-----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, UJP66sh87Q64ffX5sN9BCwbE0Es+g86/hlh8oo6gv8UDXUR9nagmc/V8z15Nqkx4 Y086jvHot7lvGl81zz2J/g== 0000024090-97-000009.txt : 19970815 0000024090-97-000009.hdr.sgml : 19970815 ACCESSION NUMBER: 0000024090-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS INC CENTRAL INDEX KEY: 0000024090 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840755371 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13004 FILM NUMBER: 97663874 BUSINESS ADDRESS: STREET 1: P O BOX 149151 CITY: AUSTIN STATE: TX ZIP: 78714 BUSINESS PHONE: 5128377100 MAIL ADDRESS: STREET 1: P O BOX 149151 CITY: AUSTIN STATE: TX ZIP: 78714 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL INVESTORS LIFE INC DATE OF NAME CHANGE: 19881222 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1997 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: 0-16509 CITIZENS, INC. (Exact name of registrant as specified in its charter) Colorado 84-0755371 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 East Anderson Lane, Austin, Texas 78752 (Address of principal executive offices) (Zip Code) (512) 837-7100 (Registrant's telephone number, including area code) 7801 North Interstate 35, Austin, Texas 78753 (Former name, former address and former fiscal year, if changed since last report.) 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 As of June 30, 1997, Registrant had 20,469,084 shares of Class A common stock, No Par Value, outstanding and 621,049 shares of Class B common stock, No Par Value, outstanding. CITIZENS, INC. AND SUBSIDIARIES INDEX Page Number Part I. Financial Information Item 1. Financial Statements Balance sheets, June 30, 1997 (Unaudited) 3 and December 31, 1996 Statements of Operations, Three-Months Ended June 30, 1997 and 1996 (Unaudited) 5 Statements of Operations, Six-Months Ended June 30, 1997 and 1996 (Unaudited) 6 Statements of Cash Flows, Three-Months Ended June 30, 1997 and 1996 (Unaudited) 7 Statements of Cash Flows, Six-Months Ended June 30, 1997 and 1996 (Unaudited) 9 Notes to Financial Statements 11 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 120 Part Other Information 1817 II. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996 (Unaudited) June 30, December 1997 31, 1996 Assets Investments: Fixed maturities held for investment, at amortized cost (market $5,622,2 $5,627,256 $5,146,000 50 in 1997 and $5,050,000 in 1996) Fixed maturities available for sale, at lower of cost or market (cost 111,100,028 109,723,050 $112,735,509 in 1997 and $100,148,327 in 1996) Equity securities, at market (cost $ 1,084,751 in 1997 and $89,580 in 1,045,326 50,155 1996) Mortgage loans on real estate (net of reserve 1,502,707 1,672,522 of $50,000 in 1997 and $145,080 in 1996) Policy loans 19,748,195 19,819,125 Guaranteed student loans (net of reserve of $10,000 in 1997 and 1996) 118,344 298,683 Other long-term investments 898,246 920,345 Short-term investments 2,440,000 200,000 Total investments 142,475,096 138,311,136 Cash 8,892,896 6,085,383 Prepaid reinsurance 1,144,824 - Reinsurance recoverable 2,121,051 1,773,541 Other receivables 1,113,512 594,088 Accrued investment income 1,860,650 1,682,084 Deferred policy acquisition costs 36,599,594 36,933,753 Cost of insurance acquired 8,817,500 7,219,594 Other intangible assets 1,540,275 1,633,625 Excess of cost over net assets 17,633,214 acquired 13,677,800 Property, plant and equipment 6,052,440 5,442,578 Other assets 1,540,489 743,636 Total assets $229,791, $ 541 214,097,218 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996 (Unaudited) June 30, December 1997 31, 1996 Liabilities and Stockholders' Equity Liabilities: Future policy benefit reserves 140,195, $132,401, 822 079 Dividend accumulations 4,838,669 3,961,603 Premium deposits 1,869,120 1,803,358 Policy claims payable 2,612,457 2,966,818 Other policyholders' funds 1,985,124 1,958,992 Total policy liabilities 151,501,192 143,091,850 Other liabilities 1,702,584 2,052,001 Commissions payable 735,205 928,288 Notes payable 910,798 489,166 Deferred Federal income tax 779,839 842,250 Amounts held on deposit 224,427 168,255 Total liabilities 155,854,045 147,571,8 10 Stockholders' Equity: Common stock: Class A, no par value, 50,000,000 shares authorized, 22,413,819 shares issued in 1997 and 21,761,894 in 1996, including shares in treasury of 1,944,735 in 1997 52,586,070 45,941,552 and 2,077,947 in 1996 Class B, no par value, 1,000,000 shares authorized, 621,049 shares 283,262 283,262 issued and outstanding in 1997 and 1996 Unrealized gain (loss) on investments (832,665) (710,166) Retained earnings 23,829,438 23,430,634 75,866,105 68,945,282 Treasury stock, at cost (1,928,60 (2,062,26 9) 6) Total stockholders' equity 73,937,496 66,883,016 Commitments and contingencies Total liabilities and stockholders' $229,791,5 $ equity 41 214,454,826 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended June 30, 1997 and 1996 (Unaudited) Three-months ended June 30, 1997 1996 Revenues: Premiums $13,079,4 $ 33 13,160,847 Annuity and Universal life 94,494 (1,913) considerations Net investment income 2,540,886 2,325,855 Other income 128,835 23,443 Realized gains (losses) on 77,9655 21,637 investments Interest expense (3,915) (754) 15,918,698 15,529,115 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 2,238,688 1,777,647 reserves