SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-15421
CITIZENS SECURITY GROUP INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1564371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
406 Main Street, Red Wing, Minnesota 55066
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-388-7171
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
----- -----
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on May 10, 1996, was 1,701,585.
Page 1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
1996 1995
---------- ----------
ASSETS
Investments:
Fixed maturities, at market (amortized cost of
$36,853,194 and $36,174,613, respectively) . $36,853,515 $37,022,064
Equity securities, at market (cost of $649,278
and $649,278, respectively). . . . . . . . . 781,577 791,385
Short-term investments . . . . . . . . . . . . 1,435,133 1,462,448
---------- ----------
Total investments. . . . . . . . . . . . 39,070,225 39,275,897
Cash. . . . . . . . . . . . . . . . . . . . . . . 208,346 1,291,173
Receivables:
Insurance premiums receivable. . . . . . . . . 8,286,306 8,322,717
Reinsurance recoverable. . . . . . . . . . . . 4,882,000 5,214,073
---------- ----------
Total receivables. . . . . . . . . . . . 13,168,306 13,536,790
Deferred policy acquisition costs . . . . . . . . 2,563,322 2,427,418
Prepaid reinsurance premiums. . . . . . . . . . . 1,976,997 2,395,744
Deferred tax asset. . . . . . . . . . . . . . . . 963,000 745,000
Accrued investment income . . . . . . . . . . . . 567,933 573,303
Equipment, at cost less accumulated depreciation. 541,701 594,525
Excess of cost over net assets acquired . . . . . 275,191 309,297
Other assets. . . . . . . . . . . . . . . . . . . 211,614 141,896
---------- ----------
Total assets . . . . . . . . . . . . . . $59,546,635 $61,291,043
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment
expenses. . . . . . . . . . . . . . . . . . . $23,431,277 $24,012,866
Unearned premiums. . . . . . . . . . . . . . . 16,439,088 16,632,332
Bank loan payable. . . . . . . . . . . . . . . 899,000 999,000
Unearned compensation. . . . . . . . . . . . . 284,999 329,999
Due to Citizens Mutual . . . . . . . . . . . . 244,334 76,616
Current income taxes payable . . . . . . . . . 93,423 90,423
Other liabilities. . . . . . . . . . . . . . . 1,374,300 2,182,897
---------- ----------
Total liabilities. . . . . . . . . . . . 42,766,421 44,324,133
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 7.95% Series A;
1,250,000 shares authorized, issued and
outstanding. . . . . . . . . . . . . . . . 4,375,000 4,375,000
Common stock, $.01 par value; 10,000,000 shares
authorized; 1,691,585 and 1,661,585 shares
issued and outstanding, respectively. . . . 16,916 16,616
Additional paid-in capital . . . . . . . . . . 5,194,772 5,097,360
Unearned compensation. . . . . . . . . . . . . (284,999) (329,999)
Unrealized appreciation of investments in
fixed maturities and equity securities,
net of related taxes . . . . . . . . . . 87,620 652,558
Retained earnings. . . . . . . . . . . . . . . 7,390,905 7,155,375
---------- ----------
Total shareholders' equity . . . . . . . 16,780,214 16,966,910
---------- ----------
Total liabilities and shareholders' equity $59,546,635 $61,291,043
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31,
-----------------------
1996 1995
---------- ----------
Revenues:
Premiums earned . . . . . . . . . . . . . . . $ 7,853,487 $ 7,734,904
Investment income, less related expenses. . . 627,513 608,610
Realized gains (losses) on investments. . . . (515) 8,784
Other income. . . . . . . . . . . . . . . . . 149,917 138,375
---------- ----------
Total revenues. . . . . . . . . . . . 8,630,402 8,490,673
---------- ----------
Losses and expenses:
Losses and loss adjustment expenses incurred. 5,533,708 4,844,414
Policy acquisition costs. . . . . . . . . . . 1,415,678 1,349,882
Interest expense. . . . . . . . . . . . . . . 28,129 40,376
Other operating expenses. . . . . . . . . . . 1,203,404 1,102,873
---------- ----------
Total losses and expenses . . . . . . 8,180,919 7,337,545
---------- ----------
Income before income taxes. . . . . . 449,483 1,153,128
Income tax expense. . . . . . . . . . . . . . . . 127,000 356,000
---------- ----------
Net income. . . . . . . . . . . . . . $ 322,483 $ 797,128
---------- ----------
---------- ----------
Weighted average common and common equivalent shares
outstanding. . . . . . . . . . . . . . . . . 1,753,765 1,670,426
---------- ----------
