-----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, CYdWXRKuXQbdVCgDFwZoHd0V1X6lqFeHFVVLzJuzeIgy5RL9mUcQ7zubzcJD1B2Z fW3zEFGIvEt/M9Pjl/+1AA== 0000024090-98-000003.txt : 19980817 0000024090-98-000003.hdr.sgml : 19980817 ACCESSION NUMBER: 0000024090-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98691519 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, 1998 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: 1-13004 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, 1998, Registrant had 20,765,088 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, 1998 (unaudited)and December 31, 1997 3 - 4 Statements of Operations, Three-Months Ended June 30, 1998 and 1997 (Unaudited) 5 Statements of Operations, Six-Months Ended June 30, 1998 and 1997 6 (Unaudited) Statements of Cash Flows, Six-Months Ended June 30, 1998 and 1997 (Unaudited) 7 - 8 Notes to Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Conditions and Results 10-160 of Operations Part Other Information 17- 18 II. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1998 and December 31, 1997 (Unaudited) December June 30, 31, 1998 1997 Assets Investments: Fixed maturities held for investment, at amortized cost (fair value $5,914,000 in 1998 and $5,704,000 in $5,611,753 $ 1997) 5,617,131 Fixed maturities available for sale, at fair value (cost $129,722,445 in 1998 and $130,621,420 in 1997) 131,190,392 133,021,681 Equity securities, at fair value (cost in $799,176 in 1998 and $983,513 in 1997) 827,255 978,391 Mortgage loans on real estate (net of reserve of $50,000 in 1998 and 1997) 1,844,342 1,287,295 Policy loans 20,717,775 20,466,184 Guaranteed student loans (net of reserve of $10,000 in 1998 and 1997) 30,561 81,681 Other long-term investments 668,903 899,329 Short-term investments 3,150,000 300,000 Total investments 164,040,981 162,651,692 Cash 8,229,317 6,454,956 Prepaid reinsurance 949,910 - Reinsurance recoverable 2,092,077 2,069,423 Other receivables 560,277 1,007,878 Accrued investment income 1,893,227 2,010,512 Deferred policy acquisition costs 36,569,751 37,107,070 Cost of insurance acquired 8,916,603 10,639,667 Other intangible assets 2,443,325 2,596,925 Excess of cost over net assets 17,634,079 17,466,123 acquired Federal income tax receivable 512,256 - Deferred Federal income tax 999,172 572,430 Property, plant and equipment 5,298,087 5,795,573 Other assets 839,479 1,147,186 Total assets 250,978,541 249,519,435 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1998 and December 31, 1997 (Unaudited) December June 30, 31, 1998 1997 Liabilities and Stockholders' Equity Liabilities: Future policy benefit reserves 155,518,625 152,119,042 Dividend accumulations 4,740,651 4,789,194 Premium deposits 2,023,190 2,010,102 Policy claims payable 4,074,249 3,488,484 Other policyholders' funds 1,999,628 1,873,588 Total policy liabilities 168,356,343 164,280,410 Other liabilities 1,980,674 2,703,346 Commissions payable 774,868 880,811 Notes payable 333,333 937,430 Federal income tax payable - 762,992 Amounts held on deposit 237,057 372,748 Total liabilities 171,682,275 169,937,737 Stockholders' Equity: Common stock: Class A, no par value, 50,000,000 shares authorized, 22,708,910 shares issued in 1998 and 1997, including shares in treasury of 1,943,822 in 1998 and 1997 52,790,643 52,790,643 Class B, no par value, 1,000,000 shares authorized, 621,049 shares issued and outstanding in 1998 and 1997 283,262 283,262 Unrealized investment gain 982,918 1,580,790 Retained earnings 27,168,597 26,856,157 81,225,420 81,510,852 Treasury stock, at cost (1,929,154) (1,929,154) Total stockholders' equity 79,296,266 79,581,698 Total liabilities and stockholders' 250,978,541 249,519,435 equity CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended June 30, 1998 and 1997 (Unaudited) Three-months ended June 30, 1998 1997 Revenues: Premiums $ $ 14,549,512 13,079,433 Annuity and Universal life 64,204 94,494 considerations Net investment income 2,860,802 2,540,886 Other income 72,209 129,835 Realized gains on investments 624,085 77,965 Interest expense (8,431) (3,915) 18,162,381 15,918,698 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 2,323,379 2,238,688 reserves Policyholders' dividends 751,255 578,440 Claims and surrenders 8,190,825 6,774,584 Annuity expenses 91,715 32,907 11,357,174 9,624,619 Commissions 3,071,337 3,160,795 Underwriting, acquisition and 3,021,246 1,791,488 insurance expenses Capitalization of deferred policy (1,899,615) (2,695,843) acquisition costs Amortization of deferred policy 1,837,627 2,746,983 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 502,240 461,734 assets acquired 17,890,009 15,089,776 Income before federal income tax $272,372 $828,922 Federal income