-----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, Rwq7BJpJ3F+CBrR5ygxhTtpoxY8itVC4jNVPE2YuoMqUkAvPpAU5IV7pO9CEfCzB 8M+VfOt3GDPncBd5ohCyLg== 0000950134-99-002388.txt : 19990402 0000950134-99-002388.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950134-99-002388 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 001-13004 FILM NUMBER: 99581671 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-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 of incorporation) (IRS Employer Identification No.) 400 East Anderson Lane, Austin, Texas 78752 - ------------------------------------------- --------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 837-7100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Class A Common Stock American Stock Exchange -------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Act: None 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 requirement for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 1999, aggregate market value of the Class A voting stock held by non-affiliates of the Registrant was approximately $78,244,000 . DOCUMENTS INCORPORATED BY REFERENCE Part III of this Report incorporates certain portions of the definitive proxy material of the Registrant in respect of its 1999 Annual Meeting of Shareholders. Number of shares of common stock outstanding as of March 15, 1999 Class A: 20,765,088 Class B: 621,049 2 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Citizens, Inc. ("Citizens") operates primarily as an insurance holding company. It was incorporated in 1977. Citizens is the parent holding company that directly or indirectly owns 100% of Citizens Insurance Company of America ("CICA"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"), Funeral Homes of America ("FHA") (formerly Funeral Homes of Louisiana), Central Investors Life Insurance Company of Illinois ("CILIC"), United Security Life Insurance Co. ("USLIC") and National Security Life and Accident Insurance Company ("NSLIC"). Collectively, Citizens and its subsidiaries are referred to herein as the "Company." Pertinent information relating to Citizens' subsidiary companies is set forth below:
YEAR STATE OF BUSINESS SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY ---------- ------------ ------------- -------- CICA 1968 Colorado Life insurance NSLIC 1954 Texas Life insurance USLIC 1967 Mississippi Life insurance CILIC 1965 Illinois Life insurance CTI 1986 Colorado Data processing III 1965 Texas Aircraft transportation FHA 1989 Louisiana Funeral home
On October 28, 1996, CICA announced that it had signed a definitive written agreement for the acquisition of American Investment Network, Inc. (AIN), a life insurance holding company headquartered in Jackson, Mississippi 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. Following the acquisition by CICA, AIN shareholders received 1 share of Citizens, Inc. Class A Common Stock for each 7.2 shares of AIN Common Stock owned. The transaction closed on June 19, 1997. Citizens issued approximately 700,000 Class A shares in connection with the transaction, which was accounted for as a purchase. On October 31, 1996, CICA, CICA Acquisition, Inc. (a subsidiary organized for purposes of the transaction) and First American Investment Corporation ("FAIC"), a holding company entered into a merger agreement for the merger of CICA Acquisition, Inc. into FAIC. Prior thereto, Citizens had indirectly owned approximately 94.5% of FAIC. As part of this merger, CICA acquired the approximately 5.5% of FAIC shares owned by minority investors at an exchange rate of 0.1111 shares of Class A Common Stock for each 1 share of FAIC owned by minority investors. The merger became effective March 7, 1997, and Citizens issued 2 3 approximately 134,000 shares of Class A Common Stock in this transaction which was accounted for as a purchase. Subsequently, FAIC was liquidated. To streamline its corporate structure, Citizens and American Liberty Financial Corporation ("ALFC"), a wholly-owned subsidiary holding company, entered into a merger agreement dated November 22, 1996 for the merger of ALFC into Citizens. No shares of Citizens were issued in the merger which became effective in January 1997. Also on November 22, 1996, CICA and American Liberty Life Insurance Company ("ALLIC"), a subsidiary of ALFC, entered into a merger agreement for the merger of ALLIC into CICA. These agreements closed in June, 1997. Pursuant to a Stock Purchase Agreement, Citizens purchased from Jansen Enterprises, Inc., a Texas corporation, 100% of the issued and outstanding shares of National Security Life and Accident Insurance Company (NSLIC) for $1,700,000, consisting of $1,000,000 cash and restricted shares of Citizen's Class A Common Stock valued at $700,000 in a transaction that closed on November 20, 1997. NSLIC is a Texas-domiciled life and accident and health insurer with assets of approximately $5 million and revenues of approximately $5 million. On September 10, 1998, Citizens entered into an agreement with First Investors Group, Inc. (Investors) of Springfield, Illinois to acquire 100% of the outstanding preferred and common shares of Investors for shares of Citizens' Class A Common stock. Investors is the parent of Excalibur Insurance Corporation, also of Springfield, Illinois. Pursuant to the agreement which closed on January 26, 1999, Citizens issued approximately 610,000 shares to holders of Investors preferred and common stock. Certain statements contained in this Annual Report on Form 10-K 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 3 4 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 of 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. (b) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS Citizens, through CICA, USLIC, NSLIC and CILIC, operates principally in two business segments, that of selling selected lines of individual life and accident and health ("A&H") insurance policies in domestic and international markets. Except for certain insignificant operations, Citizens has no present intention to engage in any non-insurance related business. The following tables set forth certain statistical information concerning the operations of the Company for each of the five years ended December 31, 1998 The information is presented in accordance with generally accepted accounting principles. 4 5 TABLE I The following table sets forth (i) life insurance in-force and (ii) mean life insurance in-force.
IN-FORCE MEAN LIFE BEGINNING IN-FORCE INSURANCE OF YEAR END OF YEAR IN-FORCE (a) (b) (a) (b) (a) (b) ------------------ ------------------ ------------------- 1998 $ 2,250,197 $ 2,340,744 $ 2,295,471 1997 2,231,017 2,250,197 2,240,607 1996 2,151,955 2,231,017 2,191,486 1995 2,144,709 2,151,955 2,148,332 1994 2,030,615 2,144,709 2,087,662
- --------------------------------- (a) In thousands (000s) (b) Before ceding reinsurance to reinsurers. The increases in insurance in-force as shown above reflect the volumes of new business written by the Company over the past five years. Approximately $40,243,000 of the 1995 increase relates to the acquisition of ALLIC in 1995, while $96,803,000 of the 1997 increases resulted from the acquisitions of USLIC and NSLIC. TABLE II The following table sets forth (i) the ratio of lapses and surrenders to mean life insurance in-force and (ii) life reinsurance ceded.
RATIO OF REINSURANCE CEDED LAPSES AND ------------------------------------------------ SURRENDERS AMOUNT REINSURANCE LAPSES AND TO MEAN OF PREMIUM SURRENDERS (a) IN-FORCE REINSURANCE (a) CEDED (b) --------------------- ----------------- ----------------------- ------------------- 1998 $ 100,906 4.4% $ 306,070 $ 3,368,690 1997 95,684 4.3 318,630 1,952,316 1996 101,860 4.6 296,378 2,511,318 1995 87,273 4.1 290,677 2,241,111 1994 84,390 4.0 285,104 2,309,672
- --------------------------------- (a) In thousands (000s) (b) Approximately 95% of the reinsurance is yearly renewable term insurance, with the remainder being coinsurance. Premiums reflect both life and accident and health business. The increased lapsation during 1996 reflects the inclusion of the ALLIC insurance business. The increase in ceded premium in 1998 is due to the cession of a substantial portion of the major medical accident and health business of NSLIC. 5 6 TABLE III The following table sets forth information with respect to total insurance premiums.
ORDINARY ANNUITY & ACCIDENT LIFE (a) UNIVERSAL LIFE GROUP LIFE & HEALTH (a) TOTAL -------- -------------- ---------- ------------ ----- 1998 $ 48,801,081 $ 263,994 $ 231,410 $9,857,844 $ 59,154,329 1997 49,412,066 366,135 284,632 5,299,783 55,362,616 1996 49,563,720 389,084 309,953 4,040,688 54,303,445 1995 45,120,631 119,335 306,256 698,206 46,244,428 1994 42,984,741 75,564 541,370 259,250 43,860,925
- --------------------- (a) After deduction for reinsurance ceded. Premium income has grown substantially due to the volume of new business written each year, as well as the acquisitions. However, new sales of life insurance decreased in 1995, and remained at similar levels in 1996 and 1997; therefore, the overall increase since 1995 is less than for previous years. The acquisition of ALLIC mitigated the total decline in new life insurance sales, although only three months of ALLIC's premiums are reflected in the above table for 1995. Much of the 1998 increase relates to the acquisition of USLIC and NSLIC. TABLE IV The following table sets forth information relating to the ratio of underwriting and other expenses to insurance revenues.
COMMISSIONS, UNDERWRITING AND OPERATING EXPENSES, POLICY RESERVE INCREASES, COMMISSIONS, UNDERWRITING POLICYHOLDER BENEFITS AND AND OPERATING EXPENSES DIVIDENDS TO POLICYHOLDERS ------------------------------ ------------------------------- RATIO TO RATIO TO INSURANCE INSURANCE INSURANCE PREMIUMS (a) AMOUNT PREMIUMS AMOUNT PREMIUMS ------------ ------ -------- ------ -------- 1998 $ 59,154,329 $ 23,580,491 39.8% $ 66,914,063 131.2% 1997 55,362,616 18,910,594 34.2 58,865,744 106.3 1996 54,303,445 21,948,637 40.4 59,113,575 108.9 1995 46,244,428 17,375,574 37.6 50,767,435 109.8 1994 43,860,925 17,461,910 39.8 48,763,076 111.2
- ------------------------- (a) After premiums ceded to reinsurers. Prior to 1996, the ratios of expenses to premiums had declined each year since 1989. These declines are the result of three factors: 1) underwriting and operating expenses have generally not increased at the same rate as premium income due to the Company's efficient method of operation; 2) sales commissions as a percentage of total premium income are declining annually as the business enters renewal stages and commissions are paid at a lower rate than the first year; and 3) the amount of new insurance written annually represents a smaller percentage of the Company's total premium income. However, in 1996, with the addition of ALLIC and the 6 7 considerable expense associated with its marketing operation start-up, the ratio reached its highest level since 1993. Following the merger of ALLIC in 1997, significant reductions in operating expenses were realized. The 1997 acquisitions and their related conversion expenses as well as increases in accident and health benefits were the primary reasons for the 1998 increase. TABLE V The following table sets forth changes in new life insurance business produced between participating and nonparticipating policies.
PARTICIPATING NONPARTICIPATING TOTAL NEW --------------------------- --------------------------- BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT ------------ ---------- ------- ---------- ------- 1998 $ 311,331 $ 222,496 71.4% $ 88,835 28.6% 1997 286,698 245,547 85.6 41,151 14.4 1996 337,051 294,408 87.3 42,643 12.7 1995 296,811 271,108 91.3 25,703 8.7 1994 380,281 352,542 92.7 27,739 7.3
- ----------------------------- (a) In thousands (000s) The percentage of the new business produced that was participating prior to 1995 increased steadily due to the fact that the Ultra Expansion products were all participating and represented the majority of new business throughout the mid 1990's. The decline in new business during 1995 was caused in part by disruptions in the international market. The decrease in non-participating business in 1997 results from sales by USLIC and NSLIC, which sell only non-participating policies. The significant change in 1998 is due to the volume of credit life business produced by NSLIC that is non-participating. See Management's Discussion and Analysis. TABLE VI The following table sets forth changes in new business issued according to policy types.
