<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CITIZENS SECURITY GROUP INC.
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) TITLE OF EACH CLASS OF SECURITIES TO WHICH TRANSACTION APPLIES:
Citizens Security Group Inc. Common Stock, $.01 par value per share
Citizens Security Group Inc. Series A Preferred Stock, $.01 par value
per share
2) AGGREGATE NUMBER OF SECURITIES TO WHICH TRANSACTION APPLIES:
1,701,585 shares of Common Stock of Citizens Security Group Inc.
1,250,000 shares of Series A Preferred Stock of Citizens Security
Group Inc.
3) PER UNIT PRICE OR OTHER UNDERLYING VALUE OF TRANSACTION COMPUTED
PURSUANT TO EXCHANGE ACT RULE 0-11) (SET FORTH THE AMOUNT ON WHICH THE
FILING FEE IS CALCULATED AND STATE HOW IT WAS DETERMINED):
$24,957,312 for all outstanding shares of Common Stock of Citizens
Security Group Inc.
$4,375,000 for all outstanding shares of Series A Preferred Stock of
Citizens Security Group Inc.
4) PROPOSED MAXIMUM AGGREGATE VALUE OF TRANSACTION:
$29,332,312
5) TOTAL FEE PAID:
$5,867*
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- -----------------
* In accordance with Rule 14a-6(i)(4) and Rule 0-11, the filing fee of $5,867
represents one-fiftieth of one percent of the value of the maximum aggregate
amount of cash to be received by Citizens Security Group Inc. shareholders in
the proposed transaction.
<PAGE>
Preliminary Copy
[Letterhead of Citizens Security Group Inc.]
July 8, 1996
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Citizens Security Group Inc. (the "Company") to be held at the offices of
Dorsey & Whitney LLP, located on the 18th floor of Pillsbury Center South,
220 South Sixth Street, Minneapolis, Minnesota, on Wednesday, July 31, 1996 at
9:00 a.m. local time (the "Special Meeting"). A Notice of the Special
Meeting, a Proxy Statement, related information about the Company and a proxy
card are enclosed. All holders of the Company's outstanding shares of Common
Stock and Series A Preferred Stock (the "Preferred Stock") as of June 21,
1996 will be entitled to notice of and to vote at the Special Meeting.
At the Special Meeting, you will be asked to consider and to vote upon a
proposal to approve and adopt an Acquisition and Affiliation Agreement, dated
as of March 20, 1996 (together with the related Plan of Merger, the "Merger
Agreement") by and among the Company, Citizens Security Mutual Insurance
Company ("Citizens Mutual") and Meridian Insurance Group, Inc. ("Meridian"),
pursuant to which an indirect wholly owned subsidiary of Meridian will be
merged with and into the Company (the "Merger"). If the Merger Agreement is
approved and the Merger becomes effective, each outstanding share of Common
Stock of the Company will be converted into the right to receive $12.50 in
cash (subject to adjustment as described in the accompanying Proxy Statement).
In addition, each share of Preferred Stock of the Company will be converted
into the right to receive $3.50 per share in cash (subject to adjustment as
described in the accompanying Proxy Statement). Approval of the Merger
requires the affirmative vote of the holders of a majority of the outstanding
shares of each of the Common Stock and the Preferred Stock, with the holders
of Common Stock and Preferred Stock voting as separate classes. Details of
the proposed Merger and other important information are set forth in the
accompanying Proxy Statement which you are urged to read carefully.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AND RECOMMENDS THAT YOU
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Citizens Mutual, the
holder of 19.8% of the outstanding shares of Common Stock and all of the
outstanding shares of Preferred Stock, currently intends to vote in favor of
the Merger Agreement. Pursuant to agreements dated as of March 20, 1996,
certain officers of the Company have agreed to vote a total of 112,470 shares
of Common Stock, or 6.6% of the total outstanding shares of Common Stock, in
favor of the Merger Agreement.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed postage
prepaid envelope. If you attend the Special Meeting, you may revoke such proxy
and vote in person if you wish, even if you have previously returned your proxy
card.
Thank you for your interest and participation.
Sincerely,
Spencer A. Broughton
Chairman of the Board and Chief
Executive Officer
<PAGE>
[Citizens Logo]
CITIZENS SECURITY GROUP INC.
406 MAIN STREET
RED WING, MINNESOTA 55066
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, JULY 31, 1996
To Shareholders of Citizens Security Group Inc.:
A special meeting of the shareholders of Citizens Security Group Inc., a
Minnesota corporation (the "Company"), will be held at the offices of Dorsey
& Whitney LLP, located on the 18th floor of Pillsbury Center South, 220 South
Sixth Street, Minneapolis, Minnesota, on Wednesday, July 31,1996 at 9:00 a.m.
local time (the "Special Meeting"), to consider and act upon the following
matters:
1. To consider and vote upon a proposal to approve and adopt an
Acquisition and Affiliation Agreement, dated as of March 20, 1996 (together
with the related Plan of Merger, the "Merger Agreement") by and among the
Company, Citizens Security Mutual Insurance Company, a Minnesota corporation
("Citizens Mutual"), and Meridian Insurance Group, Inc., an Indiana corporation
("Meridian"), pursuant to which, among other things (i) an indirect wholly
owned subsidiary of Meridian to be organized under Minnesota law (the
"Merger Subsidiary") will be merged with and into the Company (the "Merger"),
(ii) each outstanding share of Common Stock, par value $.01 per share, of the
Company (the "Common Stock") will be converted into the right to receive
$12.50 in cash (subject to adjustment as described in the accompanying Proxy
Statement) and (iii) each outstanding share of Series A Preferred Stock, par
value $.01 per share, of the Company (the "Preferred Stock") will be
converted into the right to receive $3.50 in cash (subject to adjustment as
described in the accompanying Proxy Statement ). A copy of the Merger
Agreement is attached as Exhibit A to the accompanying Proxy Statement.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Only holders of record of the Common Stock and the Preferred Stock at the
close of business on June 21, 1996 are entitled to notice of and to vote at
the Special Meeting. Citizens Mutual, the holder of 19.8% of the outstanding
shares of Common Stock and all of the outstanding shares of Preferred Stock,
currently intends to vote in favor of the Merger. Pursuant to agreements
dated as of March 20, 1996, certain officers of the Company have agreed to
vote a total of 112,470 shares of Common Stock, or 6.6% of the total
outstanding shares of Common Stock, in favor of the Merger Agreement.
Holders of Common Stock who do not vote their shares in favor of the Merger
Agreement and who strictly comply with Section 302A.473 of the Minnesota
Business Corporation Act (the "MBCA") have the right to object to the Merger
Agreement and make written demand for payment of the "fair value" of their
shares ("Dissenting Shares"). For a description of the rights of holders of
Dissenting Shares, see Section 302A.473 of the MBCA, a copy of which is
attached as Exhibit C to the accompanying Proxy Statement. In addition, a
description of the procedures to be followed in order to obtain payment for
Dissenting Shares is set forth under the caption "RIGHTS OF DISSENTING
SHAREHOLDERS" in the Proxy Statement.
<PAGE>
Your attention is directed to the Proxy Statement, the Exhibits thereto and
the other materials relating to the Company that have been mailed to you
herewith for more complete information regarding the Merger Agreement and the
Company. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
By Order of the Board of Directors
Jay L. Swanson
Secretary
Red Wing, Minnesota
July 8, 1996
YOUR VOTE IS IMPORTANT. ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND
THE SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU
MAY NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE>
[Citizens Logo]
CITIZENS SECURITY GROUP INC.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, JULY 31, 1996
This Proxy Statement is being furnished to the shareholders of Citizens
Security Group Inc. ("CSGI" or the "Company") in connection with the
solicitation of proxies by the Company's Board of Directors for a special
meeting of shareholders to be held on Wednesday, July 31, 1996 at 9:00 a.m.
local time at the offices of Dorsey & Whitney LLP, located on the 18th floor
of Pillsbury Center South, 220 South Sixth Street, Minneapolis, Minnesota
(the "Special Meeting"). At the Special Meeting, the shareholders of the
Company will consider and vote upon a proposal to approve and adopt an
Acquisition and Affiliation Agreement, dated as of March 20, 1996 (together
with the related Plan of Merger, the "Merger Agreement"), among the Company,
Citizens Security Mutual Insurance Company ("Citizens Mutual") and Meridian
Insurance Group, Inc. ("Meridian"). The Merger Agreement provides for the
merger (the "Merger") of an indirect wholly owned subsidiary of Meridian (the
"Merger Subsidiary") into the Company, with the result that the Company will
become an indirect wholly owned subsidiary of Meridian. Pursuant to the
Merger Agreement, (i) each outstanding share of Common Stock, par value $.01
per share, of the Company (the "Common Stock"), except those shares as to
which dissenters' rights have been perfected ("Dissenting Shares"), will be
converted into the right to receive $12.50 per share in cash (subject to
adjustment as described in this Proxy Statement) and (ii) each share of
Series A Preferred Stock, par value $.01 per share, of the Company (the
"Preferred Stock") will be converted into the right to receive $3.50 per
share in cash (subject to adjustment as described in this Proxy Statement).
See "THE MERGER AGREEMENT--Consideration To Be Received by Shareholders."
This Proxy Statement is accompanied by copies of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996. These materials are
included to aid shareholders in their consideration of the Merger.
Only holders of record of Common Stock and Preferred Stock at the close
of business on June 21, 1996 are entitled to notice of and to vote at the
Special Meeting. This Proxy Statement is first being sent to shareholders on
or about July 8, 1996.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY .................................................................. 1
Date, Time and Place of Special Meeting .............................. 1
Record Date; Shareholders Entitled to Vote; Quorum ................... 1
Purpose of the Meeting ............................................... 1
The Merger ........................................................... 1
Effective Time of the Merger ......................................... 2
Voting of Shares Owned by Citizens Mutual and Management.............. 2
Recommendation of Board of Directors ................................. 2
Opinion of Financial Advisor ......................................... 2
Interests of Certain Persons in the Merger ........................... 3
Payment for Shares ................................................... 3
Accounting Treatment ................................................. 3
Federal Income Tax Consequences ...................................... 3
Dissenters' Rights ................................................... 3
Regulatory Approvals ................................................. 3
The Company .......................................................... 4
Meridian ............................................................. 4
Affiliation of Citizens Mutual with Meridian ......................... 4
Comparative Market Price Data ........................................ 5
Selected Consolidated Financial Data ................................. 6
THE SPECIAL MEETING ...................................................... 7
General .............................................................. 7
Proposal to be Considered at the Special Meeting ..................... 7
Record Date; Shareholder Approval .................................... 7
Proxies .............................................................. 8
THE MERGER PROPOSAL ...................................................... 8
Background of the Merger Proposal .................................... 8
Recommendation of the CSGI Board of Directors ........................ 10
Opinion of Financial Advisor ......................................... 12
Purpose and Structure of the Merger .................................. 16
Affiliation of Citizens Mutual with Meridian ......................... 17
INTERESTS OF CERTAIN PERSONS IN THE MERGER ............................... 17
Consulting Agreement and Related Meridian Stock Option .............. 18
Employment Agreement and Related Meridian Stock Option ............... 18
CSGI Stock Options ................................................... 19
Employee Stock Ownership Plan ........................................ 19
Employment Arrangements and Employee Benefits ........................ 19
Meridian Directorships ............................................... 20
VIS'N ................................................................ 20
Indemnification of Officers and Directors ............................ 21
THE MERGER AGREEMENT ..................................................... 23
General .............................................................. 23
Effective Time ....................................................... 23
Consideration To Be Received by Shareholders ......................... 23
Payment for Shares ................................................... 24
Operations of the Company and Citizens Mutual Prior to the Merger .... 24
Conditions to Consummation of the Merger ............................. 25
Post-Closing Covenants ............................................... 27
Termination .......................................................... 27
Termination Fee ...................................................... 28
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<PAGE>
REGULATORY APPROVALS ..................................................... 28
Approvals of State Insurance Regulatory Authorities .................. 28
HSR Act Filings ...................................................... 29
ACCOUNTING TREATMENT ..................................................... 29
CERTAIN FEDERAL INCOME TAX CONSEQUENCES .................................. 29
RIGHTS OF DISSENTING SHAREHOLDERS ........................................ 30
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS .............. 34
SHAREHOLDER PROPOSALS .................................................... 35
INDEPENDENT PUBLIC ACCOUNTANTS ........................................... 36
AVAILABLE INFORMATION .................................................... 36
INFORMATION INCORPORATED BY REFERENCE .................................... 36
EXHIBIT A - Acquisition and Affiliation Agreement ........................ A-1
EXHIBIT B - Opinion of Goldsmith, Agio, Helms Securities, Inc. ........... B-1
EXHIBIT C - Provisions of Minnesota Business Corporation Act
Relating to Appraisal Rights ......................................... C-1
-ii-
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. The following summary is not intended to be complete and
is qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement, in the materials accompanying this Proxy
Statement and in the Exhibits hereto. Shareholders are urged to review the
entire Proxy Statement and accompanying materials carefully.
DATE, TIME AND PLACE OF SPECIAL MEETING
A Special Meeting of Shareholders of Citizens Security Group Inc. will be
held on July 31, 1996 at 9:00 a.m. local time at the offices of Dorsey &
Whitney LLP, located on the 18th floor of Pillsbury Center South, 220 South
Sixth Street, Minneapolis, Minnesota.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; QUORUM
Only holders of record of shares of Common Stock and Preferred Stock at the
close of business on June 21, 1996 (the "Record Date") are entitled to
notice of and to vote at the Special Meeting. On that date, there were
1,701,585 shares of Common Stock and 1,250,000 shares of Preferred Stock
outstanding. The holders of Common Stock and the holders of Preferred Stock
will vote as separate classes with respect to the matters to be voted upon at
the Special Meeting, with each share entitled to cast one vote. See "THE
SPECIAL MEETING--Record Date; Shareholder Approval." The presence, in person
or by proxy, at the Special Meeting of the holders of a majority of the
outstanding shares of each of the Common Stock and Preferred Stock is
necessary to constitute a quorum at the Special Meeting.
PURPOSE OF THE MEETING
At the Special Meeting, shareholders will consider and vote upon a proposal
to approve and adopt the Merger Agreement, a copy of which is attached as
Exhibit A to this Proxy Statement. See "THE SPECIAL MEETING--Proposal To Be
Considered at the Special Meeting." The Merger Agreement provides for the
merger of the Merger Subsidiary with and into the Company, with the result that
the Company, as the surviving corporation (the "Surviving Corporation"), will
become an indirect wholly owned subsidiary of Meridian. See "THE MERGER
AGREEMENT--General."
THE MERGER
Pursuant to the Merger Agreement, the Merger Subsidiary will merge with and
into the Company, with the Company being the Surviving Corporation. Each
outstanding share of Common Stock (except those shares as to which dissenters'
rights have been perfected ("Dissenting Shares")) will be converted into the
right to receive from Meridian $12.50 in cash, without interest (subject to
reduction in the event the Company's and Citizens Mutual's expenses incurred in
connection with the transactions contemplated by the Merger Agreement exceed
$650,000). Citizens Mutual, the owner of all the outstanding shares of
Preferred Stock, will receive $3.50 per share from Meridian (subject to
reduction in the event the Company's and Citizens Mutual's expenses incurred
in connection with the transactions contemplated by the Merger Agreement exceed
$650,000). See "THE MERGER AGREEMENT-- Consideration To Be Received by
Shareholders." After the Merger, Meridian will indirectly own all of the
outstanding shares of capital stock of the Surviving Corporation. The shares
of Common Stock will no longer be traded on the Nasdaq Small Cap Market and
the registration of the Common Stock under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), will be terminated. See "THE MERGER
AGREEMENT--General." No affiliation has previously existed between the
Company and Meridian and no such affiliation will exist until the Effective
Time.
Approval of the Merger requires the affirmative vote of the majority of all
outstanding shares of each of the Common Stock and the Preferred Stock, with
the holders of Common Stock and Preferred Stock voting as separate classes. See
"THE SPECIAL MEETING--Record Date; Shareholder Approval."
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<PAGE>
The Merger is subject to various closing conditions, including state
insurance regulatory approvals, the absence of any material adverse change in
the business, financial condition or results of operations of the Company and
Dissenting Shares not constituting more than 5% of the outstanding Common Stock.
See "THE MERGER AGREEMENT--Conditions to Consummation of the Merger."
The Merger Agreement may, under specified circumstances, be terminated and
the Merger abandoned at any time prior to filing Articles of Merger with the
Minnesota Secretary of State, notwithstanding approval of the Merger Agreement
by the shareholders of the Company. The Merger Agreement requires the Company
to pay Meridian a termination fee of $586,646 plus a sum equal to the amount of
transaction costs incurred by Meridian and Meridian Mutual if the Merger is not
consummated and (a) the Merger Agreement has not been terminated by the mutual
written consent of the parties, (b) Meridian has complied with all its
obligations under the Merger Agreement and (c) the Company enters into a letter
of intent, commitment letter or other written agreement with a third party
regarding a merger, consolidation, sale of assets or similar transaction
involving the Company or Citizens Mutual prior to January 1, 1997. See "THE
MERGER AGREEMENT--Termination" and "--Termination Fee."
EFFECTIVE TIME OF THE MERGER
Unless otherwise agreed by the parties to the Merger Agreement or otherwise
provided by law, the Merger will become effective at 11:59 p.m. Minneapolis
Time, on a date as soon as practicable after the conditions to the Merger are
satisfied or waived or at such other date agreed to by the parties (the
"Effective Time"). See "THE MERGER AGREEMENT--Effective Time."
VOTING OF SHARES OWNED BY CITIZENS MUTUAL AND MANAGEMENT
The Board of Directors and policyholders of Citizens Mutual, which is the
owner of 19.8% of the issued and outstanding shares of Common Stock and all
of the issued and outstanding shares of Preferred Stock, have approved the
Merger, and it is expected that Citizens Mutual will vote its shares of
Common Stock and Preferred Stock in favor of the Merger. Because Citizens
Mutual owns substantially less than 50.0% of the outstanding shares of Common
Stock, approval of the Merger is not assured as a result of the voting power
held by Citizen Mutual. Pursuant to agreements dated as of March 20, 1996
with Meridian, Spencer A. Broughton, Chairman of the Board and Chief
Executive Officer of the Company, and Scott S. Broughton, President, Chief
Operating Officer and Chief Financial Officer of the Company, have agreed to
vote a total of 112,470 shares of Common Stock, or 6.6% of the total
outstanding shares of Common Stock, in favor of the Merger Agreement. See
"THE SPECIAL MEETING--Record Date; Shareholder Approval."
RECOMMENDATION OF BOARD OF DIRECTORS
The Board of Directors of Citizens has determined that the Merger is fair
from a financial point of view to and in the best interests of the Company's
shareholders. The Board of Directors has approved the Merger Agreement and
recommends that shareholders vote in favor of the proposal to approve and
adopt the Merger Agreement. See "THE MERGER PROPOSAL -- Recommendation of
the CSGI Board of Directors."
OPINION OF FINANCIAL ADVISOR
On March 18, 1996, Goldsmith, Agio, Helms Securities, Inc. ("GAHS")
delivered its written opinion to the Board of Directors of the Company to the
effect that the consideration to be received by the holders of the Common Stock
and Preferred Stock pursuant to the Merger Agreement is fair to such
shareholders from a financial point of view. A copy of the written opinion of
GAHS is attached as Exhibit B to this Proxy Statement. Shareholders of the
Company are urged to read the opinion of GAHS in its entirety. For discussion
of the factors considered and assumptions made by GAHS in reaching its opinion,
see "THE MERGER PROPOSAL--Opinion of Financial Advisor."
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<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger Agreement and the transactions contemplated thereby,
shareholders should be aware that certain members of management of the Company
and the Board of Directors of the Company have certain interests in the Merger
that are in addition to the interests of shareholders of the Company generally.
For information concerning (i) consulting and employment arrangements to be
entered into by Meridian with Spencer A. Broughton and Scott S. Broughton of
the Company pursuant to the Merger Agreement, (ii) the accelerated vesting of
CSGI stock options prior to the Effective Time, (iii) the treatment of the
Citizens Mutual's Employee Stock Ownership Plan following the Merger,
(iv) arrangements relating to continued employment, compensation and benefits
for employees of Citizens Mutual after the Effective Time and (v) certain
agreements to be entered into after completion of Merger by Citizens Mutual
with VIS'N, Inc. ("VIS'N"), a data processing and claims services company to
be formed by Mr. Scott S. Broughton and Kirk D. Simmons, Vice President,
Insurance Services of the Company, see "INTERESTS OF CERTAIN PERSONS IN
THE MERGER."
PAYMENT FOR SHARES
As promptly as possible after the effective time of the Merger,
instructions will be furnished to holders of shares of Common Stock and
Preferred Stock regarding procedures to be followed to surrender their
certificates and receive payment for their shares. See "THE MERGER
AGREEMENT--Payment for Shares."
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting by
Meridian. See "ACCOUNTING TREATMENT."
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Merger will be treated as a taxable
sale or exchange of the shares of Common Stock for cash by each holder of the
Common Stock (including any holder of Dissenting Shares). The amount of gain or
loss to be recognized by each shareholder will be measured by the difference
between the amount of cash received by such shareholder in connection with the
Merger for his or her shares of Common Stock (including Dissenting Shares) and
such shareholder's tax basis in such shares of Common Stock at the Effective
Time. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
DISSENTERS' RIGHTS
Under the Minnesota Business Corporation Act (the "MBCA"), any holder of
Common Stock who does not vote in favor of the Merger and who strictly complies
with the procedural requirements of Section 302A.473 of the MBCA, the full text
of which is attached as Exhibit C to this Proxy Statement, will have the right
to object to the Merger Agreement and make written demand for the payment of
"fair value" of such holder's shares of Common Stock. See "RIGHTS OF
DISSENTING SHAREHOLDERS."
REGULATORY APPROVALS
The prior approvals of insurance regulatory authorities in the states of
Minnesota, Indiana and Ohio are required before the Merger may be
consummated. There can be no assurance that such regulatory authorities will
grant such approvals or as to the date of such regulatory approvals. For a
discussion of the status of these regulatory approvals, see "REGULATORY
APPROVALS--Approvals of State Insurance Regulatory Authorities." In addition,
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), the Merger may not be consummated unless notice has been
given and certain information has been furnished to the Antitrust Division of
the United States Department of Justice and the Federal Trade Commission.
The Company and Meridian submitted the filings required under the HSR Act on
May 1, 1996, and, on May 16, 1996, the Company was informed that such
regulatory authorities had granted early termination of the Company's notice
filed pursuant to the H-S-R Act.
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<PAGE>
THE COMPANY
The Company is a regional insurance holding company formed in 1986 and
headquartered in Minnesota. The Company, through its insurance company
subsidiaries, Citizens Fund Insurance Company ("Citizens Fund") and Insurance
Company of Ohio ("ICO"), together with Citizens Mutual, is engaged in the
preferred risk property and casualty business.
Citizens Mutual, Citizens Fund and ICO participate in a reinsurance pooling
arrangement under which they combine all of their respective insurance business
and Citizens Fund and ICO together assume 75% of the combined business.
Citizens Mutual, Citizens Fund and ICO offer a broad line of personal and
commercial property and casualty products. The personal insurance products
offered include homeowner, automobile, tenant, inland marine and umbrella
insurance, and the commercial insurance products offered include multi-peril,
automobile, general liability, umbrella and workers' compensation insurance.
These products are marketed in Minnesota, Wisconsin, Iowa, Ohio, North Dakota,
South Dakota and Missouri through a network of approximately 510 independent
agencies.
The Company does not have any employees, and the services of Citizens
Mutual's employees are provided to CSGI pursuant to a management services
agreement.
The principal executive office of the Company is located at 406 Main
Street, Red Wing, Minnesota 55066, and the Company's telephone number is
(612) 388-7171.
MERIDIAN
Meridian is a holding company principally engaged in the property and
casualty insurance business through its wholly owned subsidiary, Meridian
Security Insurance Company ("Meridian Security"). Meridian was organized in
1986 as a subsidiary of Meridian Mutual Insurance Company ("Meridian Mutual"),
which currently owns approximately 46.5 % of Meridian's outstanding shares of
Common Stock.
Meridian Security writes personal and farm lines policies primarily in
Indiana, Kentucky, Ohio, Tennessee and Wisconsin through approximately 400
independent insurance agencies. Meridian Mutual writes a broad line of
commercial and personal property and casualty insurance in Illinois, Indiana,
Iowa, Kentucky, Michigan, Ohio, Pennsylvania, Tennessee and Wisconsin through
approximately 1,050 independent insurance agencies, some of which also solicit
business for Meridian Security. Meridian Security and Meridian Mutual
participate in a reinsurance pooling arrangement under which they combine all
of their respective business.
The principal executive office of Meridian is located at 2955 North
Meridian Street, Indianapolis, Indiana 46206, and Meridian's telephone number
is (317) 931-7000.
AFFILIATION OF CITIZENS MUTUAL WITH MERIDIAN
In connection with the Merger, Meridian will affiliate with, and acquire
control of, Citizens Mutual (the "Affiliation"). The Merger Agreement provides
that, at the Effective Time, the Board of Directors of Citizens Mutual will be
reconstituted so as to be comprised of the six current directors of Meridian
Security, the current President of Citizens Mutual, and the current Vice
President, Marketing of Citizens Mutual. The Merger Agreement also requires
the business of Citizens Mutual, Citizens Fund and ICO to be pooled with the
business of Meridian Mutual and Meridian Security pursuant to a Reinsurance
Pooling Agreement. After the Merger, Meridian, Meridian Security, Meridian
Mutual, Citizens Fund, ICO and Citizens Mutual will be jointly operated and
managed by Meridian and its related companies under a Management Services
Agreement. See "THE MERGER PROPOSAL--Affiliation of Citizens Mutual with
Meridian."
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<PAGE>
COMPARATIVE MARKET PRICE DATA
The Company's Common Stock is traded on the Nasdaq Small Cap Market under
the symbol "CSGI." The following table sets forth the high and low bid prices
per share of the Common Stock on the Nasdaq Small Cap Market for the periods
indicated.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1993
First Quarter ........................ $ 3.25 $ 3.13
Second Quarter ....................... 3.38 3.13
Third Quarter ........................ 3.25 3.25
Fourth Quarter ....................... 3.38 3.25
1994
First Quarter ........................ $ 3.25 $ 3.25
Second Quarter ....................... 4.13 3.25
Third Quarter ........................ 3.75 3.38
Fourth Quarter ....................... 3.50 3.25
1995
First Quarter ........................ $ 3.63 $ 3.13
Second Quarter ....................... 4.50 3.50
Third Quarter ........................ 4.50 4.25
Fourth Quarter ....................... 5.00 4.38
1996
First Quarter ........................ $12.00 $ 5.00
Second Quarter........................
Third Quarter (through July 2, 1996)
</TABLE>
On February 7, 1996, the last full day of trading prior to the
announcement by the Company and Meridian of the Merger proposal, the reported
high and low bid prices per share of Common Stock were $6.63 and $6.25,
respectively. On March 21, 1996, the last full day of trading prior to the
announcement by the Company that it had entered into the Merger Agreement with
Meridian, such reported high and low bid prices per share of Common Stock
were both $11.00. On July 2, 1996, the last full day of trading prior to
the printing of this Proxy Statement, the reported high and low bid prices
per share of Common Stock were $____________ and $_______________,
respectively.
-5-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is a summary of certain consolidated selected financial
data with respect to the Company excerpted or derived from the information
contained in the Company's Annual Reports on Form 10-K for the fiscal years
ended December 31, 1995, 1994 and 1993, and its Quarterly Report on Form 10-Q
for the quarterly periods ended March 31, 1996 and March 31, 1995. More
comprehensive financial information is included in such reports and other
documents filed by the Company with the Securities and Exchange Commission (the
"Commission"), and the following summary is qualified in its entirety by
reference to such reports and other documents and all of the financial
information (including any related notes) contained therein. Such reports and
other documents may be inspected and copies may be obtained from the offices of
the Commission. See "AVAILABLE INFORMATION." In addition, copies of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 and its Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996 accompany each copy of this Proxy Statement being provided to
shareholders.
<TABLE>
<CAPTION>
Quarter Quarter For the Year Ended
Ended Ended December 31,
March 31, March 31, -------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- ------- ------- ------- ------- -------
(in thousands, except per common share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Premiums earned ............. $ 7,853 $ 7,735(1) $30,635(1) $27,349 $24,489 $24,288 $24,048
Investment income, less
related expenses ........... 628 609 2,452 2,194 1,953 2,002 2,093
Realized gains (losses) on
investments ................ (1) 9 77 (7) 606 39 998
Total revenues .............. 8,630 8,491 33,729 30,046 27,443 26,697 27,458
Losses and loss adjustment
expenses incurred .......... 5,534 4,844 21,347 18,569 16,424 16,575 18,947
Income (loss) before
cumulative effect of
accounting change .......... 322 797 1,441 1,382 1,464 80 (114)
Cumulative effect of
accounting change
income tax ................. -- -- -- -- 38 -- --
Net Income (loss) ........... 322 797 1,441 1,382 1,502 801 (114)
BALANCE SHEET DATA
(at period end):
Total investments ........... $39,070 $35,971 $39,276 $34,162 $35,370 $30,054 $34,859
Insurance premiums
receivable ................ 8,286 7,297 8,323 7,238 5,992 5,220 5,053
Total assets ................ 59,547 55,895 61,291 54,602 52,613 46,997 47,338
Reserves for losses and loss
adjustment expenses ........ 23,431 21,955 24,013 20,990 19,392 16,608 12,847
Unearned premiums ........... 16,439 15,285 16,632 15,673 13,150 11,978 11,494
Bank loan payable ........... 899 1,419 999 1,519 2,569 3,429 4,286
Total liabilities ........... 42,767 40,838 44,324 41,053 38,080 34,777 36,154
Shareholders' equity ........ 16,780 15,057 16,967 13,549 14,532 12,220 11,185
PER SHARE DATA (2):
Earnings (loss) per common
share ...................... .13 .43 .64 .57 .52 .31 (.04)
Cash dividends per
common share ............... -- -- -- -- -- .04 .08
Shareholders' equity
per common share
(at period end) ............ 7.33 6.43 7.58 5.52 4.99 4.20 4.36
</TABLE>
- ---------------
(1) Premiums earned for the quarter ended March 31, 1995 and for the
year ended December 31, 1995 were positively affected by a $592,398
refund of excess ceded premiums received from the Minnesota Workers'
Compensation Reinsurance Association.