Policyholders' dividends 578,440 653,920 Claims and surrenders 6,774,584 6,434,222 Annuity expenses 32,907 198,227 9,624,619 9,064,016 Commissions 3,160,795 2,805,821 Underwriting, acquisition and 1,791,488 2,942,778 insurance expenses Capitalization of deferred policy (2,695,843) (2,477,772) acquisition costs Amortization of deferred policy 2,746,983 2,360,023 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 461,734 264,347 assets acquired 15,089,776 14,959,213 Income (loss) before federal income $828,923 $569,902 tax Federal income tax: Federal income tax expense (benefit) 307,863 388,436 Net Income (Loss) $521,060 $181,466 Per Share Amounts: Net income (loss) per share of $0.03 $0.01 common stock Weighted average shares outstanding CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Six-Months Ended June 30, 1997 and 1996 (Unaudited) Six-months ended June 30, 1997 1996 Revenues: Premiums $24,589,8 $ 80 24,682,151 Annuity and Universal life 198,762 93,235 considerations Net investment income 4,894,712 4,404,543 Other income 193,812 36,078 Realized gains (losses) on 195,805 12,709 investments Interest expense (14,280) (28,904) 30,058,691 29,199,812 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 3,665,985 4,008,622 reserves Policyholders' dividends 1,058,127 1,104,161 Claims and surrenders 13,794,268 11,963,561 Annuity expenses 218,839 428,675 18,737,219 17,505,019 Commissions 5,449,162 5,448,907 Underwriting, acquisition and 4,017,980 4,401,275 insurance expenses Capitalization of deferred policy (4,757,932) (4,967,369) acquisition costs Amortization of deferred policy 5,092,091 4,740,958 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 881,905 766,275 assets acquired 29,420,425 27,895,065 Income (loss) before federal income $638,266 $1,304,7 tax 47 Federal income tax: Federal income tax expense (benefit) 238,891 638,284 Net Income (Loss) $399,375 $666,463 Per Share Amounts: Net income (loss) per share of $0.02 $0.04 common stock Weighted average shares outstanding CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended June 30, 1997 and 1996 (Unaudited) Three-months ended June 30, 1997 1996 Cash flows from operating activities: Net gain (loss) $521,061 $ 181,466 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income (493,480) (187,611) Deferred policy acquisition costs 51,140 (117,749) Amortization of cost of insurance acquired and excess cost over 461,734 264,347 net assets acquired Prepaid reinsurance 572,412 582,637 Reinsurance recoverable 559,894 (249,334) Other receivables (452,376) 67,311 Property, plant and equipment (712,140) 25,812 Future policy benefit reserves 5,578,918 928,945 Other policy liabilities 491,283 1,632,218 Commissions payable and other 759,682 1,562,797 liabilities Amounts received (paid out) as trustee 48,324 39,688 Federal income tax payable (103,351) 0 Deferred Federal income tax payable (62,411) (1,926,268) Other, net (981,785) 434,840 Net cash provided (used) by operating activities 6,238,905 3,239,099 Cash flows from investing activities: Maturity of fixed maturities (966,518) 1,225,587 Sale of fixed maturities available for (7,841,188) 2,250,819 sale Purchase of fixed maturities available 9,724,071 (2,067,410) for sale Net change in mortgage loans 66,688 95,504 Net change in guaranteed student loans 186,501 58,870 Change in other long-term investments 41,273 37,491 Increase in policy loans (net) (61,33 (200,1 7) 76) Net cash provided (used) by investing activities 1,287,628 1,400,685 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended June 30, 1997 and 1996 (Unaudited) Three-months ended June 30, 1997 1996 Cash flows from financing activities: Borrowed Funds 0 Repayment of note payable (186,714) Net cash provided (used) by financing activities (186,714) Net increase (decrease) in cash and short- 4,453,070 term investments Cash and short term investments at beginning 3,192,452 of period Cash and short term investments at end $ $7,645,522 of period CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six-Months Ended June 30, 1997 and 1996 (Unaudited) Six-months ended June 30, 1997 1996 Cash flows from operating activities: Net gain (loss) $399,377 $ 666,463 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income (178,566) 103,621 Deferred policy acquisition costs 334,159 (226,411) Amortization of cost of insurance acquired, excess cost over net assets acquired, and other intangibles 881,905 766,275 Prepaid reinsurance (1,144,824) (1,165,126) Reinsurance recoverable (347,510) (81,680) Other receivables (519,424) 484,077 Property, plant and equipment (609,862) (150,094) Future policy benefit reserves 7,794,743 4,008,622 Other policy liabilities 444,599 1,575,621 Commissions payable and other (542,500) (741,986) liabilities Amounts received (paid out) as trustee 56,172 (23,683) Federal income tax payable - (1,025,106) Deferred Federal income tax (62,411) (1,926,268) Other, net (304,666) Net cash provided (used) by operating activities 1,959,659 Cash flows from investing activities: Maturity of fixed maturities 3,313,624 Sale of fixed maturities available for 12,171,911 sale Purchase of fixed maturities available (16,388,704 for sale ) Net change in mortgage loans 172,815 164,469 Net change in guaranteed student loans 180,339 85,508 Cash from merger 138,138 78,436 Change in other long-term investments 22,099 37,491 