Earnings per common share . . . . . . . . . . . . $ .13 $ .43
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
-----------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . $ 322,483 $ 797,128
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Change in:
Insurance premiums receivable. . . . . 36,411 (58,734)
Reinsurance recoverable. . . . . . . . 260,115 (468,641)
Due from Citizens Mutual . . . . . . . 167,718 (534,550)
Prepaid reinsurance premiums . . . . . 418,747 111,662
Deferred policy acquisition costs. . . (135,904) 33,731
Deferred income taxes. . . . . . . . . 74,000 (36,000)
Reserves for losses and loss
adjustment expense . . . . . . . . . (581,589) 964,939
Unearned premiums. . . . . . . . . . . (193,244) (387,470)
Income tax payable . . . . . . . . . . 3,000 146,000
Other liabilities. . . . . . . . . . . (736,640) (299,055)
Depreciation and amortization . . . . . . 64,937 40,913
Realized gains. . . . . . . . . . . . . . 515 (8,784)
Other, net. . . . . . . . . . . . . . . . (67,765) (31,537)
---------- ----------
Net cash provided by (used in)
operating activities. . . . . . . . . (367,216) 269,602
---------- ----------
Cash flows from investing activities:
Proceeds from fixed maturities called or matured 477,096 1,017,967
Proceeds from fixed maturities sold. . . . . . 500,000 364,243
Cost of fixed maturities acquired. . . . . . . (1,627,285) (1,627,743)
Cost of equity securities acquired . . . . . . - (10,563)
Cost of equipment acquired . . . . . . . . . . (3,496) (37,807)
Change in payable to investment broker . . . . - (278,752)
---------- ----------
Net cash used in investing activities. (653,685) (572,655)
---------- ----------
Cash flows from financing activities:
Exercise of common stock options . . . . . . . 97,712 -
Repayment of bank loan . . . . . . . . . . . . (100,000) (100,000)
Series A preferred stock dividends . . . . . . (86,953) (86,953)
---------- ----------
Net cash used in financing activities. (89,241) (186,953)
---------- ----------
Net decrease in cash and short-term investments . (1,110,142) (490,006)
Cash and short-term investments
at beginning of period . . . . . . . . . . . . . 2,753,621 2,721,351
---------- ----------
Cash and short-term investments at end of period. $ 1,643,479 $ 2,231,345
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
(Unaudited)
Three
months ended Year ended
March 31, December 31,
1996 1995
------------ ------------
Preferred stock, beginning of period. . . . . . . $ 4,375,000 $ 4,375,000
Issuance of 7.95% Series A . . . . . . . . . . - -
Preferred stock, end of period. . . . . . . 4,375,000 4,375,000
------------ ------------
Common stock, beginning of period . . . . . . . . 16,616 16,616
------------ ------------
Exercise of common stock options . . . . . . . 300 -
Common stock, end of period . . . . . . . . 16,916 16,616
Additional paid-in capital, beginning of period . 5,097,360 5,097,360
Exercise of common stock options . . . . . . . 97,412 -
------------ ------------
Additional paid-in capital, end of period . 5,194,772 5,097,360
------------ ------------
Unearned compensation, beginning of period. . . . (329,999) (509,999)
ESOP principal payments. . . . . . . . . . . . 45,000 180,000
------------ ------------
Unearned compensation, end of period. . . . (329,999) (509,999)
------------ ------------
Unrealized appreciation (depreciation),
beginning of period. . . . . . . . . . . . . . 652,558 (1,492,563)
Change in unrealized appreciation (depreciation),
net of taxes. . . . . . . . . . . . . . . . (564,938) 2,145,121
------------ ------------
Unrealized appreciation, end of period. . . 87,620 652,558
------------ ------------
Retained earnings, beginning of period. . . . . . 7,155,375 6,062,664
Net income . . . . . . . . . . . . . . . . . . 322,483 1,440,523
Series A preferred stock dividend. . . . . . . (86,953) (347,812)
------------ ------------
Retained earnings, end of period. . . . . . 7,390,905 7,155,375
------------ ------------
Total shareholders' equity. . . . . . . . . $16,780,214 $16,966,910
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Unaudited
March 31, 1996 and 1995
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Citizens Security
Group Inc. (the "Company") and the Company's wholly owned subsidiaries, Citizens
Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("ICO"),
and have been prepared in conformity with generally accepted accounting
principles. All significant intercompany balances have been eliminated in
consolidation.