tax: Federal income tax expense 72,516 307,863 Net Income $199,856 $521,059 Per Share Amounts: Basic and diluted earnings per share of common stock $0.01 $0.03 Weighted average shares outstanding 21,386,137 20,591,574 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Six-Months Ended June 30, 1998 and 1997 (Unaudited) Six-months ended June 30, 1998 1997 Revenues: Premiums 27,970,186 24,589,880 Annuity and Universal Life 130,702 198,762 considerations Net investment income 5,703,433 4,894,712 Other income 190,628 193,812 Realized gains on investments 654,736 195,805 Interest expense (27,023) (14,280) 34,622,662 30,058,691 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 3,835,053 3,665,985 reserves Policyholders' dividends 1,441,535 1,058,127 Claims and surrenders 14,962,318 13,794,268 Annuity expenses 190,287 218,839 20,429,193 18,737,219 Commissions 5,957,553 5,449,162 Underwriting, acquisition a 5,880,597 4,017,980 insurance expenses Capitalization of deferred policy (3,414,322) (4,757,932) acquisition costs Amortization of deferred policy 3,951,641 5,092,091 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 1,396,122 881,905 assets acquired 34,200,784 29,420,425 Income before federal income tax $421,878 $638,266 Federal income tax: Federal income tax expense 109,438 238,891 Net Income $312,440 $399,375 Per Share Amounts: Basic and diluted earnings per share of common stock $0.01 $0.02 Weighted average shares outstanding 21,386,137 20,245,799 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six-Months Ended June 30, 1998 and 1997 (Unaudited) Six-months ended June 30, 1998 1997 Cash flows from operating activities: Net gain $312,440 $399,375 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 117,285 (178,566) Deferred policy acquisition costs 537,319 334,159 Amortization of cost of insurance acquired, excess cost over net assets acquired and other intangibles 1,708,708 881,905 Prepaid reinsurance (949,910) (1,144,824) Reinsurance recoverable (22,654) (347,510) Other receivables 447,601 (519,424) Property, plant and equipment 497,486 (609,862) Future policy benefit reserves 3,399,583 7,794,743 Other policy liabilities 676,350 444,599 Commissions payable and other (828,615) (542,500) liabilities Amounts received (expended) as trustee (135,691) 56,172 Federal income tax (1,275,248) - Deferred Federal income tax (118,748) (62,411) Other, net 227,541 (4,265,930) Net cash provided by operating activities 4,593,447 2,239,926 Cash flows from investing activities: Maturity of fixed maturities available 5,054,551 6,349,893 for sale Sale of fixed maturities available for 9,275,952 10,727,026 sale Purchase of fixed maturities available (13,319,865) (14,965,675) for sale Mortgage loans funded (665,000) - Repayment of mortgage loa ns 107,953 172,815 Sale of equity securities 151,464 - Net change in guaranteed student loans 51,120 180,339 Cash from merger - 138,138 Change in other long-term investments 230,427 22,099 Increase in policy loans (net) (251,591) (70,930) Net cash provided by investing activities 635,011 2,553,705 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six-Months Ended June 30, 1998 and 1997 (Unaudited) Six-months ended June 30, 1998 1997 Cash flows from financing activities: Exercise of stock options - 140,500 Repayment of note payable (604,097) (79,044) Sale of stock 192,426 - Net cash provided (used) by financing activities (604,097) 253,882 Net increase in cash and short- term investments 4,624,361 5,047,513 Cash and short term investments at beginning of period 6,754,956 6,285,383 Cash and short term investments at end 11,379,317 $11,332,896 of period CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 (Unaudited) (1) Financial Statements The balance sheet for June 30, 1998, the statements of operations for the three and six-month periods ended June 30, 1998 and 1997, and the statements of cash flows for the 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, 1998 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, 1997 annual 10-K report filed with the Securities and Exchange Commission. The results of operations for the period ended June 30, 1998 are not necessarily indicative of the operating results for the full year. (2) Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income." FAS 130 requires that an entity include in total comprehensive income certain amounts which were previously recorded directly to stockholders' equity. For the three and six- months ended June 30, 1998 the other comprehensive income amounts included in total comprehensive income consisted of unrealized gains (losses) on investments in debt and equity securities of $(676,599) and $(597,872), and for the same periods in 1997, $1,266,647 and $(122,499), respectively. Total comprehensive income (loss) for the three and six-months ended June 30, 1998 was $(476,743) and $(285,432) and for 1997, $1,787,706 and $276,876, respectively. 