WHOLE LIFE AND ENDOWMENT TERM CREDIT TOTAL NEW ----------------------- ---------------------- ---------------------- BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT AMOUNT (a) PERCENT ------------ ---------- ------- ---------- ------- ---------- ------- 1998 $ 311,331 $ 224,918 72.2% $ 51,531 16.6% $34,882 11.2% 1997 286,698 245,637 85.7 41,062 14.3 0 - 1996 337,051 296,985 88.1 40,066 11.9 0 - 1995 296,811 270,963 91.3 25,848 8.7 0 - 1994 380,281 352,357 92.7 27,924 7.3 0 -
- ----------------------------- (a) In thousands (000s) This table illustrates that most of the new business written prior to 1997 is whole life. The 1995 results reflect a decrease in new life business during the year, as does 1997. Most of the 1998 increase is due to the credit life business sold by NSLIC. 7 8 TABLE VII The following table sets forth deferred policy acquisition costs capitalized and amortized compared to new business issued.
DEFERRED POLICY TOTAL NEW ACQUISITION COSTS BUSINESS ----------------------------------------- ISSUED CAPITALIZED AMORTIZED ---------------- --------------- --------------- 1998 $ 311,331,000 $ 7,941,829 $ 7,789,513 1997 286,698,000 9,804,022 9,630,705 1996 337,051,000 10,531,222 10,221,917 1995 296,811,000 10,579,704 8,511,876 1994 380,281,000 13,128,049 7,203,593
In 1994, the rate of capitalization was affected by an adjustment due to the lower interest environment. The amortization of these costs has grown as the aggregate deferred acquisition cost asset has increased. In 1996, this amortization increased due to the increase in surrender activity. The decrease in costs capitalized for 1995 and 1997 reflects the reduction in the amount of new business produced and lower commission expenses incurred as a result thereof. In 1996, new business increased; however, the increase in capitalized costs was not as high due to changes in the commission structure of the Company. The decrease in the 1998 figures is a result of the shift in the business mixture to more A&H as well as lower new production in life business compared to previous years. TABLE VIII The following table sets forth investment results.
RATIO OF NET INVESTMENT INCOME MEAN AMOUNT OF NET INVESTMENT TO MEAN AMOUNT INVESTED ASSETS (a) INCOME (b) OF INVESTED ASSETS (a) ------------------- ---------- ---------------------- 1998 $ 169,461,908 $ 11,279,125 6.7% 1997 150,481,414 10,038,736 6.7 1996 134,167,938 9,185,506 6.8 1995 111,926,695 7,026,909 6.3 1994 90,419,823 5,295,784 5.9
- --------------------- (a) The year 1996 includes assets acquired from CILIC on March 12, 1996. The year 1997 includes assets acquired from NSLIC and USLIC. The year 1995 includes assets acquired from ALLIC on September 14, 1995. (b) Does not include realized and unrealized gains and losses on investments. Available yields began to increase in mid-1994 and the Company was able to obtain a slight growth in the return on invested assets. This growth continued throughout most of 1995, and continued through 1996. The Company hired an investment advisor in 1995, and this action contributed to the increased yield in 1996. Significant decreases in yields in the bond market caused the return on invested assets to drop slightly in 1997 and continued throughout 1998. 8 9 (c) NARRATIVE DESCRIPTION OF BUSINESS (i) BUSINESS OF CITIZENS Citizens' principal business is ownership of CICA and NSLIC and their affiliates. Additionally, it provides management services to these companies under management services agreements. At December 31, 1998, Citizens had approximately 85 full and part-time employees. (ii)BUSINESS OF CICA Historically, CICA's revenues have been derived from insurance premiums and revenues from investments. CICA is a Colorado-domiciled life insurance company marketing primarily ordinary whole-life products on an international basis through marketing companies. Additionally, it offers specialty life and individual accident and health policies to United States residents. During the fiscal year ended December 31, 1998, 93.2% of CICA's premium income was attributable to life, endowment and term insurance, 0.4% to individual annuities, and 6.4% to accident and health insurance. During the fiscal year ended December 31, 1997, 92.5% of CICA's premium income was attributable to life, endowment and term insurance; 0.5% to individual annuities; and 7.1% to accident and health insurance. Of the life policies in force at December 31, 1998 and 1997, 39.6% and 34.4%, were nonparticipating and 60.4% and 65.6%, respectively were participating. The change in participating policies as a percentage of total results from the ALLIC merger in 1997. From 1987 to 1997, CICA offered its Ultra Expansion products, a series of participating whole life policies targeted for international markets. All of the Ultra products were participating with dividends ranging from 2% of the premium in the first year to 123% in the 20th year. Beginning January 1, 1998, CICA introduced its Millennia 2000 series of policies as a replacement for the Ultra Expansion plans. The ten plans that make up the Millennia Series are, like the Ultra Expansion plans, designed for the international market and maintain many of the features of the Ultra series, with several new enhancements. These enhancements include terminal illness protection as well as dismemberment provisions. Additionally, following the merger with ALLIC, CICA began offering specialty individual accident and health products as well as ordinary whole life policies to residents of the United States. The sale of these products is focused in Oklahoma, Louisiana and Mississippi. The CICA underwriting policy requires a medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance. Generally, the maximum amount of ordinary life insurance issued domestically 9 10 without a medical examination is $200,000 for ages 0 through 35; $100,000 for ages 36 through 45; $50,000 for ages 46 through 50; $15,000 for ages 51 through 55; and $10,000 for ages 56 and over. Limits for insuring non-United States applicants without a medical examination are: $150,000 for ages 0 through 39; $50,000 for ages 40 through 65; and all amounts over age 65. The accident and health policies sold in the U.S. have only minimal, field underwriting. On life policies, CICA's maximum coverage on any one life is not limited by company policy. However, CICA reinsures the amount of coverage which is in excess of its retention policy. See "Business of CICA - Reinsurance." CICA does not accept substandard risks above Table 6 (generally policyholders who cannot qualify for standard ordinary insurance because of past medical history) in exchange for which CICA would charge higher premiums. CICA has $24.5 million of insurance in-force on individuals that are classified as substandard risks, the majority of such business having been acquired in the purchase of other companies. Management believes the exposure to loss as a result of insuring these individuals is minimal, since the premiums are increased to cover the nature of the risk, additional reserves are established, and the amount of insurance represents less than 1.0% of the total insurance in-force. GEOGRAPHICAL DISTRIBUTION OF BUSINESS For the year ended December 31, 1998, insurance policies held by residents of Oklahoma accounted for 5.5% of CICA's total premium income from direct business, policies held by residents of the Texas accounted for 3.2% of premium income from direct business, policies held by residents of Louisiana accounted for 1.2% of premium income from direct business for the same period. All other states of the United States totaled 6.3% of the premium income from direct business with no single state, except as set forth above, accounting for as much as 1% of premium income. Business on foreign residents accounted for 83.3% of premium revenue in 1998. For the year ended December 31, 1997, residents of Oklahoma accounted for 6.2% of CICA's total premium income, residents of Texas accounted for 2.7%, Louisiana, 1.5% and Colorado, 1%. No other state in the U.S. amounted to 1% of total premium income during the period. Business on foreign citizens represented 82.9% of 1997 premium income. For the year ended December 31, 1996, residents of Oklahoma accounted for 7.0% of CICA's total premium income, residents of Texas accounted for 3.0%, Mississippi, 2.3%, Louisiana, 1.6% and Georgia, 1.1%. No other state in the U.S. amounted to 1% of total premium income during the period. Business on foreign citizens represented 81.0% of 1996 premium income. The increase in domestic business as a percentage of total premium income in 1997 results from the above-described merger of ALLIC into CICA during the year. The participating whole life policies accepted by CICA on high net worth residents of foreign countries have an average face amount of approximately 10 11 $70,000 and are marketed primarily to the top 5% of the population in terms of household income. CICA accepts applications for international insurance policies marketed by several independent international firms with whom CICA has nonexclusive consulting contracts. These firms market life insurance products to citizens of foreign countries. Such life products are specially designed by CICA to be compatible with marketing methods and commission requirements. The international firms have many years' experience marketing life insurance products for CICA. The contract with the consultants provides that they have the responsibility for recruiting and training salesmen. They are responsible for all of their overhead costs and bear the expense of awards. These firms guarantee any debits of marketers and their associates. In consideration for the services rendered, the marketing consultants receive a fee on all new policies placed by them or their associates. See "Business of CICA Commissions." The marketing contracts may be terminated for various causes, at any time by mutual consent of the parties or upon 30 days' notice by either party. These firms provide recruitment, training and supervision of their managers and associates in the placement of dollar-denominated life insurance products; however, all consultants and associates contract directly with CICA and receive their compensation from CICA. Accordingly, should the consulting arrangement between any firm and CICA be canceled for any reason, CICA believes it could continue suitable marketing arrangements with the individuals of the consulting firms without appreciable loss of present and future sales, as it has done in the past. There is, however, always a risk that sales could decrease. At present, CICA is dependent on the non-U.S. markets for a large percentage of its new life insurance business. This subjects CICA to potential risks with regard to the continued ability to write such business should adverse events occur in the countries from which CICA receives applications. These potential risks include lapses of policies if funds that flow out of such countries were to become restricted. Based on more than 30 years experience in the marketplace in which CICA competes, management believes such risks are not material. CICA maintains no assets outside the U.S. and requires all premiums to be paid in the U.S. with U.S. dollars via drafts drawn on banks in the U.S.; therefore, it could lose no funds from currency devaluation or foreign appropriation. Many of the inherent risks in foreign countries, such as political instability, hyper-inflation and economic disruptions tend to improve rather than hurt CICA's business because it encourages individuals to convert assets out of local currencies to the more stable U.S. dollar. 11 12 MARKETING OPERATIONS CICA holds licenses to do business in 15 states and accepts applications from numerous foreign countries. Additionally, CICA has applications for admission pending in two states. CICA's operations are conducted on the independent contractor basis, with a sales force at December 31, 1998 of 615 individuals, 777 individuals at December 31, 1997 and 1,319 individuals at December 31, 1996. The decrease in marketing consultants in 1997 reflects the termination of all individuals who had not produced in the last twelve months, a practice that had not been enforced in several years. The further decline in 1998 reflects the loss of former ALLIC sales representatives described below. COMMISSIONS CICA's marketing managers are independent contractors, responsible for their respective expenses, and are compensated on a percentage of premium basis. Percentage amounts paid to salesmen on individual term, annuity and accident and health insurance are substantially less than the levels paid for individual ordinary life insurance. The marketing managers receive overriding first year and renewal commissions on business written by individuals under their supervision and all marketing expenses related thereto are included in the above percentages. RESERVES CICA establishes actuarial reserves as liabilities to meet obligations on all outstanding policies. Reserves and deferred acquisition costs are prepared in conformity with the American Academy of Actuaries Committee on Financial Reporting Principles and generally accepted accounting principles. In determining such reserves CICA used the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and Ultimate Mortality Tables with interest rates at 4% or in a range graded from 9% to 5% with recent issues reserved at 7% graded to 6 1/2%. Withdrawal assumptions are based primarily on actual historical experience. Statutory reserves are used for paid-up life business. Claims reserves include an amount equal to the expected benefit to be paid on reported claims in addition to an estimate of claims that are incurred but not reported, based on actual historical experience. CICA receives an independent actuarial certification of its reserves prepared in accordance with both Generally Accepted Accounting Principles and Statutory Accounting Principles. The certifications have noted no deficiencies for the years presented herein. ` REINSURANCE CICA assumes and cedes insurance with other insurers, reinsurers and members of various reinsurance pools. Reinsurance arrangements are utilized to provide greater diversification of risk and minimize exposure on larger risks. 