<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ------------
Commission file number 0-15421
CITIZENS SECURITY GROUP INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1564371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
406 Main Street, Red Wing, Minnesota 55066
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 612-388-7171
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 19, 1996, was $9,104,243. The number of shares of the
registrant's Common Stock, $.01 par value, outstanding on March 19, 1996, was
1,661,585.
An Exhibit Index is included on page 67 of this report. The manually signed copy
of this report contains 270 pages.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Citizens Security Group Inc. (the "Company") is a regional insurance holding
company formed in 1986 and headquartered in Minnesota. The Company, through its
subsidiaries, Citizens Fund Insurance Company ("Citizens Fund") and Insurance
Company of Ohio ("ICO"), together with Citizens Security Mutual Insurance
Company ("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 500 independent agencies.
PROPOSED ACQUISITION BY MERIDIAN
Effective as of March 20, 1996, the Company and Citizens Mutual entered into an
Acquisition and Affiliation Agreement (the "Meridian Acquisition Agreement")
with Meridian Insurance Group, Inc. ("Meridian") providing for the acquisition
of the Company by Meridian (the "Meridian Acquisition") and the affiliation of
Citizens Mutual and Meridian. Pursuant to the Meridian Acquisition Agreement, a
direct or indirect wholly-owned subsidiary of Meridian would be merged with and
into the Company, with the result that the Company would become a wholly-owned
subsidiary of Meridian or a Meridian subsidiary. In the Meridian Acquisition,
each holder of shares of Common Stock of the Company would receive approximately
$12.50 per share of Common Stock in cash (an aggregate of approximately $25
million), and Citizens Mutual, as the sole holder of shares of the Company's
7.95% Series A Preferred Stock (the "Preferred Stock"), would receive
approximately $3.50 per share of Preferred Stock in cash (an aggregate of
approximately $4.4 million).
In connection with the Meridian Acquisition, Meridian would assume control of
the Citizens Mutual Board of Directors. In addition, Citizens Mutual, Citizens
Fund, ICO and the insurance companies affiliated with Meridian would enter into
a new reinsurance pooling arrangement under which they would combine all of
their respective insurance business.
The Meridian Acquisition is conditioned upon approval by the holders of the
Common Stock of the Company, Citizens Mutual, as the sole shareholder of the
Preferred Stock, the policyholders of Citizens Mutual, and insurance company
regulatory authorities in Minnesota, Ohio and Indiana, and certain other
conditions. The Company anticipates that the Meridian Acquisition will be
completed on or about June 30, 1996.
INTERCOMPANY RELATIONSHIPS
Citizens Mutual owns 1,250,000 shares of the Preferred Stock and 337,500 shares
of the Company's Common Stock. The Preferred Stock and Common Stock vote
together as one class on all matters submitted to a vote of the holders of the
Company's Common Stock. Therefore, Citizens Mutual owns 54.5% of the Company's
outstanding voting securities.
2
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The Company, Citizens Mutual, Citizens Fund and ICO are parties to a reinsurance
pooling agreement (the "Pooling Agreement") under which the insurance business
of Citizens Mutual, Citizens Fund and ICO is pooled, and all premiums, losses,
loss adjustment expenses and underwriting expenses (after deduction of amounts
ceded to other insurance companies) are prorated among these companies on the
basis of their participation in the pool. Since October 20, 1989, Citizens Fund,
ICO and Citizens Mutual have participated in the pool 50%, 25% and 25%,
respectively. From December 24, 1986 to October 20, 1989, Citizens Fund and
Citizens Mutual participated in the pool 70% and 30%, respectively. Losses
incurred prior to December 24, 1986 are paid solely by Citizens Mutual.
The percentages of participation in the pool were determined based on the
relative amounts of statutory surplus of Citizens Mutual, Citizens Fund and ICO.
If there are significant changes in the relative amounts of surplus, the
participation of Citizens Fund and ICO in the pooled business may be adjusted to
reflect such changes. The Pooling Agreement has a one-year term expiring
December 31, 1996 and is subject to automatic renewal for additional one-year
terms. Subject to approval by Minnesota and Ohio state regulatory authorities,
the Pooling Agreement may be terminated by any party on December 31 of any year
upon 180 days' prior notice. Any amendments to the Pooling Agreement must be
approved by Minnesota and Ohio state regulatory authorities.
The operations of the Company are interrelated with the operations of Citizens
Mutual, which provides facilities, employees and services required to conduct
the business of the Company on a cost-allocated basis. See "Business-Employees
and Management Services" below. All executive officers of the Company are
officers of Citizens Mutual, and four members of the Company's seven-person
Board of Directors are directors of Citizens Mutual. The Company is a publicly
held stock company owned by its shareholders, and Citizens Mutual is a mutual
insurance company owned by its policyholders. Conflicts of interest regarding
business philosophy, profit objectives, determination of premium rates and other
matters may arise between the Company and Citizens Mutual because of the
potential varying interests of the Company's shareholders and Citizens Mutual's
policyholders. An advisory committee of four persons is required to approve any
changes in the Pooling Agreement and pass upon matters involving actual or
potential conflicts of interest that may arise between the Company and Citizens
Mutual. The advisory committee consists of two outside directors from each of
the Company and Citizens Mutual, none of whom holds a seat on both Boards. The
decisions of the advisory committee are binding on the two companies. The
Company's advisory committee members must conclude that any intercompany
transactions and compensation arrangements with the officers of Citizens Mutual
and the Company are fair and equitable to the Company.
LINES OF INSURANCE
The property and casualty insurance business underwritten by Citizens Fund is
personal lines of insurance. Citizens Mutual and ICO offer personal and
commercial lines of insurance. The personal insurance products offered by
Citizens Mutual, Citizens Fund and ICO include homeowner, automobile, tenant,
inland marine and umbrella insurance. The commercial insurance products offered
by Citizens Mutual and ICO include multi-peril, automobile, general liability
and umbrella insurance. Commercial insurance products offered by Citizens Mutual
and ICO are oriented toward retail stores, restaurants, trade contractors and
members of various trade associations, including funeral directors, newspaper
publishers and veterinarians. Citizens Mutual's commercial insurance products
also include workers' compensation insurance.
The following table sets forth by lines of insurance Citizens Fund's and ICO's
75% proportional share of the pool's direct premiums written under the Pooling
Agreement in 1995, 1994 and 1993.
3
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<TABLE>
<CAPTION>
Direct Premiums Written
---------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile. . . . . . $10,490,828 28% $ 9,660,372 27% $ 7,966,418 26%
Homeowner. . . . . . . . . . . 6,264,233 17 6,178,376 18 6,049,460 20
Other personal lines . . . . . 924,537 2 960,849 3 1,052,094 3
----------- --- ----------- --- ----------- ---
Total personal lines . . . . 17,679,598 47 16,799,597 48 15,067,972 49
----------- --- ----------- --- ----------- ---
Commercial multi-peril . . . . 8,769,142 2 8,358,662 24 7,471,397 24
Workers' compensation. . . . . 7,391,125 20 6,739,105 19 5,681,998 19
Commercial automobile. . . . . 2,741,908 7 2,336,308 7 1,929,447 6
Other commercial lines . . . . 1,221,569 3 805,024 2 719,440 2
----------- --- ----------- --- ----------- ---
Total commercial lines . . . 20,123,744 53 18,239,099 52 5,802,282 51
----------- --- ----------- --- ----------- ---
Total. . . . . . . . . . . $37,803,342 100% $35,038,696 100% $30,870,254 100%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
</TABLE>
UNDERWRITING
Citizens Mutual, Citizens Fund and ICO apply a conservative underwriting
approach and underwrite only standard lines of property and casualty insurance
rather than those lines which are considered higher risk lines, such as
aviation, pollution and liquor liability. In addition, Citizens Mutual, Citizens
Fund and ICO generally write lines of insurance only for persons and businesses
in the "preferred risk" category.
In general, the underwriting experience of a property and casualty insurer is
indicated by its statutory combined ratio, which is the sum of (i) the loss
ratio, calculated by dividing losses and loss adjustment expenses by premiums
earned, and (ii) the expense ratio, calculated by dividing underwriting
expenses, less miscellaneous income, by premiums written. A combined ratio below
100% indicates an underwriting profit, while a combined ratio above 100%
indicates an underwriting loss. The following table sets forth statutory loss,
expense and combined ratios for Citizens Fund and ICO for 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Combined Ratio
Year ended December 31,
-------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Loss ratio . . . . . . . . . . . . . . . . . 69.7% 67.9% 67.1%
Expense ratio. . . . . . . . . . . . . . . . 30.0 30.3 30.1
---- ---- ----
Combined ratio . . . . . . . . . . . . . . . 99.7% 98.2% 97.2%
---- ---- ----
---- ---- ----
</TABLE>
MARKETING
Citizens Mutual's insurance products are marketed through a network of
approximately 400 independent insurance agencies located in Minnesota,
Wisconsin, Iowa, North Dakota, South Dakota and Missouri. Citizens Fund's
insurance products are marketed through approximately 45 independent insurance
agencies located in Minnesota, Iowa, Wisconsin, North Dakota, Ohio and South
Dakota. ICO's insurance products are marketed through a network of approximately
110 independent insurance agencies in Ohio.
Citizens Mutual, Citizens Fund and ICO are selective in determining which
independent agencies to retain. They generally retain only prominent agencies
that employ full-time, professional agents. Because of the long period of time
Citizens Mutual, Citizens Fund and ICO have been engaged in the property and
casualty business, Citizens Mutual, Citizens Fund and ICO have long-standing
relationships with the majority of their independent agencies.
4
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The majority of the agencies retained by Citizens Mutual, Citizens Fund and ICO
are located in the communities in which their customers reside, and,
accordingly, they provide fast, fair and personalized service. Since the agents
generally handle competing property and casualty insurance products, the ability
of Citizens Mutual, Citizens Fund and ICO to market their products is dependent
upon the extent to which their agents promote them.
In 1995, a hierarchy of agencies was established in order to deliver services
that are consistent with each agency's performance. Citizens Mutual's, Citizens
Fund's and ICO's marketing strategy is to sell its personal insurance products
through certain select "Partner" agencies with the use of automation systems.
The Company's goal is to electronically accept and transmit the majority of
Citizens Mutual's, Citizens Fund's and ICO's business within the independent
agency system. The Company has developed a microcomputer-based automation system
to streamline underwriting, rating and policy production functions. This system,
which has been installed in the offices of approximately 110 independent
agencies in six states, enables agents to provide customers with rate quotations
and electronically transfer information to Citizens Mutual, Citizens Fund or
ICO. The Company believes the automation system will reduce the cost of
processing business while making it easier for independent agents to place
policies with Citizens Mutual, Citizens Fund and ICO.
Citizens Mutual, Citizens Fund and ICO market their insurance products so that
the products of one company are distinguishable from those of the other
companies. Because all business is combined and allocated pursuant to the
Pooling Agreement, such arrangements do not improve the operating results of one
company to the detriment of the others.
One important aspect of Citizens Mutual's and ICO's marketing strategy is to
sell commercial insurance products through various state trade associations.
Citizens Mutual is the endorsed property and casualty insurance provider for
various trade associations, including associations for funeral directors,
newspaper publishers and veterinarians in Minnesota, Wisconsin, Iowa, North
Dakota, South Dakota and Missouri. ICO is the endorsed property and casualty
insurance provider for one trade association in Ohio and is currently pursuing
additional association endorsements.
To encourage their agents to sell their products, Citizens Mutual, Citizens Fund
and ICO emphasize policyholder service, multi-line insurance coverage packages
and a policyholder-oriented premium payment plan. Citizens Mutual, Citizens Fund
and ICO offer excellent service to their agents and policyholders by providing
24-hours-a-day claims service and rapid turnaround for rate quotations, policy
issuances and policy endorsements. The Company believes the broad range of
personal and commercial insurance products written by Citizens Mutual, Citizens
Fund and ICO, and the ability to offer these products together in multi-line
packages, provide Citizens Mutual, Citizens Fund and ICO with an important
marketing tool. The personal insurance products offered by Citizens Mutual,
Citizens Fund and ICO permit agencies to offer policyholders automobile,
homeowner, inland marine and umbrella insurance together in a comprehensive
package. In addition, the broad line of retail store, restaurant and trade
contractor coverages offered by Citizens Mutual and ICO permit agents to tailor
insurance policies to their customers' needs. The Company believes the
availability of comprehensive insurance packages provides an incentive for the
agent to sell Citizens Mutual's, Citizens Fund's and ICO's products because the
agent is better able to retain all of the customer's insurance business.
Citizens Mutual, Citizens Fund and ICO emphasize claims service as a marketing
tool. Programs have been implemented to make the claims process easier for
agents and insureds, while decreasing the claim cost. Programs include a
catastrophe team, the Streamlined Auto Repair Program, a National Glass
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Program, an Approved Contractor Repair Program and on-site loss prevention
seminars.
The Citizens Account Plan, known as "CAP", is designed to offer policyholders
convenience and flexibility in paying premiums. Policyholders are billed for
premiums on a monthly basis and have the option of making a minimum monthly
payment or prepaying all or a portion of the premiums. A single, easy-to-read
bill covering the aggregate amount of premiums for all policies written by
Citizens Mutual, Citizens Fund and ICO is sent to policyholders. In 1995,
approximately 93% of all premium amounts were billed directly to policyholders
by Citizens Mutual, Citizens Fund and ICO through an automated billing process.
Each independent agency receives a percentage of direct premiums written as a
commission. Citizens Mutual, Citizens Fund and ICO have various agency
commission schedules. Citizens Mutual and ICO have a single profit sharing
program under which agents may earn additional compensation. Citizens Fund also
has a profit sharing program for its agents. Agency commissions are primarily
based on direct premiums written by an agency. The agency profit sharing
programs are based on the profitability, retention and growth of business
obtained from the agencies and are intended to provide additional compensation
to the agencies exceeding certain productivity levels.
The independent insurance agencies are currently retained under agency
contracts. Under the agency contracts, agents are authorized to sell and bind
insurance policies in accordance with procedures specified in the contracts. No
one agency or group of related agencies accounted for more than 3.2% of direct
premiums written by Citizens Mutual, Citizens Fund and ICO in 1995.
REINSURANCE
Citizens Mutual, Citizens Fund and ICO have reinsurance contracts with various
reinsurers to reduce their liability on individual risks and to protect against
catastrophic losses. Under a reinsurance contract, an insurance company cedes a
portion of its exposure and premiums received to another insurance company. The
ceding of insurance does not legally discharge the insurer from its primary
liability for the full amount of the policies. Therefore, the ceding company
remains liable to pay the loss if the reinsurer is unable to meet its obligation
under the reinsurance contract.
The reinsurance agreements maintained by Citizens Mutual, Citizens Fund and ICO
are of two general types, consisting of (i) excess of loss reinsurance, which
covers losses in excess of a specified retained amount, and (ii) pro rata
reinsurance, under which premiums and losses are shared on a proportionate basis
up to a specified amount. Effective January 1, 1996, Citizens Mutual, Citizens
Fund and ICO entered into a pro rata reinsurance contract covering 40% of each
homeowner policy. Previously, this contract covered 50% of each homeowner
policy. Under other reinsurance contracts currently in force, Citizens Mutual,
Citizens Fund and ICO retain the first $300,000 (previous to January 1, 1996,
this was set at $100,000) of loss on any one risk on property coverage. Citizens
Mutual, Citizens Fund and ICO have pro rata reinsurance contracts for property
risks covering losses between $300,000 (previously $100,000) and $4,600,000
(previously $3,600,000) per risk. For property risks in excess of $4,600,000
(previously $3,600,000), Citizens Mutual, Citizens Fund and ICO negotiate
reinsurance arrangements for each risk on an individual basis. The casualty
insurance written by Citizens Mutual, Citizens Fund and ICO is reinsured for
losses in excess of $250,000 (previously $100,000) up to a maximum of $5,000,000
per occurrence.
Citizens Mutual, Citizens Fund and ICO also maintain catastrophe reinsurance to
protect against property loss occurrences that involve more than one risk.
Citizens Mutual, Citizens Fund and ICO have a catastrophe reinsurance contract
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under which they recover 95.0% of accumulated catastrophic losses in excess of
$600,000 up to $1,250,000 and 97.5% of the next $18,750,000 of catastrophic
losses. Effective January 1, 1996 Citizens Mutual, Citizens Fund and ICO also
reinsure 100% of each umbrella policy up to and including $5,000,000. Prior to
this time, Citizens Mutual, Citizens Fund and ICO reinsured 95% of the first
$1,000,000 of risk on each umbrella policy and 100% of any umbrella risk in
excess of $1,000,000.
Effective January 1, 1996, Citizens Mutual, Citizens Fund and ICO entered
into an aggregate excess of loss contract which reinsures losses and
allocated loss adjusting expenses in excess of 62% in any accident year. The
reinsurer's obligation is limited to 5% of accident year subject net earned
premium. Losses and allocated adjusting expenses in excess of 67% are
retained by Citizens Mutual, Citizens Fund and ICO.
The reinsurance contracts maintained by Citizens Mutual, Citizens Fund and ICO
either have one-year terms or have indefinite terms and may be terminated by the
reinsurer or Citizens Mutual, Citizens Fund and ICO on January 1 of any year
upon 60 days' notice. The availability and rates of future reinsurance contracts
are subject to future market conditions. If the reinsurance market were to
become more expensive or restrictive, Citizens Mutual, Citizens Fund and ICO may
face greater exposure and higher costs. The inability of Citizens Mutual,
Citizens Fund and ICO to obtain reinsurance on acceptable terms or the
insolvency of any of their principal reinsurers could have a material adverse
effect on the Company.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
When claims are made by or against policyholders, any amounts paid or expected
to be paid by Citizens Mutual, Citizens Fund or ICO to the claimant are referred
to as losses. The costs of investigating, resolving and processing these claims
are referred to as loss adjustment expenses ("LAE"). Citizens Mutual, Citizens
Fund and ICO establish reserves which reflect the estimated unpaid total costs
of losses and LAE. These reserves include estimates of the total costs of claims
already reported but not yet settled and estimates of the costs of claims that
have been incurred but which have not been reported. Among other things, these
estimates are based on past claims experience of Citizens Mutual, Citizens Fund
and ICO and consider current claim trends as well as changes in social and
economic conditions. The effects of inflation are implicitly reflected in the
reserving process through analysis of cost trends and review of historical
reserve results. Citizens Mutual, Citizens Fund and ICO do not have an internal
actuary, but management employs actuarial techniques to analyze and develop
reserves. In addition, Citizens Mutual, Citizens Fund and ICO contract with
outside actuarial consultants to certify reserves for losses and LAE.
The Company believes the reserves currently established by Citizens Fund and ICO
for losses and LAE are adequate to cover the ultimate costs. Citizens Fund and
ICO do not discount loss reserves. See the table in Part II, Item 8, "Financial
Statements and Supplementary Data" concerning the reserves of Citizens Fund and
ICO.
The following table shows the development of balance sheet reserves for unpaid
losses and LAE for Citizens Fund from 1986 through 1995 and for ICO from October
20, 1989 through December 31, 1995 on a combined basis. The top line of the
table represents the estimated amounts of net losses and LAE for claims arising
in all prior years that were unpaid at the respective balance sheet dates,
including losses that had been incurred but not yet reported. The next portion
of the table shows the re-estimated amount of the previously recorded net
reserves based on experience as of the end of each succeeding year. The estimate
is modified as more information becomes known about the frequency and severity
of claims for individual years. The "cumulative redundancy
7
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(deficiency) on net liability" represents the aggregate change in the estimates
over all prior years. The last portion of the table shows gross balance sheet
reserves less the reinsurance recoverable on unpaid losses as of the respective
balance sheet dates and the gross re-estimated reserves less the reinsurance
recoverable on unpaid losses as of the current year. This information is
available for 1995, 1994, 1993 and 1992 and is a result of the implementation of
Statement of Financial Accounting Standard No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts." This statement
requires the Company to report gross balances on the balance sheet before the
effect of reinsurance transactions. The Company now records reinsurance
recoverables on paid and unpaid losses and ceded unearned premiums as assets, in
contrast to the Company's prior practice of netting these amounts against the
corresponding liabilities.
8
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<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
losses and LAE. . . . . . . . . . . $139 $1,974 $4,212 $6,853 $9,672 $12,463 $14,061 $15,588 $17,171 18,848
Net liability re-estimated as of:
One year later. . . . . . . . . . . 139 1,688 3,657 7,588 10,839 12,885 13,266 14,651 16,617
Two years later.. . . . . . . . . . 139 1,767 4,333 8,791 11,727 12,889 13,149 14,142
Three years later . . . . . . . . . 139 2,033 4,945 8,804 11,832 12,813 12,785
Four years later. . . . . . . . . . 139 1,949 4,738 9,169 11,798 13,031
Five years later. . . . . . . . . . 139 1,790 5,025 9,259 11,813
Six years later . . . . . . . . . . 139 1,893 4,965 9,215
Seven years later . . . . . . . . . 139 1,887 4,912
Eight years later . . . . . . . . . 139 1,874
Nine years later. . . . . . . . . . 139
Cumulative redundancy
(deficiency) on net liability . . . - 100 (700) (2,362) (2,141) (568) 1,276 1,446 554 -
Cumulative amount of net
liability paid through:
One year later. . . . . . . . . . . 139 890 1,778 3,535 5,358 6,352 6,119 6,198 7,277 -
Two years later . . . . . . . . . . 139 1,327 2,727 5,871 8,591 9,395 9,042 9,601
Three years later . . . . . . . . . 139 1,594 3,741 7,547 10,141 11,110 11,211
Four years later. . . . . . . . . . 139 1,662 4,303 8,375 10,943 12,260
Five years later. . . . . . . . . . 139 1,716 4,535 8,770 11,407
Six years later . . . . . . . . . . 139 1,805 4,727 8,998
Seven years later . . . . . . . . . 139 1,819 4,804
Eight years later . . . . . . . . . 139 1,827
Nine years later. . . . . . . . . . 139
Gross liability - end of year . . . . 16,608 19,392 20,990 24,013
Reinsurance recoverable(1). . . . . . 2,547 3,804 3,819 5,165
------ ------ ------ ------
Net liability - end of year . . . . . 14,061 15,588 17,171 18,848
Gross re-estimated liability
One year later. . . . . . . . . . . 16,100 17,486 21,372
Reinsurance recoverable - latest. . . 2,834 2,835 4,755
------ ------ ------
Net re-estimated liability- latest. . 13,266 14,651 16,617
Gross re-estimated liability
Two years later . . . . . . . . . . 15,417 18,136
Reinsurance recoverable . . . . . . . 2,268 3,994
------ ------
Net re-estimated liability. . . . . . 13,149 14,142
Gross re-estimated liability
Three years later . . . . . . . . . 15,612
Reinsurance recoverable . . . . . . . 2,827
------
Net re-estimated liability. . . . . . 12,785
Cumulative redundancy (deficiency)
on gross liability. . . . . . . . . . 996 1,256 (382)
</TABLE>
__________
(1) Reinsurance recoverables exclude $49, $55, $1 and $3 of paid recoverables
as of December 31, 1995, 1994, 1993 and 1992, respectively.
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SEASONALITY OF BUSINESS
In the geographic region where Citizens Mutual and Citizens Fund operate, most
weather-related claims, primarily those resulting from tornadoes and severe
hailstorms, historically occur during the period from May to September. Most
weather-related claims in ICO's geographic region historically occur during the
period from March to June. Accordingly, greater losses have been incurred from
claims in the second and third quarters of the year than during the rest of the
year. Therefore, the Company expects to experience poorer results of operations
during these quarters.
INVESTMENTS
An important element of the financial results of the Company is the return on
invested assets. The investment portfolios of Citizens Fund and ICO are managed
by a professional investment management firm and are under the direction of the
Company's Board of Directors. The Company's investment policy is to maximize
current yield while maintaining safety of capital together with adequate
liquidity for insurance operations.
