-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Js/uQOwLkaLD0FhaT99clyToZYq2DrjRBvGmw8VkU4NhSnK690Owd/GeIl4lkL23 Ojj3EpaMnWQQWgGJvKDzvA== 0000912057-96-005852.txt : 19960402 0000912057-96-005852.hdr.sgml : 19960402 ACCESSION NUMBER: 0000912057-96-005852 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS SECURITY GROUP INC /MN/ CENTRAL INDEX KEY: 0000802971 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 411564371 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15421 FILM NUMBER: 96543410 BUSINESS ADDRESS: STREET 1: 406 MAIN ST CITY: RED WING STATE: MN ZIP: 55066 BUSINESS PHONE: 6123887171 MAIL ADDRESS: STREET 1: 406 MAIN STREET CITY: RED WING STATE: MN ZIP: 55066 10-K 1 10-K 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. 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 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
Direct Premiums Written --------------------------------------------------------------------- Year ended December 31, --------------------------------------------------------------------- 1995 1994 1993 -------------------- -------------------- ------------------- 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% ----------- --- ----------- --- ----------- --- ----------- --- ----------- --- ----------- ---
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.
Combined Ratio Year ended December 31, ------------------------- 1995 1994 1993 ---- ---- ---- Loss ratio . . . . . . . . . . . . . . . . . 69.7% 67.9% 67.1% Expense ratio. . . . . . . . . . . . . . . . 30.0 30.3 30.1 ---- ---- ---- Combined ratio . . . . . . . . . . . . . . . 99.7% 98.2% 97.2% ---- ---- ---- ---- ---- ----
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 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 5 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 6 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 (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
Year ended December 31, ---------------------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (in thousands) 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)
__________ (1) Reinsurance recoverables exclude $49, $55, $1 and $3 of paid recoverables as of December 31, 1995, 1994, 1993 and 1992, respectively. 9 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.
1995 1994 1993 ----------- ----------- ----------- 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
__________ (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. 10 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.
December 31, ------------------------------------------------ 1995 1994 ---------------------- ----------------------- Amount Percent Amount Percent ----------- --------- ----------- ---------- 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% ----------- ----- ----------- ----- ----------- ----- ----------- -----
__________ (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 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 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 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.
1995 High Low --------------- ----- ----- First Quarter $3.63 $3.13 Second Quarter 4.50 3.50 Third Quarter 4.50 4.25 Fourth Quarter 5.00 4.38 1994 High Low --------------- ----- ----- First Quarter $3.25 $3.25 Second Quarter 4.13 3.25 Third Quarter 3.75 3.38 Fourth Quarter 3.50 3.25
14 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."
1995 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------- (in thousands, except per common share data) 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
- ------------------- * All per common share information for 1995 and 1994 reflects the March 1994 stock exchange transaction and the deduction of preferred stock dividends. 15 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 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 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 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 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS Citizens Security Group Inc. and Subsidiaries
December 31, -------------------------- 1995 1994 - ----------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 CONSOLIDATED STATEMENTS OF INCOME Citizens Security Group Inc. and Subsidiaries
Year ended December 31, ----------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Citizens Security Group Inc. and Subsidiaries
Year ended December 31, ----------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 22 CONSOLIDATED STATEMENTS OF CASH FLOWS Citizens Security Group Inc. and Subsidiaries
Year ended December 31, ----------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 23 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 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 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 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:
1995 1994 - ------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
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:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Appreciation Depreciation Value - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Citizens Security Group Inc. and Subsidiaries December 31, 1995, 1994 and 1993
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Appreciation Depreciation Value - --------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
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.
1995 -------------------------- Estimated Amortized Market Cost Value - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
Realized and unrealized gains (losses) from investments are summarized as follows:
Year ended December 31, -------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Citizens Security Group Inc. and Subsidiaries December 31, 1995, 1994 and 1993
Year ended December 31, ---------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
Investment income is summarized as follows:
Year ended December 31, ---------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
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:
December 31 -------------------------- 1995 1994 - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
(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 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:
Year ended December 31, --------------------------- 1995 1994 - ---------------------------------------------------------------------------------------------------------- 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) - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
The components of income tax expense related to income before cumulative effect of accounting change are as follows:
Year ended December 31, ----------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
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:
Year ended December 31, ----------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
30 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:
December 31, ------------------------- 1995 1994 - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
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 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 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 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.
Year ended December 31, ----------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
34 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").
Year ended December 31, ----------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
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 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:
Year ended December 31, ------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
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 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 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 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:
Name Age Position - ---- --- -------- 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
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 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 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 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 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 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 $100,000. 44
Long-Term Compensation --------------------- Annual Awards Compensation --------------------- Name and -------------------- Securities Underlying Principal Position Year Salary($) Bonus($) Options/SARs(#)(1) Compensation($)(2) - ----------------------------- ---- --------- -------- --------------------- ------------------ 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
__________ (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 $7,000 of deferred compensation payments to Mr. Scott S. Broughton. OPTION GRANTS AND VALUE The following tables summarize option grants during 1995 to the Chief Executive Officer and the other executive officer named in Summary Compensation table above, and the value of the options held by such persons at the end of 1995. No options were exercised by these officers during 1995. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - ----------------------------------------------------------------------------- --------------------- Number of % of Total Securities Options/SARs Underlying Granted to Options/SARs Employees in Exercise or Expiration Name Granted (#)(1) Fiscal Year Base Price($/Sh) Date 5% 10% - -------------------- -------------- ------------ ---------------- ---------- -------- -------- Spencer A. Broughton 13,000 14.7% $3.38 2/1/01 $14,944 $33,904 Scott S. Broughton 13,000 14.7 3.38 2/1/01 14,944 33,904
__________ (1) Each option (a) has a term of six years from the date of grant, (b) becomes exercisable to the extent of 20% of the shares subject to the option one year after the date of grant of the option with the balance of the option becoming exercisable in four cumulative installments of 20% of the shares subject to the option until five years after the date of grant, after which the option will be fully exercisable, (c) has an exercise price per share equal to the fair market value per share of the Common Stock on the date of grant, (d) is exercisable only by payment of the exercise price to the Company in cash, and (e) is an "incentive stock option" within the meaning of Section 422 of the Code. 45 FISCAL YEAR-END OPTION/SAR VALUES
Value of Unexercised Number of Securities Underlying Unexercised In-the Money Options/SARs at End of 1995(#) Options/SARs at End of 1995($) Name Exercisable/Unexercisable Exercisable/Unexercisable(1) - --------------------- ------------------------------------------- ------------------------------ 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