The Consolidated Balance Sheet as of March 31, 1996, the related Consolidated
Statements of Income and Cash Flows for the three months ended March 31, 1996
and 1995, and the Consolidated Statement of Changes in Equity for the three
months ended March 31, 1996, are unaudited. In the opinion of management, all
necessary adjustments for a fair presentation of such financial statements have
been included. The operating results for the period are not necessarily
indicative of the results to be expected for the entire year.
The consolidated financial statements and notes should be read in conjunction
with the financial statements and notes contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
Effective March 20, 1996, the Company and Citizens Security Mutual Insurance
Company ("Citizens Mutual") entered into an Acquisition and Affiliation
Agreement (the "Meridian Acquisition Agreement") with Meridian Insurance
Group, Inc. ("Meridian") providing for the acquisition of the Company by
Meridian (the "Meridian Acquisition") and the affiliation of Citizens Mutual
and Meridian. Pursuant to the Meridian Acquisition Agreement, a direct or
indirect wholly-owned subsidiary of Meridian would be merged with and into
the Company, with the result that the Company would become a wholly-owned
subsidiary of Meridian or a Meridian subsidiary. In the Meridian
Acquisition, each holder of shares of Common Stock of the Company would
receive approximately $12.50 per share of Common Stock in cash (an aggregate
of approximately $25.0 million), and Citizens Mutual, as the sole holder of
shares of the Company's 7.95% Series A Preferred Stock (the "Preferred
Stock"), would receive approximately $3.50 per share of Preferred Stock in
cash (an aggregate of approximately $4.4 million).
In connection with the Meridian Acquisition, Meridian would assume control of
the Citizens Mutual Board of Directors. In addition, Citizens Mutual, Citizens
Fund, ICO and the insurance companies affiliated with Meridian would enter into
a new reinsurance pooling arrangement under which they would combine all of
their respective insurance business.
The Meridian Acquisition is conditioned upon approval by the holders of the
Common Stock of the Company, Citizens Mutual, as the sole shareholder of the
Preferred Stock, the policyholders of Citizens Mutual, and insurance company
regulatory authorities in Minnesota, Ohio and Indiana, and subject to certain
other conditions.
Page 6
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
(2) EARNINGS PER COMMON SHARE
Earnings per common share are calculated based on the weighted average number of
common and common equivalent shares outstanding and after net income is reduced
by dividends on the Company's Series A preferred stock. Declared preferred
stock dividends were $86,953 for the quarters ended March 31, 1996 and 1995.
(3) INVESTMENTS
The Company classifies its entire fixed maturity and equity investment
portfolios as "available-for-sale." Accordingly, these investments are reported
at estimated market value with unrealized gains and losses, net of deferred
taxes, recorded in shareholders' equity. Classifying these portfolios as
"available-for-sale" does not impact net income. Estimated market value is
based on quoted market prices where available. Where quoted market prices are
not available, market value is estimated using values obtained from independent
pricing services.
Short-term investments include investments maturing within one year, money
market instruments and mutual funds. Short-term investments with original
maturities of three months or less are considered cash equivalents for purposes
of the Consolidated Statements of Cash Flows. The carrying amount reported in
the balance sheets for cash and short-term investments approximate their fair
value.