(2) All per common share information for 1996, 1995 and 1994 reflects
(i) a March 1994 corporate restructuring transaction in which the
Company exchanged 1,250,000 shares of Preferred Stock for 1,250,000
shares of Common Stock previously held by Citizens Mutual and (ii) the
deduction of cash dividends paid with respect to the Preferred Stock.
-6-
<PAGE>
THE SPECIAL MEETING
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of the Company for a Special Meeting of
Shareholders to be held on July 31, 1996 at 9:00 a.m. local time at the
offices of Dorsey & Whitney LLP, located on the 18th floor of the Pillsbury
Center South, 220 South Sixth Street, Minneapolis, Minnesota, and at any
adjournments thereof. Shares represented by properly executed proxies
received by the Company will be voted at the Special Meeting or any
adjournment thereof in accordance with the terms of such proxies, unless such
proxies are revoked. See "Proxies."
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Company will consider and
vote upon a proposal to approve and adopt the Merger Agreement. Pursuant to
the Merger Agreement, Merger Subsidiary will merge with and into the Company,
the separate corporate existence of Merger Subsidiary will cease, and the
Company will be the Surviving Corporation. At the Effective Time, each
outstanding share of Common Stock (except Dissenting Shares) will be
converted into the right to receive from Meridian $12.50 in cash, subject to
reduction as described in the following paragraph. In addition, each share
of Preferred Stock will be converted into the right to receive from Meridian
$3.50 in cash, subject to reduction as described in the following paragraph.
Holders of Dissenting Shares will be entitled to receive from the Surviving
Corporation a cash payment in the amount of the "fair value" of such shares,
determined in the manner provided in Sections 302A.471 and 302A.473 of the
MBCA but, after the Effective Time, such shares will not represent any
interest in the Surviving Corporation other than the right to receive such
cash payment. See "RIGHTS OF DISSENTING SHAREHOLDERS." A copy of the Merger
Agreement is attached as Exhibit A to this Proxy Statement.
The amount to be received for each share of Common Stock and Preferred
Stock is subject to reduction in the event that the Company's and Citizens
Mutual's total out-of-pocket costs and expenses incurred in connection with
the Merger and the Affiliation exceed $650,000. In the event such
transaction expenses and costs exceed $650,000, the consideration to be
received by Company shareholders will be adjusted such that (i) 85.1% of such
transaction costs and expenses in excess of $650,000 will be subtracted from
the total consideration otherwise payable to holders of the Common Stock
($24,957,312) and (ii) 14.9% of such excess transaction expenses and costs
will be subtracted from the total consideration otherwise payable to Citizens
Mutual as the sole holder of the Preferred Stock ($4,375,000). Through June
25, 1996, the Company's total out of pocket costs and expenses incurred in
connection with the Merger and the Affiliation were $240,000. The Company
anticipates that such costs and expenses through the Effective Time will be
approximately $600,000. Accordingly, downward adjustments to the cash
consideration payable by Meridian in the Merger for the Common Stock and
Preferred Stock should not occur. If, however, in the unlikely event that
such costs and expenses exceed $650,000 such that the amount payable for the
Common Stock and the Preferred Stock in the Merger is less than $12.25 and
$3.25, respectively, the Company will delay the Special Meeting and resolicit
proxies from the Company's shareholders with respect to approval of the
Merger.
In addition to approval and adoption of the Merger Agreement and the
transactions contemplated thereby, shareholders may be asked to approve a
proposal to adjourn the Special Meeting to permit further solicitation of
proxies in the event there are not sufficient votes at the time of the Special
Meeting to approve and adopt the Merger Agreement. It is not anticipated that
any other matters will be brought before the Special Meeting. However, if
other matters should come before the Special Meeting, it is intended that the
holders of proxies solicited hereby will vote thereon in their discretion,
unless such authority is withheld.
RECORD DATE; SHAREHOLDER APPROVAL
Only holders of record of Common Stock and Preferred Stock at the close
of business on June 21, 1996 are entitled to notice of and to vote at the
Special Meeting. On that date, there were 1,701,585 shares of Common Stock
and 1,250,000 shares of Preferred Stock outstanding. Each share of Common
Stock and each share of Preferred Stock entitles its holder to one vote
concerning all matters properly coming before the Special Meeting. A
majority of the shares of each class of stock entitled to vote, represented
in person or by proxy, will constitute a quorum with respect to such class.
Abstentions
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<PAGE>
and broker non-votes (i.e., shares held by brokers in street name, voting on
certain matters due to discretionary authority or instructions from the
beneficial owner but not voting on other matters due to lack of authority to
vote on such matters without instructions from the beneficial owner) are
counted for the purpose of establishing a quorum and will have the same
effect as a vote against the approval of the Merger. Under the MBCA, the
holders of Preferred Stock and the holders of Common Stock vote as separate
classes on the Merger Agreement. The Merger Agreement must be approved by
the holders of at least a majority of the outstanding shares of Common Stock
and a majority of the outstanding shares of Preferred Stock. Citizens
Mutual, which is the owner of 19.8% of the issued and outstanding shares of
Common Stock and all of the issued and outstanding Preferred Stock, currently
intends to vote in favor of the approval and adoption of the Merger
Agreement. Because Citizens Mutual owns substantially less than 50.0% of the
outstanding shares of Common Stock, approval of the Merger is not assured as
a result of the voting power held by Citizens Mutual. Pursuant to agreements
dated as of March 20, 1996 with Meridian, Spencer A. Broughton, Chairman of
the Board and Chief Executive Officer of the Company, and Scott S. Broughton,
President, Chief Operating Officer and Chief Financial Officer of the
Company, have agreed to vote a total of 112,470 shares of Common Stock, or
6.6% of the total outstanding shares of Common Stock, in favor of the Merger
Agreement.
PROXIES
Any Company shareholder entitled to vote at the Special Meeting may vote
either in person or by duly authorized proxy. All shares of Common Stock and
Preferred Stock represented by properly executed proxies received prior to or
at the Special Meeting and not revoked will be voted in accordance with the
instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH
PROXIES WILL BE VOTED FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT AND, IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY, ON SUCH
OTHER MATTERS AS MAY PROPERLY BE PRESENTED AT THE SPECIAL MEETING.
A shareholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated and signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
Expenses in connection with the solicitation of proxies will be paid by the
Company. Upon request, the Company will reimburse brokers, dealers and banks,
or their nominees, for reasonable expenses incurred in forwarding copies of the
proxy material to the beneficial owners of Common Stock which such persons hold
of record. Solicitation of proxies will be made principally by mail. Proxies
may also be solicited in person, or by telephone or telegraph, by officers and
regular employees of the Company.
THE MERGER PROPOSAL
BACKGROUND OF THE MERGER PROPOSAL
Since the Company's inception in 1986, the Board of Directors and
management of CSGI have evaluated and considered various alternatives for
maximizing shareholder value. The Board has long believed that the trading
price of the Common Stock has not been reflective of the actual value of the
Company. Until the public announcement of the Merger, the Common Stock trading
price was consistently below the book value per share. The Company believes
that the low market price for the Common Stock has been the result of several
factors. First, CSGI is a small regional insurance company not well known in
the financial markets, particularly outside the Midwest. Second, the number of
shares of Common Stock in the public float is very limited. Third, the Common
Stock, which is traded on the Nasdaq Small Cap Market, has historically been
very thinly traded. Fourth, since the Company's initial public offering in
1986, the Company has had a very limited number of market makers and investment
banking firms preparing research reports with respect to the Company. Fifth,
-8-
<PAGE>
in recent years, as the Company's premium volume has increased, its leverage
ratios have become higher, hampering CSGI's ability to aggressively increase
its revenues. The Company's leverage ratio has also increased because of
ongoing cash dividends paid to the Company by Citizens Fund and ICO in order
to provide the Company with funds to repay its bank loan obtained in 1989 to
finance the acquisition of ICO. Although the Company has investigated various
ways of raising new capital to improve its leverage ratio, the low trading
price of the Common Stock has effectively prevented the Company from raising
additional capital in the public equity markets. The Company's leverage
ratio has been an increasing concern of its Board of Directors in recent
years.
In the past, the Company has taken steps to deal with these problems,
including a corporate restructuring transaction in March 1994 in which the
Company issued the Preferred Stock to Citizens Mutual in exchange for shares of
Common Stock previously held by Citizens Mutual. The exchange transaction was
intended to position the Company for a possible public offering of its Common
Stock. The transaction had the effect of increasing the book value and
earnings per share for the Common Stock, but did not have any significant
effect on the trading price of the Common Stock. Accordingly, the public
offering was not pursued because of the dilutive effect on outstanding shares
of Common Stock.
Since the exchange transaction, the Board of Directors of CSGI has
continued to consider and evaluate other alternatives for increasing
shareholder value. Senior management of the Company periodically has
received overtures from larger insurance companies seeking to expand through
acquisition. In August 1994, at the request of Allied Insurance Group, Inc.,
("Allied") executive officers at the Company met with representatives of
Allied to discuss Allied's interest in acquiring the Company. A similar
meeting was held by the Company with representatives of the Argonaut
Insurance Company in January 1996. No purchase price or other specific
transaction terms were discussed at either of these meetings, and the Company
did not have further discussions with these companies. In addition, the
Company has on several occasions received unsolicited telephone calls or
letters making general inquiry regarding the Company's interest in entering
into a possible business combination. Because these inquiries were general,
and did not include any specific transaction terms, the Company's management
did not respond to them.
While the Company's practice was not to encourage inquiries from
prospective acquirors, continued analysis of the Company's strategic
alternatives for maximizing shareholder value led the Board of Directors to
view a sale of the Company as a possible means of achieving this goal. At a
Board meeting held on November 2, 1995, management informed the Board that it
had recently received several general inquiries from prospective buyers
regarding the Company's interest in being acquired. At this meeting, after a
thorough review of the Company's strategic alternatives, the Board concluded
that the Company should more actively pursue a possible acquisition
transaction, and instructed senior management to explore this alternative.
On October 26, 1995, management of the Company was contacted by a
representative of Philo Smith Capital Corporation, an investment banking firm
specializing in the insurance industry ("Philo Smith"). Philo Smith did not
present any specific proposed transaction but offered to arrange a meeting
between representatives of the Company and Meridian to discuss the two
companies' respective insurance operations. On November 6, 1995,
representatives of the two companies met in Indianapolis, Indiana. Following
this meeting, another meeting between representatives of CSGI and Meridian
was held in Red Wing, Minnesota to further discuss the Company's business and
operations. On December 15, 1995, the Company received a letter of intent
(the "Letter of Intent") from Meridian proposing the acquisition of the
Company by Meridian and the affiliation of Meridian with Citizens Mutual.
The initial Letter of Intent contemplated a merger of a Meridian subsidiary
with the Company in which holders of Common Stock and Preferred Stock would
receive approximately $11.70 and $3.50 per share (subject to certain possible
adjustments), respectively, in cash from Meridian. The Letter of Intent was
reviewed by senior management and legal counsel, and management discussed the
Letter of Intent with the CSGI Board of Directors at a special meeting held
December 21, 1995. The Board authorized management to continue discussions
with Meridian and to begin negotiations regarding the terms of the Letter of
Intent. At this meeting, the Board also authorized the Company to retain
Goldsmith, Agio, Helms Securities, Inc. as CSGI's financial advisor with
respect to the proposed Meridian transaction or other possible business
combinations.
Following the December 21, 1995 meeting of CSGI's Board of Directors,
representatives of CSGI and Meridian continued their discussions and commenced
negotiations regarding the terms of the Letter of Intent. These further
discussions and negotiations resulted in a final Letter of Intent relating to a
transaction in which holders of shares of Common Stock and Preferred Stock
would receive $12.50 per share (the "Common Stock Merger Consideration") and
$3.50 per share (subject to certain possible adjustments), respectively, in
cash from Meridian. Representatives of the Company and Meridian also agreed
on various details concerning provisions for accelerated vesting of CSGI stock
options, continued employment of Citizens Mutual employees following completion
-9-
<PAGE>
of the Merger, employment and consulting arrangements for certain senior
executive officers of CSGI and other matters. The Letter of Intent also
contemplated that a termination fee of $586,646 (plus transaction costs
and expenses incurred by Meridian and its affiliates) would be paid to
Meridian under certain circumstances. The final Letter of Intent was
discussed with and approved by the Board of Directors of CSGI at a special
meeting held on January 31, 1996 and February 1, 1996, and signed by the
Company on February 1, 1996. The Letter of Intent provided that the Merger
was subject to the negotiation and execution of a definitive acquisition
agreement and related agreements, approval thereof by the Boards of Directors
of CSGI and Meridian and by the shareholders of CSGI and the policyholders of
Citizens Mutual, and receipt of certain regulatory approvals.
Following announcement of the signing of the Letter of Intent on
February 8, 1996, the parties proceeded with the negotiation of the definitive
Merger Agreement and other related agreements. A draft of the definitive
Merger Agreement was submitted to and approved by CSGI's Board of Directors on
March 18, 1996, and the final Merger Agreement, dated as of March 20, 1996, was
executed and delivered by the parties on March 22, 1996. A draft of the
definitive Merger Agreement had been approved by the Board of Directors of
Meridian on March 12, 1996.
RECOMMENDATION OF THE CSGI BOARD OF DIRECTORS
On March 18, 1996, the Company's Board of Directors, by affirmative vote
of all directors in attendance at a special board meeting held on March 18,
1996, determined that the transactions contemplated by the Merger Agreement
are fair from a financial point of view to and in the best interests of the
shareholders of CSGI, approved the Merger Agreement and resolved to recommend
that the Company's shareholders approve the Merger Agreement.
In arriving at its recommendation and determining that the Merger is fair
to and in the best interests of shareholders of CSGI, the Board carefully
considered the terms of the Merger at its meetings held on December 21, 1995,
January 31, 1996 and February 1, 1996 and March 18, 1996. As part of this
process, the Board considered the advice and assistance of its outside
financial and legal advisors and management regarding fairness to the
shareholders of CSGI of the terms of the Merger Agreement and management's
advice regarding the business reasons that favored approval of the Merger.
Among the principal factors considered by the Board of Directors of CSGI were
the following:
(a) The fact that the Common Stock Merger Consideration of $12.50 per
share represents a premium of approximately 88.5% over the $6.63 high bid
price per share on January 31, 1996 and approximately 94.4% over CSGI's
$6.43 book value per share on December 31, 1995, and a multiple of 29 times
CSGI's $.43 earnings per share of Common Stock for the fiscal year ended
December 31, 1995, all of which compared favorably to other recent
acquisitions of property and casualty insurance companies.
(b) The conditions, prospects and strategic direction of the
Company's business, including the Company's increasing inability to
significantly increase revenues due to its high leverage ratio and its
inability to raise capital in the public equity markets. (See "Background
of the Merger Proposal").
(c) The fact that, despite the period of time between the public
announcement of the execution of the Letter of Intent and the execution of
the Merger Agreement, no other offer was submitted to acquire CSGI.
(d) The various background data and analyses thereof reviewed by
CSGI's outside financial and legal advisors and management with the Board
of Directors as well as the opinion of GAHS that the consideration to be
received by the holders of Common Stock and Preferred Stock in the Merger
is fair to such shareholders (See "Opinion of Financial Advisor").
-10-
<PAGE>
(e) The fact that Citizens Mutual, the holder of 19.8% of the
outstanding shares of Common Stock and all of the outstanding shares of
Preferred Stock, would realize a significant increase in the value of its
invested assets and its surplus and be given an opportunity to
significantly diversify its investment portfolio as a result of the Merger.
(f) Meridian's willingness to commit that it would maintain
significant insurance operations and employees in Red Wing, Minnesota
through at least December 31, 1999.
(g) Meridian's agreements regarding continued employment of and
benefits for employees of Citizens Mutual.
(h) Meridian's reputation in the property and casualty industry and
the expectation that CSGI's independent agents would be well served by
Meridian after the completion of the Merger.
(i) The expectation that CSGI's independent agents will have a
broader line of insurance products to sell after completion of the Merger.
(j) The terms and conditions of the Merger Agreement, and related
agreements and the likelihood that the conditions to the Merger would be
satisfied.
(k) The willingness of management of CSGI to support the Merger.
In view of the wide variety of factors considered in connection with its
evaluation of the terms of the Merger, the Company's Board of Directors did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching its conclusions.
The background data and analyses reviewed with the Board of Directors
included (i) consolidated income statement and balance sheet data for CSGI for
each of its fiscal years in the five-year period ended December 31, 1995 and
estimated data for its fiscal year ending December 31, 1996 based on
management's projections for such fiscal year, (ii) data with respect to the
trading price of the Common Stock from January 28, 1994 through January 28,
1996, (iii) comparisons of the trading prices of Company's Common Stock to the
trading prices of Common Stock of other similar insurance holding companies,
(iv) valuation summaries comparing the Company's price multiples and annual
sales and operating income to those of similar insurance holding companies,
(v) comparisons of certain recent acquisitions of companies (vi) trading values
of certain property and casualty insurance companies, (vii) analyses of the
Common Stock Merger Consideration as a multiple of historical fiscal year 1995
and projected fiscal year 1996 revenues, operating earnings of Common Stock,
and as a multiple of the Company's recent market price per share and
December 31, 1995 book value per share of Common Stock, and (viii) analyses
of the trading prices of publicly traded preferred stocks with rights and
preferences similar to the Preferred Stock.
The directors evaluated the factors described above in light of their
knowledge of the business and operations of the Company, and their business
judgment, and concluded that the $12.50 and $3.50 per share in cash to be
received by the holders of Common Stock and Preferred Stock, respectively, in
the Merger was preferable to such holders retaining their current interest in
the Company. In this regard, the Board placed special emphasis on its belief
that the terms of the Merger Agreement are fair to and in the best interests
of the holders of Common Stock and Preferred Stock.
If the Merger is not approved by the Company's shareholders, and the
Merger does not occur, the Company will continue its current operations as an
independent insurance holding company. However, for the reasons discussed
above (including the Company's high leverage ratio), the Company may continue
to seek a business combination with a larger insurance company group.
-11-
<PAGE>
OPINION OF FINANCIAL ADVISOR
CSGI has retained GAHS to act as its exclusive financial advisor in
connection with the Merger and to render an opinion as to the fairness, from a
financial point of view, to the holders of shares of Common Stock and Preferred
Stock of the consideration to be received by such shareholders for their shares
in the Merger. GAHS rendered its written opinion dated March 18, 1996 to the
Board of Directors of CSGI that, as of such date, the consideration that the
holders of Common Stock will receive pursuant to the Merger is fair to such
holders from a financial point of view, and that, as of such date, the
consideration that the holder of the Preferred Stock will receive pursuant to
the Merger is fair to such holder from a financial point of view.
A copy of GAHS's written opinion dated March 18, 1996, which sets
forth, among other things, the assumptions made, procedures followed, matters
considered and limitations of the review undertaken, is attached as Exhibit B
to this Proxy Statement and is considered a part of this discussion.
SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY. The limitations
of the review undertaken by GAHS and the material assumptions made, procedures
followed and matters considered by GAHS in the course of that review are
summarized in the following paragraphs.
For purposes of its opinion, GAHS, among other things, reviewed the
Merger Agreement; reviewed certain publicly available business and financial
information concerning CSGI and Meridian; reviewed certain financial analyses
and other business information furnished to it by CSGI; reviewed the reported
prices and trading activity for the Common Stock; compared the reported prices
for the Common Stock and certain financial information for CSGI to similar
information for certain other companies engaged in businesses considered by
GAHS to be comparable to that of CSGI; reviewed the financial terms, to the
extent publicly available, of transactions considered by GAHS to be similar
in whole or in part to the Merger; reviewed the reported prices for publicly
traded preferred stocks that GAHS considered comparable to the Preferred Stock;
reviewed the interest-rate environment for United States Treasury securities;
visited the facilities of CSGI and Meridian; and held discussions with members
of senior management of CSGI and Meridian regarding the business and prospects
of their companies. No limitations were imposed on GAHS by CSGI with respect
to the scope of GAHS's investigation.
As set forth in its opinion, GAHS assumed and relied upon, and did not
independently verify, the accuracy, completeness and fairness of the financial
and other information described above. GAHS did not make an independent
evaluation or appraisal of the assets and liabilities of CSGI, nor was it
furnished with any such appraisals or valuations, and GAHS expressed no opinion
regarding the liquidation value of CSGI. In addition, GAHS relied upon the
management of CSGI as to the reasonableness and achievability of the financial
and operating prospects (and the assumptions and bases therefor) provided to
GAHS, and assumed that such information reflected the best currently available
information, estimates and judgments of such management as to the likely future
financial performance of CSGI. GAHS's opinion is based on financial, economic
and other considerations as they existed and could be evaluated as of the date
hereof. Events occurring after the date of the opinion, including events
specific to CSGI or events relating to general market, economic, financial,
interest rate or other conditions, may materially alter the factors underlying
the analyses used in arriving at the GAHS opinion. In addition, GAHS's opinion
is directed only to the consideration that holders of Common Stock and the
holder of the Preferred Stock will receive pursuant to the Merger, and no
opinion is expressed as to any other consideration.
The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant quantitative methods of financial
analyses and the application of those methods to the particular circumstances,
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, in arriving at its opinion, GAHS did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of each
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<PAGE>
analysis and factor. No company or transaction used in GAHS's analyses is
identical to CSGI or the Merger. Accordingly, the analyses performed by GAHS
were not purely mathematical; rather, they involved complex considerations
and judgments concerning differences between the financial and operating
characteristics of CSGI and the financial and operating characteristics of
the companies to which CSGI was compared. As a result, GAHS believes that
its analyses and the summary set forth below must be considered as a whole
and that selecting portions of its analyses, without considering all factors
and analyses, could create a misleading or incomplete view of the process
underlying GAHS's analyses. The analyses performed by GAHS are not
necessarily indicative of actual values or actual future results, which may
be significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold,
nor should they be considered predictions of future stock prices.
GAHS reviewed the performance of the per share market prices and daily
trading volumes of the Common Stock over the two-year period ended March 15,
1996. GAHS noted that, for the two-year period ended March 15, 1996, the
average closing price for the Common Stock was approximately $4.50 per share
and the average daily trading volume for Common Stock was approximately 19,079
shares. GAHS also noted that the average closing price for CSGI Common Stock
during the 10-day trading period ended February 7, 1996 (the last full day of
trading prior to the public announcement of the Merger) was approximately $6.18
per share and that the average daily trading volume for CSGI Common Stock was
approximately 22,600 shares.
GAHS reviewed a broad range of publicly traded companies GAHS believes
have businesses that are generally comparable to the businesses of CSGI. CSGI
was compared to this group of publicly traded companies so that an assessment
of CSGI's trading-volume and stock-price history could be made. Based upon
this review, GAHS selected a group of property and casualty insurance companies
("Comparable P/C Group") that it believed to be closely comparable to CSGI,
and compared certain historical financial statement and trading market data,
and revenue, operating income, net income, asset and book value measures, for
the Comparable P/C Group and CSGI. GAHS also compared various multiples and
ratios of income statement categories and historical balance sheet figures
for the Comparable P/C Group. Such data and ratios included market
capitalization (defined to be the market value of common stock plus the
liquidation value of preferred stock and the principal amount of debt) to
historical revenue, market capitalization to historical assets, market
capitalization to historical operating income (defined as earnings before
interest and taxes), market equity capitalization (defined to be the market
value of total outstanding shares of common stock) to historical net income,
market equity capitalization to historical book value and market equity
capitalization to projected net income (where such projections were
available) (together, the "Six Valuation Categories").
The Comparable P/C Group reviewed by GAHS in conjunction with its
analysis of CSGI included ALLIED Group, Inc., Donegal Group, Inc., EMC
Insurance Group, First Central Financial Corporation, Harleysville Group Inc.,
Meridian and Penn-America Group, Inc. These companies engaged in the
underwriting of property and casualty insurance.
The multiples and ratios referred to above were applied to historical
and projected financial information for CSGI, which information was adjusted to
exclude from consideration, for analytical purposes only, the $592,398 refund
to excess ceded premiums received by CSGI from the Minnesota Workers'
Compensation Reinsurance Association, which refund was received during the
first quarter of fiscal 1995. This refund accounted for net income of
approximately $410,000 for CSGI during fiscal 1995. An adjustment was also
made, again for analytical purposes only, to reflect the estimated impact on
CSGI's balance sheet of the anticipated exercise on or prior to the Effective
Date of outstanding stock options to purchase 335,000 shares of Common
Stock for approximately $1.1 million. These adjustments were made by GAHS
to establish historical financial results that, in the opinion of GAHS, more
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accurately reflect CSGI's performance on a going-forward basis for analytical
purposes. GAHS then determined that the median multiple of
last-twelve-months ("LTM") revenues for the Comparable P/C Group was .81,
that the median multiple of LTM assets was .34, that the median multiple of
LTM Operating Income was 6.4, that the median multiple of LTM net income was
8.2, that the median multiple of LTM book value was 1.06, and that the median
multiple of next-fiscal-year ("NFY") projected net income was 8.4. GAHS also
determined the high and low multiples for the Comparable P/C Group for each
valuation-multiple category, and concluded that the multiple range for LTM
revenues was .62 to 1.22, that the multiple range for LTM assets was .25 to
.67, that the multiple range for LTM operating income was 4.8 to 9.0, that
the multiple range for LTM net income was 6.1 to 9.1, that the multiple range
for LTM book value was .85 to 1.90, and that the multiple range for NFY
projected net income was 7.2 to 8.9.
Based on the cash consideration of $12.50 per share Common Stock
Merger Consideration, and assuming all outstanding stock options to purchase
Common Stock are exercised on or prior to the Effective Date, GAHS calculated
CSGI's market equity capitalization to be approximately $25.0 million on a
fully diluted basis. At this equity value, CSGI's implied multiple of LTM
revenues was .92, as compared with a range of .62 to 1.22 for the Comparable
P/C Group; its implied multiple of LTM assets was .49, as compared with a
range of .25 to .67 for the Comparable P/C Group; its implied multiple of LTM
book value was 1.83, as compared with a range of .85 to 1.90 for the Comparable
P/C Group; its implied multiple of LTM net income was 31.2, as compared with a
range of 6.1 to 9.1 for the Comparable P/C Group; its implied multiple of LTM
operating income was 20.0, as compared with a range of 4.8 to 9.0 for the
Comparable P/C; and its implied multiple of NFY projected net income was 11.0,
as compared with a range of 7.2 to 8.9 for the Comparable P/C.
GAHS then calculated aggregate equity values for CSGI by applying
CSGI's actual and certain forecasted financial results provided by CSGI
management (which may or may not be indicative of actual future results) to
the multiples derived from its analyses of the Comparable P/C Group
described above (any value derived from the analyses of the Comparable P/C
Group being referred to herein as the "Implied Equity Value"). Based upon
the low, median and high multiples of each of the Six Valuation Categories,
GAHS calculated Implied Equity Values for CSGI for a total of 18 Implied
Equity Values for CSGI. From this matrix of Implied Equity Values for CSGI,
GAHS then calculated a mean and a median Implied Equity Value for CSGI based
upon the low values of the Six Valuation Categories, the median values of the
Six Valuation Categories and the high values of the Six Valuation Categories.
The Implied Equity Value for CSGI ranged from $9.9 million (based on the
mean of the Six Valuation Categories on the low end of each valuation range)
to $23.4 million (based on the median of the Six Valuation Categories on the
high end of each valuation range). The Implied Equity Value for CSGI based
on the median of the Six Valuation Categories on the low end of each of the
Six Valuation Categories was $10.5 million; and the Implied Equity Value for
CSGI based on the mean of the Six Valuation Categories on the high end of
each of the Six Valuation Categories was $21.8 million. The Implied Equity
Value for CSGI based on the median of each of the Six Valuation Categories
was $14.5 million when calculated as the median of the Six Valuation Categories
and $13.3 million when calculated as the mean of the Six Valuation Categories.
GAHS then analyzed the relationship between the Implied Equity Values
of CSGI with the $12.50 per share Common Stock Merger Consideration. At the low
end of the Implied Equity Value range for CSGI, the Common Stock Merger
Consideration represents a premium, calculated on an arithmetic basis, of
158.8%. At the high end of the Implied Equity Value range for CSGI, this
premium equals 9.3%. GAHS then analyzed the relationship between the closing
price for the Common Stock one week and four weeks prior to the public
announcement of the Merger and the proposed Common Stock Merger Consideration.
The closing price for the Common Stock one week prior to the public announcement
of the proposed Merger was $6.00 per share; and the closing price for the Common
Stock four weeks prior to the public announcement of the proposed Merger was
$5.00 per share. At these prices for the Common Stock, the Common Stock Merger
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Consideration price represents a premium of 108.3% and 150.0%, respectively.
GAHS also reviewed publicly available information on certain merger
and acquisition transactions involving the acquisition of all or part of certain
property and casualty, health and related insurance companies. The analysis
included 32 such transactions announced from July 1992 through December 1995
involving the acquisition or merger of a publicly held target. In examining
these transactions, GAHS analyzed the change in each target company's stock
price following the announcement that the company was being acquired (such
change in stock price being referred to herein as the "Control Premium").
The transactions analyzed included the following (listed by acquiror
and target): BLV Acquisition Corp./Belvedere Corp.; Citizens Inc./First
Centennial Corp.; Selective Insurance Group, Inc./Niagara Exchange Corp.;
American Financial Corp./STI Group Inc.; Leucadia National Corp./PHLCORP Inc.;
UNUM Corp./Colonial Cos. Inc.; United Insurance Cos./Southern Educators Life
Insurance Co.; Investors/TIG Holdings Inc.; Shareholders/First Colony Corp.; LMI
Insurance Co./ARI Holdings Inc.; Primerica Corp./Travelers Corp.; Wellpoint
Health Networks Inc./UniCare Financial Corp.; Liberty Corp./North American
National Corp.; Conseco Capital Partners II L.P./Statesman Group Inc.; Torchmark
Corp./American Income Holdings; NWNL Cos. Inc./USLICO Corp.; Zurich Reinsurance
Centre/RE Capital Corp.; CNA Financial Corp. (Loews Corp.)/Continental Corp.;
USF&G Corp./Victoria Financial Corp.; Beverly Enterprises Inc./Pharmacy
Management Services; Shareholders/Allstate Corp. (Sears Roebuck); Conseco
Inc./CCP Insurance Inc.; Citizens Inc./American Liberty Financial;
Investors/Prudential Reinsurance Holdings; Unitrin Inc./Milwaukee Insurance
Group Inc.; Humana Inc./Emphesys Financial Group Inc.; First Financial
Management/Employee Benefits Plans Inc.; Sierra Health Services Inc./CII
Financial Inc.; American Annuity Group Inc./Laurentian Capital Corp.;
Shareholders/ITT Hartford Group Inc.; Financial Security Assurance
Holdings/Capital Guaranty Corp.; SCOR/SCOR US Corp. (SCOR SA). The mean Control
Premium in the foregoing transactions was 29.5%, based on the target companies'
stock prices one week prior to the announcement of their respective
transactions, and was 36.8% based on the target companies' stock prices four
weeks prior to the announcement of their respective transactions. The median
Control Premiums were 31.2% and 37.4%, respectively. These Control Premiums
compare with the implied Control Premiums offered in the Merger of 9.3% at the
high end of the Implied Equity Value range for CSGI and 158.8% at the low end of
the Implied Equity Value range for CSGI, and with the implied Control Premiums
offered in the merger of 108.3% based on the closing price for the Common Stock
one week prior to the public announcement of the proposed Merger and 150.0%
based on the closing price for the Common Stock four weeks prior to the public
announcement of the proposed Merger.