The investment portfolios consist primarily of fixed maturity tax-exempt and
taxable bonds, including United States Government and governmental agency
securities and corporate, state and municipal bonds. The entire investment
portfolios are classified as "available-for-sale," and therefore, these
investments are reported at estimated market value, with unrealized gains and
losses, net of deferred taxes, recorded in shareholders' equity. In 1995, the
investment portfolios were positively affected by an decrease in interest rates.
The Company experienced an after-tax increase of approximately $2.1 million from
December 31, 1994 to December 31, 1995 in the market value of its investments in
fixed maturities and equity securities.
The following table sets forth the combined investment results of Citizens
Fund's and ICO's investment portfolios for the years ended December 31, 1995,
1994 and 1993. Because of the inability to predict future investment yield, the
following information should not be considered indicative of future investment
results for the Company.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Average invested assets(1) . . . . $36,718,784 $34,765,854 $33,074,125
Investment income(2) . . . . . . . 2,452,264 2,194,372 1,952,529
Average annualized yield . . . . . 6.7% 6.3% 5.9%
Net realized gains (losses)(3) . . 76,880 (7,422) 606,031
Change in unrealized
appreciation (depreciation)
of fixed maturities/
available-for-sale(3) . . . . . . 3,150,505 (3,238,042) 210,388
Change in unrealized appreciation
of equity securities(3) . . . . . 99,616 4,788 21,569
</TABLE>
__________
(1) Average of the aggregate invested amounts at market at the beginning and
end of the year.
(2) After deduction of investment expenses, but before applicable income taxes.
(3) Before applicable income taxes.
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The following table sets forth the composition of the investment portfolios of
Citizens Fund and ICO, based on estimated market values, as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1995 1994
---------------------- -----------------------
Amount Percent Amount Percent
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies . . . . . . . . . $ 6,748,373 17.2% $ 7,833,186 22.9%
Obligations of states and
public subdivisions. . . . . . 7,131,048 18.2 8,348,303 24.4
Corporate securities . . . . . . 11,477,976 29.2 8,140,208 23.9
Mortgage-backed securities . . . 11,664,667 29.7 7,529,212 22.0
----------- ----- ----------- -----
Total fixed maturities(1). . . . . 37,022,064 94.3 31,850,909 93.2
Equity securities(2) . . . . . . . 791,385 2.0 689,088 2.0
Short-term investments(3). . . . . 1,462,448 3.7 1,621,674 4.8
----------- ----- ----------- -----
Total investments. . . . . . . . . $39,275,897 100.0% $34,161,671 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
__________
(1) Total cost adjusted for amortization of discount or premium of fixed
maturities was $36,174,613 and $34,153,963 on December 31, 1995 and 1994,
respectively.
(2) Equity securities are valued at market. Total cost of equity securities was
$649,278 and $646,597 on December 31, 1995 and 1994, respectively.
(3) Short-term investments are valued at amortized cost, which approximates
market.
COMPETITION
The property and casualty insurance industry is highly competitive. Price
competition has been particularly intense during recent years and is expected to
continue for the foreseeable future. Citizens Mutual, Citizens Fund and ICO
compete with numerous insurance companies, many of which are substantially
larger and have considerably greater financial resources. In addition, Citizens
Mutual, Citizens Fund and ICO operate through independent agents which represent
more than one company and therefore face competition within each agency.
RATING
As a result of the proposed Meridian Acquisition, A. M. Best & Company,
Inc., publisher of Best's Insurance Reports, Property-Casualty ("Best's"),
has placed its rating of Citizens Mutual, Citizens Fund and ICO
under review with positive implications. Best's rating of Citizens Mutual,
Citizens Fund and ICO is currently "B++ (Very Good)". As is customary for
pooled insurance companies, Citizens Mutual, Citizens Fund and ICO are rated
as a group. Best's ratings are based in part on an analysis of the financial
condition, operations and strategic plans of insurance companies. These
ratings are not designed for investors and do not constitute recommendations
to buy, sell or hold any security.
INVESTIGATION AND SETTLEMENT OF CLAIMS
In the ordinary course of business, Citizens Mutual, Citizens Fund and ICO are
regularly engaged in the defense of claims arising out of the conduct of their
insurance business. Claims under insurance policies written by Citizens Mutual,
Citizens Fund and ICO are investigated and settled either by claims adjusters
employed by Citizens Mutual, by their independent agents who have the authority
to settle small claims or by independent adjusters. Citizens Mutual, Citizens
Fund and ICO currently utilize 14 full-time claims adjusters
11
<PAGE>
employed by Citizens Mutual. If a claim or loss cannot be settled and results in
litigation, Citizens Mutual, Citizens Fund and ICO retain outside counsel to
represent them.
In 1995, Citizens Mutual, Citizens Fund and ICO entered into an agreement with a
single adjusting company, Adjusting Unlimited ("AU"), covering claims inspection
and loss control services. The Company's strategy is to reduce non-legal
expenses and severity. AU has the ability to provide claim adjustment services
more efficiently through the use of highly automated equipment and by
strategically placing their employees in territories serviced by Citizens
Mutual, Citizens Fund and ICO.
GOVERNMENT REGULATION
Citizens Fund and Citizens Mutual hold licenses to write property and casualty
insurance in Minnesota, Wisconsin, Iowa, North Dakota and South Dakota. ICO and
Citizens Fund each hold a license to write property and casualty insurance in
Ohio. Citizens Mutual also holds licenses to reinsure property and casualty
insurance in Ohio and to write property and casualty insurance in Missouri.
Citizens Mutual, Citizens Fund and ICO are regulated by Minnesota, Ohio and the
other states in which they are licensed. The purpose of such regulation is to
protect policyholders rather than shareholders. The insurance laws of the
various states establish regulatory agencies with broad administrative powers,
including the power to grant or revoke licenses to transact business and to
regulate trade practices, investments, premium rates, the form and content of
financial statements and insurance policies, accounting practices and the
maintenance of specified reserves and surplus.
Pursuant to Ohio insurance laws, ICO must maintain minimum statutory surplus of
$5,000,000 in order to write commercial property and casualty insurance lines.
As of December 31, 1995, ICO's statutory surplus was $5,287,053.
Citizens Mutual and the Company have agreed that, without prior approval of
Minnesota state regulatory authorities, neither of the two companies will engage
in any transaction which would result in Citizens Mutual and the directors,
officers and employees of, and employee benefit or stock ownership plans
sponsored by, Citizens Mutual, the Company, and Citizens Fund owning less than
35.0% of the issued and outstanding voting stock of the Company. In addition,
the Minnesota insurance statutes require that Citizens Mutual have "voting
control" of the Company. Voting control is presumed to exist if Citizens Mutual
owns at least 10% of the voting securities of the Company.
Under Minnesota and Ohio laws, dividends which may be paid by Citizens Fund and
ICO to the Company are restricted. The information contained under Note 14 of
Notes to Consolidated Financial Statements is incorporated herein by reference.
In addition to regulatory supervision of Citizens Mutual, Citizens Fund and ICO,
the Company is subject to statutes governing insurance holding company systems.
Typically, such statutes require the Company to periodically file information
with the state insurance commissioner, including information concerning its
capital structure, ownership, financial condition and general business
operations and material intercompany transactions not in the ordinary course of
business. In addition, these laws require administrative approval of a change in
control of insurance companies.
The regulatory authorities of the states in which Citizens Mutual and Citizens
Fund operate require them to deposit securities with the Minnesota Department of
Commerce for the benefit of policyholders. ICO is required to deposit securities
with the Ohio Insurance Department. Amounts deposited may only be
12
<PAGE>
used for the purpose of paying claims. At December 31, 1995, the securities on
deposit by Citizens Fund with the Minnesota Department of Commerce had a market
value of $705,671. At December 31, 1995, the securities on deposit by ICO with
the Ohio Insurance Department had a market value of $259,140.
Under insolvency or guaranty laws in all states in which Citizens Mutual,
Citizens Fund and ICO operate, insurers doing business in those states can be
assessed up to prescribed limits for policyholder losses of insolvent insurance
companies. Assessments are based on prior years' experience or prior years'
direct premiums written. In addition, other state laws require Citizens Mutual,
Citizens Fund and ICO to participate in various mandatory pools or underwriting
associations in certain states in which they operate. During 1995, 1994 and
1993, Citizens Fund's and ICO's portion of total paid assessments was
approximately $402,000, $287,000 and $290,000, respectively.
In 1994, Citizens Fund and ICO received refunds of $592,398 of excess ceded
reinsurance premiums from the Minnesota Workers' Compensation Reinsurance
Association. These refunds were required to be distributed to certain Workers'
Compensation policyholders under legislation passed by the State of Minnesota in
1992. This legislation was challenged by a group of insurers and on January 31,
1995, the US Court of Appeals for the Eighth Circuit upheld a lower court ruling
that found the legislation to be unconstitutional. Citizens Fund and ICO
recorded such refunds as premiums earned in 1995 which were recognized in net
income accordingly.
In December 1993, the National Association of Insurance Commissioners approved a
model risk-based capital formula for property and casualty insurers to be
effective with the 1994 statutory annual statement. Citizens Mutual, Citizens
Fund and ICO have adequate surplus to meet these requirements.
EMPLOYEES AND MANAGEMENT SERVICES
The Company, Citizens Fund and ICO have no employees, and Citizens Mutual
provides the services of its employees to the Company, Citizens Fund and ICO
under a management services agreement (the "Management Services Agreement").
Under the Management Services Agreement, Citizens Fund and ICO pay 75% of all
salaries and related expenses of Citizens Mutual's employees. In addition, the
Company pays Citizens Mutual for services that are performed specifically for
the Company.
Pursuant to the Management Services Agreement, the employees will be
transferred to the Company when Citizens Mutual owns shares of Common Stock
and Preferred Stock that constitute less than 50% of the voting power of all
outstanding voting securities of the Company. After the transfer of such
employees, Citizens Mutual would pay 25% of all employee related expenses of
the Company.
Citizens Fund and ICO also pay 75% of the total expenses relating to data
processing equipment and other employee support facilities. Prior to October 20,
1989, Citizens Fund paid 70% of such expenses. If the Pooling Agreement is
amended, the Management Services Agreement provides that the percentage of
expenses paid by Citizens Fund and ICO will change to equal the new percentages
of the pool allocated to Citizens Fund and ICO. The Management Services
Agreement expires on December 31, 1996 and is subject to automatic renewal on an
annual basis.
13
<PAGE>
ITEM 2. PROPERTIES
The principal office of the Company in Red Wing, Minnesota, consists of
approximately 30,000 square feet and is leased by Citizens Mutual under a lease
expiring on December 31, 2002. Citizens Mutual may terminate the lease upon
prior written notice of one year. Citizens Mutual also has the option to extend
the lease for two periods of five years. Under the terms of the Management
Services Agreement, Citizens Mutual and the Company have the right to occupy the
premises jointly. Citizens Mutual also leases an additional office in Red Wing,
Minnesota, consisting of approximately 3,300 square feet under a lease expiring
on June 30, 1998. The lease is automatically extended for an additional 60
months. Although, Citizens Mutual may terminate the lease upon written notice
prior to April 1, 1998. ICO leases an office in Mansfield, Ohio, which consists
of approximately 2,700 square feet under a lease which expires on January 3,
1997. ICO is subleasing the Mansfield, Ohio office space.
The annual rent on offices is currently $314,412 plus the amount of real estate
taxes, utility, insurance and common area maintenance expenses. Citizens Fund
and ICO pay 75% of the rent and all other expenses under the leases. If the
Pooling Agreement is amended, the Management Services Agreement provides that
this percentage will change to equal the new percentage of the pool allocated to
Citizens Fund and ICO.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock ($.01 par value) of the Company trades on The Nasdaq Small-Cap
Market under the symbol "CSGI".
The following table sets forth the high and low bid quotations as reported by
Nasdaq for each quarterly period during 1995 and 1994.
<TABLE>
<CAPTION>
1995 High Low
--------------- ----- -----
<S> <C> <C>
First Quarter $3.63 $3.13
Second Quarter 4.50 3.50
Third Quarter 4.50 4.25
Fourth Quarter 5.00 4.38
<CAPTION>
1994 High Low
--------------- ----- -----
<S> <C> <C>
First Quarter $3.25 $3.25
Second Quarter 4.13 3.25
Third Quarter 3.75 3.38
Fourth Quarter 3.50 3.25
</TABLE>
14
<PAGE>
HOLDERS
There were 115 holders of record of Common Stock as of March 19, 1996. The
Company believes there were more than 1,000 beneficial owners of its Common
Stock as of March 19, 1996.
DIVIDENDS
The Company does not intend to pay cash dividends to holders of its Common Stock
for the foreseeable future. As a result of changes in state insurance statutes
and covenants contained in its bank loan agreement, the Company has not paid any
cash dividends with respect to its Common Stock since 1992. As a holding
company, the Company's source of cash is dividends from its subsidiaries and
payments under a capital access fee agreement with Citizens Mutual, Citizens
Fund and ICO. See Part III, Item 13, "Certain Relationships and Related
Transactions." These subsidiaries are subject to state laws and regulations
which restrict their ability to pay dividends. See Note 14 of Notes to
Consolidated Financial Statements in Part II, Item 8, "Financial Statements and
Supplementary Data."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company as of December 31, 1990 through 1995
and for the years then ended are derived from the consolidated financial
statements of Citizens Security Group Inc. and subsidiaries, which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors. The
consolidated financial statements for 1995, 1994 and 1993 and KPMG Peat Marwick
LLP's report thereon are included in Part II, Item 8, "Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per common share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premiums earned. . . . . . . . . . . . . $30,635 $27,349 $24,489 $24,288 $24,048 $21,359
Investment income, less related
expenses . . . . . . . . . . . . . . . 2,452 2,194 1,953 2,002 2,093 1,932
Realized gains (losses) on investments . 77 (7) 606 39 998 60
Total revenues . . . . . . . . . . . 33,729 30,046 27,443 26,697 27,458 23,608
Losses and loss adjustment
expenses incurred. . . . . . . . . . . 21,347 18,569 16,424 16,575 18,947 15,231
Income (loss) before cumulative
effect of accounting change. . . . 1,441 1,382 1,464 801 (114) 77
Cumulative effect of accounting
change - income tax. . . . . . . . . . - - 38 - - -
Net income (loss). . . . . . . . . . 1,441 1,382 1,502 801 (114) 77
Earnings (loss) per common share*. . . . .64 .57 .52 .31 (.04) .03
BALANCE SHEET DATA:
Total investments. . . . . . . . . . . . $39,276 $34,162 $35,370 $30,054 $34,859 $27,219
Insurance premiums receivable. . . . . . 8,323 7,238 5,992 5,220 5,053 4,772
Total assets . . . . . . . . . . . . 61,291 54,650 52,613 46,997 47,338 38,729
Reserves for losses and loss
adjustment expenses. . . . . . . . . . 24,013 20,990 19,392 16,608 12,847 9,918
Unearned premiums. . . . . . . . . . . . 16,632 15,673 13,150 11,978 11,494 10,648
Bank loan payable. . . . . . . . . . . . 999 1,519 2,569 3,429 4,286 5,143
Total liabilities. . . . . . . . . . 44,324 41,101 38,080 34,777 36,154 27,427
Shareholders' equity . . . . . . . . 16,967 13,549 14,532 12,220 11,185 11,302
Shareholders' equity per
common share*. . . . . . . . . . . . . 7.58 5.52 4.99 4.20 4.36 4.41
Dividends declared and
paid per common share. . . . . . . . . - - - .04 .08 .08
</TABLE>
- -------------------
* All per common share information for 1995 and 1994 reflects the March 1994
stock exchange transaction and the deduction of preferred stock dividends.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The consolidated financial statements and the related notes included in Part II,
Item 8, "Financial Statements and Supplementary Data" should be read in
conjunction with the following discussion as they contain important information
for evaluation of the Company's financial condition and operating results.
RESULTS OF OPERATIONS
INDUSTRY OVERVIEW
Property and casualty insurance policies are priced before costs are known as
premiums are determined before losses are reported. The profitability of
insurers is affected by many factors, including the severity and frequency of
claims, natural disasters, interest rates, crime rates, general business
conditions, regulatory measures, and court decisions that define and expand the
extent of coverage and amount of compensation due for injuries or losses.
The property and casualty insurance industry experienced record catastrophe
losses in recent years as a result of hurricanes, floods, earthquakes and other
natural disasters. While the Company was not adversely affected by these
catastrophic losses, they will have a lasting effect on how the insurance
industry evaluates exposures.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Direct premiums written increased 7.9 percent in 1995 over the comparable amount
in 1994 primarily because of growth in commercial lines of business. The growth
is also attributable to an increase in policies written with agents that the
Company has designated as "Partner" agencies. As anticipated, this growth was
somewhat offset by the effect of the Company's decision not to write new
business with certain agencies that do not fit within the Company's long-term
marketing strategies.
Net premiums earned increased 12.0 percent in 1995 over 1994. In the first
quarter of 1995, net premiums earned were positively affected by a $592,398
refund of excess ceded premiums received from the Minnesota Workers'
Compensation Reinsurance Association ("MWCRA").
The property and casualty insurance market continues to be competitive. Although
revenues from the Company's association business grew approximately 32 percent
in 1995 compared to association revenues during 1994, the workers'
compensation market in Minnesota and Wisconsin is intensely competitive. The
Company's current strategy is to maintain rate adequacy in order not to
jeopardize underwriting results.
Net investment income increased 11.8 percent in 1995 over 1994, primarily as a
result of an increase in invested assets. Realized gains on investments were
$76,880 in 1995 compared to a realized loss of $7,422 in 1994. The Company
continued to shorten the duration of the investment portfolios in order to
decrease exposure to interest rate volatility.
The Company's loss ratio was 62.0 percent in 1995 compared to 59.3 percent in
1994. The Company experienced a 12.7 percent decrease in the number of claims in
1995 compared to 1994; however, this decrease was offset by an increase in
severe claims during 1995. The Company experienced an increase in the severity
of claims mainly in the homeowners line of business as a result of catastrophe
hailstorms in Iowa, North Dakota and South Dakota and in the personal automobile
line due to major accidents. The increase in severity was partially offset by
favorable development of prior years' workers' compensation losses in 1995.
16
<PAGE>
The Company continued to decrease loss adjustment expenses in 1995. The
Company's loss adjustment expense ratio (loss adjustment expenses to premiums
earned) was 7.7 percent in 1995 compared to 8.6 percent in 1994. The majority of
this decrease occurred as a result of utilizing one outside vendor to handle
certain adjusting functions previously handled by many outside vendors.
The Company's expense ratio (total operating expenses to premiums earned) in
1995 was approximately the same as the expense ratio reported in 1994.
In evaluating its financial performance, the Company focuses on after-tax
operating results before consideration of realized investment gains or losses.
Management believes operating results are a better indicator of the Company's
financial performance because it eliminates the variability associated with such
gains or losses. After-tax operating income, excluding realized gains and
losses, was $1,389,643 in 1995 compared to $1,386,961 in 1994. This resulted in
operating earnings per common share of $.61 in 1995 (after deduction of
Preferred Stock dividends) compared to $.57 in 1994. The MWCRA refund, in
addition to accrued interest income associated with such refund, accounted for
net income of approximately $410,000, or $.25 per common share, in the first
quarter of 1995.
Net income was $1,440,523, or $.64 per common share, in 1995 compared to net
income of $1,381,538, or $.57 per common share, in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Direct premiums written increased 13.5 percent in 1994 over the comparable
amount in 1993. The growth was primarily attributable to an increase in the
number of policies written for personal automobile, commercial multi-peril,
workers' compensation and related commercial lines in Iowa, Minnesota and
Wisconsin.
Net premiums written in 1994 rose 16.3 percent over the comparable amount in
1993 mainly as the result of the increase in direct premiums written. The
Company's net premiums written also increased by $592,398 due to a refund of
excess ceded premiums from the MWCRA. Net written premiums and unearned
premiums as of December 31, 1994 were increased by this amount. Net premiums
earned in 1994 increased 11.7 percent over 1993.
Net investment income was $2,194,372 for 1994 compared to $1,952,529 for 1993.
This increase over 1993 results was primarily from an increase in invested
assets. The Company experienced realized losses on investments of $7,422 in 1994
compared to realized gains of $606,031 in 1993. During the first quarter of
1993, the Company took advantage of favorable conditions in the bond market and
repositioned a portion of its investment portfolio to reduce its exposure to
fixed maturities being called before maturity.
The Company's loss ratio was 59.3 percent in 1994 compared to 54.5 percent in
1993. The Company experienced a 13.5 percent increase in the number of claims
for the year ended December 31, 1994 compared to the same period in 1993. In
addition, the Company experienced an increase in the severity of claims during
1994. The majority of the increase in claim frequency and severity occurred in
the homeowners line of business as a result of a catastrophe hailstorm which
occurred on August 18 and 19, 1994, in three separate locations in Iowa,
Minnesota and North Dakota. The increase in claim frequency and severity was
partially offset by favorable development primarily in commercial multi-peril,
commercial automobile liability and homeowners lines of business related to
claims incurred prior to 1994.
17
<PAGE>
The Company aggressively decreased loss adjustment processing costs in 1994. The
Company's loss adjustment expense ratio was 8.6 percent in 1994 compared to 12.5
percent in 1993. The majority of this decrease occurred as a result of adding
in-house staff to handle certain adjusting functions previously handled by
outside vendors. The Company also realized a decrease of approximately $169,000
in loss adjustment expenses during 1994 as a result of a reclassification of
expenses into insurance operating expenses based on a recent study of the
allocation of expenses between loss adjustment and underwriting.
As a result of the expense reallocation, the Company's expense ratio for 1994
increased nearly one percentage point as compared to the expense ratio for 1993.
After-tax operating income, excluding realized gains and losses, increased 30
percent to $1,386,961 in 1994 from $1,062,887 in 1993. This increase
resulted in operating earnings per common share of $.57 in 1994 (after
effect of the March 1994 stock exchange of Common Stock for Preferred Stock
by Citizens Mutual and the deduction of Preferred Stock dividends) compared
to $.37 in 1993.
Net income was $1,381,538, or $.57 per common share, in 1994 compared to net
income of $1,501,918, or $.52 per common share, in 1993.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The primary sources of liquidity for the Company's subsidiaries are funds
generated from insurance premiums and net investment income. The principal
outflows of cash are payments of claims, taxes and operating expenses. The
amount of cash provided from operating activities was $2,557,371 in 1995 and
$3,826,575 in 1994. The Company's subsidiaries generate sufficient cash to meet
their operating requirements.
In December 1993, the National Association of Insurance Commissioners approved a
model risk-based capital formula for property and casualty insurers to be
effective with the 1994 statutory annual statement. The Company's subsidiaries
have adequate surplus to meet these requirements.
INVESTING ACTIVITIES
In addition to the cash provided from operations, the Company maintains
liquidity in its subsidiaries' investment portfolios. At December 31, 1995,
Citizens Fund and ICO had total investments, at market value, of $39,275,897
compared to $34,161,671 at December 31, 1994.
In 1995, the Company's subsidiaries' investment portfolios were effected by a
change in economic conditions which led to a decrease in interest rates. The
Company experienced an after-tax increase of approximately $2.1 million from
December 31, 1994 to December 31, 1995 in the market value of its investments in
fixed maturities and equity securities. The entire investment portfolio is
classified as "available-for-sale," and, therefore, these investments are
reported at estimated market value, with unrealized gains and losses, net of
deferred taxes, recorded in shareholders' equity. Citizens Fund's and ICO's
investment portfolios consist almost entirely of fixed maturity bonds, of which
97% are rated "A" or higher by investment rating agencies. The Company does not
own real estate, junk bonds or high-risk derivative products.