Realized gains or losses on sales of investments, based on specific
identification of the investments sold, are credited or charged to income.
Changes in unrealized appreciation or depreciation resulting from changes in the
market value of investments are credited or charged to shareholders' equity, net
of deferred income taxes, if any.
Realized gains (losses) on investments were as follows:
Three months ended
March 31,
------------------------
1996 1995
---------- ----------
Fixed maturities. . . . . . . . . . . . . . . . . $ (515) $ 8,784
---------- ----------
Realized gains (losses) on investments. . . . $ (515) $ 8,784
---------- ----------
---------- ----------
The unrealized appreciation (depreciation) for the three months ended 1996 and
1995 is summarized as follows:
1996 1995
---------- ----------
Equity securities . . . . . . . . . . . . . . . . $ (9,808) $ 1,527
Fixed maturities. . . . . . . . . . . . . . . . . (847,130) 1,139,662
---------- ----------
Unrealized appreciation (depreciation)
for the three months ended . . . . . . . . . $ (856,938) $ 1,141,189
---------- ----------
---------- ----------
Page 7
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
(4) FEDERAL INCOME TAXES
The primary objective under the Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," is to ensure the deferred tax
asset or liability on the balance sheet properly reflects the amount due to or
from the government in the future. As a consequence, the portion of the tax
expense resulting from the change in the deferred tax asset or liability may not
always be consistent with the income reported in the Consolidated Statements of
Income.
Some items of revenue and expense included in the Consolidated Statements of
Income may not be currently taxable or deductible on income tax returns.
Therefore, the income tax assets and liabilities are divided into a current
portion, which is the amount attributable to the current year's tax return, and
a deferred portion, which is the amount attributable to another year's tax
return. The revenue and expense items not currently taxable or deductible are
called temporary differences. Income tax expense or benefits are recorded in
various places in the Company's financial statements. A summary of these
amounts is as follows:
Three months ended
March 31,
-----------------------
1996 1995
--------- --------
STATEMENTS OF OPERATIONS
Income tax attributable to operations . . . . . . $ 127,000 $ 356,000
SHAREHOLDERS' EQUITY
Income tax attributable to unrealized
appreciation (depreciation) of investments . . (292,000) 388,000
--------- --------
. . . . . . . . . . . . . . . . . . . . . . . . . $ (165,000) $ 744,000
--------- --------
--------- --------
The components of income tax expense related to the income before cumulative
effect of accounting change are as follows:
Three months ended
March 31,
-----------------------
1996 1995
--------- --------
Federal current . . . . . . . . . . . . . . . . . $ 51,000 $ 381,000
Federal deferred. . . . . . . . . . . . . . . . . 74,000 (36,000)
State . . . . . . . . . . . . . . . . . . . . . . 2,000 11,000
--------- --------
Total income tax expense . . . . . . . . . . . $ 127,000 $ 356,000
--------- --------
--------- --------
Federal income tax expense is less than the U. S. Federal income tax rate of 34
percent applied to income before income taxes. The reasons for this difference
and the related tax effects are as follows:
Page 8
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
Three months ended
March 31,
------------------------
1996 1995
---------- ----------
Tax expense calculated at the Federal rate. . . . $ 152,824 $ 392,064
Reduction attributable to nontaxable investment income
(municipal bond interest and domestic dividends) (30,097) (38,560)
State tax expense . . . . . . . . . . . . . . . . 1,320 7,260
Other . . . . . . . . . . . . . . . . . . . . . . 2,953 (4,764)
---------- ----------
Total income tax expense . . . . . . . . . . $ 127,000 $ 356,000
---------- ----------
---------- ----------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
March 31, December 31,
1996 1995
---------- ----------
DEFERRED TAX ASSETS
Loss reserves . . . . . . . . . . . . . . . . . . $ 1,052,828 $ 1,108,125
Unearned premium reserves . . . . . . . . . . . . 983,421 968,087
Other . . . . . . . . . . . . . . . . . . . . . . 12,751 10,788
---------- ----------
Total gross deferred tax assets . . . . . . . 2,049,000 2,087,000
---------- ----------
DEFERRED TAX LIABILITIES
Deferred acquisition costs. . . . . . . . . . . . 871,530 825,322
Excess of cost over net assets acquired . . . . . 90,485 101,464
Unrealized appreciation of investments. . . . . . 45,091 366,450
Prepaid expenses. . . . . . . . . . . . . . . . . 35,440 37,279
Other . . . . . . . . . . . . . . . . . . . . . . 43,454 41,485
---------- ----------
Total gross deferred tax liabilities. . . . . 1,086,000 1,342,000
---------- ----------
Net deferred income tax assets. . . . . . . . $ 963,000 $ 745,000
---------- ----------
---------- ----------
The Company has determined it is not necessary to establish a valuation
allowance for the deferred tax asset as it is more likely than not the deferred
tax asset will be realized principally through future reversal of existing
taxable temporary differences and future taxable income.