The Preferred Stock has a par value of $3.50 per share and a
liquidation value per share equal to such amount. GAHS reviewed a broad range
of publicly traded preferred stocks that have characteristics that are
generally comparable to the characteristics of the Preferred Stock. The
analysis included 37 such preferred stocks issued by 31 different companies.
In examining these securities, GAHS analyzed the change in each preferred
stock's price from March 10, 1994 (the date on which the Preferred Stock was
issued at par) to March 1, 1996, the date on which this analysis was
undertaken (such change in the comparable preferred stock price being
referred to as the "Price Movement").
The preferred stocks analyzed were also reviewed as part of the
analysis undertaken by GAHS in March 1994, when CSGI issued the Preferred Stock
in exchange for 1,250,000 shares of Common Stock then held by Citizens Mutual
Company and retained GAHS to render an opinion as to the fairness, from a
financial point of view, to CSGI of the stock consideration to be issued by CSGI
in the transaction. These preferred stocks include the following (listed by
issuer and ticker symbol): Ahmanson/AHM-C; Alabama Power/ALP-A; Bank United
Texas/BKU-A; Chase Manhattan/CMB-K; Citicorp/CCI-D; Cleveland Electric/CVX-T;
Coastal Corp./CGP-H; Comdisco/CDO-B; Commonwealth Edison/CWE-E; Commonwealth
Edison/CWE-I; Dial Corp./DL; Duquesne Light Co./DQU-A; Fleet Financial
Group/FLT-C; General Motors/GM-G; General Motors/GM-D; Great Western
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Financial/GWF-A; Gulf States Utility/GSU; Household International/HI-X; James
River/JR-O; Jersey Central Power/JYP-E; Long Island Lighting/LIL-A; Long
Island Lighting/LIL-C; Long Island Lighting/LIL-Q; Louisiana Power &
Light/LPL-A; Mellon Bank/MEL-J; Mellon Bank/MEL-K; Ohio Edison/OEC-M; Public
Service Co. of Colorado/PSR-B; Public Service E&G/PEG-J; Sears Roebuck/S-A;
Tejas Gas Corp./TEJ-A; Toledo Edison/TED-F; Utilicorp United Inc./UCU-A;
Wells Fargo/WFC-D; Wells Fargo/WFC-C; Western Gas Resources/WGR; Williams
Companies/WMB-A. The mean Price Movement among the foregoing preferred
stocks was negative 2.15%, and the median Price Movement was negative 2.23%.
The Preferred Stock was issued at its par value of $3.50 per share
on March 31, 1994. The above analysis of publicly traded preferred stocks
suggests that the value of the Preferred Stock has declined since such date.
Accordingly, the analysis indicates that the $3.50 per share to be paid for
the Preferred Stock in the Merger exceeds the current fair market value
thereof. Prevailing interest rates with respect to T-Bills and T-Notes have a
direct effect on the price of fixed income securities, and the fair market
value of fixed coupon, nonconvertible preferred stocks (including the
Preferred Stock) in such interest rates in inversely related to positive
movements in interest rates. From March 10, 1994, to March 14, 1996, interest
rates as measured by the yield on T-Bills and T-Notes increased. GAHS also
analyzed the yields on United States Treasury bills ("T-Bills") and United
States Treasury notes ("T-Notes") as of March 10, 1994 and March 14, 1996.
The yield on 91-day T-Bills increased from 3.50% on March 10, 1994 to 4.98%
on March 14, 1996, the yield on 182-day T-Bills increased from 3.79% to 4.96%
during this period, the yield on one-year T-Notes increased from 4.11% to
5.11% during this period, the yield on two-year T-Notes increased from 4.94%
to 5.72% during this period, the yield on three-year T-Notes increased from
5.34% to 5.85% during this period, and the yield on seven-year T-Notes
increased from 6.09% to 6.27% during this period.
Although GAHS has advised CSGI throughout the Merger negotiations and
has delivered to the CSGI Board of Directors an opinion as the fairness, from a
financial point of view, of the consideration to be received by holders of
Common Stock for their shares in the proposed Merger, and of the consideration
to be received by the holder of the shares of Preferred Stock for its Preferred
shares in the proposed Merger, GAHS did not recommend to CSGI that any specific
figure constituted the appropriate per-share price to be paid for the Common
Stock or the Preferred Stock in connection with the Merger. Rather, the
per-share price to be paid to holders of Common and Preferred Stock pursuant to
the Merger Agreement was determined through negotiations between members of the
senior management of CSGI and Meridian.
GAHS is a nationally recognized investment banking firm and, as a part
of its investment banking services, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
corporate restructuring, strategic alliances, private placements and valuations
for corporate and other purposes.
Pursuant to the terms of an engagement letter dated March 6, 1996,
CSGI agreed to pay GAHS a fee of $125,000 for the delivery of a fairness
opinion to the CSGI Board of Directors. One-half of this fee was paid on
March 18, 1996, and one-half will be paid at the closing of the Merger. In
addition, CSGI (other engagement letter) agreed to reimburse GAHS for its
reasonable out-of-pocket expenses, including fees and disbursements of its
legal counsel, and to indemnify GAHS against certain liabilities relating to
or arising out of its engagement, including liabilities under the federal
securities laws. In addition, pursuant to an engagement letter effective
June 27, 1996 relating to GAHS's fairness opinion, the Company agreed to
indemnify GAHS against certain liabilities relating to or arising out of the
fairness opinion. CSGI has also agreed to pay to GAHS a transaction fee of
$125,000 for acting as its exclusive agent to assist it with the Merger
(which fee is in addition to the $125,000 to be paid to GAHS for its fairness
opinion). Such transaction fee is contingent upon the consummation of the
Merger. (Pursuant to the engagement letter, CSGI has agreed to indemnify GAHS
and to reimburse GAHS for certain out-of-pocket expenses incurred in
connection with rendering financial advisory services, including fees and
disbursements of its legal counsel, regardless of whether the Merger is
consummated.)
Terry A. Lynner, a member of the CSGI Board of Directors, is a
Principal of GAHS, its Secretary and a member of its Board of Directors. GAHS
previously has provided financial advisory services to CSGI and received fees
therefor.
GAHS acted as the Company's financial advisor in connection with the
transaction in which the Company exchanged 1,250,000 shares of Preferred
Stock for the same number of shares of Common Stock previously issued to
Citizens Mutual. Total fees and expenses paid by the Company to GAHS in
connection with this transaction were $73,300. In addition, during the period
from 1991 to 1994, GAHS provided other miscellaneous financial advisory
services to the Company and received total fees therefore of approximately
$28,000.
The Board of Directors of the Company believes that the terms
pursuant to which GAHS was retained as financial advisor by the Company are
as fair to the Company as could have been obtained from unaffiliated
investment banking firms. Management of the Company recommended to the Board
of Directors that it engage GAHS as the Company's financial advisor because
of GAHS's significant experience in valuing businesses and their securities
in connection with mergers and acquisitions. Although the Board considered
retaining another investment banking firm as the Company's financial advisor,
the Board determined that, in view of its high level of satisfaction with the
financial advisory services previously provided by GAHS and GAHS's existing
familiarity with the Company, its business, financial condition and results
of operations, the Company should retain GAHS as its financial advisor in
connection with the Merger.
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the Merger is for Meridian to acquire the entire equity
interest in CSGI. The acquisition of the entire equity interest in CSGI has
been structured as a cash merger in order to provide a prompt and orderly
transfer of ownership of the Company from the shareholders of the Company to
Meridian and to provide the shareholders of the Company with cash for all their
shares. The Merger Agreement provides that the directors and officers of the
Merger Subsidiary immediately prior to the Effective Time shall be the
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directors and officers of the Surviving Corporation immediately after the
Effective Time.
AFFILIATION OF CITIZENS MUTUAL WITH MERIDIAN
In connection with the Merger, Meridian will affiliate with, and acquire
control of, Citizens Mutual. The Merger Agreement provides that, at the
Effective Time, the Board of Directors of Citizens Mutual will be reconstituted
so as to be comprised of the six current directors of Meridian Security, plus
Scott S. Broughton, the current President, Chief Operating Office and Chief
Financial Office of CSGI, and William J. Haaland, the current Vice President,
Marketing of CSGI. As a result of these changes in Citizens Mutual's Board,
Meridian will acquire control of Citizens Mutual.
The Merger Agreement also provides for the reconstitution of the Boards of
Directors of Citizens Fund, ICO and Mississippi Valley Corporation, a wholly
owned non-insurance subsidiary of Citizens Mutual ("Mississippi Valley"), as of
the Effective Time. The Board of Directors of each of Citizens Fund and ICO
shall consist of the six current directors of Meridian Security and Messrs.
Scott S. Broughton and Haaland, and the Board of Directors of Mississippi Valley
shall consist of such persons as may be designated by Meridian not less than
five days prior to the closing of the Merger. In addition, the Merger Agreement
requires that each officer of Citizens Mutual, Citizens Fund and ICO shall have
tendered his or her resignation as an officer, effective as of the Effective
Time, and arrangements reasonably satisfactory to Meridian shall have been made
providing for the appointment of the Chief Executive Officer of Meridian as the
Chairman of the Board, President and Chief Executive Officer of each such
company. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER--Meridian
Directorships." The Merger Agreement also requires that each officer of CSGI
and Mississippi Valley shall have tendered his or her resignation as an
officer, effective as of the Effective Time. To ensure continuity of operations
following the Merger, the Merger Agreement provides that Mr. Spencer A.
Broughton will enter into a Consulting Services Agreement with Meridian, and
that Mr. Scott S. Broughton will enter into an Employment Agreement with
Meridian. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER--Consulting Agreement
and Related Meridian Stock Option" and "--Employment Agreement and Related
Meridian Stock Option."
CSGI, Citizens Mutual, Citizens Fund, ICO and Mississippi Valley
(collectively, the "Citizens Companies") currently are jointly operated and
managed under a Management Services Agreement among such companies. The Merger
Agreement provides that Citizens Mutual, Citizens Fund, ICO and Mississippi
Valley will be jointly managed and operated with Meridian and its affiliated
companies after the Effective Time pursuant to the Management Services Agreement
(the "Management Services Agreement") among such companies. The Management
Services Agreement will provide Citizens Mutual, Citizens Fund, ICO and
Mississippi Valley with access to Meridian Mutual's executive, managerial,
administrative and other employees, along with use of Meridian Mutual's data
processing services. The Merger Agreement also requires Meridian Mutual,
Meridian Security, Citizens Mutual, Citizens Fund and ICO to enter into a
Reinsurance Pooling Agreement (the "Reinsurance Pooling Agreement") pursuant to
which the insurance business of such companies will be pooled with the business
of Meridian Mutual and Meridian Security.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger Agreement and the transactions contemplated thereby,
shareholders should be aware that certain members of the management and the
Boards of Directors of the Company have certain interests in the Merger in
addition to the interests of shareholders of the Company generally. In
connection with the Board of Directors' determination that the Merger is fair
to the Company's shareholders, the Board carefully considered conflict of
interest issues relating to the proposed agreements between Meridian and
certain members of management and the Board described below.
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CONSULTING AGREEMENT AND RELATED MERIDIAN STOCK OPTION
In connection with the Merger, Spencer A. Broughton, Chairman of the Board,
Chief Executive Officer and a director of CSGI, will enter into a Consulting
Services Agreement (the "Consulting Agreement") with Meridian at the Effective
Time. Under the Consulting Agreement, Mr. Spencer A. Broughton will provide
consulting services to Meridian in connection with the management and operations
of the Company, Citizens Mutual, Citizens Fund and ICO, the integration of such
companies with Meridian, such companies' relationships with employees, agents,
lenders and regulators and such other matters as may be requested by Meridian.
Mr. Spencer A. Broughton will receive $225,000 annually as compensation for
his services under the Consulting Agreement, which will terminate on December
31, 1999. In the event that Mr. Spencer A. Broughton dies or becomes disabled
during the term of the Consulting Agreement, he or his estate and heirs will be
entitled to continue receiving compensation thereunder.
In connection with the Consulting Agreement, Mr. Spencer A. Broughton and
Meridian will also enter into a Stock Option Agreement (the "Chairman's Stock
Option Agreement") at the Effective Time. Under the Chairman's Stock Option
Agreement, Mr. Spencer A. Broughton will receive an option to purchase up to
20,000 shares of the Common Stock of Meridian at the price of $14.125 (the last
reported sale price per share of Meridian Common Stock on February 7, 1996 (the
last full day of trading of the Meridian Common Stock prior to the public
announcement of the Merger), subject to adjustment in case of a subdivision or
combination of Meridian's Common Stock or a reorganization, reclassification,
consolidation, merger or sale of Meridian. The option will become exercisable
in equal installments over four years beginning on the first anniversary date of
the Chairman's Stock Option Agreement and will expire on the earlier of the date
90 days after Mr. Spencer A. Broughton's death or the date 10 years after the
Effective Time. The option is not transferable, except to Mr. Spencer A.
Broughton's estate or heirs upon his death.
EMPLOYMENT AGREEMENT AND RELATED MERIDIAN STOCK OPTION
In connection with the Merger, Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer and a director of CSGI, will enter
into an Employment Agreement (the "Employment Agreement") with Meridian and
Citizens Mutual. Under the Employment Agreement, Mr. Scott S. Broughton will
be employed by Meridian and Citizens Mutual to assist in the management and
operations of the Company, Citizens Mutual, Citizens Fund and ICO, the
integration of such companies with Meridian, such companies' relations with
employees, agents, lenders and regulators and such other matters as may be
requested by Citizens Mutual and Meridian.
As compensation for services under the Employment Agreement, Mr. Scott S.
Broughton will receive compensation of $175,000 annually throughout the term of
the Employment Agreement, and the same employee and fringe benefits as he
currently receives from Citizens Mutual for a period ending on the earlier of
the date of one year after the Effective Time or the Operational Date (as
defined below). In the event that Mr. Scott S. Broughton becomes disabled or
dies during the term of the Employment Agreement, he or his estate or heirs will
be entitled to continue receiving payments thereunder for the remaining term of
the Employment Agreement.
The Employment Agreement will terminate on the earlier of the date five
years after the Effective Date or the date on which VIS'N, Inc., a company to
be organized by Mr. Scott S. Broughton and Kirk D. Simmons, Vice President,
Insurance Services of the Company, that will provide data processing, agency
automation and claims services to the Citizens Companies, is able to perform
such services (the "Operational Date"). If the Employment Agreement terminates
on the Operational Date, Mr. Scott S. Broughton and Meridian shall immediately
enter into a Consulting Services Agreement, which provides for substantially
the same duties and compensation as the Employment Agreement.
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In connection with the Employment Agreement, Mr. Scott S. Broughton and
Meridian will enter into a Stock Option Agreement (the "President's Stock
Option Agreement") at the Effective Time. Under the President's Stock Option
Agreement, Mr. Scott S. Broughton will receive an option to purchase up to
20,000 shares of the Common Stock of Meridian at the price of $14.125, subject
to adjustment in case of a subdivision or combination of Meridian's Common
Stock or a reorganization, reclassification, consolidation, merger or sale of
Meridian. The option will become exercisable over four years beginning on the
first anniversary of the President's Stock Option Agreement and terminate on
the earlier of 90 days after the death of Mr. Scott S. Broughton or the date 10
years after the Effective Time. The option is not transferable, except to Mr.
Scott A. Broughton's heirs or estate upon his death.
CSGI STOCK OPTIONS
In accordance with the Merger Agreement, the unvested portion of each CSGI
stock option issued under the Company's 1986 Stock Option Plan (the "Employee
Option Plan") and its Nonemployee Director Stock Option Plan (the "Director
Option Plan") and outstanding at the Effective Time will be accelerated such
that all shares of Common Stock covered by each such option will be fully
exercisable immediately prior to the Effective Time.
As of the date hereof, CSGI stock options covering a total of _______
shares of Common Stock with exercise prices ranging from $______ to $_____
per shares were outstanding under the Employee Option Plan, of which options
covering a total of ______ shares were vested and options covering a total of
_____ shares were unvested. The sum of the "Spreads" (as defined below) for
all such vested stock options is $______ and for all such unvested stock
options is $______. As used herein, the Spread means for each option an
amount equal to the difference between $12.50 and the exercise price of such
option. All of the options outstanding under the Employee Option Plan are
held by executive officers of the Company. The sum of the Spreads for the
vested stock option held by Messrs. Spencer A. Broughton and Scott S.
Broughton is $______ and $_____, respectively, and the sum of the Spreads for
the unvested stock options held by Messrs. Spencer A. Broughton and Scott S.
Broughton is $_____ and $_____, respectively.
As of the date hereof, CSGI stock options covering a total of 40,000 shares
of Common Stock with exercise prices ranging from $3.13 to $4.00 per share were
outstanding under the Director Option Plan, all of which were vested. The sum
of the Spreads for such stock options is $353,700.
EMPLOYEE STOCK OWNERSHIP PLAN
Citizens Mutual currently maintains an Employee Stock Ownership Plan (the
"ESOP") for the benefit of its employees. In accordance with the Merger
Agreement, the ESOP will be terminated as of the Effective Time and the cash
received by the ESOP trustee in the Merger with respect to the ______
unallocated shares of Common Stock held in the ESOP will be used first to repay
the ESOP loan principal and interest ($______) and the balance of $______ will
be allocated to the accounts of participants and rolled-over to other
participant retirement plans or distributed to participants as soon as
practicable after the Effective Date.
EMPLOYMENT ARRANGEMENTS AND EMPLOYEE BENEFITS
Pursuant to the Merger Agreement, Meridian has agreed to offer 30 employees
of Citizens Mutual continued employment in Red Wing, Minnesota in their present
or similar capacities with Citizens Mutual (at not less than their current cash
compensation levels) until the earlier of (i) the date on which such employees
are offered employment with VIS'N or (ii) the first anniversary date of the
date of the Closing of the Merger. The employment of such employees may not be
terminated prior to such date, except for failure to meet reasonable performance
expectations consistent with their respective job descriptions, failure to
comply with applicable employment policies or misconduct. Kirk D. Simmons,
Vice President, Insurance Services of CSGI, is covered by this agreement.
Pursuant to the Merger Agreement, Meridian has agreed to offer 66 employees
of Citizens Mutual continued employment in Red Wing, Minnesota in their present
or similar capacities with Citizens Mutual (at not less than their current cash
compensation levels) until December 31, 1997. The employment of such employees
may not be terminated prior to such date, except for failure to meet reasonable
performance expectations consistent with their respective job descriptions,
failure to comply with applicable employment policies or misconduct. Jerald K.
Olson, Vice President, Peoples Services, of CSGI and Secretary of Citizens
Mutual, is covered by this agreement.
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Pursuant to the Merger Agreement, Meridian has agreed to offer three
employees of Citizens Mutual continued employment in Red Wing, Minnesota in
their present or similar capacities with Citizens Mutual (at not less than their
current cash compensation levels) until December 31, 1998. The employment of
such employees may not be terminated, except for failure to make reasonable
performance expectations consistent with their respective job descriptions,
failure to comply with applicable employment policies, or misconduct.
William J. Haaland, Vice President, Marketing of CSGI , Mary B. Plein, Vice
President, Financial Services and Treasurer of CSGI, and Bruce A. Tollefson,
Vice President, Product Services of CSGI, are covered by this agreement.
Pursuant to the Merger Agreement, Meridian has agreed that if any of four
employees of Citizens Mutual not covered by the agreements described above are
terminated on or after the date of the Closing, such terminated employees will
be offered a severance package. Supervisory employees will be offered their
then current salary and benefits for a period of eight weeks (plus an additional
week for each full year of service with Citizens Mutual as of the date of
termination of employment.) Non-supervisory employees will be offered their
then current salary and benefits for a period of four weeks (plus an additional
week for each full year of service with Citizens Mutual as of the date of
termination of employment).
All employment policies and benefit plans for continuing employees of
Citizens Mutual (except for the ESOP) will continue in effect until December 31,
1996. Effective January 1, 1997, all existing Citizens Mutual employee benefit
plans will be terminated or merged into or amended to be consistent with
Meridian employee benefit plans. For purposes of determining participation and
vesting (but not for purposes of calculating benefits) under the Meridian
employee benefit plans, each continuing employee of Citizens Mutual will be
credited with his or her length of service while employed by Citizens Mutual.
MERIDIAN DIRECTORSHIPS
The Merger Agreement provides for Mr. Scott S. Broughton to be elected to
the Board of Directors of Meridian after completion of the Merger. In addition,
Messrs. Scott S. Broughton and Haaland will continue to be directors of Citizens
Mutual after the Effective Date.
VIS'N
After the Effective Time, Messrs. Scott S. Broughton and Simmons will form
a new company, VIS'N, Inc. Messrs. Scott S. Broughton and Simmons will own __%
and __%, respectively, of the capital stock of VIS'N. VIS'N will be engaged in
the business of providing data processing, agency automation and claims
services to property and casualty insurance companies, including the Citizens
Companies. Prior to VIS'N commencing operations, Claims Solutions, Inc., a 51%
owned subsidiary of VIS'N, will acquire Adjusting Unlimited, Inc. (a company
which currently provides claims services to the Citizens Companies). In
addition, VIS'N will acquire certain assets, including certain assets from
Citizens Mutual. Such assets will be purchased by VIS'N at a price to be agreed
upon by VIS'N and Meridian. After commencement of operations, VIS'N will also
enter into certain agreements with Citizens Mutual, Citizens Fund and ICO
(collectively, the "Citizens Insurance Companies").
Pursuant to a Claims Administration Agreement (the "Claims Agreement")
among VIS'N and the Citizens Insurance Companies, VIS'N will perform claims
administration services for the Citizens Insurance Companies in connection
with all insurance policies issued or assumed by the Citizens Insurance
Companies, including processing and settling claims, making claim payments
and providing customer service in connection with claims. The Claims
Agreement will be effective until terminated by any of the parties thereto,
and each such party may terminate the Claims Agreement prior to the earlier
of a date three years after the Claims Agreement is executed or December 31,
1999 only for specified reasons. As compensation for its services under the
Claims Agreement, VIS'N will be entitled to a fee during the first year of
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the Claims Agreement of 5.1% of the greater of total premiums written by the
Citizens Insurance Companies or $45,000,000 (such greater amount being
referred to herein as the "Annual Premium Amount"). The fee will decrease to
4.75% of the Annual Premium Amount during the second year of the Claims
Agreement, and to 4.4% of the Annual Premium Amount during the third year.
VIS'N will also be entitled to 15% of funds obtained as the result of its
salvage and subrogation efforts, less its collection expenses and
administrative fees and less deductible recoveries made and issued to
policyholders. VIS'N is required to refund specified portions of such fees
under certain circumstances.
Pursuant to the Claims Agreement, each Citizens Insurance Company will
severally indemnify VIS'N against breach of the Claims Agreement by such
Citizens Insurance Company, certain acts or omissions of the Citizens Insurance
Company or its agents or employees, claims against VIS'N arising from its denial
of a claim (provided that VIS'N complies with certain standards concerning
denial of claims) or of a Citizens Insurance Company's denial of a claim.
Pursuant to the Claims Agreement, VIS'N will indemnify the Citizens Insurance
Companies against losses occurring from breaches by VIS'N of the Claims
Agreement or acts or omissions by VIS'N that fail to meet a specified standard
of care.
VIS'N and the Citizens Insurance Companies will also enter into a Software
and Hardware Support Agreement (the "Computer Support Agreement"), pursuant to
which VIS'N will provide technical support and software backup for the Citizens
Insurance Companies' computer system, and negotiate software and software
maintenance contracts, hardware and hardware maintenance contracts on their
behalf. VIS'N will also provide upgrades for the Citizens Insurance Companies'
computer system, and provide training with respect to enhancements of such
computer system.
As compensation for providing such services under the Computer Support
Agreement, VIS'N will be entitled to receive monthly fees of 1.667% of the
Annual Premium Amount during the first year of the Computer Support
Agreement, 1.567% of the Annual Premium Amount during the second year thereof
and 1.467% of Annual Premium Amount during the third year thereof.
The Computer Support Agreement will expire on the earlier of a date three
years after the effective date of the Computer Support Agreement or December 31,
1999. The Computer Support Agreement may be terminated at an earlier date under
certain circumstances, and may be extended by written agreement of the parties
thereto.
Pursuant to a Sublease Agreement (the "Sublease Agreement") among VIS'N,
Citizens Mutual and Citizens Mutual's landlord, VIS'N has agreed to sublease
certain office space from Citizens Mutual. The Sublease will commence on the
earlier of the effective date of the Claims Agreement or the Computer Support
Agreement, and will extend for 36 months thereafter (subject to earlier
termination upon one-year's notice by VIS'N or Citizens Mutual to the other
party). During the term of the Sublease Agreement, VIS'N will pay Citizens
Mutual on a monthly basis an amount equal to 28.6% of the current monthly rent
payable by Citizens Mutual under its lease with its landlord.
VIS'N and Citizens Mutual have also entered into an Office Equipment
Lease Agreement ("Equipment Lease Agreement") for a minimum term of 36
months. The office equipment to be leased under the Equipment Lease
Agreement will be agreed upon by the parties at a later date. Such equipment
will be leased at fair market rental value as determined in good faith by
VIS'N and Citizens Mutual prior to execution of the Equipment Lease Agreement.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Merger Agreement provides that Meridian shall, and shall cause the
Surviving Corporation to, honor the obligations of the Citizens Companies under
Minnesota and Ohio law and their respective Articles or Certificates of
Incorporation or Bylaws relating to indemnification of the present and former
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officers, directors, employees or agents of the Citizens Companies to full
extent permitted thereunder against losses, claims, damages or liabilities
arising out of actions or omissions occurring at or prior to the Effective Time.
Meridian has also agreed to use reasonable efforts to cause the Surviving
Corporation to maintain for the benefit of such persons for a period of five
years after the Merger officer's and director's liability insurance comparable
in scope and amount to the officers' and directors' insurance coverage
currently maintained by the Citizens Companies.
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THE MERGER AGREEMENT
The information under this caption is qualified in its entirety by
reference to the full text of the Merger Agreement, a copy of which is
attached as Exhibit A to this Proxy Statement.
GENERAL
The Company, Citizens Mutual and Meridian entered into the Merger Agreement
as of March 20, 1996. If the shareholders of the Company approve the Merger
Agreement, Merger Subsidiary will be merged with and into the Company, with the
result that the separate corporate existence of Merger Subsidiary will then
cease. The Company will be the Surviving Corporation and will be an indirect
wholly owned subsidiary of Meridian. At the Effective Time, the Common Stock
and Preferred Stock will be converted automatically into the right to receive
cash, as described below. See "--Consideration to be Received by Shareholders."
The shares of Common Stock will no longer be listed or traded on the Nasdaq
Small Cap Market, and the registration of the Common Stock under the Exchange
Act will be terminated.
EFFECTIVE TIME
If the Merger Agreement is adopted by the requisite vote of the Company's
shareholders, the Merger will be consummated and become effective at 11:59 p.m.
Minneapolis, Minnesota Time on a date as soon as practicable after conditions to
the Merger are satisfied (or waived to the extent permitted), or such other date
agreed on by the parties. It is currently contemplated that the Effective Time
will occur on or about July 31, 1996. There can be no assurance that all
conditions to the Merger will be satisfied. See "--Conditions to Consummation
of the Merger."
CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS
In connection with the Merger, each share of Common Stock outstanding
immediately prior to the Effective Time (other than Dissenting Shares) will be
converted into the right to receive $12.50 in cash, without interest, and each
share of Preferred Stock outstanding immediately prior to the Effective Time
will be converted into the right to receive $3.50 per share, without interest,
in each case subject to adjustment as discussed in the following paragraph (the
cash consideration to be paid to the Company's shareholders in the Merger being
sometimes referred to herein as the "Merger Consideration"). Dissenting Shares
will be converted to cash in the manner described under the caption "RIGHTS OF
DISSENTING SHAREHOLDERS."
The Merger Consideration is subject to reduction in the event that
"Transaction Costs" (as defined below) exceed $650,000. Transaction Costs are
defined in the Merger Agreement as expenses incurred by CSGI and Citizens Mutual
in connection with the Merger and the Affiliation, including, without
limitation, legal, accounting and financial advisory fees and expenses incident
to the negotiation and preparation of the Merger Agreement and to their
performance and compliance with the provisions thereof. In the event that the
Transaction Costs exceed $650,000, the consideration to be received by Company
shareholders will be adjusted such that (i) 85.1% of the Company's Transaction
Costs in excess of $650,000 will be subtracted from the total consideration to
be paid to holders of the Common Stock ($24,957,312) and (ii) 14.9% of such
excess Transaction Costs will be subtracted from the total consideration to be
paid to holders of the Preferred Stock ($4,375,000).
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PAYMENT FOR SHARES
Norwest Bank Minnesota, National Association (the "Exchange Agent") will
act as the exchange agent for payment of the Merger Consideration to the holders
of the Common Stock. Instructions with regard to the surrender of certificates
formerly representing shares of Common Stock, together with the letter of
transmittal to be used for that purpose, will be mailed to shareholders as soon
as practicable after the Effective Time. As soon as practicable following
receipt from the shareholder of a duly executed letter of transmittal, together
with certificates formerly representing Common Stock and any other items
specified by the letter of transmittal, the Exchange Agent will pay the Merger
Consideration to such shareholder, by check or draft.