The Company's subsidiaries' investment portfolios are managed by an investment
advisor under the direction of the Company's Board of Directors.
18
<PAGE>
At December 31, 1995, the Company, Citizens Fund and ICO held cash and short-
term investments of $2,753,621. Management believes these funds provide adequate
liquidity for the payment of claims and other short-term cash needs.
FINANCING ACTIVITIES
On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan to
fund the purchase of ICO. On November 9, 1995, the bank loan was assigned by the
lender to Goodhue County National Bank of Red Wing, Minnesota ("GCNB"). The
principal balance of the bank loan remaining to be paid as of December 31, 1995
was $999,000. The current interest rate is 8.75 percent, but the rate is
variable and is tied to the prime rate. Under the bank loan agreement, the
Company agreed to certain restrictive covenants. See Note 9 of Notes to
Consolidated Financial Statements included in Part II, Item 8, "Financial
Statements and Supplementary Data."
On March 31, 1994, Citizens Mutual exchanged 1,250,000 shares of Common Stock
for 1,250,000 shares of Preferred Stock issued by the Company. Annual cumulative
dividends totaling $347,813 ($.27825 per share) are payable with respect to the
Preferred Stock.
As a holding company, the Company depends on cash dividends from its
subsidiaries and fees payable under a capital access fee agreement to make
principal and interest payments due under the loan agreement and provide funds
for preferred stock dividends and other expenses. Citizens Fund and ICO are
restricted under state insurance laws as to the amount of dividends that may be
paid without the approval of such regulatory authorities. See Note 14 of Notes
to Consolidated Financial Statements included in Part II, Item 8, "Financial
Statements and Supplementary Data."
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
Citizens Security Group Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities, at market (amortized cost of $36,174,613 and
$34,153,963, respectively) . . . . . . . . . . . . . . . . . $37,022,064 $31,850,909
Equity securities, at market (cost of $649,278 and $646,597,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . 791,385 689,088
Short-term investments . . . . . . . . . . . . . . . . . . . . . 1,462,448 1,621,674
- -----------------------------------------------------------------------------------------------
Total investments. . . . . . . . . . . . . . . . . . . . . . . 39,275,897 34,161,671
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,291,173 1,099,677
Receivables:
Insurance premiums receivable. . . . . . . . . . . . . . . . . 8,322,717 7,238,448
Reinsurance recoverable. . . . . . . . . . . . . . . . . . . . 5,214,073 3,874,223
- -----------------------------------------------------------------------------------------------
Total receivables. . . . . . . . . . . . . . . . . . . . . . 13,536,790 11,112,671
Deferred policy acquisition costs. . . . . . . . . . . . . . . . 2,427,418 2,298,703
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . 2,395,744 2,299,649
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 745,000 1,684,000
Equipment, at cost less accumulated depreciation . . . . . . . . 594,525 840,625
Accrued investment income. . . . . . . . . . . . . . . . . . . . 573,303 494,943
Excess of cost over net assets acquired. . . . . . . . . . . . . 309,297 451,517
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 141,896 206,259
- -----------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $61,291,043 $54,649,715
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Reserves for losses and loss adjustment expenses . . . . . . . $24,012,866 $20,989,736
Unearned premiums. . . . . . . . . . . . . . . . . . . . . . . 16,632,332 15,672,948
Bank loan payable. . . . . . . . . . . . . . . . . . . . . . . 999,000 1,518,920
Unearned compensation. . . . . . . . . . . . . . . . . . . . . 329,999 509,999
Due to Citizens Mutual . . . . . . . . . . . . . . . . . . . . 76,616 215,850
Current income tax payable . . . . . . . . . . . . . . . . . . 90,423 118,229
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . 2,182,897 2,074,955
- -----------------------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 44,324,133 41,100,637
- -----------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $.01 par value; 7.95% Series A; 1,250,000
shares authorized, issued and outstanding. . . . . . . . . . 4,375,000 4,375,000
Common stock, $.01 par value; 10,000,000 shares
authorized; 1,661,585 shares issued and outstanding. . . . . 16,616 16,616
Additional paid-in capital . . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Unearned compensation. . . . . . . . . . . . . . . . . . . . . (329,999) (509,999)
Unrealized appreciation (depreciation) of investments in fixed
maturities and equity securities, net of related taxes . . . 652,558 (1,492,563)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 7,155,375 6,062,664
- -----------------------------------------------------------------------------------------------
Total shareholders' equity . . . . . . . . . . . . . . . . . 16,966,910 13,549,078
Commitments and contingencies (notes 8 and 10) . . . . . . . . . - -
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity . . . . . . . . . $61,291,043 $54,649,715
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Citizens Security Group Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums earned. . . . . . . . . . . . . . . . . . . $30,635,266 $27,349,069 $24,488,918
Investment income, less related expenses . . . . . . 2,452,264 2,194,372 1,952,529
Realized gains (losses) on investments . . . . . . . 76,880 (7,422) 606,031
Other income . . . . . . . . . . . . . . . . . . . . 564,594 510,329 395,059
- ----------------------------------------------------------------------------------------------------
Total revenues . . . . . . . . . . . . . . . . . . 33,729,004 30,046,348 27,442,537
- ----------------------------------------------------------------------------------------------------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses incurred . . . . 21,346,784 18,569,082 16,424,267
Policy acquisition costs . . . . . . . . . . . . . . 5,461,203 5,216,627 4,845,920
Interest expense . . . . . . . . . . . . . . . . . . 163,656 276,791 243,563
Other operating expenses . . . . . . . . . . . . . . 4,815,027 4,230,278 3,809,869
- ----------------------------------------------------------------------------------------------------
Total losses and expenses. . . . . . . . . . . . . 31,786,670 28,292,778 25,323,619
- ----------------------------------------------------------------------------------------------------
Income before income taxes . . . . . . . . . . . . 1,942,334 1,753,570 2,118,918
Income tax expense . . . . . . . . . . . . . . . . . . 501,811 372,032 655,000
- ----------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change. . . . . . . . . . . . . . . . 1,440,523 1,381,538 1,463,918
Cumulative effect of accounting change - income tax. . - - 38,000
- ----------------------------------------------------------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . $ 1,440,523 $ 1,381,538 $ 1,501,918
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Weighted average common shares and
common equivalent shares outstanding . . . . . . . . 1,699,550 1,973,010 2,915,171
- ----------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Income before cumulative effect of accounting change $ .64 $ .57 $ .51
Cumulative effect of accounting change - income tax. - - .01
- ----------------------------------------------------------------------------------------------------
Net income per common share. . . . . . . . . . . . $.64 $.57 $.52
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Citizens Security Group Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK, beginning of period . . . . . . . . . $ 4,375,000 $ - $ -
Issuance of 7.95% Series A . . . . . . . . . . . . . - 4,375,000 -
- ----------------------------------------------------------------------------------------------------
Preferred stock, end of period . . . . . . . . . . 4,375,000 4,375,000 -
- ----------------------------------------------------------------------------------------------------
COMMON STOCK, beginning of period. . . . . . . . . . . 16,616 29,116 29,116
Common stock exchanged . . . . . . . . . . . . . . . - (12,500) -
- ----------------------------------------------------------------------------------------------------
Common stock, end of period. . . . . . . . . . . . 16,616 16,616 29,116
- ----------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL, beginning of period. . . . 5,097,360 9,609,674 9,609,674
Common stock exchanged . . . . . . . . . . . . . . . - (4,512,314) -
- ----------------------------------------------------------------------------------------------------
Additional paid-in capital, end of period. . . . . 5,097,360 5,097,360 9,609,674
- ----------------------------------------------------------------------------------------------------
UNEARNED COMPENSATION, beginning of period . . . . . . (509,999) (689,998) (870,004)
Employee Stock Ownership Plan principal payments. . . 180,000 179,999 180,006
- ----------------------------------------------------------------------------------------------------
Unearned compensation, end of period . . . . . . . (329,999) (509,999) (689,998)
- ----------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION), beginning
of period. . . . . . . . . . . . . . . . . . . . . (1,492,563) 641,691 11,134
Change due to adoption of SFAS No.115. . . . . . . - - 616,988
Change in unrealized appreciation (depreciation),
net of taxes . . . . . . . . . . . . . . . . . . 2,145,121 (2,134,254) 13,569
- ----------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation),
end of period. . . . . . . . . . . . . . . . . . 652,558 (1,492,563) 641,691
- ----------------------------------------------------------------------------------------------------
RETAINED EARNINGS, beginning of period . . . . . . . . 6,062,664 4,941,985 3,440,067
Net income . . . . . . . . . . . . . . . . . . . . . 1,440,523 1,381,538 1,501,918
Series A preferred stock dividend. . . . . . . . . . (347,812) (260,859) -
- ----------------------------------------------------------------------------------------------------
Retained earnings, end of period . . . . . . . . . 7,155,375 6,062,664 4,941,985
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . $16,966,910 $13,549,078 $14,532,468
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Citizens Security Group Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,440,523 $ 1,381,538 $ 1,501,918
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in:
Insurance premiums receivable. . . . . . . . . . (1,084,269) (1,246,434) (772,184)
Reinsurance recoverable. . . . . . . . . . . . . (1,339,850) (69,140) (1,255,149)
Due from/to Citizens Mutual. . . . . . . . . . . (139,234) 215,850 604,670
Prepaid reinsurance premiums . . . . . . . . . . (96,095) (160,186) (113,304)
Deferred policy acquisition costs. . . . . . . . (128,715) (215,765) (143,350)
Deferred income taxes. . . . . . . . . . . . . . (166,000) (221,000) (103,000)
Reserves for losses and loss adjustment expense. 3,023,130 1,597,610 2,784,409
Unearned premiums. . . . . . . . . . . . . . . . 959,384 2,523,367 1,171,125
Income tax payable . . . . . . . . . . . . . . . (27,806) (85,678) 57,509
Other liabilities. . . . . . . . . . . . . . . . 107,942 (897) 134,690
Depreciation and amortization. . . . . . . . . . . 121,548 233,823 314,423
Realized losses (gains). . . . . . . . . . . . . . (76,880) 7,422 (606,031)
Other, net . . . . . . . . . . . . . . . . . . . . (36,307) (133,935) (130,410)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . 2,557,371 3,826,575 3,445,316
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities called or matured . 2,611,887 2,407,203 8,400,551
Proceeds from fixed maturities sold. . . . . . . . 7,725,730 7,074,596 24,663,805
Proceeds from equity securities sold . . . . . . . 9,500 5,550 -
Cost of fixed maturities acquired. . . . . . . . . (12,040,383) (11,753,978) (36,490,431)
Cost of equity securities acquired . . . . . . . . (10,605) - (272,000)
Cost of equipment disposed (acquired). . . . . . . 46,502 92,012 (446,714)
Change in due from investment broker . . . . . . . - - 195,196
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities. . . . . . (1,657,369) (2,174,617) (3,949,593)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Cost of issuance of Series A preferred stock . . . - (149,814) -
Repayment of bank loan . . . . . . . . . . . . . . (519,920) (1,050,000) (859,651)
Series A preferred stock dividends . . . . . . . . (347,812) (260,859) -
Other. . . . . . . . . . . . . . . . . . . . . . . - (28,211) (4,497)
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities. . . . . . (867,732) (1,488,884) (864,148)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and short-term
investments. . . . . . . . . . . . . . . . . . . . . 32,270 163,074 (1,368,425)
Cash and short-term investments at beginning of period 2,721,351 2,558,277 3,926,702
- ----------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period . . . $2,753,621 $2,721,351 $2,558,277
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(1) BASIS OF PRESENTATION
Citizens Security Group Inc. (the "Company") was incorporated on September 12,
1986 and is currently 54.5 percent owned by Citizens Security Mutual Insurance
Company ("Citizens Mutual"). Citizens Fund Insurance Company ("Citizens Fund"),
a wholly-owned subsidiary of the Company, was incorporated on September 15,
1986. Insurance Company of Ohio ("ICO"), a wholly-owned subsidiary of the
Company, was acquired by the Company effective as of October 20, 1989. As used
herein, "Subsidiaries" refers to Citizens Fund and ICO. The consolidated
financial statements include the accounts of the Company and Subsidiaries. All
significant intercompany balances have been eliminated in consolidation.
The Subsidiaries and Citizens Mutual provide personal and commercial insurance
products throughout the states of Iowa, Minnesota, Missouri, North Dakota, Ohio,
South Dakota, and Wisconsin.
The Subsidiaries and Citizens Mutual are parties to a reinsurance pooling
agreement. Under the pooling agreement, all premiums, losses, loss adjustment
expenses and underwriting expenses of the three companies are combined and
prorated between the parties based on their participation in the pool. Since
October 20, 1989, the Subsidiaries have been 75 percent participants in the pool
and Citizens Mutual has been a 25 percent participant.
Citizens Fund and Citizens Mutual losses incurred prior to October 20, 1989 (but
not prior to December 24, 1986) are pooled 70 percent to Citizens Fund and 30
percent to Citizens Mutual. Losses incurred prior to December 24, 1986 are
incurred solely by Citizens Mutual.
Pursuant to a loss and loss adjustment expense agreement between Prudential-LMI
Commercial Insurance Company ("Prudential-LMI") and ICO, ICO losses incurred
prior to October 20, 1989 are incurred solely by Prudential-LMI regardless of
when such losses are reported or paid.
Under the terms of a management services agreement, Citizens Mutual provides the
Company and Subsidiaries with facilities, employees and substantially all
services required to conduct its business. In return, the Subsidiaries pay 75
percent of the related expenses of Citizens Mutual, which consist primarily of
salaries, employee benefits, rent and depreciation of equipment. In addition,
the Company pays Citizens Mutual for services that are performed specifically
for the Company.
The Company entered into a capital access fee agreement on March 31, 1994 under
which the Subsidiaries and Citizens Mutual pay a fee to the Company in
consideration of its ability to raise capital for the combined insurance
operations of the Subsidiaries and Citizens Mutual. The fee is paid monthly in
an amount equal to one percent of the aggregate direct written premiums of the
Subsidiaries and Citizens Mutual. Of the total monthly fee, 75 percent of the
fee is paid by the Subsidiaries and 25 percent by Citizens Mutual. Citizens
Mutual's obligation to pay its portion of the fee will terminate on the earlier
of (i) the date on which the Company's currently outstanding bank loan (or any
indebtedness incurred to refinance such loan) is repaid in full or (ii) the
closing date of the Company's next public offering of securities.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
On February 8, 1996, Meridian Insurance Group, Inc., ("Meridian") and the
Company announced that they entered into a letter of intent providing for
Meridian's acquisition of the Company for approximately $29 million in cash.
Common shareholders of the Company would receive approximately $12.50 per common
share, and the preferred shareholder, Citizens Mutual, would receive
approximately $4.4 million for the Company's preferred stock. In conjunction
with the transaction, Meridian would also assume control of Citizens Mutual and
the Subsidiaries and Citizens Mutual would enter into arrangements with the
Meridian Insurance Group companies relating to the pooling of insurance.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities" as of
December 31, 1993. The Company classified its entire fixed maturity and equity
investment portfolios as "available-for-sale." Accordingly, these investments
are reported at estimated market value with unrealized gains and losses, net of
deferred taxes, recorded in shareholders' equity. Classifying these portfolios
as "available-for-sale" does not impact net income. Estimated market value is
based on quoted market prices where available. Where quoted market prices are
not available, market value is estimated using values obtained from independent
pricing services.
Short-term investments include investments maturing within one year, money
market instruments and mutual funds. Short-term investments with original
maturities of three months or less are considered cash equivalents for purposes
of the Consolidated Statements of Cash Flows. The carrying amount reported in
the balance sheets for cash and short-term investments approximate their fair
value.
Realized gains or losses on sales of investments, based on specific
identification of the investments sold, are credited or charged to income.
Changes in unrealized appreciation or depreciation resulting from changes in the
market value of investments are credited or charged to shareholders' equity, net
of deferred income taxes, if any.
PREMIUMS
Premiums are recognized as revenue on a pro rata basis over the terms of the
respective policies. Unearned premiums are calculated on the daily pro rata
basis.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs such as commissions, premium taxes and certain other
underwriting expenses, which vary with and are primarily related to the
production of business, are deferred and amortized over the effective period of
the related insurance policies. If deferred policy acquisition expenses were to
exceed the sum of unearned premiums and related anticipated investment income
less losses and loss adjustment expenses, the excess costs would be expensed
immediately.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company provides reserves for losses based upon aggregate case basis
estimates for losses reported and estimates of unreported losses, less
reductions for estimated amounts recoverable for salvage and subrogation. The
estimated amounts recoverable for salvage and subrogation were $685,000 and
$695,000 at December 31, 1995 and 1994, respectively. The Company provides
reserves for loss adjustment expenses by estimating expenses to be incurred in
settlement of the claims. Estimated losses and loss adjustment expenses
recoverable from reinsurers are reflected as assets.
The reserves for losses and loss adjustment expenses are considered adequate to
cover the ultimate net cost of losses and loss adjustment expenses. Since the
reserves are necessarily based on estimates, the ultimate liability may be more
or less than such reserves. Any adjustments made to reserves are reflected in
the operating results of the year during which the adjustments are made.
BANK LOAN PAYABLE
The carrying amount reported in the Consolidated Balance Sheets for the bank
loan payable approximates its fair value.
EQUIPMENT
Equipment is stated at cost less accumulated depreciation. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets.
INCOME TAXES
Deferred Federal income taxes are provided to recognize temporary differences
between income determined for financial reporting purposes and income determined
for Federal income tax purposes and changes during the year in cumulative
temporary differences between the tax basis and book basis and liabilities.
EARNINGS PER COMMON SHARE
Earnings per common share are calculated based on the weighted average number of
common and common equivalent shares outstanding and after net income is reduced
by dividends on the Company's Series A preferred stock. Declared preferred stock
dividends were $347,812 and $260,859 in 1995 and 1994, respectively.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired of $1,184,550, less accumulated
amortization of $875,253 and $733,033 as of December 31, 1995 and 1994,
respectively, represents the unamortized excess of cost over underlying net
tangible assets of ICO at the date of acquisition. The original amount is being
amortized on a straight-line basis over an average life of approximately nine
years. The Company monitors the value of goodwill and would reduce the carrying
value against expenses if it was determined that goodwill had been impaired.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
reported financial statement balances as well as the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Similar to most companies with property and casualty insurance operations, the
Company's gross and net reserves for losses and loss adjustment expenses and
deferred acquisition costs, although supported by actuarial projections and
other data, are ultimately based on management's reasoned expectations of future
events. It is reasonably possible that the expectations associated with these
accounts could change in the near term (i.e., within one year) and that the
effect of such changes could be material to the consolidated financial
statements.
RECLASSIFICATIONS
The Company reclassified some figures in prior years' financial statements to
conform with the 1995 presentation.
(3) INVESTMENTS
The following schedule summarizes information related to equity securities as of
December 31:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $791,385 $689,088
Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649,278 646,597
- -------------------------------------------------------------------------------------------------
Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . 142,107 42,491
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 48,000 15,000
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . $ 94,107 $ 27,491
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) consists of the following:
Gross unrealized appreciation . . . . . . . . . . . . . . . . . . . $154,682 $ 81,541
Gross unrealized depreciation . . . . . . . . . . . . . . . . . . . (12,575) (39,050)
- -------------------------------------------------------------------------------------------------
Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . $142,107 $ 42,491
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost, gross unrealized appreciation, gross unrealized depreciation
and estimated market value of investments in fixed maturities available for sale
as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies . . . . . . . . . . . . . . $ 6,656,527 $101,170 $(9,324) $ 6,748,373
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . 6,848,211 282,837 - 7,131,048
Corporate securities . . . . . . . . . . . . 11,189,336 308,480 (19,840) 11,477,976
Mortgage-backed securities . . . . . . . . . 11,480,539 206,816 (22,688) 11,664,667
- ---------------------------------------------------------------------------------------------------------
Totals . . . . . . . . . . . . . . . . . $36,174,613 $899,303 $(51,852) $37,022,064
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies . . . . . . . . . . . . . . $ 8,697,141 $ - $ (863,955) $ 7,833,186
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . 8,738,709 79,990 (470,396) 8,348,303
Corporate securities . . . . . . . . . . . . 8,711,771 14,507 (586,070) 8,140,208
Mortgage-backed securities . . . . . . . . . 8,006,342 9,181 (486,311) 7,529,212
- ----------------------------------------------------------------------------------------------------------
Totals . . . . . . . . . . . . . . . . . $34,153,963 $103,678 $(2,406,732) $31,850,909
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1995
--------------------------
Estimated
Amortized Market
Cost Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,359,787 $ 3,368,737
Due after one year through five years. . . . . . . . . . . . . . . . . . . 9,265,077 9,545,067
Due after five years through ten years . . . . . . . . . . . . . . . . . . 6,607,280 6,756,660
Due after ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,461,930 5,686,933
- ----------------------------------------------------------------------------------------------------------
24,694,074 25,357,397
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . 11,480,539 11,664,667
- ----------------------------------------------------------------------------------------------------------
$36,174,613 $37,022,064
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Realized and unrealized gains (losses) from investments are summarized as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains (losses) on investments:
Fixed maturities:
Gross realized gains . . . . . . . . . . . . . . . . . . $128,338 $ 124,334 $635,860
Gross realized losses. . . . . . . . . . . . . . . . . . (53,033) (137,306) (29,829)
- ---------------------------------------------------------------------------------------------------------
Total fixed maturities . . . . . . . . . . . . . . . . 75,305 (12,972) 606,031
- ---------------------------------------------------------------------------------------------------------
Equities:
Gross realized gains . . . . . . . . . . . . . . . . . . 1,575 5,550 -
- ---------------------------------------------------------------------------------------------------------
Total realized gains (losses) on investments . . . . . $76,880 $(7,422) $606,031
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes in unrealized appreciation (depreciation):
Equity securities. . . . . . . . . . . . . . . . . . . . . $ 99,616 $ 4,788 $ 21,569
Fixed maturities . . . . . . . . . . . . . . . . . . . . . 3,150,505 (3,238,042) 210,388
- ---------------------------------------------------------------------------------------------------------
Total change in unrealized appreciation
(depreciation) . . . . . . . . . . . . . . . . . . . . $3,250,121 $(3,233,254) $231,957
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Investment income is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on fixed maturities . . . . . . . . . . . . . . . . $2,409,795 $2,167,506 $1,911,863
Dividends on equity securities . . . . . . . . . . . . . . . 33,097 32,815 32,710
Interest on short-term investments . . . . . . . . . . . . . 141,505 125,793 52,338
Other interest . . . . . . . . . . . . . . . . . . . . . . . 66,894 50,383 73,253
- ---------------------------------------------------------------------------------------------------------
2,651,291 2,376,497 2,070,164
Investment expenses. . . . . . . . . . . . . . . . . . . . . 199,027 182,125 117,635
- ---------------------------------------------------------------------------------------------------------
Investment income, less related expenses . . . . . . . . . . $2,452,264 $2,194,372 $1,952,529
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, there were no investments, other than investments
in U.S. Government or U.S. Government Agency securities, which exceeded 10
percent of shareholders' equity.
At December 31, 1995 and 1994, bonds carried at $705,671 and $602,064
respectively, were pledged to the Commerce Department of the State of Minnesota.
At December 31, 1995 and 1994, bonds carried at $259,140 and $237,577,
respectively, were pledged to the Insurance Department of the State of Ohio.
