-----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, CCDC1fsrZvimLg08KSRHYvUjlgABadp7stV+3nx2cQEtQztagnU3HWHjCJIbVitQ NCFHLfifal9VvKdjLFqaUQ== 0000024090-97-000013.txt : 19971117 0000024090-97-000013.hdr.sgml : 19971117 ACCESSION NUMBER: 0000024090-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 001-13004 FILM NUMBER: 97720113 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 September 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 September 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, September 30, 1997 (Unaudited) and December 31, 1996 3 Statements of Operations, Three-Months Ended September 30, 1997 and 1996 (Unaudited) 5 Statements of Operations, Nine-Months Ended September 30, 1997 and 1996 (Unaudited) 6 Statements of Cash Flows, Three-Months Ended September 30, 1997 and 1996 (Unaudited) 7 Statements of Cash Flows, Nine-Months Ended September 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 13 Part Other Information 2117 II. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1997 and December 31, 1996 (Unaudited) September December 30, 31, 1997 1996 Assets Investments: Fixed maturities held for investment, at amortized cost (market $5,146,000 in 1997 and $5,050,000 in 1996) $5,619,663 $5,627,256 Fixed maturities available for sale, at lower of cost or market (cost $119,882,725 in 1997 and $110,759,634 in 1996) 125,338,896 109,723,050 Equity securities, at market (cost $ 971,765 in 1997 and $89,580 in 1996) 931,840 50,155 Mortgage loans on real estate (net of reserve of $50,000 in 1997 and 1996) 1,321,292 1,672,522 Policy loans 20,144,579 19,819,125 Guaranteed student loans (net of reserve of $10,000 in 1997 and 1996) 107,112 298,683 Other long-term investments 893,041 920,345 Short-term investments 1,200,000 200,000 Total investments 155,556,423 138,311,136 Cash 4,760,091 6,085,383 Prepaid reinsurance 572,412 - Reinsurance recoverable 2,280,467 1,773,541 Other receivables 771,133 594,088 Accrued investment income 1,426,240 1,682,084 Deferred policy acquisition costs 37,552,730 36,933,753 Cost of insurance acquired 8,625,449 7,219,594 Other intangible assets 1,493,600 1,633,625 Federal income tax receivable 0 357,608 Excess of cost over net assets 15,488,417 acquired 13,677,800 Property, plant and equipment 5,865,747 5,442,578 Other assets 1,108,088 743,636 Total assets 235,500,797 214,454,826 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1997 and December 31, 1996 (Unaudited) September December 30, 31, 1997 1996 Liabilities and Stockholders' Equity Liabilities: Future policy benefit reserves 141,215,224 132,401,079 Dividend accumulations 4,812,771 3,961,603 Premium deposits 1,924,110 1,803,358 Policy claims payable 2,696,357 2,966,818 Other policyholders' funds 2,150,306 1,958,992 Total policy liabilities 152,798,768 143,091,850 Other liabilities 1,961,551 2,052,001 Commissions payable 827,778 928,288 Notes payable 897,367 489,166 Deferred Federal income tax 1,534,512 842,250 Amounts held on deposit 274,562 168,255 Total liabilities 158,294,538 147,571,810 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 and 2,077,947 in 1996 52,586,069 45,941,552 Class B, no par value, 1,000,000 shares authorized, 621,049 shares issued and outstanding in 1997 and 1996 283,262 283,262 Unrealized gain (loss) on investments 1,073,912 (710,166) Retained earnings 25,191,625 23,430,634 79,134,868 68,945,282 Treasury stock, at cost 1,928,609 (2,062,266) Total stockholders' equity 77,206,259 66,883,016 Commitments and contingencies Total liabilities and stockholders' 235,500,797 214,454,826 equity CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended September 30, 1997 and 1996 (Unaudited) Three-months ended September 30, 1997 1996 Revenues: Premiums 15,423,872 14,619,278 Annuity and Universal life considerations 90,425 179,468 Net investment income 2,672,981 2,177,548 Other income 296,584 53,495 Realized gains (losses) on investments (292,029) 80,667 Interest expense (19,162) (14,100) 18,172,671 17,096,356 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit reserves 2,865,160 2,541,236 Policyholders' dividends 1,203,584 629,079 Claims and surrenders 6,978,631 7,319,704 Annuity expenses 104,400 168,791 11,151,775 10,658,810 Commissions 3,317,928 3,182,045 Underwriting, acquisition and insurance expenses 2,265,672 1,973,659 Capitalization of deferred policy acquisition costs (2,709,440) (2,558,902) Amortization of deferred policy acquisition costs 1,756,304 2,784,806 Amortization of cost of insurance acquired and excess of cost over net 485,453 92,434 assets acquired 16,267,692 16,132,852 Income (loss) before federal income tax 1,904,979 $963,504 Federal income tax: Federal income tax expense (benefit) 543,363 317,969 Net Income (Loss) $1,361,616 $645,535 Per Share Amounts: Net income (loss) per share of $0.07 $0.03 common stock Weighted average shares outstanding 20,591,574 19,497,613 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Nine-Months Ended September 30, 1997 and 1996 (Unaudited) Nine-months ended September 30, 1997 1996 Revenues: Premiums 40,013,752 39,301,429 Annuity and Universal life 289,187 272,703 considerations Net investment income 7,567,693 6,582,091 Other income 490,396 89,573 Realized gains (losses) on (96,224) 93,376 investments Interest expense (33,442) (43,004) 48,231,362 46,296,168 