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, 1998 and 1997 Net income for the six-months ended June 30, 1998 was $312,440 compared to $399,375 for the same period in 1997. Revenues increased to $34,622,6629,763,884, an increase of 15.2% over the first six months of 1997 when revenues were $30,058,691. The increase in revenues was driven by a 13.7% increase in premium income and an 16.5% increase in investment income. Higher expenses associated with the conversion of the two companies acquired in 1997, coupled with increased claim activity, fueled the decrease in earnings. Premium income for the first six months of 1998 was $27,970,186 compared to $24,589,880 for the same period in 1997. Production of new premiums by the agents of Citizens Insurance Company of America (CICA) was higher during the first quarter of 1998 than in the previous year, but slowed somewhat in the second quarter. Management introduced a new line of ordinary whole life products during January 1998 which will, in the opinion of management, have considerable impact on new production once the marketing force has been trained in the sale of the new products. Additionally, the premiums of United Security Life Insurance Company (USLIC) and National Security Life and Accident Insurance Co. (NSLIC), both acquired in 1997, are included in the 1998 results, contributing $2,059,000 and $1,842,000, respectively. Net investment income increased 16.5% in the first half of 1998 compared to the same period in 1997. Net investment income for the six months ended June 30, 1998 was $5,703,433 compared to $4,894,712 in 1997. This increase reflects the earnings on the growth in the Company's asset base that is occurring, as well as the earnings on assets of USLIC and NSLIC. 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 to $14,962,318 at June 30, 1998 from $13,794,268 for the same period in 1997. Death claims decreased slightly to $2,287,873 in 1998 from $2,392,182 in 1997. Surrender expense decreased to $6,662,466 from $7,453,385. Management constantly monitors this activity to insure that the Company's persistency is holding at levels equal to or above assumptions. The decrease in the first half of 1998 is, in management's opinion, a result of a slowdown of lapsation of the American Liberty block of business following the acquisition and subsequent merger of said Company, as well as a re-emphasis on conservation on the part of CICA's sales force. Coupons and endowments decreased to $2,358,256 in 1998 from $2,453,164 in 1997. The endowment benefits, a significant component of the Company's Ultra Expansion and Millennia 2000 international life insurance products, are factored into the premium much like dividends and therefore, the amount 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 $3,143,944 in 1998, compared to $984,886 in 1997. This increase is directly related to the USLIC and NSLIC blocks of business which consist of large amounts of scheduled benefit daily indemnity policies and were not included in the first half of 1997 due to the date of their respective acquisitions. 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 $509,779 in 1998, compared to $510,651 in 1997. Commission expense increased to $5,957,553 from $5,449,162. The increase reflects the execution of an agreement with Worldwide Professional Associates, Inc. to manage the Company's international marketing operations in exchange for an overriding commission, as well as commissions relating to USLIC and NSLIC that were not included in the prior year. This agreement is expected to generate expense savings in future years by converting fixed home office marketing expenses to variable commission expenses. Deferred policy acquisition costs capitalized in 1998 were $3,414,322 compared to $4,757,932 in the prior year. Amortization of these costs was $3,951,641 for the first half of 1998 compared to $5,092,091 for 1997. Underwriting, acquisition and insurance expenses increased from $4,017,980 in the first half of 1997 to $5,880,597. The increase is primarily attributable to the absorption of the operating expenses of USLIC and NSLIC. Management believes that through economies of scale which can be achieved in the future after conversion of systems of these companies that additional expense reductions can be made. The 1997 results includes a one-time charge of approximately $400,000 as the result of the acquisition of a 5.52% interest in First American Investment Corporation, a 94.48% subsidiary of American Liberty. The operations of