<PAGE>
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, 1995
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 11, 1995, was 1,661,585.
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1995 1994
----------- ------------
Assets
------
<S> <C> <C>
Investments:
Fixed maturities, at market (amortized cost of $34,489,836
and $34,153,963, respectively). . . . . . . . . . . . . . . $33,329,587 $31,850,909
Equity securities, at market (cost of $657,160 and
$646,597, respectively) . . . . . . . . . . . . . . . . . . 701,178 689,088
Short-term investments. . . . . . . . . . . . . . . . . . . . 1,939,790 1,621,674
----------- -----------
Total investments . . . . . . . . . . . . . . . . . . . 35,970,555 34,161,671
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,555 1,099,677
Receivables:
Insurance premiums receivable . . . . . . . . . . . . . . . . 7,297,182 7,238,448
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . 4,295,086 3,826,444
Due from Citizens Mutual. . . . . . . . . . . . . . . . . . . 318,700 -
----------- -----------
Total receivables . . . . . . . . . . . . . . . . . . . 11,910,968 11,064,892
Deferred policy acquisition costs. . . . . . . . . . . . . . . . 2,264,973 2,298,703
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . 2,187,987 2,299,649
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 1,332,000 1,684,000
Equipment, at cost less accumulated depreciation . . . . . . . . 793,952 840,625
Accrued investment income. . . . . . . . . . . . . . . . . . . . 509,159 494,943
Excess of cost over net assets acquired. . . . . . . . . . . . . 415,962 451,517
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 218,001 206,259
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . $55,895,112 $54,601,936
----------- -----------
----------- -----------
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Liabilities:
Reserves for losses and loss adjustment expenses. . . . . . . $21,954,675 $20,989,736
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . 15,285,478 15,672,948
Bank loan payable . . . . . . . . . . . . . . . . . . . . . . 1,418,920 1,518,920
Unearned compensation . . . . . . . . . . . . . . . . . . . . 464,999 509,999
Due to Citizens Mutual. . . . . . . . . . . . . . . . . . . . - 215,850
Current income taxes payable. . . . . . . . . . . . . . . . . 264,229 118,229
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 1,449,369 2,027,176
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . 40,837,670 41,052,858
----------- -----------
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; 1,661,585 shares issued and outstanding. . . . 16,616 16,616
Additional paid-in capital. . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Unearned compensation . . . . . . . . . . . . . . . . . . . . (464,999) (509,999)
Unrealized depreciation of investments in fixed maturities
and equity securities, net of related taxes . . . . . . . (739,374) (1,492,563)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 6,772,839 6,062,664
----------- -----------
Total shareholders' equity. . . . . . . . . . . . . . . 15,057,442 13,549,078
----------- -----------
Total liabilities and shareholders' equity. . . . . . . $55,895,112 $54,601,936
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
(Unaudited)
Three months ended
March 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenues:
Premiums earned. . . . . . . . . . . . . . . . . . . . . . . . $7,734,904 $6,441,467
Investment income, less related expenses . . . . . . . . . . . 608,610 518,068
Realized gains on investments. . . . . . . . . . . . . . . . . 8,784 16,784
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 138,375 103,228
---------- ----------
Total revenues . . . . . . . . . . . . . . . . . . . . 8,490,673 7,079,547
---------- ----------
Losses and expenses:
Losses and loss adjustment expenses incurred . . . . . . . . . 4,844,414 4,385,792
Policy acquisition costs . . . . . . . . . . . . . . . . . . . 1,349,882 1,243,950
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 40,376 62,017
Other operating expenses . . . . . . . . . . . . . . . . . . . 1,102,873 954,605
---------- ----------
Total losses and expenses. . . . . . . . . . . . . . . 7,337,545 6,646,364
---------- ----------
Income before income taxes . . . . . . . . . . . . . . 1,153,128 433,183
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . 356,000 99,000
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 797,128 $ 334,183
---------- ----------
---------- ----------
Weighted average common and common equivalent shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 1,670,426 2,902,259
---------- ----------
Earnings per common share. . . . . . . . . . . . . . . . . . . . . $ .43 $ .12
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Three months ended
March 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 797,128 $ 334,183
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Change in:
Insurance premiums receivable . . . . . . . . . . . . . (58,734) (261,704)
Reinsurance recoverable . . . . . . . . . . . . . . . . (468,641) (916,102)
Due from Citizens Mutual. . . . . . . . . . . . . . . . (534,550) (359,016)
Prepaid reinsurance premiums. . . . . . . . . . . . . . 111,662 107,018
Deferred policy acquisition costs . . . . . . . . . . . 33,731 (16,303)
Deferred income taxes . . . . . . . . . . . . . . . . . (36,000) (42,000)
Reserves for losses and loss adjustment expense . . . . 964,939 1,118,487
Unearned premiums . . . . . . . . . . . . . . . . . . . (387,470) 216,840
Income tax payable. . . . . . . . . . . . . . . . . . . 146,000 6,000
Other liabilities . . . . . . . . . . . . . . . . . . . (299,055) (748,983)
Depreciation and amortization. . . . . . . . . . . . . . . 40,913 157,783
Realized gains . . . . . . . . . . . . . . . . . . . . . . (8,784) (16,784)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . (31,537) (66,054)
---------- ----------
Net cash provided by (used in) operating activities . . 269,602 (486,635)
---------- ----------
Cash flows from investing activities:
Proceeds from fixed maturities called or matured. . . . . . . . 1,017,967 800,888
Proceeds from fixed maturities sold . . . . . . . . . . . . . . 364,243 2,095,203
Proceeds from equity securities . . . . . . . . . . . . . . . . - 5,550
Cost of fixed maturities acquired . . . . . . . . . . . . . . . (1,627,743) (2,091,045)
Cost of equity securities acquired. . . . . . . . . . . . . . . (10,563) -
Cost of equipment acquired. . . . . . . . . . . . . . . . . . . (37,807) (37,837)
Change in payable to investment broker. . . . . . . . . . . . . (278,752) -
---------- ----------
Net cash provided by (used in) investing activities . . (572,655) 772,759
---------- ----------
Cash flows from financing activities:
Cost of issuance of Series A preferred stock. . . . . . . . . . - (149,728)
Repayment of bank loan. . . . . . . . . . . . . . . . . . . . . (100,000) (100,000)
Series A preferred stock dividends. . . . . . . . . . . . . . . (86,953) -
---------- ----------
Net cash used in financing activities . . . . . . . . . (186,953) (249,728)
---------- ----------