After the Effective Time, the holder of a certificate formerly representing
Common Stock or Preferred Stock will cease to have any rights as a shareholder
of the Company, and such holder's sole right will be to receive the Merger
Consideration with respect to such shares (or, in the case of Dissenting Shares,
the statutorily determined "fair value"). If payment is to be made to a person
other than the person in whose name the surrendered certificate is registered,
it will be a condition of payment that the certificates so surrendered be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of such payment or establish to the satisfaction of the Surviving Corporation
that such taxes have been paid or are not applicable. No transfer of shares
outstanding immediately prior to the Effective Time will be made on the stock
transfer books of the Surviving Corporation after the Effective Time.
To the extent permitted by law, the appointment of the Exchange Agent may
be terminated at any time by Citizens after 12 months following the Effective
Time. Any portion of the Merger Consideration remaining undistributed upon
termination of the Exchange Agent's appointment will be returned to the
Surviving Corporation, and any holders of theretofore unsurrendered Common Stock
certificates may thereafter surrender to the Surviving Corporation such stock
certificates and (subject to abandoned property, escheat or similar laws)
receive in exchange therefor the Merger Consideration to which they are
entitled.
In no event will holders of shares of Common Stock or Preferred Stock be
entitled to receive payment of any interest on the Merger Consideration.
SHAREHOLDERS OF THE COMPANY SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO
THE EXCHANGE AGENT WITHOUT A LETTER OF TRANSMITTAL, AND SHOULD NOT RETURN THEIR
STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
OPERATIONS OF THE COMPANY AND CITIZENS MUTUAL PRIOR TO THE MERGER
The Company and Citizens Mutual have agreed that, prior to the Effective
Time, the business of the Citizens Companies will be conducted in accordance
with certain restrictions set forth in the Merger Agreement. Among other
things, the Company and Citizens Mutual have agreed that each of the Citizens
Companies will operate only in the ordinary course of business in substantially
the same manner as its business has historically been conducted, and none of the
Citizens Companies will do any of the following: (a) issue, sell or deliver any
shares of its capital stock (except for shares of Common Stock issuable upon
exercise of outstanding CSGI options) or issue or sell any securities
convertible into or exchangeable for, or options with respect to, or warrants
to purchase or rights to subscribe to any of its capital stock; (b) effect any
recapitalization, reclassification, stock dividend, stock split or similar
change in capitalization; (c) merge with or into, consolidate or otherwise
combine with, or acquire all or substantially all of the assets of, any other
entity (except as described in the following paragraph); (d) make any
commitments that extend beyond the date of the closing of the Merger in an
amount individually exceeding $25,000; (e) change any provision of its Articles
of Certificate of Incorporation or Bylaws or similar governing documents; (f)
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permit any material insurance policy naming it as a beneficiary or a loss
payable payee to be canceled or terminated or any of the coverage thereunder
to lapse unless simultaneously with such termination or cancellation
replacement policies reasonably satisfactory to Meridian are in full force
and effect; (g) enter into any material contract, lease or other agreement,
other than in the ordinary course of business, that extends by its terms
beyond the Effective Time; (h) amend or cancel or agree to the amendment or
cancellation of any reinsurance agreement, treaty or arrangement; (i) make
any material change in any accounting methods or practices; (j) effect any
increases in salary, bonuses or otherwise increase or enhance any employee or
officer compensation or benefits other than in the ordinary course of
business consistent with past practices, or make any employment commitments
to existing employees that extend by their terms beyond the Effective Time,
except such as are consistent with arrangements regarding employees otherwise
agreed to by Meridian pursuant to the Merger Agreement; or (k) enter into any
agreement or understanding to do any of the things described in clauses (a)
through (j) above.
In addition, the Company has agreed that, prior to the Effective Time, it
will not, without the prior written consent of Meridian, authorize or permit any
of its officers, directors, employees or agents to directly or indirectly
solicit, initiate or encourage any inquiries relating to, or the making of any
proposal that constitutes a "Takeover Proposal" (as defined below), or recommend
or endorse any Takeover Proposal, or participate in any discussions or
negotiations or provide third parties with any nonpublic information relating to
any such inquiry or proposal, or otherwise facilitate any effort or attempt to
make or implement a Takeover Proposal. Notwithstanding the foregoing, the
Company may, following prior written notice to Meridian, provide a third party
with nonpublic information or otherwise facilitate any offer or attempt by that
third party to make a Takeover Proposal, participate in discussions and
negotiations with that third party relating to any takeover proposal, and
recommend or endorse any Takeover Proposal with or by that third party if the
Board of Directors of the Company, after having consulted with and considered
the advice of outside counsel, has reasonably determined in good faith that it
is the fiduciary duty of such directors to do so. A Takeover Proposal is
defined in the Merger Agreement as a tender offer or proposal for a merger or
similar transaction involving any of the Citizens Companies or a proposal to
acquire a substantial equity interest in or a substantial portion of the assets
of any of the Citizens Companies.
CONDITIONS TO CONSUMMATION OF THE MERGER
The Merger will occur only if the Merger Agreement is approved and
adopted by the requisite votes of the holders of the Common Stock and
Preferred Stock, voting as separate classes. In addition, the Merger
Agreement and the reconstitution of the Board of Directors of Citizens Mutual
contemplated under the Merger Agreement (see "THE MERGER
PROPOSAL--Affiliation of Citizens Mutual with Meridian") must be approved by
the requisite vote of the policyholders of Citizens Mutual. Such approval by
Citizens Mutual's policyholders was obtained on June 27, 1995. Consummation
of the Merger also is subject to the satisfaction of certain other conditions
specified in the Merger Agreement, unless such conditions are waived (to the
extent such waiver is permitted by law). The failure of any such condition
to be satisfied, if not waived, would prevent consummation of the Merger.
The obligations of Meridian to consummate the Merger are subject to
satisfaction of, among others, the following conditions: (a) as of the time of
the closing of the Merger (the "Closing"), (i) there shall have been no material
breach by the Company or Citizens Mutual in the performance of any of their
covenants and agreements under the Merger Agreement; (ii) each of the
representations and warranties of the Company and Citizens Mutual contained in
the Merger Agreement shall have been true and correct as of the date of
execution of the Merger Agreement, and (iii) each of the representations and
warranties of the Company and Citizens Mutual contained in the Merger Agreement
shall be true and correct as of the date of the Closing (except for any
inaccuracies which, individually or in the aggregate, have not had a material
adverse affect on the business, financial condition and results of operations of
the Citizens Companies); (b) Meridian shall have received certificates from the
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corporate secretary of the Company and Citizens Mutual certifying as to, among
other things, the Articles and Certificates of Incorporation, Bylaws and
corporate existence of each of the Citizens Companies, and the adoption of
certain resolutions relating to the Merger; (c) Meridian shall have received
from the Company and Citizens Mutual a letter specifying the amount of the
Company's Transaction Costs; (d) the Dissenting Shares shall not constitute more
than 5% of the issued and outstanding shares of Common Stock at the Effective
Time; (e) all required approvals, authorizations and consents from governmental
and regulatory bodies shall have been obtained and the waiting period required
under the HSR Act, including any extensions thereof, shall have terminated or
expired; (f) all consents, permits and approvals from parties to material
contracts or other agreements with the Citizens Companies required in connection
with the Merger shall have been obtained; (g) the respective Boards of Directors
of the Citizens Companies shall have been reconstituted as provided in the
Merger Agreement; (h) each officer of each of the Citizens Companies shall have
tendered his or her resignation as an officer, effective as of the Effective
Time, and arrangements reasonably satisfactory to Meridian shall have been made
providing for the appointment of the Chief Executive Officer of Meridian as the
Chairman of the Board, President and Chief Executive Officer of certain of the
Citizens Companies; (i) certain of the Citizens Companies shall have entered
into a Reinsurance Pooling Agreement; (j) certain of the Citizens Companies
shall have entered into the Management Services Agreement; (k) since
December 31, 1995, there shall have been no material adverse change in the
business of the Citizens Companies (considered as a whole) or in the
consolidated results of operations or consolidated financial condition of either
the Company (considered as a whole) or Citizens Mutual (considered as a whole);
(l) Spencer A. Broughton shall have entered into the Consulting Services
Agreement, and Scott S. Broughton shall have entered into the Employment
Agreement; (m) Mr. Scott S. Broughton, Kirk D. Simmons, Meridian and Citizens
Mutual shall have entered into a letter agreement regarding VIS'N as provided in
the Merger Agreement; (n) the actions to be taken regarding the ESOP described
above under the caption "INTERESTS OF CERTAIN PERSONS IN THE MERGER--Employee
Stock Ownership Plan" shall have been taken; (o) Meridian shall have received
from counsel for CSGI and counsel for Citizens Mutual opinions, dated the date
of the Closing, in form and substance reasonably satisfactory to Meridian and
(p) the fairness opinion Meridian received from the investment banking firm of
McDonald & Company Securities, Inc., to the effect that the consideration to be
paid by Meridian to the shareholders of CSGI pursuant to the Merger is fair
from a financial point of view to the shareholders of Meridian, shall have been
updated to the time of Closing.
The obligations of Company and Citizens Mutual to consummate the Merger are
subject to satisfaction of the following conditions, among others: (a) as of
the time of the Closing, (i) there shall have been no material breach by
Meridian in the performance of any of its covenants under the Merger Agreement,
(ii) each of the representations and warranties of Meridian contained in the
Merger Agreement shall have been true and correct as of the date of the
execution of the Merger Agreement, and (iii) each of the representations and
warranties of Meridian contained in the Merger Agreement shall be materially
true and correct as of the date of the Closing as though made on and as of such
date; (b) Citizens and Citizens Mutual shall have received certificates from the
corporate secretary or assistant corporate secretary of Meridian and Merger
Subsidiary, certifying as to, among other things, the Articles of Incorporation,
Bylaws and corporate existence of Meridian and Merger Subsidiary and the
adoption of certain resolutions relating to the Merger; (c) all approvals,
authorizations and consents from governmental and regulatory bodies required for
the transactions contemplated by the Merger Agreement shall have been obtained;
(d) the waiting period required under the HSR Act, including any extension
thereof, shall have terminated or expired prior to the time of the Closing; (e)
arrangements reasonably satisfactory to the Company and Citizens Mutual shall
have been made providing (i) for the Boards of Directors of each of the Citizens
Subsidiaries to include the current President and the current Vice President,
Marketing of the Company, (ii) for the Board of Directors of Citizens Mutual to
include the current President and the current Vice President, Marketing of
Citizens Mutual, and (iii) for the Board of Directors of Meridian to include the
current President of the Company, in each case as of immediately following the
Effective Time; (f) all consents, permits and approvals from parties to
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material contracts or other material agreements with Meridian and its affiliates
required in connection with the Merger shall have been obtained; (g) Meridian
Mutual and Meridian Security shall have entered into the Reinsurance Pooling
Agreement; (h) Meridian, Meridian Mutual and Meridian Security shall have
entered into the Management Services Agreement; (i) Meridian shall have entered
into the Consulting Services Agreement with Mr. Spencer A. Broughton and the
Employment Agreement with Mr. Scott S. Broughton; (j) Meridian shall have
provided a letter or letters to certain employees of Citizens Mutual regarding
their continued employment, as discussed above under the caption "INTERESTS OF
CERTAIN PERSONS IN THE MERGER--Employment Arrangements and Employee Benefits";
(k) Messrs. Scott S. Broughton and Simmons, Meridian and Citizens Mutual shall
have entered into a letter agreement regarding VIS'N as provided in the Merger
Agreement; (l) since December 31, 1995, there shall have been no material
adverse change in the business, results of operations or financial condition of
the Meridian Companies (considered as a whole); (m) the Company and Citizens
Mutual shall have received from counsel for Meridian an opinion, dated the date
of the Closing, in form and substance reasonably satisfactory to the Company and
Citizens Mutual; (n) the fairness opinion the Company has received from GAHS, to
the effect that the Merger Consideration to be received by the holders of its
Common Stock and Preferred Stock in the Merger is fair to such holders from a
financial point of view, shall have been updated to the date of the Closing;
and (o) the ESOP loan shall have been repaid.
POST-CLOSING COVENANTS
The parties to the Merger Agreement have agreed to certain post-closing
covenants. Meridian has agreed that it will cause Citizens Mutual to continue
to operate under its present name and will cause Citizens Mutual and the
Citizens Subsidiaries to continue to maintain substantial business operations
and employment in the Red Wing, Minnesota, area through at least December 31,
1999. Meridian will also maintain the existing rights of Citizens Companies
employees, officers, directors and agents to indemnification and reimbursement
or advancement of expenses for a period of at least five years after the
Effective Date and will, for a period of five years from the Effective Time,
use good faith efforts to provide certain directors' and officers' liability
insurance to the present and former officers and directors of each of the
Citizens Companies. See "INTERESTS OF CERTAIN PERSONS IN THE
MERGER--Indemnification of Officers and Directors."
Meridian has agreed to offer certain employees of the Company and Citizens
Mutual continued employment until the earlier of the first anniversary of the
closing or such date as those employees are offered employment by VIS'N. See
"INTERESTS OF CERTAIN PERSONS IN THE MERGER--Employment Arrangements and
Employee Benefits." Certain other employees will be offered continued
employment until either December 31, 1997 or December 31, 1998. In the event
that certain other employees are terminated on or after the date of the Closing,
Meridian will offer such employees severance packages. Supervisory employees
will be offered their then current salary and benefits for a period of eight
weeks, plus an additional week for each full year of service with Citizens
Mutual. Nonsupervisory employees will be offered their then current salary and
benefits for a period of four weeks, plus an additional week for each full year
of service with Citizens Mutual. Meridian will keep all employment policies and
benefit plans for continuing Citizens Mutual employees in place until December
31, 1996. Thereafter, all existing Citizens Mutual employee benefit plans will
be terminated or merged with Meridian plans and all other Citizens Mutual
employment policies will be changed to be consistent with Meridian's policies.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the filing of Articles of Merger with the Minnesota Secretary of State
whether before or after action by the Company's shareholders and without further
approval by the Company's shareholders under the following circumstances:
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(a) by mutual written consent of the Company, Citizens Mutual and
Meridian; or
(b) by the Company and Citizens Mutual, upon written notice to
Meridian if Company shareholders do not approve the Merger; or
(c) by the Company and Citizens Mutual, or by Meridian, if the
Minnesota Department of Commerce fails by September 30, 1996, to approve
the Merger or any material transactions thereto for which consent of the
Minnesota Department of Commerce is required; or
(d) by Meridian, in the event of a failure of a condition to
Meridian's obligation to close; or
(e) by the Company and Citizens Mutual, in the event of a failure of
a condition to their obligation to close; or
(f) by Meridian or by the Company and Citizens Mutual if the Merger
is not consummated by September 30, 1996.
TERMINATION FEE
The Merger Agreement requires the Company to pay Meridian a termination fee
of $586,646 plus costs and expenses incurred by Meridian and its affiliated
companies in connection with the Merger and the Affiliation if the parties fail
to consummate the Merger and (i) the Merger Agreement has not been terminated by
the mutual written consent of the parties, (ii) Meridian has complied with all
its obligations under the Merger Agreement, and (iii) the Company enters into a
letter of intent, commitment letter or other written agreement with a third
party regarding a merger, consolidation or sale of assets involving the Company
or Citizens Mutual prior to January 1, 1997.
If the parties fail to consummate the Merger and (i) such failure is not
the result of mutual written agreement of the parties, (ii) Meridian has
complied with all of its obligations under the Merger Agreement and (iii) the
Merger is not approved by the Minnesota Department of Commerce because of the
amount of the Merger Consideration, Citizens Mutual does not vote its shares in
favor of the Merger, or the Software Agreement dated March 21, 1996 between
Citizens Mutual and Michael L. Halvorson, a former officer of the Company, shall
not have remained in effect, then the Company is required to reimburse
Meridian for all costs and expenses incurred by Meridian in connection with the
Merger and the Affiliation. The termination fee and the reimbursement of
Transaction Costs is the sole and exclusive remedy of Meridian upon any such
termination of the Acquisition Agreement.
REGULATORY APPROVALS
APPROVALS OF STATE INSURANCE REGULATORY AUTHORITIES
Under Chapter 60D.17 of the Minnesota Statutes and related regulations, the
acquisition of control of a Minnesota domestic insurer must receive prior
approval by the Minnesota Commissioner of Commerce (the "Commissioner"). The
statute provides that the transaction will be approved unless the Commissioner
finds that the transaction is not in the interest of policyholders or the
insurance buying public. Protection of shareholders is not a criterion of the
Commissioner's review of change of control transactions. An application for
approval of the acquisition of control resulting from the Merger and the
Affiliation was submitted to the Commissioner by Meridian on April 19, 1996. In
addition to such filings, information must be submitted to the Commissioner in
connection with the Commissioner's approval of the Reinsurance Pooling
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Agreement and the Management Services Agreement. These filings were made
with the Commissioner on April 22, 1996. Pursuant to an order dated June 25,
1996, the Commissioner approved the Merger and the affiliation as well as the
Reinsurance Pooling Agreement and the Management Services Agreement.
Certain filings are required to be made with, and approvals obtained from
insurance regulatory authorities in, the states of Ohio and Indiana in
connection with the Merger, the Affiliation, the Reinsurance Pooling Agreement
and Management Services Agreement. Such insurance regulatory authorities have
approved or agreed not to raise objection to the transactions described in
these filings.
There can be no assurance that state insurance regulatory authorities will
approve the matters required for the Merger, the Affiliation and the agreements
contemplated thereby, or as to the date of such approvals.
HSR ACT FILINGS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules promulgated thereunder by the Federal Trade Commission (the "FTC"),
certain acquisition transactions may not be consummated unless notice has been
given and certain information has been furnished to the Antitrust Division of
the United States Department of Justice (the "Antitrust Division") and the FTC
and certain waiting period requirements have been satisfied. The Merger is
subject to these requirements.
The Company and Meridian each filed with the Antitrust Division and the FTC
a Notification and Report Form with respect to the Merger on May 1, 1996. Under
the HSR Act, the Merger may not be consummated until the expiration of a waiting
period of at least 30 days following the receipt of each filing, unless the
waiting period is earlier terminated by the FTC and the Antitrust Division or
unless the waiting period is extended by a request for additional
information. On May 16, 1996, the FTC and the Antitrust Division notified
the Company that it had been granted early termination of such waiting period.
State Attorneys General and private parties may also bring legal actions
under the federal or state antitrust laws under certain circumstances. There
can be no assurance that a challenge to the proposed Merger on antitrust
grounds will not be made or of the result if such a challenge is made.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting
under which the total consideration paid in the Merger will be allocated among
the Surviving Corporation's consolidated assets and liabilities based on the
fair values of the assets acquired and liabilities assumed.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under currently existing provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the treasury regulations promulgated thereunder,
applicable judicial decisions and administrative rulings, all of which are
subject to change, the federal income tax consequences described below are
expected to arise in connection with the Merger. Due to the complexity of the
Code, the following discussion is limited to the material federal income tax
aspects of the Merger for a CSGI shareholder who is a citizen or resident of
the United States and who, as of the Effective Time, holds shares of Common
Stock as a capital asset. The general tax principles discussed below are
subject to retroactive changes that may result from subsequent amendments to
the Code. The following discussion does not address potential foreign, state,
local and other tax consequences, nor does it address taxpayers subject to
special treatment under the federal income tax laws, such as insurance
companies, including Citizens Mutual, the holder of all of the outstanding
shares of Preferred Stock, tax-exempt organizations, S corporations and
taxpayers subject to the alternative minimum tax. In addition,
the following discussion may not apply to Company shareholders who acquired
their shares upon the exercise of employee stock options or otherwise as
compensation. Neither the Company nor Meridian has requested either the
Internal Revenue Service or counsel to rule or issue an opinion on the federal
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income tax consequences of the Merger. ALL SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES OF THE DISPOSITION OF THEIR SHARES IN THE MERGER.
For federal income tax purposes, the Merger will be treated as a taxable
sale or exchange of shares of Common Stock for cash by each holder of such
shares (including any holder of Dissenting Shares). Accordingly, the federal
income tax consequences to the holders of Common Stock will generally be as
follows:
(a) Assuming that the shares of Common Stock exchanged by a CSGI
shareholder for cash in connection with the Merger are capital assets in the
hands of the shareholder at the Effective Time, such shareholder may recognize
a capital gain or loss by reason of the consummation of the Merger.
(b) The capital gain or loss, if any, will be long-term with respect to
shares of Common Stock held for more than 12 months as of the Effective Time
and short-term with respect to such shares held for 12 months or less as of the
Effective Time.
(c) The amount of capital gain or loss to be recognized by each holder of
Common Stock will be measured by the difference between the amount of cash
received by such shareholder in connection with the Merger (including cash
received for Dissenting Shares) and such shareholder's tax basis in the Common
Stock at the Effective Time.
Because all "incentive stock options" (within the meaning of Section 422
of the Code) issued to employees of Citizens Mutual have been or will be
exercised within one year prior to the Effective Time, the holders of such
stock options will incur ordinary income by reason of consummation of the
Merger. All nonemployee director options are non-incentive stock options with
respect to which ordinary income has been or will be recognized upon
exercise. As of the Effective Time, holders of such nonemployee director
stock options may recognize short-term capital gain by reason of consummation
of the Merger.
Cash payments made pursuant to the Merger (including any cash paid to
holders of Dissenting Shares) will be reported to the extent required by the
Code to shareholders of the Company and the Internal Revenue Service. Such
amounts will ordinarily not be subject to withholding of federal income tax.
However, backup withholding of such tax at a rate of 31% may apply to certain
shareholders by reason of the events specified in Section 3406 of the Code and
the treasury regulations promulgated thereunder, which include failure of a
shareholder to supply the Company or its agent with such shareholder's taxpayer
identification number. Accordingly, Company shareholders will be asked to
provide the shareholder's correct taxpayer identification number on a Substitute
Form W-9 which is to be included in the letter of transmittal to be sent to
shareholders relating to their shares of Common Stock. Withholding may also
apply to Company shareholders who are otherwise exempt from such withholding,
such as a foreign person, if such person fails to properly document its status
as an exempt recipient.
RIGHTS OF DISSENTING SHAREHOLDERS
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act
(the "MBCA") provide to each shareholder the right to dissent from, and
obtain payment for the "fair value" of such shareholder's shares in the event
of, the Merger.
The following summary of the applicable provisions of Sections 302A.471 and
302A.473 of the MBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to such sections, the
full texts of which are attached as Exhibit C to this Proxy Statement. These
sections should be reviewed carefully by any shareholder who wishes to exercise
dissenters' rights or who wishes to preserve the right to do so, since failure
to comply with the procedures set forth herein or therein will result in the
loss of dissenters' rights.
Under the MBCA, holders of Common Stock will have the right, by fully
complying with applicable provisions of Sections 302A.471 and 302A.473, to
dissent with respect to the Merger and to receive from the Surviving
Corporation payment in cash of the "fair value" of their shares of Common
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Stock after the Merger is completed. The term "fair value" means the value
of the shares of Common Stock immediately before the Effective Time.
All references in Sections 302A.471 and 302A.473 and in this summary to a
"shareholder" are to the record holder of the shares of Common Stock as to which
rights are asserted. A person having beneficial ownership of shares of Common
Stock that are held of record in the name of another person, such as a broker,
nominee, trustee or custodian, must act promptly to cause the record holder to
follow the steps summarized below properly and in a timely manner in order to
perfect whatever dissenters' rights the beneficial owner may have.
Shareholders of record who desire to exercise their dissenters' rights must
satisfy all of the following conditions. A written notice of intent to demand
fair value for shares must be delivered to the executive offices of the Company
before the taking of the shareholder vote on the Merger. This written demand
must be in addition to and separate from any proxy or vote against the Merger.
Voting against, abstaining from voting or failing to vote on the Merger will not
constitute a demand for appraisal within the meaning of the MBCA.
Shareholders electing to exercise their dissenters' rights under the MBCA
must not vote for adoption of the Merger. A shareholder's failure to vote
against the Merger will not constitute a waiver of dissenters' rights. However,
if a shareholder returns a signed proxy but does not specify a vote against
adoption of the Merger or direction to abstain, the proxy will be voted for
adoption of the Merger, which will have the effect of waiving that
shareholder's dissenters' rights.
A shareholder of the Company may not assert dissenters' rights as to less
than all of the shares registered in such holder's name except where certain
shares are beneficially owned by another person but registered in such holder's
name. If a record owner, such as a broker, nominee, trustee or custodian,
wishes to dissent with respect to shares beneficially owned by another person,
such shareholder must dissent with respect to all of such shares and must
disclose the name and address of the beneficial owner on whose behalf the
dissent is made. A beneficial owner of shares of Common Stock who is not the
record owner may assert dissenters' rights as to shares held on such person's
behalf, provided that such beneficial owner submits a written consent of the
record owner to the Company at or before time such rights are asserted.
A shareholder who elects to exercise dissenters' rights must send his or
her written demand, before the taking of the vote on the Merger, to the
Secretary of the Company, 406 Main Street, Red Wing, Minnesota 55066. The
written demand should specify the shareholder's name and mailing address, the
number of shares owned and that the shareholder intends to demand the value of
his or her shares.
After approval of the Merger by the shareholders at the Special Meeting,
the Surviving Corporation will send a written notice to each shareholder who
filed a written demand for dissenters' rights. The notice will contain the
address to which the shareholder shall send a demand for payment and the stock
certificates in order to obtain payment and the date by which they must be
received, a form to be used in connection therewith and other related
information.
In order to receive fair value for his or her shares, a dissenting
shareholder must, within 30 days after the date such notice was given, send his
or her stock certificates, and all other information specified in the notice
from the Surviving Corporation, to the address specified in such notice. A
dissenting shareholder will retain all rights as a shareholder until the
Effective Time. After a valid demand for payment the related stock certificates
and other information are received, or after the Effective Time, whichever is
later, the Company will remit to each dissenting shareholder who has complied
with statutory requirements the amount Citizens estimates to be the fair value
of such shareholder's shares, with interest commencing five days after the
Effective Time at a rate prescribed by statute. Remittance will be accompanied
by the Company's closing balance sheet and statement of income for a fiscal
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year ending not more than 16 months before the Effective Time, together with
the latest available interim financial data, an estimate of the fair value of
the shareholder's shares and a brief description of the method used to reach
the estimate, a brief description of the procedure to be follower demanding
supplemental payment and copies of Sections 302A.471 and 302A.473 of the MBCA.
If the dissenting shareholder believes that the amount remitted by the
Surviving Corporation is less than the fair value of such holder's shares, plus
interest, the shareholder may give written notice to the Surviving Corporation
of such holder's own estimate of the fair value of the shares, plus interest,
within 30 days after the mailing date of the remittance and demand payment of
the difference. Such notice must be given at the Company's executive offices at
the address set forth above. A shareholder who fails to give such written
notice within this time period is entitled only to the amount remitted by the
Surviving Corporation.
Within 60 days after receipt of a demand for supplemental payment, the
Surviving Corporation must either pay the shareholder the amount demanded or
agreed to by such shareholder after discussion with the Surviving Corporation or
petition a court for the determination of the fair value of the shares, plus
interest. The petition shall name as parties all shareholders who have demanded
supplemental payment and have not reached an agreement with the Surviving
Corporation. The court, after determining that the shareholder or shareholders
in question have complied with all statutory requirements, may use any valuation
method or combination of methods it deems appropriate to use, whether or not
used by the Surviving Corporation or the dissenting shareholder, and may appoint
appraisers to recommend the amount of the fair value of the shares. The court's
determination will be binding on all shareholders of the Company who properly
exercised dissenters' rights and did not agree with the Company as to me fair
value of the shares. Dissenting shareholders are entitled to judgment for the
amount by which the court-determined fair value per share, plus interest,
exceeds the amount per share, plus interest, remitted to the shareholders by the
Surviving Corporation. The shareholders shall not be liable to the Surviving
Corporation for any amounts paid by the Surviving Corporation which exceed the
fair value of the shares as determined by the court, plus interest. The costs
and expenses of such a proceeding, including the expenses and compensation of
any appraisers, will be determined by the court and assessed against the
Surviving Corporation, except that the court may, in its discretion, assess part
or all of those costs and expenses against any shareholder whose action in
demanding supplemental payment is found to be arbitrary, vexatious or not in
good faith. The court may award fees and expenses to an attorney for the
dissenting shareholders out of the amount, if any, awarded to such shareholders.
Fees and expenses of experts or attorneys may also be assessed against any
person who acted arbitrarily, vexatiously or not in good faith in bringing the
proceeding.
The Company may withhold the remittance of the estimated fair value, plus
interest, for any shares owned by any person who was not a shareholder or who is
dissenting on behalf of a person who was not a beneficial owner on February 8,
1996, the date on which the proposed Merger was first announced to the public
(the "Public Announcement Date"). The Company will forward to any such
dissenting shareholder who has complied with all requirements in exercising
dissenters' rights the notice and all other materials sent after shareholder
approval of the Merger to all shareholders who have properly exercised
dissenters' rights, together with a statement of the reason for withholding the
remittance and an offer to pay the dissenting shareholder the amount listed in
the materials if the shareholder agrees to accept that amount in full
satisfaction. The shareholder may decline this offer and demand payment by
following the same procedure as that described for demand of supplemental
payment by shareholders who owned their shares as of the Public Announcement
Date. Any shareholder who did not own shares on the Public Announcement Date
and who fails properly to demand payment will be entitled only to the amount
offered by the Company. Upon proper demand by any such shareholder, rules and
procedures applicable in connection with receipt by the Company of the demand
for supplemental payment given by a dissenting shareholder who owned shares on
the Public Announcement Date will also apply to any shareholder properly giving
a demand but who did not own shares of record or beneficially on the Public
Announcement Date, except that any such shareholder is not entitled to receive
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any remittance from the Company until the fair value of the shares, plus
interest, has been determined pursuant to such rules and procedures.
Shareholders considering exercising dissenters' rights should bear in mind
that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the consideration they would receive pursuant to the
Merger Agreement if they do not seek appraisal of their shares, and that the
opinion of any investment banking firm as to fairness, from a financial point
of view, is not an opinion as to fair value under Sections 302A.471 and
302A.473.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
ANY HOLDER WHO FAILS TO COMPLY FULLY WITH THE STATUTORY PROCEDURE
SUMMARIZED ABOVE WILL FORFEIT HIS OR HER RIGHTS OF DISSENT AND WILL RECEIVE THE
MERGER CONSIDERATION FOR HIS OR HER SHARES. See Exhibit C.
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STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding ownership of Company's
voting securities as of June 25, 1996 by each person beneficially owning at
least 5% of such securities, each director of the Company, by each of the
executive officers of the Company who received in excess of $100,000 of cash
compensation from the Company in fiscal 1996, and by all executive officers and
directors as a group.