12 13 (a) INSURANCE CEDED CICA generally retains $75,000 of risk on any one person. As of December 31, 1998, the aggregate amount of life insurance ceded amounted to $278,277,000 or 9.7% of total direct and assumed life insurance in force, and $281,400,000 or 13.1% in 1997. CICA is contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations reinsured. As of December 31, 1998, CICA had in effect automatic reinsurance agreements that provide for cessions of ordinary insurance from CICA. Additionally, CICA has reinsurance treaties in force with several reinsurers of life and accident and health insurance. These treaties provide for both automatic and facultative reinsurance of standard and substandard risks ceded to them by CICA for life, accident and health and supplemental benefits above CICA's retention limit on a yearly renewable term, coinsurance or modified coinsurance basis. Treaties with Employers Reassurance (ERC) and Businessmen's Assurance ("BMA") historically have been the primary vehicles utilized by CICA for its international business. The treaties are structured in such a way as to allow CICA to "self administer" the cessions on a reduced cost basis. During 1995, a third carrier was added as a principal reinsurer, Riunione Adriatica di Sicurta, of Italy (RAS). The ERC and BMA agreements provide that for risks reinsured in specified countries, 70% of each risk in excess of CICA's retention will be ceded to ERC and 30% to BMA. The RAS agreement provides that on risks reinsured in specified countries, 100% of the risk in excess of CICA's retention will be ceded to RAS. CICA pays premiums to ERC, BMA and RAS on an annual basis and is responsible for the production of the reporting monthly and annually to ERC, BMA and RAS to allow proper accounting for the treaties. The cessions are on a yearly renewable term basis and are automatic up to $333,333 for ERC, $500,000 for RAS and $166,667 for BMA at which point the reinsurance is subject to a facultative review by the reinsurers. At December 31, 1998, CICA had ceded $168,365,000 in face amount of insurance to ERC, $26,178,000 to BMA and $75,343,000 to RAS under these agreements. RAS is an unauthorized reinsurer in the state of Colorado; however, RAS has agreed to comply with Colorado statutes regarding such companies. Under these statutes, RAS will provide a letter of credit, issued by a U.S. bank meeting the Colorado requirements, equal to any liabilities it incurs under this agreement. A reinsurance treaty with Connecticut General Life Insurance Company (CG) covers all of CICA's accidental death insurance supplementing its life insurance policies. These cessions are on a yearly renewable term basis and occur automatically if total accidental death benefits known to CICA are less than $250,000 or otherwise on a facultative review basis. At December 31, 1998, 13 14 CICA had ceded $1,273,000,000 in face amount of business to CG under this treaty. CICA monitors the solvency of its reinsurers to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers of CICA are large, well capitalized entities which have no current or prior history of financial difficulty. (b) INSURANCE ASSUMED. At December 31, 1998, CICA had in-force reinsurance assumed as follows:
TYPE OF AMOUNT BUSINESS IN-FORCE AT NAME OF COMPANY LOCATION ASSUMED END OF YEAR --------------- -------- ------- ----------- Prudential Insurance Newark, Ordinary Company (Prudential) New Jersey Group Life $333,719,000
The reinsurance agreement with Prudential provides for CICA to assume a portion of the insurance under a group insurance policy issued by Prudential to the Administrator of Veterans' Affairs. CICA's portion of the total insurance under the policy is allocated to CICA in accordance with the criteria established by the Administrator. The agreement continues in full force and effect at December 31, 1998. CICA has also entered into a Serviceman's Group Life Insurance Conversion Pool Agreement with Prudential, under the above described agreement, whereby CICA assumed a portion of the risk of Prudential under the group policy due to excess mortality under the conversion pool agreement resulting from issuing conversion policies as prescribed for membership in the conversion pool. 14 15 INVESTMENTS State insurance statutes prescribe the quality and percentage of the various types of investments which may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, real estate and mortgage loans by certain specified percentages. CICA's invested assets at December 31, 1998 were distributed as follows: fixed maturities - 86.3%, equity securities - 0%, mortgage loans - 0.9%, policy loans - 12.7%, government insured student loans - 0%, short-term investments - 0% and other long-term investments - 0.1% (see Note 2 of the "Notes to Consolidated Financial Statements"). CICA did not foreclose on any mortgage loans in 1998. All mortgage loans are supported by independently appraised real estate. The investment policy of CICA with regard to mortgage loans is consistent with the provisions of the Colorado Insurance Code. At December 31, 1998, 85.1% of CICA's investments in fixed maturities were comprised of U.S. Treasury securities and obligations of U.S. government corporations and agencies, including U.S. government guaranteed mortgage-backed securities, compared to 85.7% at December 31, 1997. Of these mortgage-backed securities, all were guaranteed by U.S. government agencies or corporations that are backed by the full faith and credit of the U.S. government or that bear the implied full faith and credit of the U.S. government. REGULATION CICA is subject to regulation and supervision by the insurance department of each state or other jurisdiction in which it is licensed to do business. These departments have broad administrative powers relating to the granting and revocation of licenses to transact business, the licensing of marketing persons, the approval of policy forms, the advertising and solicitation of insurance, the form and content of mandatory financial statements, the reserve requirements, and the type of investments which may be made. CICA is required to file detailed annual reports with each such insurance department, and its books and records are subject to examination at any time. In accordance with state laws and the rules and practices of the National Association of Insurance Commissioners, CICA is examined periodically by examiners of its domiciliary state and by representatives (on an "association" or "zone" basis) of the other states in which it is licensed to do business. An examination began in late 1997 and concluded in 1998 for the five years ended December 31, 1996, by a public accounting firm under contract with and supervision by the Colorado Division of Insurance. CICA is audited annually by an independent public accounting firm. Various states, including Colorado, have enacted "Insurance Holding Company" legislation which requires the registration and periodic reporting by insurance 15 16 companies which control, or are controlled by, other corporations or persons. Under most of such legislation, control is presumed to exist with the ownership of 10% or more of an insurance company's voting securities. CICA is subject to such regulation and has registered under such statutes as a member of an "insurance holding company system." The legislation typically requires periodic disclosure concerning the transactions between the registered insurer, the ultimate controlling party, and all affiliates and subsidiaries of the ultimate controlling party, and in many instances requires prior approval of intercorporate transfers of assets (including in some instances payment of dividends by the insurance subsidiary) within the holding company system. Since CICA does not physically conduct business in countries outside the U.S. but rather accepts applications from overseas marketers, it is not subject to regulation in countries where most of its insureds are residents. The prospect of such regulation is viewed as remote by management of CICA because obtaining insurance through application by mail outside of one's country is a common practice in many foreign countries, particularly those where CICA's insureds reside. COMPETITION The life insurance business is highly competitive, and CICA competes with a large number of stock and mutual companies. CICA believes that its premium rates and its policies are generally competitive with those of other life insurance companies, many of which are larger than CICA, selling similar types of insurance. CICA's marketing plan stresses making available dollar-denominated life insurance products available to high net worth individuals residing in foreign countries and the sale of individual, whole life and supplemental accident and health products to United States residents. A large percentage of CICA's first year and renewal life insurance premium income during 1997 and 1998 came from the international market. See "Business of CICA - Geographical Distribution of Business." Management believes CICA to be a significant competitor in the international market and attributes its success in penetrating that market to the expertise of management, the uniqueness of its life insurance products and competitiveness of its pricing methods. CICA faces offshore competition from numerous American life insurance companies that also sell U.S. dollar denominated policies to non-U.S. citizens, with no one company being dominant in the market. Some companies may be deemed to have a competitive advantage due to histories of successful operations and large agency forces. Management believes that its experience, combined with the special features of its unique policies, allows CICA to compete effectively in pursuing new business. 16 17 Management believes that CICA competes indirectly with non-U.S. companies, particularly with respect to Latin American companies. CICA, as a U.S. domestic insurer paying claims in U.S. dollars in the U.S., has a different clientele and product than foreign-domiciled companies. CICA's product is usually acquired by persons in the top 5% of income of their respective countries. The policies sold by foreign companies are sold broadly and are priced based on the mortality of the entire populace of the respective geographic region. Because of the predominance of lower incomes in most of these countries, the mortality experience tends to be very high on the average, causing mortality charges which are considered unreasonable based on the life mortality experience of the upper five percent of income of the population. Additionally, the assets that back up the policies issued by foreign companies are invested in the respective countries, and thus, are exposed to the inflationary risks and economic crises that historically have impacted many foreign countries. Another reason that CICA experiences an advantage is that many of its policyholders desire to transfer capital out of their countries due to the perceived financial strength and security of the United States by foreigners. Also, CICA competes indirectly with other U.S. and European insurers in countries where CICA's insureds reside. CICA's experience has been that its market niche is in attracting insureds who want the safety and security of a U.S. domestic insurer. Management of CICA considers it to be difficult and speculative to estimate the potential of the foreign market for U.S. insurers. However, based upon the volume of new premium generated by CICA that originates from many countries in Latin America, management believes that CICA receives a substantial share of such business. However, CICA does not have market share data to confirm management's belief. In CICA's block of accident and health insurance (6.5% of total premium income), it is in competition with many insurance companies as well as with voluntary and government-sponsored plans for meeting hospitalization and medical expenses such as Blue Cross/Blue Shield, "Medicare" and "Medicaid." Future expansion of such programs or the establishment of additional government health programs could adversely affect the future of accident and health insurance on CICA's books, most of which has been acquired in the acquisition of other companies. FEDERAL INCOME TAXATION CICA is a "small company" as that term is defined in the Internal Revenue Code (the "Code"), section 806. As such, CICA qualified for a special small company deduction (presently equal to 60% of "tentative life insurance company taxable income") which serves to decrease significantly the amount of tax which might otherwise have to be paid. 17 18 The Omnibus Reconciliation Act of 1993 (the "1993 Act") was signed into law on August 10, 1993. Among its provisions was an increase to corporate tax rates to 35% on taxable income between $10,000,000 and $15,000,000 and to 38% on taxable income between $15,000,000 and $18,300,000. This legislation had no material impact on the financial position of the Company. The Revenue Reconciliation Act of 1990 revised the method in which insurance companies claim deductions for policy acquisition costs. Previously, insurance companies were allowed to deduct actual policy acquisition costs as they were incurred. Beginning in 1990, policy acquisition costs are determined as a percentage of annual net premiums and are then deductible on a straight-line basis over a ten-year period rather than treated as an immediate deduction. This change in treatment for acquisition costs has had a significant impact on CICA's taxable income due to the relatively large amounts of such deferrals caused by the increases in new business. CICA files a consolidated Federal income tax return with Citizens and its subsidiaries. (iii) BUSINESS OF CTI CTI is a wholly-owned subsidiary of CICA and engages in the business of providing data processing services and acquisition and leasing of furniture and equipment for its parent as well as data processing services and software to other companies. Pursuant to an Information Systems Management and Services Contract dated October 1, 1991, CTI provides data processing services to the Company for a fixed fee of $53,000 per month. In August, 1997, this fee was increased to $85,000 per month to reflect the growth in the Company's business. As of and for the year ended December 31, 1998, CTI's total assets were $933,000 and revenues were $1,057,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements. (iv) BUSINESS OF III In August, 1993, Citizens sold the stock of III to CICA for its book value. CICA subsequently contributed debit balances receivable of approximately $169,000 to III. III collected such receivables and, as additional consideration, received an airplane which it operates for Citizens and CICA. As of and for the year ended December 31, 1998, III's total assets were $1,250,000 and revenues were $770,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements. (v) BUSINESS OF USLIC USLIC is a Mississippi-domiciled life and accident and health insurer offering whole life products and specialty accident and health products to residents of the 18 19 Southeastern United States. USLIC is licensed in the states of Alabama, Arizona, Arkansas, Georgia, Indiana, Louisiana, Mississippi, New Mexico, Oklahoma, Tennessee and Texas. As of December 31, 1998, USLIC had $34,243,000 of life insurance in force, of which $21,319,000 was reinsured and $12,924,000 retained. The maximum retention by USLIC on any one life for life insurance policies is $20,000. All of the accidental death benefit coverage is reinsured. USLIC historically offered customary forms of life insurance, including non-participating whole life, decreasing term, level term policies, supplementary health policies and a participating whole life policy. Its leading life policy in the past has been the "Lifetime Accumulator," a participating whole life insurance policy. This policy differs from the usual offering of life insurance in that the premium is uniform but the amount of insurance varies by the age of the proposed insured. The product was sold, therefore, in premium units rather than in face amount units. While this policy was written only on persons at ages 0 - 40, other life insurance products were offered at ages 0 - 70. Since 1994, USLIC has developed several new supplementary health insurance products, i.e., cancer, hospital indemnity, mental illness, outpatient sickness, catastrophic illness, emergency accident, intensive care and disability income and Medicare supplement. Premiums are employer paid or paid through payroll deduction. USLIC can issue life insurance on a rated premium substandard basis up through Table 16 (400% extra mortality), but in so doing it will reinsure all of the risk. USLIC only issues through Table 4 (100% extra mortality) on its Lifetime Accumulator policy to improve the mortality and potential profitability on that product line. The substandard risks are those that by reason of health, occupation or avocation fall outside the normal anticipated mortality levels of the general population as developed by the actuarial sciences. It reinsures all of its accidental death risk. USLIC also has a reinsurance agreement on its cancer policy which limits its claim risk to $25,000 in any calendar year on any one claim. It also reinsures various amounts on several other health products. USLIC's selling efforts are not usually concentrated on any one economic, occupational, hazard or age group. The marketing territory is Alabama, Arkansas, Louisiana, Mississippi, Oklahoma, Tennessee and Texas. USLIC's products are generally competitive with those of other insurers in those states. USLIC's policies are being sold by direct licensed representatives and licensed general agents. None of these agents has underwriting authority. The commissions paid are believed by management to be competitive with commissions paid by other life insurance companies in the states in which USLIC is licensed to operate. USLIC is aware that there is considerable competition for obtaining qualified agents and that it will be competing with well-established life insurance companies for agents to sell its policies. USLIC will also recruit agents 19 20 from among persons who are not now engaged in the selling of life and accident and health insurance, and USLIC expects to train such agents. USLIC presently has approximately 300 licensed agents. The agents recruited and licensed by USLIC hold licenses with other companies and possibly could sell other companies' policies that are similar in some respects to USLIC's policies. This arrangement is quite common with companies that recruit and license general agents. Through 1993, USLIC had written primarily the Lifetime Accumulator, which accounted for approximately 98% of premium income. From late 1993 through 1996, USLIC shifted its marketing thrust to non-participating ordinary life products and supplementary accident and health and group dental products. In 1997 and 1998, virtually all sales were supplemental accident and health or group dental products. For 1998, 12.5% of premium income was from life policies and 87.5% was from accident and health policies, and in 1997, 22.8% of premium income was from life products, and 77.2% from accident and health. INVESTMENTS USLIC invests and reinvests certain of its reserves and other funds. The investments of USLIC are limited as to type and amount by the Mississippi insurance laws which are designed to insure prudent investment policies. The investment of capital, paid-in and operating surplus and other funds of insurers organized under the laws of the State of Mississippi is specified by the Mississippi Insurance Code. This statute includes general and specific limitations on investments, records of investments and other matters. The Mississippi insurance law regulating investments and other aspects of the management of insurance companies is designed primarily for the protection of policyholders rather than investors. The administration of USLIC's investment portfolio is handled by the same outside investment manager as CICA's, with all trades approved by a committee of the Board of Directors. The guidelines used require that bonds, both government and corporate, are of high quality and comprise a majority of the investment portfolio. The assets selected are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for USLIC to meet its policyholder obligations. The type, quality and mix will enable USLIC to compete in the life insurance marketplace and to provide appropriate interest margins. USLIC has classified all its investments as securities available-for-sale which are carried at fair value. 20 21 REINSURANCE As is customary among insurance companies, USLIC will reinsure with other companies' portions of the life insurance risks it will underwrite. The primary purpose of reinsurance agreements is to enable the company to reduce the amount of its risk on any particular policy and, by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain, to write policies in amounts larger than it could without such agreements. Even though a portion of the risk may be reinsured, USLIC will remain liable to perform all obligations imposed by the policies issued by it and is liable if its reinsurer should be unable to meet its obligation under the reinsurance agreements. USLIC's general policy is to reinsure business with insurance companies with an A.M. Best and Company rating of "A" or better. USLIC's life reinsurance is being ceded through automatic and facultative treaties with two unaffiliated insurance companies, Businessmen's Assurance Company, Kansas City, Missouri, and Optimum Re Insurance Company, Dallas, Texas. At December 31, 1998, USLIC had ceded to BMA, $9,992,000 in face amount, and $11,327,000 to Optimum Re. It is the practice of USLIC to reinsure all accidental death benefit risks that are written. USLIC has a reinsurance agreement with Reliastar Financial Corporation, Minneapolis, Minnesota, providing coverage of claims in excess of various amounts on several of USLIC's accident and health policies. Approximately $336,000 in premiums were ceded under this treaty in 1998. RESERVES USLIC has set up actuarially computed reserves as liabilities to meet the obligations on the policies it writes. These reserves are the amounts which, with additions from premiums to be received and with interest in such reserves, compounded annually at certain assumed rates, are calculated to be sufficient according to accepted actuarial principles to meet policy obligations as they mature. The various actuarial factors are determined from mortality tables and interest rates in effect when the policies are issued. The reserves to be included in statutory filings will be valued on a basis that meets the requirements of law in Mississippi. USLIC receives an independent actuarial certification of its reserves prepared in accordance with both GAAP and statutory practices. REGULATION Mississippi insurance laws and regulations generally govern the accounting practices and prescribe the procedures and forms for financial reports of insurance companies prepared on a statutory accounting basis and filed with the Insurance Department. Reports prepared in accordance with the prescribed or permitted statutory accounting practices are primarily intended to insure the ability of an insurance company to meet its obligations to policyholders and do not necessarily reflect going concern value. Balance sheets prepared in accordance with statutory accounting practices are designed primarily to reflect the financial position of 21 22 insurance companies from the standpoint of solvency. Certain of the prescribed or permitted accounting practices differ in some respects from generally accepted accounting principles followed by other business enterprises in determining financial position and results of operations. The insurance laws of Mississippi also provide that a life insurance company will be assessed a lower premium tax if up to 25% of the life company's investments are in Mississippi securities. The management of USLIC has invested its assets in a manner to incur the lower tax rate. In common with other insurance companies operating in Mississippi, USLIC is subject to the regulation and supervision of the Mississippi Insurance Commissioner. After making application for admission and receiving proper license, USLIC may operate in other states and, at that time, will be subject to regulation and supervision in any other state where it may be permitted to transact business. Such regulation is primarily for the benefit and protection of insurance policyholders. Broad administrative powers are possessed by the Mississippi Department of Insurance and other supervising agencies. Although the powers differ from state to state, in general they include authority to grant and revoke licenses to transact business, to be an agent, to supervise premium rates, to approve the form of insurance contracts, to supervise the form of financial statements filed with such agency, to regulate capital requirements, to regulate insurable interest on one life and to require the filing of detailed annual reports. USLIC's business and accounts are subject to examination by the Mississippi Department of Insurance, which conducted an examination of the three years ended December 31, 1996 during 1997. Such regulation includes the filing of financial statements by USLIC, periodic reporting and examination by the insurance regulatory authorities, and review of transactions between members of the holding company group. At December 31, 1998, USLIC's capital and surplus, while above the minimum levels required by law, was below that required by several states to continue to write new business. Additionally, its Risk-Based Capital Ratio fell below 200%, the minimum action level. Immediately upon realization of this circumstance, management caused a $600,000 capital contribution to be made to USLIC to increase its capital and surplus to an amount greater than that required by every state in which it is licensed to do business. Additionally, USLIC has subsequently determined that the claim reserves used in its 1998 Annual Statement filed with regulatory authorities was approximately $250,000 overstated, and expects to file amended financial statements which will further strengthen USLIC's statutory position. (vi) BUSINESS OF FHA Formed in 1989, FHA, formerly Funeral Homes of Louisiana, owns