Net increase (decrease) in cash and short-term investments . . . . (490,006) 36,396
Cash and short-term investments at beginning of period . . . . . . 2,721,351 2,558,277
---------- ----------
Cash and short-term investments at end of period . . . . . . . . . $2,231,345 $2,594,673
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
(Unaudited)
Three
months ended Year ended
March 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Preferred stock, beginning of period . . . . . $ 4,375,000 $ -
Issuance of 7.95% Series A . . . . . . . . . - 4,375,000
----------- -----------
Preferred stock, end of period . . . . . 4,375,000 4,375,000
----------- -----------
Common stock, beginning of period. . . . . . . 16,616 29,116
Common stock exchanged. . . . . . . . . . . - (12,500)
----------- -----------
Common stock, end of period. . . . . . . 16,616 16,616
----------- -----------
Additional paid-in capital, beginning
of period . . . . . . . . . . . . . . . . . . 5,097,360 9,609,674
Common stock exchanged. . . . . . . . . . . - (4,512,314)
----------- -----------
Additional paid-in capital, end
of period . . . . . . . . . . . . . . . 5,097,360 5,097,360
----------- -----------
Unearned compensation, beginning of period . . (509,999) (689,998)
ESOP principal payments . . . . . . . . . . 45,000 179,999
----------- -----------
Unearned compensation, end of period . . (464,999) (509,999)
----------- -----------
Unrealized appreciation (depreciation),
beginning of period . . . . . . . . . . . . . (1,492,563) 641,691
Change in unrealized appreciation
(depreciation), net of taxes. . . . . . . . 753,189 (2,134,254)
----------- -----------
Unrealized depreciation, end
of period . . . . . . . . . . . . . . . (739,374) (1,492,563)
----------- -----------
Retained earnings, beginning of period . . . . 6,062,664 4,941,985
Net income. . . . . . . . . . . . . . . . . 797,128 1,381,538
Series A preferred stock dividend . . . . . (86,953) (260,859)
----------- -----------
Retained earnings, end of period . . . . 6,772,839 6,062,664
----------- -----------
Total shareholders' equity . . . . . . . $15,057,442 $13,549,078
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Unaudited
March 31, 1995 and 1994
(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, 1995, the related Consolidated
Statements of Income and Cash Flows for the three months ended March 31, 1995
and 1994, and the Consolidated Statement of Changes in Equity for the three
months ended March 31, 1995, 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
to Shareholders for the year ended December 31, 1994.
(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 and $0 for the quarter ended March 31, 1995 and
1994, respectively.
(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.
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.
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.
Page 6
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
Realized gains on investments were as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1995 1994
--------- --------
<S> <C> <C>
Fixed maturities . . . . . . . . . . . . . . . $ 8,784 $ 11,234
Equity securities. . . . . . . . . . . . . . . - 5,550
--------- --------
Realized gains on investments. . . . . . . $ 8,784 $ 16,784
--------- --------
--------- --------
</TABLE>
Change in unrealized appreciation (depreciation) is summarized as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1995 1994
---------- ------------
<S> <C> <C>
Equity securities. . . . . . . . . . . . . . . $ 1,527 $ (17,725)
Fixed maturities . . . . . . . . . . . . . . . 1,139,662 (1,123,797)
---------- -----------
Total change in unrealized appreciation
(depreciation). . . . . . . . . . . . . . $1,141,189 $(1,141,522)
---------- -----------
---------- -----------
</TABLE>
(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:
Page 7
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
STATEMENTS OF OPERATIONS
Income tax attributable to operations . . . . $ 356,000 $ 99,000
SHAREHOLDERS' EQUITY
Income tax attributable to unrealized
appreciation (depreciation) of investments . 388,000 (389,000)
--------- ---------
$ 744,000 $(290,000)
--------- ---------
--------- ---------
</TABLE>
The components of income tax expense related to the income before cumulative
effect of accounting change are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Federal current. . . . . . . . . . . . . . . . $ 381,000 $ 134,000
Federal deferred . . . . . . . . . . . . . . . (36,000) (42,000)
State. . . . . . . . . . . . . . . . . . . . . 11,000 7,000
--------- ---------
Total income tax expense. . . . . . . . . . $ 356,000 $ 99,000
--------- ---------
--------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Tax expense calculated at the Federal rate . . $ 392,064 $ 147,282
Reduction attributable to nontaxable
investment income (municipal bond
interest and domestic dividends) . . . . . (38,560) (45,079)
State tax expense. . . . . . . . . . . . . . . 7,260 4,950
Other. . . . . . . . . . . . . . . . . . . . . (4,764) (8,153)
--------- ---------
Total income tax expense . . . . . . . . . $ 356,000 $ 99,000
--------- ---------
--------- ---------
</TABLE>
Page 8
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS
Loss reserves. . . . . . . . . . . . . . . . . $1,038,563 $1,009,292
Unearned premium reserves. . . . . . . . . . . 890,629 909,687
Unrealized depreciation of investments . . . . 380,587 768,591
Other. . . . . . . . . . . . . . . . . . . . . 18,221 14,733
--------- ---------
Total gross deferred tax assets . . . . . . 2,328,000 2,702,000
--------- ---------
DEFERRED TAX LIABILITIES
Deferred acquisition costs . . . . . . . . . . 770,091 781,559
Excess of cost over net assets acquired. . . . 134,403 145,383
Prepaid expenses . . . . . . . . . . . . . . . 37,119 38,084
Other. . . . . . . . . . . . . . . . . . . . . 54,387 52,974
--------- ---------
Total gross deferred tax liabilities. . . . 996,000 1,018,000
--------- ---------
Net deferred income tax assets. . . . . . . $1,332,000 $1,684,000
--------- ---------
--------- ---------
</TABLE>
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 $245,000 and $136,000 in the first three months of
1995 and 1994, 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.
SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," requires the Company to report balances pertaining to
reinsurance transactions "gross" on the balance sheet. The Company now records
reinsurance recoverables on unpaid losses and ceded unearned premiums as assets
in contrast to the Company's prior practice of netting these amounts against the
corresponding liabilities.
Page 9
<PAGE>
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
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 Company will pay these amounts. As of December 31, 1994,
approximately 66 percent and 77 percent of the total reinsurance recoverable and
prepaid reinsurance premiums, respectively, were with the North American
Reinsurance Corporation. That company is rated "A" by A.M. Best Company and
"AAA" by Standard and Poor's for its property/liability claims-paying ability.