(4) EQUIPMENT
Equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . $ 505,038 $ 416,498
Data processing equipment. . . . . . . . . . . . . . . . . . . . . . . . . 1,916,403 2,051,445
Automobiles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,697 65,697
- ---------------------------------------------------------------------------------------------------------
Equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,487,138 2,533,640
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (1,892,613) (1,693,015)
- ---------------------------------------------------------------------------------------------------------
Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 594,525 $ 840,625
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(5) FEDERAL INCOME TAXES
The Company implemented SFAS No. 109, "Accounting for Income Taxes," in the
first quarter of 1993. The cumulative effect of this change was a one-time
increase to earnings of $38,000 or $.01 per share.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
SFAS No. 109 changed the way the Company calculates tax expense shown in the
financial statements. Under prior rules, the primary objective was to match the
tax expense with pretax operating income on the Consolidated Statements of
Income. Under SFAS No. 109, the primary objective is to ensure the deferred tax
asset or liability on the balance sheet properly reflects the amount due to or
from the government in the future. As a consequence, the portion of the tax
expense resulting from the change in the deferred tax asset or liability may not
always be consistent with the income reported in the Consolidated Statements of
Income.
Some items of revenue and expense included in the Consolidated Statements of
Income may not be currently taxable or deductible on income tax returns.
Therefore, the income tax assets and liabilities are divided into a current
portion, which is the amount attributable to the current year's tax return, and
a deferred portion, which is the amount attributable to another year's tax
return. The revenue and expense items not currently taxable or deductible are
called temporary differences. Income tax expense or benefits are recorded in
various places in the Company's financial statements. A summary of these amounts
is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Statements of Income:
Expenses related to income . . . . . . . . . . . . . . . . . . . . . . . $ 501,811 $ 372,032
Shareholders' Equity:
Income tax attributable to change in unrealized appreciation
(depreciation) of investments. . . . . . . . . . . . . . . . . . . . . 1,105,000 (1,099,000)
- ----------------------------------------------------------------------------------------------------------
$1,606,811 $ (726,968)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The components of income tax expense related to income before cumulative effect
of accounting change are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal current. . . . . . . . . . . . . . . . . . . . . . . $644,811 $602,032 $638,000
Federal deferred . . . . . . . . . . . . . . . . . . . . . . (166,000) (221,000) (103,000)
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000 (9,000) 120,000
- ----------------------------------------------------------------------------------------------------------
Income tax expense. . . . . . . . . . . . . . . . . . . . . $501,811 $372,032 $655,000
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Federal income tax expense is less than the U.S. Federal income tax rate of 34
percent applied to income before income taxes. The reasons for this difference
and the related tax effects are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense calculated at the Federal rate . . . . . . . . . $ 660,394 $ 596,214 $ 720,432
Reduction attributable to nontaxable investment income
(municipal bond interest and domestic dividends) . . . . . (118,530) (197,039) (148,479)
State tax expense. . . . . . . . . . . . . . . . . . . . . . 15,180 (5,940) 79,200
Prior years' tax adjustment. . . . . . . . . . . . . . . . . (70,000) - -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,767 (21,203) 3,847
- ----------------------------------------------------------------------------------------------------------
Income tax expense . . . . . . . . . . . . . . . . . . . . $ 501,811 $ 372,032 $ 655,000
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
The tax effects of temporary differences giving rise to significant portions of
the deferred tax assets and deferred tax liabilities are presented as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loss reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,108,125 $1,009,292
Unearned premium reserves. . . . . . . . . . . . . . . . . . . . . . . . 968,087 909,384
Unrealized depreciation of investments . . . . . . . . . . . . . . . . . - 768,591
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,788 14,733
- ---------------------------------------------------------------------------------------------------------
Total gross deferred tax asset . . . . . . . . . . . . . . . . . . . . 2,087,000 2,702,000
- ---------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . $ 825,322 $ 781,559
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . 336,450 -
Excess of cost over net assets acquired. . . . . . . . . . . . . . . . . 101,464 145,383
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,279 38,084
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,485 52,974
- ---------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . 1,342,000 1,018,000
- ---------------------------------------------------------------------------------------------------------
Net deferred income tax asset. . . . . . . . . . . . . . . . . . . . . $ 745,000 $1,684,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Company has determined it is not necessary to establish a valuation
allowance for the deferred tax asset as it is more likely than not the deferred
tax asset will be realized principally through future reversal of existing
taxable temporary differences, future taxable income and tax planning strategies
related to its investment portfolios.
Income tax payments in 1995, 1994 and 1993 were $695,617, $678,710 and $700,491,
respectively.
(6) STOCK OPTION PLANS
On April 18, 1995, the Company amended the 1986 Stock Option Plan (a) to extend
the term of such plan from September 16, 1996 to September 16, 2006, (b) to
increase the number of shares of the Company's Common Stock authorized for
issuance from 225,000 to 375,000 and (c) to satisfy the requirements of Section
162(m) of the Internal Revenue Code of 1986. The Company has reserved a maximum
of 375,000 and 225,000 shares of common stock for issuance under the 1986 Stock
Option Plan as of December 31, 1995 and December 31, 1994, respectively. At
December 31, 1995 and 1994, options to purchase 285,000 and 196,500 shares,
respectively, had been granted at exercise prices ranging from $3.13 to $4.00.
No options have been exercised under this plan.
In 1991, the Company adopted a non-employee director stock option plan. The
Company has reserved a maximum of 50,000 shares of common stock for issuance
under such plan. As of December 31, 1995 and 1994, options to purchase 50,000
and 40,000 shares, respectively, had been granted at exercise prices ranging
from $3.13 to $4.00. No options have been exercised under this plan.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(7) POST RETIREMENT BENEFITS
In October 1992, Citizens Mutual established an Employee Stock Ownership Plan
("ESOP"). The ESOP borrowed $1,200,000 from Citizens Mutual. The loan will be
repaid in monthly principal payments of $20,000. The current interest rate is
9.5 percent, but the rate is variable and is tied to the prime rate. On October
30, 1992, the ESOP purchased 349,090 shares of the Company's authorized but
previously unissued shares of Common Stock for approximately $1,200,000. The
stock held by the ESOP is released for allocation to the participants' accounts
over the term of the loan as the Company and Citizens Mutual make contributions.
The Company has reflected the principal portion of the loan it expects to repay
as an unearned compensation liability and a corresponding reduction in
shareholders' equity. These amounts will be reduced as the ESOP loan is repaid.
The amount of the annual contribution is discretionary, except that it must be
sufficient to enable the ESOP to meet its current obligations. The Company's
portion of contribution expense related to the ESOP amounted to $221,988,
$229,699 and $235,131 in 1995, 1994 and 1993, respectively, of which $41,988,
$49,700 and $55,125, respectively, was payment of interest.
Citizens Mutual had a defined benefit pension plan covering substantially all of
its employees which was curtailed on June 20, 1992. The Company recognized a
gain of $3,266 on the final settlement which occurred in early 1993.
(8) COMMITMENTS AND CONTINGENCIES
Citizens Mutual leases the home office, a branch office, automobiles and
equipment under various agreements. Under the terms of the management services
agreement, Citizens Mutual and the Company have the right to occupy the offices
jointly, and the Company pays 75 percent of the rent and all other expenses
under the leases. The Company's portion of rental expense for these leases was
$316,729, $275,894 and $295,232 in 1995, 1994 and 1993, respectively. The
Company's portion of future rentals under these leases are $328,320, $106,685,
$37,852, $22,679 and $2,870 in the years 1996, 1997, 1998, 1999 and 2000,
respectively. Lease payments include amounts paid to an affiliated company for
the rental of computer software and equipment. The Company's annual portion of
this lease is $81,795 in 1996 and 1997, $26,625 in 1998, $21,610 in 1999 and
$1,801 in 2000. The future rentals do not include insurance and real estate
taxes which are also payable by the Company. The home and branch office rentals
also do not include utilities and maintenance expenses.
The Company is subject to claims and lawsuits that arise in the ordinary course
of business. In the opinion of management, the ultimate resolution of such
litigation will not have a material adverse effect on the Company's financial
position.
The Company has not established a liability for environmental-related losses
because it does not offer a pollution liability policy. The Company's commercial
liability policies contain standard Insurance Services Office pollution
exclusions and no claims have been reported to date.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(9) BANK LOAN PAYABLE
On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan
from First Bank National Association, which has subsequently been purchased on
November 9, 1995 by Goodhue County National Bank, Red Wing, Minnesota. The
principal balance of the bank loan remaining to be paid as of December 31, 1995,
was $999,000. The current interest rate is 8.75 percent, but the rate is
variable and is tied to the prime rate. On March 31, 1994, the Company and First
Bank National Association amended the bank loan to change the debt repayment
schedule and revise certain covenants. The Company is now required to make
quarterly principal payments of $100,000 until October 1996 when the remaining
principal amount of $699,000 is due. Principal may be prepaid. Principal
payments of $519,920 were made in 1995. Interest payments in 1995, 1994 and 1993
totaled $121,669, $202,928 and $243,563, respectively.
The loan is secured by a pledge of the stock of the Subsidiaries. Additionally,
the Company agreed to certain restrictive covenants which limit the amount of
subsequent indebtedness, dividends payable to shareholders, capital expenditures
and business acquisitions. The covenants also restrict any changes to the
pooling agreement.
These restrictive covenants further require that the Subsidiaries maintain
specified levels of capital and policyholders' surplus and that net written
premiums to policyholders' surplus and combined trade ratios not exceed
specified levels. The Company is currently in compliance with all requirements
of the loan agreement.
(10) REINSURANCE
Ceded reinsurance involves having other insurance companies agree to share
certain risks with the Company. The primary purpose of ceded reinsurance is to
protect the Company from potential losses in excess of the amount it is prepared
to accept. Reinsurance may be on an individual policy basis or to protect
against catastrophic losses.
During 1993, the Company implemented SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This statement
requires the Company to report balances pertaining to reinsurance transactions
"gross" on the balance sheet. The Company now records reinsurance recoverables
on unpaid losses and ceded unearned premiums as assets, in contrast to the
Company's prior practice of netting these amounts against the corresponding
liabilities. Adoption of SFAS No. 113 had no impact on net income or
shareholders' equity.
The Company expects the companies with whom reinsurance is placed to honor their
obligations to the Company. In the event these companies are unable to honor
their obligations, the Company will pay these amounts. As of December 31, 1995,
approximately 74 percent of the prepaid reinsurance premiums was with Mutual
Reinsurance Bureau. All business written with that company is automatically
assumed on an equal and joint basis by its six owner/assuming companies and the
six
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
companies are rated from "A" to "A++" by A.M. Best Company. As of December
31, 1995, approximately 54 percent of the total reinsurance recoverable was
with Swiss Reinsurance America Corporation, formerly known as the North
American Reinsurance Corporation. Swiss Reinsurance America Corporation is
rated "A" by A.M. Best Company and "AAA" by Standard and Poor's for its
property/liability claims-paying ability.
In 1994, the Company received refunds of $592,388 of excess ceded reinsurance
premiums from the Minnesota Workers' Compensation Reinsurance Association
("WCRA"). These refunds were required to be distributed to certain workers'
compensation policyholders under legislation passed by the State of Minnesota in
1992. This legislation was challenged by a group of insurers and on January 31,
1995 the U.S. Court of Appeals for the Eighth Circuit upheld a lower court
ruling that found the legislation to be unconstitutional. At December 31, 1994
the Company recorded the refund as a reduction of ceded written premium and
ceded unearned premium, with no effect on earned premium. The Company recorded
these refunds as premiums earned in 1995.
The effect of assumed and ceded reinsurance on premiums written, premiums earned
and insurance losses and loss adjustment expenses is reflected in the following
table.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $37,803,342 $35,038,696 $30,870,254
Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,304,787 5,326,445 5,323,515
- ---------------------------------------------------------------------------------------------------------
Net premiums written . . . . . . . . . . . . . . . . . . $31,498,555 $29,712,251 $25,546,739
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Premiums earned:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $36,251,560 $33,107,727 $29,699,129
Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,616,294 5,758,658 5,210,211
- ---------------------------------------------------------------------------------------------------------
Net premiums earned. . . . . . . . . . . . . . . . . . . $30,635,266 $27,349,069 $24,488,918
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Insurance losses and loss adjustment expenses:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $26,464,085 $22,745,832 $20,688,952
Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,117,301 4,176,750 4,264,685
- ---------------------------------------------------------------------------------------------------------
Net insurance losses and loss adjustment
expense. . . . . . . . . . . . . . . . . . . . . . . . $21,346,784 $18,569,082 $16,424,267
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(11) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table contains information concerning the reserves of Citizens
Fund and ICO for losses and Loss Adjustment Expenses ("LAE").
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning year. . . . . . . . $20,989,736 $19,392,126 $16,607,717
Less reinsurance recoverables on unpaid losses
at beginning of year . . . . . . . . . . . . . . . . . . . 3,818,909 3,804,095 2,546,375
- ---------------------------------------------------------------------------------------------------------
Net reserves for losses and LAE at
beginning of year. . . . . . . . . . . . . . . . . . . 17,170,827 15,588,031 14,061,342
- ---------------------------------------------------------------------------------------------------------
Provision for losses and LAE for claims
occurring in the current year. . . . . . . . . . . . . . . 21,900,996 19,506,310 17,219,223
Change in estimated losses and LAE for
claims occurring in prior years. . . . . . . . . . . . . . (554,212) (937,228) (794,956)
- ---------------------------------------------------------------------------------------------------------
Total losses and LAE incurred. . . . . . . . . . . . . . 21,346,784 18,569,082 16,424,267
- ---------------------------------------------------------------------------------------------------------
Payments on losses and LAE for claims
occurring during:
Current year . . . . . . . . . . . . . . . . . . . . . . 12,393,198 10,788,251 8,778,219
Prior years. . . . . . . . . . . . . . . . . . . . . . . 7,276,725 6,198,035 6,119,359
- ---------------------------------------------------------------------------------------------------------
Total payments . . . . . . . . . . . . . . . . . . . . 19,669,923 16,986,286 14,897,578
- ---------------------------------------------------------------------------------------------------------
Net reserves for losses and LAE at end of year . . . . . . . 18,847,688 17,170,827 15,588,031
Plus reinsurance recoverables on unpaid losses at
end of year. . . . . . . . . . . . . . . . . . . . . . . 5,165,178 3,818,909 3,804,095
- ---------------------------------------------------------------------------------------------------------
Reserves for losses and LAE at end of year . . . . . . . $24,012,866 $20,989,736 $19,392,126
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
In 1995, the majority of the decrease in estimated losses and LAE for claims
occurring in prior years is the result of favorable development primarily in the
workers' compensation line.
(12) STATUTORY ACCOUNTING PRACTICES
The Subsidiaries are required to file statutory financial statements with state
regulatory authorities. The Subsidiaries follow prescribed statutory accounting
policies in all material respects. The accounting practices used to prepare
statutory financial statements differ from generally accepted accounting
principles ("GAAP").
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
A reconciliation of net income and shareholders' equity, as determined in
accordance with GAAP on a consolidated basis, to statutory amounts reported to
regulatory authorities by the Subsidiaries on an unconsolidated basis, is as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
Subsidiaries combined on a statutory basis . . . . . . . . . $ 1,208,733 $ 961,570 $1,739,851
Change in deferred policy acquisition costs. . . . . . . . . 128,715 215,766 143,350
Amortization of excess of cost over
net assets acquired. . . . . . . . . . . . . . . . . . . . (129,173) (129,173) (129,173)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 166,000 221,000 103,000
Prior years' tax adjustments . . . . . . . . . . . . . . . . 47,019 111,504 (87,536)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (2,743) 55,597 49,493
- ----------------------------------------------------------------------------------------------------------
Subsidiaries' net income on a GAAP basis . . . . . . . . . . $1,418,551 $1,436,264 $1,818,985
Parent only net income (loss) on a GAAP basis. . . . . . . . 21,972 (54,726) (317,067)
- ----------------------------------------------------------------------------------------------------------
Consolidated net income on a GAAP basis. . . . . . . . . . . $1,440,523 $1,381,538 $1,501,918
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Subsidiaries combined on a statutory basis . . . . . . . . . $13,338,574 $13,222,505 $13,733,154
Deferred policy acquisition costs. . . . . . . . . . . . . . 2,427,418 2,298,703 2,082,938
Unrealized appreciation (depreciation) on
fixed maturities . . . . . . . . . . . . . . . . . . . . . 847,451 (2,303,054) 934,830
Excess of cost over net assets acquired. . . . . . . . . . . 298,424 427,597 556,770
Non-admitted assets. . . . . . . . . . . . . . . . . . . . . 224,544 197,487 230,451
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 745,000 1,684,000 364,000
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 82,543 37,752 (181,675)
- ----------------------------------------------------------------------------------------------------------
Subsidiaries' shareholders' equity on a
GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . $17,963,954 $15,564,990 $17,720,468
Parent only and eliminations on a GAAP basis . . . . . . . . (997,044) (2,015,912) (3,188,000)
- ----------------------------------------------------------------------------------------------------------
Consolidated shareholders' equity on a
GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . $16,966,910 $13,549,078 $14,532,468
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
In December 1993, the National Association of Insurance Commissioners approved a
model risk-based capital formula for property and casualty insurers to be
effective with the 1994 statutory annual statement. The Subsidiaries have
adequate surplus to meet these requirements.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(13) STOCK EXCHANGE
On March 31, 1994, the Company's affiliate, Citizens Mutual, exchanged 1,250,000
shares of common stock for 1,250,000 shares of 7.95% Series A Preferred Stock
("Preferred Stock"). The Preferred Stock, which has an annual cumulative
dividend of $.27825 per share and a liquidation preference of $3.50 per share,
ranks senior to the Company's common stock as to payment of dividends and also
as to the distribution of assets should there be a liquidation or dissolution of
the Company. The Preferred Stock has one vote per share voting together with the
Company's common stock on all matters submitted to a shareholders' vote. The
Preferred Stock is not convertible by Citizens Mutual and is not subject to
redemption at the option of the Company or the holder thereof.
The Preferred Stock was recorded at the liquidation preference of $3.50 per
share which approximated the market of the common stock retired at the time of
the exchange. Common stock and additional paid-in capital were decreased
$4,524,814 for the common stock retired (including $149,814 of transaction
costs).
(14) DIVIDEND RESTRICTIONS
As a holding company, the Company depends on dividends from the Subsidiaries to
make principal and interest payments with respect to its bank loan and to meet
its other expenses. As members of an insurance holding company system, the
Subsidiaries are restricted by law as to the amount of dividends they may pay to
the Company without the approval of state regulatory authorities.
Generally, restrictions on Citizens Fund limit the amount of dividends paid
during a twelve month period to an amount which does not exceed the greater of
(i) 10 percent of Citizens Fund's statutory surplus at the end of the prior year
or (ii) the statutory net income, not including realized gains, of Citizens Fund
for the prior year. In addition, ordinary dividends may only be paid from the
earned surplus of Citizens Fund, also known as unassigned funds, determined in
accordance with the accounting procedures and practices used in the preparation
of its statutory annual statement, minus 25 percent of earned surplus
attributable to unrealized capital gains. As of December 31, 1995, Citizens
Fund's unassigned surplus was $305,020. Citizens Fund's ordinary dividends are
restricted to a maximum of $832,883 for 1996. Citizens Fund paid dividends of
$789,000 in 1995.
Restrictions on ICO limit the amount of dividends paid during a twelve month
period to an amount which does not exceed the greater of (i) 10 percent of ICO's
statutory surplus at the end of the prior year or (ii) the net income of ICO for
the prior year. In addition, ordinary dividends may only be paid from earned
surplus, which equals ICO's unassigned funds as set forth in its most recent
statutory annual statement, including net unrealized capital gains and losses.
As of December 31, 1995, ICO's unassigned surplus was $69,053. ICO's ordinary
dividends are restricted to a maximum $528,705 for 1996. ICO paid dividends of
$375,706 in 1995.
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Citizens Security Group Inc.:
We have audited the consolidated balance sheets of Citizens Security Group Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in equity and cash flows for each of the years in
the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens Security
Group Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes 2 and 5 to the consolidated financial statements, the
Company in 1993 adopted the provisions of the Financial Accounting Standards
Board's Statements of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and No. 109, "Accounting for
Income Taxes."
/s/ KPMG PEAT MARWICK LLP
-------------------------
Minneapolis, Minnesota
March 15, 1996
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Spencer A. Broughton ........ 67 Chairman of the Board, Chief Executive
Officer and Director
Scott S. Broughton .......... 41 President, Chief Operating Officer,
Chief Financial Officer and Director
David A. Cairns.............. 49 Director
William C. Ferril ........... 64 Director
S. B. Foot, III.............. 49 Director
William J. Haaland........... 34 Vice President, Marketing
R. Scott Jones .............. 51 Director
Terry A. Lynner ............. 42 Director
Jerald K. Olson ............. 36 Vice President, People Services
Mary B. Plein ............... 35 Vice President, Financial Services
and Treasurer
Kirk D. Simmons.............. 35 Vice President, Insurance Services
Bruce A. Tollefson........... 47 Vice President, Product Services
</TABLE>
Spencer A. Broughton has been Chairman of the Board, Chief Executive Officer and
a director of the Company since its inception in September 1986 and of Citizens
Mutual since 1965. Mr. Broughton was also President of the Company from its
inception in September 1986 to April 1992 and President of Citizens Mutual from
1965 to April 1992. He joined Citizens Mutual as General Manager in 1962. Mr.
Broughton is a director of BancInsure Company, an insurance company formed by
national banks to provide directors' and officers' insurance and blanket bond
coverage to member banks, and a director of the Independent Casualty Companies
of America. Mr. Broughton is also a director and past President of the Insurance
Federation of Minnesota, Minnesota Association of Mutual Insurance Companies and
Minnesota Insurance Information Center. In addition, he is a director of the
Alliance of American Insurers and a past President of the Twin Cities
Underwriters Association.
Scott S. Broughton has been President and Chief Operating Officer of the Company
and Citizens Mutual since April 1992 and Chief Financial Officer of the Company
and Citizens Mutual since December 1994. Mr. Broughton has served as a director
of the Company since April 1992 and a director of Citizens Mutual since April
1990. Mr. Broughton was Senior Vice President of the Company from April 1991 to
April 1992 and Senior Vice President of Citizens Mutual from December 1990 to
April 1992. He was Vice President, Sales of the Company from February 1989 to
April 1991 and Vice President, Sales of Citizens Mutual from February 1989 to
December 1990. From July 1986 to February 1989, Mr. Broughton was employed by
Citizens Mutual as Assistant to the President. Mr. Broughton is on the Board of
Trustees of the Ohio Insurance Institute. He is the son of Spencer A. Broughton.
David A. Cairns was elected to the Board of Directors of the Company in 1994.
Mr. Cairns is a private business consultant. He served as Vice President and
Treasurer of SUPERVALU INC. a food wholesaler, from 1984 to February 1995.
William C. Ferril was elected to the Board of Directors of the Company in
November 1986. Mr. Ferril is a private investor and consultant. He served as
39
<PAGE>
President and Chief Executive Officer of Ciatti's Inc., a company that operates
full-service Italian restaurants, from May 1988 to May 1992 and as a director of
Ciatti's Inc. from November 1986 to July 1992.
S. B. Foot, III has served as a director of the Company since its inception in
September 1986. He has been President and Chief Executive Officer of S. B. Foot
Tanning Company since 1981. Mr. Foot has served as a director of Citizens Mutual
since 1983.
William J. Haaland has been Vice President, Marketing (previously known as Sales
and Underwriting) of the Company and Citizens Mutual since January 1994. Mr.
Haaland was named a director of Citizens Mutual in March 1996. From February
1992 until January 1994, Mr. Haaland was the Assistant Vice President, Sales of
Citizens Mutual. He was Sales Manager of Citizens Mutual from January 1991 until
February 1992, and Agency Automation Manager of Citizens Mutual from January
1989 until January 1991. He is the son-in-law of Spencer A. Broughton.
R. Scott Jones has served as a director of the Company since its inception in
September 1986. He has been Chairman of the Board of GCNB since April 1993 and
Chief Executive Officer of GCNB since 1984. He has been Co-Chairman of the
Board, Co-Chief Executive Officer and a director of United Community Bancshares
Inc. ("United Bancshares") since January 1994. Mr. Jones has served as a
director of Citizens Mutual since 1982.