Increase in policy loans (net) (70,93 (947,3 0) 50) Net cash provided (used) by (1,484,615) investing activities CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six-Months Ended June 30, 1997 and 1996 (Unaudited) Six-months ended June 30, 1997 1996 Cash flows from financing activities: Exercise of stock options 140,500 0 Repayment of note payable (79,044) (223,734) Sale of stock 192,426 145,359 Net cash provided (used) by financing activities 253,882 (78,375) Net increase (decrease) in cash and short- 5,047,513 396,669 term investments Cash and short term investments at beginning 6,285,383 7,248,853 of period Cash and short term investments at end $11,332,896 $7,645,522 of period CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) (1) Financial Statements The balance sheet for June 30, 1997, the statements of operations for the three and six-month periods ended June 30, 1997 and 1996, and the statements of cash flows for the three and six-month periods then ended have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows at June 30, 1997 and for comparative periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1996 annual 10-K report filed with the Securities and Exchange Commission. The results of operations for the period ended June 30, 1997 are not necessarily indicative of the operating results for the full year. (2) Merger and Pending Acquisition On October 28, 1996, Citizens announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. (American Investment), a Jackson, Mississippi, based life insurance holding company with $7.5 million in assets, $3.4 million of stockholders' equity, revenues of $3.2 million and $67 million of life insurance in force. The American Investment agreement provided that following the acquisition, American Investment shareholders would receive 1 share of Citizens Class A Common Stock for each 7.2 shares of American Investment Common Stock owned. Approximately 700,000 Class A shares were issued in connection with the transaction, which was accounted for as a purchase. The companies will continue to operate in their respective locations under a combined management team with consolidation of computer data processing on the Citizens' system. The agreement closed on June 19, 1997. On August 13, 1997, Citizens signed a definitive agreement to acquire 100% of the outstanding shares of National Security Life and Accident Insurance Company of Arlington, Texas for $1.7 million in cash and restricted stock. The Agreement, which is subject to approval by regulatory authorities in Texas, provides that Citizens will pay $1 million in cash and $700,000 in restricted stock for all of the outstanding shares of National, a privately-owned, Texas domiciled life and accident and health insurer. The transaction is expected to increase assets by approximately $6 million, revenues by $ 5 million and capital by $1 million. The transaction is expected to close before year end 1997. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Certain statements contained in this Form 10Q are not statements of historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"), including, without limitation, the italicized statements and the statements specifically identified as forward- looking statements within this document. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Company which are not statements of historical fact constitute forward- looking statements within the meaning of the Act. Examples of forward-looking statements, include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of plans and objectives of the Company or its management or Board of Directors including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", "may", "will" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) the strength of foreign and U.S. economies in general and the strength of the local economies in which operations are conducted; (ii) the effects of and changes in trade, monetary and fiscal policies and laws; (iii) inflation, interest rates, market and monetary fluctuations and volatility; (iv) the timely development and acceptance of new products and services and perceived overall value of these products and services by existing and potential customers; (v) changes in consumer spending, borrowing and saving habits; (vi) concentrations of business from persons residing in third world countries; (vii) acquisitions; (viii) the persistency of existing and future insurance policies sold by the Company and its subsidiaries; (ix) the dependence of the Company on its Chairman of the Board; (x) the ability to control expenses; (xi) the effect of changes in laws and regulations (including laws and regulations concerning insurance) with which the Company and its subsidiaries must comply, (xii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board, (xiii) changes in the Company's organization and compensation plans; (xiv) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (xv) the success of the Company at managing the risks involved in the foregoing. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. Six-months ended June 30, 1997 and 1996 Net gain for the six-months ended June 30, 1997 was $399,375, compared to a gain of $666,463 for the same period in 1996. Revenues increased to $30,058,691 compared to the first six- months of 1996 when revenues were $29,199,812. The increase in revenues was driven by an 11.1% increase in investment income. The primary reason for the lower earnings in 1997 was a non- recurring charge of approximately $400,000 related to the acquisition of the minority interest not already owned of First American Investment Corporation for shares of the Company's stock previously held in treasury. Premium income for the first six-months of 1997 was $24,589,880 compared to $24,682,151 for the same period in 1996. Production of new premiums by the agents of Citizens Insurance Company of America ("CICA") was flat during the first half of 1997 compared to the previous year. Management introduced a new line of products and an enhanced marketing self-promotion plan during mid- 1996 as part of a re-emphasis of new production. During the past several years, management had not promoted new sales and recruiting so as to emphasize the growth of capital through the profitability of CICA on a statutory accounting basis. These new programs will, in the opinion of management, have considerable impact on new production once they are assimilated by the marketing force. Premium income was negatively impacted during 1997 due to the pending merger of American Liberty Life Insurance Company, acquired in 1995, into CICA and the conversion of the administrative functions previously performed by American Liberty in Baton Rouge, Louisiana being transferred to Austin, Texas in late 1996. Additionally, management re-evaluated the commission contracts offered by American Liberty and in late 1996 notified the majority of agents writing new business that there would be a substantial reduction in the first year commission they had been receiving. Management believes that such actions will limit the production of new business by the American Liberty agents; however, the business produced will offer significantly greater opportunity for profit for the company than that previously sold. Net investment income increased 11.1% in the first six-months of 1997 compared to the same period in 1996. Net investment income for the six-months ended June 30, 1997 was $4,894,712 compared to $4,404,543 in 1996. This increase reflects the earnings on the growth in the Company's asset base that is occurring, as well as the higher yields that have been available in the bond market during the past year. A shift in investment strategy implemented in 1996 to shift away from U.S. Treasury instruments to government guaranteed mortgage backed securities and agency issues will, in the opinion of management continue to offer greater return with a minimum amount of additional risk. Claims and surrenders expense increased from $11,963,561 at June 30, 1996 to $13,794,268 for the same period in 1997. Death claims increased to $2,392,182 in 1997 from $2,034,144 in 1996 with the increases occuring primarily in the international business in force. Management believes the increase in claims is a temporary situation, and not indicative of an adverse trend on the Company's international life insurance. Claims on the Company's domestic business remained relatively stable compared to 1996. Surrender expense increased to $7,453,385 from $6,347,831. Management constantly monitors this activity to insure that the Company's persistency is holding at levels equal to or above assumptions. The increase in 1997 is, in management's opinion, a carryover from the impact of the termination of several well established agents during 1996. Coupons and endowments increased to $2,453,164 in 1997 from $2,338,416 in 1996. The endowment benefits are factored into the premium much like dividends and therefor, the increase does not pose a threat to future profitability. Management expects to see further increases in this category in the future. Accident and Health benefits were $984,886 in 1997, compared to $852,295 in 1996. This increase is directly related to the ALFC block of business which consists of a large block of scheduled benefit daily indemnity policies. The remaining components of claims and expenses, consisting of supplemental contracts and payments of dividends and endowments previously earned and held at interest, amounted to $510,651 in 1997, compared to $390,875 in 1996. Commission expense remained flat at $5,449,162 compared to $5,448,907. The level reflects a slight decline in the amount of business issued during the year compared to the prior year. Additionally, the agreement with WPA described below contributed to the decline. Deferred policy acquisition costs capitalized in 1997 were $4,757,932 compared to $4,967,369 in the prior year. The decline is related to the relatively flat level of new sales during the year. Amortization of these costs was $5,092,091 for the second quarter of 1997 compared to $4,740,958 for 1996. Underwriting, acquisition and insurance expenses decreased to $4,017,980 in 1997 from $4,401,275. The decrease is primarily attributable to the elimination of the operating expenses of ALFC. Additionally, a one-time charge of approximately $400,000 was incurred during the first quarter of 1997 as the result of the acquisition of a 5.52% interest in First American Investment Corporation, a 94.48% subsidiary of American Liberty. Management believes such acquisition, which entailed the issuance of 133,212 shares of the Company's Class A shares previously held in treasury, will prove