The effect of ceded reinsurance on premiums written, premiums earned and
insurance losses and loss adjustment expenses is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Premiums written:
Direct. . . . . . . . . . . . . . . . . . . $8,859,719 $7,981,020
Ceded . . . . . . . . . . . . . . . . . . . 1,400,623 1,215,695
---------- ----------
Net premiums written. . . . . . . . . . $7,459,096 $6,765,325
---------- ----------
---------- ----------
Premiums earned:
Direct. . . . . . . . . . . . . . . . . . . $8,654,791 $7,764,180
Ceded . . . . . . . . . . . . . . . . . . . 919,887 1,322,713
---------- ----------
Net premiums earned . . . . . . . . . . $7,734,904 $6,441,467
---------- ----------
---------- ----------
Insurance losses and loss adjustment
expenses:
Direct. . . . . . . . . . . . . . . . . . . $5,796,932 $5,743,125
Ceded . . . . . . . . . . . . . . . . . . . 952,518 1,357,333
---------- ----------
Net insurance losses and loss
adjustment expenses. . . . . . . . . . $4,844,414 $4,385,792
---------- ----------
---------- ----------
</TABLE>
Page 10
<PAGE>
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 11.0 percent in the first quarter of 1995 over
the first quarter of 1994, mainly because of business growth in Ohio.
Throughout the states in which the Company operates, additional growth is
primarily attributable to an increase in policies written for personal
automobile, commercial multi-peril and related commercial lines.
Premiums earned increased 20.1 percent in the first quarter of 1995 over the
first quarter of 1994. 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 $608,610 for the first quarter of 1995 compared to
$518,068 for the first quarter of 1994 mainly due to an increase in invested
assets. Realized gains on investments were $8,784 in 1995 compared with $16,784
in 1994.
The Company's loss ratio (loss and loss adjustment expenses incurred to premiums
earned) was 62.6 percent in the first quarter of 1995 compared to 68.1 percent
in the first quarter of 1994. The Company experienced a 7.6 percent decrease in
the number of claims for the three months ended March 31, 1995 compared to the
first three months of 1994. First quarter 1994 claims were at a higher
level primarily from weather related losses during January 1994 when severe cold
weather caused a significant number of frozen pipe claims.
The Company's expense ratio (total operating expenses to premiums earned) for
the first quarter of 1995 was 32.2 percent as compared to 35.1 percent for the
first quarter of 1994. The decrease was mainly due to the $592,398 refund
received from the MWCRA that was reflected in premiums earned for 1995.
Net income for the 1995 period was $797,128, or $.43 per common share, versus
$334,183, or $.12 per common share, in the same period in 1994. 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
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for the Company's subsidiaries are funds
generated from insurance premiums and net investment income. The Company's
subsidiaries' funds are generally invested in investment securities. At March
31, 1995, the Company and its subsidiaries held cash and short-term investments
of $2,231,345. 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 amended. The
principal balance of the bank loan remaining to be paid as of March 31, 1995 was
$1,418,920. The current interest rate is 9.5 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, 1995, the Company had no material commitments for capital
expenditures.
Page 12
<PAGE>
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.
The Company held its annual meeting of shareholders on April 18, 1995. A
proposal to elect seven members to the Board of Directors to serve for
one-year terms until their successors are elected and qualified was submitted
to a vote of security holders. The seven directors named in the proposal were
Scott S. Broughton, Spencer A. Broughton, David A. Cairns, William C. Ferril,
S.B. Foot, III, R. Scott Jones, and Terry A. Lynner. Of the 2,789,336 shares
represented at the meeting, shares were voted in the following manner for
director nominees: Scott S. Broughton - 2,774,796 shares voted in favor and
14,540 shares were withheld; Spencer A. Broughton - 2,774,896 shares voted in
favor and 14,440 shares were withheld; David A. Cairns - 2,774,896 shares voted
in favor and 14,440 shares were withheld; William C. Ferril - 2,775,296 shares
voted in favor and 14,040 shares were withheld; S.B. Foot, III - 2,775,296
shares voted in favor and 14,040 shares were withheld; R.Scott Jones - 2,775,296
shares voted in favor and 14,040 shares were withheld; and Terry A. Lynner -
2,775,296 shares voted in favor and 14,040 shares were withheld.
A proposal to amend the 1986 Stock Option Plan (a) to extend the term of such
plan from September 16, 1996 to September 16, 2006, (b) to increase the number
of shares of the Company's Common Stock authorized for issuance from 225,000 to
375,000 and (c) to satisfy the requirements of Section 162(m) of the Internal
Revenue Code of 1986, as amended was submitted to a vote of security holders.
Of the 2,789,336 shares represented at the meeting, 2,246,438 shares were voted
in favor of the proposal, 167,383 shares were voted against the proposal, 9,158
shares abstained from voting on the proposal and there were broker non-votes on
366,357 shares.
A proposal to ratify and approve KPMG Peat Marwick LLP as independent auditors
for the Company for the fiscal year ending December 31, 1995, was submitted to a
vote of security holders. Of the 2,789,336 shares represented at the meeting,
2,778,206 shares were voted in favor of the proposal, 2,625 shares were voted
against the proposal and 8,505 shares abstained from voting on the proposal.
ITEM 5. OTHER INFORMATION.
None
Page 13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
------ -----------------------------------------------------------------
(10.1) 1995 Employee Bonus Plan
(10.2) 1986 Stock Option Plan, as restated April 18, 1995
(10.3) Lease dated April 21, 1995 between Eagle Building, L.L.C. and
Citizens Security Mutual Insurance Company
(b) Reports on Form 8-K.
None
Page 14
<PAGE>
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 11, 1995 By: /s/ Scott S. Broughton
-----------------------------
Scott S. Broughton
President, Chief
Operating Officer (duly
authorized officer) and
Chief Financial Officer
(principal financial and
accounting officer)
Page 15
<PAGE>
EXHIBIT INDEX
Page
Exhibit Description Number
- - - - ------ ------------------------------------------------------- ------
(10.1) 1995 Employee Bonus Plan
(10.2) 1986 Stock Option Plan, as restated April 18, 1995
(10.3) Lease dated April 21, 1995 between Eagle Building, L.L.C.
and Citizens Security Mutual Insurance Company
(27.1) Financial Data Schedule
Page 16
<PAGE>
EXHIBIT 10.1
CITIZENS SECURITY GROUP
1995 BONUS PLAN
I. Employee Team Plan
A. To include all employees, excluding Management Team members, COO and
CEO.