Terry A. Lynner was elected to the Board of Directors of the Company in November
1986. He is a Managing Director of Goldsmith, Agio, Helms & Company, an
investment banking firm, and has been employed by such firm since March 1989.
From March 1985 until such time, he was a Vice President of Piper, Jaffray &
Hopwood Incorporated (now Piper Jaffray Inc.), an investment banking firm.
Mr. Lynner is also a director of the Minnesota Zoo Foundation.
Jerald K. Olson has been Vice President, People Services (previously known as
Human Resources) of the Company and Citizens Mutual since December 1994. Mr.
Olson has been Assistant Secretary of the Company since April 1992 and Secretary
of Citizens Mutual since December 1991. From April 1990 until December 1994, Mr.
Olson was the Human Resources Manager of the Company and Citizens Mutual. Mr.
Olson was a Management Trainee at Citizens Mutual and Citizens Fund from March
1987 through April 1990 and a Management Trainee at ICO from October 1989
through April 1990. He is the son-in-law of Spencer A. Broughton.
Mary B. Plein has been Vice President, Financial Services (previously known as
Accounting) and Treasurer of the Company and Citizens Mutual since April 1995.
Ms. Plein was the Assistant to the President of the Company and Citizens Mutual
from January 1993 to April 1995. Ms. Plein was named an Assistant Vice President
of Citizens Mutual, Citizens Fund and ICO in February 1992. She joined Citizens
Mutual as an accountant in April 1993.
Kirk D. Simmons has been Vice President, Insurance Operations (previously known
as Claims and Information Services) of the Company and Citizens Mutual since
October 1993. Mr. Simmons was a Regional Claims Analyst/Manager of the CNA
Insurance Group("CNA") from January 1992 to October 1993 and a CNA Claims
Supervisor from May 1988 to January 1992.
Bruce A. Tollefson has been Vice President, Product Services (previously known
as Operations) of the Company since April 1991 and Vice President, Product
Services of Citizens Mutual since December 1990. From April 1987 until December
1990, Mr. Tollefson was the Assistant Vice President, Research and Development
of Citizens Mutual. Mr. Tollefson was the Research and Development Manager of
Citizens Mutual from December 1985 through April 1987.
40
<PAGE>
MEETINGS OF THE BOARD OF DIRECTORS AND DIRECTOR FEES
The Board of Directors held six meetings in 1995. In 1995, all directors
attended at least 75% of the total number of meetings of the Board of Directors
and committees of the Board on which they served during 1995. Each nonemployee
director receives an annual fee of $4,000 for serving as a director and a fee of
$1,000 plus expenses for each Board meeting attended.
COMMITTEES
The Board of Directors has an Audit Committee that reviews, and makes
recommendations to the Board with respect to, financial and accounting matters,
including the activities of the Company's independent auditors and the Company's
internal accounting controls. Messrs. R. Scott Jones (Chairman), Cairns, Ferril,
Foot and Lynner are the members of the Audit Committee. The Audit Committee
held two meetings in 1995.
The Board of Directors also has a Compensation Committee that reviews, and makes
recommendations to the Board with respect to, executive compensation matters.
Messrs. Ferril (Chairman), Cairns, Foot and R. Scott Jones are the members of
the Compensation Committee. The Compensation Committee held four meetings in
1995.
An Advisory Committee of four persons has been established to approve any
changes in the Pooling Agreement between the Company and Citizens Mutual (see
Part III, Item 13, "Certain Relationships and Related Transactions" below), to
pass upon any other matters involving actual or potential conflicts of interest
between the two companies and to approve the compensation of officers of the
Company and Citizens Mutual. The Advisory Committee consists of two outside
directors from each of the Company and Citizens Mutual, none of whom holds seats
on both Boards. Advisory Committee members must conclude that any intercompany
transactions are fair and equitable to both companies. Decisions of the Advisory
Committee are binding on the Company. Messrs. Ferril and Lynner are the
Company's Advisory Committee members.
The Company's Board of Directors does not have a nominating committee. Each
nonemployee member of a Board committee receives $300 plus expenses for each
committee meeting attended. The Chairman of each Board committee receives $400
plus expenses for each committee meeting attended.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has a Nonemployee Director Stock Option Plan ("Director Option
Plan") under which a total of 50,000 shares of Common Stock are reserved for
issuance. Each director of the Company is eligible to participate in the
Director Option Plan unless such director is an employee of Citizens mutual, the
Company or a subsidiary of the Company. Under the Director Option Plan, each
eligible director automatically is granted an option to purchase 2,000 shares of
Common Stock at the time of each Annual Meeting of Shareholders at which such
director is elected for the first time or re-elected to the Board.
All options granted under the Director Option Plan have an exercise price equal
to the fair market value of the Company's Common Stock on the date of grant and
become exercisable six months after the date of grant. The option exercise price
is payable in cash. The options expire five years from the date of grant and are
not transferable (except by will or the laws of descent and distribution).
During the year ended December 31, 1995, Messrs. Cairns, Ferril, Foot, R. Scott
Jones and Lynner each were granted an option under the Director Option Plan to
purchase 2,000 shares of the Company's Common Stock at an exercise price of
$4.00. No options granted under the Director Option Plan have been exercised to
date.
41
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than 10% of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than 10% shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a)
reports they file. To the Company's knowledge, based solely on review of
copies of such reports furnished to the Company relating to transactions
during the fiscal year ended December 31, 1995, all Section 16(a) filing
requirements applicable to its directors, officers and greater than 10%
beneficial owners were complied with, except that (a) each of David A.
Cairns, William C. Ferril, S.B. Foot, III, R. Scott Jones and Terry A. Lynner
(who are directors of the Company) were late in filing a Form 5 (annual
statement of changes in beneficial ownership) reporting the grant of a stock
option pursuant to the Company's Nonemployee Stock Option Plan and (b) each
of Spencer A. Broughton, Scott S. Broughton, William J. Haaland, Jerald K.
Olson, Mary B. Plein, Kirk D. Simmons and Bruce A. Tollefson (who are
executive officers of the Company) and Charles W. Bergher, Michael L.
Halvorson and Gloria J. Reeck (former executive officers of the Company) were
late in filing a Form 5 reporting the grant of options under the Company's
Employee Stock Option Plan and certain indirect acquisitions of Common Stock
of the Company through the Company's 401(k) Plan. All of the above
transactions were exempt from Section 16(b) of the Exchange Act pursuant to
Rule 16b-3 or Rule 16a-8 under the Exchange Act and have been reported on
Form 5 reports filed with the SEC prior to the date of filing of this report.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
The Compensation Committee of the Board of Directors of the Company (the
"Committee") is responsible for developing and making recommendations to the
Board with respect to the Company's executive compensation policies. In
addition, the Committee makes annual recommendations to the Board concerning the
compensation to be paid to the Chief Executive Officer and each of the other
executive officers of the Company. The Committee is composed entirely of outside
directors of the Company.
EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program is intended to reward executives
for successful long-term strategic management and enhancement of shareholder
value. In addition, it is intended to attract and retain highly qualified and
motivated managers, recognize and reward outstanding performance, and foster a
diverse and cohesive management team. The components of the Company's executive
compensation program include (a) base salaries, (b) performance-based bonuses,
(c) stock options, (d) participation in an employee stock ownership plan and (e)
miscellaneous other fringe benefits.
The executive officers of the Company are employees of Citizens Mutual, and all
salaries and cash bonuses of such officers are paid by Citizens Mutual. Pursuant
to the Management Services Agreement, Citizens Mutual provides the services of
its employees (including the Company's officers) to the Company in exchange for
payments equal to 75% of the amount of such employees' cash compensation and
other benefits. In addition, the Company pays Citizens Mutual for services that
are performed specifically for the Company. The salaries and cash bonuses of the
Company's executive officers are approved by the Boards of Directors of both the
Company and Citizens Mutual.
42
<PAGE>
The Chief Executive Officer and the Chief Operating Officer proposes to the
Committee base salary amounts for the executive officers. The proposed salaries
are based on factors such as the quality and achievement of the strategic plan
produced for the executive officer's department, development of organizational
and management skills, and industry and civic involvement. In 1995, the Company
revised its internal performance management system. Job descriptions,
compensation levels and performance evaluation processes were reviewed and
revised.
In determining base salaries for executive officers, the Committee takes into
account the Chief Executive Officer's and Chief Operating Officer's
recommendations and considers subjective factors relating to each executive
officer's performance. The Committee reviews the executive officers'
compensation structures and the individual executive officers' proposed salaries
within such structures. Based on this review, the Committee believes the base
salaries for the Company's executive officers are comparable to the average
salary levels of executive officers of other property and casualty insurance
companies of similar size.
Cash bonuses are awarded only if the Company achieves or exceeds certain
corporate performance objectives as determined by the Board at the beginning of
each year based on the Committee's recommendations. Under the 1995 employee
bonus plan for executive officers, the payment of bonuses was conditioned upon
the achievement of a combined trade ratio goal (losses plus loss adjustment
expenses to net earned premiums and underwriting expenses to net written
premiums) for the Company's and Citizens Mutual's combined insurance operations
and of certain Company department goals. No bonuses were awarded to executive
officers because the combined trade ratio goal was not achieved.
The Committee believes that significant stock ownership by executive officers
provides strong incentive to increase shareholder value and aligns the interest
of executive officers and shareholders. Options are granted under the Company's
Employee Option Plan, which is administered by the Committee. Options are
granted to executive management employees based on recommendations made by the
Chief Operating Officer involving subjective criteria. The size of option grants
depend upon an executive officer's responsibility level. To date, the exercise
prices of all stock options granted under the Employee Option Plan have been
equal to the fair market value of the Common Stock on the date of grant.
In October 1992, Citizens Mutual established the Citizens Security Mutual
Employee Stock Ownership Plan (the "ESOP"). The ESOP purchased 349,090 shares of
the Company's authorized but unissued shares of Common Stock on October 30, 1992
for approximately $1,200,000. The ESOP borrowed such amount from Citizens
Mutual. During the five years ending October 30, 1997, as the annual principal
payments of $240,000 are paid by the Company and Citizens Mutual to the ESOP,
the shares held by the ESOP are allocated to eligible employees proportionally
based on their salaries.
The Company also provides miscellaneous fringe benefits. These benefits include
a split-dollar life insurance program for executive officers. Under this plan,
Citizens Mutual matches 100% of the officer's premiums paid for a life insurance
policy up to a maximum of $3,000 per year.
43
<PAGE>
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer's base salary is determined in accordance with the
criteria discussed above. The Committee meets to evaluate the Chief Executive
Officer's performance and reports on that evaluation to the other members of
the Board. In determining Spencer A. Broughton's 1995 base salary, the
Committee considered many factors, including the overall quality of
management and leadership exhibited by Mr. Broughton as well as his tenure
with the Company. The following factors were particularly important to the
Committee in determining the amount of his base salary: (a) the achievement
of the combined trade ratio goal, (b) the continued decrease in expenses to
direct written premiums and (c) the substantial increase in productivity as
measured by written premiums per employee. The determination of Mr.
Broughton's base salary also took into account information relating to the
salaries of chief executive officers of other similar sized regional
property and casualty companies.
Mr. Broughton was not awarded a bonus for 1995 in accordance with the Company's
annual bonus plan as described above. Option grants made to Mr. Broughton during
1995 were determined in the manner described above.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, should not
affect the deductibility of compensation paid to the Company's executive
officers for the foreseeable future. Accordingly, the Committee has not
formulated any policy with respect to qualifying such compensation for
deductibility under Section 162(m). However, the Board of Directors has amended
the Employee Option Plan to comply with Section 162(m) in order that
compensation resulting from stock options granted under the Employee Option Plan
will not be counted toward the $1,000,000 limit on deductible compensation under
Section 162(m).
William C. Ferril, Chairman
David A. Cairns,
S. B. Foot, III and
R. Scott Jones
Members of the Compensation Committee
SUMMARY COMPENSATION TABLE
The executive officers of the Company are employees of Citizens Mutual, and all
salaries and cash bonuses of such officers are paid by Citizens Mutual. Pursuant
to the Management Services Agreement between the Company and Citizens Mutual,
Citizens Mutual provides the services of its employees (including the Company's
executive officers) to the Company in exchange for payments equal to 75% of the
amount of such employees' cash compensation and other benefits. In addition, the
Company pays Citizens Mutual for services that are performed specifically for
the Company.
The following table sets forth the cash and noncash compensation for each of the
last three fiscal years awarded to or earned by the Chief Executive Officer of
the Company and the only other executive officer of the Company whose salary and
bonus earned in 1995 exceeded $100,000.
44
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------------
Annual Awards
Compensation ---------------------
Name and -------------------- Securities Underlying
Principal Position Year Salary($) Bonus($) Options/SARs(#)(1) Compensation($)(2)
- ----------------------------- ---- --------- -------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Spencer A. Broughton, 1995 $176,000 $ - 13,000 $16,935
Chairman of the Board 1994 176,000 49,385 - 18,282
and Chief Executive Officer 1993 176,677 9,000 12,000 22,142
Scott S. Broughton, President, 1995 125,000 - 13,000 24,735
Chief Operating Officer and 1994 125,000 49,385 - 19,303
Chief Financial Officer 1993 116,619 8,000 15,125 18,695
</TABLE>
__________
(1) The Company does not grant stock appreciation rights.
(2) The compensation reported represents (a) contributions (determined at cost)
to the ESOP, (b) contributions to the Savings Plan, (c) premiums paid for
split-dollar life insurance, (d) premiums paid for whole life insurance and
(e) deferred compensation plan benefits. Company contributions during
fiscal 1995 were as follows: ESOP contributions of $9,315 to both to Mr.
Spencer A. Broughton and Mr. Scott S. Broughton; Savings Plan Contributions
of $4,620 to both Mr. Spencer A. Broughton and Mr. Scott S. Broughton;
premium payments on split-dollar life insurance of $3,000 and $2,750 for
Mr. Spencer A. Broughton and Mr. Scott S. Broughton, respectively; $1,050
of premiums paid for term life insurance for Mr. Scott S. Broughton; and
$7,000 of deferred compensation payments to Mr. Scott S. Broughton.
OPTION GRANTS AND VALUE
The following tables summarize option grants during 1995 to the Chief Executive
Officer and the other executive officer named in Summary Compensation table
above, and the value of the options held by such persons at the end of 1995. No
options were exercised by these officers during 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------- ---------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Expiration
Name Granted (#)(1) Fiscal Year Base Price($/Sh) Date 5% 10%
- -------------------- -------------- ------------ ---------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Spencer A. Broughton 13,000 14.7% $3.38 2/1/01 $14,944 $33,904
Scott S. Broughton 13,000 14.7 3.38 2/1/01 14,944 33,904
</TABLE>
__________
(1) Each option (a) has a term of six years from the date of grant, (b) becomes
exercisable to the extent of 20% of the shares subject to the option one
year after the date of grant of the option with the balance of the option
becoming exercisable in four cumulative installments of 20% of the shares
subject to the option until five years after the date of grant, after which
the option will be fully exercisable, (c) has an exercise price per share
equal to the fair market value per share of the Common Stock on the date of
grant, (d) is exercisable only by payment of the exercise price to the
Company in cash, and (e) is an "incentive stock option" within the meaning
of Section 422 of the Code.
45
<PAGE>
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying Unexercised In-the Money
Options/SARs at End of 1995(#) Options/SARs at End of 1995($)
Name Exercisable/Unexercisable Exercisable/Unexercisable(1)
- --------------------- ------------------------------------------- ------------------------------
<S> <C> <C>
Spencer A. Broughton 22,400 options/ $45,838/
27,600 options $51,437
Scott S. Broughton 30,775 options/ $63,491/
34,225 options $67,559
</TABLE>
__________
(1) Value based on market value of the Company's Common Stock as of December
31, 1995 less the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
R. Scott Jones, a director of the Company, is the Chairman of the Board of GCNB
and is a director and principal shareholder of United Bancshares, Inc.("UBI"),
GCNB's parent corporation. Mr. R. Scott Jones is also the Co-Chairman of the
Board and Co-Chief Executive Officer of UBI. Mr. R. Scott Jones serves on the
Compensation Committee of the Company's Board of Directors. Mr. Spencer A.
Broughton, Chairman of the Board and Chief Executive Officer of the Company,
serves on the Board of Directors of GCNB and UBI and also serves on the
Audit, Loan/Discount and Personnel Committees of GCNB. Mr. Spencer A.
Broughton also owns less than 1% of the outstanding common stock of UBI.
In December 1993, Citizens Fund purchased 4,000 shares of common stock of UBI
for its investment portfolio. The aggregate purchase price paid for such
shares was $272,000.
Pursuant to a term loan agreement dated as of November 3, 1989, the Company
obtained a $6,000,000 seven-year loan payable through 1996 to fund the purchase
price of ICO, and certain acquisition expenses. On November 9, 1995, the lender
assigned the bank loan, which as of December 31, 1995 had an outstanding
principal balance of $999,000, to GCNB. The current interest rate on the loan is
8.75%, but the rate is variable and is tied to the prime rate.
COMPARATIVE STOCK PERFORMANCE GRAPH
The following table shows a five-year comparison of cumulative total returns for
the Company, the Nasdaq Insurance Stocks and the Nasdaq Stock Market (U.S.
Companies) over the same period (assuming the investment of $100 in each vehicle
on January 1, 1991 and reinvestment of all dividends).
<TABLE>
<CAPTION>
Nasdaq Nasdaq Stock
Insurance Market
Year Company Stocks (U.S. Companies)
-------- ------- --------- ----------------
<S> <C> <C> <C>
12/31/95 151.65 272.85 296.30
12/31/94 99.91 192.04 209.69
12/31/93 103.48 204.06 214.51
12/31/92 98.12 190.79 186.87
12/31/91 102.19 140.97 160.56
</TABLE>
46
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
the Company's voting securities as of March 19, 1996 by each person beneficially
owning at least five percent of such securities, by each director of the
Company, by each executive officer named in the Summary Compensation Table above
and by all executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount of
Name and Address of Nature of Percent Percent of Total
Title of Class Beneficial Owners Beneficial Ownership of Class Voting Securities
- ------------------------ -------------------------------------- -------------------- -------- -----------------
<C> <S> <C> <C> <C>
Series A Preferred Stock Citizens Security Mutual Insurance Co. 1,250,000 shares 100.0% 42.9%
406 Main Street
Red Wing, MN 55066
Common Stock Citizens Security Employee Stock 340,876 shares(1) 21.2 11.7
Ownership Plan
c/o National City Bank of Minneapolis
75 South Fifth Street
Minneapolis, MN 55402
Citizens Security Mutual Insurance Co. 337,500 shares 20.3 11.6
Citizens Mutual 401(k) Plan 134,389 shares(2) 8.3 4.6
c/o Frontier Trust
3100 13th Avenue South
Fargo, ND 58106
Spencer A. Broughton 120,761 shares(3) 7.5 4.2
406 Main Street
Red Wing, MN 55066
Scott S. Broughton 57,259 shares(4) 3.5 2.0
406 Main Street
Red Wing, MN 55066
Terry A. Lynner 21,260 shares(5) 1.3 *
First Bank Place
601 2nd Ave. S, #4600
Minneapolis, MN 55402
R. Scott Jones 15,100 shares(5) * *
222 Bush Street
Red Wing, MN 55066
William C. Ferril 12,500 shares(5) * *
240 Wakefield Road
Wayzata, MN 55391
S. B. Foot, III 12,500 shares(5) * *
Bench Street
Red Wing, MN 55066
David A. Cairns 8,000 shares(6) * *
18500 Beaverwood Road
Minnetonka, MN 55345
All executive officers and directors
as a group (12 persons) 315,549 shares(7) 19.0 10.8
</TABLE>
47
<PAGE>
__________
* Less than one percent.
(1) 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 and Gloria
J. Reeck, who are officers of the Company. 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.
(2) Shares reported as owned by the Citizens 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 "Savings Plan Trustee"). The shares in
the Savings Plan are voted by the Savings Plan Trustee in the manner
directed by the participants.
(3) Includes (a) 82,700 shares held in trust under the Savings Plan, (b) 10,661
shares held in trust under the ESOP and (c) 27,400 shares that may be
purchased under currently exercisable options or options that will be come
exercisable within 60 days after the date of this Form 10-K.
(4) Includes (a) 8,116 shares held in trust under the Savings Plan, (b) 8,693
shares held in trust under the ESOP and (c) 38,150 shares that may be
purchased under currently exercisable options or options that will be come
exercisable within 60 days after the date of this Form 10-K.
(5) Includes 10,000 shares that may be purchased under currently exercisable
options.
(6) Includes 2,000 shares that may be purchased under currently exercisable
options.
(7) 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) 144,700 shares that may be purchased under
currently exercisable options or options that will be come exercisable
within 60 days after the date of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The operations of the Company are directly interrelated with the operations of
Citizens Mutual. Under the terms of the Pooling Agreement, all premiums, losses,
loss adjustment expenses and underwriting expenses (after deducting all other
reinsurance) are prorated between the Company and Citizens Mutual on the basis
of their participation in the pool. Since October 20, 1989, the Company's and
Citizens Mutual's participation in the pool have been 75% and 25%, respectively.
During the year ended December 31, 1995, the Company assumed approximately
$32,194,349 of gross premiums written from, and ceded approximately $1,869,665
of gross premiums written to Citizens Mutual under the Pooling Agreement.
Under the Management Services Agreement, Citizens Mutual provides the Company
with facilities, employees and all services required to conduct its business on
a cost allocated basis. Under the Management Services Agreement, the Company
pays 75% of all expenses of Citizens Mutual relating to salaries, employee
benefits, facilities and data processing equipment. In addition, the Company
pays Citizens Mutual for services that are performed specifically for the
Company. Pursuant to a second amended Management Services Agreement, the
employees will be transferred to the Company when Citizens Mutual owns shares of
Common Stock and Series A Preferred Stock with less than 50% of the voting power
of all outstanding voting securities of the Company.
Pursuant to a capital access fee agreement, Citizens Mutual, Citizens Fund and
ICO pay a fee to the Company in consideration of the Company's ability to raise
capital for the combined insurance operations of Citizens Mutual, Citizens Fund
and ICO. The fee is paid monthly in an amount equal to 1% of
48
<PAGE>
the aggregate direct written premiums of Citizens Mutual, Citizens Fund and ICO.
Of the total monthly fee, 25% of the fee is payable by Citizens Mutual. However,
Citizens Mutual's obligation to pay its portion of the fee would terminate on
the earlier of (i) the date on which the Company's currently outstanding bank
loan (or any indebtedness incurred to refinance such loan) is repaid in full or
(ii) the closing date of the next public offering of securities by the Company.
In March 1994, the Boards of Directors of the Company and Citizens Mutual
approved a transaction in which the Company issued 1,250,000 shares of Series A
Preferred Stock in exchange for 1,250,000 shares of Common Stock of the Company
previously held by Citizens Mutual. Dividends (in an annual amount of $.27825
per share) are paid on the Series A Preferred Stock, when, as and if declared by
the Company's Board of Directors, and such dividends are cumulative and payable
quarterly. The Series A Preferred Stock has a liquidation preference of $3.50
per share, is not convertible by Citizens Mutual and is not subject to
redemption at the option of the Company or Citizens Mutual.
Goldsmith, Agio, Helms & Company ("Goldsmith, Agio"), an investment banking
firm, is providing certain financial advisory services to the Company in
connection with the Meridian Acquisition. The Company anticipates paying
Goldsmith, Agio total fees of approximately $250,000, of which $62,500 has been
paid to date. Terry A. Lynner, a director of the Company, is a Managing Director
of Goldsmith, Agio.
Citizens Fund holds an investment in UBI. See Part III, Item 11, "Executive
Compensation - Compensation Committee Interlocks and Insider Participation."