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 6,531,145 6,549,858 reserves Policyholders' dividends 2,261,711 1,733,240 Claims and surrenders 20,772,899 19,283,265 Annuity expenses 323,239 597,466 29,888,994 28,163,829 Commissions 8,767,090 8,630,952 Underwriting, acquisition and 6,283,652 6,374,934 insurance expenses Capitalization of deferred policy (7,467,372) (7,526,271) acquisition costs Amortization of deferred policy 6,848,395 7,525,764 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 1,367,358 858,709 assets acquired 45,688,117 44,027,917 Income (loss) before federal income $2,543,2 $2,268,2 tax 45 51 Federal income tax: Federal income tax expense (benefit) 782,254 956,253 Net Income (Loss) 1,760,991 1,311,998 Per Share Amounts: Net income (loss) per share of $0.09 $0.07 common stock Weighted average shares outstanding 20,362,324 19,497,613 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended September 30, 1997 and 1996 (Unaudited) Three-months ended September 30, 1997 1996 Cash flows from operating activities: Net gain (loss) 1,361,616 645,535 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 434,410 514,659 Deferred policy acquisition costs (953,136) 225,904 Amortization of cost of insurance acquired and excess cost over net assets acquired (741,880) 92,434 Prepaid reinsurance 572,412 582,211 Reinsurance recoverable (159,416) (100,152) Other receivables 342,379 162,012 Property, plant and equipment 186,693 78,028 Future policy benefit reserves 1,019,402 2,541,236 Other policy liabilities 448,174 244,704 Commissions payable and other 452,049 415,767 liabilities Amounts received (paid out) as trustee 50,135 (38,234) Deferred Federal income tax payable 754,673 904,605 Other, net 1,811,028 (615,095) Net cash provided (used) by operating activities 5,578,539 5,653,614 Cash flows from investing activities: Maturity of fixed maturities 225,000 1,672,058 Sale of fixed maturities available for 2,300,076 3,042,929 sale Purchase of fixed maturities available (14,024,225) (8,507,482) for sale Net change in mortgage loans 148,415 (31,036) Net change in guaranteed student loans 11,232 (42,640) Change in other long-term investments 5,205 106,861 Increase in policy loans (net) 396,384 (226,748) Net cash provided (used) by investing activities (10,937,913) (3,986,058) (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended September 30, 1997 and 1996 (Unaudited) Three-months ended September 30, 1997 1996 Cash flows from financing activities: Repayment of note payable (13,431) (49,433) Sale of stock 0 81,047 Net cash provided (used) by financing activities (13,431) 31,614 Net increase (decrease) in cash and short- (5,372,805) 1,699,170 term investments Cash and short term investments at beginning 11,332,896 7,654,522 of period Cash and short term investments at end $5,960,091 $9,344,692 of period CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine-Months Ended September 30, 1997 and 1996 (Unaudited) Nine-months ended September 30, 1997 1996 Cash flows from operating activities: Net gain (loss) $1,760,991 1,311,998 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 255,844 618,280 Deferred policy acquisition costs (618,977) (507) Amortization of cost of insurance acquired, excess cost over net assets acquired, and other intangibles 140,025 858,709 Prepaid reinsurance (572,412) (582,915) Reinsurance recoverable (506,926) (181,832) Other receivables (177,045) 646,089 Property, plant and equipment (423,169) (72,066) Future policy benefit reserves 8,814,145 6,549,858 Other policy liabilities 892,773 1,820,325 Commissions payable and other (90,451) (326,219) liabilities Amounts received (paid out) as trustee 106,307 (61,917) Federal income tax receivable 357,608 (1,025,106) (payable) Deferred Federal income tax 692,262 (1,021,663) Other, net (2,812,510) (919,761) Net cash provided (used) by operating activities 7,818,465 7,613,273 Cash flows from investing activities: Maturity of fixed maturities 6,574,893 4,985,682 Sale of fixed maturities available for 13,027,102 15,214,840 sale Purchase of fixed maturities available (28,989,900) (24,896,186) for sale Net change in mortgage loans 321,230 133,433 Net change in guaranteed student loans 191,571 42,868 Cash from merger 138,138 78,436 Change in other long-term investments 27,304 144,352 Increase in policy loans (net) 325,454 (1,174,098) Net cash provided (used) by investing activities (8,384,208) (5,470,673) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine-Months Ended September 30, 1997 and 1996 (Unaudited) Nine-months ended September 30, 1997 1996 Cash flows from financing activities: Exercise of stock options 140,500 0 Repayment of note payable (92,475) (273,167) Sale of stock 192,426 226,406 Net cash provided (used) by financing activities 240,451 (46,761) Net increase (decrease) in cash and short- (325,292) 2,095,839 term investments Cash and short term investments at beginning 6,285,383 7,248,853 of period Cash and short term investments at end $5,960,091 $9,344,692 of period CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 (Unaudited) (1) Financial Statements The balance sheet for September 30, 1997, the statements of operations for the three and nine-month periods ended September 30, 1997 and 1996, and the statements of cash flows for the three and nine-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 September 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 September 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 and is expected to close in November, 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. 