<PAGE> 1
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
March 31, 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. Yes X No
---------- -----------
As of May 10, 1996 there were 5,546,522 shares of Common Stock outstanding.
<PAGE> 2
Part I
Item 1. Financial Statements
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
ASSETS March 31, Dec. 31,
------ 1996 1995
--------- --------
(as restated)
<S> <C> <C>
Cash and equivalents $ 3,925 $ 12,479
Investments available for sale
at fair value
Equity securities 14,838 13,408
Fixed maturities 147,163 148,916
------- -------
162,001 162,324
Receivables:
Agents and insureds 38,473 39,741
Finance contracts receivable 282 365
Reinsurance receivables
- direct 18,570 17,165
- assumed 432 654
Prepaid Reinsurance Premium 21,408 21,207
Accrued investment income 2,067 2,296
Deferred policy acq. costs 9,440 9,617
Net furniture, equip, fixtures 3,334 3,398
Notes receivable 2,743 2,158
Subsidiary investments 2,267 293
Deferred income taxes 4,350 3,813
Income taxes recoverable 6,746 5,414
Other Assets 4,659 2,607
-------- --------
Total Assets $280,697 $283,531
======== ========
TOTAL LIABILITIES
-----------------
Unpaid losses and loss adjustment expenses $111,016 $104,516
Unearned premiums and fees - direct 78,710 77,311
- assumed 3,172 5,162
Due to reinsurers 3,473 7,946
Notes payable and other debt 26,000 27,000
Accrued premium taxes and other expenses 9,923 12,751
------- -------
Total Liabilities 232,294 234,686
------- -------
Common stock 41,625 39,420
Additional paid-in capital 1,887 1,887
Retained earnings 4,176 5,796
Unrealized depr. on equity 715 1,742
------- -------
Total Equity 48,403 48,845
------- --------
Total Liabilities and Equity $280,697 $283,531
======= ========
</TABLE>
2
<PAGE> 3
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
-------- ---------
(as restated)
<S> <C> <C>
Gross premiums written $ 51,890 $ 49,083
======== ========
Net premiums written $ 38,271 $ 48,293
======== ========
Income:
Premiums earned $ 39,064 $ 38,787
Commissions and policy fees 3,080 1,983
Investment income 2,159 2,064
Net realized investment gains 407 (30)
Other income 21 66
------- -------
44,731 42,870
------- -------
Expenses:
Losses and loss adjustment expenses 35,447 27,786
Policy acquisition costs 9,746 9,671
Operating expenses 1,755 1,458
Interest 629 402
Amortization of intangible assets 36 31
------- -------
47,613 39,348
------- -------
Income (loss) before provision for income
taxes and equity interests (2,882) 3,522
Income tax provision (benefit) (1,247) 879
------- -------
Income (loss) before equity interests (1,635) 2,643
Equity interests 15 34
------- -------
Net income (loss) $(1,650) $ 2,609
======= =======
Net income (loss) per common share $ (.29) $ .48
======= =======
Weighted average common shares
outstanding 5,567 5,462
======= =======
</TABLE>
3
<PAGE> 4
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1995
------ ------
<S> <C> <C>
Net cash flows from operating
activities $(6,376) $6,094
------- ------
Cash flows from investing activities:
Sales of investments 27,439 73
Purchases of investments (28,913) (11,346)
Other (78) (135)
------- ------
Net cash used by investing activities (1,552) (11,408)
------- ------
Cash flows from financing activities:
Exercise of warrants and options -- 28
Repayment of debt (1,000) (21,000)
Other 374 (246)
------- ------
Net cash provided (used)
by financing activities (626) (21,218)
------- ------
Cash, beginning of period 12,479 29,196
------- ------
Cash, end of period $ 3,925 $2,664
======= ======
</TABLE>
4
<PAGE> 5
MIDLAND FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated condensed 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 condensed 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 period ended March 31, 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 during each period
adjusted for the assumed exercise of all outstanding stock options
using the treasury stock method (5,567,000 and 5,462,000 for the three
months ended March 31, 1996 and 1995, respectively).
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 a regulatory approval.
In January 1997, the Company determined that its Quarterly Reports on
Form 10-Q for the quarters ended March 31, June 30 and
September 30, 1996 should be amended to reflect the inadvertent
omission of certain loss data from the actuarial analysis performed as
of March 31, and June 30, 1996, aggregating $3.3 million of incurred
commercial automobile liability losses and loss adjustment expenses.