The Company is the borrower under a bank loan agreement with GCNB. See Part III,
Item 11, "Executive Compensation - Compensation Committee Interlocks and Insider
Participation."
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) FINANCIAL STATEMENTS
Page
Description Number
----------------------------------------------------------- -------
Independent Auditors' Report............................... 38
Consolidated Balance Sheets as of December 31,
1995 and................................................... 20
Consolidated Statements of Income for the Years ended
December 31, 1995, 1994 and 1993........................... 21
Consolidated Statements of Changes in Equity for the Years
ended December 31, 1995, 1994 and 1993..................... 22
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1994 and 1993........................... 23
Notes to Consolidated Financial Statements................. 24
(2) FINANCIAL STATEMENT SCHEDULES
Schedule Page
Number Description Number
-------- ----------------------------------------- ------
Independent Auditors' Report.................... 56
I. Summary Of Investments - Other Than Investments
In Related Parties............................ 57
II. Condensed Financial Information of Registrant... 58
III. Supplementary Insurance Information............. 64
IV. Reinsurance..................................... 65
VI. Supplemental Information Concerning Property-
Casualty Insurance Operations................. 66
All other schedules not listed have been omitted since the required
information is included in the consolidated financial statements or
the notes thereto, or is not applicable or required.
(3) LISTING OF EXHIBITS
Exhibit
Number Description
------ ---------------------------------------------------------------
(2) (.1) Plan of Stock Exchange between the Company and Citizens
Security Mutual Insurance Company dated as of March 31,
1994(1)
(.2) Acquisition and Affiliation Agreement dated as of
March 20, 1996 by and among the Company, Citizens
Security Mutual Insurance Company, and Meridian Insurance
Group, Inc.
50
<PAGE>
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
------ ---------------------------------------------------------------
(3) (.1) Articles of Incorporation(2)
(.2) Bylaws(3)
(4) (.1) Certificate of Designations, defining the rights of the
holders of Series A Preferred Stock of the Company(1)
(.2) Form of Common Stock certificate(4)
(10) (.1a) Reinsurance Pooling Agreement dated as of September 22,
1986 and restated as of November 10, 1986 among Citizens
Security Mutual Insurance Company, the Company and
Citizens Fund Insurance(4)
(.1b) First Amended Reinsurance Pooling Agreement dated as of
October 20, 1989 among the Company, Citizens Fund
Insurance Company, Citizens Security Mutual Insurance
Company and Insurance Company of Ohio(5)
(.2a) Management Services Agreement dated as of September 22,
1986 and restated as of November 10, 1986 among Citizens
Security Mutual Insurance Company, the Company and
Citizens Fund Insurance Company(4)
(.2b) First Amended Management Services Agreement dated as of
October 20, 1989 among the Company, Citizens Fund
Insurance Company, Citizens Security Mutual Insurance and
Insurance Company of Ohio(5)
(.2c) Second Amended Management Services Agreement among the
Company, Citizens Security Mutual Insurance Company,
Citizens Fund Insurance Company and Insurance Company of
Ohio, dated March 31, 1994(1)
(.3) 1986 Stock Option Plan, as restated April 18, 1995(6)*
(.4) Third Amended Stipulation dated April 9, 1993 among the
Minnesota Department of Commerce, Citizens Security
Mutual Insurance Company and Citizens Fund Insurance
Company(7)
(.5) Lease dated March 1, 1993 between Red Wing Hotel
Corporation and Citizens Security Mutual Insurance
Company(3)
(.6a) Software License and Development Agreement dated as of
August 25, 1988 between the Company and Programming
Resources Company(2)
51
<PAGE>
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
-----------------------------------------------------------------------
(.6b) Amendment dated January 3, 1989 to Software License and
Development Agreement dated as of August 25, 1988 between
the Company and Programming Resources Company(5)
(.6c) Addendum dated October 7, 1991 to Software License and
Development Agreement between the Company and Programming
Resources Company(5)
(.6d) Addendum effective as of September 1, 1993 to Software
License and Development Agreement dated as of August 25,
1988 between the Company and Programming Resources
Company(2)
(.7a) Amended and Restated Term Loan Agreement dated as of
December 31, 1992 between the Company and First Bank
National Association(3)
(.7b) First Amendment dated as of March 31, 1993 to Amended and
Restated Term Loan Agreement dated as of December 31,
1992 by and between the Company and First Bank National
Association(7)
(.7c) Waiver Letter dated March 1, 1994 to the Company from
First Bank National Association(2)
(.7d) Second Amendment, dated as of March 31, 1994 to Amended
and Restated Term Loan Agreement, dated as of December
31, 1992 by and between the Company and First Bank
National Association(1)
(.7e) Third Amendment, dated as of August 1, 1994 to Amended
and Restated Term Loan Agreement, dated as of December
31, 1992 by and between the Company and First Bank
National Association(8)
(.7f) Waiver letter dated February 28, 1995 to the Company from
First Bank National Association(5)
(.7g) Waiver letter dated November 9, 1995 to the Company from
Goodhue County National Bank(9)
(.7h) Fourth Amendment, dated as of November 9, 1995 to Amended
and Restated Term Loan Agreement, dated as of December
31, 1992 by and between the Company and Goodhue County
National Bank
(.8) Pledge Agreement dated as of December 31, 1992 between
the Company and First Bank National Association(3)
(.9a) Letter Agreement dated as of November 2, 1989 among the
Company, Insurance Company of Ohio and the Ohio
Department of Insurance(5)
(.9b) Letter dated October 7, 1993 to Insurance Company of Ohio
from the Ohio Department of Insurance(10)
52
<PAGE>
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
-----------------------------------------------------------------------
(.10a) 1994 Employee Bonus Plan(2)*
(.10b) 1995 Employee Bonus Plan(6)*
(.11) Nonemployee Director Stock Option Plan(11)*
(.12) Letter Agreement dated January 15, 1992 between Citizens
Fund Insurance Company and the Minnesota Department of
Commerce(12)
(.13a) Lease dated September 16, 1993 between Engwiller
Properties, Inc. and Insurance Company of Ohio(10)
(.13b) Sublease Agreement dated July 5, 1995 between Insurance
Company of Ohio and Tom Witkowski(12)
(.14) Letter dated September 22, 1993 to State of Minnesota
Department of Commerce from Citizens Fund Insurance
Company(2)
(.15) Capital Access Fee Agreement dated March 31, 1994 among
the Company, Citizens Security Mutual Insurance Company,
Citizens Fund Insurance Company and Insurance Company of
Ohio(1)
(.16) Order Approving Restructuring dated March 31, 1994
issued by the Minnesota Department of Commerce(1)
(.17) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Citizens Fund Insurance
Company(8)
(.18) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Insurance Company of Ohio(8)
(.19a) Agreement dated December 31, 1994 among Citizens
Security Mutual Insurance Company, Citizens Fund
Insurance Company, Insurance Company of Ohio and
Adjusting Unlimited, Inc.(5)
(.19b) Agreement dated December 31, 1995 between the Company
and Adjusting Unlimited, Inc.
(.20) Lease dated April 21, 1995 between Eagle Building,
L.L.C. and Citizens Security Mutual Insurance Company(6)
(.21) Deferred Compensation Plan Agreement dated August 1,
1995 between Citizens Security Mutual Insurance Company
and Scott Broughton*
(21) Subsidiaries of the Company(5)
(24) Power of Attorney
(27) Financial Data Schedule
53
<PAGE>
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
-----------------------------------------------------------------------
(28) (.1) Schedule P from Citizens Fund Insurance Company's 1995
Annual Statement filed with the Minnesota State
Insurance Department
(.2) Schedule P from Insurance Company of Ohio's 1995 Annual
Statement filed with the Ohio Department of Insurance
__________
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Form 8-K dated March 31,
1994.
(2) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1992.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33-9096) which became effective on December
17, 1986.
(5) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1994.
(6) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1995.
(7) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1993.
(8) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1994.
(9) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1995.
(10) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1993.
(11) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1991.
(12) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1991.
(13) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1995.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CITIZENS SECURITY GROUP INC.
March 19, 1996 By: /s/ Spencer A. Broughton
------------------------
Spencer A. Broughton
Chairman of the Board,
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Spencer A. Broughton Chairman of )
the Board, )
Chief Executive )
Officer )
(principal )
executive )
officer) and )
Director )
)
Scott S. Broughton* President, Chief ) By: /s/ SPENCER A. BROUGHTON
Operating Officer, ) ------------------------
Chief Financial ) Spencer A. Broughton
Officer ) Pro Se and Attorney-
(principal ) in-Fact
financial and ) Date: March 19, 1996
accounting )
officer) and )
Director )
)
David A. Cairns* Director )
)
R. Scott Jones* Director )
)
S. B. Foot, III* Director )
)
Terry A. Lynner* Director )
)
William C. Ferril* Director )
__________
* Executed on behalf of the indicated persons by Spencer A. Broughton
pursuant to the Power of Attorney included as Exhibit 24 to this report.
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Citizens Security Group Inc.:
Under date of March 15, 1996, we reported on the consolidated balance sheets of
Citizens Security Group Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, changes in equity and cash
flows for each of the years in the three-year period ended December 31, 1995, as
contained in Part III, Item 8, "Financial Statements and Supplementary Data". In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedules as
listed in the accompanying index (see Item 14.(a)(2)). These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Notes 2 and 5 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and No. 109, "Accounting for Income
Taxes," in 1993.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 15, 1996
56
<PAGE>
Citizens Security Group Inc. and Subsidiaries
Schedule I. Summary Of Investments -
Other Than Investments In Related Parties
December 31, 1995
<TABLE>
<CAPTION>
Amount at which
shown in the
Cost(1) Value balance sheet
------------ --------- -------------
<S> <C> <C> <C>
Type of investment:
Fixed maturities:
Bonds:
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies . . . . . . . . . . . . . . . . $ 6,656,527 6,748,373 $ 6,748,373
Obligations of states and
political subdivisions . . . . . . . . . . . . 6,848,211 7,131,048 7,131,048
Corporate securities . . . . . . . . . . . . . . 11,189,336 11,477,976 11,477,976
Mortgage-backed securities . . . . . . . . . . . 11,480,539 11,664,667 11,664,667
----------- ----------- -----------
Total fixed maturities . . . . . . . . . . . . . . . 36,174,613 37,022,064 37,022,064
----------- ----------- -----------
Equity securities:
Preferred stocks . . . . . . . . . . . . . . . . . 200,000 231,000 231,000
Common stocks:
Banks, trusts & insurance
companies. . . . . . . . . . . . . . . . . . . 280,450 387,518 387,518
Industrial & miscellaneous . . . . . . . . . . . 168,831 172,867 172,867
----------- ----------- -----------
Total equity securities. . . . . . . . . . . . . . . 649,281 791,385 791,385
----------- ----------- -----------
Short-term investments . . . . . . . . . . . . . . . 1,462,448 1,462,448
----------- -----------
Total investments. . . . . . . . . . . . . . . . . . $38,286,342 $39,275,897
----------- -----------
----------- -----------
</TABLE>
__________
(1) Fixed maturities and short-term investments are at amortized cost and
equity securities at original cost.
57
<PAGE>
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Condensed Balance Sheet Information
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
Investment in subsidiaries . . . . . . . . . . . . . . . . . $17,963,956 $15,564,990
Cash . . . . . . . . . . . . . . . . . . . . . . . . . 257,816 105,214
Receivable from subsidiary . . . . . . . . . . . . . . . . . 139,285 -
Loan origination costs (accumulated amortization
of $142,897 and $107,541, respectively) . . . . . . . . . 31,384 66,740
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 13,303 39,897
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . $18,405,744 $15,776,841
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loan payable . . . . . . . . . . . . . . . . . . . . $ 999,000 $ 1,518,920
Payable to subsidiary . . . . . . . . . . . . . . . . . . - 108,184
Unearned compensation . . . . . . . . . . . . . . . . . . 329,999 509,999
Other liabilities . . . . . . . . . . . . . . . . . . . . 109,835 90,660
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . 1,438,834 2,227,763
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par value; 7.95% Series A;
1,250,000 shares authorized issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . 4,375,000 4,375,000
Common stock, $.01 par value; 10,000,000
shares authorized; 1,661,585 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . 16,616 16,616
Additional paid-in capital . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Unearned compensation. . . . . . . . . . . . . . . . . . . . (329,999) (509,999)
Unrealized appreciation of subsidiaries'
investments in equity securities. . . . . . . . . . . . 94,107 27,491
Unrealized appreciation (depreciation)
of subsidiaries' investments in
fixed maturities. . . . . . . . . . . . . . . . . . . . 558,451 (1,502,054)
Retained earnings, including undistributed
income of subsidiaries of $1,379,773 and
$1,125,928 as of December 31, 1995 and
1994, respectively. . . . . . . . . . . . . . . . . . . 7,155,375 6,062,664
----------- -----------
Total shareholders' equity . . . . . . . . . . . . 16,966,910 13,549,078
----------- -----------
Total liabilities and shareholders'
equity. . . . . . . . . . . . . . . . . . . . . $18,405,744 $15,776,841
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION.
58
<PAGE>
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Condensed Statement of Income Information
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Capital access fee income. . . . . . $ 504,045 $ 360,769 $ -
---------- ---------- ----------
Total revenues . . . . . . . . . 504,045 360,769 -
---------- ---------- ----------
Operating expenses:
Salaries . . . . . . . . . . . . . . . 215,525 125,000 110,000
Interest expense. . . . . . . . . . . . 121,669 202,928 243,563
Legal and auditing expenses . . . . . . 38,379 39,139 35,547
Amortization of organization and
loan origination cost . . . . . . . . . 35,357 33,550 24,672
Professional services expenses. . . . . 24,341 24,751 54,187
Other operating expenses. . . . . . . . 35,802 18,127 13,098
---------- ---------- ----------
Total operating expenses . . . . 471,073 443,495 481,067
---------- ---------- ----------
Operating income (loss). . . . . 32,972 (82,726) (481,067)
Income tax expense (benefit) . . . . . . 11,000 (28,000) (164,000)
---------- ---------- ----------
Net income (loss)
- Parent only . . . . . . . . . 21,972 (54,726) (317,067)
Equity in net income of
subsidiaries . . . . . . . . . . . . 1,418,551 1,436,264 1,818,985
---------- ---------- ----------
Consolidated net income. . . . . $1,440,523 $1,381,538 $1,501,918
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION.
59
<PAGE>
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Condensed Statement of Cash Flows Information
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . $1,440,523 $1,381,538 $1,501,918
Adjustments to reconcile net
income to net cash provided
by operating activities:
Change in receivable from/ (3,840)
payable to subsidiaries. . . . . (247,469) 80,132 (3,840)
Change in other liabilities . . . . 19,175 89,049 (53,139)
Change in equity in
undistributed net (594,085)
income of subsidiaries. . . . . . (253,845) 21,224 (594,085)
Other. . . . . . . . . . . . . . . . . 61,950 15,939 12,076
---------- ---------- ----------
Net cash from operating
activities. . . . . . . . . . . . 1,020,334 1,587,882 862,930
---------- ---------- ----------
Cash flows from investing activities:
Capital contribution to
subsidiary . . . . . . . . . . . . . . - - -
---------- ---------- ----------
Net cash used in investing
activities . . . . . . . . . . . . - - -
---------- ---------- ----------
Cash flows from financing activities:
Cost of issuance of Series A -
preferred stock. . . . . . . . . . . . - (149,814) -
Change in bank loan payable . . . . . . . (519,920) (1,050,000) (859,651)
Common stock dividends. . . . . . . . . . - - -
Series A preferred stock dividends. . . . 347,812 (260,859) -
Other . . . . . . . . . . . . . . . . . - (28,211) (4,497)
---------- ---------- ----------
Net cash from used in
financing activities. . . . . . . . . . . (867,732) (1,488,884) (864,148)
---------- ---------- ----------
Net increase (decrease) in cash. . . . . . . 152,602 98,998 (1,218)
Cash at beginning of year. . . . . . . . . . 105,214 6,216 7,434
---------- ---------- ----------
Cash at end of year. . . . . . . . . . . . . $ 257,816 $ 105,214 $ 6,216
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION.
60
<PAGE>
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Notes To Condensed Financial Information
December 31, 1995, 1994 and 1993
1. Basis of presentation
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes as set forth in Part II,
Item 8, "Financial Statements and Supplementary Data."
The Company entered into a capital access fee agreement on March 31, 1994 under
which Citizens Security Mutual Insurance Company ("Citizens Mutual"), Citizens
Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("ICO")
pay a fee to the Company in consideration of its ability to raise capital for
the combined insurance operations of Citizens Mutual, Citizens Fund and ICO. The
fee is paid monthly in an amount equal to one percent of the aggregate direct
written premiums of Citizens Mutual, Citizens Fund and ICO. Citizens Mutual's
obligation to pay its portion of the fee will terminate on the earlier of (i)
the date on which the Company's currently outstanding bank loan (or any
indebtedness incurred to refinance such loan) is repaid in full or (ii) the
closing date of the Company's next public offering of securities.
As of March 20, 1996, Meridian Insurance Group, Inc., ("Meridian") and the
Company executed a definitive acquisition agreement providing for Meridian's
acquisition of the Company for approximately $29 million in cash. Common
shareholders of the Company would receive approximately $12.50 per common share,
and the preferred shareholder, Citizens Mutual, would receive approximately $4.4
million for the Company's preferred stock. In conjunction with the transaction,
Meridian would also assume control of Citizens Mutual and Citizens Fund, ICO and
Citizens Mutual would enter into arrangements with the Meridian Insurance Group
companies relating to the pooling of insurance.
The acquisition is conditioned upon approval by the companies' Board of
Directors, the Company's common and preferred shareholders, Citizen Mutual's
policyholders and insurance regulators in Indiana, Minnesota, and Ohio, where
the insurance companies are domiciled. It is anticipated that the acquisition
will be completed by June 30, 1996.
2. Bank loan payable
On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan
from First Bank National Association, which has subsequently been assigned on
November 9, 1995 to Goodhue County National Bank, Red Wing, Minnesota. The
principal balance of the bank loan remaining to be paid as of December 31, 1995,
was $999,000. The current interest rate is 8.75 percent, but the rate is
variable and is tied to the prime rate. The Company is required to make
quarterly principal payments of $100,000 until October 1996 when the remaining
principal amount of $699,000 is due. Principal may be prepaid. Principal
payments of $519,920 were made in 1995. Interest payments in 1995, 1994 and 1993
totaled $121,669, $202,928, and $243,563, respectively.
The loan is secured by a pledge of the stock of Citizens Fund and ICO.
Additionally, the Company agreed to certain restrictive covenants which limit
the amount of subsequent indebtedness, dividends payable to shareholders,
capital expenditures and business acquisitions. The covenants also restrict any
changes to the pooling agreement.
These restrictive covenants further require that Citizens Fund and ICO maintain
specified levels of capital and policyholders' surplus and that net
61
<PAGE>
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Notes To Condensed Financial Information
December 31, 1995, 1994 and 1993
written premiums to policyholders' surplus and combined trade ratios not exceed
specified levels. The Company is currently in compliance with all requirements
of the loan agreement.
3. Stock exchange
On March 31, 1994, Citizens Mutual exchanged 1,250,000 shares of common stock
for 1,250,000 shares of 7.95% Series A Preferred Stock ("Preferred Stock"). The
Preferred Stock, which has an annual cumulative dividend of $.27825 per share
and a liquidation preference of $3.50 per share, ranks senior to the Company's
common stock as to payment of dividends and also as to the distribution of
assets should there be a liquidation or dissolution of the Company. The
Preferred Stock is not convertible by Citizens Mutual and is not subject to
redemption at the option of the Company or Citizens Mutual.
The Preferred Stock was recorded at the liquidation preference of $3.50 per
share, which approximated the market value of the common stock retired at the
time of the exchange. Common stock and additional paid-in capital were decreased
$4,524,814 for the common stock retired (including $149,814 of transaction
costs).
4. Dividend restrictions
As a holding company, the Company depends on dividends from Citizens Fund and
ICO to make principal and interest payments with respect to its bank loan and to
meet its other expenses. During 1995, 1994 and 1993, the Company received
dividends from Citizens Fund of $789,000, $811,754 and $682,845, respectively.
During 1995, 1994 and 1993, the Company received dividends from ICO of $375,706,
$645,735 and $542,057, respectively. As members of an insurance holding company
system, Citizens Fund and ICO are restricted by law as to the amount of
dividends they may pay to the Company without the approval of state regulatory
authorities.
Generally, restrictions on Citizens Fund limit the amount of dividends paid
during a twelve month period to an amount which does not exceed the greater of
(i) 10 percent of Citizens Fund's statutory surplus at the end of the prior year
or (ii) the statutory net income, not including realized gains, of Citizens Fund
for the prior year. In addition, ordinary dividends may only be paid from the
earned surplus of Citizens Fund, also known as unassigned funds, determined in
accordance with the accounting procedures and practices used in the preparation
of its statutory annual statement, minus 25 percent of earned surplus
attributable to unrealized capital gains. As of December 31, 1995, Citizens
Fund's unassigned surplus was $305,020. Citizens Fund's ordinary dividends are
restricted to a maximum of $832,883 for 1996. Citizens Fund paid dividends of
$789,000 in 1995.
Restrictions on ICO limit the amount of dividends paid during a twelve month
period to an amount which does not exceed the greater of (i) 10 percent of ICO's
statutory surplus at the end of the prior year or (ii) the net income of ICO for
the prior year. In addition, ordinary dividends may only be paid from earned
surplus, which equals ICO's unassigned funds as set forth in its most recent
statutory annual statement, including net unrealized capital gains and losses.
As of December 31, 1995, ICO's unassigned surplus was $69,053. ICO's ordinary
dividends are restricted to a maximum $528,705 for 1996. ICO paid dividends of
$375,706 in 1995.
62
<PAGE>
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Notes To Condensed Financial Information
December 31, 1995, 1994 and 1993
Pursuant to Ohio insurance laws, ICO must maintain statutory surplus of
$5,000,000 in order to write commercial property and casualty insurance lines.
As of December 31, 1995, ICO's statutory surplus was $5,287,053. The
requirements for minimum capital and surplus may restrict ICO's ability to pay
dividends to the Company.
63
<PAGE>
Citizens Security Group Inc. and Subsidiaries
Schedule III. Supplementary Insurance Information
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
Loss Other
Deferred and loss policy
policy adjustment claims and
acquisition expense Unearned benefits
Segment costs reserves premiums payable
- ------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
1995
Property-Liability
Insurance:
Commercial 1,288,959 16,160,791 9,148,444
Personal 1,138,459 7,852,075 7,483,888
Investment
income,
less
related
expenses - - - -
Other - - - -
---------- ---------- ---------- ----------
Total Insurance
Segment $2,427,418 24,012,866 16,632,332 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1994
Property-Liability
Insurance:
Commercial $1,218,083 13,601,524 8,890,975 -
Personal 1,080,620 7,388,212 6,781,973 -
Investment
income,
less
related
expenses - - - -
Other - - - - -
---------- ---------- ---------- ----------
Total Insurance
Segment $2,298,703 20,989,736 15,672,948 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1993(1)
Property-Liability
Insurance:
Commercial $1,147,004 11,988,698 7,199,859 -
Personal 935,934 7,403,428 5,949,722 -
Investment
income,
less
related
expenses - - - -
Other - - - -
---------- ---------- ---------- ----------
Total Insurance
Segment $2,082,938 19,392,126 13,149,581 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------
Insurance
losses Amortization
Net and loss of policy Other
Premiums investment adjustment acquisition operating Premiums
earned income expenses costs expenses written
-------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
1995
Property-Liability
Insurance:
Commercial 17,127,812 11,026,234 2,899,899 2,661,189 17,336,908
Personal 13,507,454 10,320,550 2,561,304 2,350,466 14,161,647
Investment
income,
less
related
expenses - 2,452,264 - - - -
Other - - - - (32,972) -
---------- ---------- ---------- ---------- ---------- ----------
Total Insurance
Segment 30,635,266 2,452,264 21,346,784 5,461,203 4,978,683 31,498,555
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
1994
Property-Liability
Insurance:
Commercial 14,784,091 - 9,391,332 2,764,812 2,344,902 16,346,327
Personal 12,564,978 - 9,177,750 2,451,815 2,079,441 13,365,924
Investment
income,
less
related
expenses - 2,194,372 - - - -
Other - - - - 82,726 -
---------- ---------- ---------- ---------- ---------- ----------
Total Insurance
Segment 27,349,069 2,194,372 18,569,082 5,216,627 4,507,069 29,712,251
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
1993(1)
Property-Liability
Insurance:
Commercial 12,552,511 - 7,442,534 2,668,648 1,860,731 13,533,548
Personal 11,936,407 - 8,981,733 2,177,272 1,711,634 12,013,191
Investment
income,
less
related
expenses - 1,952,529 - - - -
Other - - - - 481,067 -
---------- ---------- ---------- ---------- ---------- ----------
Total Insurance
Segment 24,488,918 1,952,529 16,424,267 4,845,920 4,053,432 25,546,739
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
__________
(1) Balance sheet information not applicable.