<TABLE>
<CAPTION>
Amount and
Class of Shares Percent Percent of
Name and Address Beneficially of Total Voting
of Beneficial Owners(2) Owned(1)(2) Class Securities
- ------------------------------------------ --------------- ------- ------------
<S> <C> <C> <C>
Citizens Security 1,250,000 100.0% 38.5%
Mutual Insurance Company Preferred
406 Main Street Stock
Red Wing, Minnesota 55066
Citizens Security 337,500 16.9 10.4
Mutual Insurance Company
Citizens Security 340,876(3) 17.1 10.5
Employee Stock Ownership Plan
c/o National City Bank of Minneapolis
75 South Fifth Street
Minneapolis, Minnesota 55402
Citizens Security Mutual Insurance Company 134,389(4) 6.7 4.1
401(K) Plan
c/o Frontier Trust
3100 13th Avenue South
Fargo, North Dakota 58106
Spencer A. Broughton 143,341(5) 7.2 4.4
406 Main Street
Red Wing, Minnesota 55066
Scott S. Broughton 84,109(6) 4.2 2.6
Terry A. Lynner 21,260(7) 1.1 *
R. Scott Jones 15,100(7) * *
William C. Ferril 12,500(7) * *
S. B. Foot, III 12,500(7) * *
David A. Cairns 8,000(8) * *
All executive officers and directors 427,849(9) 21.9 13.4
as a group (12 persons)
</TABLE>
____________
* Less than one percent
(1) Unless otherwise indicated, each person has sole voting and investment
power with respect to all shares of Common Stock and Preferred Stock.
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<PAGE>
(2) Unless otherwise indicated, each person's ownership noted in the table
relates to ownership of Common Stock.
(3) Shares allocated to the accounts of executive officers and reported as
owned by the ESOP are also reported as beneficially owned by such executive
officers. The shares of Common Stock owned by the ESOP are held by
National City Bank of Minneapolis, as trustee of the ESOP (the "ESOP
Trustee"). Although the ESOP is required to invest primarily in the Common
Stock of the Company, certain investment control is retained by the
committee that administers the ESOP, which is composed of Scott S.
Broughton, President, Chief Operating Officer and Chief Financial Officer
of the Company, and Gloria J. Reeck, an employee of Citizens Mutual. The
shares held by the ESOP that are allocated to participants are voted by the
ESOP Trustee in the manner directed by the participants, and the
unallocated shares are voted by the ESOP Trustee in the same proportion as
the allocated shares.
(4) Shares reported as owned by the Company Mutual 401(K) Plan (the "Savings
Plan") that are held in the accounts of executive officers of the Company
are also reported as beneficially owned by such executive officers. The
shares of Common Stock owned by the Savings Plan are held by Frontier
Trust, as trustee of the Savings Plan. The shares in the Savings Plan are
voted by such Trustee in the manner directed by the participants.
(5) Includes (a) 82,700 shares held in trust under the Savings Plan, (b) 10,661
shares held in trust under the ESOP and (c) 50,000 shares that may be
purchased under currently exercisable options or options that will become
exercisable on or before the Effective Date.
(6) Includes (a) 8,116 shares held in trust under the Savings Plan, (b) 8,693
shares held in trust under the ESOP and (c) 65,000 shares that may be
purchased under currently exercisable options or options that will become
exercisable on or before the Effective Date.
(7) Includes 8,000 shares that may be purchased under currently exercisable
options.
(8) Includes 2,000 shares that may be purchased under currently exercisable
options.
(9) Includes (a) 102,802 shares held in trust under the Savings Plan, (b)
38,013 shares held in trust under the ESOP for the benefits of certain
officers of the Company, and (c) 249,000 shares that may be purchased under
currently exercisable options or options that will become exercisable on or
before the Effective Date.
SHAREHOLDER PROPOSALS
In the event the Merger is not consummated for any reason, proposals of
shareholders intended to be presented at the 1997 annual meeting of shareholders
must be received by the Company at its principal executive offices not later
than ________ for inclusion in the Company's proxy statement and form of proxy
relating to that meeting. Shareholders should mail any proposals by certified
mail return receipt requested.
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<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1995, December 31, 1994, and December 31, 1993, and for each of the years in the
three-year period ended December 31, 1995, incorporated by reference in this
Proxy Statement, have been audited by KPMG Peat Marwick LLP, independent public
accountants.
A representative of KPMG Peat Marwick LLP will be at the Special Meeting to
answer questions by shareholders and will have the opportunity to make a
statement if so desired.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copies made at the Public Reference Room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the
Commission's regional offices at Seven World Trade Center, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Section of Commission at its Washington address at prescribed
rates.
INFORMATION INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1995 and its Quarterly Reports on Form 10-Q for the quarter ended March 31,
1996, as filed by the Company with the Commission (Commission File No. 15421),
are incorporated by reference into this Proxy Statement.
All documents filed by the Company pursuant to sections 13(a), 13(c), 14 or
15(d) or the Exchange Act after the date of this Proxy Statement and prior to
the date of the Special Meeting shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents.
Copies of the documents (without exhibits) incorporated by reference in this
Proxy Statement are available without charge upon written or oral request from
Mary B. Plein, Vice President, Financial Services and Treasurer, Citizens
Security Group Inc., 406 Main Street, Red Wing, Minnesota 55066 (telephone
(612) 388-7171, extension 255).
By Order of the Board of Directors
Jay L. Swanson
Secretary
Red Wing, Minnesota
July 8, 1996
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Exhibit A
ACQUISITION AND AFFILIATION AGREEMENT
This ACQUISITION AND AFFILIATION AGREEMENT ("Agreement") is made and
entered into as of March 20, 1996, by and among CITIZENS SECURITY GROUP INC.
("Citizens"), a business corporation organized under the laws of the State of
Minnesota, whose office and principal place of business is located at 406 Main
Street, Red Wing, Minnesota 55066, CITIZENS SECURITY MUTUAL INSURANCE COMPANY
("Citizens Mutual"), a mutual insurance company organized under the laws of the
State of Minnesota, whose office and principal place of business is located at
406 Main Street, Red Wing, Minnesota 55066, and MERIDIAN INSURANCE GROUP, INC.
("Meridian"), a business corporation organized under the laws of the State of
Indiana, whose office and principal place of business is located at 2955 North
Meridian Street, Indianapolis, Indiana 46208.
RECITALS
A. Citizens is a publicly-held insurance holding company. Citizens
directly owns all of the issued and outstanding shares of capital stock of
Citizens Fund Insurance Company ("Citizens Fund"), a stock insurance company
organized under the laws of the State of Minnesota, whose office and principal
place of business is located at 406 Main Street, Red Wing, Minnesota 55066, and
all of the issued and outstanding shares of capital stock of Insurance Company
of Ohio ("Citizens Ohio"), a stock insurance company organized under the laws of
the State of Ohio, whose office and principal place of business is located at
406 Main Street, Red Wing, Minnesota 55066. (Citizens Fund and Citizens Ohio
are sometimes referred to herein as the "Citizens Subsidiaries.") Citizens was
A-1
<PAGE>
organized by Citizens Mutual, which presently owns approximately 20% of the
issued and outstanding shares of Citizens Common Stock (as defined in Section
2.3) and all of the issued and outstanding shares of Citizens Preferred Stock
(as defined in Section 2.3). Citizens Mutual also owns all of the issued and
outstanding shares of capital stock of Mississippi Valley Corporation
("Mississippi Valley"), a business corporation organized under the laws of
the State of Minnesota, whose office and principal place of business is
located at 406 Main Street, Red Wing, Minnesota 55066. (Citizens Mutual,
Citizens, Citizens Fund, Citizens Ohio and Mississippi Valley are
collectively referred to herein as the "Citizens Companies.")
B. Citizens Mutual, Citizens Fund and Citizens Ohio (collectively, the
"Citizens Insurance Companies") are jointly operated and managed under a
management services agreement and a reinsurance pooling agreement.
C. Meridian is a publicly-held insurance holding company. Meridian
directly owns all of the issued and outstanding shares of capital stock of
Meridian Security Insurance Company ("Meridian Security"), a stock insurance
company organized under the laws of the State of Indiana, whose office and
principal place of business is located at 2955 North Meridian Street,
Indianapolis, Indiana 46208. Meridian was organized by Meridian Mutual
Insurance Company ("Meridian Mutual"), a mutual insurance company organized
under the laws of the State of Indiana, whose office and principal place of
business is located at 2955 North Meridian Street, Indianapolis, Indiana 46208;
Meridian Mutual presently owns approximately 47% of the issued and outstanding
shares of common stock of Meridian. Meridian, Meridian Security and Meridian
Mutual (such companies are collectively referred to herein as the "Meridian
A-2
<PAGE>
Companies") are jointly operated and managed under a reinsurance pooling
agreement and shared management services arrangements.
D. The parties to this Agreement entered into a non-binding letter of
intent (the "Letter of Intent") dated January 29, 1996 and accepted by Citizens
and Citizens Mutual on February 1, 1996.
E. In order to consummate the acquisition of Citizens by Meridian as
contemplated by the Letter of Intent and this Agreement, Meridian will cause a
corporation to be formed under the laws of the State of Minnesota ("Merger
Company"). All of the issued and outstanding capital stock of Merger Company
will be owned by Meridian or by Meridian Security.
F. The Boards of Directors of Citizens, Citizens Mutual, Meridian and
Meridian Mutual have determined that it is in the best interest of their
respective corporations that Citizens be acquired by Meridian pursuant to the
merger of Merger Company with and into Citizens (the "Merger"), and the Boards
of Directors of Citizens Mutual, Meridian and Meridian Mutual have determined
that it would be in the best interests of their respective corporations that
Citizens Mutual become affiliated with Meridian, all upon and subject to the
terms and conditions of this Agreement.
G. Citizens, Citizens Mutual and Meridian desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated by the Letter of Intent and this Agreement and to
prescribe various conditions precedent to the transactions contemplated hereby.
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<PAGE>
AGREEMENT
In consideration of the foregoing and the mutual representations,
warranties, covenants and agreements herein set forth, the parties to this
Agreement hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. MERGER. Subject to the terms and conditions of this
Agreement and the Plan of Merger substantially in the form attached hereto as
Exhibit A (the "Plan of Merger"), at the Effective Time (as defined in Section
1.2) Merger Company shall merge with and into Citizens in accordance with the
applicable laws of the State of Minnesota and the separate existence of Merger
Company shall cease (except insofar as continued by applicable law). Articles
of Merger, with the Plan of Merger attached, shall be filed with the Secretary
of State of the State of Minnesota in connection with the closing of the Merger
and other transactions contemplated by this Agreement (the "Closing").
SECTION 1.2. EFFECTIVE TIME OF THE MERGER AND CLOSING . Unless otherwise
agreed by the parties or otherwise provided by law, the Merger shall become
effective at 11:59 p.m., Eastern Standard Time, on a date as soon as practicable
after the conditions to the Merger pursuant to Articles VI and VII are satisfied
or waived, or such other date as the parties may agree (the "Effective Time").
The parties anticipate that the Effective Time will be on or about June 30,
1996. The Closing shall take place at the offices of Meridian, or such other
place as the parties may agree.
A-4
<PAGE>
SECTION 1.3. CONVERSION OF CITIZENS' SHARES. (a) At the Effective Time of
the Merger, the shares of Citizens Common Stock and Citizens Preferred Stock
issued and outstanding immediately prior to the Effective Time, and all rights
with respect thereto, shall by reason of the Merger and without any further
action on the part of the holders thereof, be cancelled and converted into
rights to receive cash (except for Dissenting Shares, as defined in Section
1.3(f)), as follows:
(i) CITIZENS COMMON STOCK. The holders of Citizens Common Stock shall
be entitled to receive, for each share held, an amount of cash equal
to the portion of the "Final Common Stock Merger Price" (as
hereinafter defined) which bears the same proportion to the total
Final Common Stock Merger Price as one share of Citizens Common
Stock bears to all issued and outstanding shares of Citizens Common
Stock as of the Effective Time. The term "Final Common Stock Merger
Price" as used in this Agreement means: $24,957,312, less 85.1% of
the Transaction Costs Adjustment, if any, as that term is defined in
Section 10.2.
(ii) CITIZENS PREFERRED STOCK. Citizens Mutual, as the holder of all of
the issued and outstanding shares of Citizens Preferred Stock, shall
be entitled to receive for all of such shares, an amount of cash
equal to: $4,375,000, less 14.9% of the Transaction Costs
Adjustment, if any, as that term is defined in Section 10.2.
No Dissenting Shares shall be converted into or represent a right to receive
cash. Dissenting Shares shall be subject to the provisions of Section 1.3(f).
A-5
<PAGE>
(b) Immediately following the Effective Time, each holder of an
outstanding certificate representing shares of Citizens Common Stock, upon
surrender of the certificate or certificates therefor, properly endorsed, to a
bank appointed by Citizens with the prior approval of Meridian (which approval
shall not be unreasonably withheld) to act as exchange agent (the "Exchange
Agent"), shall be entitled to receive the amount of cash as provided herein.
The cash payment will be made by check payable to the registered holder of each
certificate representing shares of Citizens Common Stock in the name of each
such holder, or to such other person as that holder may specify in writing to
the Exchange Agent. Immediately following the Effective Time, Citizens Mutual,
upon surrender to Citizens of the certificate or certificates representing the
Citizens Preferred Stock, properly endorsed, shall be entitled to receive the
amount of cash as provided herein. The cash payment shall be made by direct
wire transfer of funds to a bank account of Citizens Mutual specified in writing
to Meridian not less than two business days prior to the Closing, or in such
other manner as Citizens Mutual and Meridian may agree.
(c) All rights with respect to shares of Citizens Common Stock and
Citizens Preferred Stock owned by holders thereof as of the Effective Time shall
cease and terminate, notwithstanding that any certificates for such shares shall
not have been surrendered to the Exchange Agent or Citizens, and the holders of
such shares shall have no interest in nor claims against Citizens, the surviving
corporation in the Merger, except the right to receive the cash payment
specified herein, without interest (except for Dissenting Shares, the holders of
which shall be subject to Section 1.3(f)).
A-6
<PAGE>
(d) Meridian shall cause to be deposited with the Exchange Agent and
with Merger Company on or prior to Closing, funds immediately available as shall
be necessary for the cash distribution by the Exchange Agent and Citizens
described herein. No interest shall accrue or be payable with respect to any
funds held by the Exchange Agent or Merger Company or Citizens for the benefit
of the former holders of Citizens Common Stock or Citizens Preferred Stock. All
interest or other investment income earned on the funds on deposit with the
Exchange Agent shall, from time to time, be paid to Merger Company prior to the
Effective Time or to Citizens following the Effective Time.
(e) To the extent permitted by law, the appointment of the Exchange
Agent may be terminated by Citizens at any time after twelve months following
the Effective Time; and upon termination of such appointment, any unclaimed
funds for cash payments shall be returned to Citizens, as the surviving
corporation in the Merger, and thereafter the holders of certificates formerly
representing shares of Citizens Common Stock who have not received their cash
payments for whatever reason may surrender such certificates to Citizens and
(subject to applicable abandoned property, escheat and similar laws) receive in
exchange therefor the cash payment to which they are entitled under this
Agreement.
(f) Each share of Citizens Common Stock, the holder of which has taken
all of the steps required by Section 302A.473 of the Minnesota Business
Corporation Act (the "Minnesota Dissenters' Rights Statute") to establish such
holder's shares as dissenting shares as therein defined, is herein referred to
as a "Dissenting Share." Dissenting Shares owned by each holder thereof shall
not be converted into or represent the right to receive cash and shall be
entitled only to receive the value of such Dissenting Shares in accordance with
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the Minnesota Dissenters' Rights Statute, provided that such holder complies
with the procedures contemplated by and set forth therein. If any holder of
Dissenting Shares shall effectively withdraw or lose such holder's
dissenters' rights, such Dissenting Shares shall be converted into the right
to receive cash in accordance with the provisions of Section 1.3(a).
(g) Citizens shall give Meridian (i) prompt notice of any written
notices, demands for payment, withdrawals of notices or demands and any other
instrument served pursuant to the Minnesota Dissenters' Rights Statute and
received by Citizens (such notice by Citizens shall, to the extent available to
Citizens, set forth the name and address of, and the number of shares of
Citizens Common Stock held by, the holder making such objection or giving such
notice), and (ii) the opportunity to direct all negotiations or proceedings with
respect to holders of Dissenting Shares. Citizens shall not voluntarily make
any payment with respect to any demands for payment for shares under the
Minnesota Dissenters' Rights Statute, and shall not, except with the prior
written consent of Meridian, settle or offer to settle any such demands.
SECTION 1.4. CONVERSION OF MERGER COMPANY'S SHARES. At the Effective Time
of the Merger, the shares of capital stock of Merger Company issued and
outstanding immediately prior to the Effective Time shall, by reason of the
Merger and without any further action on the part of the holder thereof, be
cancelled and converted into all of the issued and outstanding shares of capital
stock of Citizens. Immediately following the Effective Time, the holder of the
certificate representing all of the shares of capital stock of Merger Company
issued and outstanding immediately prior to the Effective Time, upon surrender
to Citizens of the certificate therefor, properly endorsed, shall be entitled to
receive a certificate representing all of the issued and outstanding shares of
capital stock of Citizens following the Effective Time.
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SECTION 1.5. EMPLOYEE STOCK OWNERSHIP PLAN. Prior to the Closing and the
Effective Time, Citizens and Citizens Mutual shall take such actions in
connection with the Citizens Security Employee Stock Ownership Plan (the "ESOP")
as may be necessary to:
(a) cause National City Bank of Minneapolis, as Trustee of the ESOP (the
"ESOP Trustee"), to surrender to the Exchange Agent the certificates
representing all shares of Citizens Common Stock owned by the ESOP for payment
at the Effective Time in accordance with the terms of the Merger;
(b) cause (i) the repayment, by ESOP Trustee, of the outstanding amounts due
under the Promissory Note of the ESOP dated October 30, 1992, executed on behalf
of the ESOP by the ESOP Trustee and payable to the order of Citizens Mutual (the
"ESOP Note"), (ii) the cancellation of the ESOP Note, and (iii) the release of
the assets held as collateral in the ESOP suspense account, as of the Effective
Time;
(c) allow for the allocation of the unallocated assets held by the ESOP,
after repayment of the outstanding amounts due under the ESOP Note, to the ESOP
participants as provided in the ESOP and to the fullest extent permitted by
applicable law, as soon as practicable after the Effective Time; and
(d) at the Effective Time, cause the ESOP participants who were employed by
Citizens Mutual as of February 8, 1996, to become fully vested in their ESOP
accounts and cause ESOP participation to be limited to those individuals
employed by Citizens Mutual on or before the Closing.
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SECTION 1.6. STOCK OPTIONS. Prior to the Closing and the Effective Time,
Citizens shall make any necessary amendments to or adjustments in outstanding
stock options for the purchase of shares of Citizens Common Stock, or the plan
under which those options were issued, so that: (a) such options may be
exercised immediately prior to the Effective Time (including payment to Citizens
in cash of the exercise price), (b) the shares of Citizens Common Stock issued
in respect of such exercises may be tendered for payment in accordance with the
terms of the Merger, and (c) any unexercised options and any stock option plans
of Citizens shall, as of the Effective Time, terminate, no longer be
exercisable, and otherwise not represent any claim against Citizens or Merger
Company for the issuance of capital stock or other securities or for the payment
of cash or other consideration.
SECTION 1.7. BOARD OF DIRECTORS OF CITIZENS MUTUAL. At the Effective Time,
the Board of Directors of Citizens Mutual shall be reconstituted so that it
consists of the six current directors of Meridian Security, plus the current
Vice President of Marketing of Citizens Mutual and the current President of
Citizens Mutual.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CITIZENS AND CITIZENS MUTUAL
Citizens and Citizens Mutual hereby represent and warrant to Meridian as
follows; SUBJECT, HOWEVER, to the exceptions set forth on the attached
Disclosure Schedule which specifies the particular section or sections to which
each exception relates; and FURTHER SUBJECT to the exception that the
representations and warranties of Citizens Mutual set forth in this Article II
and pertaining solely to Citizens or to the Citizens Subsidiaries are limited
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and made to the knowledge of Citizens Mutual, its officers, directors and
employees who are not officers, directors or employees of Citizens or the
Citizens Subsidiaries:
SECTION 2.1. ORGANIZATION. Each of Citizens and Citizens Mutual is a
corporation duly organized and validly existing under the laws of the State of
Minnesota. Each of Citizens and Citizens Mutual has the corporate power and
authority to own, operate and lease its properties and assets and to carry on
its business as now being conducted.
SECTION 2.2. ORGANIZATION OF SUBSIDIARIES. Citizens Mutual has no direct or
indirect subsidiaries other than Citizens (and its subsidiaries) and Mississippi
Valley, and Citizens has no direct or indirect subsidiaries other than the
Citizens Subsidiaries. Schedule 2.2 sets forth for Mississippi Valley and for
each Citizens Subsidiary the authorized capital stock, the number of shares duly
issued and outstanding, and the owners of such shares and the number of shares
held by each owner. The shares of capital stock of Mississippi Valley owned by
Citizens Mutual, and the shares of capital stock of each Citizens Subsidiary
owned directly or indirectly by Citizens are duly authorized, validly issued,
fully paid and non-assessable, and are owned free and clear of any liens,
claims, charges or encumbrances. No equity security of Mississippi Valley or
either Citizens Subsidiary is or may be required to be issued by reason of any
option, warrant, right to subscribe to, call, or commitment of any character
whatsoever relating to, or security or right convertible into, shares of any
capital stock, and there are no contracts, commitments, understandings, or
arrangements by which Mississippi Valley or either Citizens Subsidiary is bound
to issue additional shares of its capital stock, or options, warrants, or rights
to purchase or acquire any additional shares of its capital stock. None of the
Citizens Companies has any investment in any partnership, joint venture or
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limited liability company, and all loans or advances to its independent
insurance agents are listed on Schedule 2.2 (including the relevant amounts,
outstanding balances and dates thereof). Each of Mississippi Valley and the
Citizens Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and
has the corporate power and authority to own or lease its properties and
carry on its business as now being conducted.
SECTION 2.3. CAPITALIZATION. The authorized capital stock of Citizens
consists of (i) 5,000,000 shares of preferred stock, par value $0.01 per share,
of which the only authorized series is 1,250,000 shares of Series A Preferred
Stock, par value $0.01 per share (the "Citizens Preferred Stock"), and (ii)
10,000,000 shares of common stock, par value $0.01 per share (the "Citizens
Common Stock"). As of the date of this Agreement, the only issued and
outstanding shares of Citizens' capital stock are 1,250,000 shares of Citizens
Preferred Stock and 1,661,585 shares of Citizens Common Stock. The only
outstanding options, warrants, or other rights to purchase shares of Citizens
Common Stock or Preferred Stock are the employee and nonemployee director stock
options covering a total of 335,000 shares of Citizens Common Stock referred to
in Section 1.6 above. All shares of capital stock of Citizens which are
outstanding as of the date hereof, or which will be outstanding immediately
prior to the Effective Time, are or will be duly authorized, validly issued,
fully paid and non-assessable, and are not or will not be subject to or issued
in violation of, any preemptive rights. Except as set forth above, there are no
shares of capital stock of Citizens authorized or outstanding and there are no
subscriptions, options to purchase shares of the capital stock of Citizens,
conversion or exchange rights, warrants, preemptive rights or other
arrangements, claims or commitments of any nature whatsoever (whether firm or
conditional) obligating Citizens to issue, transfer, deliver or sell, or
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cause to be issued, transferred, delivered or sold, additional shares of the
capital stock or other securities or interests of Citizens or obligating
Citizens to grant, extend or enter into any such agreement or commitment.
SECTION 2.4. AUTHORITY TO CONDUCT INSURANCE BUSINESS. Each of Citizens
Mutual and the Citizens Subsidiaries is an insurance company licensed or
authorized to write the kinds of insurance coverage set forth on Schedule 2.4 in
its respective state of incorporation and in each of the jurisdictions specified
in such schedule in which it writes insurance. Each of Citizens Mutual and the
Citizens Subsidiaries holds a license and is fully qualified as a foreign
insurer to conduct its business in each of those jurisdictions, and there is no
other jurisdiction in which the failure to hold a license or to be so qualified
to conduct the business as now being conducted by the respective company would
have a material adverse effect on the business of the Citizens Companies
(considered as a whole) or on the consolidated results of operations or
consolidated financial condition of Citizens and the Citizens Subsidiaries
(considered as a whole) or of Citizens Mutual and Mississippi Valley (considered
as a whole) (hereinafter referred to as a "Citizens Material Adverse Effect").
No license or certificate of authority identified in Schedule 2.4 has been
revoked, restricted, suspended, limited or modified nor is any license or
certificate of authority the subject of, nor, to the knowledge of Citizens or
Citizens Mutual, is there a basis for, a proceeding for, or a threatened
proceeding for, revocation, restriction, suspension, limitation or modification,
nor is Citizens Mutual or either of the Citizens Subsidiaries operating under
any formal or informal agreement or understanding with the licensing authority
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of any state that restricts its authority to do business or requires any such
company to take, or refrain from taking, any action.
SECTION 2.5. CONSENTS AND APPROVALS AND NO DEFAULTS. The execution and
delivery by Citizens and Citizens Mutual of this Agreement, the performance by
Citizens and Citizens Mutual of their obligations hereunder, and the
consummation by Citizens and Citizens Mutual of the transactions contemplated
hereby do not require Citizens or Citizens Mutual to obtain any consent,
approval or action of, or make any filing with or give any notice to, any
corporation, person or firm or any public, governmental or judicial authority,
OTHER THAN any consents or approvals from, or any filings or notices to, any
corporations, persons or firms in connection with any agreements or other
instruments that individually or in the aggregate are not material to Citizens
or Citizens Mutual. This Agreement is the valid and binding obligation of each
of Citizens and Citizens Mutual, enforceable against each of them in accordance
with its terms, subject to bankruptcy, receivership, insolvency, reorganization,
moratorium or similar laws affecting or relating to creditors' rights generally
and subject to general principles of equity. Provided the required approvals of
agencies of any government (including, without limitation, the Insurance
Division of the Minnesota Department of Commerce (the "Minnesota Department")
and the Ohio Department of Insurance (the "Ohio Department")) are obtained,
neither the execution, delivery, and performance by Citizens or Citizens Mutual
of this Agreement, nor the consummation of the transactions contemplated hereby,
nor compliance by Citizens or Citizens Mutual with any of the provisions hereof,
will:
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(A) violate, conflict with, or result in a breach of any provisions of,
or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by,
or result in a right of termination or acceleration of, or
result in the creation of any lien, security interest, charge,
or encumbrance upon any of the properties or assets of the
Citizens Companies under, any of the terms, conditions, or
provisions of:
(i) their respective articles of incorporation or by-laws, or
(ii) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement, or other material instrument or
obligation to which any of the Citizens Companies is a party
or by which any of such companies may be bound, or to which
any Citizens Company or any of their properties or assets may
be subject; or
(iii) any governmental license, permit or authorization material to
the business of any Citizens Company; or
(B) violate any judgment, ruling, order, writ, injunction, decree,
statute, rule, or regulation applicable to any Citizens Company or
any of their respective properties or assets.
SECTION 2.6. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Citizens and
Citizens Mutual has all requisite corporate power and authority to enter into
and deliver this Agreement, and the execution and delivery hereof has been duly
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approved and authorized by the Boards of Directors of Citizens and Citizens
Mutual. Subject to approvals by the holders of the Citizens Preferred Stock
and the Citizens Common Stock and such approvals of governmental agencies
having regulatory authority over the Citizens Companies (including the
Minnesota Department and the Ohio Department) and such further action of the
Board of Directors of Citizens and Citizens Mutual as may be required by the
Minnesota Insurance Law or the Indiana Insurance Law, Citizens and Citizens
Mutual have or will have all requisite corporate power and authority to
effectuate the Merger. The holders of Citizens Preferred Stock and the
holders of Citizens Common Stock are entitled to vote as separate classes on
the Merger in person or by proxy at a meeting convened to approve the Merger
(with each such holder being entitled to one vote per share), and the vote at
such meeting is the only vote of the holders of Citizens Preferred Stock or
Citizens Common Stock necessary to approve the Merger.
SECTION 2.7. GAAP FINANCIAL STATEMENTS. Citizens has previously delivered
to Meridian true and complete copies of audited financial statements (the "GAAP
Financial Statements") for the years ended December 31, 1993, December 31, 1994,
and December 31, 1995 for Citizens (prepared on a consolidated basis). The GAAP
Financial Statements so provided were prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis and
present fairly, in all material respects, the financial condition, results of
operations and changes in financial position of Citizens as of the dates or for
the periods covered thereby, in conformity with GAAP. Citizens has also
previously delivered to Meridian true and complete copies of the internally
prepared unaudited financial statements for the years ended December 31, 1993,
December 31, 1994, and December 31, 1995, for Mississippi Valley (the
"Mississippi Valley Financial Statements"). The Mississippi Valley Financial
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Statements were prepared by personnel of Citizens Mutual based on the
accounting records of Mississippi Valley, which accounting records were
prepared by personnel of Citizens Mutual in the ordinary course and in
accordance with customary business practices, and the Mississippi Valley
Financial Statements fairly present in all material respects the financial
condition and results of operations of Mississippi Valley for the periods
covered by the Mississippi Valley Financial Statements.
SECTION 2.8. STATUTORY FINANCIAL STATEMENTS. (a) Citizens has previously
delivered to Meridian true and complete copies of the audited statutory
financial statements of Citizens Mutual and each Citizens Subsidiary (including
statements of operations, unassigned surplus and cash flows) for the fiscal
years ended December 31, 1990 to 1995 (the "Audited SAP Financials"). The
Audited SAP Financial Statements present fairly in all material respects the
financial condition of the respective companies at such dates and results of
operations for such periods and were prepared in accordance with statutory
accounting principles ("SAP").
(b) Annual Statements required to be filed with applicable insurance
regulatory authorities on the respective forms prescribed or permitted by such
authorities (the "Annual Statements") for Citizens Mutual and each Citizens
Subsidiary for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 have
been filed with the appropriate regulatory authorities in all jurisdictions in
which such filing is required. The Annual Statements were prepared in
accordance with accounting practices prescribed or permitted by such regulatory
authorities, applied on a consistent basis throughout the related periods except
as otherwise stated therein, and presented fairly in all material respects the
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statutory financial position of the respective company at the dates of, and
the statutory results of operations for the respective company for the
periods covered by, such statutory statements.