The accompanying unaudited consolidated financial statements for the
quarter ended March 31, 1996 have been revised to reflect a $3.3
million increase to loss and loss adjustment expense reserves.
As a result of the restatement of the accompanying unaudited
consolidated financial statements for the quarter ended March
31, 1996, the Company was in default of certain financial covenants
under its bank credit facility at March 31, 1996.
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 will be consummated and
the debt paid prior to March 31, 1997.
5
<PAGE> 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of March 31, 1996 has been revised to reflect the effect of the
restatement discussed in Note 2 to the accompanying unaudited consolidated
financial statements.
Changes in Financial Condition March 31, 1996, as restated, compared to
December 31, 1995.
The operating cash requirements of the Company relate primarily 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.
These 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's portfolio is heavily weighted toward intermediate fixed maturity
securities. 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 carries its investment portfolio as
available for sale and the securities are stated at fair value.
During the quarter ended March 31, 1996, the Company liquidated a portion of
its nontaxable securities, resulting in a net realized gain of $407,000. The
proceeds from the sale of these securities were reinvested in higher yielding
taxable securities, to take advantage of the Company's net operating loss
carryforward generated in 1995.
The Company's objective is to maintain a capital adequacy ratio based on the
industry standard of a maximum of 3:1. For the quarter ended March 31, 1996,
the capital adequacy ratio was 2.7:1 compared to 3:1 for the first quarter of
1995. The Company expects its premium writings to decline during 1996 as a
result of its decision during 1995 to eliminate certain programs and due to
rate increases already taken or anticipated to be taken during 1996. The
Company is utilizing a 30% quota share reinsurance facility obtained effective
September 30, 1995 on its personal automobile programs in 1996.
The Company obtained a $20 million permanent credit facility in December 1993,
which was utilized to expand underwriting capacity in 1994. This 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. The default was not cured prior to December 31, 1995. The loan
agreement was amended, including revised financial covenants, effective March
1, 1996. Under the terms of the restated loan agreement, the Company is not
required to pay principal until June 30, 1996, and quarterly thereafter through
June 30, 1998. Interest is payable quarterly.
6
<PAGE> 7
Results of Operations for the quarter ended March 31, 1996, as restated,
compared to the quarter ended March 31, 1995.
Gross premiums written for the quarter ended March 31, 1996 increased
by 6% as compared to the same period of 1995. The Company expanded
certain of its programs during 1995, but experienced unfavorable
results. Certain programs have been eliminated, rate increases have
been or are being implemented and underwriting guidelines have been
tightened. As a result the Company expects 1996 premiums to decline
as compared to 1995. Net premiums written for the quarter
ended March 31, 1996 declined by 21% as compared to the same quarter
of 1995 due to the utilization of a 30% quota-share reinsurance
facility during 1996.
The Company expanded certain of its personal automobile
programs during late 1994 and 1995, but experienced unfavorable
results. Certain of those programs have been eliminated, rate
increases have been or are being implemented and underwriting
guidelines have been tightened. As a result, the Company expects 1996
personal automobile premiums to decline as compared to 1995.
The Company also ceased to offer certain of its commercial automobile
programs and consolidated its commercial lines underwriting
operations. These programs will be closely monitored and
re-evaluated throughout 1996.
Fee income for the quarter increased by 55% as compared to the
same quarter of the prior year due to rate increases implemented in
1995 and due to fees generated from direct bill policies. During
1994, a large percentage of the Company's business was agency billed
business, but the accounts were substantially converted to direct bill
in late 1994 and 1995.
Losses and loss adjustment expenses for the quarter ended March 31,
1996 increased by 28% as compared to the same period of 1995. This
increase was mitigated by the utilization of reinsurance during 1996.
The loss ratio increased from 71.6% at March 31, 1995, when the
Company retained 98% of its premiums written to 90.7% at March 31,
1996, net of reinsurance. The Company experienced adverse loss
results on certain of its personal and commercial automobile programs
during the second half of 1995 and during the first quarter of 1996.
The Company's loss and loss adjustment expense reserves have been
established at levels consistent with the prior year end.
Policy acquisition costs remained relatively flat for the first
quarter of 1996 compared to the first quarter of 1995, after giving
recognition to ceding commission income on reinsurance. This is due
to a significant decrease in the percentage of acquisition costs being
deferred, as a result of increased loss ratios.
