-----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, OwxASvggK4HPzN31aSxhtjdUMEU6MVVm/U0XeEjqtGcDBRDwuehf27oherMpBgKv jlgnE5zcEtC7e3G+2LkMiQ== 0000024090-99-000003.txt : 19990518 0000024090-99-000003.hdr.sgml : 19990518 ACCESSION NUMBER: 0000024090-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626299 BUSINESS ADDRESS: STREET 1: 400 EAST ANDERSON LANE CITY: AUSTIN STATE: TX ZIP: 78752 BUSINESS PHONE: 5128377100 MAIL ADDRESS: STREET 1: 400 EAST ANDERSON LANE CITY: AUSTIN STATE: TX ZIP: 78752 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 March 31, 1999 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 March 31, 1999, Registrant had 21,374,357 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 Consolidated Statements of Financial Position, March 31, 1999 (Unaudited) 3 and December 31, 1998 Consolidated Statements of Operations, Three-Months Ended March 31, 1999 5 and 1998 (Unaudited) Consolidated Statements of Cash Flows, Three-Months Ended March 31, 1999 6 and 1998 (Unaudited) Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 11 Part Other Information 18 II. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION March 31, 1999 and December 31, 1998 (Unaudited) December 31, March 31, 1998 1999 Assets Investments: Fixed maturities held for investment, at amortized cost (market $5,737,500 in 1999 and $6,169,000 in 1998) $5,603,317 $ 5,606,374 Fixed maturities available for sale, at fair value (cost $140,670,445 in 1999 and $141,202,761 in 1998) 142,772,125 146,645,842 Equity securities, at fair value (cost $716,294 in 1999 and $815,271 733,735 862,287 in 1998) Mortgage loans on real estate (net of reserve of $50,000 in 1999 and 1998) 1,521,314 1,560,757 Policy loans 21,306,136 20,996,919 Guaranteed student loans 9,346 4,673 Other long-term investments 551,096 595,271 Short-term investments 4,675,000 300,000 Total investments 177,172,069 176,572,123 Cash 9,152,963 9,868,728 Prepaid reinsurance 1,427,271 - Reinsurance recoverable 1,674,420 1,755,561 Other receivables 600,708 433,320 Accrued investment income 1,293,515 1,806,065 Deferred policy acquisition costs 36,360,504 37,259,386 Cost of insurance acquired 8,184,077 8,290,853 Excess of cost over net assets 8,561,196 8,375,799 acquired Other intangible assets 2,212,925 2,289,725 Property, plant and equipment 5,221,228 5,155,088 Deferred Federal income tax 1,613,261 699,848 Other assets 905,876 877,699 Total assets $254,380,103 $253,384,195 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION March 31, 1999 and December 31, 1998 (Unaudited) December 31, March 31, 1998 1999 Liabilities and Stockholders' Equity Liabilities: Future policy benefit reserves $161,204,839 $160,176,329 Dividend accumulations 4,812,704 4,818,915 Premium deposits 2,435,206 2,013,274 Policy claims payable 4,359,004 4,801,548 Other policyholders' funds 1,632,662 1,977,711 Total policy liabilities 174,789,464 173,442,728 Other liabilities 1,516,432 2,067,392 Commissions payable 821,730 833,881 Notes payable 333,333 333,333 Federal income tax payable 413,309 1,534,269 Amounts held on deposit 268,913 122,110 Total liabilities 177,996,37 178,480,516 8 Stockholders' Equity: Common stock: Class A, no par value, 50,000,000 shares authorized, 23,318,179 shares issued in 1999 and 22,708,910 in 1998, including shares in treasury of 1,944,735 in 1999 56,217,781 52,790,643 and 1998 Class B, no par value, 1,000,000 shares authorized, 621,049 shares 283,262 283,262 issued and outstanding in 1999 and 1998 Accumulated other comprehensive income: Unrealized investment gains 1,398,621 3,623,464 Retained earnings 20,135,464 20,413,215 78,312,879 76,832,833 Treasury stock, at cost (1,929,154) (1,929,154) Total stockholders' equity 74,903,679 76,383,725 Commitments and contingencies Total liabilities and stockholders' $254,380,103 $253,384,195 equity CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended March 31, 1999 and 1998 (Unaudited) Three-months ended March 31, 1999 1998 Revenues: Premiums $ $ 13,420,674 13,534,945 Annuity and Universal life 69,283 66,498 considerations Net investment income 3,004,958 2,842,631 Other income 183,517 118,419 Realized gains on investments 31,200 30,651 Interest expense (5,833) (18,592) 16,818,070 16,460,281 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 1,173,649 1,511,674 reserves Policyholders' dividends 501,634 690,280 Claims and surrenders 8,207,261 6,771,493 Annuity expenses 134,129 98,572 10,016,673 9,072,019 Commissions 2,866,678 2,886,216 Underwriting, acquisition and 2,347,720 2,859,351 insurance expenses Capitalization of deferred policy (1,685,220) (1,514,707) acquisition costs Amortization of deferred policy 2,584,102 2,114,014 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 351,882 assets acquired 893,882 16,481,835 16,310,775 Income before Federal income tax $336,235 $ 149,506 Federal income tax: Federal