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 and is expected to close in November, 1997. Nine-months ended September 30, 1997 and 1996 Net gain for the nine-months ended September 30, 1997 was $1,760,991, or $.09 per share compared to $1,311,998, or $.07 for the same period in 1996. Revenues increased to $48,231,362 compared to the first nine-months of 1996 when revenues were $46,296,168. The increase in revenues was driven by an 14.9% increase in investment income. The earnings in 1997 include 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. A slight decline in expenses, coupled with the increased revenues contributed to the increased profitability in 1997. Premium income for the first nine-months of 1997 was $40,013,752 compared to $39,301,429 for the same period in 1996. Production of new premiums by Citizens Insurance Company of America ("CICA") during the first nine months of 1997 trailed the previous year. 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. Additionally, beginning in January, 1998 an entire new line of products will be introduced to the Company's marketing consultants. Called the Millennia 2000 series, the portfolio of ten new products will replace the Ultra Expansion series that has been sold since mid 1987. The new products will continue to offer participating ordinary whole life insurance with new features such as terminal illness benefits, and an increased focus on providing retirement income. The Millennia products will also retain the assignment of benefit provisions that have proven popular with the Company's clients over the past several years. 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. American Liberty was merged into CICA in June, 1997. Additionally, management re-evaluated the commission contracts offered by American Liberty and in late 1996 notified the majority of marketing representatives 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 former American Liberty agents; however, the business produced will offer significantly greater opportunity for profit for the company than that previously sold. The field force of United Security Life Insurance Company, acquired in mid-1997, is expected to produce approximately $2 million of new premium for the entire year 1997. Due to the purchase accounting applied to this acquisition, only three months of activity are included in this 3rd quarter 10Q. The majority of premium written through United Security is individual "specialty" accident and health business. Net investment income increased 14.9% in the first nine-months of 1997 compared to the same period in 1996. Net investment income for the nine-months ended September 30, 1997 was $7,567,693 compared to $6,582,091 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 $19,283,265 at September 30, 1996 to $20,772,899 for the same period in 1997. Death claims increased slightly to $3,331,080 in 1997 from $3,312,101. Surrender expense increased to $10,784,581 from $10,291,360. 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 $3,870,832 in 1997 from $3,698,624 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 $1,936,896 in 1997, compared to $1,294,922 in 1996. This increase is directly related to the American Liberty and United Security blocks of business which consist 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 $849,510 in 1997, compared to $686,258 in 1996. Commission expense remained flat at $8,767,090 compared to $8,630,952. The level reflects a 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 $(7,467,372) compared to $(7,526,271) in the prior year. The decline is related to the relatively flat level of new sales during the year. Amortization of these costs was $6,848,395 through the third quarter of 1997 compared to $7,525,764 for 1996. Underwriting, acquisition and insurance expenses declined to $6,283,652 in 1997 from $6,374,934. 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. The decline in spite of the one-time charge is representative of the cost savings that are being realized following the consolidation of American Liberty, as well as the WPA agreement. Management expects these reductions to continue throughout the year. Three-months ended September 30, 1997 and 1996 Net income for the three-months ended September 30, 1997 was $1,361,616 or $.07 per share, an increase of 187.1% over the same period in 1996 when income was $645,535, or $.03 per share. Total revenues for the quarter were $18,172,671, compared to $17,096,356 for the same period in 1996. Premium income for the quarter was $15,423,872, a 5.5% increase from 1996 when premiums totaled $14,619,278. Production from United Security offset declines in the writing of new business by CICA. Investment income increased to $2,672,981 from $2,177,548. 