and operates a funeral home in Baker, Louisiana. Constructed in 1992, the Baker Funeral 22 23 Home constitutes the primary business function of FHA. At December 31, 1998, FHL had total assets of $565,000 and total annual revenues of $349,000. (vii) BUSINESS OF CILIC CILIC is an Illinois domiciled life insurer admitted to do business in four states. Dormant for several years, the Company services a closed block of life insurance policies. At December 31, 1998, CILIC had assets of $3.1 million and annual revenues of $200,000. (viii) BUSINESS OF NSLIC NSLIC was acquired in November, 1997 by Citizens. Domiciled in Arlington, Texas, NSLIC's revenues have historically been derived from revenues generated by the sale of ordinary whole life insurance, individual supplemental and major medical health insurance and credit insurance and investment income. During the year ended December 31, 1998, 7.4% of premium revenue was attributable to life, endowment and term insurance; 18.1% to credit insurance; and 74.5% to accident and health insurance. All of the life insurance in force is non-participating. In recent years, NSLIC's sales efforts have centered on a major medical supplemental hospitalization policy and its credit business. The claims incurred on the accident and health policy to date are below the level anticipated in the development and pricing of the product. The credit business is sold primarily through a chain of furniture stores in Texas. As a result, the average contract size is relatively small, and the average duration is approximately three years. Beginning in 1998, sale of the major medical products was discontinued. During 1998, management discontinued selling the limited major medical products that NSLIC's prior management had begun to introduce in 1997. Management believes that the level of surplus and asset size of NSLIC are not sufficient to support the potential volatility that is inherent in such types of business. As such, NSLIC's marketing efforts are focused solely on the expansion of existing credit life and credit accident and health business. GEOGRAPHICAL DISTRIBUTION OF BUSINESS For the year ended December 31, 1998, 97.3% of NSLIC's total premium income was derived from residents of Texas and 2.6% from Louisiana residents. For 1997, 96.6% of total premium income was derived from residents of Texas; and 3.3% from Louisiana residents. MARKETING OPERATIONS NSLIC holds licenses to do business in three states - Texas, Oklahoma and Louisiana. NSLIC's operations are conducted through independent contractors, 23 24 with a sales force of 142 representatives at December 31, 1998 and 218 at December 31, 1997. RESERVES NSLIC establishes actuarial reserves as liabilities to meet obligations on all outstanding policies. Reserves and deferred acquisition costs are prepared in conformity with the American Academy of Actuaries Committee on Financial Reporting Principles and generally accepted accounting principles. Claims reserves include an amount equal to the expected benefit to be paid on reported claims in addition to an estimate of claims that are incurred but not reported, based on actual historical experience. NSLIC receives an independent actuarial certification of its reserves. The certifications have noted no deficiencies for the years presented herein. REINSURANCE NSLIC cedes insurance with other insurers, reinsurers and members of various reinsurance pools. Reinsurance arrangements are utilized to provide greater diversification of risk and minimize exposure on larger risks. (a) INSURANCE CEDED NSLIC generally retains $20,000 of risk on any one person. As of December 31, 1998, the aggregate amount of life insurance ceded amounted to $5,276,000 or 10.6% of total direct life insurance in force. Additionally, NSLIC ceded $1,169,000 of accident and health premium (approximately 32.9% of NSLIC's total A&H premium). NSLIC is contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations reinsured. As of December 31, 1998, NSLIC had in effect automatic reinsurance agreements that provide for cessions of ordinary insurance from NSLIC. Additionally, NSLIC has reinsurance treaties in force with several reinsurers of life and accident and health insurance. These treaties provide for both automatic and facultative reinsurance of standard and substandard risks ceded to them by NSLIC for life, accident and health and supplemental benefits above NSLIC's retention limit on a yearly renewable term basis. A treaty with Employers Reassurance (ERC) has historically been the primary vehicle utilized by NSLIC for its life business. A reinsurance treaty with Continental Assurance Company covers virtually all of NSLIC's accident and health business. NSLIC closely monitors the solvency of its reinsurers to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers are large, 24 25 well capitalized entities which have no current or prior history of financial difficulty. INVESTMENTS State insurance statutes prescribe the quality and percentage of the various types of investments which may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, real estate and mortgage loans by certain specified percentages. NSLIC's invested assets at December 31, 1998 were distributed as follows: fixed maturities - 99.8%, equity securities - 0%, mortgage loans - 0%, policy loans - 0.2%, short-term investments - 0%. REGULATION NSLIC is subject to regulation and supervision by the insurance department of each state or other jurisdiction in which it is licensed to do business. These departments have broad administrative powers relating to the granting and revocation of licenses to transact business, the licensing of marketing persons, the approval of policy forms, the advertising and solicitation of insurance, the form and content of mandatory financial statements, the reserve requirements, and the type of investments which may be made. NSLIC is required to file detailed annual reports with each such insurance department, and its books and records are subject to examination at any time. In accordance with state laws and the rules and practices of the National Association of Insurance Commissioners, NSLIC is examined periodically by examiners of its domiciliary state and by representatives (on an "association" or "zone" basis) of the other states in which it is licensed to do business. NSLIC's most recent examination which was completed during 1998, was for the three years ended December 31, 1997, by the Texas Department of Insurance. NSLIC is audited annually by an independent public accounting firm. Various states, including Texas, have enacted "Insurance Holding Company" legislation which requires the registration and periodic reporting by insurance companies which control, or are controlled by, other corporations or persons. Under most of such legislation, control is presumed to exist with the ownership of ten percent or more of an insurance company's voting securities. NSLIC is subject to such regulation and has registered under such statutes as a member of an "insurance holding company system." The legislation typically requires periodic disclosure concerning the transactions between the registered insurer, the ultimate controlling party, and all affiliates and subsidiaries of the ultimate controlling party, and in many instances requires prior approval of intercorporate transfers of assets (including in some instances payment of dividends by the insurance subsidiary) within the holding company system. 25 26 At December 31, 1998, NSLIC's capital was impaired by approximately $131,000. Additionally, its Risk-Based Capital Ratio fell below 200%, the minimum action level. Immediately upon realization of this circumstance, management caused a $500,000 capital contribution to be made to NSLIC to increase its capital and surplus to an amount greater than that required by every state in which it is licensed to do business. Additionally, NSLIC has subsequently determined that the claim reserves used in its 1998 Annual Statement filed with regulatory authorities was approximately $1,000,000 overstated, and expects to file amended financial statements which will further strengthen its statutory position. COMPETITION The life insurance business is highly competitive, and NSLIC competes with a large number of stock and mutual companies. NSLIC believes that its premium rates and its policies are generally competitive with those of other life insurance companies, many of which are larger than NSLIC, selling similar types of insurance. In NSLIC's block of accident and health insurance, it is in competition with many life insurance companies as well as with voluntary and government-sponsored plans for meeting hospitalization and medical expenses such as Blue Cross/Blue Shield, "Medicare" and "Medicaid." Future expansion of such programs or the establishment of additional government health programs could adversely affect the future of accident and health insurance on NSLIC's books. ITEM 2. DESCRIPTION OF PROPERTIES CICA owns its principal office in Austin, Texas, consisting of an 80,000 square foot office building. Approximately 33,000 square feet is occupied by CICA and its affiliates with the remainder of the building being leased. At December 31, 1998, the occupancy rate of the property was 100%. CICA also owned 1.10 acres of land with a 13,000 square foot office building which previously served as the Company's executive offices. The property, with a book value of $104,000, was sold for cash in 1998 for $850,000. During 1995, CICA acquired through foreclosure, a 7,500 square foot office property in Wheatridge, Colorado for $116,000. Subsequently, the Company renovated the property, bringing its investment to $230,000. The property was sold for $275,000 in 1998, with the Company retaining a $240,000 first lien. Through the acquisition of American Liberty Financial Corporation described above, the Company also owns a 6,324 square foot funeral home in Baker, 26 27 Louisiana with a total cost of $473,000. This facility is owned and operated by a subsidiary, FHA. AIN owned a 13,000 square foot building in a suburb of Jackson, Mississippi. In March, 1998, this building was sold for $537,000, a gain of approximately $50,000 with CICA making a $430,000 mortgage loan. ITEM 3. LEGAL PROCEEDINGS 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 believed that these rulings are significantly in error and filed a motion for appeal. On August 19, 1998, the Louisiana Second Circuit Court of Appeals vacated the class action certification by the trial court, and the case was remanded for further proceedings consistent with the decision of the Court of Appeals. 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 alleged 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 alleged 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. In October, all claims were settled for $75,000. In March 1999, the Company was served with a summons regarding an action entitled Berdeaux Living Trust v. First Investors Group, Inc., Donald L. Dennis, H. Marie Dennis, Winona Drewes and Citizens, Inc. in U.S. District Court, Southern District of Illinois. The complaint alleges that the defendants defrauded the plaintiffs and other persons who were preferred shareholders of First Investors Group, Inc. in connection with an acquisition of First Investors completed by the Company in early 1999. In the acquisition, the Company issued approximately 27 28 610,000 shares of its Class A Common Stock to shareholders of First Investors pursuant to a registration statement declared effective by the Securities and Exchange Commission in December 1998. The plaintiffs are seeking class action certification on behalf of the approximately 1,860 persons who where preferred shareholders of First Investors. Damages are alleged based upon alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and the Illinois securities laws as well as under Illinois common law fraud and against the defendants other than the Company, for breach of fiduciary duty. The Company is preparing an answer which vigorously denies the allegations, and it believes the case is without merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders of Citizens during the fourth calendar quarter of 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Citizens' Class A common stock is traded on the American Stock Exchange (AMEX) under the symbol CIA. The high and low prices per share as supplied by the Amex Monthly Statistical Report are as follows.
1998 1997 --------------------------- ----------------------- QUARTER ENDED HIGH LOW HIGH LOW ----------------------- ----------- ----------- --------- --------- March 31 $6.81 $5.69 $8.81 $7.63 June 30 6.44 6.00 8.13 7.25 September 30 6.09 5.56 7.88 7.19 December 31 6.00 5.25 7.56 6.38
As of December 31, 1998, the approximate number of record owners of Citizens' Class A common stock was 19,000. Management estimates the number of beneficial owners to be approximately 57,000. Citizens has not paid dividends in any of the past four years and does not intend to pay cash dividends in the immediate future. For restrictions on the present and future ability to pay dividends, see Note 7 of the "Notes to Consolidated Financial Statements." 28 29 ITEM 6. SELECTED FINANCIAL DATA The table below sets forth, in summary form, selective data of the Company. This data, which is not covered in the report of the independent auditors, should be read in conjunction with the consolidated financial statements and notes which are included elsewhere herein (amounts in thousands except per share amounts).