income tax expense 58,484 36,922 Net Income $277,751 $ 112,584 Per Share Amounts: Basic and diluted earnings per share of common stock $0.01 $0.01 Weighted average shares outstanding 21,824,263 21,386,137 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended March 31, 1999 and 1998 (Unaudited) Three-months ended March 31, 1999 1998 Cash flows from operating activities: Net income $ $ 277,751 112,584 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 546,875 551,926 Realized gains (losses) on sale of investment (31,200) (30,651) Deferred policy acquisition costs 898,882 599,307 Amortization of cost of insurance acquired and excess cost over 351,882 847,206 net assets acquired Reinsurance recoverable (1,345,773) (1,074,647) Other receivables (166,946) 51,655 Deferred Federal income tax 496,598 (670,779) Future policy benefit reserves 960,796 1,640,176 Other policy liabilities 317,199 (660,977) Commissions payable and other (591,737) 858,256 liabilities Amounts received (paid out) as trustee (146,805) (155,605) Federal income tax payable (1,120,960) 5,753 Other, net 63,791 (1,594,284) Net cash provided (used) by operating activities 510,353 479,920 Cash flows from investing activities: Maturity of fixed maturities 1,687,161 1,126,716 Sale of fixed maturities available for 268,090 5,184,949 sale Purchase of fixed maturities available 0 (8,764,433) for sale Sale of equity securities 92,500 151,463 Principal payments on mortgage loans 39,443 29,146 Net change in guaranteed student loans (4,673) 49,085 Sale of other long-term investments and property plant and equipment 68,100 352,307 Cash from merger 1,512,255 0 Purchase of other long-term investments and property plant and (204,777) (256,924) equipment (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended March 31, 1999 and 1998 (Unaudited) Three-months ended March 31, 1999 1998 Purchase of short-term investments (4,375,000) 0 Increase in policy loans (net) (309,217) (88,513) Net cash provided (used) by investing activities (1,226,118) (2,216,204) Cash flows from financing activities: Repayment of note payable 0 (4,222) Net cash provided (used) by financing activities 0 (4,222) Net decrease in cash and cash (715,765) (1,740,506) equivalents Cash and cash equivalents at beginning of period 9,868,728 6,754,956 Cash and cash equivalents at end of $9,152,963 $5,014,450 period Supplemental Disclosure of Non-Cash Investing and Financing Activities: In 1999 the Company issued 609,269 Class A stock to purchase all of the capital stock of First Investors Group, Inc. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of tangible assets acquired $3,170,802 Fair value of intangible assets acquired, gross 353,703 Net assets acquired 3,524,505 Capital stock issued (3,427,138) Liabilities assumed $ 97,367 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 (Unaudited) (1) Financial Statements The Statement of Financial Position for March 31, 1999, the statements of operations for the three-month periods ended March 31, 1999 and 1998, and the statements of cash flows for the three-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 March 31, 1999 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 (GAAP) 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, 1998 annual 10-K report filed with the Securities and Exchange Commission. The results of operations for the period ended March 31, 1999 are not necessarily indicative of the operating results for the full year. (2) Acquisition On September 15, 1998, Citizens announced that a definitive agreement had been reached between Citizens and First Investors Group, Inc. (Investors) of Springfield, Illinois wherein Citizens would acquire 100% of the outstanding shares of Investors for shares of Citizens Class A Common stock. Investors is the parent of Excalibur Insurance Corporation (Excalibur), also of Springfield, Illinois. This transaction closed on January 26, 1999. Pursuant to the terms of the Agreement, which was approved by Investors' shareholders and regulatory authorities, Citizens issued one share of Citizens Class A Common stock for each 6.6836 shares of Investors common and preferred stock issued and outstanding. Citizens issued approximately 610,000 shares of its Class A Common stock to consummate the transaction, which was accounted for as a purchase. (3) Segment Information The Company has two reportable segments identified by geographic area: International Business and Domestic Business. International Business consists of ordinary whole-life business. International sales are throughout Latin America with policies sold to residents of Central and South America. The Company has no assets, offices or employees outside of the United States of America (U.S.) and requires that all transactions be in U.S. dollars paid in the U.S. Domestic Business consisting of traditional life and burial insurance, pre-need policies, accident and health specified disease, hospital indemnity and accidental death policies are sold throughout the Southern U.S. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on GAAP net income (loss) before federal income taxes for its two reportable segments. Geographic Areas - The following summary represents financial data of the Company's continuing operations based on their location for the quarter ended March 31, 1999 and 1998. 1999 1998 Revenues Domestic. $ 5,212,404 $ 5,172,434 International 11,611,499 11,306,439 Total Revenues $16,823,903$16,478,873 The following summary represents revenues and pretax income from continuing operations and identifiable assets for the Company's reportable segments as of and for the quarters ended March 31, 1999 and 1998, is as follows: Quarter ended March 31 1999 1998 Revenue, excluding net investment income and realized gain (loss) on investments: Domestic $ $ 4,270,560 4,271,738 International 9,335,030 9,516,007 Total consolidated revenue $ 13,787,74 $ 13,605,590 5 Net investment income: Domestic 892,253 931,000 International 1,950,378 2,073,958 Total consolidated net investment income $ $ 2,842,631 3,004,958 Amortization expense: Domestic 909,630 944,127 International 2,026,354 2,063,769 Total consolidated amortization expense $ 2,935,984 $ 3,007,896 Realized gain (loss) on investments: Domestic 9,666 9,621 International 21,534 21,030 Total consolidated realized gain (loss) on investments $ 31,200 $ 30,651 Net income (loss) before federal income tax: Domestic 104,173 46,934 International 232,062 102,572 Total consolidated net income (loss) before federal income taxes $ 336,235 $ 149,506 Quarter ended Year ended March 31, 1999 December 31, 1998 Assets: Domestic 80,384,11 80,069,406 3 International 173,995,990 173,314,789 Total $254,380,103 $253,384,195 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. Three-months ended March 31, 1999 and 1998 Net income for the three-months ended March 31, 1999 was $277,751 compared to $112,584 for the same period in 1998. Revenues increased to $16,818,0709,763,884, an increase of 2.2% over the first three months of 1998 when revenues were $16,460,281. The increase in revenues was driven by a 5.7% increase in investment income. Increased revenues coupled with decreases in operating expenses contributed to the improved earnings. Premium income for the first three months of 1999 was $13,534,945 compared to $13,420,674 for the same period in 1998. Production of new premiums by the agents of Citizens Insurance Company of America ("CICA") was higher during the first quarter of 1999 than in the previous year. Management introduced a new line of ordinary whole life products during January 1998 which will, in the opinion of management, have a favorable impact on new production once they are assimilated by the marketing force. Net investment income increased 5.7% in the first three months of 1999 compared to the same period in 1998. Net investment income for the three months ended March 31, 1999 was $3,004,958 compared to $2,842,631 in 1998. This increase reflects the earnings on the growth in the Company's asset base. In the coming quarters, management expects to further diversify the portfolio focusing on high quality private placement instruments as well as possibly mortgage loans. Through this diversification, management believes that additional yield can be earned with a minimal increase in risk. Claims and surrenders expense increased from $6,771,493 at March 31, 1998 to $8,207,261 for the same period in 1999. Death claims increased from $914,381 in 1998 to $1,350,376 in 1999. Surrender expense decreased to $3,181,778 from $3,343,683. Management constantly monitors this activity to insure that the Company's persistency is holding at levels equal to or above assumptions. Coupons and endowments increased to $1,165,656 in 1999 from $1,133,891 in 1998. 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 $2,306,778 in 1999, compared to $1,142,036 in 1998. This increase is directly related to the USLIC and NSLIC blocks of business which consist of large amounts of scheduled benefit daily indemnity policies. During the second half of 1998, the Company experienced a significant increase in the volume of claims which resulted in a backlog. During the fourth quarter of 1998, management increased the number of individuals processing claims from approximately 13 to 30. 