64
<PAGE>
Citizens Security Group Inc. and Subsidiaries
Schedule IV. Reinsurance
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Insurance Gross other from other Net assumed
premiums earned amount(1) companies companies amount to net
--------------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995 $36,251,560 5,616,294 - 30,635,266 0.0%
1994 33,107,727 5,758,658 - 27,349,069 0.0
1993 29,699,129 5,210,211 - 24,488,918 0.0
</TABLE>
__________
(1) Pursuant to the Pooling Agreement, gross insurance premiums earned includes
75% of Citizens Fund's, ICO's and Citizens Mutual's gross premiums earned.
65
<PAGE>
Citizens Security Group Inc. and Subsidiaries
Schedule VI. Supplemental Information Concerning
Property-Casualty Insurance Operations
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
Reserves for
Deferred unpaid losses
policy and loss Discount
acquisition adjustment on loss Unearned
costs expenses reserves premiums
----------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
1995 $2,427,418 24,012,866 - 16,632,332
1994 2,298,703 20,989,736 - 15,672,948
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------------------------------------------
Losses and loss
adjustment
expenses incurred Amortization Paid
related to of deferred losses
Net --------------------------- policy and loss
Earned investment Current Prior acquisition adjustment Premiums
premiums income year years costs expenses written
------------ ---------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $30,635,266 2,452,264 21,900,996 (554,212) 5,461,203 19,669,923 31,498,555
1994 27,349,069 2,194,372 19,506,310 (937,228) 5,216,627 16,986,286 29,712,251
1993 24,488,918 1,952,529 17,219,223 (794,956) 4,845,920 14,897,578 25,546,739
</TABLE>
66
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ ---------------------------------------------------------------------
(2) (.1) Plan of Stock Exchange between the Company and
Citizens Security Mutual Insurance Company dated
as of March 31, 1994(1)
(.2) Acquisition and Affiliation Agreement dated as of
March 20, 1996 by and among the Company, Citizens
Security Mutual Insurance Company and Meridian
Insurance Group, Inc.
(3) (.1) Articles of Incorporation(2)
(.2) Bylaws(3)
(4) (.1) Certificate of Designations, defining the rights
of the holders of Series A Preferred Stock of the
Company(1)
(.2) Form of Common Stock certificate(4)
(10) (.1a) Reinsurance Pooling Agreement dated as of
September 22, 1986 and restated as of November 10,
1986 among Citizens Security Mutual Insurance
Company, the Company and Citizens Fund Insurance(4)
(.1b) First Amended Reinsurance Pooling Agreement dated as of
October 20, 1989 among the Company, Citizens Fund Insurance
Company, Citizens Security Mutual Insurance Company and
Insurance Company of Ohio(5)
(.2a) Management Services Agreement dated as of
September 22, 1986 and restated as of November 10,
1986 among Citizens Security Mutual Insurance
Company, the Company and Citizens Fund Insurance
Company(4)
(.2b) First Amended Management Services Agreement dated as of
October 20, 1989 among the Company, Citizens Fund Insurance
Company, Citizens Security Mutual Insurance and Insurance
Company of Ohio(5)
(.2c) Second Amended Management Services Agreement among
the Company, Citizens Security Mutual Insurance
Company, Citizens Fund Insurance Company and
Insurance Company of Ohio, dated March 31, 1994(1)
(.3) 1986 Stock Option Plan, as restated April 18, 1995(6)*
(.4) Third Amended Stipulation dated April 9, 1993 among the
Minnesota Department of Commerce, Citizens Security Mutual
Insurance Company and Citizens Fund Insurance Company(7)
67
<PAGE>
EXHIBIT INDEX - CONTINUED
Exhibit Description
- ------- ----------------------------------------------------------------------
(.5) Lease dated March 1, 1993 between Red Wing Hotel Corporation
and Citizens Security Mutual Insurance Company(3)
(.6a) Software License and Development Agreement dated as of
August 25, 1988 between the Company and Programming
Resources Company(2)
(.6b) Amendment dated January 3, 1989 to Software License and
Development Agreement dated as of August 25, 1988 between
the Company and Programming Resources Company(5)
(.6c) Addendum dated October 7, 1991 to Software License
Development Agreement between the Company and Programming
Resources Company(5)
(.6d) Addendum effective as of September 1, 1993 to Software
License and Development Agreement dated as of August 25,
1988 between the Company and Programming Resources
Company(2)
(.7a) Amended and Restated Term Loan Agreement dated as of
December 31, 1992 between the Company and First Bank
National Association(3)
(.7b) First Amendment dated as of March 31, 1993 to Amended and
Restated Term Loan Agreement dated as of December 31, 1992
by and between the Company and First Bank National
Association(7)
(.7c) Waiver Letter dated March 1, 1994 to the Company from First
Bank National Association(2)
(.7d) Second Amendment, dated as of March 31, 1994 to Amended and
Restated Term Loan Agreement, dated as of December 31, 1992
by and between the Company and First Bank National
Association(1)
(.7e) Third Amendment, dated as of August 1, 1994 to Amended and
Restated Term Loan Agreement, dated as of December 31, 1992
by and between the Company and First Bank National
Association(8)
(.7f) Waiver letter dated February 28, 1995 to the Company from
First Bank National Association(5)
(.7g) Waiver letter dated November 9, 1995 to the Company from
Goodhue County National Bank(9)
(.7h) Fourth Amendment, dated as of November 9, 1995 to Amended
and Restated Term Loan Agreement, dated as of December 31,
1992 by and between the Company and Goodhue County National
Bank
(.8) Pledge Agreement dated as of December 31, 1992 between the
Company and First Bank National Association(3)
68
<PAGE>
EXHIBIT INDEX - CONTINUED
Exhibit Description
- ------- ----------------------------------------------------------------------
(.9a) Letter Agreement dated as of November 2, 1989 among the
Company, Insurance Company of Ohio and the Ohio Department
of Insurance(5)
(.9b) Letter dated October 7, 1993 to Insurance Company of Ohio
from the Ohio Department of Insurance(10)
(.10a) 1994 Employee Bonus Plan(2)*
(.10b) 1995 Employee Bonus Plan(6)*
(.11) Non-employee Director Stock Option Plan(11)*
(.12) Letter Agreement dated January 15, 1992 between Citizens
Fund Insurance Company and the Minnesota Department of
Commerce(12)
(.13a) Lease dated September 16, 1993 between Engwiller Properties,
Inc. and Insurance Company of Ohio(10)
(.13b) Sublease Agreement dated July 5, 1995 between Insurance
Company of Ohio and Tom Witkowski(12)
(.14) Letter dated September 22, 1993 to State of Minnesota
Department of Commerce from Citizens Fund Insurance
Company(2)
(.15) Capital Access Fee Agreement dated March 31, 1994 among the
Company, Citizens Security Mutual Insurance Company,
Citizens Fund Insurance Company and Insurance Company of
Ohio(1)
(.16) Order Approving Restructuring dated March 31, 1994 issued by
the Minnesota Department of Commerce(1)
(.17) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Citizens Fund Insurance
Company(8)
(.18) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Insurance Company of Ohio(8)
(.19a) Agreement dated December 31, 1994 among Citizens Security
Mutual Insurance Company, Citizens Fund Insurance Company,
Insurance Company of Ohio and Adjusting Unlimited, Inc.(5)
(.19b) Agreement dated December 31, 1996 between the Company and
Adjusting Unlimited, Inc.
(.20) Lease dated April 21, 1995 between Eagle Building, L.L.C.
and Citizens Security Mutual Insurance Company(6)
69
<PAGE>
EXHIBIT INDEX - CONTINUED
Exhibit Description
- ------- ----------------------------------------------------------------------
(.21) Deferred Compensation Plan Agreement dated August 1, 1995
between Citizens Security Mutual Insurance Company and Scott
Broughton
(21) Subsidiaries of the Company(5)
(24) Power of Attorney
(27) Financial Data Schedule
(28) (.1) Schedule P from Citizens Fund Insurance Company's
1995 Annual Statement filed with the Minnesota State
Insurance Department
(.2) Schedule P from Insurance Company of Ohio's 1995
Annual Statement filed with the Ohio Department of
Insurance
__________
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Form 8-K dated March 31, 1994.
(2) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1992.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-9096) which became effective on
December 17, 1986.
(5) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1994.
(6) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1995.
(7) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1993.
(8) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1994.
(9) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1995.
(10) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1993.
(11) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1991.
(12) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1991.
(13) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1995.
70
<PAGE>
ACQUISITION AND AFFILIATION AGREEMENT
By and Among
CITIZENS SECURITY GROUP INC.,
CITIZENS SECURITY MUTUAL INSURANCE COMPANY,
AND
MERIDIAN INSURANCE GROUP, INC.
March 20, 1996
<PAGE>
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
organized by Citizens Mutual, which presently owns
<PAGE>
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
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.
3
<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.
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).
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)).
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
the Minnesota Dissenters'
7
<PAGE>
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.
8
<PAGE>
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.
9
<PAGE>
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
and made to the
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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
limited liability company, and all loans
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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
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or sell, or 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
of any
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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
approved and authorized by the Boards of Directors
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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
Statements were
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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
statutory financial position of the respective
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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
to be reflected in a balance sheet prepared in
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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
of the circumstances in which they were made, not
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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
infringement suits pending, or to the best
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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
Companies have adequately reserved, in
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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
prepared in accordance with SAP, except for the absence
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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
department of insurance in any jurisdiction where any of the
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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
Mutual Board of Directors as contemplated by Section 1.7, and
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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
services of its present executive officers and key employees; and
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(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 Effective Time, except such as are consistent
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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,
would
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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,
through at least December 31, 1999,
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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
and the
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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
of Citizens Mutual (the "Citizens
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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
compensation levels) after the date of the Closing, and,
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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
shall
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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
it and its counsel,
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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
obtained, and the Citizens Insurance
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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
listed on Schedule 5.4(a), such
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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
Citizens by the requisite
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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
material transactions contemplated by this
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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
the amounts of
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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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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
either
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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
<PAGE>
EXHIBITS
TO
ACQUISITION AND AFFILIATION AGREEMENT *
- - - - - - - - - - - - - - - - - -
Exhibit A: Plan of Merger (Section 1.1).
Exhibit B: Reinsurance Pooling Agreement (Section 6.11).
Exhibit C-1: Management Services Agreement - Meridian Mutual and Affiliates
(Section 6.12).
Exhibit C-2: Management Services Agreement - Citizens Mutual and Affiliates
(Section 6.12).
Exhibit D: Spencer Broughton Consulting Services Agreement, and attached
form of Stock Option Agreement (Section 6.14(a)).
Exhibit E: Scott Broughton Employment Agreement, and attached forms of
Consulting Services Agreement and Stock Option Agreement
(Section 6.14 (b)).
Exhibit F: Vis'n, Inc. Real Estate Sublease Agreement
(Section 6.15(b)).
Exhibit G: Vis'n, Inc. Claims Administration Agreement
(Section 6.15(c)).
Exhibit H: Vis'n, Inc. Software and Hardware Support Agreement
(Section 6.15(d)).
Exhibit I: Vis'n, Inc. Office Equipment Lease Agreement
(Section 6.15(e)).
Exhibit J: Representation Letter of ESOP Trustee
(Section 4.8)
- ----------
* Pursuant to Item 601(b)(2) of Regulation S-K, the Company agrees to furnish
supplementally a copy of any omitted schedule to the Commission upon request.
<PAGE>
SCHEDULES
TO
ACQUISITION AND AFFILIATION AGREEMENT *
Schedule 2.2: Subsidiaries, Liens, Loan and Investments
Schedule 2.4: Licenses and Agreements with Licensing Authorities
Schedule 2.5: Consents, Approvals and Termination Rights
Schedule 2.6: Citizens Mutual Policyholder Approval
Schedule 2.10: Undisclosed Liabilities
Schedule 2.13: Litigation
Schedule 2.16: Registered Intellectual Property Rights and Factors Affecting
Intellectual Property
Schedule 2.19: Employee Benefit Plans
Schedule 2.21: Related Party Transactions
Schedule 2.22: Financial Advisory Fees
Schedule 4.3: Operation of Business
Schedule 5.4: Employee Lists
- ------
* Pursuant to Item 601(b)(2) of Regulation S-K, the Company agrees to furnish
supplementally a copy of any omitted schedule to the Commission upon request.
<PAGE>
FOURTH AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT is by and between Citizens Security Group Inc., a Minnesota
corporation (the "Borrower"), and Goodhue County National Bank (the "Bank").
The parties agree that such amendment will be deemed to have been effective as
of November 9, 1995, the date which the Bank purchased the Amended and Restated
Term Loan Agreement dated December 31, 1992 (as amended to date, the
"Agreement") between Citizens Security Group Inc. and First Bank National
Association.
1. Section 4.23 (a) of the Agreement is amended to read as follows:
"for CF, the greater of (i) $7,200,000 as of December 31, 1992 and
$7,400,000 after December 31, 1992, or (ii) the amount necessary to maintain
the Premium to Surplus Ratio of no greater than 3.0 to 1 for CF, and"
2. Section 4.28 of the Agreement is amended to read as follows:
"The Company shall cause each of CF and ICO to maintain, as of the end
of each fiscal quarter, the Premium to Surplus Ratio of not more than 3.0 to
1."
3. Section 4.35 of the Agreement is amended to read as follows:
"The Company will not permit the Leverage Ratio as of the end of any
fiscal quarter to be more than 5.50 to 1."
4. Except as amended herein, all provisions of the Agreement and all other
agreements of the parties remain in full force and effect. No provision of this
Amendment can be amended, modified, waived or terminated, except by a writing
executed by the Borrower and the Bank. This Amendment shall bind and benefit
the parties and their respective successors and assigns; provided, the Borrower
shall not assign any of its rights or obligations under this Amendment without
the prior written consent of the Bank, and any assignment in violation of this
sentence shall be null and void. This Amendment shall be governed by and
construed in accordance with the laws of the State of Minnesota.
GOODHUE COUNTY NATIONAL BANK CITIZENS SECURITY GROUP INC.
By: /s/ Tom Longlet By: /s/ Mary B. Plein
------------------------ -----------------------------
Title: President Title: Vice President & Treasurer
-------------------- --------------------------
<PAGE>
AGREEMENT
AGREEMENT made this 31 day of December, 1995 by and between Citizens Security
Group, Inc., a Minnesota corporation, hereinafter "Citizens", and Adjusting
Unlimited, Inc., a Minnesota corporation, hereinafter "Adjusting".
R E C I T A L S :
(R1) Citizens is a Minnesota corporation in the business of providing insurance
for individuals, businesses and others in the State of Minnesota and other
states.
(R2) Adjusting is in the business of providing services on behalf of insurance
companies including adjusting claims for said insurance companies.
(R3) Citizens desires to have Adjusting adjust claims on its behalf and
Adjusting is willing to provide said adjusting services.
WHEREFORE, based on the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, it is agreed as follows:
1. APPOINTMENT AND ACCEPTANCE. Citizens does hereby appoint Adjusting as
an authorized party to adjust claims on Citizens behalf. Said
appointment in nonexclusive and Citizens reserves the right to appoint
other parties to adjust claims. Adjusting does hereby accept the
appointment and agrees to provide Adjusting services on behalf of
Citizens according to the terms of this Agreement and industry
standards.
2. COMPENSATION. As and for its agreement to adjust claims on behalf of
Citizens, Adjusting shall be paid by Citizens a retainer amount of
Fifty thousand and no/100 ($50,000.00) dollars per month payable on a
monthly basis. This amount will be increased on January 1 of each year
at the rate of Citizens premium growth for the previous year. Said
amount shall be paid during the entire term of this Agreement and shall
not be changed except upon the mutual agreement of the parties to this
Agreement.
12-15-95
<PAGE>
3. OBLIGATIONS. Adjusting agrees to provide adjusting services on behalf
of Citizens on claims assigned to Adjusting by Citizens as per Addendum
A. Adjusting further agrees to follow such procedures in regard to
adjusting claims, payment of claims, releases and other matters as are
directed by Citizens from time to time.
4. OTHER COMPANIES. In the event Adjusting provides adjusting services to
insurance companies other than Citizens, and in part consideration for
the loan provided by Citizens and the weekly retainer provided by
Citizens, Adjusting agrees to pay Citizens fifty (50%) percent of all
net pre-tax profits earned by Adjusting in providing adjusting services
to other insurance companies. Adjusting agrees to provide to Citizens
an accounting on a quarterly basis in regard to all adjusting services
provided to other insurance companies, including the income from said
services, the expenses attributed to said services and the amount due
Citizens. Payments shall be made by Adjusting to Citizens for
Citizens' fifty (50%) percent share of the net profits from said other
adjusting services on or before the 15th day of the end of each quarter
commencing April 15, 1996.
5. INSURANCE. Adjusting agrees to obtain professional and general
liability insurance and workers compensation insurance from companies
licensed to do business in the State of Minnesota and with such
coverage's in such amounts as agreed to by the parties. Adjusting
shall provide Citizens with proof of said insurance periodically as
requested by Citizens.
6. TERMINATION. Either party may terminate this Agreement upon one
hundred eighty (180) days written notice to the other party.
7. DISPUTES. All claims, disputes or issues relating to or arising out of
this Agreement shall be submitted for resolution by arbitration and
only after efforts by the parties to resolve the dispute have been
exhausted. The parties may agree on some other alternative dispute
resolution method. In the event the parties are unable to agree to the
arbitration procedure, arbitrators of some other form of dispute
resolution, the arbitration shall be in accordance with the rules of
the American Arbitration Association before an arbitrator who is
licensed to practice law in the State of Minnesota. Each party shall
equally share the fees and costs of the arbitration and arbitrator.
The agreement to arbitrate shall survive the termination of this
Agreement.
8. NO AUTHORITY. Adjusting is prohibited from making any contract or
agreement in the name of Citizens except as approved by Citizens in
writing or as otherwise authorized in this Agreement.
9. TERM. This contract will be in effect January 1, 1996 and terminate
January 1 1999.
12-15-95
<PAGE>
10. INDEPENDENT PARTY. Nothing herein shall be construed to ascribe unto
Adjusting a status other than that of an independent contractor.
Further, nothing contained herein shall be construed to establish a
partnership or joint venture relationship between the parties.
Adjusting is an independent contractor with full and complete liberty
to use its own free and uncontrolled judgment and discretion as to the
method of performance of each obligation and undertaking by Adjusting.
11. INDEMNIFICATION. The parties hereto hereby indemnify and hold the
other harmless from and against any and all claims, damages, losses,
liabilities, costs or expenses whatsoever (I) by reason of any untrue
statement or alleged untrue statement of any material fact contained
in this Agreement; (II) by reason of or in connection with the
execution and delivery or transfer of or payment failure to pay under
this Agreement; (III) by reason of any action by the other party not
contemplated or authorized in this Agreement; provided, however,
that the parties do not indemnify the other regarding any claims,
damages, losses, liabilities, costs or expenses, to the extent, but
only to the extent, caused by the willful misconduct or gross
negligence of the other.
12. NONASSIGNABILITY. This Agreement and all rights accruing hereunder
shall not be assigned by either party without the prior consent of the
other. If Citizens is sold, acquired, or merged with any other
company, Adjusting will have the option to terminate this Agreement on
the date of sale, acquisition, or merger.
13. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the parties and shall not be amended except in writing
executed by both parties.
14. BINDING AGREEMENT. This Agreement shall be binding upon the parties
hereto, their heirs, successors and assigns.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
16. HEADINGS. Paragraph headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of
this Agreement for any other purpose.
17. NOTICES. Any notice to be given hereunder by any party to the other
party must be in writing and shall be deemed to be delivered and,
regardless of whether actually received, upon States Postal services,
in a prepaid wrapper, sent either certified or registered mail and
addressed to whom such notice is to be given, at the address set forth
below, or at such other address as any party hereto may designate to
the other party hereto by the giving of notice as provided herein:
<PAGE>
If to Citizens:
Citizens Security Group, Inc.
P.O. Box 3500
Red Wing, MN 55066
Attn: Kirk D. Simmons 12-15-95
If to Adjusting:
Adjusting Unlimited, Inc.
P.O. Box 241
Red Wing, MN 55066
Attn: Andrew Schoenecker
IN WITNESS WHEREOF, the parties executed this Agreement the day and year
first above written.
Citizens Security Group, Inc.
By: /s/ Kirk D. Simmons
------------------------------
Its: Vice President
Adjusting Unlimited, Inc.
By: /s/ Andy Schoenecker
-----------------------------
Its: President
12-15-95
<PAGE>
ADDENDUM A
Claims handling contract:
For the set fee, Adjusting Unlimited Inc. will complete the following procedures
for the following types of losses:
A. First and Third Party Property damage:
Property damage claims should exceed $2,500 and be less than $25,000 in total
damages. Exceptions are made for losses involving coverage issues or when
documentation of damages is needed for pursuit of recovery. Catastrophe related
claims are excluded from this contract except as provided below.
Building damage:
1. photos of the scene and risk
2. diagram of damaged areas
3. obtain an agreed price on the cost of repairs or replacement
4. conduct an Insurance to Value review when feasible
5. investigate subrogation or contribution potential.
6. issue Insurer checks if authority is granted from Insurer
Theft losses greater than $10,000 and less than $25,000:
1. photo scene
2. contact investigation officer
3. obtain signed police report authorization form
4. gather support documentation from insured issue Insurer checks if
authority is granted from Insurer
5. verify amounts submitted by insured
Catastrophe related claims ( involving claim volume greater than 15 from one
storm). AUI will handle the first 15 claims resulting from a catastrophe at no
additional fee. Reporting will consist of:
1. photos of the scene and risk
2. obtain an agreed price on the cost of repairs or replacement
3. issue Insurer checks if authority is granted from Insurer
B. Automobile damage:
AUI will investigate auto damage losses involving questionable condition of
the vehicle, pre-existing damage, and when total loss is questionable.
Catastrophe related claims are excluded from this contract.
1. obtain photos of the damaged vehicle
2. obtain CCC list for vehicle
Agreed prices on the cost to repair will be available in Ohio, Iowa,
Northern Minnesota and North Dakota.
<PAGE>
C. Bodily Injury Investigations:
Bodily Injury investigations will be limited to claims requiring on site
investigation to rule out liability or require physical evidence to be obtained
by an outside representative. This includes losses involving death or severe
injury.
The investigation will include:
1. photos as needed
2. authorizations for records
3. recorded interviews as per definition below
4. medical records as per below
5. an analysis of liability if requested
D. Subrogation Investigations will include:
1. Obtain a fire or police report authorization.
2. list all potential tort feasors; giving the name, address, phone number
and contact name.