SECTION 2.9. RESERVES. The aggregate actuarial reserves and other actuarial
amounts held in respect of liabilities with respect to Citizens Mutual and each
of the Citizens Subsidiaries as established or reflected in their respective
financial statements as of December 31, 1995:
(a) (i) were determined in accordance with generally accepted actuarial
standards consistently applied, (ii) were fairly stated in accordance with sound
actuarial principles, and (iii) were based on reasonable and appropriate
actuarial assumptions;
(b) met the requirements of the applicable insurance laws of the States of
Minnesota and Ohio, or any other state having such jurisdiction in all material
respects; and
(c) were adequate (under generally accepted actuarial standards consistently
applied) to cover the total amount of all reasonably anticipated matured and
unmatured liabilities of Citizens Mutual and each Citizens Subsidiary under all
outstanding insurance policies pursuant to which Citizens Mutual or either
Citizens Subsidiary has any liability.
SECTION 2.10. NO UNDISCLOSED LIABILITIES. As of December 31, 1995, none of
the Citizens Companies had any debts, obligations or liabilities of whatever
kind or nature, either direct or indirect, absolute or contingent, matured or
unmatured (the "Citizens Liabilities"), except debts, obligations and
liabilities that are fully reflected in, or reserved against on, the GAAP
Financial Statements or the Audited SAP Financial Statements, except for
liabilities arising from the ordinary course of business that are not required
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to be reflected in a balance sheet prepared in accordance with GAAP or SAP
(as the case may be). Since such date, there have been no changes in the
Citizens Liabilities except for changes arising from the ordinary course of
business, none of which changes, individually or in the aggregate, have had a
Citizens Material Adverse Effect.
SECTION 2.11. REGULATORY FILINGS. Citizens has previously delivered to
Meridian true and complete copies of all filings which were made by Citizens,
Citizens Mutual or any Citizens Subsidiary within the past three years with the
Minnesota Department, the Ohio Department or any other department of insurance
in any jurisdiction where Citizens, Citizens Mutual or any Citizens Subsidiary
is required to make such filings. Each of such filings, as of its respective
date, complied as to form and content in all material respects with the
provisions of applicable law.
SECTION 2.12 . SEC REPORTS. Citizens has delivered to Meridian (i) each
registration statement, Current Report on Form 8-K, Quarterly Report on Form 10-
Q, annual report to shareholders, and proxy statement or information statement
prepared by it since January 1, 1992, (ii) an Annual Report on Form 10-K for
each of the years ended December 31, 1991, 1992, 1993 and 1994, and (iii) a
Quarterly Report on Form 10-Q for each of the periods ended March 31, June 30
and September 30, 1995, each in the form (including exhibits) filed with
Securities and Exchange Commission (collectively, the "Citizens SEC Reports").
As of its respective date, each of the Citizens SEC Reports did not contain any
untrue statements of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
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of the circumstances in which they were made, not misleading. Each of the
balance sheets included in or incorporated by reference into the Citizens SEC
Reports (including the related notes and schedules) fairly presents the
financial position of Citizens as of its date, and each of the statements of
income, of shareholders' equity and of cash flows included in or incorporated
by reference into the Citizens SEC Reports (including the related notes and
schedules) fairly presents the results of operations, shareholders' equity
and cash flows, as the case may be, of Citizens for the period set forth
therein (subject, in the case of unaudited statements, to normal year-end
audit adjustments which will not be material to Citizens in amount or
effect), in each case in accordance with generally accepted accounting
principals consistently applied during the periods involved, except as may be
noted therein. Other than the Citizens SEC Reports, Citizens has not filed
any other definitive reports or statements with the Securities and Exchange
Commission since January 1, 1992.
SECTION 2.13. LITIGATION. There are no proceedings or investigations (other
than claims in the ordinary course of the insurance business), pending or
threatened against, relating to, involving or otherwise affecting any of the
Citizens Companies, which individually exceed $10,000 or in the aggregate may
have a Citizens Material Adverse Effect.
SECTION 2.14. COMPLIANCE WITH LAW. (a) None of the Citizens Companies is in
violation in any material respect (or, with notice or lapse of time or both,
would be in violation in any material respect) of any term or provision of any
applicable law, regulation, rule, ordinance, order, judgment, writ or injunction
of any federal, state or local government or instrumentality or agency thereof,
or of any court, which violation may reasonably be expected to have a Citizens
Material Adverse Effect, and Citizens and Citizens Mutual are not aware of any
facts or circumstances which may constitute or result in any such violation.
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(b) None of the Citizens Companies is a party to any contract with or
other undertaking to, or is subject to any order by, or is a recipient of any
supervisory letter or other oral or written communication of any kind from, any
governmental entity that (i) currently materially and adversely affects the
business of the Citizens Companies (considered as a whole) or the consolidated
financial condition of either Citizens and the Citizens Subsidiaries (considered
as a whole) or Citizens Mutual and Mississippi Valley (considered as a whole),
including without limitation, reserve adequacy, investment, sales or trade
practices and policies, underwriting practices and policies, or management, or
(ii) may reasonably be expected to materially and adversely affect the business
or financial condition of any of the Citizens Companies. None of Citizens,
Citizens Mutual or any Citizens Subsidiary has been advised by a governmental
entity that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any order, contract or other
communication of the kind described above in this Section 2.14.
SECTION 2.15. PROPERTIES. Each of Citizens Companies has good title to all
properties and assets material to the conduct of its business, which it purports
to own, including, without limitation, all property reflected in the GAAP
Financial Statements or Audited SAP Financial Statements or Mississippi Valley
Financial Statements dated December 31, 1995, or acquired since that date
(except in all cases to the extent such assets or properties have been sold or
otherwise disposed of in the ordinary and usual course of business since that
date). All such properties and assets are owned, free and clear of all liens,
charges and encumbrances, other than (i) those set forth on Schedule 2.15,
(ii) any liens and assessments for taxes not yet due and payable or being
contested in good faith by appropriate proceedings, and (iii) such imperfections
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of title, or encumbrances and liens, if any, as do not materially detract from
the value or interfere with the actual or intended use of the properties owned
by any of the Citizens Companies or otherwise materially impair the business
operations of any of the Citizens Companies. All material leases pursuant to
which any of the Citizens Companies leases real or personal property are valid
and binding on the respective Citizens Company, enforceable against such
Citizens Company in accordance with their respective terms subject to
bankruptcy, receivership, insolvency, reorganization, moratorium or similar laws
affecting or relating to creditors' rights generally and subject to general
principles of equity (and Citizens and Citizens Mutual do not know of any reason
that such leases would not be valid and binding upon or enforceable against the
other parties thereto), and there is not under any of such leases any existing
default or event of default on the part of any Citizens Company, or any event
which with notice or lapse of time, or both, would constitute a default on the
part of any Citizens Company (and Citizens and Citizens Mutual do not know of
any default, event of default or event which with notice or lapse of time, or
both, would constitute a default, in each case on the part of the other party
thereto), the consequence of which would have a Citizens Material Adverse
Effect.
SECTION 2.16. INTELLECTUAL PROPERTY. There are no copyrights, trademarks,
trade names, service marks or patents covered under federal or state common law
or statutory law, whether or not registered, used by any of the Citizens
Companies (the "Intellectual Property") that are material to the conduct of
their respective businesses. Set forth on Schedule 2.16 is a listing of any
federal or state registered Intellectual Property that any of the Citizens
Companies uses in the conduct of its respective business. There are no
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infringement suits pending, or to the best knowledge of Citizens or Citizens
Mutual threatened, against any of the Citizens Companies with respect to the
Intellectual Property, and neither Citizens nor Citizens Mutual knows of any
fact or condition which could give rise to any such infringement suit.
SECTION 2.17. ENVIRONMENTAL LAWS AND PERMITS. Each of the Citizens
Companies is in compliance with any and all laws, regulations, rules,
ordinances, orders, judgments, permits, agreements, licenses or other
governmental restrictions or requirements relating to health, the environment or
the release by such Citizens Company of any materials into the environment, now
in effect in any and all jurisdictions, in which the Citizens Companies are or
from time to time may be doing business (collectively the "Environmental Laws"),
except where such failure to comply would not have a Citizens Material Adverse
Effect.
SECTION 2.18. TAXES. (a) All federal income tax returns required to be
filed by the Citizens Companies have been properly and timely filed with the
Internal Revenue Service, (b) all state and local income tax returns required
to be filed by the Citizens Companies have been properly and timely filed with
the appropriate state or local taxing authorities, except where the failure so
to file such state and local income tax returns would not have a Citizens
Material Adverse Effect, and (c) all federal, state and local tax information
returns required to be filed by the Citizens Companies have been properly and
timely filed with the appropriate federal, state or local taxing authorities,
except where the failure so to file such information returns would not have a
Citizens Material Adverse Effect. Such income tax returns were true, correct
and complete in all material respects at the time filed, and the Citizens
Companies have paid all taxes shown to be due on such returns. The Citizens
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Companies have adequately reserved, in accordance with GAAP, on the GAAP
Financial Statements, and in accordance with SAP, on the Audited SAP
Financial Statements, for the payment of all unpaid federal, state and local
taxes, including interest and penalties, payable in respect of any taxable
event or period (including interim periods) ending on the dates of such
financial statement and for all periods prior thereto. There are no
outstanding deficiencies, assessments or proceedings for the assessment or
collection of taxes or any material dispute as to taxes against or involving
any of the Citizens Companies.
SECTION 2.19. EMPLOYEE BENEFIT PLANS. (a) Except for the Citizens
Companies, there are no other trades or businesses, whether or not incorporated,
which, together with any of the Citizens Companies, would be deemed to be a
"single employer" within the meaning of Code Sections 414(b), (c) or (m) of the
Internal Revenue Code of 1986, as amended (the "Code").
(b) Schedule 2.19 sets forth a true and a complete list of (i) each employee
benefit plan, as defined in Section 3 (3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") that any of the Citizens Companies
currently maintains or has maintained within the three year period preceding the
Effective Time (the "ERISA Plans"), and (ii) each other plan, arrangement,
program and agreement providing employee benefits, including, but not limited
to, deferred compensation, bonuses, severance pay and fringe benefits, that are
presently maintained for the benefit of any current or former employees of any
of the Citizens Companies (the ERISA Plans and each other plan listed on
Schedule 2.19 hereafter, collectively, the "Plans"). Citizens has delivered or
made available to Meridian copies of all Plans and any related documents or
instruments establishing the Plans or any related trusts or funding
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arrangements; the most recent determination letter, or any outstanding request
for a determination letter, from the Internal Revenue Service (the "IRS") with
respect to each ERISA Plan intended to satisfy the requirements of Code Section
401(a) and a copy of the application on which the determination letter or
request for determination letter is based; actuarial valuations, if applicable,
for the most recent three plan years for which such valuations are available;
current summary plan descriptions; annual returns/reports on Form 5500 and
summary annual reports for each of the most recent three plan years; Form 5310
and any related filings with the IRS, the Department of Labor ("DOL") or the
Pension Benefit Guaranty Corporation ("PBGC") within the last five years
preceding the date of this Agreement; and any material correspondence to or from
the IRS, DOL or PBGC within the last three years preceding the Effective Time in
connection with any Plan.
(c) Each ERISA Plan intended to be qualified under Code Section 401(a) has
received a favorable determination letter from the IRS that the Plan, in its
current form, is qualified and satisfies all legal requirements, including the
requirements of the Tax Reform Act of 1986 and subsequent legislation enacted
through the date hereof. Nothing has occurred since the dates of the respective
IRS favorable determination letters that could adversely affect the
qualification of the Plans and their related trusts.
(d) None of the Citizens Companies currently maintains or contributes to, or
has ever maintained or contributed to, a "multiemployer plan" as defined in
ERISA Section 3(37), and none of the Citizens Companies currently maintains or
contributes to a defined benefit pension plan, as defined in ERISA Section 3
(35). None of the Citizens Companies has any unpaid liability or is threatened
with any liability for the termination of any Plan, and each terminated
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Plan was terminated in accordance with all provisions of applicable law. Each
terminated ERISA Plan that was intended to be qualified under Code Section
401(a) received a favorable determination letter from the IRS that such Plan was
qualified upon termination.
(e) The written terms of each of the Plans, and any related trust agreement,
group annuity contract, insurance policy or other funding arrangement are in
substantial compliance with all applicable laws, rules and regulations,
including without limitation, the rules and regulations promulgated by the DOL,
PBGC or IRS pursuant to the provisions of ERISA and the Code, and each of such
Plans has been administered in substantial compliance with such requirements.
(f) Except with respect to income taxes on benefits paid or provided, no
income, excise or other tax or penalty (federal or state) has been waived or
excused, has been paid or is owed by any person (including, but not limited to,
any Plan, any Plan fiduciary or any of the Citizens Companies) with respect to
the operations of, or any transactions with respect to, any Plan. No action has
been taken by any of the Citizens Companies, nor has there been any failure by
any of the Citizens Companies to take any action, nor is any action or failure
to take action contemplated by any of the Citizens Companies, that would subject
any person or entity to any liability, tax or penalty imposed by the IRS, DOL,
or PBGC, in connection with any Plan. No reserve for any taxes or penalties has
been established with respect to any Plan by any of the Citizens Companies, nor
has any advice been given to any of the Citizens Companies with respect to the
need to establish such a reserve.
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(g) There are no (i) actions, suits, arbitrations or claims (other than
routine claims for benefits), (ii) legal, administrative or other proceedings or
governmental investigations or audits, or (iii) complaints to or by any
governmental entity, which are pending, anticipated or threatened, against any
Plan or its assets, or against any Plan fiduciary or administrator, or against
any of the Citizens Companies or their officers or employees with respect to any
Plan.
(h) The present value of the future cost of post-retirement medical benefits
that any of the Citizens Companies is obligated to provide, calculated on the
basis of actuarial assumptions Citizens Mutual considers reasonable estimates of
future experience and which have been provided to Meridian, does not exceed the
amount specified on Schedule 2.19.
(i) None of the Citizens Companies, nor any of the Plans, nor any trust
created thereunder, nor any trustee or administrator thereof has engaged in a
transaction in connection with which any of the Citizens Companies, any of the
Plans, any such trust, or any trustee or administrator thereof, or any party
dealing with the Plans or related trusts could be subject to either a civil
penalty assessed pursuant to ERISA Sections 409 or 502 or a tax imposed pursuant
to Code Sections 4975 or 4976. None of the Citizens Companies is, or, as a
result of any actions, omissions, occurrences or state of facts existing prior
to or at the Effective Time, may become liable for any tax imposed under Code
Sections 4978 or 4978(B).
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(j) There are no leased employees, as defined in Code Section 414(n), that
must be taken into account with respect to the requirements under Code Section
414(n)(3).
(k) Total employer contributions to each Plan with respect to the most
recent plan year are listed in Scheduled 2.19 and the employer contributions to
all Plans required for the current plan year are not estimated to be materially
more than contributions for the prior plan year.
(l) Each Plan may be terminated directly or indirectly by Meridian, in its
discretion, at any time after the Effective Time of the Merger in accordance
with its terms, without any liability to Meridian, or any of the Citizens
Companies, to any person, entity or government agency for any conduct, practice
or omission of any of the Citizens Companies which occurred prior to the
Effective Time of the Merger, except for liabilities to and the rights of the
employees thereunder accrued prior to the Effective Time of the Merger, or if
later, the time of termination, and except for continuation rights required by
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or other
applicable law.
SECTION 2.20. CONTRACTS AND COMMITMENTS. None of the Citizens Companies is
in default under any material agreement, commitment, arrangement, lease,
insurance policy, or other instrument, whether entered into in the ordinary
course of business or otherwise, and there has not occurred any event that, with
the lapse of time or giving of notice or both, would constitute such a default,
except, in all cases, where such default would not have a Citizens Material
Adverse Effect.
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SECTION 2.21. RELATED PARTY TRANSACTIONS. None of the Citizens Companies has
made any loan to any director, officer or other affiliate of any of the Citizens
Companies which remains outstanding, nor has any of the Citizens Companies
entered into any agreement for the purchase or sale of any property or services
from or to any director, officer or other affiliate of any of the Citizens
Companies.
SECTION 2.22. NO FINDERS. None of the Citizens Companies has made any
representation, contract or commitment by which any such party or Meridian might
be obligated to pay any finder's fee, brokerage commission or similar payment
for bringing the parties together or bringing about the transactions
contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MERIDIAN
Meridian represents and warrants to Citizens and Citizens Mutual that:
SECTION 3.1. ORGANIZATION. Meridian is a corporation duly organized and
validly existing under the laws of the State of Indiana and has the corporate
power and authority to carry on its business as it is now being conducted and to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby.
SECTION 3.2. CORPORATE POWER AND AUTHORITY, ETC. The execution, delivery
and performance by Meridian of this Agreement and the consummation by Meridian
of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Meridian. This Agreement has been
duly and validly executed and delivered by Meridian and constitutes the valid
and binding obligation of Meridian, enforceable against it in accordance
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with its terms, subject to bankruptcy, receivership, insolvency, reorganization,
moratorium or similar laws affecting or relating to creditors' rights generally
and subject to general principles of equity.
SECTION 3.3. NO CONFLICTS. The execution, delivery and performance by
Meridian of this Agreement and the consummation by Meridian of the transactions
contemplated hereby will not, with or without the giving of notice or the lapse
of time, or both, (i) violate any provision of law, statute, rule or regulation
to which Meridian is subject, (ii) violate any order, judgment or decree
applicable to Meridian or (iii) conflict with, or result in a breach or default
under, any term or condition of the Articles of Incorporation or By-Laws of
Meridian or any material agreement or other material instrument to which
Meridian or any of its subsidiaries is a party or by which any of them may be
bound; except for violations, conflicts, breaches or defaults which in the
aggregate would not materially hinder or impair the consummation of the
transactions contemplated hereby.
SECTION 3.4. CONSENTS. Except as set forth on Schedule 3.4, no consent,
approval or authorization of, exemption by, or filing with, any governmental or
regulatory authority, or any third party, is required in connection with the
execution, delivery and performance by Meridian of this Agreement or the
consummation by Meridian of the transactions contemplated hereby.
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SECTION 3.5. FUNDS AVAILABLE. Meridian and Merger Company have or will have
available to them sufficient funds to perform all of their respective
obligations pursuant to this Agreement.
SECTION 3.6. MERGER COMPANY. At or prior to the Closing:
(a) Merger Company shall be a corporation duly organized and validly
existing under the laws of the State of Minnesota, with the corporate power and
authority to adopt, deliver and perform the Plan of Merger and to consummate the
transactions of Merger Company contemplated thereby and by this Agreement.
(b) The adoption, delivery and performance by Merger Company of the Plan of
Merger and the consummation by Merger Company of the transactions contemplated
thereby and by this Agreement shall have been duly authorized by all necessary
corporate action on the part of Merger Company, and the Plan of Merger shall
have been duly and validly adopted by Merger Company and constitute its valid
and binding obligation, enforceable against Merger Company in accordance with
its terms, subject to bankruptcy, receivership, insolvency, reorganization,
moratorium or similar laws affecting or relating to creditors' rights generally
and subject to general principles of equity.
(c) The adoption, delivery and performance by Merger Company of the Plan of
Merger and the consummation by Merger Company of the transactions contemplated
thereby and by this Agreement will not, with or without the giving of notice or
the lapse of time, or both, (i) violate any provision of law, statute, rule or
regulation to which Merger Company is subject, (ii) violate any order, judgment
or decree applicable to Merger Company, or (iii) conflict with, or result in a
breach or default under, any term or condition of the Articles of Incorporation
or By-Laws of Merger Company.
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SECTION 3.7. GAAP FINANCIAL STATEMENTS. Meridian has previously delivered
to Citizens and Citizens Mutual true and complete copies of audited financial
statements (the "Meridian GAAP Financial Statements") for the years ended
December 31, 1993, December 31, 1994, and December 31, 1995 for Meridian
(prepared on a consolidated basis). The Meridian GAAP Financial Statements so
provided were prepared in accordance with GAAP applied on a consistent basis and
present fairly, in all material respects, the financial condition, results of
operations and changes in financial position of Meridian as of the dates or for
the periods covered thereby, in conformity with GAAP.
SECTION 3.8. STATUTORY FINANCIAL STATEMENTS. (a) Meridian has previously
delivered to Citizens and Citizens Mutual true and complete copies of (i) the
audited combined statutory financial statements of Meridian Mutual and
affiliates (including statements of operations, unassigned surplus and cash
flows) for the fiscal years ended December 31, 1990 to 1994 (the "Meridian
Audited SAP Financial Statements"), and (ii) the unaudited combined statutory
financial statements of Meridian Mutual and affiliates for the interim periods
ended March 31, 1995, June 30, 1995 and September 30, 1995 (the "Meridian
Unaudited Interim SAP Financials"). The Meridian Audited SAP Financial
Statements present fairly in all material respects the combined financial
condition of Meridian Mutual and affiliates at such dates and results of
operations for such periods and were prepared in accordance with SAP, and the
Meridian Unaudited Interim SAP Financial Statements present fairly in all
material respects the combined financial condition of Meridian Mutual and
affiliates at such dates and results of operations for such periods and were
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prepared in accordance with SAP, except for the absence of notes and subject
to normal year-end adjustments which are not material to the Meridian
Companies in amount or effect.
(b) Annual Statements required to be filed with applicable insurance
regulatory authorities on the respective forms prescribed or permitted by such
authorities (the "Meridian Annual Statements") for Meridian Mutual and Meridian
Security for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 have
been filed with the appropriate regulatory authorities in all jurisdictions in
which such filing is required. The Meridian Annual Statements were prepared in
accordance with accounting practices prescribed or permitted by such regulatory
authorities, applied on a consistent basis throughout the related periods except
as otherwise stated therein, and presented fairly in all material respects the
statutory financial position of the respective company at the dates of, and the
statutory results of operations for the respective company for the periods
covered by, such statutory statements.
SECTION 3.9. RESERVES. The aggregate actuarial reserves and other actuarial
amounts held in respect of liabilities with respect to Meridian Mutual and
Meridian Security as established or reflected in their combined financial
statements as of September 30, 1995:
(a) (i) were determined in accordance with generally accepted
actuarial standards consistently applied, (ii) were fairly stated in
accordance with sound actuarial principles, and (iii) were based on
reasonable and appropriate actuarial assumptions;
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(b) met the requirements of the applicable insurance laws of the State
of Indiana, or any other state having such jurisdiction, in all material
respects; and
(c) were adequate (under generally accepted actuarial standards
consistently applied) to cover the total amount of all reasonably anticipated
matured and unmatured liabilities of Meridian Mutual and Meridian Security
under all outstanding insurance policies pursuant to which Meridian Mutual or
Meridian Security has any liability;
SUBJECT, HOWEVER, to normal year-end adjustments which shall not be material to
the Meridian Companies in amount or effect.
SECTION 3.10. NO UNDISCLOSED LIABILITIES. None of the Meridian Companies has
any debts, obligations or liabilities of whatever kind or nature, either direct
or indirect, absolute or contingent, matured or unmatured (the "Meridian
Liabilities"), except debts, obligations and liabilities that are fully
reflected in, or reserved against on, the Meridian GAAP Financial Statements,
the Meridian Audited SAP Financial Statements or the Meridian Unaudited Interim
SAP Financial Statements, except for liabilities arising from the ordinary
course of business that are not required to be reflected in a balance sheet
prepared in accordance with GAAP or SAP (as the case may be), and except for
changes in the Meridian Liabilities arising from the ordinary course of business
since the respective dates of such financial statements, none of which changes,
individually or in the aggregate, have had a Meridian Material Adverse Effect.
SECTION 3.11. REGULATORY FILINGS. Meridian has previously delivered or made
available to Citizens and Citizens Mutual true and complete copies of all
filings which were made by the Meridian Companies within the past three years
with the Indiana Department of Insurance (the "Indiana Department") or any other
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department of insurance in any jurisdiction where any of the Meridian
Companies is required to make such filings. Each of such filings, as of its
respective date, complied as to form and content in all material respects
with the provisions of applicable law.
SECTION 3.12 . SEC REPORTS. Meridian has delivered or made available to
Citizens and Citizens Mutual (i) each registration statement, Current Report on
Form 8-K, Quarterly Report on Form 10-Q, annual report to shareholders, proxy
statement or information statement prepared by it since January 1, 1992, (ii) an
Annual Report on Form 10-K for each of the years ended December 31, 1991, 1992,
1993 and 1994, and (iii) a Quarterly Report on Form 10-Q for each of the periods
ended March 31, June 30 and September 30, 1995, each in the form (including
exhibits) filed with Securities and Exchange Commission (collectively, the
"Meridian SEC Reports"). As of its respective date, each of the Meridian SEC
Reports did not contain any untrue statements of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading. Each of the balance sheets included in or incorporated by
reference into the Meridian SEC Reports (including the related notes and
schedules) fairly presents the financial position of Citizens as of its date,
and each of the statements of income, of shareholders' equity and of cash flows
included in or incorporated by reference into the Meridian SEC Reports
(including the related notes and schedules) fairly presents the results of
operations, shareholders' equity and cash flows, as the case may be, of Meridian
for the period set forth therein (subject, in the case of unaudited statements,
to normal year-end audit adjustments which will not be material to Meridian in
amount or effect), in each case in accordance with generally accepted accounting
principals consistently applied during the periods involved, except as may
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be noted therein. Other than the Meridian SEC Reports, Meridian has not filed
any other definitive reports or statements with the Securities and Exchange
Commission since January 1, 1992.
SECTION 3.13. LITIGATION. There are no proceedings or investigations (other
than claims in the ordinary course of the insurance business), pending or
threatened against, relating to, involving or otherwise affecting any of the
Meridian Companies, which individually or in the aggregate may have a material
adverse effect on the business, results of operations or financial condition of
the Meridian Companies (considered as a whole) (a "Meridian Material Adverse
Effect").
SECTION 3.14. COMPLIANCE WITH LAW. (a) None of the Meridian Companies is in
violation in any material respect (or, with notice or lapse of time or both,
would be in violation in any material respect) of any term or provision of any
applicable law, regulation, rule, ordinance, order, judgment, writ or injunction
of any federal, state or local government or instrumentality or agency thereof,
or of any court, which violation may reasonably be expected to have a Meridian
Material Adverse Effect, and Meridian and Meridian Mutual are not aware of any
facts or circumstances which may constitute or result in any such violation.
(b) None of the Meridian Companies is a party to any contract with or
other undertaking to, or is subject to any order by, or is a recipient of any
supervisory letter or other oral or written communication of any kind from, any
governmental entity that (i) currently materially and adversely affects the
business, results of operations or financial condition of the Meridian Companies
(considered as a whole), including without limitation, reserve adequacy,
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investment, sales or trade practices and policies, underwriting practices and
policies, or management, or (ii) may reasonably be expected to materially and
adversely affect the business, results of operations or financial condition of
any of the Meridian Companies. None of the Meridian Companies has been advised
by a governmental entity that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any order, contract or
other communication of the kind described above in this Section 3.14.
SECTION 3.15. AUTHORITY TO CONDUCT INSURANCE BUSINESS. Each of Meridian
Mutual and Meridian Security is an insurance company licensed or authorized to
write insurance coverages in its state of incorporation, and each of Meridian
Mutual and Meridian Security holds a license and is fully qualified as a foreign
insurer to conduct its respective business in each jurisdiction in which such
licensure or qualification is required therefor, and there is no other
jurisdiction in which the failure to hold a license or to be so qualified to
conduct the business as is now being conducted by the respective company would
have a Meridian Material Adverse Effect. No such license or certificate of
authority has been revoked, restricted, suspended, limited or modified nor is
any license or certificate of authority the subject of, nor, to the knowledge of
Meridian, is there a basis for, a proceeding for, or a threatened proceeding
for, revocation, restriction, suspension, limitation or modification, nor is
Meridian Mutual or Meridian Security operating under any formal or informal
agreement or understanding with the licensing authority of any state that
restricts its authority to do business or requires any such company to take, or
refrain from taking, any action.
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SECTION 3.16. PROPERTIES. Each of Meridian Companies has good title to all
properties and assets material to the conduct of its business, which it purports
to own, including, without limitation, all property reflected in the Meridian
GAAP Financial Statements or Meridian Audited SAP Financial Statements, or
acquired since the date of such financial statements, except (a) in all cases to
the extent such assets or properties have been sold or otherwise disposed of in
the ordinary and usual course of business since that date or (b) to the extent
such failure to have good title would not have a Meridian Material Adverse
Effect.
SECTION 3.17. INTELLECTUAL PROPERTY. There are no infringement suits
pending, or to the best knowledge of Meridian, threatened, against any of the
Meridian Companies with respect to any copyright, trademark, trade name, service
mark, or patent covered under federal or state common law or statutory law,
whether or not registered, used by any of the Meridian Companies in a way that
is material to the conduct of their respective businesses, which would have a
Meridian Material Adverse Effect, and neither Meridian nor Meridian Mutual knows
of any fact or condition which could give rise to any such infringement suit.
SECTION 3.18. ENVIRONMENTAL LAWS AND PERMITS. Each of the Meridian
Companies is in compliance with any and all laws, regulations, rules,
ordinances, orders, judgments, permits, agreements, licenses or other
governmental restrictions or requirements relating to health, the environment or
the release by such Meridian Company of any materials into the environment, now
in effect in any and all jurisdictions, in which the Meridian Companies are or
from time to time may be doing business, except where such failure to comply
would not have a Meridian Material Adverse Effect.
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SECTION 3.19. TAXES. (a) All federal income tax returns required to be
filed by the Meridian Companies have been properly and timely filed with the
Internal Revenue Service, (b) all state and local income tax returns required
to be filed by the Meridian Companies have been properly and timely filed with
the appropriate state or local taxing authorities, except where the failure so
to file such state and local income tax returns would not have a Meridian
Material Adverse Effect, and (c) all federal, state and local tax information
returns required to be filed by the Meridian Companies have been properly and
timely filed with the appropriate federal, state or local taxing authorities,
except where the failure so to file such information returns would not have a
Meridian Material Adverse Effect. Such income tax returns were true, correct
and complete in all material respects at the time filed, and the Meridian
Companies have paid all taxes shown to be due on such returns. The Meridian
Companies have adequately reserved, in accordance with GAAP, on the GAAP
Financial Statements, and in accordance with SAP, on the Audited SAP Financial
Statements, for the payment of all unpaid federal, state and local taxes,
including interest and penalties, payable in respect of any taxable event or
period (including interim periods) ending on the dates of such financial
statement and for all periods prior thereto, except where any deficiencies would
not have a Meridian Material Adverse Effect. There are no outstanding
deficiencies, assessments or proceedings for the assessment or collection of
taxes or any material dispute as to taxes against or involving any of the
Meridian Companies that would have a Meridian Material Adverse Effect.