B. Bonus is based on 5% of 1995 employee payroll or $165,000 (the greater
of).
C. 50% available for distribution if the combined ratio (year-to-date) is
99% or lower (39.5% expenses + 59.5% losses).
D. Distribution to departments will be based on the ratio of the total
compensation of eligible participants in the department to the total
compensation of eligible participants in the Employee Team Plan.
E. Distribution of individuals will be based on department manager's and
president's discretion.
$135,000 (75% of $165,000) will be available for distribution on
a quarterly (25% each quarter) basis and payable within 31 days
of the end of the quarter, providing goals are met during the
quarter.
Annual bonuses will be determined by calculating the total annual
bonus available then subtracting what was paid in the first three
quarters. In other words, if combined ratio is higher during the
first three quarters but made at year-end, the full 12-month
trade ratio bonus amount would be available.
F. Employees are eligible if they are working for Citizens Security Group
on a full-time basis. The members of the Management Team, CEO and COO
are excluded from Part I of this employee bonus plan.
II. Management Team Plan
A. To include seven member Management Team excluding the COO and CEO.
B. The company must meet the target combined expense and loss ratio of
99% to pay 100% of Management Team bonus.
(continued)
<PAGE>
CSG - 1995 Bonus Plan
PAGE 2
C. Bonus will be 66.6% of the Employees Bonus under Section I.
D. Bonus will be paid within 31 days of the end of the year.
E. Distribution will be based on the President/COO discretion.
III. President/COO and Chairman/CEO Plan
A. Bonus will be a maximum of 60% of the Employee bonus under Section I.
B. Determination of the bonus amount and distribution to participants
will be made by the Compensation Committee, after considering the
following factors:
1. EPS growth
2. Equity per share performance
3. Operating income of companies
4. Operating and Corporate Strategic Plans
5. Growth in revenue
6. Company expenses as measured on a net written premium basis
7. Employee morale and growth
<PAGE>
EXHIBIT 10.2
CITIZENS SECURITY GROUP INC.
1986 STOCK OPTION PLAN
(as amended February 1, 1995)
1. PURPOSE OF PLAN.
This Plan shall be known as the "Citizens Security Group Inc. 1986
Stock Option Plan" and is hereinafter referred to as the "Plan". The purpose of
the Plan is to aid in maintaining and developing personnel capable of assuring
the future success of Citizens Security Group Inc., a Minnesota corporation (the
"Company"), and Citizens Security Mutual Insurance Company, a Minnesota
corporation and holder of more than 50% of the outstanding Common Stock, par
value $.01 per share, of the Company ("Citizens Mutual"), to offer such
personnel additional incentives to put forth maximum efforts for the success of
the business, and to afford them an opportunity to acquire a proprietary
interest in the Company through stock options as provided herein. Options
granted under this Plan may be either incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or options which do not qualify as Incentive
Stock Options.
2. STOCK SUBJECT TO PLAN.
Subject to the provisions of Section 12 hereof, the stock to be
subject to options under the Plan shall be the Company's authorized Common
Stock. Such shares may be either authorized but unissued shares, or issued
shares which have been reacquired by the Company. Subject to the adjustment as
provided in Section 12 hereof, the maximum number of shares on which options may
be exercised under this Plan shall be 375,000 shares. If an option under the
Plan expires, or for any reason is terminated or unexercised with respect to any
shares, such shares shall again be available for options thereafter granted
during the term of the Plan.
3. ADMINISTRATION OF PLAN.
(a) The Plan shall be administered by the Board of Directors of the
Company or, at the option of the Board of Directors, by a committee (the
"Committee") appointed by the Board of Directors and consisting of three or more
directors of the Company.
(b) The Board of Directors (or the Committee) shall have plenary
authority in its discretion, but subject to the express provisions of this Plan,
to determine: (i) the purchase price of the Common Stock covered by each option,
(ii) the persons to whom and the time or times at which such options shall be
granted and the number of shares to be subject to each option, (iii) the terms
of exercise of each option, (iv) to
<PAGE>
accelerate the time at which all or any part of an option may be exercised, (v)
to amend or modify the terms of any option with the consent of the optionee,
(vi) to interpret the Plan, (vii) to prescribe, amend and rescind rules and
regulations relating to the Plan, (viii) to determine the terms and provisions
of each option agreement under this Plan (which agreements need not be
identical), including the designation of those options intended to be Incentive
Stock Options, and (ix) to make all other determinations necessary or advisable
for the administration of the Plan, except that the Board of Directors alone
shall have exclusive authority under Section 13 herein to amend or terminate the
Plan. The Committee's determinations on the foregoing matters, unless otherwise
disapproved by the Board of Directors of the Company, shall be final and
conclusive; provided, however, that the Committee's determinations with respect
to the matters set forth in clause (ii) above shall be final and conclusive
without any right of disapproval by the Board of Directors of the Company. Not
withstanding clause (ii) above, no employee may be granted any options under the
Plan for more than 75,000 shares of Common Stock, in the aggregate, in any one
calendar year period beginning with the 1995 calendar year. The foregoing
annual limitation specifically includes the grant of any options representing
"qualified performance-based compensation" within the meaning of Section 162 (m)
of the Code.
(c) The Committee shall select one of its members as its Chairman and
shall hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations of the
Committee shall be made by not less than a majority of its members. Any
decision or determination reduced to writing and signed by all of the members of
the Committee shall be fully effective as if it had been made by a majority vote
at a meeting duly called and held. The Committee may appoint a Secretary and
may make such rules and regulations for the conduct of its business as it shall
deem advisable.
(d) The granting of an option pursuant to the Plan shall be effective
only if a written agreement shall have been duly executed and delivered by and
on behalf of the Company and the person to whom such right is granted.