__________ (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).
Nasdaq Nasdaq Stock Insurance Market Year Company Stocks (U.S. Companies) -------- ------- --------- ---------------- 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
46 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.
Amount of Name and Address of Nature of Percent Percent of Total Title of Class Beneficial Owners Beneficial Ownership of Class Voting Securities - ------------------------ -------------------------------------- -------------------- -------- ----------------- 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
47 __________ * 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 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 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 (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 (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 (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 (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 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 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 Citizens Security Group Inc. and Subsidiaries Schedule I. Summary Of Investments - Other Than Investments In Related Parties December 31, 1995
Amount at which shown in the Cost(1) Value balance sheet ------------ --------- ------------- 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 ----------- ----------- ----------- -----------
__________ (1) Fixed maturities and short-term investments are at amortized cost and equity securities at original cost. 57 Citizens Security Group Inc. (Parent Only) Schedule II. Condensed Financial Information of Registrant Condensed Balance Sheet Information
December 31, --------------------------- 1995 1994 ------------ ------------ ASSETS 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 ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION. 58 Citizens Security Group Inc. (Parent Only) Schedule II. Condensed Financial Information of Registrant Condensed Statement of Income Information
Year ended December 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- 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 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION. 59 Citizens Security Group Inc. (Parent Only) Schedule II. Condensed Financial Information of Registrant Condensed Statement of Cash Flows Information
Year ended December 31, ----------------------------------------- 1995 1994 1993 ----------------------------------------- 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 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION. 60 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 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 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 Citizens Security Group Inc. and Subsidiaries Schedule III. Supplementary Insurance Information
At December 31, ------------------------------------------------------ Loss Other Deferred and loss policy policy adjustment claims and acquisition expense Unearned benefits Segment costs reserves premiums payable - ------- ----------- ---------- -------- ---------- 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 - ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 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 -------- ---------- ---------- ------------ --------- -------- 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 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
__________ (1) Balance sheet information not applicable. 64 Citizens Security Group Inc. and Subsidiaries Schedule IV. Reinsurance Years ended December 31, 1995, 1994 and 1993
Percentage Ceded to Assumed of amount Insurance Gross other from other Net assumed premiums earned amount(1) companies companies amount to net --------------- ------------ --------- ---------- ---------- ---------- 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
__________ (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 Citizens Security Group Inc. and Subsidiaries Schedule VI. Supplemental Information Concerning Property-Casualty Insurance Operations
At December 31, ------------------------------------------------------------------- Reserves for Deferred unpaid losses policy and loss Discount acquisition adjustment on loss Unearned costs expenses reserves premiums ----------- ------------- ---------- ----------- 1995 $2,427,418 24,012,866 - 16,632,332 1994 2,298,703 20,989,736 - 15,672,948
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 ------------ ---------- ----------- ----------- ------------ ------------ ----------- 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
66 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 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 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 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 EX-2.2 2 EX-2.2 ACQUISITION AND AFFILIATION AGREEMENT By and Among CITIZENS SECURITY GROUP INC., CITIZENS SECURITY MUTUAL INSURANCE COMPANY, AND MERIDIAN INSURANCE GROUP, INC. March 20, 1996 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 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 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 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 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 (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 (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 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 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 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 10 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 11 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 12 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 13 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: 14 (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 15 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 16 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 17 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 18 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 19 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. 20 (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 21 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 22 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 23 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 24 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 25 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. 26 (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). 27 (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. 28 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 29 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. 30 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. 31 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 32 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; 33 (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 34 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 35 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, 36 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. 37 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. 38 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. 39 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 40 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 41 (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 42 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 43 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, 44 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. 45 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, 46 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 47 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 48 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 49 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, 50 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. 51 (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: 52 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 53 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. 54 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, 55 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. 56 (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 57 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 58 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. 59 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. 60 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 61 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 62 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. 63 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. 64 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). 65 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 66 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 67 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 68 (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: 69 (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 70 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 71 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 72 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. 73 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. 74 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 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. 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. EX-10.7H 3 EX-10.7H 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 -------------------- -------------------------- EX-10.19B 4 EX-10.19B 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 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 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: 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 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. 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 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. EX-10.21 5 EX-10.21 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: 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 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 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 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 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 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 (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 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 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 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 EX-24 6 EX-24 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 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 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 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 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 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 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 EX-27 7 EX-27
7 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 37,022,064 0 0 791,385 0 0 39,275,897 1,291,173 5,214,073 2,427,418 61,291,043 24,012,866 16,632,332 0 0 999,000 0 4,375,000 16,616 12,575,294 61,291,043 30,635,266 2,452,264 76,880 564,594 21,346,784 5,461,203 4,978,683 1,942,334 501,811 1,440,523 0 0 0 1,440,523 .64 0 17,170,827 21,900,996 (554,212) 12,393,198 7,276,725 18,847,688 (554,212)
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