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 $10,658,810 in 1996 to $11,151,775 in the current year. Decreases in death claims and policy surrenders were the primary causes. Commissions increased from $3,182,045 to $3,317,928 due to the agreement with WPA described above. Management expects to see further increases in this area due to the WPA agreement. Expenses increased in the quarter to $2,265,672 compared to $1,973,659 for the same period in 1996. The inclusion of the expenses of United Security for the quarter was the primary reason for the increase. Liquidity and Capital Resources Stockholders' equity increased to $77,206,259 at September 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 were the primary reasons for the growth. In May 1995 an offering under Regulation S was initiated to the Company's international policyholders which 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 $155,556,423 in 1997 from $138,311,136 at December 31, 1996. At December 31, 1996, and September 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 $5,619,663 ($5,627,256 at December 31), 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 less than 1% of invested assets at September 30, 1997, (1.2% at December 31, 1997) has historically been composed of small residential loans in Texas. At September 30, 1997 one loan of less than $35,000 was in default, and at December 31, 1996, no mortgage loans were in default. Management has established a reserve of $50,000 at September 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 12.9% of invested assets at September 30, 1997 and 14.3% at 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 September 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 September 30, 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 $1.0 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 ( at September 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 ($4,000,000), 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 1997, approximately 133,212 shares were issued in conjunction with the First American transaction. CICA had outstanding at September 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. On September 22, 1997, Citizens was notified that class action certification was granted September 15, 1997 to plaintiffs in a lawsuit (Dwain Kirkham et al. v. American Liberty Life Insurance Company et al., No. 25,954, 2nd Judicial District, Jackson Parish, Louisiana) filed against American Liberty Life Insurance Company ("ALLIC") on August 19, 1996 and against Citizens, Inc. on December 20, 1996 (collectively "Defendants"). In the same ruling, Defendants' motion for summary judgment and exception of prescription (statute of limitations) were denied. Defendants believe that these rulings are significantly in error. Defendants will appeal these rulings, during which time, the trial court proceedings will be stayed. Defendants intend to vigorously defend against these claims. The lawsuit was filed by four individuals who purchased from ALLIC, prior to August 1, 1986, life insurance policies on their children and grandchildren. In the complaint, plaintiffs allege that the insurance policies were fraudulently misrepresented to be "retirement" and "insured savings" plans in which, after six or seven years, additional premiums would be unnecessary and monthly retirement income would be generated for plaintiffs. Plaintiffs also allege other causes of action including breach of contract and are seeking rescission, unspecified damages, interest and attorneys' fees. Prior to the class certification ruling, rescission of the insurance policies purchased by the four plaintiffs would have resulted in a total payment of $31,000 (including 33% for contingent attorneys fees). The activities described in plaintiffs' complaint allegedly occurred over 10 years ago with respect to certain types of insurance policies sold by an independent general agent. Prior to its recent merger into Citizens' principal subsidiary, CICA, ALLIC was a separate subsidiary of Citizens since its acquisition in September 1995. As part of the acquisition, not all historical records of ALLIC were loaded on the computer system currently used. Further, no officers or managers of ALLIC are currently employed by Citizens or any of its affiliates. Management has been advised by counsel that the class action certification is in error and will vigorously appeal the decision. Because of the significant errors on the part of the court, Management does not believe the Company to have significant loss exposure as a result of the litigation. Management is performing an ongoing evaluation of the matter. There has been much recent publicity regarding the cost of converting data processing systems to deal with the year 2000. Citizens has performed an evaluation of its systems and determined that the significant majority are already year 2000 compliant. The small percentage that are not currently compliant should be ready well before the turn of the century. In addition, management has been making inquiries of consultants, etc. to insure that their systems will be compliant as well. Because of the method of coding in the Company's core systems, there is virtually no cost with the year 2000 compliance. 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 See Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 Item 6. Exhibits and Reports on Form 8-K Current Report dated September 2, 1997 regarding sales of Common Stock via Reg. S. Current Report dated September 22, 1997 regarding a Class Action lawsuit. 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: November 14, 1997 EX-27 2
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