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SECTION 3.20. EMPLOYEE BENEFIT PLANS. All employee benefit plans, as
defined in Subsection 3(3) of ERISA, and all other arrangements, agreements, or
programs for deferred compensation, bonuses, severance pay, or employee fringe
benefits covering current or former employees of the Meridian Companies that the
Meridian Companies currently maintain or to which the Meridian Companies
contribute, or are obligated to contribute, and all related trusts and insurance
contracts comply in form and in operation in all material respects with all
applicable laws and regulations, including, without limitation, the applicable
requirements of ERISA and the Code, except where any failure to comply would not
have a Meridian Material Adverse Effect.
SECTION 3.21. CONTRACTS AND COMMITMENTS. None of the Meridian Companies is
in default under any material agreement, commitment, arrangement, lease,
insurance policy, or other instrument, whether entered into in the ordinary
course of business or otherwise, and there has not occurred any event that, with
the lapse of time or giving of notice or both, would constitute such a default,
except, in all cases, where such default would not have a Meridian Material
Adverse Effect.
ARTICLE IV
PRE-CLOSING COVENANTS
From the date hereof through the Closing Date, the parties covenant and agree
as follows:
SECTION 4.1. GENERAL. Each of the parties will use its good faith efforts
to take all action and to do all things necessary, proper or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including, without limitation, the Merger, the reconfiguration of the Citizens
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Mutual Board of Directors as contemplated by Section 1.7, and the
satisfaction, but not waiver, of the closing conditions set forth in Articles
VI and VII below); PROVIDED, HOWEVER, that nothing contained in this
Agreement shall constitute an obligation or agreement of Citizens Mutual to
vote its shares of Citizens Common Stock and Citizens Preferred Stock in
favor of the Merger and other transactions contemplated by this Agreement at
the meeting of the shareholders of Citizens contemplated by Section 4.5(a).
SECTION 4.2. NOTICES AND CONSENT. Each of the parties to this Agreement
will, individually and in cooperation with the other parties, give any notices
to, make any filing with, and use good faith efforts to obtain any
authorizations, consents, and approvals of, governments and governmental
agencies and any other third parties that are necessary, proper or advisable in
connection with the transactions contemplated by this Agreement (including,
without limitation, the Merger and the reconfiguration of the Citizens Mutual
Board of Directors as contemplated by Section 1.7). Without limiting the
generality of the foregoing, each of the parties will file any Notification and
Report Forms and related material that it may be required to file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice under the Hart-Scott-Rodino Act, will use good faith
efforts to obtain a waiver from the applicable waiting period, and will make any
further filings pursuant thereto that may be necessary, proper or advisable.
SECTION 4.3. OPERATION OF BUSINESS. Except as set forth in Schedule 4.3, as
otherwise contemplated by this Agreement or as Meridian may otherwise consent to
in writing: (a) each of the Citizens Companies will: (i) operate only in the
ordinary course of business in substantially the same manner as its business has
historically been conducted; (ii) use good faith efforts to keep available the
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services of its present executive officers and key employees; and (iii) use
good faith efforts to preserve its relationships with employees and agents,
lenders, suppliers, policyholders, licensors and licensees, insurance
departments and others having material business dealings with the Citizens
Companies; and (b) none of the Citizens Companies will: (i) issue, sell or
deliver any shares of its capital stock or issue or sell any securities
convertible into or exchangeable for, or options with respect to, or warrants
to purchase or rights to subscribe to any of its capital stock; (ii) effect
any recapitalization, reclassification, stock dividend, stock split or
similar change in capitalization; (iii) merge with or into, consolidate or
otherwise combine with, or acquire all or substantially all of the assets of,
any other entity (except as may be permitted under Section 4.6 of this
Agreement); (iv) make any commitments that extend beyond the Closing Date in
an amount individually exceeding $25,000; (v) change any provision of its
Articles of Incorporation or By-Laws or similar governing documents; (vi)
permit any material insurance policy naming it as a beneficiary or a loss
payable payee to be cancelled or terminated or any of the coverage thereunder
to lapse unless simultaneously with such termination or cancellation
replacement policies reasonably satisfactory to Meridian are in full force
and effect; (vii) enter into any material contract, lease or other agreement
other than in the ordinary course of business, that extends by its terms
beyond the Effective Time; (viii) amend or cancel or agree to the amendment
or cancellation of any reinsurance agreement, treaty or arrangement; (ix)
make any material change in any accounting methods or practices; (x) effect
any increases in salary, bonuses or otherwise increase or enhance any
employee or officer compensation or benefits other than in the ordinary
course of business consistent with past practices or make any employment
commitments to existing employees that extend by their terms beyond the
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Effective Time, except such as are consistent with Section 5.4 and Section
7.10(c) hereof; or (xi) enter into any agreement or understanding to do any
of the things described in clauses (i) through (x) above.
SECTION 4.4. FULL ACCESS. Citizens and Citizens Mutual shall permit
representatives of Meridian to have full access at all reasonable times to all
premises, properties, personnel, books, records (including tax records),
contracts, and documents of or pertaining to the Citizens Companies.
SECTION 4.5. SHAREHOLDERS' MEETING. (a) Citizens shall prepare and file
with the Securities and Exchange Commission (the "SEC"), as soon as is
reasonably practicable, the required proxy materials relating to shareholder
approval of the Merger and shall use its good faith efforts to obtain clearance
by the SEC of the mailing of such material to the Citizens shareholders. After
such clearance is obtained, Citizens shall promptly call a meeting of its
shareholders to be held at the earliest date that is reasonably practicable for
the purpose of voting on this Agreement and the transactions contemplated
hereby. Subject to the provisions of Section 4.5(b) hereof, Citizens shall,
through its Board of Directors, recommend to its shareholders approval of the
Merger and of the other transactions contemplated by this Agreement (to the
extent such shareholder approval is required for such other transactions).
(b) The Board of Directors of Citizens may fail to make the foregoing
recommendation, or withdraw, modify or change any such recommendation in a
manner adverse to Meridian or approval of the Merger, if such Board of
Directors, after having consulted with and considered the advice of outside
counsel, has reasonably determined in good faith that the making of such
recommendation, or the failure to withdraw, modify or change its recommendation,
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would constitute a breach of the fiduciary duty of the members of such Board
of Directors under applicable law.
SECTION 4.6. ACQUISITION NEGOTIATIONS. During the period from the date of
this Agreement to the Effective Time, Citizens shall not without the prior
written consent of Meridian authorize or permit any of its officers, directors,
employees or agents to directly or indirectly solicit, initiate or encourage any
inquiries relating to, or the making of any proposal which constitutes, a
Takeover Proposal (as defined below), or recommend or endorse any Takeover
Proposal, or participate in any discussions or negotiations, or provide third
parties with any nonpublic information, relating to any such inquiry or proposal
or otherwise facilitate any effort or attempt to make or implement a Takeover
Proposal; provided, however, that, following prior written notice to Meridian,
Citizens may, and may authorize and permit its officers, directors, employees
and agents to,
(i) provide a third party with nonpublic information (subject to
execution of an appropriate confidentiality agreement requiring, that all
confidential or non-public information provided to such third party or its
representatives shall be used exclusively for the purpose of evaluating the
possible Takeover Proposal and not for any other purpose) or otherwise
facilitate any offer or attempt by that third party to make a Takeover
Proposal,
(ii) participate in discussions and negotiations with that third party
relating to any Takeover Proposal, and
(iii) recommend or endorse any Takeover Proposal with or by that third
party,
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if the Board of Directors of Citizens, after having consulted with and
considered the advice of outside counsel, has reasonably determined in good
faith that the failure to do so would cause the members of such Board of
Directors to breach their fiduciary duties under applicable law. The prior
written notice to Meridian required by the foregoing sentence shall include
the identity of the third party and shall be maintained by Meridian on a
confidential basis. As used in this Agreement, "Takeover Proposal" shall
mean, with respect to any person, any tender or exchange offer, proposal for
a merger, consolidation or other business combination involving any of the
Citizens Companies or any proposal or offer to acquire in any manner a
substantial equity interest in, or a substantial portion of the assets of,
any of the Citizens Companies other than the transactions contemplated or
permitted by this Agreement.
SECTION 4.7. POLICYHOLDERS' MEETING. Citizens Mutual shall promptly call a
meeting of its policyholders to be held at the earliest date that is reasonably
practicable for the purpose of ratifying this Agreement and voting on the
reconstitution of the Board of Directors of Citizens Mutual, as contemplated by
Section 1.7 of this Agreement, and Citizens Mutual shall (absent the existence
of an event which has a Meridian Material Adverse Effect), through its Board of
Directors, recommend to its policyholders the ratification of this Agreement and
the approval of such reconstitution of the Board of Directors, as contemplated
by Section 1.7 of this Agreement.
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SECTION 4.8. REPRESENTATION LETTER OF ESOP TRUSTEE. Citizens and Citizens
Mutual shall use their good faith efforts to cause the ESOP Trustee to provide
to Meridian and Citizens Mutual the ESOP Trustee's written representations,
dated the date of Closing and substantially in the form of Exhibit J
(Representation Letter of ESOP Trustee), that the ESOP Trustee has made an
independent investigation of the proposed Merger and the transactions
contemplated by this Agreement (including use of the Merger proceeds to pay the
outstanding balance due under the ESOP Note) and determined that such Merger and
transactions are in the best interests of the ESOP and its beneficiaries, and
that all allocated and unallocated ESOP Shares have been voted in accordance
with the provisions of the ESOP and applicable laws.
ARTICLE V
OTHER COVENANTS
The parties agree as follows with respect to the period following the
Closing:
SECTION 5.1. GENERAL. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes and interest of this
Agreement, each of the parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
party reasonably may request, all at the sole cost and expense of the requesting
party.
SECTION 5.2. CONTINUITY OF IDENTITY AND OPERATIONS FOR CITIZENS INSURANCE
COMPANIES. Meridian acknowledges the importance of Citizens Mutual and the
Citizens Subsidiaries to the community of Red Wing, Minnesota. Accordingly,
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through at least December 31, 1999, Meridian shall cause Citizens Mutual to
continue to operate under its present corporate name and shall cause Citizens
Mutual and the Citizens Subsidiaries to continue to maintain substantial
business operations and employment in the Red Wing, Minnesota, area.
SECTION 5.3. INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE. (a) For a
period of at least five years after the Effective Time, Meridian shall not, and
shall not permit any of its affiliates to, take any action to change, alter or
diminish the rights to indemnification and reimbursement or advancement of
expenses by the Citizens Companies now existing in favor of each present and
former director, officer, employee and agent of any of the Citizens Companies
(the "Indemnified Parties") as provided in their respective articles or
certificate of incorporation in effect on the date hereof; PROVIDED that, in the
event any claim or claims are asserted or made within such five-year period, all
rights to indemnification and reimbursement or advancement of expenses with
respect of any such claim or claims shall continue until final disposition of
any and all such claims.
(b) To the extent not otherwise provided for in the rights to
indemnification referred to in Section 5.3(a) hereof, Meridian shall, subject to
the terms set forth herein, indemnify and hold harmless an Indemnified Party,
and advance costs and expenses (including reasonably attorneys' fees) as
incurred, in each case to the fullest extent permitted under applicable law
(PROVIDED, the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to indemnification), in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to the transactions contemplated by
this Agreement, for a period of five years after the Effective Time; PROVIDED
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that, in the event any claim or claims are asserted or made within such five-
year period, all rights to such indemnification and advancement of expenses in
respect of the defense of any such claim or claims shall continue until final
disposition of any and all such claims.
(c) Any Indemnified Party wishing to claim indemnification under
Section 5.3(a) or (b), upon learning of any such claim, action, suit, proceeding
or investigation, shall promptly notify Meridian thereof, but the failure to so
notify shall not relieve Meridian of any liability it may have to such
Indemnified Party except to the extent such failure materially prejudices
Meridian. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) Meridian
shall have the right to assume the defense thereof, and Meridian shall not be
liable to such Indemnified Parties for any advancement of legal expenses of
other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that, if Meridian elects
not to assume such defense or if counsel for the Indemnified Parties advises
that there are issues which raise conflicts of interest between Meridian and the
Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to
them, and Meridian shall advance all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received; PROVIDED, HOWEVER, that (i) Meridian shall be obligated to advance
costs and expenses for only one firm of counsel for all Indemnified Parties in
any jurisdiction unless the use of one counsel for such Indemnified Parties
would present such counsel with a conflict of interest, and (ii) all Indemnified
Parties shall cooperate in good faith in the defense of any such matter. If
full indemnity is not available with respect to any Indemnified Party, Meridian
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and the Indemnified Party shall contribute to the amount payable in such
proportion as is appropriate to reflect faults and benefits.
(d) For a period of five years from the Effective Time, Meridian shall
use good faith efforts to provide that portion of directors' and officers'
liability insurance that serves to reimburse the present and former officers and
directors of each of the Citizens Companies (determined immediately prior to the
Effective Time) with respect to claims against such officers and directors
arising from facts or events which occurred before the Effective Time but were
not previously reported to the Citizens Companies' insurance carriers, which
insurance shall contain substantially at least the same coverage and amounts,
and contain terms and conditions substantially no less advantageous, as that
coverage currently provided by the Citizens Companies; provided, that officers
and directors of the Citizens Companies may be required to make application and
provide customary representations and warranties to Meridian's or the Citizens
Companies' insurance carrier for the purpose of obtaining such insurance; and
provided, further, that such coverage will have a single aggregate for such
five-year period in an amount not less than the annual aggregate of such
coverage currently provided by the Citizens Companies.
(e) The provisions of this Section 5.3 shall survive the Closing ,
shall be binding on all successors and assigns of Meridian, and are intended to
be for the benefit of, and shall be enforceable by, each Indemnified Party and
his or her heirs and representatives.
SECTION 5.4. CITIZENS EMPLOYEES. This Section 5.4 sets forth certain
agreements of Meridian with Citizens and Citizens Mutual regarding the employees
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of Citizens Mutual (the "Citizens Employees") following the Closing. At or
prior to the Closing, Meridian and Citizens Mutual shall provide a joint
letter to each of the Citizens Employees establishing the applicable
agreements contained in this Section 5.4.
(a) The Citizens Employees listed on Schedule 5.4(a) will be offered
continued employment in Red Wing, Minnesota in their present or similar
capacities with Citizens Mutual (and at not less than their current cash
compensation levels) until the earlier of (i) the date on which such Citizens
Employees are offered employment with Vis'n (as defined in Section 6.15 hereof)
or (ii) the first anniversary date of the date of the Closing; and until the
earlier of such dates the employment of such Citizens Employees may not be
terminated except for failure to meet reasonable performance expectations
consistent with their respective job descriptions, failure to comply with
applicable employment policies, or misconduct.
(b) The Citizens Employees listed on Schedule 5.4(b) will be offered
continued employment in Red Wing, Minnesota in their present or similar
capacities with Citizens Mutual (and at not less than their current cash
compensation levels) after the date of the Closing, and, during the period
beginning on such Closing date through December 31, 1997, the employment of such
Citizens Employees may not be terminated except for failure to meet reasonable
performance expectations consistent with their respective job descriptions,
failure to comply with applicable employment policies, or misconduct. Such
employment shall continue to be in Red Wing, Minnesota throughout such period.
(c) The Citizens Employees listed on Schedule 5.4(c) will be offered
continued employment in Red Wing, Minnesota in their present or similar
capacities with Citizens Mutual (and at not less than their current cash
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compensation levels) after the date of the Closing, and, during the period
beginning on such Closing date through December 31, 1998, the employment of
such Citizens Employees may not be terminated except for failure to meet
reasonable performance expectations consistent with their respective job
description, failure to comply with applicable employment policies, or
misconduct. Such employment shall continue to be in Red Wing, Minnesota
throughout such period.
(d) Continued employment following the Closing is not contemplated with
respect to the Citizens Employees listed on Schedule 5.4(d). In the event the
employment of any such Citizens Employee is terminated on or after the date of
the Closing, such terminated Citizens Employee will be offered a severance
package, substantially as follows: (i) supervisory employees would be offered
their then current salary and benefits for a period of eight weeks, plus an
additional week for each full year of service with Citizens Mutual as of the
time of termination of employment, and (ii) non-supervisory employees would be
offered their then current salary and benefits for a period of four weeks, plus
an additional week for each full year of service with Citizens Mutual as of the
date of termination of employment.
(e) No severance package (other than existing arrangements or agreements
contemplated by this Agreement) or offer of continued employment will be made to
the Citizens Employees and other persons listed on Schedule 5.4(e). Citizens
and Citizens Mutual represent and warrant that the Schedules provided for in
this Section 5.4 include all of the Citizens Employees.
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(f) All employment policies and benefit plans for continuing employees of
Citizens Mutual will continue in full force and effect until December 31, 1996.
Effective January 1, 1997, all existing Citizens Mutual employee benefit plans
will be terminated or merged into or amended to be consistent with Meridian
employee benefit plans, and all other existing Citizens Mutual employment
policies and practices will be changed to be consistent with Meridian employment
policies and practices. For purposes of determining participation and vesting
(but not for calculating benefits) under the employee benefit plans of Meridian,
each Citizens Employee will be credited with his or her length of service while
employed by Citizens Mutual. After December 31, 1996, and except as otherwise
provided in this Section 5.4, Citizens Employees will be governed by Meridian's
employment policies and practices as they may be changed from time to time.
(g) The provisions of this Section 5.4 are not intended and shall not be
construed to give any Citizens Employee or any person other than the parties to
this Agreement any legal or equitable right, remedy or claim under or in respect
of this Agreement. Any rights of the Citizens Employees contemplated by this
Section 5.4 shall be established by and arise under the separate joint letter to
be provided to each of the Citizens Employees, as contemplated by this Section
5.4 and by Section 7.10.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF MERIDIAN
The obligations of Meridian under this Agreement shall, at the option of
Meridian, be subject to the satisfaction, at or prior to the time of the
Closing, of the following conditions:
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SECTION 6.1. NO MISREPRESENTATION OR BREACH OF COVENANTS OR WARRANTIES. As
of the time of Closing, (a) there shall have been no material breach by Citizens
or Citizens Mutual in the performance of any of its covenants and agreements
herein, (b) each of the representations and warranties of Citizens and Citizens
Mutual contained in this Agreement shall have been true and correct as of the
date of execution of this Agreement, and (c) each of the representations and
warranties of Citizens and Citizens Mutual contained in this Agreement, without
regard to any qualification, materiality threshold or reference to immateriality
or a Citizens Material Adverse Effect, shall be true and correct as of the date
of the Closing as though made on and as of such date (PROVIDED, that each of the
representations and warranties made as of a particular date need only be true
and correct as of that date), except for any inaccuracies which, individually or
in the aggregate, have not had a Citizens Material Adverse Effect; PROVIDED,
HOWEVER, that there shall be deemed not to be such a Citizens Material Adverse
Effect to the extent that such effect is the result of the announcement of the
Merger or the result of transactions contemplated by this Agreement.
SECTION 6.2. OFFICERS' CERTIFICATES. Citizens and Citizens Mutual shall
have delivered to Meridian a certificate, dated the date of the Closing and
executed by the chief executive officer and by the chief financial officer or an
executive vice president of Citizens and Citizens Mutual, certifying that the
conditions set forth in Section 6.1 hereof have been fulfilled. In addition,
Citizens and Citizens Mutual shall have delivered to Meridian a certificate,
dated the date of the Closing and executed by the corporate secretary or
assistant corporate secretary of Citizens and Citizens Mutual, certifying as to:
the articles of incorporation, by-laws and corporate existence of each of the
Citizens Companies; that the resolutions (true and complete copies of which
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shall be attached to the certificate) of the Boards of Directors of Citizens
and Citizens Mutual with respect to this Agreement and the transactions
contemplated hereby have been duly and validly adopted and are in full force
and effect; that the resolutions (true and complete copies of which shall be
attached to the certificate) of the shareholders of Citizens with respect to
this Agreement and the transactions contemplated hereby have been duly and
validly adopted and are in full force and effect; that any resolutions (true
and complete copies of which shall be attached to the certificate) of the
policyholders or members of Citizens Mutual with respect to this Agreement
and the transactions contemplated hereby, if any such resolutions are
required, have been duly and validly adopted and are in full force and
effect; and as to the incumbency and signatures of certain officers of
Citizens and Citizens Mutual.
SECTION 6.3. LETTER AS TO TRANSACTION COST. Citizens and Citizens Mutual
shall have delivered to Meridian a letter, dated the date of the Closing and
executed by the chief financial officer and the treasurer of Citizens and
Citizens Mutual, setting forth all Transaction Costs (as defined in Section
10.2) paid or incurred by the Citizens Companies (whether paid or payable before
or after the Effective Time), in connection with this Agreement or the
transactions contemplated hereby, and specifying in reasonable detail the amount
of such Transaction Costs in a manner that will enable the parties to determine
the amount of the Transaction Costs Adjustment, if any, as that term is defined
in Section 10.2. Such letter shall be based upon facts and such good faith
estimates as may be reasonable under the circumstances; provided, however, that
the letter shall clearly indicate the amounts that are estimated and the basis
for the estimates.
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SECTION 6.4. APPROVAL OF CITIZENS' SHAREHOLDERS AND CITIZENS MUTUAL'S
POLICYHOLDERS. (a) The Merger shall have been approved and adopted at a duly
called meeting of the shareholders of Citizens by the requisite vote of the
issued and outstanding shares of Citizens Common Stock and Citizens Preferred
Stock entitled to vote thereon, voting as separate classes.
(b) This Agreement and the reconstitution of the Board of Directors of
Citizens Mutual, as contemplated by Section 1.7 of this Agreement, shall have
been approved at a duly called meeting of the policyholders of Citizens Mutual
by the requisite vote of policyholders entitled to vote thereon.
SECTION 6.5. DISSENTING SHARES. The holders of not more than 5% of the
issued and outstanding shares of Citizens Common Stock at the Effective Time
shall have delivered written notice of intent to demand payment of the fair
value of their shares of Citizens Common Stock pursuant to the Minnesota
Dissenters' Rights Statute, and Citizens Mutual shall not have delivered written
notice of intent to demand payment of the fair value of the shares of Citizens
Preferred Stock pursuant to the Minnesota Dissenters' Rights Statute.
SECTION 6.6. REGULATORY APPROVAL. All approvals, authorizations and
consents from governmental and regulatory bodies required for the transactions
contemplated by this Agreement and to permit the business currently carried on
by the Citizens Companies to continue to be carried on substantially in the same
manner following the Effective Time, shall have been obtained and shall be in
full force and effect (including, without limitation, approvals by appropriate
insurance regulators in the states of Minnesota, Indiana and Ohio), and Meridian
shall have been furnished with appropriate evidence, reasonably satisfactory to
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it and its counsel, of the granting of such approvals, authorizations and
consents. There shall not have been any action taken by any court,
arbitration tribunal or any governmental or regulatory body prohibiting or
making illegal at the time of the Closing or the Effective Time any of the
transactions contemplated by this Agreement.
SECTION 6.7. HART-SCOTT-RODINO. The waiting period required under the Hart-
Scott-Rodino Act, including any extension thereof, shall have terminated or
expired prior to the time of the Closing.
SECTION 6.8. THIRD PARTY CONSENTS. All consents, permits and approvals from
parties to material contracts or other material agreements with the Citizens
Companies required in connection with the transactions contemplated hereby shall
have been obtained (including, without limitation, any consents required for the
continued use by the Citizens Companies of computer software or hardware
material to the business of the Citizens Companies licensed or leased to
Citizens Mutual for use by any of the other the Citizens Companies).
SECTION 6.9. BOARDS OF DIRECTORS. The respective Boards of Directors of the
Citizens Companies shall be reconstituted as follows:
(a) CITIZENS SUBSIDIARIES: The six current directors of Meridian
Security, plus the current President and the current Vice President of
Marketing of Citizens.
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(b) CITIZENS MUTUAL: The six current directors of Meridian Security,
plus the current Vice President of Marketing of Citizens Mutual and the
current President of Citizens Mutual.
(c) MISSISSIPPI VALLEY CORPORATION: Such persons as may be designated
by Meridian not less than five days prior to the Closing.
In addition, any amendments to the articles or certificate of incorporation or
bylaws of any of the Citizens Companies necessary for the foregoing shall have
been adopted and become effective.
SECTION 6.10. OFFICERS. Each officer of each of the Citizens Insurance
Companies shall have tendered his or her resignation as an officer, effective as
of the Effective Time, and arrangements reasonably satisfactory to Meridian
shall have been made providing for the appointment of the Chief Executive
Officer of Meridian as the Chairman of the Board, President and Chief Executive
Officer of each of the Citizens Insurance Companies, effective at the Effective
Time. In addition, each officer of each other Citizens Company shall have
tendered his or her resignation as an officer, effective as of the Effective
Time.
SECTION 6.11. REINSURANCE POOLING AGREEMENT. All regulatory approvals
necessary for the execution of the Reinsurance Pooling Agreement, substantially
in the form of Exhibit B, by all parties thereto shall have been obtained, and
the Citizens Insurance Companies shall have entered into that Pooling
Reinsurance Agreement, effective as of the Effective Time.
SECTION 6.12. MANAGEMENT SERVICES AGREEMENTS. All regulatory approvals
necessary for the execution of the Management Services Agreements, substantially
in the forms of Exhibits C-1 and C-2, by all parties thereto shall have been
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obtained, and the Citizens Insurance Companies shall have entered into those
Management Services Agreements, effective as of the Effective Time.
SECTION 6.13. NO MATERIAL ADVERSE CHANGE. Since December 31, 1995, there
shall have been no material adverse change in the business of the Citizens
Companies (considered as a whole) or in the consolidated results of operations
or consolidated financial condition of either Citizens (considered as a whole)
or Citizens Mutual (considered as a whole); PROVIDED, HOWEVER, that there shall
be deemed not to be such a material adverse change to the extent that such
change is the result of the announcement of the Merger or the result of
transactions contemplated by this Agreement.
SECTION 6.14. CERTAIN PERSONNEL MATTERS. (a) Spencer Broughton shall have
entered into the Consulting Services Agreement, substantially in the form of
Exhibit D.
(b) Scott Broughton shall have entered into the Employment Agreement,
substantially in the form of Exhibit E.
SECTION 6.15. VIS'N MATTERS. Scott Broughton, Kirk Simmons, Meridian and
Citizens Mutual shall have entered into a letter agreement (the "Vis'n Letter")
regarding a corporation to be organized by Scott Broughton and Kirk Simmons
("Vis'n"). The Vis'n Letter shall provide among other matters that, upon Vis'n's
formation and Meridian's reasonable satisfaction that Vis'n is then or will be
authorized to conduct business and to enter into the contracts and transactions
contemplated by this Section 6.15, Vis'n or Vis'n and Citizens Mutual, as the
case may be, will do the following:
(a) Vis'n will offer employment, with at least substantially the
same compensation as provided by Citizens Mutual, to the Citizen employees
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listed on Schedule 5.4(a), such employment to be effective on or about the
commencement date of the Claims Administration Agreement and Software and
Hardware Systems Agreement referred to in Sections 6.15(c) and (d) hereof;
and Vis'n will immediately reimburse Citizens Mutual or Meridian for any
required payments in respect of unused vacation time or personal leave time
made to such Citizens Employees who accept Visn's employment offer (or will
allow Citizens Mutual or Meridian to deduct such payments from amounts
otherwise payable to Vis'n under the Claims Administration Agreement and
Software and Hardware Support Agreement referred to in Sections 6.15(c) and
(d) hereof);
(b) Vis'n and Citizens Mutual will enter into the Real Estate Sublease
Agreement, substantially in the form of Exhibit F.
(c) Vis'n and Citizens Mutual will enter into the Claims Administration
Agreement, substantially in the form of Exhibit G.
(d) Vis'n and Citizens Mutual will enter into the Software and Hardware
Support Agreement, substantially in the form of Exhibit H.
(e) Vis'n and Citizens Mutual will enter into the Office Equipment Lease
Agreement, substantially in the form of Exhibit I.
(f) Vis'n will pay $3,000 of the monthly consulting fees payable by
Citizens Mutual to Michael L. Halvorson under a certain Independent Consultant
Agreement with Citizens Mutual.
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SECTION 6.16. ESOP AND PLAN MATTERS. The actions to be taken by or in
respect of the ESOP described in Section 1.5 shall have been taken.
SECTION 6.17. OPINION OF COUNSEL FOR CITIZENS AND CITIZENS MUTUAL.
Meridian shall have received from separate counsel for Citizens and for Citizens
Mutual, opinions dated the date of the Closing, in form and substance reasonably
satisfactory to Meridian.
SECTION 6.18. FAIRNESS OPINION. The fairness opinion Meridian has received
from the investment banking firm of McDonald & Company Securities, Inc., to the
effect that the consideration to be paid by Meridian to the shareholders of
Citizens pursuant to the Merger is fair, from a financial point of view, to the
shareholders of Meridian, shall have been updated to the time of Closing in form
and substance reasonably satisfactory to the Board of Directors of Meridian.
SECTION 6.19. HALVORSON ARRANGEMENTS. The First Amended Software Agreement,
dated March 21, 1996, between Michael L. Halvorson and Citizens Mutual shall be
in effect.
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ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF
CITIZENS AND CITIZENS MUTUAL
The obligations of Citizens and Citizens Mutual under this Agreement shall,
at the option of Citizens and Citizens Mutual, be subject to the satisfaction,
at or prior to the time of the Closing, of the following conditions:
SECTION 7.1. NO MISREPRESENTATION OR BREACH OF COVENANTS OR WARRANTIES. As
of the time of the Closing, (a) there shall have been no material breach by
Meridian in the performance of any of its covenants herein, (b) each of the
representations and warranties of Meridian contained in this Agreement shall
have been true and correct as of the date of the execution of this Agreement,
and (c) each of the representations and warranties of Meridian contained in this
Agreement, without regard to any qualification, materiality threshold or
reference to immateriality or a Meridian Material Adverse Effect, shall be true
and correct as of the date of the Closing as though made on and as of such date
(provided, that each of the representations and warranties made as of a
particular date need only be true and correct as of that date), except for any
inaccuracies which, individually or in the aggregate, have not had a Meridian
Material Adverse Effect; PROVIDED, HOWEVER, that there shall be deemed not to be
such a Meridian Material Adverse Effect to the extent that such effect is the
result of the announcement of the Merger or the result of transactions
contemplated by this Agreement.