4. ELIGIBILITY.
Incentive Stock Options and options not qualifying as Incentive Stock
Options may be granted under this Plan only to full or part-time employees
(including officers and directors who are also employees) of Citizens Mutual,
the Company and the Company's present and future subsidiary corporations
("Subsidiaries"). In determining the employees to whom options shall be granted
and the number of shares subject to each option, the Board of Directors (or the
Committee) may take into account the nature of services rendered by the
prospective participant, their present and potential contributions to the
success of the Company and such other factors as the Board of Directors (or the
Committee) in its discretion shall deem relevant. An employee who has been
granted an option under this Plan may be granted an additional option or options
under the Plan if
<PAGE>
the Board of Directors (or the Committee) shall so determine; provided, however,
that for Incentive Stock Options granted after December 31, 1986, the aggregate
fair market value (determined at the time the Incentive Stock Option is granted)
of the stock with respect to which all Incentive Stock Options are exercisable
for the first time by an employee during any calendar year (under all plans
described in Subsection (d) of Section 422 of the Code of his or her employer
corporation and its parent and subsidiary corporations) shall not exceed
$100,000.
5. PRICE.
The option price for all Incentive Stock Options granted under the
Plan shall be determined by the Board of Directors (or the Committee) but shall
not be less than 100% of the fair market value of the Common Stock at the date
of granting of such option. The option price for options granted under the Plan
which do not qualify as Incentive Stock Options shall also be determined by the
Board of Directors (or the Committee) and may be less than the fair market value
of the Common Stock at the date of granting of such option. For purposes of the
preceding sentence and for all other valuation purposes under the Plan, the fair
market value of the Common Stock shall be as reasonably determined by the Board
of Directors (or the Committee), but shall not be less than (i) the closing
price of the Common Stock as reported for composite transactions, if the Common
Stock is then traded on a national securities exchange, (ii) the last sale price
if the Common Stock is then quoted on the Nasdaq National Market System or (iii)
the average of the closing representative bid and asked prices of the Common
Stock as reported on Nasdaq on the date as of which fair market value is being
determined. If on the date of grant of any option granted under the Plan, the
Common Stock of the Company is not publicly traded, the Board of Directors (or
the Committee) shall make a good faith attempt to satisfy the option price
requirement of this Section 5 and in connection therewith shall take such action
as it deems necessary or advisable.
6. TERM.
Each option and all rights and obligations thereunder shall, subject
to the provisions of Section 9, expire on the date determined by the Board of
Directors (or the Committee) and specified in the option agreement. The Board
of Directors (or the Committee) shall be under no duty to provide terms of like
duration for options granted under the Plan, but the term of any option may not
extend more than ten (10) years from the date of granting of such option.
<PAGE>
7. EXERCISE OF OPTION.
(a) The Board of Directors (or the Committee) shall have full and
complete authority to determine, subject to Section 9 herein, whether the option
will be exercisable in full at any time or from time to time during the term of
the option, or to provide for the exercise thereof in such installments, upon
the occurrence of such events and at such times during the term of the option as
the Board of Directors (or the Committee) may determine.
(b) The exercise of any option granted hereunder shall only be
effective at such time that the sale of Common Stock pursuant to such exercise
will not violate any state or federal securities or other laws.
(c) An optionee electing to exercise an option shall give written
notice to the Company of such election and of the number of shares subject to
such exercise. The full purchase price of such shares shall be tendered with
such notice of exercise. Payment shall be made to the Company in cash
(including check, bank draft or money order). Until the optionee has been
issued a certificate or certificates for the shares subject to such exercise,
the optionee shall possess no rights as a shareholder with respect to such
shares.
8. ADDITIONAL RESTRICTION.
The Board of Directors (or the Committee) shall have full and complete
authority to determine whether all or any part of the Common Stock of the
Company acquired upon exercise of any of the options granted under the Plan
shall be subject to restrictions on the transferability thereof or any other
restrictions affecting in any manner the optionee's rights with respect thereto,
but any such restriction shall be contained in the agreement relating to such
options.
9. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.
(a) In the event that an optionee shall cease to be employed by
Citizens Mutual, the Company or its Subsidiaries for any reason other than his
gross and willful misconduct or his death or disability, such optionee shall
have the right to exercise the option at any time within three months after such
termination of employment to the extent of the full number of shares he or she
was entitled to purchase under the option on the date of termination, subject to
the condition that no option shall be exercisable after the expiration of the
term of the option.
(b) In the event that an optionee shall cease to be employed by
Citizens Mutual, the Company or its Subsidiaries by reason of his or her gross
and willful misconduct during the course of his employment, including but not
limited to wrongful appropriation of funds of his or her employer or the
commission of a gross misdemeanor or felony, the option shall be terminated as
of the date of the misconduct.
<PAGE>
(c) If the optionee shall die while in the employ of Citizens Mutual,
the Company or its Subsidiaries or within three months after termination of
employment for any reason other than gross and willful misconduct, or become
disabled (within the meaning of Code Section 22(e)(3)) while in the employ of
Citizens Mutual, the Company or its Subsidiaries and such optionee shall not
have fully exercised the option, the option may be exercised at any time within
twelve months after the optionee's death or such disability by the personal
representatives, administrators, or if applicable, guardian, of the optionee or
by any person or persons to whom the option is transferred by will or the
applicable laws of descent and distribution, to the extent of the full number of
shares the optionee was entitled to purchase under the option on the date of
death, disability or termination of employment, if earlier, and subject to the
condition that no option shall be exercisable after the expiration of the term
of the option.
(d) Nothing in the Plan or in any agreement thereunder shall confer
on any employee any right to continue in the employ of Citizens Mutual, the
Company or its Subsidiaries or affect, in any way, the right of Citizens Mutual,
the Company or its Subsidiaries to terminate his employment at any time.
10. TEN-PERCENT SHAREHOLDER RULE.
Notwithstanding any other provision in the Plan, if at the time an
option is otherwise to be granted pursuant to the Plan the optionee owns
directly or indirectly (within the meaning of Section 424(d) of the Code) Common
Stock of the Company possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or its parent or
subsidiary corporations, if any, (within the meaning of Section 422 (b)(6) of
the Code) then any Incentive Stock Option to be granted to such optionee
pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the
Code, and the option price shall be not less than 110% of the fair market value
of the Common Stock of the Company determined as described herein, and such
option by its terms shall not be exercisable after the expiration of five (5)
years from the date such option is granted.
11. NON-TRANSFERABILITY.
No option granted under the Plan shall be transferable by an optionee,
otherwise than by will or the laws of descent or distribution as provided in
Section 9(c) herein. During the lifetime of an optionee the option shall be
exercisable only by such optionee.