USLIC were combined with those of CICA in April, 1998, and USLIC's Mississippi office was closed. Management expects to see significant cost savings beginning in late 1998 as a result. Similarly, the operations of NSLIC are expected to be combined in October, 1998, with cost reductions appearing in the first quarter of 1999. Amortization of cost of insurance acquired and excess of cost over net assets acquired increased to $1,396,122 in 1998 from $881,905 in 1997. The increase is attributable to the amortization of excess of cost over net assets acquired and cost of insurance recorded on the acquisitions of USLIC, NSLIC and American Liberty. Because of the slowdown in sales activity on the part of the agency operations previously associated with American Liberty, management is monitoring the excess of cost over net assets acquired associated with the acquisition of this company. Should future production levels be less than anticipated, the Company could face a charge-off ranging from to $2,000,000 to $8,000,000 associated with such decline. Management is monitoring this recoverability. At December 31, 1997, the excess of cost over net assets acquired on the Company's balance sheet was recoverable within the period of amortization. Production from these agents began to recover in late 1997; however, due to the nature of their market, management believes it will be the third quarter of 1998 before significant levels of production are obtained from these agents. Management believes that in the event any such amount proved unrecoverable, a charge in the appropriate period will be booked. Three-months ended June 30, 1998 and 1997 Net income of $199,856 was earned for the three-months ended June 30, 1998 compared to $521,059 for the same period in 1997. Revenues increased 14.4% to $18,162,3819,763,884 over the first three months of 1997 when revenues were $15,918,698. The increase in revenues was driven by an 11.2% increase in premium income and a 12.6% increase in investment income, as well as more than $624,000 in capital gains. Increased expenses associated with the conversion of the two companies acquired in 1997 and higher claims offset the increased revenues and contributed to the lower earnings. Premium income for the second three months of 1998 was $14,549,512 compared to $13,079,433 for the same period in 1997. Management introduced a new line of ordinary whole life products to the international market during January 1998 which will, in the opinion of management, have considerable impact on new production once the marketing force has been trained in the sale of the new products. The premiums of USLIC and NSLIC, both acquired in 1997, are included in the 1998 results, and are the primary reason for the increase. Net investment income increased 12.6% in the second quarter of 1998 compared to the same period in 1997. Net investment income for the three months ended June 30, 1998 was $2,860,802 compared to $2,540,886 in 1997. This increase reflects the earnings on the growth in the Company's asset base that is occurring, as well as the earnings on assets of USLIC and NSLIC. Claims and surrenders expense increased to $8,190,825 at June 30, 1998 from $6,774,584 for the same period in 1997. Death claims increased slightly to $1,373,492 in 1998 from $1,016,779 in 1997. Surrender expense decreased to $3,318,783 from $3,608,154. Management constantly monitors this activity to insure that the Company's persistency is holding at levels equal to or above assumptions. The decrease in the first half of 1998 is, in management's opinion, a result of the slowdown of lapsation of the American Liberty block of business following the acquisition and subsequent merger of said Company, as well as a re-emphasis on conservation on the part of CICA's sales force. Coupons and endowments decreased to $1,224,365 in 1998 from $1,360,206 in 1997. The endowment benefits, a significant component of the Company's Ultra Expansion and Millennia 2000 international life insurance products, are factored into the premium much like dividends and therefore, the amount 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 $2,001,908 in 1998, compared to $494,287 in 1997. This increase is directly related to the USLIC and NSLIC blocks of business which consist of large amounts of scheduled benefit daily indemnity policies and were not included in the first half of 1997 due to the date of their respective acquisitions. Additionally, claims increased approximately $450,000 in the second quarter of 1998 due to the settlement of three lawsuits. 