SECTION 7.2. SHAREHOLDER AND POLICYHOLDER APPROVAL. (a) The Merger shall
have been approved and adopted at a duly called meeting of the shareholders of
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Citizens by the requisite vote of the issued and outstanding shares of
Citizens Common Stock and Citizens Preferred Stock entitled to vote thereon,
voting as separate classes.
(b) This Agreement and the reconstitution of the Board of Directors of
Citizens Mutual, as contemplated by Section 1.7 of this Agreement, shall have
been approved at a duly called meeting of the policyholders of Citizens Mutual
by the requisite vote of such policyholders entitled to vote thereon.
SECTION 7.3. OFFICERS' CERTIFICATES. Meridian shall have delivered to
Citizens and Citizens Mutual a certificate, dated the date of the Closing and
executed by the chief executive officer and by the chief financial officer or an
executive vice president of Meridian, certifying that the conditions set forth
in Section 7.1 hereof have been fulfilled. In addition, Meridian shall have
delivered to Citizens and Citizens Mutual a certificate, dated the date of the
Closing and executed by the corporate secretary or assistant corporate secretary
of Meridian and Merger Company, certifying as to: the articles of incorporation,
by-laws and corporate existence of Meridian and Merger Company; that the
resolutions (true and complete copies of which shall be attached to the
certificate) of the Boards of Directors of Meridian and Merger Company with
respect to this Agreement and the transactions contemplated hereby have been
duly and validly adopted and are in full force and effect; and as to the
incumbency and signatures of certain officers of Meridian and Merger Company.
SECTION 7.4. REGULATORY APPROVAL. All approvals, authorizations and
consents from governmental and regulatory bodies required for the transactions
contemplated by this Agreement shall have been obtained and shall be in full
force and effect (including, without limitation, approvals by appropriate
insurance regulators in the states of Minnesota, Indiana and Ohio), and
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Citizens and Citizens Mutual shall have been furnished with appropriate
evidence, reasonably satisfactory to it and its counsel, of the granting of such
approvals, authorizations and consents. There shall not have been any action
taken by any court, arbitration tribunal or any governmental or regulatory body
prohibiting or making illegal at the time of the Closing or the Effective Time
any of the transactions contemplated by this Agreement.
SECTION 7.5. HART-SCOTT-RODINO. The waiting period required under the
Hart-Scott-Rodino Act, including any extension thereof, shall have terminated or
expired prior to the time of the Closing.
SECTION 7.6. BOARDS OF DIRECTORS. Arrangements reasonably satisfactory to
Citizens and Citizens Mutual shall have been made providing for: (a) the Boards
of Directors of each of the Citizens Subsidiaries to include the current
President and the current Vice President of Marketing of Citizens, (b) for the
Board of Directors of Citizens Mutual to include the current Vice President of
Marketing of Citizens Mutual and the current President of Citizens Mutual, and
(c) for the Board of Directors of Meridian to include the current President of
Citizens and Citizens Mutual; in each case, as of immediately following the
Effective Time.
SECTION 7.7. THIRD PARTY CONSENTS. All consents, permits and approvals from
parties to material contracts or other material agreements with the Meridian
Companies required in connection with the transactions contemplated hereby shall
have been obtained.
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SECTION 7.8. REINSURANCE POOLING AGREEMENT. All corporate and regulatory
approvals necessary for the execution of the Reinsurance Pooling Agreement
substantially in the form of Exhibit B, by all parties thereto, shall have been
obtained; and Meridian Mutual and Meridian Security shall have entered into that
Reinsurance Pooling Agreement, effective as to the Effective Time.
SECTION 7.9. MANAGEMENT SERVICES AGREEMENTS. All corporate and regulatory
approvals necessary for the execution of the Management Services Agreements
substantially in the forms of Exhibit C-1 and C-2, by the respective parties
thereto, shall have been obtained; and Meridian, Meridian Mutual and Meridian
Security shall have entered into those Management Services Agreements, effective
as of the Effective Time.
SECTION 7.10. CERTAIN PERSONNEL MATTERS. (a) Meridian shall have entered
into the Consulting Services Agreement with Spencer Broughton, substantially in
the form of Exhibit D.
(b) Meridian shall have entered into the Employment Agreement with Scott
Broughton, substantially in the form of Exhibit E.
(c) The letter or letters to Citizens Employees referred to in
Section 5.4, in a form or forms reasonably satisfactory to Citizens and Citizens
Mutual, shall have been provided to such Citizens Employees, or arrangements
therefor reasonably satisfactory to Citizens and Citizens Mutual shall have been
made.
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SECTION 7.11. VIS'N MATTERS. The Vis'n Letter referred to in Section 6.15
shall have been entered into.
SECTION 7.12. NO MATERIAL ADVERSE CHANGE. Since December 31, 1995, there
shall have been no material adverse change in the business, results of
operations or financial condition of the Meridian Companies (considered as a
whole); PROVIDED, HOWEVER, that there shall be deemed not to be such a material
adverse change to the extent that such change is the result of the announcement
of the Merger or the result of transactions contemplated by this Agreement.
SECTION 7.13. OPINION OF COUNSEL FOR MERIDIAN. Citizens and Citizens
Mutual shall have received from counsel for Meridian, an opinion dated the date
of the Closing, in form and substance reasonably satisfactory to Citizens and
Citizens Mutual.
SECTION 7.14. FAIRNESS OPINIONS. The fairness opinion Citizens has received
from the investment banking firm of Goldsmith, Agio, Helms Securities, Inc., to
the effect that the consideration to be received in the Merger by the holders of
Citizens Common Stock and Citizens Preferred Stock is fair to such holders from
a financial point of view, shall have been updated to the date of the proxy
statement referred to in Section 4.5(a) and to the time of Closing, in form and
substance reasonably satisfactory to the Board of Directors of Citizens.
SECTION 7.15. PAYMENT OF ESOP NOTE. The ESOP note shall have been repaid as
contemplated by Section 1.5(b).
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ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
SECTION 8.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made in this Agreement by the parties hereto
shall not survive the Closing. Notwithstanding the foregoing, the covenants set
forth in Article V shall survive the Effective Time.
ARTICLE IX
TERMINATION
SECTION 9.1. TERMINATION. This Agreement and the transactions contemplated
by this Agreement may be terminated at any time prior to the filing of the
Articles of Merger with the Secretary of State of Minnesota, whether before or
after action by the shareholders of Citizens as contemplated by Section 4.5(a),
of this Agreement and without further approval by the shareholders of Citizens:
(a) By mutual written consent of Meridian, Citizens and Citizens Mutual;
(b) By Citizens and Citizens Mutual, by written notice to Meridian, if the
number of votes in favor of the Merger and this Agreement cast by the
shareholders of Citizens and required for the consummation of the Merger shall
not have been obtained at the meeting of Citizens' shareholders or at any
adjournment thereof duly held for such purpose;
(c) By either Citizens and Citizens Mutual, on the one hand, or by Meridian,
on the other hand, by written notice to the other, if the Minnesota Department
fails by September 30, 1996, to approve, or give its consent to any of the
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material transactions contemplated by this Agreement that the Minnesota
Department is required to approve or consent to under applicable law;
(d) By Meridian, in the event a condition set forth in Article VI of this
Agreement cannot be satisfied;
(e) By Citizens and Citizens Mutual, in the event a condition set forth in
Article VII of this Agreement cannot be satisfied; or
(f) By either Meridian, on the one hand, or by Citizens and Citizens Mutual,
on the other hand, by written notice to the other if the Merger is not
consummated by September 30, 1996.
SECTION 9.2. TERMINATION FEE. (a) If Citizens and Meridian fail to
consummate the Merger and:
(i) Citizens enters into a letter of intent, commitment letter or other
written agreement with a third party regarding a merger, consolidation, sale
of assets or other similar transaction involving Citizens or Citizens Mutual
prior to January 1, 1997; and
(ii) Meridian shall have complied with all of its obligations under
this Agreement required to be performed by it through the date of the
earliest relevant event described in Section 9.2(a)(i); and
(iii) this Agreement shall not have been terminated by mutual
written consent of all of the parties pursuant to Section 9.1(a);
then Citizens shall promptly pay to Meridian an amount equal to $586,646 PLUS
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the amounts of all Transaction Costs paid or incurred by Meridian or its
affiliates, and Citizens and Citizens Mutual shall have no further liability
or obligation to Meridian with respect to this Agreement.
(b) If Citizens and Meridian fail to consummate the Merger and:
(i) either (A) the Board of Directors of Citizens refuses or fails to
make the recommendation to the shareholders of Citizens contemplated by
Section 4.5(a), or withdraws, modifies or changes any such recommendation in
a manner adverse to Meridian or to approval of the Merger, (B) any party
terminates this Agreement pursuant to Section 9.1(c) because the Minnesota
Department does not approve the Merger due to the amount of consideration to
be received by any shareholders in the Merger, (C) Citizens Mutual shall not
have voted its shares of Citizens Common Stock or Citizens Preferred Stock in
favor of the Merger and other transactions contemplated by this Agreement at
the meeting of the shareholders of Citizens contemplated by Section 4.5(a)
(it being understood that Citizens Mutual is not obligated by this Agreement
or otherwise to vote in favor of the Merger and such transactions) or (D) the
First Amended Software Agreement, dated March 21, 1996, between Michael L.
Halvorson and Citizens Mutual shall not have remained in effect; and
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(ii) Meridian shall have complied with all of its obligations under
this Agreement required to be performed by it through the date of the
earliest relevant event described in Section 9.2(b)(i); and
(iii) this Agreement shall not have been terminated by mutual written
consent of all of the parties pursuant to Section 9.1(a),
then Citizens shall pay and reimburse to Meridian all Transaction Costs paid or
incurred by Meridian or its affiliates, promptly upon receipt from Meridian of a
reasonably detailed accounting thereof; and Citizens and Citizens Mutual shall
have no further liability or obligations to Meridian with respect to this
Agreement except as may arise under Section 9.2(a).
SECTION 9.3. SURVIVAL OF RIGHTS. Except as otherwise provided in
Sections 9.1 and 9.2, nothing in this Article IX or in this Agreement shall be
construed as limiting the rights of any party in the event of a breach by any
party of this Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.1. NOTICES. All notices or other communications required or
permitted hereunder shall be in writing and shall be given by confirmed telecopy
or registered mail addressed:
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(a) If to Citizens or Citizens Mutual:
Mr. Scott S. Broughton
President, Chief Operating Officer and Chief Financial Officer
Citizens Security Group Inc.
Citizens Security Mutual Insurance Company
406 Main Street
Red Wing, Minnesota 55066
Fax: (612) 388-0538
If to Citizens, a copy to:
Jay L. Swanson, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Fax: (612) 340-8738
If to Citizens Mutual, a copy to:
Thomas H. Borman, Esq.
Maslon Edelman Borman & Brand
3300 Norwest Center
90 S. Seventh Street
Minneapolis, Minnesota 55402-4140
Fax: (612) 672-8397
(b) If to Meridian:
Ms. Norma J. Oman
President and Chief Executive Officer
Meridian Insurance Group, Inc.
2955 North Meridian Street
Indianapolis, Indiana 46208
Fax: (317) 927-8119
with copies to:
J. Mark McKinzie, Esq.
General Counsel
2955 North Meridian Street
Indianapolis, Indiana 46208
Fax: (317) 931-7930
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and
Tibor D. Klopfer, Esq.
Baker & Daniels
300 North Meridian Street, Suite 2700
Indianapolis, Indiana 46204
Fax: (317) 237-1000
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Section 10. 01 will (i) if delivered
personally, be deemed given upon delivery, (ii) if delivered by facsimile
transmissions, be deemed given when sent and confirmation or receipt is
received, and (iii) if delivered by mail in the manner described above, be
deemed received on the date of receipt. Any party from time to time may change
its address for the purpose of notices to that party by giving notice to the
other parties hereto specifying a new address, but no such notice will be deemed
to have been given until it is actually received by the party sought to be
charged with the contents thereof.
SECTION 10.2. EXPENSES. (a) Except as otherwise provided herein, each party
hereto shall pay its own expenses, including without limitation, legal and
accounting fees and expenses, incident to its negotiation and preparation of
this Agreement and to its performance and compliance with the provisions
contained herein ("Transaction Costs").
(b) In the event that the aggregate Transaction Costs paid or incurred
by the Citizens Companies exceed $650,000, the excess over that amount (the
"Transaction Costs Adjustment") shall reduce the amount of cash payable to the
holders of Citizens Common Stock and Citizens Preferred Stock, as provided in
Section 1.3(a). The parties acknowledge that the Transaction Costs Adjustment,
if any, may be based in part upon reasonable good faith estimates
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if any, may be based in part upon reasonable good faith estimates and
projections made immediately prior to the Closing and shall be determined in
the manner provided in Section 6.3.
SECTION 10.3. TITLES AND HEADINGS. Titles and headings to Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement.
SECTION 10.4. NO THIRD-PARTY BENEFICIARIES. Except as otherwise provided in
Section 5.3 of this Agreement, nothing in this Agreement or in any agreement
attached hereto as an exhibit is intended or shall be construed to give any
person, other than the parties hereto any legal or equitable right, remedy or
claim under or in respect of this Agreement or any agreement attached hereto as
an exhibit or any provision contained herein or therein.
SECTION 10.5. ENTIRE AGREEMENT. This Agreement, together with the contracts
executed and delivered pursuant hereto, supersedes all prior discussions and
agreements between the parties with respect to the subject matter of this
Agreement, and this Agreement, including documents, certificates and contracts
executed and delivered pursuant hereto, contains the sole and entire agreement
between the parties hereto with respect to the subject matter hereof.
Notwithstanding the foregoing, the parties agree that the terms and conditions
of the Confidentiality and Non-Disclosure Agreement shall continue to remain in
full force and effect.
SECTION 10.6. PUBLIC ANNOUNCEMENTS. At all times at or before the Closing,
Citizens and Citizens Mutual and Meridian will consult with the other before
issuing or making any reports, statements, or releases to the public with
respect to this Agreement or the transactions contemplated hereby and will use
good faith efforts to obtain the other party's approval of the text of any
public report, statement, or releases to be made on behalf of such party. If
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either party is unable to obtain the approval of its public report,
statement, or release from the other party and such report, statement, or
release is, in the opinion of legal counsel to such party, required by law in
order to discharge such party's disclosure obligations, then such party may
make or issue the legally required report, statement, or release and promptly
furnish the other party with a copy thereof.
SECTION 10.7. WAIVER. Any term or condition of this Agreement may be waived
at any time by the party that is entitled to the benefit thereof. A waiver on
one occasion will not be deemed to be a waiver of the same or any other breach
on a future occasion. All remedies, either under this Agreement, or by law or
otherwise afforded, will be cumulative and not alternative, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party waiving such terms or conditions.
SECTION 10.8. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the state of Indiana without giving
effect to any choice or conflicts of law provision or rule (whether of the State
of Indiana or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Indiana.
SECTION 10.9. BINDING EFFECT. This Agreement is binding upon and will inure
to the benefit of the parties and their respective successors and permitted
assignees.
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SECTION 10.10. NO ASSIGNMENT. This Agreement or any right or obligation
hereunder may not be assigned by any party hereto without the prior written
consent of the other parties hereto and any attempt to do so will be void.
SECTION 10.11. INVALID PROVISIONS. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future law,
and if the rights or obligations of the parties under this Agreement will not be
materially and adversely affected thereby: (a) such provision will be fully
severable; (b) this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part hereof; (c) the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom; and (d) in lieu of such illegal, invalid or
unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
SECTION 10.12. CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party. Any
reference to any federal, state, local or foreign statute or law shall be deemed
also to refer to all rules and regulations promulgated thereunder, unless the
context requires otherwise.
SECTION 10.13. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
two or more counterparts, all of which shall be considered one and the same
agreement, and shall become a binding agreement when one or more counterparts
have been signed by each of the parties and delivered to each of the other
parties.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
MERIDIAN INSURANCE GROUP, INC.
By:/s/ Norma J. Oman
------------------------------
Norma J. Oman, President and
Chief Executive Officer
CITIZENS SECURITY GROUP INC.
By:/s/ Scott S. Broughton
------------------------------
Name: Scott S. Broughton
Title: President, Chief Operating Officer,
and Chief Financial Officer
CITIZENS SECURITY MUTUAL
INSURANCE COMPANY
By: /s/ Scott S. Broughton
------------------------------
Name: Scott S. Broughton
Title: President, Chief Operating Officer,
and Chief Financial Officer
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EXHIBIT A TO ACQUISITION
AND AFFILIATION AGREEMENT
PLAN OF MERGER
This Plan of Merger (the "Plan of Merger") is pursuant to the Minnesota
Business Corporation Act (the "MBCA"):
ARTICLE I
THE MERGER
1.01 THE MERGER. At the Effective Time (as defined in Section 1.03 hereof)
in accordance with this Plan of Merger and the MBCA, [Merger Company]
("Merger Company"), a Minnesota corporation and an indirect wholly owned
subsidiary of Meridian Insurance Group, Inc. ("Parent"), shall be merged (the
"Merger") into Citizens Security Group Inc., a Minnesota corporation
("Citizens"), the separate existence of Merger Company shall cease, and
Citizens shall continue as the surviving corporation under the corporate name
Citizens Security Group Inc. Citizens, in its capacity as the corporation
surviving the Merger, is hereinafter sometimes referred to as the "Surviving
Corporation." Citizens and Merger Company are hereinafter sometimes
collectively referred to as the "Constituent Corporations."
1.02 EFFECT OF THE MERGER. The effect of the Merger shall be as set
forth in Section 641 of the MBCA, and the Surviving Corporation shall succeed
to and possess all the properties, rights, privileges, immunities, powers,
franchises and purposes, and be subject to all the duties, liabilities,
debts, obligations, restrictions and disabilities, of the Constituent
Corporations, all without further act or deed.
1.03 EFFECTIVE TIME. The Merger shall become effective immediately upon
the filing of articles of merger, prepared in accordance with Section 615 of
the MBCA and containing the Plan of Merger, with the Secretary of State
of the State of Minnesota or at such later time as set forth in such articles
of merger. The date and time on which the Merger shall become effective is
referred to herein as the "Effective Time."
1.04 DIRECTORS AND OFFICERS. From and after the Effective Time, the
directors of the Surviving Corporation shall be the persons who were the
directors of Merger Company immediately prior to the Effective Time, and the
officers of the Surviving Corporation shall be the persons who were the
officers of Merger Company immediately prior to the Effective Time. The
directors and officers of the Surviving Corporation shall hold office for the
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term specified in, and subject to the provisions contained in, the Articles
of Incorporation and Bylaws of the Surviving Corporation and applicable law.
1.05 ARTICLES OF INCORPORATION AND BYLAWS. From and after the Effective
Time and until further amended in accordance with applicable law, the
Articles of Incorporation of Citizens as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation. From and after the Effective Time and until further amended in
accordance with applicable law, the Bylaws of Citizens as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation.
1.06 FURTHER ACTION. If, at any time after the Effective Time, any further
action is necessary or desirable to carry out the purposes of this Plan of
Merger and to vest the Surviving Corporation with full right, title and
possession to all properties, rights, privileges, immunities, powers and
franchises of either of the Constituent Corporations, the officers of the
Surviving Corporation are fully authorized in the name of each Constituent
Corporation or otherwise to take, and shall take, all such action.
ARTICLE II
CONVERSION OF SECURITIES
2.01 CONVERSION OF SECURITIES. At the Effective Time, by virtue of the
Merger and without any action on the part of Citizens, Merger Company, the
Surviving Corporation or the holder of any of the following securities:
(a) each share, $.01 par value, of Citizens common stock
("Citizens Common Stock") issued and outstanding immediately prior to
the Effective Time (except Dissenting Shares, as such term is defined
in Section 2.03(a) below) shall be canceled and extinguished and be
converted into and become a right to receive a cash payment in an
amount equal to the portion of the Final Common Stock Merger Price, as
defined in Section 2.02(a) below, that bears the same proportion to
the total Final Common Stock Merger Price as one share of Citizens
Common Stock bears to all issued and outstanding shares of Citizens Common
Stock as of the Effective Time, which amount is $_______ per share;
(b) each share, $.01 par value, of Citizens Series A preferred
stock ("Citizens Preferred Stock") issued and outstanding immediately
prior to the Effective Time shall be canceled and extinguished and be
converted into and become a right to receive a cash payment in an amount
equal to the portion of the Final Preferred Stock Merger Price, as
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defined in Section 2.02(b) below, that bears the same proportion to the
total Final Preferred Stock Merger Price as one share of Citizens Preferred
Stock bears to all issued and outstanding shares of Citizens Preferred Stock
as of the Effective Time, which amount is $________ per share; and
(c) the shares of capital stock of Merger Company issued and
outstanding immediately prior to the Effective Time shall be canceled and
converted into all of the issued and outstanding capital stock of
Citizens.
2.02 DEFINITIONS.
(a) The term Final Common Stock Merger Price means $24,957,312
less 85.1% of the Transaction Costs Adjustment, if any, as that term is
defined in Section 2.02(c).
(b) The term Final Preferred Stock Merger Price means
$4,375,000 less 14.9% of the Transaction Costs Adjustment, if any, as
that term is defined in Section 2.02(c).
(c) The term Transaction Costs Adjustment means the amount by
which Transaction Costs paid or incurred by Citizens and its affiliates
exceed $650,000. Transaction Costs means expenses, including, without
limitation, legal and accounting fees and expenses incident to the
negotiation and preparation of an Acquisition and Affiliation Agreement
by and among Citizens, Citizens Security Mutual Insurance Company and
Meridian Insurance Group, Inc. and compliance with the provisions
contained therein.
2.03 DISSENTING SHARES.
(a) Notwithstanding anything in this Plan of Merger to the
contrary, if Section 471 of the MBCA is applicable to the Merger, shares
of Citizens Common Stock that are issued and outstanding immediately
prior to the Effective Time and that are held by shareholders who (i)
have not voted such shares in favor of the Merger, (ii) have delivered,
prior to any vote on the Merger, a written demand for the fair value of
such shares in the manner provided in Section 473 of the MBCA and (iii)
as of the Effective Time have not effectively withdrawn such written
demand or otherwise lost their right to appraisal of the payment for such
shares ("Dissenting Shares") shall not be converted into or represent a
right to receive cash pursuant to Section 2.01 hereof, but the holders
thereof shall be entitled only to such rights as are granted by Section
473 of the MBCA. After the Effective Time, if any such holder of
Dissenting Shares shall have effectively withdrawn such holder's demand
for appraisal of such shares or lost such holder's right to appraisal of
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and payment for such shares under Section 473 of the MBCA, such holder or
holders (as the case may be) shall forfeit the right to appraisal of such
shares and each such share shall thereupon be deemed to have been
canceled, extinguished and converted, as to the Effective Time, into and
represent the right to receive payment from the Surviving Corporation, as
provided in Section 2.01 hereof.
(b) If the holder of any shares of Citizens Common Stock shall
become entitled to receive payment for such shares pursuant to Sections
471 and 473 of the MBCA, such payment shall be made by the Surviving
Corporation.
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EXHIBIT B
18 March 1996
PERSONAL AND CONFIDENTIAL
Board of Directors
Citizens Security Group Inc.
P.O. Box 3500
Red Wing, MN 55066
RE: Fairness Opinion
Gentlemen:
In connection with the proposed acquisition through a cash merger (the "Merger")
by Meridian Insurance Group, Inc. ("MIGI") of Citizens Security Group Inc.
("CSGI" or the "Company") and the affiliation of their related companies
("Meridian Group" and "Citizens Group," respectively), including their mutual
insurance company parents, Meridian Mutual Insurance Company ("Meridian Mutual")
and Citizens Security Mutual Insurance Company ("Citizens Mutual") (the
"Proposed Transaction"), pursuant to the draft Acquisition and Affiliation
Agreement dated March 11, 1996 between MIGI, CSGI, and Citizens Mutual (the
"Acquisition and Affiliation Agreement"), you have requested our opinion as to
the fairness, from a financial point of view, to the Company's present common
shareholders of the consideration to be received by such shareholders for their
common stock in the proposed Merger. You have also requested our opinion as to
the fairness, from a financial point of view, to the holder of the Company's
7.95% Series A Preferred Stock ("Preferred Stock"), which Preferred Stock is
exclusively held by Citizens Mutual, of the consideration to be received by such
holder for its Preferred Stock in the proposed Merger.
Under the terms of the proposed Merger and subject to the approval of the common
and preferred shareholders of the Company, at closing CSGI shareholders would
receive from MIGI a total of $29,332,312 in cash, consisting of $24,957,312 for
the common stock of CSGI ($12.50 per share on a fully-diluted basis assuming all
CSGI common stock options currently outstanding are exercised) and $4,375,000
for the Preferred Stock, subject to a dollar-for-dollar reduction if the
transaction expenses incurred by CSGI, Citizens Group, and Citizens Mutual
exceed $650,000, such reduction to be borne 85.1 percent by CSGI common
stockholders and 14.9 percent by the CSGI preferred stockholder.
As a customary part of its investment banking business, Goldsmith, Agio, Helms
Securities, Inc. ("GAHS") is engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, private placements, and
valuations for estate, corporate and other purposes. GAHS does not make a
market for the Company's common stock. GAHS is a party to a separate engagement
agreement with the Company whereby GAHS is providing advisory services to the
Company with respect to the Proposed Transaction, pursuant to which GAHS will
receive a fee contingent upon the consummation of the Proposed Transaction. In
return for our services in connection with providing this opinion, the Company
will pay us a fee, which fee is not contingent upon the consummation of the
Proposed Transaction, and indemnify us against certain liabilities.
In arriving at our opinions, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have (i) reviewed the Acquisitions and Affiliation Agreement;
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Board of Directors
Citizens Security Group Inc.
18 March 1996
Page 2
(ii) analyzed financial and other information that is publicly available
relating to the company; (iii) analyzed certain other operating data of the
Company that has been made available to us in our role as financial advisor
to the Company; (iv) visited the facilities of the Company and discussed with
management of the Company the financial condition, operating results,
business outlook and prospects of the Company; (v) analyzed the valuations of
publicly traded companies that we deemed comparable to the Company; (vi)
analyzed the valuations of shares publicly traded preferred stock that we
deemed comparable to the Preferred Stock; (vii) analyzed the financial terms
of certain similar transactions that have recently been effected; and (viii)
taken into account our general experience in similar transactions and our
knowledge derived from our role as financial advisor to the Company.
We have relied upon and assume the accuracy, completeness, and fairness of the
financial statements and other information of the Company, and have not
attempted independently to verify such information. We have further relied upon
assurances by the Company that the information provided to us has a reasonable
basis, and with respect to transaction expenses, projections and other business
outlook information, reflects the best currently available estimates, and that
the Company is not aware of any information or fact that would make the
information provided to us incomplete or misleading. In arriving at our
opinions, we have not performed any appraisals or valuations of specific assets
of the Company and express no opinion regarding the liquidation value of the
Company or any of its assets. We are not expressing any opinion as to the price
at which shares of common stock of CSGI has traded prior to the date hereof, and
we are not expressing any opinion as to the fair market value of the Company's
Preferred Stock. Our opinions are based upon the information available to us
and the facts and circumstances as they exist and are subject to evaluation on
the date hereof; events occurring after the date hereof could materially affect
the assumptions used in preparing these opinions. We did not actively solicit
indications of interest or value from any third parties, other than MIGI, for
the Company or any of its assets. We were not requested to opine, and do not
opine, in any way concerning other transactions or agreements entered into in
conjunction with the Proposed Transaction.
Our opinions are rendered to the Board of Directors of the Company and cannot be
relied upon by any other person, including Citizens Mutual or its Board of
Directors, nor published or otherwise used or referred to publicly, except as
provided in our letter of engagement.
Based upon and subject to the foregoing, and based upon such other facts as we
consider relevant, it is our opinion that, as of the date hereof, the
consideration to be received by the Company's present common shareholders for
their common stock in the proposed Merger is fair to such common shareholders
from a financial point of view, and that the consideration to be received by the
Company's present preferred shareholder for its Preferred Stock in the proposed
Merger is fair to such preferred shareholder from a financial point of view.
Sincerely,
Goldsmith, Agio, Helms Securities, Inc.
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EXHIBIT C
PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT RELATING TO
APPRAISAL RIGHTS
302A.471. Rights of dissenting shareholders
Subdivision 1. Actions creating rights. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the redemption
or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares or
securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or
to cumulate votes, except as the right may be excluded or limited through the
authorization or issuance of securities of an existing or new class or series
with similar or different voting rights; except that an amendment to the
articles of an issuing public corporation that provides that section 302A.671
does not apply to a control share acquisition does not give rise to the right to
obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
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shall be determined as if the shares as to which the shareholder has
dissented and the other shares were registered in the names of different
shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
Subd. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. Procedures for asserting dissenters' rights
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by
the shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the shareholder
and must not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
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(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the shares
or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description of
the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together With the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a) a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest,
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within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only
to the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of 180 civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding
on all shareholders, wherever located. A dissenter is entitled to judgment in
cash for the amount by which the fair value of the shares as determined by the
court, plus interest, exceeds the amount, if any, remitted under subdivision 5,
but shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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Preliminary Copy
----------------
CITIZENS SECURITY GROUP INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints as proxies for the undersigned, Spencer
A. Broughton and R. Scott Jones, or either of them, with full power of
substitution, hereby revoking any proxy heretofore given, and hereby
authorizes them to represent and to vote, as designated below, all the shares
of stock of Citizens Security Group Inc. (the "Company") which the
undersigned is entitled to vote at the Special Meeting of the Shareholders of
the Company to be held on July 31, 1996 at 9:00 am local time, or at such
later time and date as it may be announced, or at any adjournment thereof, as
fully as could the undersigned if personally present:
1. Approval and adoption of the Acquisition and Affiliation Agreement among the
Company, Citizens Security Mutual Insurance Company and Meridian Insurance
Group, Inc. and the related Plan of Merger.
/ / FOR / / AGAINST / / ABSTAIN
2. IN THEIR DISCRETION, upon such other business as may properly come before
the meeting or any adjournment therof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS INDICATED. IF NO
PREFERENCE IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ACQUISITION AND
AFFILIATION AGREEMENT AND THE PLAN OF MERGER.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, as executor,
administrator, trustee, or guardian please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
Dated: ..........................., 1996
........................................
SIGNATURE
........................................
SIGNATURE, IF HELD JOINTLY
PLEASE MARK, SIGN, DATE, AND RETURN
THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE WHICH REQUIRES NO
POSTAGE.