Operating expenses for the quarter ended March 31, 1996 increased by
20% as compared to the quarter ended March 31, 1995 due primarily to
the addition of certain personnel and the enhancement of information
technology to increase underwriting controls.
Interest and bank charges increased by 56% for the first quarter of
1996 as compared to the first quarter of 1995 because the interest
rate on the Company's credit facility was increased retroactive to
October 1, 1995 during the first quarter of 1996. In addition, the
Company was required to pay amendment fees of $117,500 in connection
with the renegotiation of the financial covenants of the loan during
the first quarter of 1996.
7
<PAGE> 8
Liquidity and Capital Resources
As a result of the restatement of the accompanying unaudited
consolidated financial statements for the quarter ended March 31, 1996, the
Company was in default of certain financial covenants under its bank credit
facility at March 31, 1996.
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.
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 Chapter 13
automobile program in Alabama. The Company and its subsidiaries denied the
material allegations of the complaint and were awarded Dismissal by Summary
Judgement in August 1995. The plaintiffs filed a motion for
reconsideration which was denied in October 1995. The plaintiffs have
appealed this determination and no decision has been rendered to date.
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. The matter is in the discovery stages. Management believes that
it had valid cause for the dismissal of this employee and will vigorously
defend the case. Management believes that the resolution of this matter will
not have a material impact on the Company's operations.
The Company and its subsidiaries are involved in asserted claims in the
normal course of business. Management believes the outcome of these matters
in the aggregate will not have a material adverse effect on the consolidated
financial statements of the Company.
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.
No matters were submitted to a vote of security holders during the first
quarter.
Item 5. Other Information.
None.
8
<PAGE> 9
Item 6a. Exhibits and Reports in Form 8-K.
a) Exhibits required by item 601 of Regulation S-K.
11.1 Statement Regarding Computation of Net Income Per Share.
27.1 Financial Data Schedule (for SEC use only).
b) Reports on Form 8-K.
The Company filed a report on Form 8-K on February 27, 1996, to
announce that it had entered into an Agreement and Plan of Merger with
Danielson Holding Corporation.
9
<PAGE> 10
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)
February 3, 1997 /s/ Joseph W. McLeary
--------------------------------------------
By: Joseph W. McLeary
Chairman and CEO
February 3, 1997 /s/ Elena Barham
--------------------------------------------
By: Elena Barham
Senior Vice-President and
Chief Financial Officer
10
<PAGE> 1
EXHIBIT 11.1
MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In thousands except per share amounts)
<TABLE>
<CAPTION>
March 31
-----------------------
1996 1995
------ ------
(as restated)
<S> <C> <C>
Primary:
Average Shares outstanding 5,547 5,347
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price 20 97
------- ------
Common and common equivalent shares 5,567 5,444
======= ======
Net income (loss) $(1,650) $2,609
======= ======
Fully diluted:
Average shares outstanding 5,547 5,347
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price 20 115
------- ------
Common and common equivalents 5,567 5,462
======= ======
Net income (loss) $(1,650) $2,609
======= ======
Per share amount:
Primary: $ (.29) $ .48
Fully diluted: $ (.29) $ .48
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 147,163
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,838
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 162,001
<CASH> 3,925
<RECOVER-REINSURE> 19,002
<DEFERRED-ACQUISITION> 9,440
<TOTAL-ASSETS> 280,697
<POLICY-LOSSES> 111,016
<UNEARNED-PREMIUMS> 81,882
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 26,000
0
0
<COMMON> 41,625
<OTHER-SE> 6,778
<TOTAL-LIABILITY-AND-EQUITY> 280,697
39,064
<INVESTMENT-INCOME> 2,159
<INVESTMENT-GAINS> 407
<OTHER-INCOME> 3,101
<BENEFITS> 35,447
<UNDERWRITING-AMORTIZATION> 9,746
<UNDERWRITING-OTHER> 2,435
<INCOME-PRETAX> (2,897)
<INCOME-TAX> 1,247
<INCOME-CONTINUING> (1,650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,650)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
<RESERVE-OPEN> 92,305
<PROVISION-CURRENT> 35,447
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 9,669
<PAYMENTS-PRIOR> 24,029
<RESERVE-CLOSE> 93,954
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