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 $202,673 in 1999, compared to $237,502 in 1998. Deferred policy acquisition costs capitalized in 1998 were $1,514,707 compared to $1,685,220 in the current year. Amortization of these costs was $2,584,102 for the first quarter of 1999 compared to $2,114,014 for 1998. Underwriting, acquisition and insurance expenses decreased from $2,859,351 in the first quarter of 1998 to $2,347,720 in 1999, a reduction of 17.9%. The decrease can be attributed to the economies of scale being achieved after the consolidation of the administration of the business of USLIC and NSLIC. Amortization of cost of insurance acquired and excess of cost over net assets acquired decreased to $351,882 in 1999 from $893,882 in 1998. The decrease in amortization is related to the write-off of approximately $9.5 million of goodwill recorded on the purchase of American Liberty in 1995. Liquidity and Capital Resources Stockholders' equity increased to $76,383,725 at March 31, 1999 from $74,903,679 at December 31, 1998. The acquisition of First Investors Group, Inc. for shares of the Company's stock, coupled with the net income offset declines in the market value of the Company's bond portfolio caused by higher interest rates and fueled the growth. Invested assets remained stable at $176,373,052 in 1999 from $176,572,123 at December 31, 1998. At March 31, 1999 and December 31, 1998, 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 1999; however, because of continued uncertainty regarding long- term interest rates, management cannot rule out sales during 1999. Fixed maturities held to maturity, amounting to $5,603,317, 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 0.8% of invested assets at December 31, 1998 and March 31, 1999, has historically been composed of small residential loans in Texas. Management has established a reserve of $50,000 at March 31, 1999 and December 31, 1998 (approximately 3% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. Policy loans comprise 11.6% of invested assets at March 31, 1999. 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 March 31, 1999 and December 31, 1998. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At March 31, 1999, management does not believe the Company is at risk for such a loss. During 1999, 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. The Company relocated to the building in September 1993. The Company occupies approximately 35,000 square feet of space in the building, which is 100% leased. CICA owned 1,821,332 shares of Citizens Class A common stock at March 31, 1999 and December 31, 1998. 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 March 31, 1999 and December 31, 1998, 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. CICA had outstanding at March 31, 1999 and December 31, 1998, a $333,333 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. In April 1999 Citizens paid off the note to Chase Bank. The National 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, 1998, CICA, and CILIC were well above required minimum levels. NSLIC and USLIC fell below the 200% level as reported on their December 31, 1998 Annual Statement to insurance regulatory authorities. Management immediately made capital contributions to both companies to raise them above the minimum levels. Further evaluation of the estimate of claims reserves indicated discovered that the provisions for pending claims in both companies were overstated. Management has amended the 1998 statutory financial statements of NSLIC to increase surplus by approximately $1,000,000, as a result of the overstatement, bringing the Company well above the 200% level of RBC. Information Systems and the Year 2000 Company management has been actively involved in life and health insurance software development since the 1960's. The Company continues to develop and maintain its core information systems with a professional staff of program designers, analysts and programmers through its wholly-owned subsidiary Computing Technology, Inc. During the past fifteen years, the Company has undertaken numerous major systems projects, including but not limited to, development of interactive, simulated-real-time transaction collection and user inquiry programs, conversion from CSC/Continuum's Life/70 to in-house developed core processing systems, transition from a Harris minicomputer to a Wang VS, transition from an IBM plug-compatible mainframe to a Wang VS and conversion of at least seven life and health insurance company operations to its systems. During 1998, Company personnel have successfully completed conversion of two insurance company operations, namely United Security Life Insurance Company and National Security Life and Accident Insurance Company, from non- compliant UNIX and IBM systems to systems designed and operated by Citizens. ESD management believes year 2000 issues will continue to be addressed as a top priority until the Company can certify its systems are Year 2000 compliant. Company personnel have been actively planning, identifying and resolving year 2000 issues for more than a year. These activities are expected to continue throughout the year with parallel testing and final remediation actions concluding within the second half of 1999. In the late 1980's, the