Income tax payments totaled $50,000 and $245,000 in the first three months of
1996 and 1995, respectively.
(5) PROPERTY-LIABILITY REINSURANCE AND RELATED RESERVES
Ceded reinsurance involves having other insurance companies agree to share
certain risks with the Company. The primary purpose of ceded reinsurance is to
protect the Company from potential losses in excess of the amount it is prepared
to accept. Reinsurance may be on an individual policy basis or to protect
against catastrophic losses.
The Company expects the companies with whom reinsurance is placed to honor their
obligations to the Company. In the event these companies are unable to
honor their obligations, the
Page 9
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
Company will pay these amounts. As of December 31, 1995, approximately 74
percent of the Company's prepaid reinsurance premiums was with Mutual
Reinsurance Bureau ("MRB"). All business written with MRB is automatically
assumed on an equal and joint basis by its six owner/assuming companies. The
six companies are rated from "A" to "A++" by A.M. Best Company. As of
December 31, 1995, approximately 54 percent of the Company's total
reinsurance recoverable was with Swiss Reinsurance America Corporation,
formerly known as North American Reinsurance Corporation. Swiss Reinsurance
America Corporation is rated "A" by A.M. Best Company and "AAA" by Standard
and Poor's for its property/liability claims-paying ability.
In 1994, the Company received refunds of $592,398 of excess ceded reinsurance
premiums from the Minnesota Workers' Compensation Reinsurance Association.
These refunds were required to be distributed to certain workers'
compensation policyholders under legislation passed by the State of Minnesota
in 1992. This legislation was challenged by a group of insurers and on
January 31, 1995 the U.S. Court of Appeals for the Eighth Circuit upheld a
lower court ruling that found the legislation to be unconstitutional. At
December 31, 1994 the Company recorded the refund as a reduction of ceded
written premium and ceded unearned premium, with no effect on earned premium.
The Company recorded these refunds as premiums earned in 1995.
The effect of assumed and ceded reinsurance on premiums written, premiums earned
and insurance losses and loss adjustment expenses is reflected in the following
table.
Three months ended
March 31,
------------------------
1996 1995
---------- ----------
Premiums written:
Direct . . . . . . . . . . . . . . . . . . . . $ 9,200,990 $ 8,859,719
Ceded. . . . . . . . . . . . . . . . . . . . . 1,122,000 1,400,623
---------- ----------
Net premiums written. . . . . . . . . . . $ 8,078,990 $ 7,459,096
---------- ----------
---------- ----------
Premiums earned:
Direct . . . . . . . . . . . . . . . . . . . . $ 9,394,235 $ 8,654,791
Ceded. . . . . . . . . . . . . . . . . . . . . 1,540,748 919,887
---------- ----------
Net premiums earned . . . . . . . . . . . $ 7,853,487 $ 7,734,904
---------- ----------
---------- ----------
Insurance losses and loss adjustment expenses:
Direct . . . . . . . . . . . . . . . . . . . . $ 6,439,549 $5,796,932
Ceded. . . . . . . . . . . . . . . . . . . . . 905,841 952,518
---------- ----------
Net insurance losses and loss adjustment
expenses . . . . . . . . . . . . . . . . $ 5,533,708 $4,844,414
---------- ----------
---------- ----------
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The consolidated financial statements and the related notes should be read in
conjunction with the following discussion, since they contain important
information for evaluation of the Company's financial condition and operating
results.