YEAR ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- NET OPERATING REVENUES $ 72,685 $ 65,027 $ 63,822 $ 53,130 $ 49,212 NET INCOME (LOSS) $ (6,721) $ 3,426 $ 2,214 $ 2,750 $ 4,175 NET INCOME (LOSS) PER $ (.31) $ .16 $ .11 $ .16 $ .25 SHARE TOTAL ASSETS $ 253,384 $ 249,519 $ 218,277 $ 209,308 $ 149,798 NOTES PAYABLE $ 333 $ 937 $ 489 $ 773 $ 712 TOTAL LIABILITIES $ 178,480 $ 169,938 $ 151,394 $ 144,595 $ 114,742 TOTAL STOCKHOLDERS' EQUITY $ 74,904 $ 79,581 $ 66,883 $ 64,713 $ 35,056 BOOK VALUE PER SHARE $ 3.50 $ 3.71 $ 3.29 $ 3.24 $ 1.99
See Part I (b) - Financial information regarding the insurance business and Item 7 - Management's Discussion and Analysis. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On October 28, 1996, Citizens announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. ("American"), a Jackson, Mississippi, based life insurance holding company and parent of United Security Life Insurance Company ("USLIC") 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. Approximately 700,000 Citizens' Class A common shares were issued in connection with the transaction, which was accounted for as a purchase. The transaction 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 ("NSLIC") of Arlington, Texas for $1.7 million in cash and restricted stock. The transaction closed in November, 1997. On September 15, 1998 Citizens and First Investors Group, Inc. ("Investors") of Springfield, Illinois reached an agreement wherein Citizens would acquire 100% of the outstanding preferred and common shares of Investors for shares of Citizens' Class A Common stock. Investors is the parent of Excalibur Insurance Corporation, also of Springfield, Illinois ("Excalibur"), and has consolidated assets of approximately $3.2 million, annual revenues of $201,000 and capital of 29 30 $3.1 million. Pursuant to the terms of the Agreement, which was approved by the Illinois Department of Insurance on October 13, 1998 and the shareholders of Investors on January 26, 1999, 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. RESULTS OF OPERATIONS A net loss of $6,720,693, or $0.31 per share was incurred during 1998, compared to net income of $3,425,523 or $.16 per share in 1997 and net income of $2,213,726 or $.11 per share in 1996. A non-recurring charge to goodwill of $9.5 million recorded in the third quarter of 1998 caused the 1998 loss. The writedown was related to goodwill recorded in the 1995 acquisition of American Liberty Financial Corporation. The writedown was caused by a decline in new production from insurance agents formerly associated with American Liberty. Subsequent to the 1995 acquisition, management implemented a 45% reduction in commissions paid to these agents in order to preserve profitability of the accident and health business which was negatively impacted by (i) changes in state laws that established minimum claims ratios, and (ii) a mandated change in interest rates used to compute reserves. In addition, as a result of a merger of American Liberty into CICA during 1997, new policy sales were delayed because CICA had to resubmit policies formerly sold by American Liberty for approval in each of the states in which the policies were sold by American Liberty. Accordingly, the Company experienced what was believed to be a temporary decline in new production of American Liberty. The Company continued to monitor production associated with these products, for which the primary marketing efforts occur during the months of June to September, due to the nature of the policies sold. As a result of obtaining the necessary policy approval and increased sales efforts during 1998, management was successful in reviving production from some of the largest producers of American Liberty. However, management's estimate of future production was reevaluated during the quarter ended September 30, 1998 based upon the sales activity of the products sold during that quarter, the size of the active agency force, and the anticipated future production to be achieved in subsequent years. As a result of this evaluation, the writedown was recognized. Management continues to monitor production associated with these products. As a result of obtaining the necessary policy approvals by CICA in 1997 and increased sales efforts during 1998, management was successful in reviving production from some of the largest producers of American Liberty. Estimates of future production will continue to be reevaluated based upon the sales activity of the products sold, the size of the active agency force, and the anticipated future production. Management has been successful in returning the largest producing marketing organization of American Liberty to production and anticipates continuing increases in new production in 1999, compared to amounts seen in 1997 and 1998. 30 31 Total revenues for the year ended December 31, 1998 were $72,684,915 compared to $65,027,298 in 1997 , an increase of 11.8%. In 1996 revenues were $63,822,160. The inclusion of the revenues from USLIC and NSLIC for the entire year was the primary reason for the increase during 1998. Decreased writing of new business by CICA in the international market and by ALLIC domestically was offset by the premium revenues of USLIC and NSLIC, which contributed to the increase in revenue in 1997. Additionally, only six months of revenues of USLIC and only one month of NSLIC's revenues are included in the 1997 results. However, economies of scale created by the combination of companies contributed to the increase in 1997 income. Premium income reached $59,154,329 in 1998, a 6.8% increase over the $55,362,616 in 1997. The 1997 amounts were a 1.9% increase over the previous year when premium income totaled $54,303,445. Declines in the production of international premium by CICA and domestically by ALLIC's former marketing operations during 1997 resulted in a nominal increase in 1997 compared to 1996. Additionally, as stated above, the results for USLIC and NSLIC were not included for the entire year 1997. In January, 1998, CICA introduced a new line of international products known as the Millennia 2000 series. Management believes that these products will be well received in the marketplace; however, in 1998, CICA's international sales were hampered due to the contraction of several Latin American economies as well as increased competition from new local insurance companies who are subsidiaries of large U.S. insurers. It is management's belief that CICA, utilizing the marketing representatives who previously represented ALLIC, is better served to continue to exploit its niche selling specialty accident and health life products through existing distribution channels. The acquisition of USLIC also brings capable sales forces that have historically sold similar products; therefore, management believes that the ability to "cross-sell" products between companies is high. During 1998, management discontinued selling the limited major medical products that NSLIC's prior management had begun to introduce in 1997. Management believes that the level of surplus and asset size of NSLIC are not sufficient to support the potential volatility that is inherent in such types of business. As such, NSLIC's marketing efforts are focused solely on the expansion of existing credit life and credit accident and health business. Net investment income increased 12.4% during 1998 to $11,279,125 from $10,038,736 during 1997. The 1997 results were up 9.29% compared to the $9,185,506 earned in 1996. The 1998 and 1997 results reflect the continuing expansion of the Company's asset base as well as the actions taken in previous years to change the mix and duration of the Company's invested assets. Overall, the duration was increased to approximately 5.19 years from 4 years. 31 32 The low yields available in the bond market during the Company's growth period have made it difficult to increase the return on the Company's invested assets without exposing the portfolio to undue risk.. Management hired the investment advisory firm of Asset Allocation and Management, Inc. of Chicago ("AAM"), Illinois in late 1995 to manage the Company's fixed maturity portfolio. During 1996, a nominal reconfiguration was begun. In lieu of purchasing U.S. Treasury instruments, the Company began to purchase U.S. Government guaranteed mortgage pass-through securities. This program continued throughout 1998. Management expects to continue this strategy throughout 1999 as opportunities present themselves. Overall policyholder dividends increased to $3,025,746 in 1998, up 8.7% over 1997 when such benefits were $2,782,215. The 1997 amounts represented an increase of 18% compared to $2,363,201 in 1996. The 1997 growth is primarily due to the acquisition of USLIC, which increased the current year results by approximately $397,000. Virtually all CICA's policies that have been sold since 1989 are participating. However, sales of credit life by NSLIC are non-participating and have had the effect of lowering the overall growth in dividends. Participating policies represent a large majority (71%) of the Company's business in-force, although the percentage of participating business has declined from approximately 91% due to the acquisitions in recent years. Additionally, due to the disruption in the Argentine market mentioned above and the lower than usual persistency in that market, the growth in overall dividends has been slowed as policies lapse before the dividend amount can grow. Management expects continued growth in this item due to the fact that CICA will continue to focus on participating products internationally, subject to factors such as persistency and future sales, although dividends are factored into the policies, although dividends are factored into the policies. Claims and surrenders increased to $31,592,740 in 1998, an increase of 13.4% over 1997 when such benefits were $27,852,907. In 1996 claims and surrenders were $25,919,054. The increase in benefits can be attributed to the inclusion of NSLIC and USLIC for an entire year in 1998, as well as increases in accident and health benefits attributable to the respective blocks of business of these companies. Death benefits increased to $5,150,647 in 1998, up from $4,475,083 in 1997, and $3,667,159 in 1996. The 1998 increase can be traced directly to the inclusion of NSLIC and USLIC for an entire year. During 1998, claims on NSLIC were $421,801, while claims from USLIC were $35,570. The increase in such claims in 1997 does not appear to be due to any trend. Rather, it is the result of the growing block of business written by the Company. Additionally, the pre-need and burial policies formerly sold by ALLIC were marketed to an older clientele and as such, higher claims are anticipated and factored into the product. The Company has historically adhered to a strict underwriting policy which requires complete medical examinations on all applicants who are foreign residents, except children, regardless of age or face amount of the policy applied for. For 1996 and future years, management initiated a change to more selective 32 33 medical examinations in conjunction with dry spot blood tests and extensive medical questions on the application in order to lower the cost of new business without sacrificing necessary information for the underwriter. Additionally, X-rays and electrocardiograms are required depending on age and face amount of the policy. On all policies of $150,000 or more, inspection reports are required which detail the background resources and lifestyle of the applicant. The Company has developed numerous contacts throughout Latin America with which its underwriters can validate information contained in the application, medical or inspection report. Accident and health benefits grew to $6,160,966 in 1998 from $2,963,636 in 1997. Such claims were $1,719,244 in 1996. The increase reflects the growing block of accident and health premium on the Company's books, and more specifically the inclusion of NSLIC and USLIC for the entire year. Claims on USLIC's A&H benefits were $2,513,680, while NSLIC's were $1,653,367. In 1997, the addition of USLIC and NSLIC contributed approximately $740,000 to the benefit amounts. In 1996, the acquisition of ALLIC caused such benefits to increase sharply because of the volume of A&H premium on ALLIC's books compared to the amount on CICA's books. 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. Management believes the Company will be current on its claims processing in the second quarter of 1999. In the meantime, significant effort has been made to ensure that the pending claims reserve and provisions for incurred but not reported claims are conservative and reasonable. Endowment expense grew to $5,258,881 in 1997 from $5,192,607 in 1996. In 1998, such expenses declined to $5,027,937. Beginning in late 1990, Citizens introduced a new series of plans called "Ultra Expansion Plus" which carried an immediate endowment benefit of an amount elected by the policyowner. This endowment is factored into the premium of the policy and is paid annually. The relatively small increase from 1996 to 1997 and the decline in 1998 reflects the decline in production of this policy over the last three years. In 1998, policy surrenders remained flat at $14,481,335. Policy surrenders were $14,322,593 in 1997, compared to $14,421,683 in 1996. The decrease in 1997 and relative stability in 1998 is, in the opinion of management, the result of a campaign begun in mid-1997 to inform policyowners about the benefits of their policies. Other claim expenses amounted to $1,020,410 in 1998, $848,093 in 1997 and $918,361 in 1996. These expenses are comprised of supplemental contract benefits, interest on policy funds and assorted other miscellaneous policy benefits. 