to be of significant benefit to the Company in the long term. The removal of First American allows the merger of American Liberty and CICA to proceed as well as remedying an unhappy block of minority holders of First American who were left without a market for their First American shares as the result of an intrastate offering that was only marginally successful. Management expects to achieve significant reductions in expenses beginning late in the second quarter of 1997 due to the execution of an agreement with Worldwide Professional Associates, Inc.,"WPA", an international marketing company, to manage the Company's international sales activities in exchange for an overriding commission on new sales. As a result of this agreement, the Company will eliminate approximately $900,000 of fixed overhead on an annual basis, in exchange for the variable cost of the commission override. Three-months ended June 30, 1997 and 1996 Net income for the three-months ended June 30, 1997 was $521,060, or $.03 per share, an increase of 187.1% over the same period in 1996 when income was $181,466, or $.01 per share. Total revenues for the quarter were $15,918,698, compared to $15,529,115 for the same period in 1996. Premium income for the quarter was $13,079,433, down slightly from 1996 when premiums totalled $13,160,847. A slowdown of production by the agents representing American Liberty as the result of commission reductions described above and flat international sales contributed to the lack of increase. Investment income increased to $2,540,886 from $2,325,855. The increase relates to the growing asset base of the Company as well as the higher yields available in the past year in the bond market. Policy benefits increased from $9,064,016 in 1996 to $9,624,619 in the current year. Increases in death claims and policy surrenders were the primary causes. Management does not believe such increases to be indicative of a strong negative trend, but rather the result of recent growth. Commissions increased from $2,805,821 to $3,160,795 due to the agreement with WPA described above. Management expects to see further increases in this area due to the WPA agreement. Liquidity and Capital Resources Stockholders' equity increased to $73,947,496 at June 30, 1997 from $66,883,016 at December 31, 1996. The First American and American Investment Network acquisitions and the exercise of certain stock options that had been outstanding for some time and were the primary reasons for the growth. In May 1995 an offering under Regulation S was initiated to the Company's international policyholders. It was terminated in June, 1997. As of June 30, 1997, an additional $1.1 million had been raised through the offering. Invested assets grew to $142,475,096 in 1997 from $138,311,136 at December 31, 1996. At December 31, 1996, and June 30, 1997, fixed maturities have been categorized into two classifications: Fixed maturities held to maturity, which are valued at amortized cost, and fixed maturities available for sale which are valued at market. The Company does not have a plan to make material dispositions of fixed maturities during 1997; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out sales during 1997. Fixed maturities held to maturity, amounting to $5,622,250, consist primarily of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity. The Company's mortgage loan portfolio, which constitutes 1.2% of invested assets at December 31, 1996, (1.1% at June 30, 1997) has historically been composed of small residential loans in Texas. At December 31, 1996, no mortgage loans were in default. Management has established a reserve of $50,000 at June 30, 1997 and December 31, 1996 (approximately 3% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. Policy loans comprise 13.9% of invested assets at June 30, 1997 and December 31, 1996. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 10% percent and maturities that are related to the maturity or termination of the applicable policies. Management believes that the Company maintains more than adequate liquidity despite the uncertain maturities of these loans. Cash balances of the Company in its primary depository, Texas Commerce Bank Austin, Texas, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at June 30, 1997 and December 31, 1996. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At March 31, 1997, management does not believe the Company is at risk for such a loss. During 1997, the Company intends to utilize short-term Treasury Bills and highly- rated commercial paper as cash management tools to minimize excess cash balances and enhance return. In February 1992, the Company paid cash for an 80,000 square foot office building in Austin, Texas to serve as its primary office. This building will, in the opinion of management, provide adequate space for the Company's operations for many years. Renovation and remodeling of the property began in the third quarter of 1992 and the Company relocated to the building in September 1993. The Company occupies approximately 27,000 square feet of space in the building. The Company's former office property, consisting of approximately 13,000 square feet in Austin, with a carrying value of $146,000 was leased to a third party on a triple-net basis for three years during 1995. The lease provided that the party can purchase the