014 $ 24,114 $ 1,014 $ 24,114
======== ======== ======== ========
</TABLE>
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MIDLAND FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the accounting policies in effect as of
December 31, 1995, as set forth in the annual consolidated financial
statements of Midland Financial Group, Inc. (the "Company"), of such date.
In the opinion of Management, all adjustments necessary for a fair
presentation of the consolidated financial statements have been included.
Certain 1995 amounts have been reclassified to conform with the 1996
presentation. The results of operations for the three-month and
nine-month periods ended September 30, 1996, are not necessarily
indicative of the results to be expected for the full year.
The computations of earnings per share are based upon the weighted
average number of common shares outstanding each period adjusted for the
assumed exercise of outstanding dilutive stock options using the treasury
stock method.
2. Subsequent Events
On November 6, 1996, the Company entered an Agreement and Plan of Merger
with The Progressive Corporation ("Progressive") Under the agreement,
Progressive will acquire all of the Company's outstanding stock at a
price of $9.00 per share in cash. The transaction is expected to be
completed during the first quarter of 1997, subject to regulatory
approval.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Changes in Financial Condition September 30, 1996 compared to December 31,
1995.
The operating cash requirements of the Company primarily relate to the
payment of claims, policy acquisition costs and operating expenses. Due
to the nature of risks the Company insures, the Company's liabilities can
be estimated. The liabilities generally develop and are resolved over a
period of less than three years. Therefore, the Company generally has a
predictable schedule of cash needs. The Company manages its investment
activities to maintain adequate liquidity for operating purposes and to
protect its policyholders and stockholders (i.e., "matching" of liquidity
and cash requirements). The Company generally invests in investment
grade securities and has a policy of not acquiring real estate
investments. Historically, the Company has not experienced any
"mismatches" related to liquidity management and none are anticipated.
The Company's objective is to maintain a premiums-to-surplus ratio within
the industry standard maximum of 3:1. For the quarter and nine months
ended September 30, 1996, the premiums-to-surplus ratios were 1.0:1 and
2.2:1, respectively, compared to 1.9:1 and for 2.6:1 the same periods of
1995.
The Company's permanent credit facility was increased to $30 million in
December 1994, with the increase being utilized to expand underwriting
capacity during 1995. At September 30, 1995, the Company defaulted on
certain financial covenants contained in the related loan agreement.
This default was not cured prior to December 31, 1995. The loan
agreement was amended, including revised financial covenants, effective
March 1, 1996. The Company was not in compliance with certain revised
financial covenants at September 30, 1996. The Company anticipates full
payment of the credit facility balance and termination of the facility in
connection with the closing of the Progressive acquisition transaction.
Results of Operations for the quarter and nine-months ended September 30, 1996,
compared to the quarter and nine-months ended September 30, 1995.
Gross premiums written for the quarter and nine-months ended September
30, 1996, were 26% and 11% less, respectively, than for the same periods
of 1995 due to deliberate changes made in underwriting guidelines and
elimination of certain of the Company's programs. This is in line with
management's stated goals for 1996.
Net premiums written for the quarter and nine-months ended September 30,
1996, were 59% and 35% less, respectively, than the same periods of the
prior year due to the personal auto 30% quota share reinsurance in-force
in the first half of 1996 and not in the same period of 1995. In
addition, the Company entered into a new reinsurance agreement effective
July 1, 1996, whereby the Company's net retention of in-force, new and
renewal commercial business has been ceded, thus, effectively eliminating
the Company from the commercial market.
Earned premiums decreased for the quarter and nine-months ended September
30, 1996, compared to those same periods of 1995 due to the decrease in
premiums written.
Fee income for the quarter compared to the same period of 1995 was lower
due to decreased premium volume. In contrast, fee income for the
nine-months ended September 30, 1996, was higher than for the same
periods of 1995 due to increases in amounts of fees charged in certain
programs and due to a larger percentage of the Company's in-force
business being direct billed during the period. Direct bill programs
complement policy fees with installment billing fees. The installment
fees track in-force premium more directly than premiums written.
In-force premium has declined at a slower pace than the decline in
premium written, thus, installment fee
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income has increased during 1996 and has offset the reduction in policy
fees, which bear a direct relationship to premium written.
Investment income decreased for the quarter and nine months ended
September 30, 1996, compared to the same periods of 1995 due to lower
invested assets for the periods.
Losses for the quarter ended September 30, 1996, were lower than losses
for the same period of 1995 due to the personal auto cession of 30%
during 1996 and the 100% cession of commercial business for losses
occurring subsequent to June 30, 1996. The loss ratio, however,
increased to 108.8% from 94.8% for the quarters ended September 30, 1996,
and 1995, respectively, and up from 83.6% at June 30, 1996, due to the
continued effects of the in-force policies from unprofitable programs
written in 1995 and loss development on discontinued commercial auto
programs. The loss ratio for the first nine-months of 1996 was 90.01%
compared to 81.6% for the same period of 1995 due to the effects of the
same. As previously disclosed, the Company eliminated its full coverage
personal automobile program in California and tightened controls over full
coverage in Arizona in late 1995 after experiencing significant increases
in premium volume and a deterioration in results from these programs. A
number of the policies written in these programs remained in force into
1996 with expiration dates through October 31, 1996.