Company began developing software to routinely audit its data bases and its source code. These internal audit tools run daily and provide perpetual balancing of the Company's policy and agency master files to its general ledger. The source code audit tool has been an instrumental key to identifying system code that may need year 2000 remediation. By using this automated "bloodhound" combined with visual review of record and screen layouts/documentation, the Company's ESD staff have identified the "worst case" scenario for a year 2000 impact. The overall expenditure for addressing year 2000 issues is minimal because all planning, remediation and testing have been, and will continue to be, performed with existing staff during normal business hours. The Company utilizes a Wang VS 7160 for providing core processing and on-line support in conjunction with a local-area-network (LAN) based upon CISCO 5500 and 2900 intelligent switching components. The Company's Mitel telephone system was replaced during 1998 with a Mitel 2000 Light, nodal, fiber-optic system which is year 2000 compliant. Wang has certified the 7.53.00 operating system to be year 2000 compliant and the Company successfully completed installation and testing of this system in July, 1998. The Company uses Microsoft's WFW 3.11 and NT Server 3.51 (SP5), for its LAN, both of which are certified by Microsoft to be year 2000 compliant. The Company uses Word 6.0, EXCEL 5.0, and Notes 3.3 as applications on the LAN which are certified to be compliant except for the Notes product which is not compliant, but is reported to have no loss of data or functionality. However, only the Wang system is mission-critical with the in-house developed code for Host Daily Cycle systems being considered a part thereof. As for electronic data exchanges, the Company interacts with Chase Bank, Rudd and Wisdom, Dataplex, PCS Health Systems and certain reinsurance companies. The Chase Bank relationship is the only third-party interface that could be considered mission- critical and it can be circumvented (in less than one man-hour) by using paper drafts instead of electronic transactions should the Company find such to be desirable. Other vendor interfaces can be circumvented with hard-copy reporting should an electronic interface become untenable for some reason. The Company believes it has addressed its Year 2000 concerns. The Company has begun to develop contingency and recovery plans aimed at ensuring the continuity of critical business functions before, on and after December 31, 1999. The contingency and recovery planning is substantially complete. The Year 2000 contingency plans will be reviewed periodically throughout 1999 and revised as needed. The Company believes its Year 2000 contingency plan, coupled with existing "disaster recovery" and "business resumption" plans, minimize the impact Year 2000 issues may have on the organization Financial Accounting Standards In February 1997, the Financial Accounting Standards Board ("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. Implementation has not had a material impact on the Company. 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), has been expanded to significant lines of business by geographic location of policyholder (international and domestic). In December 1997, the AICPA issued Statement of Position (SOP) 97- 3. SOP 97-3 provides: 1) guidance for determining when an entity should recognize a liability for guaranty fund and other insurance-related assessments, 2) guidance on how to measure a liability, 3) guidance on when an asset may be recognized for a portion or all of the assessment liability or paid assessment that can be recovered through premium tax offsets or policy surcharges, and 4) requirements for disclosure of certain information. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company does not anticipate implementation of SOP 97-3 to have a material impact on the Company's financial statements. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance for determining whether costs of software developed or obtained for internal use should be capitalized or expensed when incurred. In the past, the Company has expensed such costs as they were incurred. This SOP is also effective for fiscal years beginning after December 15, 1998. The Company is currently completing an evaluation of the financial impact as well as the changes to its related disclosures. 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 will be held on Tuesday, June 1, 1999, at 10:00 a.m. at the Company's executive offices. The record date for the meeting was April 19, 1999. 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 By:/s/ Jeffrey J. Wood_____ Jeffrey J. Wood, CPA Executive Vice President, Secretary/Treasurer and CFO Date: May 15, 1995May 14, 1999 EX-27 2
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