<PAGE>
12. DILUTION OR OTHER ADJUSTMENTS.
If there is any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend (of whatever
amount), stock split or other change in the corporate structure, appropriate
adjustments in the Plan and outstanding options shall be made by the Board of
Directors (or the Committee). In the event of any such changes, adjustments
shall include, where appropriate, changes in the aggregate number of shares
subject to the Plan and the number and price per share of shares subject to
outstanding options, in order to prevent dilution or enlargement of option
rights.
13. AMENDMENT OR DISCONTINUANCE OF PLAN.
The Board of Directors may amend or discontinue the Plan at any time.
Subject to the provisions of Section 12, no amendment of the Plan shall without
shareholder approval: (i) increase the maximum number of shares under the Plan
as provided in Section 2 herein, (ii) decrease the minimum option price provided
in Section 5 herein, (iii) extend the maximum option term under Section 6, or
(iv) materially modify the eligibility requirements for participation in the
Plan. The Board of Directors (or the Committee) shall not alter or impair any
option theretofore granted under the Plan without the consent of the holder of
the option.
14. TIME OF GRANTING.
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholders of the Company, and no
action taken by the Board of Directors (or the Committee) (other than the
execution and delivery of an option), shall constitute the granting of an option
hereunder.
15. EFFECTIVE DATE AND TERMINATION OF PLAN.
(a) The Plan was approved by the Board of Directors on September 16,
1986 and approved in restated form on November 3, 1986, and was approved by
the shareholders of the Company on November 3, 1986. An amendment to the Plan
was approved by the Board of Directors on July 23, 1992, and such amendment
to the Plan was approved by the shareholders on April 22, 1993. Additional
amendments to the Plan were approved by the Board of Directors on
February 1, 1995, and such amendments to the Plan were approved by the
shareholders on April 18, 1995.
(b) Unless the Plan shall have been discontinued as provided in
Section 13 hereof, the Plan shall terminate September 16, 2006. No option may
be granted after such termination, but termination of the Plan shall not,
without the consent of the optionee, alter or impair any rights or obligations
under any option theretofore granted.
<PAGE>
EXHIBIT 10.3
LEASING AGREEMENT
This Lease is made this 21st day of April, 1995 between Eagle Building,
L.L.C., a Minnesota limited liability company ("Lessor") and Citizens Security
Mutual Insurance Company, a Minnesota corporation ("Lessee"):
A. RECITALS
1. Lessor is the owner of a building located on the Property described in this
Lease.
2. Lessee desires to lease the Lease Premises described in this Lease, which
constitutes a portion of the building located on the Property, on the terms
and conditions stated in this Lease.
3. The Parties represent that this Lease has been duly authorized and validly
executed and constitutes a binding obligation of the Parties and that no
consents or approvals of any third parties are necessary in order to
effectuate the terms of this Agreement.
B. AGREEMENT
For the purposes stated above and in consideration of the mutual agreements
contained herein, the Parties agree as follows:
1. DEFINITIONS. Unless otherwise indicated herein, the following terms
shall have the following meanings:
(a) "Consumer Price Index" means the U.S. Department of Labor's
Bureau of Labor Statistics Consumer Price Index, All Urban
Consumers, All Items, Minneapolis-St. Paul, Minnesota or the
successor to the Index;
(b) "Default" or "Event of Default" means the events described in
Section 13 of this Agreement;
(c) "Extension Date" is the date that the Term of this Lease is
extended on the first day of each Extension Term. The first
Extension Date is July 1, 1998, and subsequent Extension
Dates shall be on the first day of July each 60 months
thereafter during the Term of this Lease;
(d) "Extension Term" means each 60-month period during which the
Term of this Lease is extended after the Initial Term of this
Lease. Extension Terms shall be successive 60-month periods
commencing as of July 1, 1998 and continuing the first day of
July each subsequent 60 months thereafter during the Term of
this Lease until this Lease is cancelled by written notice
as provided in Section 4 of this Lease. Each Extension Term
shall commence as of July 1 and end as of June 30 60 months
thereafter;
(e) "Initial Term" shall be the period of 36 months from July 1,
1995 to June 30, 1998;
<PAGE>
(f) "Lease" means this Lease Agreement and all renewals, extensions,
modifications or amendments thereof;
(g) "Lease Premises" is approximately 3,386 square feet in the
basement of the building located on the Property as depicted
on the sketch attached hereto as Exhibit B;
(h) "Lessee" is the Citizens Security Mutual Insurance Company, a
Minnesota corporation;
(i) "Lessee's Pro Rata Portion" is that portion of the real estate
taxes and insurance premiums which are payable by Lessee in
addition to rent in accordance with the terms of this Lease.
Lessee's Pro Rata Portion is 35 percent of such expenses,
which percentage is determined by dividing the square footage
of the Lease Premises by the total square footage of the
building located on the Property;
(j) "Lessor" is Eagle Building, L.L.C., a Minnesota limited liability
company;
(k) "Parties" are the Lessor and Lessee, their successors,
representatives and assigns;
(l) "Property" is that parcel of real estate located at 433 West
Third Street, Red Wing, Goodhue County, Minnesota, more
particularly described in Exhibit A attached hereto;
(m) "Term" of this lease is the period of time during which this
Lease remains in effect, including the Initial Term, the
Extension Terms and any additional period of time during which
Lessee is actually or constructively occupying all or any part
of the Lease Premises;
2. LEASE OF LEASE PREMISES. Lessor agrees to let and demise to Lessee,
and Lessee agrees to lease and hire from Lessor, subject to the
conditions stated herein, the Lease Premises;
3. PURPOSE. Lessee shall use and occupy the Lease Premises for the
purpose of operating a printing business and for all uses and
purposes reasonably necessary or incidental thereto. Lessee shall
not use, or permit the Lease Premises or any part thereof to be
used, in any manner that will increase the risks covered by insurance
on the Property or result in an increase or cancellation of any
insurance policy, even if such use may be in furtherance of Lessee's
purposes. Lessee shall, at its expense, comply with any and all
requirements of any insurance organization, governmental unit or
body pertaining to the use of the Lease Premises. Lessee shall
not allow any waste or nuisance on the Lease Premises, or use or
allow the Lease Premises to be used for any unlawful purpose.