The Company's loss ratio continued to show the negative effects of these
policies through September 30, 1996. Also, as the Company previously
disclosed it eliminated certain of its commercial automobile programs in
Texas and Illinois in 1995 and early 1996. During the third quarter of
1996 the Company substantially completed an extensive file review and
its in-house actuary completed a thorough analysis of all its commercial
automobile programs. These reviews resulted in a $6 million increase in
prior year loss reserves related to commercial programs. The Company
entered into a reinsurance agreement effective July 1, 1996 to cede 100%
of its risk on all commercial policies in force at June 30, 1996 to a
major reinsurer.
Policy acquisition costs for the quarter and first nine months ended
September 30, 1996, decreased compared to the same periods of 1995 due to
the decrease in premium and the effects of ceding commission income.
During the third quarter of 1996, the results of an in-house actuarial
review of the Company's personal automobile programs resulted in an
estimated premium deficiency of approximately 3%. As a result, the
Company wrote off $1.5 million of deferred policy acquisition costs.
This write-off was offset by ceding commission income of $2.4 million
received in conjunction with the 100% commercial reinsurance program
effective July 1, 1996. The expense ratio for the quarter and first nine
months of 1996 were to 24.7% and 23.4% compared to 30.0% and 26.0% for
the year earlier periods, respectively.
During 1995, the Company utilized catastrophe insurance futures and
options to help manage the Company's risk from catastrophic losses. All
contracts open at December 31, 1995 were closed in 1996 and the Company
has not utilized this program in 1996.
Liquidity and Capital Resources
-------------------------------
As a result of the net loss for the quarter ended September 30, 1996, the
Company is in default of certain financial covenants under its bank
credit facility. The lender has requested to be paid in full at March 31,
1997. Due to the current dividend restrictions on the Company's insurance
subsidiaries, the Company will be unable to meet its 1997 debt service
requirements without receiving special regulatory approval to dividend
capital out of its insurance subsidiaries to the Company. Management
anticipates that the Progressive transaction described in Note 2 will be
consummated and the debt paid prior to March 31, 1997.
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PART II
Item 1. Legal Proceedings
In August 1994, the Company and three of its wholly-owned subsidiaries
were named in a civil lawsuit on behalf of two Chapter 13 debtors and as
putative representatives of a plaintiffs' class challenging the validity
of the Chapter 13 automobile insurance program in Alabama. The
plaintiffs sought certification of a class, a declaration that the
insurance policies violate Alabama statutes, a permanent injunction
against further implementation of the Chapter 13 automobile insurance
program in Alabama, and reimbursement of premiums received by the Company
under the Chapter 13 automobile program in Alabama. The Company and its
subsidiaries denied the material allegations of the complaint and were
awarded Dismissal by Summary Judgment in August 1995. The plaintiff's
filed a motion for reconsideration, which was denied in October 1995.
The plaintiffs have appealed this determined and no decision has been
rendered to date. The lawsuit was filed in the United States District
Court for the Northern District of Alabama, Western Division, and is
presently pending in the United States Court of Appeals, Eleventh
Circuit.
In May 1995, the Company, one of its officers and one of its subsidiaries
were named in a wrongful termination lawsuit by a former employee. This
lawsuit is pending in the State of Illinois Circuit Court, Seventh
Judicial Circuit. The matter is in the discovery stages. Management of
the Company also believes that it had valid cause for the dismissal of
this employee and presently intends to vigorously defend the case.
Management of the Company also believes that the resolution of this
matter will not have a material impact on the Company's operations.
Item 2. Changes in Securities.
There were no changes in securities.
Item 3. Default by the Company upon its Senior Securities.
The Company has no senior securities.
Item 4. Submission of Matters to a Vote by Security Holders.
There were no matters submitted to a vote by security holders.
Item 5. Other Information.
Item 6a.
Exhibits and Reports in Form 8-K.
a) Exhibits required by item 601 of Regulations S-K.
* 11.1 Statement Regarding Computation of Net Income Per share.
* 27 Financial Data Schedule (SEC use only)
-----------
* Previously filed.
b) Reports on Form 8-K.
The Company did not file a report on Form 8-K during the quarter ended
September 30, 1996.
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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.
Midland Financial Group, Inc.
(Registrant)
January 14, 1997 /s/ Joseph W. McLeary
---------------------------------
By: Joseph W. McLeary
Chairman and CEO
January 14, 1997 /s/ Elena Barham
---------------------------------
By: Elena Barham
Senior Vice-President and
Chief Financial Officer
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