3. secure necessary evidence for pursuit of tort feasor.
4. obtain support documentation if available.
E. Salvage:
we will advise of salvage potential and contact a salvor if requested to do so.
F. Business income:
1. gather the documentation being submitted by the insured to support his BI
claim.
2. determine the time period it SHOULD HAVE TAKEN TO restore operation to
pre-loss condition. note: for AUI to do the adjusting of business income
losses, an addition fee may be charged.
G. Recorded statements:
AUI will take in person recorded interviews for situations involving:
1. phone contact is unsuccessful and face to face meeting is beneficial
2. Complex situations requiring an adjuster's physical presence to
comprehend.
H. Record pick ups:
AUI will pick up or deliver records if one of the following occurs:
1. any time the records can't be obtained by mail.
2. records required in less than 3 days
3. deliveries which can't be completed by normal mail
<PAGE>
I. Photo copying:
Pick up and delivery are included in the contract, however the cost to
obtain the copies or records is a direct expense to the insurer.
The contract amount with AUI will cover the costs of:
- - labor
- - photos
- - vehicle use and mileage
- - tax on investigation services (a Minnesota tax)
- - long distance telephone and fax fees
Contact and reporting:
AUI will contact the insured and or claimant with 24 hours of receipt of the
assignment and same day whenever possible. Reports will be completed in 14 day
intervals until the assignment is completion. In addition, 5 day acknowledgment
reports will be submitted on first party property losses.
<PAGE>
DEFERRED COMPENSATION PLAN AGREEMENT
THIS AGREEMENT, made and entered into as of this 1st day of August, 1995,
by and between Citizens Security Mutual Insurance Company, a Minnesota
corporation, with principal offices in Red Wing, Minnesota (hereinafter referred
to as the "Company"), and Scott Broughton, an individual residing in the City of
Red Wing, Minnesota (hereinafter referred to as the "Employee"),
WITNESSETH THAT:
WHEREAS, the Employee is employed by the Company; and
WHEREAS, the Company recognizes the valuable services heretofore performed
for it by the Employee and wishes to encourage his continued employment; and
WHEREAS, the Employer wishes to provide Employee with deferred compensation
and Employee wishes to defer such compensation; and
WHEREAS, the parties hereto wish to provide the terms and conditions upon
which the Company shall pay such deferred compensation to the Employee or his
designated beneficiary; and
WHEREAS, the parties hereto intend that this Agreement be considered an
unfunded arrangement, maintained primarily to provide deferred compensation
benefits for the Employee, a member of select group of management or highly
compensated employees of the Company, for purposes of the Employee Retirement
Income Act of 1974, as amended;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree as follows:
<PAGE>
1. DEFINITION OF TERMS. Certain words and phrases are defined when first
used in later paragraphs of this Agreement. In addition, the following words
and phrases when used herein, unless the context clearly requires otherwise,
shall have the following respective meanings:
a. AGREEMENT. This Agreement, together with any and all amendments
or supplements thereto.
b. EARLY RETIREMENT DATE: The date the Employee attains fifty-five
(55) years of age.
c. FISCAL YEAR: The taxable year of the Company.
d. NORMAL RETIREMENT DATE: The date the Employee attains sixty-five
(65) years of age.
e. RETIREMENT ACCOUNT: Book entries maintained by the Company
reflecting Deferred Amounts and Additions thereon; provided, however, that
the existence of such book entries and the Retirement Account shall not
create and shall not be deemed to create a trust of any kind, or a
fiduciary relationship between the Company and the Employee, his designated
beneficiary, or other beneficiaries under this Agreement.
2. DEFERRED COMPENSATION. Commencing on the date this Agreement is made,
and continuing through the date on which the Employee's employment terminates as
herein provided or because of his death, early retirement, normal retirement,
disability, or any other cause, (whichever shall first occur), the Employee and
the Company agree that the Company shall credit to Employee's Retirement Account
Seven Thousand Dollars ($7,000.00) (herein "Annual Deferral Sum"), on August 1,
1995 and on the first business day in August of each year thereafter. The
amounts so credited to Employee's Retirement Account are hereinafter
collectively referred to as "Deferred Amounts."
3. ACCRUED BENEFIT. The term Accrued Benefit when used with regard to
the Employee shall mean the sum of all Deferred Amounts, plus any increases or
decreases in value
2
<PAGE>
allocated to them, due and owing to the Employee or the Employee's beneficiaries
on the date of retirement, disability retirement, termination or death, as the
case may be; provided, however, that Accrued Benefit with regard to the Employee
or the Employee's beneficiaries, shall never be less than the total of all
Deferred Amounts deposited into that Employee's Retirement Account.
4. (a) RETIREMENT BENEFIT. The Company agrees that, from and after the
retirement of the Employee from the service of the Company upon reaching his
Early Retirement Date or Normal Retirement Date, the Company shall thereafter
pay as a retirement benefit ("Retirement Benefit") to the Employee the
Employee's entire Accrued Benefit, plus an additional "Yield Amount" as
determined below, payable in equal monthly installments for a period of two
hundred forty (240) months, commencing with the first day of the first month
following the Employee's retirement ("Commencement Date"). The additional Yield
Amount to be paid shall be determined by applying the amount of yield on a U.S.
Treasury Bond with a maturity occurring twenty (20) years after the Commencement
Date, to the Accrued Benefit (or any balance of the Accrued Benefit which has
not been paid to the Employee) as reported in the WALL STREET JOURNAL.
(b) ELECTION OF BENEFITS UPON EARLY RETIREMENT DATE OR NORMAL
RETIREMENT DATE. The Employee shall have the option, upon attaining his Early
Retirement Date or Normal Retirement Date, to elect to receive his Retirement
Benefit, notwithstanding his continued employment with the Company after he has
attained his Early Retirement Date or Normal Retirement Date. The Employee's
election to receive his Retirement Benefit notwithstanding his continued
employment must be made in writing at least fifteen (15) days prior to his Early
Retirement Date or Normal Retirement Date, whichever applies. The Retirement
Benefit payable upon election pursuant to this paragraph 4(b) shall be the
amount that would have been
3
<PAGE>
payable had the Employee retired from service with the Company as of his Early
Retirement Date or Normal Retirement Date, whichever applies. Any such election
shall be irrevocable, and shall result in the termination of the Employee's
right to any further deferrals hereunder.
5. DISABILITY RETIREMENT. Notwithstanding any other provision hereof,
the Employee shall be entitled to receive payments hereunder prior to his Early
Retirement Date or Normal Retirement Date, whichever applies, in any case in
which it is determined by a duly licensed physician selected by the Company
that, because of ill health, accident, disability or general inability because
of age, the Employee is no longer able, properly and satisfactorily, to perform
his regular duties as an Employee. If the Employee's employment is terminated
pursuant to this paragraph 5, the disability retirement benefit payable
hereunder ("Disability Retirement Benefit") shall be that amount that would have
been payable as a Retirement Benefit had the Employee attained his Normal
Retirement Date on the date of the physician's disability determination. The
Disability Retirement Benefit payable under this paragraph 5 shall be
distributed in accordance with the provisions of paragraph 4(a) as if the
Employee had retired on the date of the physician's disability determination.
6. (a) DEATH BENEFIT PRIOR TO COMMENCEMENT OF RETIREMENT BENEFITS. In
the event of the Employee's death while in the employment of the Company and
prior to the commencement of Retirement Benefits or Disability Retirement
Benefits, the Company shall pay the Accrued Benefit in the Employee's Retirement
Account as of the date of his death in equal monthly installments for a period
of one hundred twenty (120) months to the Employee's designated beneficiary, in
accordance with the last such designation received by the Company from the
Employee prior to his death. If no such designation has been received by the
Company from the Employee prior to his death or if said payments are otherwise
to be made as provided
4
<PAGE>
herein, said payments shall be made to the Employee's then living spouse, so
long as she shall live and thereafter to such person or persons, including her
estate, as she may appoint under her Will, making specific reference hereto; if
the Employee is not survived by a spouse or if she shall fail to so appoint,
then said payments shall be made to the then living children of the Employee, if
any, in equal shares, for their joint and survivor lives; and if none, or after
their respective joint and survivor lives, any balance thereof in one lump sum
to the estate of the Employee. Such payments shall commence on the first day of
the first month following the Employee's death.
(b) DEATH BENEFIT AFTER COMMENCEMENT OF BENEFITS. In the event of
the Employee's death after the commencement of Retirement Benefits, Normal
Retirement Benefits, or Disability Retirement Benefits, but prior to the
completion of all such payments due and owing hereunder, the Company shall
continue to make such payments, in equal monthly installments, over the
remainder of the period specified in paragraph 4 or 5 hereof that would have
been applicable to the Employee had he survived. Such continuing payments shall
be made to the Employee's designated beneficiary, in accordance with the last
such designation received by the Company from the Employee prior to his death or
if said payments are otherwise to be made as provided herein, said payments
shall be made to the Employee's then living spouse, so long as she shall live
and thereafter to such person or person, including her estate, as she may
appoint under her Will, making specific reference hereto; if the Employee is not
survived by a spouse or if she shall fail to so appoint, then said payments
shall be made to the then living children of the Employee, if any, in equal
shares, for their joint and survivor lives; and if none, or after their
respective joint and survivor lives, any balance thereof in one lump sum to the
5
<PAGE>
estate of the Employee. Such continuing payments shall commence on the first
day of the first month following the Employee's death.
7. TERMINATION BENEFIT. In the event of the Employee's termination of
employment with the Company before his Early Retirement Date for any reason,
other than his disability retirement or his death, the Company shall pay to the
Employee, as compensation for services rendered prior to such termination, a
single sum equal to the entire Accrued Benefit hereunder, including additions
thereto, (the "Termination Benefit"); provided however, if the termination of
the Employee by the Company is for just cause, payment of the Accrued Benefit,
shall be exclusive of additions thereto, and any and all additions credited to
the Employee's Retirement Account shall be forfeited to the Company. The
Termination Benefit shall be payable on the first day of the first month
following the termination of the Employee's employment with the Company. Just
cause is defined as either serious criminal conduct by the Employee against the
Company, or conduct which the Employee knew was against the best interests of
the Company at the time it was committed by the Employee.
8. HARDSHIP BENEFIT. In the event the Employee suffers a financial
hardship (as hereinafter defined), the Company may, if it deems advisable in its
sole and absolute discretion, distribute to or utilize on behalf of the Employee
as a hardship benefit (the "Hardship Benefit") any portion of the Employee's
Retirement Account up to, but not in excess of, the Termination Benefit to which
the Employee would have been entitled as of the date a Hardship Benefit is
distributed or utilized. Any Hardship Benefit shall be distributed or utilized
at such times as the Company shall determine, and the Accrued Benefit in the
Employee's Retirement Account shall be reduced by the amount so distributed
and/or utilized. Financial Hardship shall mean dire financial need of the
Employee caused by temporary or permanent disability or incapacity,
6
<PAGE>
medical or educational expenses, the purchase or maintenance of a residence, or
a material reduction in family income.
9. BENEFICIARY DESIGNATION. The Employee shall have the right, at any
time, to submit in substantially the form attached hereto as Exhibit A, a
written designation of primary and secondary beneficiaries to whom payment under
this Agreement shall be made in the event of his death prior to complete
distribution of the benefits due and payable under the Agreement. Each
beneficiary designation shall become effective only when receipt thereof is
acknowledged in writing by the Company.
10. NO TRUST CREATED. Nothing contained in this Agreement, and no action
taken pursuant to its provisions by either party hereto shall create, or be
construed to create, a trust of any kind, or a fiduciary relationship between
the Company and the Employee, his designated beneficiary, other beneficiaries of
the Employee or any other person.
11. BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED
GENERAL CREDITOR STATUS OF EMPLOYEE (a) The payments to the Employee or his
designated beneficiary or any other beneficiary hereunder shall be made from
assets which shall continue, for all purposes, to be a part of the general,
unrestricted assets of the Company; no person shall have any interest in any
such assets by virtue of the provisions of this Agreement. The Company's
obligation hereunder shall be an unfunded and unsecured promise to pay money
in the future. To the extent that any person acquires a right to receive
payments from the Company under the provisions hereof, such right shall be no
greater than the right of any unsecured general creditor of the Company; no
such person shall have nor require any legal or equitable right, interest or
claim in or to any property or assets of the Company.
7
<PAGE>
(b) In the event that, in its discretion, the Company purchases an
insurance policy or policies insuring the life of the Employee (or any other
property), to allow the Company to recover the cost of providing benefits, in
whole or in part, hereunder, neither the Employee, his designated beneficiary
nor any other beneficiary shall have any rights whatsoever therein or in the
proceeds therefrom. The Company shall be the sole owner and beneficiary of any
such insurance policy and shall possess and may exercise all incidents or
ownership therein. No such policy, policies or other property shall be held in
any trust for the Employee or any other person nor as collateral security for
any obligation of the Company hereunder.
12. NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be
construed to be a contract of employment for any term of years, nor as
conferring upon the Employee the right to continue to be employed by the Company
in his present capacity, or in any capacity. It is expressly understood by the
parties thereto that this Agreement relates to the payment of deferred
compensation for the Employee's services, payable after termination of his
employment with the Company, and is not intended to be an employment contract.
13. BENEFITS NOT TRANSFERRABLE. Neither the Employee, his designated
beneficiary, nor any other beneficiary under this Agreement shall have any power
or right to transfer, assign, anticipate, hypothecate or otherwise encumber any
part of all of the amounts payable hereunder. No such amounts shall be subject
to seizure by any creditor of any such beneficiary, by a proceeding at law or in
equity, nor shall such amounts be transferable by operation of law in the event
of bankruptcy, insolvency or death of the Employee, his designated beneficiary,
or any other beneficiary hereunder. Any such attempted assignment or transfer
shall be void.
8
<PAGE>
14. DETERMINATION OF BENEFITS
a. Claim. A person who believes that he or she is being denied a benefit
to which he or she it entitled under the Plan (hereinafter referred to as a
"Claimant") must first file a written request for such benefit with the
Company, setting forth his or her claim. The request must be addressed to
the President of the Company at its then principal place of business.
b. Claim Decision. Upon receipt of a claim, the Company shall advise the
Claimant that a reply will be forthcoming within ninety (90) days and
shall, in fact, deliver such reply within such period. The Company may,
however, extend the reply period for an additional ninety (90) days for
reasonable cause.
If the claim is denied in whole or in part, the Company shall adopt a
written opinion, using language calculated to be understood by the
Claimant, setting forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of this Agreement
on which such denial is based;
(c) A description of any additional material or information necessary
for the Claimant to perfect his claim and an explanation why such
material or such information is necessary;
(d) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review; and
(e) The time limits for requesting a review under subsection c. and
for review under subsection d. hereof.
c. Request for Review. Within sixty (60) days after the receipt by the
Claimant of the written opinion described above, the Claimant must request
in writing that the Secretary of the Company review the determination of
the Company. Such request must be addressed to the Secretary of the
Company, at its then principal place of business. The Claimant or his duly
authorized representative may, but need not, review the pertinent documents
and submit issues and comments in writing for consideration by the Company.
If the Claimant does not request a review of the Company's determination by
the Secretary of the Company within such sixty (60) day period, he shall be
barred and estopped from challenging the Company's determination.
9
<PAGE>
d. Review of Decision. Within sixty (60) days after the Secretary's
receipt of a request for review, he will review the Company's
determination. After considering all materials presented by the Claimant,
the Secretary will render a written opinion, written in a manner calculated
to be understood by the Claimant, setting forth the specific reasons for
the decision and containing specific references to the pertinent provisions
of this Agreement on which the decision is based. If special circumstances
require that the sixty (60) day time period be extended, the Secretary will
so notify the Claimant and will render the decision as soon as possible,
but no later than one hundred twenty (120) days after receipt of the
request for review.
15. AMENDMENT. This Agreement may not be amended, altered or modified,
except by a written instrument signed by the parties hereto, or their respective
successors, and may not be otherwise terminated except as provided herein.
16. TERMINATION. The Agreement may be terminated at any time by either
party by written notice to the other party. All rights and obligations of the
parties with regard to Accrued Benefits shall continue in full force and effect,
but the Employer shall not be required to credit any additional Annual Deferral
Sums to Employee's Retirement Account, after termination.
17. INUREMENT. This Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns, and the Employee, his
successors, heirs, executors, administrators and beneficiaries.
18. NOTICE. Any notice, consent or demand required or permitted to be
given under the provisions of this Agreement shall be in writing, and shall be
signed by the party giving or making the same. If such notice, consent or
demand is mailed to a party hereto, it shall be sent by United States certified
mail, postage prepaid, addressed to such party's last known address as shown on
the records of the Company. The date of such mailing shall be deemed the date
of notice, consent or demand. Either party may change the address to which
notice is to be sent by giving notice of the change of address in the manner
aforesaid.
10
<PAGE>
19. GOVERNING LAW. This Agreement, and the rights of the parties
hereunder, shall be governed by and construed in accordance with the laws of the
State of Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement, in duplicate,
effective as of the day and year first above written.
CITIZENS SECURITY MUTUAL
INSURANCE COMPANY
By: /s/ JERALD K. OLSON
-----------------------------------
Jerry Olson, Vice President and
Corporate Secretary
/s/ Scott S. Broughton
-----------------------------------
Scott Broughton
11
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Spencer A. Broughton and Scott S.
Broughton and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report of Form
10-K of Citizens Security Group Inc. for the fiscal year ended December 31,
1995, and all amendments to such Annual Report of Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURE DATE
--------- ----
/s/ Spencer A. Broughton March 16, 1996
- ------------------------
Spencer A. Broughton, Chairman of the
Board, Chief Executive Officer
(Principal Executive Officer)
and Director
March , 1996
- ------------------------
Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
March , 1996
- ------------------------
David A. Cairns, Director
March , 1996
- ------------------------
William C. Ferril, Director
March , 1996
- ------------------------
S. B. Foot III, Director
March , 1996
- ------------------------
R. Scott Jones, Director
March , 1996
- ------------------------
Terry A. Lynner, Director
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Spencer A. Broughton and Scott S.
Broughton and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report of Form
10-K of Citizens Security Group Inc. for the fiscal year ended December 31,
1995, and all amendments to such Annual Report of Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURE DATE
--------- ----
March , 1996
- ------------------------
Spencer A. Broughton, Chairman of the
Board, Chief Executive Officer
(Principal Executive Officer)
and Director
/s/ Scott S. Broughton March 18, 1996
- ------------------------
Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
March , 1996
- ------------------------
David A. Cairns, Director
March , 1996
- ------------------------
William C. Ferril, Director
March , 1996
- ------------------------
S. B. Foot III, Director
March , 1996
- ------------------------
R. Scott Jones, Director
March , 1996
- ------------------------
Terry A. Lynner, Director
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Spencer A. Broughton and Scott S.
Broughton and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report of Form
10-K of Citizens Security Group Inc. for the fiscal year ended December 31,
1995, and all amendments to such Annual Report of Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURE DATE
--------- ----
March , 1996
- ------------------------
Spencer A. Broughton, Chairman of the
Board, Chief Executive Officer
(Principal Executive Officer)
and Director
March , 1996
- ------------------------
Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
/s/ David A. Cairns March 18, 1996
- ------------------------
David A. Cairns, Director
March , 1996
- ------------------------
William C. Ferril, Director
March , 1996
- ------------------------
S. B. Foot III, Director
March , 1996
- ------------------------
R. Scott Jones, Director
March , 1996
- ------------------------
Terry A. Lynner, Director
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Spencer A. Broughton and Scott S.
Broughton and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report of Form
10-K of Citizens Security Group Inc. for the fiscal year ended December 31,
1995, and all amendments to such Annual Report of Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURE DATE
--------- ----
March , 1996
- ------------------------
Spencer A. Broughton, Chairman of the
Board, Chief Executive Officer
(Principal Executive Officer)
and Director
March , 1996
- ------------------------
Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
March , 1996
- ------------------------
David A. Cairns, Director
/s/ William C. Ferril March 18, 1996
- ------------------------
William C. Ferril, Director
March , 1996
- ------------------------
S. B. Foot III, Director
March , 1996
- ------------------------
R. Scott Jones, Director
March , 1996
- ------------------------
Terry A. Lynner, Director
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Spencer A. Broughton and Scott S.
Broughton and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report of Form
10-K of Citizens Security Group Inc. for the fiscal year ended December 31,
1995, and all amendments to such Annual Report of Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURE DATE
--------- ----
March , 1996
- ------------------------
Spencer A. Broughton, Chairman of the
Board, Chief Executive Officer
(Principal Executive Officer)
and Director
March , 1996
- ------------------------
Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
March , 1996
- ------------------------
David A. Cairns, Director
March , 1996
- ------------------------
William C. Ferril, Director
/s/ S. B. Foot, III March 13, 1996
- ------------------------
S. B. Foot III, Director
March , 1996
- ------------------------
R. Scott Jones, Director
March , 1996
- ------------------------
Terry A. Lynner, Director
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Spencer A. Broughton and Scott S.
Broughton and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report of Form
10-K of Citizens Security Group Inc. for the fiscal year ended December 31,
1995, and all amendments to such Annual Report of Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURE DATE
--------- ----
March , 1996
- ------------------------
Spencer A. Broughton, Chairman of the
Board, Chief Executive Officer
(Principal Executive Officer)
and Director
March , 1996
- ------------------------
Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
March , 1996
- ------------------------
David A. Cairns, Director
March , 1996
- ------------------------
William C. Ferril, Director
March , 1996
- ------------------------
S. B. Foot III, Director
/s/ R. Scott Jones March 18, 1996
- ------------------------
R. Scott Jones, Director
March , 1996
- ------------------------
Terry A. Lynner, Director
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Spencer A. Broughton and Scott S.
Broughton and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report of Form
10-K of Citizens Security Group Inc. for the fiscal year ended December 31,
1995, and all amendments to such Annual Report of Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURE DATE
--------- ----
March , 1996
- ------------------------
Spencer A. Broughton, Chairman of the
Board, Chief Executive Officer
(Principal Executive Officer)
and Director
March , 1996
- ------------------------
Scott S. Broughton, President, Chief
Operating Officer, Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
March , 1996
- ------------------------
David A. Cairns, Director
March , 1996
- ------------------------
William C. Ferril, Director
March , 1996
- ------------------------
S. B. Foot III, Director
March , 1996
- ------------------------
R. Scott Jones, Director
/s/ Terry A. Lynner March 18, 1996
- ------------------------
Terry A. Lynner, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 37,022,064
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 791,385
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 39,275,897
<CASH> 1,291,173
<RECOVER-REINSURE> 5,214,073
<DEFERRED-ACQUISITION> 2,427,418
<TOTAL-ASSETS> 61,291,043
<POLICY-LOSSES> 24,012,866
<UNEARNED-PREMIUMS> 16,632,332
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 999,000
0
4,375,000
<COMMON> 16,616
<OTHER-SE> 12,575,294
<TOTAL-LIABILITY-AND-EQUITY> 61,291,043
30,635,266
<INVESTMENT-INCOME> 2,452,264
<INVESTMENT-GAINS> 76,880
<OTHER-INCOME> 564,594
<BENEFITS> 21,346,784
<UNDERWRITING-AMORTIZATION> 5,461,203
<UNDERWRITING-OTHER> 4,978,683
<INCOME-PRETAX> 1,942,334
<INCOME-TAX> 501,811
<INCOME-CONTINUING> 1,440,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,440,523
<EPS-PRIMARY> .64
<EPS-DILUTED> 0
<RESERVE-OPEN> 17,170,827
<PROVISION-CURRENT> 21,900,996
<PROVISION-PRIOR> (554,212)
<PAYMENTS-CURRENT> 12,393,198
<PAYMENTS-PRIOR> 7,276,725
<RESERVE-CLOSE> 18,847,688
<CUMULATIVE-DEFICIENCY> (554,212)
</TABLE>