RESULTS OF OPERATIONS
Direct premiums written increased 3.9 percent in the first quarter of 1996 over
the first quarter of 1995. Premiums earned increased 1.5 percent in the first
quarter of 1996 over the first quarter of 1995. The 1995 earned premiums were
positively affected by a $592,398 refund of excess ceded premiums received from
the Minnesota Workers' Compensation Reinsurance Association ("MWCRA").
Net investment income was $627,513 for the first quarter of 1996 compared to
$608,610 for the first quarter of 1995, due mainly to an increase in invested
assets. The Company experienced a realized loss on investments of $515 in 1996
compared with a realized gain of $8,784 in 1995.
The Company's loss ratio (loss and loss adjustment expenses incurred to premiums
earned) was 70.5 percent in the first quarter of 1996 compared to 62.6 percent
in the first quarter of 1995. The Company experienced a 23.5 percent increase
in the number of claims for the three months ended March 31, 1996 compared to
the first three months of 1995. First quarter 1996 claims were at a higher
level primarily because of weather related losses.
Effective January 1, 1996, Citizens Fund, ICO and Citizens Mutual entered
into an aggregate excess of loss contract which reinsures losses and allocated
loss adjusting expenses in excess of 62% in any accident year. The reinsurer's
obligation is limited to 5% of accident year subject net earned premium. Losses
and allocated adjusting expenses in excess of 67% are retained by Citizens Fund,
ICO and Citizens Mutual. In the first quarter of 1996, the Company's loss ratio
was positively affected by the 5% benefit of the excess of loss contract.
The Company's expense ratio (total operating expenses to premiums earned) for
the first quarter of 1996 was 33.7 percent as compared to 32.2 percent for the
first quarter of 1995.
Net income for the 1996 period was $322,483, or $.13 per common share, as
compared to $797,128, or $.43 per common share, in the same period in 1995. The
MWCRA refund, in addition to accrued interest income associated with such
refund, accounted for net income of approximately $410,000, or $.25 per common
share, in the first quarter of 1995.
The Company's results of operations are affected by seasonal weather variations.
Accordingly, results reflected for any interim period are not necessarily
indicative of those to be expected for the entire year.
Page 11
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for the Citizens Fund and ICO are funds
generated from insurance premiums and net investment income. The Company's
subsidiaries' funds are generally invested in investment securities. At March
31, 1996, the Company and its subsidiaries held cash and short-term investments
of $1,643,479. Management believes these funds provide adequate liquidity for
the payment of claims and other short-term cash needs of the subsidiaries.
On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan
from First Bank National Association, which has subsequently been purchased on
November 9, 1995 by Goodhue County National Bank, Red Wing, Minnesota. The
principal balance of the bank loan remaining to be paid as of March 31, 1996 was
$899,000. The current interest rate is 8.75 percent, but the rate is variable
and is tied to the prime rate. The Company agreed to certain restrictive
covenants which limit the amount of subsequent indebtedness, capital
expenditures and business acquisitions.
As a holding company, the Company depends on dividends from Citizens Fund and
ICO and fees payable under a Capital Access Fee Agreement to provide funds for
bank loan payments, Preferred Stock dividends and other operating expenses.
As of March 31, 1996, the Company had no material commitments for capital
expenditures.
Page 12
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
------ ---------------------------------------------------
(27) Financial Data Schedule
(b) Reports on Form 8-K.
None
Page 13
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.
CITIZENS SECURITY GROUP INC.
(Registrant)
Date: May 10, 1996 By:
-----------------------------
Scott S. Broughton
President, Chief
Operating Officer (duly
authorized officer) and
Chief Financial Officer
(principal financial and
accounting officer)
Page 14
EXHIBIT INDEX
Page
Exhibit Description Number
- ------- ----------------------------------------------------- ------
(27) Financial Data Schedule
Page 15