building during the first 18 months of the lease for $850,000 cash, with no lease payments applying to the purchase price. The option period expired in 1996. The property is being re-marketed with a $1.5 million asking price. The tenant retains a right of first refusal for the remainder of the lease. CICA owned 1,955,457 shares of Citizens Class A common stock at December 31, 1996 (1,822,245 at June 30, 1997). For statutory accounting purposes, CICA received written approval from the Colorado Insurance Department to carry its investment in Citizens at 50% of the fair market value limited to 7% of admitted assets ($8,310,000), which differs from prescribed statutory accounting practices. Statutory accounting practices prescribed by Colorado require that the Company carry its investment at market value reduced by the percentage ownership of Citizens by CICA, limited to 2% of admitted assets. As of December 31, 1996, that permitted transaction increased statutory surplus by $4,000,000 over what it would have been had prescribed accounting practices been followed. In the Citizens' consolidated financial statements, this stock is shown as treasury stock. During 1995, Citizens re-acquired 115,943 of these shares and retired them. During 1997, approximately 133,212 shares were issued in conjunction with the First American transaction. CICA had outstanding at June 30, 1997 and December 31, 1996, a $400,000 ($466,000 at December 31, 1996) surplus debenture payable to Citizens. For statutory accounting purposes, this debenture is a component of surplus, while for GAAP it is eliminated in consolidation. Citizens has recognized a liability for its related obligation to a bank in a like amount. The NAICNational Association of Insurance Commissioners ("NAIC") has established minimum capital requirements in the form of Risk- Based Capital ("RBC"). Risk-based capital factors the type of business written by a company, the quality of its assets, and various other factors into account to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to an adjusted statutory capital that includes capital and surplus as reported under Statutory Accounting Principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk- based capital fall below 200%, a series of actions by the Company would begin. At December 31, 1996 and 1995, CICA, ALLIC and CILIC were well above required minimum levels. Financial Accounting Standards In May 1993, the FASB issued Statement 114 "Accounting by Creditors for Impairment of a Loan" ("Statement 114"). Statement 114 requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Statement 114 is effective for years beginning after December 15, 1994. Implementation did not have a material impact on the Company's financial statements. In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Statement 121 established accounting standards for the recognition and measurement of impairment on long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain intangibles to be disposed of. This statement does not apply to long-lived assets such as deferred policy acquisition costs and deferred tax assets. Statement 121 is effective for fiscal years beginning after December 15, 1995. The Statement did not have a material impact on the Company's financial statements. Also in 1993, the FASB issued Statement 115 "Accounting for Certain Investments in Debt and Equity Securities" ("Statement 115"). Statement 115 requires the classification of debt and equity securities as held to maturity, trading or available for sale based on established criteria. Trading securities are bought and held principally for the purpose of resale in the near term. The Company had no investment securities classified as trading at January 1, 1994, December 31, 1996 or December 31, 1995. Held-to-maturity securities are those in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities from held-to-maturity to available-for- sale are recorded as a separate component of stockholders' equity. The unrealized holding gains or losses included in the separate component of equity for securities transferred from available-for-sale to held-to-maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security. A decline in the market value of any available-for-sale or held- to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The Company adopted Statement 115 at January 1, 1994. PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2 Changes in Securities None, other than disclosed in the Notes to the Financial Statements or Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information The Annual meeting of stockholders was held on Tuesday, June 3, 1997, at 10:00 a.m. at the Company's executive offices. The record date for the meeting was April 15, 1997. Elected as Directors for the coming year were: Flay F. Baugh Steven F. Shelton Ralph M. Smith, Th.D. Timothy T. Timmerman T. Roby Dollar Mark A. Oliver Joe R. Reneau Harold E. Riley Rick D. Riley Item 6. Exhibits and Reports on Form 8-K Current Report dated April 30, 1997 regarding sales of Common Stock via Reg. S. Current Report dated June 20, 1997 regarding sales of Common Stock via Reg. S.. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS, INC. By:/s/ Mark A. Oliver_____ Mark A. Oliver, FLMI President Date: August 14, 1997 EX-27 2
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