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 $272,277 in 1998, compared to $295,158 in 1997. Commission expense decreased to $3,071,337 from $3,160,795. The decrease reflects a slowdown in CICA's sales during the quarter, which caused overall commissions for 1998 to drop despite the inclusion of NSLIC and USLIC. Underwriting, acquisition and insurance expenses increased from $1,791,488 in the second quarter of 1997 to $3,021,246. The increase is primarily attributable to the absorption of the operating expenses of USLIC and NSLIC and the cost of data processing conversions of each company. Management believes that through economies of scale which can be achieved in the future after conversion of systems of these companies, additional expense reductions can be made. The operations of USLIC were combined with those of CICA in April, 1998, and USLIC's Mississippi office was closed. Management expects to see significant cost savings beginning in late 1998 as a result. Similarly, the operations of NSLIC are expected to be combined in October, 1998, with cost reductions appearing in the first quarter of 1999. Amortization of cost of insurance acquired and excess of cost over net assets acquired increased to $502,240 in 1998 from $461,734 in 1997. The increase is attributable to the amortization of excess of cost over net assets acquired and cost of insurance recorded on the acquisitions of USLIC, NSLIC and American Liberty. Because of the slowdown in sales activity on the part of the agency operations previously associated with American Liberty, management is monitoring the excess of cost over net assets acquired associated with the acquisition of this company. Should future production levels be less than anticipated, the potential exists that the Company could face a charge-off ranging from $2,000,000 to $8,000,000 associated with such decline. Management believes that should such amount proved unrecoverable, a charge in the appropriate period will be booked. Liquidity and Capital Resources Stockholders' equity declined to $79,296,266 at June 30, 1998 from $79,581,698 at December 31, 1997. The comparative decline in net income coupled with a decrease in the fair value of the Company's bond portfolio contributed to the decrease in stockholders' equity. Invested assets grew to $164,040,981 in 1998 from $162,651,692 at December 31, 1997. At December 31, 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 fair value. The Company does not have a plan to make material dispositions of fixed maturities during 1998; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out sales during 1998. Fixed maturities held to maturity, amounting to $5,611,753, 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 1.1% of invested assets at June 30, 1998, has historically been composed of small residential loans in Texas. At December 31, 1997 and June 30, 1998, one mortgage loan was in default with an outstanding principal balance of $31,000. Management has established a reserve of $50,000 at June 30, 1998 and December 31, 1997 (approximately 3% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. Two mortgages totaling $665,000 were made during 1998 relating to sales of real estate owned by the Company. Policy loans comprise 12.6% of invested assets at June 30, 1998 and December 31, 1997. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 10% 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, Chase Bank, Austin, Texas, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at June 30, 1998 and December 31, 1997. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At June 30, 1998, management does not believe the Company is at risk for such a loss. During 1998, the Company has utilized highly-rated commercial paper as a cash management tool 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. The Company relocated to the building in September 1993. The Company occupies approximately 38,000 square feet of space in the building, which is 100% leased. The Company's former office property, consisting of approximately 13,000 square feet in Austin, with a carrying value of $104,000 was leased to a third party on a triple-net basis for three years during 1995. At June 30, 1998, this property was under a sales contract for $850,000 which closed in July, 1998. The Company will record a gain of approximately $700,000 on the transaction in the third quarter. CICA owned 1,821,332 shares of Citizens Class A common stock at June 30, 1998 and December 31, 1997. Statutory accounting practices prescribed by the National Association of Insurance Commissioners and the State of 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 June 30, 1998 and December 31, 1997, the Company valued the shares in accordance with prescribed statutory accounting practices. In the Citizens' consolidated financial statements, this stock is shown as treasury stock. A