<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
June 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 August 13, 1996 there were 5,546,522 shares of Common Stock outstanding.
1
<PAGE> 2
Part I
Item 1. Financial Statements
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, Dec. 31,
ASSETS 1996 1995
------- -------- ---------
(as restated)
<S> <C> <C>
Cash and short term investments $ (1,809) $ 12,479
Investments held for resale 162,994 162,324
-------- --------
161,185 174,803
Agent and direct bill receivables 35,228 39,741
Finance contracts receivable 273 365
Reinsurance recoverable 29,167 17,819
Prepaid reinsurance premium 21,224 21,207
Accrued interest receivable 2,289 2,296
Deferred policy acq. costs 11,079 9,617
Furniture, equip, fixtures, net 3,462 3,398
Intangibles, net 2,968 571
Notes receivable 2,726 2,158
Subsidiary investments 300 293
Income taxes recoverable 9,773 9,227
Other assets 4,991 2,036
-------- --------
Total Assets $284,665 $283,531
======== ========
LIABILITIES
-----------
Unpaid losses and loss adjustment expense $110,089 $104,516
Unearned premiums and fees 80,906 82,473
Due to reinsurers 11,286 7,946
Notes payable 26,000 27,000
Accrued premium taxes and other expenses 7,617 12,751
-------- --------
Total Liabilities 235,898 234,686
-------- --------
EQUITY
------
Common stock 41,625 39,420
Additional paid-in capital 1,887 1,887
Retained earnings 5,036 5,796
Unrealized appreciation on equity securities 219 1,742
-------- --------
Total Equity 48,767 48,845
-------- --------
Total Liabilities and Equity $284,665 $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 Six Months Ended
June 30, June 30,
------------------------- -----------------------
1996 1995 1996 1995
-------- -------- --------- ---------
(as restated)
<S> <C> <C> <C> <C>
Gross premiums written $ 51,872 $ 57,577 $ 103,762 $ 106,660
======== ======== ========= =========
Net premiums written $ 38,174 $ 55,788 $ 76,445 $ 104,081
======== ======== ========= =========
Income:
Premiums earned $ 38,965 $ 45,078 $ 78,029 $ 83,865
Policy fees 3,250 2,775 6,330 4,758
Investment income 2,338 2,753 4,497 4,817
Net realized investment gains 37 36 444 6
Other income 18 49 39 115
-------- -------- --------- ---------
44,608 50,691 89,339 93,561
-------- -------- --------- ---------
Expenses:
Losses & loss adjustment exp. 32,593 34,174 68,040 61,960
Policy acquisition costs 9,180 11,351 18,926 21,022
Operating expenses 1,652 1,126 3,407 2,585
Interest 582 378 1,211 780
Amort. of intangible assets 38 37 74 68
-------- -------- --------- ---------
44,045 47,066 91,658 86,415
-------- -------- --------- ---------
Income (loss) before provision for
income taxes and equity interest 563 3,625 (2,319) 7,146
Income tax provision
(benefit) (327) 740 (1,574) 1,619
-------- -------- --------- ---------
Income (loss) before equity interests 890 2,885 (745) 5,527
Equity interests - (90) (15) (123)
-------- -------- --------- ---------
Net income (loss) $ 890 $ 2,795 $ (760) $ 5,404
======== ======== ========= ========
Net income (loss) per common share $ .16 $ .51 $ (.14) $ .99
======== ======== ========= ========
Weighted average common shares
outstanding 5,567 5,468 5,567 5,466
======== ======== ========= ========
</TABLE>
3
<PAGE> 4
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net cash flows from operating
activities $ (3,227) $ 15,291 $ (9,603) $ 21,385
--------- -------- --------- --------
Cash flows from investing activities:
Sales of investments 10,195 1,515 37,634 1,588
Purchase of investments (12,172) (6,317) (41,085) (17,663)
Other 412 (186) 334 (321)
--------- -------- --------- --------
Net cash used by investing
activities (1,565) (4,988) (3,117) (16,396)
--------- -------- --------- --------
Cash flows from financing activities:
Exercise of warrants and options - 125 - 153
Bank credit facility transactions - 10,000 (1,000) (11,000)
Other (942) (619) (568) (865)
--------- -------- --------- --------
Net cash provided (used)
by financing activities (942) 9,506 (1,568) (11,712)
--------- -------- --------- --------
Cash, beginning of period 3,925 2,664 12,479 29,196
--------- -------- --------- --------
Cash, end of period $ (1,809) $ 22,473 $ (1,809) $ 22,473
========= ======== ======== ========
</TABLE>
4
<PAGE> 5
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 six-month periods ended June 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 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
six months ended June 30, 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 six-month period ended June
30, 1996, the Company was in default of certain financial covenants
under its bank credit facility at June 30, 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 Conditions and
Results of Operations as of June 30, 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 June 30, 1996, as restated, 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 investment 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.
At June 30, 1996, the balance of ($1.8) million shown as cash was net
of a significant amount of outstanding checks for claim payments.
This was a temporary situation. The Company has paid significant
amounts of premiums to its reinsurer during the first half of 1996 but
anticipates collecting on paid claims throughout the remainder of
1996. In addition, the Company is moving a substantial portion of its
securities portfolio to taxable securities and will increase its
balance of cash on hand during the third quarter of 1996. At December
31, 1994, the Company's fixed maturity securities were classified as
held-to-maturity. During 1995, the Company's Investment Committee
made a decision to liquidate and reinvest the proceeds of certain of
those securities to take advantage of higher available yields. As a
result, the Company has reclassified the entire portfolio to
available-for-sale and the securities are carried at fair value.