4. TERM. The Initial Term of this Lease is for a period of 36 months
commencing July 1, 1995 and terminating June 30, 1998. The term of
this Lease shall be automatically extended for an additional
60-month Extension Term from July 1, 1998 to June 30, 2003 unless
Lessee notifies Lessor in writing of Lessee's election not to extend
the term of this Lease prior to April 1, 1998. Thereafter,
unless cancelled in the manner described herein, the Term of this
Lease shall be automatically extended for additional successive
60-month Extension Terms commencing July 1, 2003 and continuing
on the first day of July each succeeding 60 months thereafter. The
Term of this Lease shall be automatically extended for additional
successive 60-month Extension Terms unless either party notifies the
other in writing of such party's election not to extend the Term of
this Lease prior to April 1 in the year that the Term of the Lease
would be automatically extended, commencing on or before April 1,
2003. If either party fails to notify the other in writing that such
party will not
<PAGE>
agree to extend the Term of this Lease prior to April 1 in each year
that the Term of this Lease would be automatically extended, then the
Term of the Lease will automatically be extended for an additional
60-month Extension Term. In the event that either party notifies the
other in writing prior to April 1 in the year that the Term of the
Lease would be automatically extended that such party does not elect
to extend the Term of the Lease, then the Term shall expire as of
5:00p.m. on June 30 of that year.
5. RENTS AND ADJUSTMENTS. During the term of this Lease, Lessee shall
pay Lessor rent as follows:
(a) Base Rent. During the Initial Term of this Lease Lessee shall
pay Lessor Base Rent in the amount of $2,257.33 per month
commencing July 1, 1995; and
(b) Adjustments. On each Extension Date the monthly installment of
rent for the succeeding 60 monthly payments during the Extension
Term shall be adjusted by the following amount: Base Rent plus
the amount by which the Base Rent would increase when multiplied
by a fraction, the denominator of which is the most recent
Consumer Price index published prior to July 1, 1995, and the
numerator of which shall be the most recent Consumer Price
index figure published prior to the Extension Date.
The amount of the rent for the succeeding 60-month Extension
Term shall not be less than the amount of the rent for the
immediately preceding Initial Term or Extension Term of this
Lease.
Each monthly installment of rent shall be payable in advance on the
first day of each month commencing July 1, 1995. Lessor shall notify
Lessee in advance of the adjustment to the rent during the period of
any Extension Term prior to each Extension Date.
6. INSURANCE-INDEMNITY.
(a) Lessor shall maintain throughout the Term of this Lease property
insurance covering the Property against fire, wind, storm damage
and other perils as may be included in the standard Minnesota
fire insurance policy and extended coverage endorsements.
Lessee shall pay on demand of Lessor Lessee's Pro Rata Portion
of the premiums for such fire insurance policy. In addition,
Lessee shall maintain throughout the Term of this Lease at
Lessee's expense, property insurance covering Lessee's
personal property and any fixtures or leasehold improvements
against fire, wind, storm damage and other perils as may be
included in the standard Minnesota fire insurance policy and
extended coverage endorsements. Further, lessee shall maintain
throughout the Term of this Lease, at Lessee's expense,
liability insurance with limits for bodily injury and property
damage in amounts acceptable to Lessor;
(b) All policies of insurance provided for or contemplated by this
Article to be supplied by Lessee shall name the Lessor and the
Lessee as insured or additional insured, as their respective
interests may appear, and shall provide that the policies
cannot be cancelled without thirty (30) days written notice
to the parties. In addition, all of such policies shall
contain endorsements by the respective insurance companies
waiving all rights of subrogation, if any, against the
Lessor and Lessee. All insurance companies must be approved
in writing by the Lessor. The Lessee shall provide the Lessor
with copies of any and all policies upon request.
<PAGE>
(c) The Lessee shall defend, indemnify and hold the Lessor
harmless against any and all claims, damages and lawsuits, and
any orders, decrees or judgements which may be entered therein,
brought for damages or alleged damages resulting from any
injury to person or property or from loss of life sustained in
or about the Lease Premises, including attorneys' fees and
costs incurred by Lessor.
7. TAXES, UTILITIES AND ASSESSMENTS. Lessor shall pay real estate taxes
and installments of special assessments due and payable in 1995.
Thereafter Lessee shall pay Lessee's Pro Rata Portion of all real
estate taxes and installments of special assessments due and payable
during the Term of this Lease. Lessor shall notify Lessee of the
amount of Lessee's Pro Rata Portion of such taxes and special
assessments prior to May 1 and October 1 of each year during
the Term of this Lease and Lessee shall pay Lessor such
amount within ten days of the date of such notice. Lessee shall
pay all personal property taxes, assessments or governmental charges
imposed or assessed against property owned by Lessee. Lessee shall
be liable for and shall pay when due all utility services rendered
or furnished to the Lease Premises, including heat, water, gas,
fuel, electricity, sewer, sewage treatment facilities and the like
during the Term of this Lease.
8. REPAIRS AND MAINTENANCE.
(a) The Lessee covenants and agrees to keep and maintain in good
order, condition and repair the Lease Premises during the Term
of this Lease. The Lessee agrees that it shall be responsible
for all repairs, maintenance, alteration, and improvements to
the Lease Premises, including but without limitation all doors,
door checks and operators, windows, plate glass, plumbing,
water and sewage facilities, fixtures, electrical equipment,
walls, ceilings, floor coverings, signs, heating
and air conditioning equipment, and electrical facilities.
Lessee shall provide cleaning and janitorial service for
the Lease Premises. In addition, Lessee shall be responsible
for the repair and replacement of any and all damage caused
as a result of any act, omission or negligence of Lessee, its
agents, employees or invitees. The Lessor shall be responsible
for, at its own expense, snow removal and landscaping
in and about the Property. At the expiration of the Term
of this Lease Lessee shall return the Lease Premises to as good
a condition as the Lease Premises were in as of the commencement
of the Term of this Lease, subject only to reasonable wear and
tear.
(b) If the Lessee refuses or neglects to commence or complete
repairs promptly and adequately, the Lessor may, but shall
not be required to, do so and the Lessee shall pay the cost
thereof to Lessor upon demand. It is understood that the
intention of the parties hereto is that the Lessee shall
pay all expenses and maintenance and repair of the Lease
Premises during the Term of this Lease except for those items
that are the responsibility of Lessor. The Lessee further
covenants and agrees not to permit alterations of or upon
any part of the Lease Premises except by and with the
prior written consent of the Lessor. All alterations
and additions to said Lease Premises, including those
constructed by Lessor prior to commencement of the Term of
this Lease, shall be made in accordance with all applicable
laws and shall remain for the benefit of the Lessor unless
otherwise provided in the said written consent; and the
Lessee further agrees, in the event of making
such alterations as herein provided, to indemnify and
save harmless the Lessor from all expenses, liens, claims or
damages to either persons or property or the Lease Premises
arising out of or resulting from the undertaking or making of
said alterations or additions.