subsidiary of CICA sold certain fixed assets in the second quarter of 1998 for over $1 million, generating a profit of approximately $500,000. CICA had outstanding at June 30, 1998 a $333,333 ($400,000 at December 31, 1997) 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, 1997, CICA, NSLIC, USLIC and CILIC were well above required minimum levels. Information Systems and the Year 2000 The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is generally referred to as the Year 2000 compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date- based or date-sensitive information. The Company is in the process of identifying all significant applications that will require modification to ensure Year 2000 compliance. Internal resources will be used as necessary to make the required modifications and to test and verify Year 2000 compliance. Due to the nature of the programming of the Company's core processing systems, such date oriented issues are not a problem since the dates are stored as the number of days since the year 1900, rather than as a two-digit field. Accordingly, a significant part of the Company's efforts to ensure Year 2000 compliance will be to obtain assurances from vendors that timely upgrades will be made available to make third party software Year 2000 compliant. Additionally, the Company will contact companies with whom it does business and upon whose systems the Company may indirectly rely, to obtain assurances that such systems will be timely modified. The Company anticipates that it will complete this process in early 1999, leaving adequate time to assess and resolve any significant remaining issues. The cost of Year 2000 compliance is not expected to be material to the Company's financial position or results of operations in any one year. Financial Accounting Standards In February 1997, the FASB issued Statement 128 "Earnings per Share" ("Statement 128"). Statement 128 establishes the standards for computing and presenting earnings per share ("EPS"). This statement replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS. Statement 128 is effective for fiscal years ending after December 15, 1997. Implementation did not have a material impact on the Company's earnings per share. In June 1997, the FASB issued Statement 130 "Reporting Comprehensive Income" ("Statement 130"). Statement 130 establishes the standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. Statement 130 is effective for fiscal periods beginning after December 15, 1997. The Company does not believe that this statement will have an impact on future operations or liquidity. Also in June, 1997, Statement 131, "Disclosures about Segments of an Enterprise and Related Information," was issued by the Financial Accounting Standards Board. This Statement requires that companies disclose segment data on the basis that is used internally by management for evaluating segment performance and allocating resources to segments. This Statement requires that a company report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It also requires various reconciliation's of total segment information to amounts in the consolidated financial statements. The Company's current definition of its business segments, significant lines of business (life and health products), will be expanded to significant lines of business by geographic location of policyholder (international and domestic). The footnote disclosure requirements of SFAS No. 131 are effective for fiscal years beginning after December 15, 1997. PART II. OTHER INFORMATION Item 1. Legal Proceedings On September 22, 1997, the Company 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 the Company's principal subsidiary, Citizens Insurance Company of America, ALLIC was a separate subsidiary of the Company 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 the Company or any of its affiliates. Due to the unexpected nature of this ruling, the historical records have not been examined to determine the potential magnitude of these claims in the event of class action certification. Management will be examining ALLIC's historical records to determine if such an estimate can be developed. 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 2, 1998, at 10:00 a.m. at the Company's executive offices. The record date for the meeting was April 15, 1998. Elected to the Company's Board of Directors were: Class A Class B James C. Mott Harold E. Riley, Chairman Steven F. Shelton T. Roby Dollar Ralph M. Smith, Th.D. Mark A. Oliver Timothy T. Timmerman Joe R. Reneau, M.D. Rick D. Riley Item 6. Exhibits and Reports on Form 8-K None. 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, 1998 EX-27 2
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