33 34 During 1998, commissions increased to $12,501,426 from $11,918,192. In 1996, commission expense was $12,447,664. The majority of such amounts paid relates to first year commissions which were $8,169,835, $8,120,748, and $8,677,297 in 1998, 1997, and 1996, respectively. The 1996 increases relate to improved sales activity in CICA and approximately $1.5 million associated with ALLIC. The decline in first year commissions reflected in 1998 and 1997 compared to 1996 relates to the slowdown in new sales discussed earlier. Additionally, the increase in new sales of accident and health and credit business contributed to the decline. These products typically carry lower commissions than do ordinary life products. Underwriting, acquisition and insurance expenses increased to $11,079,065 compared to $6,992,402 in 1997 and $9,500,973 in 1996. Approximately $2.5 million of the increase in 1998 relates to the inclusion of NSLIC and USLIC for the entire year. Additionally, because of the increased claims volume mentioned above, management was forced to significantly increase staff size and thus overhead on a temporary basis. Due to the consolidation of ALLIC's operations with CICA, management was able to achieve significant reductions in expenses through economies of scale which were reflected in the 1997 results. In order to convert a majority of CICA's marketing overhead from fixed to variable, management contracted in early 1997 with an independent international marketing company to serve as managing agent for the Company's international marketing activities. This firm receives an overriding commission on all new business sold internationally in exchange for the absorption of all marketing management and promotion activities. Management has utilized firms such as this in previous periods with great success at obtaining increases in sales and expense reductions. Capitalized deferred policy acquisition costs were $7,941,829 in 1998, $9,804,022 in 1997, and $10,531,222 in 1996. The large drop in 1998 reflects the sale of accident and health products described above which carry lower levels of commission and thus capitalization. The decline in amounts in 1997 reflects the lower level of new sales experienced during the year, as well as the lower interest rate environment. Amortization of these costs was $7,789,513, $9,630,705 and $10,221,917, respectively in 1998, 1997 and 1996. Amortization of cost of insurance acquired and excess of cost over net assets acquired declined in 1998 to $2,100,433 from $2,305,127 in 1997. In 1996, such amortization was $1,398,859 in 1996. The increase in 1997 was attributable to the goodwill and cost of insurance recorded on the acquisitions of USLIC, NSLIC, ALLIC and IIH. As discussed above, management wrote off $9.5 million of the goodwill associated with the acquisition of American Liberty during the third quarter of 1998. 34 35 LIQUIDITY AND CAPITAL RESOURCES Stockholders' equity decreased to $74,903,679 at December 31, 1998 from $79,581,698 in 1997. The loss from operations caused by the non-recurring charge offset improvement in the market value of the Company's fixed maturity portfolio and caused the decline in equity. Invested assets grew to $176,572,123 in 1998 from $162,651,692 in 1997, an increase of 8.6%. The growth is attributable to the internal growth achieved by the Company. At December 31, 1998 and 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 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 $5,606,374 at December 31, 1998 consist of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity. In order to monitor the market risk associated with the Company's investment policy, management measures the sensitivity of the portfolio to instantaneous interest rate changes. At December 31, 1998, decreases in interest rates of 100, 200 and 300 basis points, respectively, would result in increases in market values of approximately $12,402,000, $19,666,000 and $23,588,000, respectively. Conversely, increases in rates of 100, 200 and 300 basis points would generate losses of $1,041,000, $7,484,000 and $13,738,000, respectively. Under either interest rate scenario the portfolio carries positive convexity. The Company's mortgage loan portfolio, which constitutes 0.9% of invested assets at December 31, 1998 and 1997, has historically been composed of small residential loans in Texas. At December 31, 1998 and 1997, one mortgage loan with a principal balance of approximately $38,400 was in default. Management has established a reserve of $50,000 at December 31, 1998 and 1997 (approximately 3% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. During the first quarter of 1999 while foreclosure on the above-referenced loan was in progress, the Company was notified that the property had been sold and a payoff of its lien was forthcoming. Policy loans comprise 11.9% of invested assets at December 31, 1998 compared to 12.6% at December 31, 1997. 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, Chase Bank of Texas, Austin, Texas, were significantly in excess of Federal Deposit Insurance 35 36 Corporation coverage at December 31, 1998 and 1997. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. Management does not believe the Company is at risk for such a loss. During 1999, the Company intends to utilize 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. 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 33,000 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 $104,000 was sold during 1998 for $850,000. CICA owned 1,821,332 shares of Citizens Class A common stock at December 31, 1998 and 1997. 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, 1997 and 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 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. The 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 practices, 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, 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. Additionally, during the 1998 annual audit, it was discovered that the provisions for pending claims in both companies were overstated. Management expects to amend the 1998 statutory financial statements of USLIC and NSLIC to increase surplus by approximately $250,000 and $1,000,000, respectively as a result of the overstatement, bringing both companies further above the 200% level of RBC. 36 37 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 15 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. The Company's electronic systems department ("ESD") staff believes year 2000 issues will continue to be addressed as a top priority until the Company can certify its systems are Year 2000 compliant. The effort needed to complete the task is expected to be effected with existing staff by June 30, 1999, thus leaving ample time to assess and resolve any significant remaining issues. Company personnel have been actively planning, identifying and resolving year 2000 issues for more than a year. These activities are expected to continue through the early part of 1999 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. Under this scenario, the Company does not expect material costs, because the remaining functions that could be non-compliant can be handled manually. 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. 37 38 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 developed 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 38 39 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 reconciliations 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). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this item is set forth in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 39 40 ITEM 8. FINANCIAL STATEMENTS CITIZENS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE REFERENCE --------- Independent auditors' report 5 Consolidated statements of financial position at December 31, 1998 and 1997 46-47 Consolidated statements of operations - years ended December 31, 1998, 1997 and 1996 48-49 Consolidated statements of stockholders' equity and comprehensive Income (loss) - years ended December 31, 1998, 1997 and 1996 50 Consolidated statements of cash flows - years ended December 31, 1998, 1997 and 1996 51-53 Notes to consolidated financial statements 54-77 Schedules at December 31, 1998 and 1997: Schedule II - Condensed Financial Information of Registrant 78-80 Schedules for each of the years in the three-year period ended December 31, 1998: Schedule IV - Reinsurance 81
All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the 24 months preceding the date of the audited financial statements of Citizens included herein, there has been no change of accountants made by Citizens, nor has it reported on Form 8-K any disagreements between the Company and its independent accountants. 40 41 PART III Items 10, 11, 12, and 13 of this Report incorporate by reference the information in the Company's definitive proxy material under the headings "Stock and Principal Stockholders," "Control of the Company," "Election of Directors," "Executive Officers," "Executive Officer and Director Compensation" and "Certain Reports" to be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 AND 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed as part of this Form 10-K. (a) 3 EXHIBITS
EXHIBIT EXHIBIT NO. DESCRIPTION PAGE NO. ----------- ----------- -------- (1) Underwriting Agreement N/A (2) Plan of acquisition, reorganization, arrangement, liquidation or succession (e) (3) 3.1 Articles of Incorporation; as amended (d) 3.2 Bylaws Filed herewith (4) Instruments defining the rights of security holders, including indentures N/A (5) Opinion re: Legality N/A (6) (Removed and Reserved) N/A (7) (Removed and Reserved) N/A (8) Opinion re: Tax Matters N/A (9) Voting Trust Agreement N/A (10) Material Contracts 10.1 Automatic Yearly Renewable term (NR) Life Reinsurance Agreement between Citizens Insurance Company of America and The Centennial Life Insurance Company dated March 1, 1982 (a) 10.2 Stock Purchase Agreement between Citizens Insurance Company of America and Citizens, Inc. (a)
41 42 10.3 Plan and Agreement of Merger and Exchange by and among Insurance Investors & Holding Co., Central Investors Life Insurance Company of Illinois, Citizens, Inc. and Citizens Acquisition, Inc. (g) 10.4 Self-Administered Automatic Reinsurance Agreement - Citizens Insurance Company of America and Riunione Adriatica di Sicurta, S.p.A. (h) 10.5 Plan and Agreement of Exchange dated October 28, 1996 between Citizens, Inc. and American Investment Network, Inc. (h) 10.6 Agreement and Plan of Merger dated October 31, 1996 between Citizens Insurance Company of America, CICA Acquisition, Inc., and First American Investment Corporation (h) 10.7 Plan and Agreement of Merger dated November 22, 1996 between Citizens, Inc. and American Liberty Financial Corporation, as amended (i) 10.8 Plan and Agreement of Merger dated November 22, 1996 between Citizens Insurance Company of America and American Liberty Life Insurance Company, as amended (i) 10.9 Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life Insurance Company and Citizens Insurance Company of America, as amended Plan and Agreement of Exchange dated October 28, 1996 (i) 10.10 between American Investment Network, Inc., United Security Life Insurance Co., Inc. and Citizens Insurance Company of America (j) 10.11 Stock Purchase Agreement dated November 20, 1997 between Jansen Enterprises, Inc. and Citizens, Inc. (j) 10.12 Plan and Agreement of Merger dated September 10, 1998 between First Investors Group, Inc., Citizens, Inc., and Excalibur Acquisition, Inc. (k) (11) Statement re: Computation of per share earnings N/A (12) Statement re: Computation of ratios N/A (13) Annual report to security holders, Form 10-Q or quarterly report to N/A security holders (14) (Removed and Reserved) N/A (15) Letter re: Unaudited interim financial statements N/A (16) Letter re: Change in certifying accountant N/A (17) Letter re: Director resignation N/A
42 43 (18) Letter re: Change in accounting principles N/A (19) Report furnished to security holders N/A (20) Other documents or statements to security holders N/A (21) Subsidiaries of the registrant Filed herewith (22) Published report regarding matters submitted to a vote of security holders N/A (23) Consents of expert and counsel Filed herewith (24) Power of Attorney See signature page (25) Statement of eligibility of trustee N/A (26) Invitations for competitive bids N/A (27) Financial Data Schedule Filed herewith (28) (Removed and Reserved) N/A (99) Additional Exhibits N/A