<PAGE>
9. NET LEASE. Except as otherwise specifically stated herein, it is
the intention of the parties that this shall be a net lease agreement
and that the rent should be a net rent paid to the Lessor and any
other expenses, except those specifically allocated to Lessor, shall
be paid by Lessee.
10. ASSIGNMENT AND SUBLETTING. Lessee shall not assign, sublease or
transfer its interest in this Lease or in the Lease Premises, or any
part or portion thereof, during the Term of this Lease without first
obtaining the consent of Lessor; provided that no assignment shall
release Lessee of its obligations under this Lease.
11. LOSS OF USE OF PREMISES. If fire or other damage or casualty shall
render the Lease Premises wholly or partially untenantable or if the
Lease Premises are taken in whole or in part by any public authority
under power of eminent domain or sold to any public authority pursuant
to threat of eminent domain, Lessee may, at its sole option, terminate
this Lease forthwith, and any prepayments of rent shall be refunded by
Lessor; provided, however, that, in the case of fire or other damage
or casualty, if the Lease Premises can be repaired by Lessor within
180 days of the date of such loss, then at the option of Lessor this
Lease shall remain in full force and effect but rent for the period
during which the Lease Premises are untenantable shall be abated pro
rata.
12. DEFAULT.
(a) The following shall be deemed events of default hereunder:
(1) Lessee fails to pay when due any installment of rent or
other amount or charge which is the obligation of Lessee
under the terms of this Lease.
(2) Lessee fails to observe or perform any of the other
obligations required to be observed or performed by Lessee
hereunder.
(3) Lessee ceases doing business as a going concern; makes an
assignment for the benefit of creditors; admits in writing
its inability to pay its debts as they become due; files a
voluntary petition in bankruptcy; is adjudicated a bankrupt
or insolvent; files a petition seeking for itself any
reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar arrangement under any
present or future statute, law or regulation or files
an answer admitting the material allegations of a petition
filed against it in any such proceeding; consents to or
acquiesces in the appointment of a trustee, receiver, or
liquidator of it or of all or any substantial part of its
assets or properties, or if it shall take any action to
effect its dissolution or liquidation.
(b) If any of the foregoing events of default shall take place,
Lessor may at its option do any or all of the following:
(i) by notice to Lessee, terminate this Lease; (ii) whether
or not this Lease is terminated, take possession of any
or all of the Lease Premises, and for such purpose,
enter upon any premises using all legal force; (iii) sell,
dispose of, hold, use or lease the Lease Premises as Lessor
in its sole discretion may decide, without any duty to account
to Lessee, except as may be required by applicable law;
(iv) by notice to Lessee, declare immediately due and
payable all monies to be paid by Lessee during the Term
of this Lease, and Lessee shall thereupon be obligated
to pay such monies to Lessor immediately. Lessee shall in
any event remain fully liable for reasonable damages as
provided by law and for all costs and expenses incurred
by Lessor on account of such default including all
court costs and attorneys' fees.
<PAGE>
(c) The waiver by Lessor of any breach of any obligation of
Lessee shall not be deemed a waiver of such obligation
or of any subsequent breach of the same or any other
obligations. The subsequent acceptance of rental payments
hereunder by Lessor shall not be deemed a waiver of
any prior existing breach by Lessee regardless of lessor's
acceptance of such rental payments. The rights afforded
Lessor under this Paragraph shall not be deemed to be
exclusive, but shall be in addition to any rights or
remedies provided by law.
(d) In the event Lessee shall fail to perform any of its
obligations hereunder, then Lessor, in addition to all of
its rights and remedies hereunder, may perform the same,
but shall not be obligated to do so, at the cost and
expense of Lessee. In any such event, Lessee shall
promptly reimburse Lessor for any such costs and expenses
incurred by Lessor together with interest computed at the
rate of 1.5% per month until the date such reimbursement
is made; provided, however, that if such rate exceeds
the maximum rate of interest allowed by applicable
law, then said interest shall be computed at such maximum rate.
13. RIGHT OF ENTRY. Lessor shall at all times have the right to enter
upon the Lease Premises to inspect their condition, and at its
election to make reasonable and necessary repairs thereon for the
protection and preservation thereof, but nothing herein shall be
construed to require Lessor to make such repairs, and Lessor shall
not be liable to Lessee, or any other person, for failure or
delay in making such repairs, or for damage or injury to
person or property caused in or by the making of such
repairs, or the doing of any work therein.
14. TOTAL AGREEMENT. This Lease contains the entire agreement between
the parties and supersedes and revokes any and all prior leases
between the parties hereto. This Lease cannot be changed or
terminated except by a written instrument subsequently executed by
the parties hereto. This Lease and the terms and conditions
hereof apply to and are binding on the heirs, legal
representatives, successors and assigns of all parties. All
notices required under this agreement shall be in writing and
delivered by certified mail, return receipt requested, to the parties
at the following locations:
Lessor: Eagle Building, L.L.C.
433 West Third Street
Red Wing, MN 55066
Lessee: Citizens Security Mutual Insurance Company
St. James Hotel
406 Main Street
Red Wing, MN 55066
15. APPLICABLE LAW. This agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease at the City of Red
Wing, County of Goodhue, State of Minnesota, the day and year first above
written.
EAGLE BUILDING, L.L.C. CITIZENS SECURITY MUTUAL INSURANCE
COMPANY
By: /s/Charles H. Bang By: /s/Charles W. Bergner
------------------------- ----------------------------------
Its Financial Manager Its Senior Vice President
STATE OF MINNESOTA )
) ss.
COUNTY OF GOODHUE )
The foregoing was acknowledged before me this 21st day of April, 1995 by Charles
H. Bang, Financial Manager of Eagle Building, L.L.C., a limited liability
company under the laws of Minnesota, on behalf of the company.
/s/Cheryl R. Johnson
---------------------------------------
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF GOODHUE )
The foregoing was acknowledged before me this 21st day of April, 1995 by Charles
W. Bergner, Senior Vice President of Citizens Security Mutual Insurance Company,
a corporation under the laws of Minnesota, on behalf of the corporation.
/s/Cheryl R. Johnson
---------------------------------------
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
WATSON & SPEIGHT, P.A.
411 West Third Street
Red Wing, MN 55066
(612)388-8805
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