The Company's objective is to maintain a premiums-to-surplus ratio
based on the industry standard of a maximum of 3:1. For the quarter
and six months ended June 30, 1996, the premiums-to-surplus ratio was
2.7:1 and 2.71:1, compared to 2.98:1 and 2.78:1 for the same
periods of 1995. The Company anticipates these ratios will continue to
decrease during the remainder of 1996.
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. See "Liquidity and Capital
Resources."
6
<PAGE> 7
Results of Operations for the quarter and six-months, as restated, ended
June 30, 1996 compared to the quarter and six-months ended June 30, 1995.
Gross premiums written for the quarter and six months ended June 30, 1996 were
slightly less 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 six months ended June 30, 1996 were
32% and 27% less, respectively, than the same periods of the prior year due to
the 30% quota share reinsurance in-force in the first half of 1996 and not in
the same period of 1995.
Earned premiums decreased for the quarter and six months ended June 30, 1996
compared to those same periods of 1995 due to the decreases in premiums written
and due to the 30% quota share reinsurance in place in 1996.
Fee income for the quarter and six months ended June 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.
Investment income decreased slightly for the quarter and six months ended June
30, 1996 compared to the same periods of 1995 due to a heavier concentration in
tax preferential securities in 1996 than in 1995. Also, in 1995, the Company
was earning a higher rate on its invested cash than it is in 1996.
Losses for the quarter ended June 30, 1996 were slightly lower than losses for
the same period of 1996 due to the cession of 30% to reinsurers in 1996. The
loss ratio, however, increased to 83.6% from 75.8% for the quarters ended June
30, 1996 and 1995, respectively, due to the continued effects of the in-force
policies from unprofitable programs written in 1995. The loss ratio for the
first six months of 1996 was 87.2% compared to 73.9% for the same period of 1995
due to the continuing effects of the adverse loss results the Company has
experienced on certain of its personal and commercial automobile programs.
During the second quarter, management of the Company retained an experienced
commercial claims specialist to review its commercial claims files and to
reevaluate its claims handling procedures and philosophies. Certain of the
outstanding loss reserves for reported commercial claims have been increased as
a result of his review, which is ongoing.
Policy acquisition costs for the quarter ended June 30, 1996 decreased by 19.2%
due to the decrease in premiums and the effects of ceding commission income on
reinsurance. The expense ratio for the same periods decreased to 23.6% from
25.2% due to the ceding commission. Year-to-date at June 30, 1996, the expense
ratio decreased to 24.3% from 25.1% year to date as of June 30, 1995.
Operating expenses increased for the three and six month periods ended June 30,
1996 compared to the same periods of 1995 due to the addition of certain
control personnel, such as actuaries, an internal auditor, a market analyst and
due to software development costs. The Company is converting its in-house
insurance processing software to accommodate the century change.
7
<PAGE> 8
Liquidity and Capital Resources
As a result of the restatement of the 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 June 30, 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 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 Judgement in August
1995. The plaintiff's 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. 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.
Subsequent Events. On July 17, 1996, the President and Chief Operating
Officer of the Company, Charles H. Gray, III, along with two executives
of Danielson Holding Corporation were killed in the crash of TWA flight
800. Shortly thereafter, the proposed merger of the two companies was
cancelled.
The duties of the President and Chief Operating officer have been
assumed by the Chairman and Chief Executive Officer, Joseph W. McLeary.
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 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K.
The Company did not file a report on Form 8-K during the quarter ended
June 30, 1996.
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>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
------ ------- ------ -------
(as restated)
<S> <C> <C> <C> <C>
Primary:
Average Shares outstanding 5,547 5,357 5,547 5,352
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price 20 107 20 104
------- ------- ------- -------
Common and common equivalent shares 5,567 5,464 5,567 5,456
======= ======= ======= =======
Net income (loss) $ 890 $ 2,795 $ (760) $ 5,404
======= ======= ======= =======
Fully diluted:
Average shares outstanding 5,547 5,357 5,547 5,352
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price 20 111 20 114
------- ------- ------- -------
Common and common equivalents 5,567 5,468 5,567 5,466
======= ======= ======= =======
Net income (loss) $ 890 $ 2,795 $ (760) $ 5,404
======= ======= ======= =======
Per share amount:
Primary: $ .16 $ .51 $ (.14) $ .99
Fully diluted: $ .16 $ .51 $ (.14) $ .99
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 162,994
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 162,994
<CASH> (1,809)
<RECOVER-REINSURE> 29,167
<DEFERRED-ACQUISITION> 11,079
<TOTAL-ASSETS> 284,665
<POLICY-LOSSES> 110,089
<UNEARNED-PREMIUMS> 80,906
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 26,000
0
0
<COMMON> 41,625
<OTHER-SE> 7,142
<TOTAL-LIABILITY-AND-EQUITY> 284,665
78,029
<INVESTMENT-INCOME> 4,497
<INVESTMENT-GAINS> 444
<OTHER-INCOME> 6,369
<BENEFITS> 68,040
<UNDERWRITING-AMORTIZATION> 18,926
<UNDERWRITING-OTHER> 4,707
<INCOME-PRETAX> (2,334)
<INCOME-TAX> 1,574
<INCOME-CONTINUING> (760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (760)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
<RESERVE-OPEN> 92,205
<PROVISION-CURRENT> 68,040
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 26,473
<PAYMENTS-PRIOR> 42,661
<RESERVE-CLOSE> 91,111
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