- ---------------------------------- (a) Filed as a part of the Amendment No. 1 to Registration Statement on Form S-4, SEC File No. 33--4753, filed on or about June 19, 1992. (b) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (c) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. (d) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (e) Filed with or referenced in the Registrant's Current Report on Form 8-K dated December 9, 1994 and incorporated herein by reference. (f) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--59039, filed on or about May 2, 1995. (g) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--63275, filed on or about October 6, 1995. (h) Filed as a part of the Registration Statement on Form S-4, SEC File No. 333--16163, filed on or about November 14, 1996. (i) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (j) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (k) Filed as a part of the Registration Statement on Form S-4, SEC File No. 333--67091, on or about November 10, 1998. (b) REPORTS ON FORM 8-K No Reports on Form 8-K were filed by Citizens during the fourth quarter of 1998. 43 44 CITIZENS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE REFERENCE --------- Independent auditors' report 45 Consolidated statements of financial position at December 31, 1998 and 1997 46-47 Consolidated statements of operations - years ended December 31, 1998, 1997 and 1996 48-49 Consolidated statements of stockholders' equity and comprehensive income- years ended December 31, 1998, 1997 and 1996 50 Consolidated statements of cash flows - years ended December 31, 1998, 1997 and 1996 51-53 Notes to consolidated financial statements 54-77 Schedules at December 31, 1998 and 1997: Schedule II - Condensed Financial Information of Registrant 78-80 Schedules for each of the years in the three-year period ended December 31, 1998: Schedule IV - Reinsurance 81
All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein. 44 45 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Citizens, Inc.: We have audited the consolidated financial statements of Citizens, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas March 18, 1999 45 46 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997 ------ ------------ ------------ Investments: Fixed maturities held-to-maturity, at amortized cost $ 5,606,374 $ 5,617,131 Fixed maturities available-for-sale at fair value 146,645,842 133,021,681 Equity securities available-for-sale, at fair value 862,287 978,391 Mortgage loans on real estate 1,560,757 1,287,295 Policy loans 20,996,919 20,466,184 Guaranteed student loans 4,673 81,681 Other long-term investments 595,271 899,329 Short-term investments 300,000 300,000 ------------ ------------ Total investments 176,572,123 162,651,692 Cash and cash equivalents 9,868,728 6,454,956 Other receivables 433,320 1,007,878 Accrued investment income 1,806,065 2,010,512 Reinsurance recoverable 1,755,561 2,069,423 Deferred policy acquisition costs 37,259,386 37,107,070 Other intangible assets 2,289,725 2,596,925 Deferred federal income tax 699,848 572,430 Cost of insurance acquired 8,290,853 10,639,667 Excess of cost over net assets acquired 8,375,799 17,466,123 Property, plant and equipment 5,155,088 5,795,573 Other assets 877,699 1,147,186 ------------ ------------ $253,384,195 $249,519,435 ============ ============
46 47 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ------------------------------------ -------------- -------------- Liabilities: Future policy benefit reserves: Life insurance $ 147,170,436 $ 140,003,642 Annuities 3,675,937 3,819,861 Accident and health 9,329,956 8,295,539 Dividend accumulations 4,818,915 4,789,194 Premium deposits 2,013,274 2,010,102 Policy claims payable 4,801,548 3,488,484 Other policyholders' funds 1,632,662 1,873,588 -------------- -------------- Total policy liabilities 173,442,728 164,280,410 Other liabilities 2,067,392 2,703,346 Commissions payable 833,881 880,811 Notes payable 333,333 937,430 Federal income tax payable 1,534,269 762,992 Amounts held on deposit 268,913 372,748 -------------- -------------- Total liabilities 178,480,516 169,937,737 -------------- -------------- 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 Retained earnings 20,135,464 26,856,157 Accumulated other comprehensive income: Unrealized investment gain 3,623,464 1,580,790 -------------- -------------- 76,832,833 81,510,852 Treasury stock, at cost (1,929,154) (1,929,154) -------------- -------------- Total stockholders' equity 74,903,679 79,581,698 -------------- -------------- Commitments and contingencies $ 253,384,195 $ 249,519,435 ============== ==============
See accompanying notes to consolidated financial statements. 47 48 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Revenues: Premiums: Life insurance $ 49,032,491 $ 49,696,698 $ 49,873,673 Accident and health 9,857,844 5,299,783 4,040,688 Annuity and universal life considerations 263,994 366,135 389,084 Net investment income 11,279,125 10,038,736 9,185,506 Realized gains (losses) 1,614,388 (320,125) 226,212 Other income 664,084 23,945 136,566 Interest expense (27,011) (77,874) (29,569) ------------ ------------ ------------ Total revenues 72,684,915 65,027,298 63,822,160 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit reserves 8,279,056 8,958,166 8,198,243 Policyholders' dividends 3,025,746 2,782,215 2,363,201 Claims and surrenders 31,592,740 27,852,907 25,919,054 Annuity expenses 436,030 361,862 684,440 ------------ ------------ ------------ Total insurance benefits paid or provided 43,333,572 39,955,150 37,164,938 Commissions 12,501,426 11,918,192 12,447,664 Other underwriting, acquisition and insurance expenses 11,079,065 6,992,402 9,500,973 Capitalization of deferred policy acquisition costs (7,941,829) (9,804,022) (10,531,222) Amortization of deferred policy acquisition costs 7,789,513 9,630,705 10,221,917 Amortization of cost of insurance acquired and excess of cost over net assets acquired 11,600,433 2,305,127 1,398,859 ------------ ------------ ------------ Total benefits and expenses 78,362,180 60,997,554 60,203,129 ------------ ------------ ------------ (Continued)
48 49 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Income (loss) before federal income tax $ (5,677,265) $ 4,029,744 $ 3,619,031 Federal income tax expense 1,043,428 604,221 1,405,305 ------------ ------------ ------------ Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726 ============ ============ ============ Basic and diluted earnings (loss) per share of common stock $ (.31) $ .16 $ .11 ============ ============ ============
See accompanying notes to consolidated financial statements. 49 50 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COMMON STOCK ACCUMULATED OTHER TOTAL -------------------------- RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' CLASS A CLASS B EARNINGS INCOME STOCK EQUITY ------------ ------------ ------------ ------------ ----------- ------------ BALANCE AT DECEMBER 31, 1995 $ 44,007,339 $ 283,262 $ 21,216,908 $ 1,267,747 $(2,062,266) $ 64,712,990 ------------ ------------ ------------ ------------ ----------- ------------ Comprehensive income: Net income -- -- 2,213,726 -- -- 2,213,726 Unrealized investment gains, net -- -- -- (1,977,913) -- (1,977,913) ------------ ------------ ------------ ------------ ----------- ------------ Comprehensive income -- -- 2,213,726 (1,977,913) -- 235,813 Acquisition of IIH 1,542,501 -- -- -- -- 1,542,501 Sale of stock 445,462 -- -- -- -- 445,462 Stock issuance costs (157,500) -- -- -- -- (157,500) Exercise of options 103,750 -- -- -- -- 103,750 ------------ ------------ ------------ ------------ ----------- ------------ BALANCE AT DECEMBER 31, 1996 $ 45,941,552 $ 283,262 $ 23,430,634 $ (710,166) $(2,062,266) $ 66,883,016 ------------ ------------ ------------ ------------ ----------- ------------ Comprehensive income: Net income -- -- 3,425,523 -- -- 3,425,523 Unrealized investment gains, net -- -- -- 2,290,956 -- 2,290,956 ------------ ------------ ------------ ------------ ----------- ------------ Comprehensive income -- -- 3,425,523 2,290,956 -- 5,716,479 Acquisition of minority interest in FAIC 932,584 -- -- -- 133,112 1,065,696 Acquisition of AIN 5,320,895 -- -- -- -- 5,320,895 Acquisition of NSLIC 700,000 -- -- -- -- 700,000 Stock options exercised 130,500 -- -- -- -- 130,500 Stock issuance costs (234,888) -- -- -- -- (234,888) ------------ ------------ ------------ ------------ ----------- ------------ BALANCE AT DECEMBER 31, 1997 $ 52,790,643 $ 283,262 $ 26,856,157 $ 1,580,790 $(1,929,154) $ 79,581,698 ------------ ------------ ------------ ------------ ----------- ------------ Comprehensive income: Net loss -- -- (6,720,693) -- -- (6,720,693) Unrealized investment gains, net -- -- -- 2,042,674 -- 2,042,674 ------------ ------------ ------------ ------------ ----------- ------------ Comprehensive loss -- -- (6,720,693) 2,042,674 -- (4,678,019) ------------ ------------ ------------ ------------ ----------- ------------ BALANCE AT DECEMBER 31, 1998 $ 52,790,643 $ 283,262 $ 20,135,464 $ 3,623,464 $(1,929,154) $ 74,903,679 ============ ============ ============ ============ =========== ============
See accompanying notes to consolidated financial statements. 50 51 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726 Adjustments to reconcile net income to net cash provided by operating activities, net of assets acquired: Realized (gains) losses on sale of investments and other assets (1,614,388) 320,125 (226,212) Accrued investment income 204,447 (236,828) 372,781 Net deferred policy acquisition costs (152,316) (173,317) (309,305) Amortization of cost of insurance acquired and excess cost over net assets acquired 11,600,433 2,305,127 1,398,859 Change in: Other receivables 574,558 (134,853) 626,300 Future policy benefit reserves 8,057,287 9,511,158 8,357,859 Other policy liabilities 1,105,031 (291,121) 34,343 Deferred federal income tax (1,477,949) (1,008,907) (407,226) Federal income tax 771,277 1,120,600 (1,368,629) Commissions payable and other liab (682,884) (569,763) 226,675 Amounts held on deposit (103,835) 204,491 (99,348) Other, net 1,574,659 (544,901) 1,124,509 ------------ ------------ ------------ Net cash provided by operating activities 13,135,627 13,927,334 11,944,332 ------------ ------------ ------------ Cash flows from investing activities: Sale of fixed maturities available for sale 28,476,347 19,967,749 16,403,929 Maturity of fixed maturities available for sale 688,037 3,596,134 5,811,179 Purchase of fixed maturities available for sale (39,392,056) (36,553,342) (33,759,945) Sale of equity securities 151,923 619,277 66,251 Purchase of equity securities -- (511,231) -- Principal payments on mortgage loans 391,538 510,561 391,804 Mortgage loans funded (665,000) (125,334) (203,718) Guaranteed student loans funded (32,338) (60,131) (100,902) Guaranteed student loans sold 119,346 277,133 135,606 Purchase of short-term investments -- (100,000) (200,000) Sale of other long-term investments and property, plant and equipment 2,702,877 21,291 (303,567) (Continued)
51 52 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Cash and short-term investments provided by mergers -- 834,290 355,654 Acquisition of NSLIC -- (1,000,000) -- Increase in policy loans (net) (530,735) (638,141) (801,105) Purchase of other long-term investments and property, plant and equipment (1,027,697) (197,286) (691,632) ------------ ------------ ------------ Net cash used by investing activities (9,117,758) (13,359,030) (12,896,446) ------------ ------------ ------------ Cash flows from financing activities: Payments on notes payable (604,097) (94,343) (603,068) Sale of stock, net -- (104,388) 391,712 ------------ ------------ ------------ Net cash provided (used) by financing activities (604,097) (198,731) (211,356) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 3,413,772 369,573 (1,163,470) ------------ ------------ ------------ Cash and cash equivalents at beginning of year 6,454,956 6,085,383 7,248,853 ------------ ------------ ------------ Cash and cash equivalents at end of year 9,868,728 6,454,956 6,085,383 ============ ============ ============ Supplemental 1998 1997 1996 ------------ ------------ ------------ Cash paid during the year for: Interest $ 41,650 $ 77,874 $ 38,826 ------------ ============ ============ Income taxes $ 1,750,100 $ 800,000 $ 3,195,245 ============ ============ ============
52 53 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 Supplemental disclosures of non-cash investing and financing activities: The Company issued Class A stock and cash to purchase all of the capital stock of AIN, NSLIC, and the minority ownership in FAIC in 1997 and IIH in 1996. In conjunction with the acquisitions, liabilities were assumed as follows:
1997 1996 ------------ ------------ Fair value of tangible assets acquired $ 9,726,825 $ 2,381,252 Fair value of intangible assets acquired, gross 6,795,488 614,665 ------------ ------------ Net assets acquired 16,522,313 2,995,917 Capital stock issued and cash paid (8,086,591) (1,542,501) ------------ ------------ Liabilities assumed $ 8,435,722 $ 1,453,416 ============ ============ Issuance of 134,125 treasury shares in 1997 $ 133,112 $ -- ============ ============
See accompanying notes to consolidated financial statements. 53 54 CITIZENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) NATURE OF BUSINESS The consolidated financial statements include the accounts and operations of Citizens, Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977 and its wholly-owned subsidiaries, Citizens Insurance Company of America (CICA), Computing Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc. (III), National Security Life and Accident Insurance Company (NSLIC), United Security Life Insurance Company (USLIC) and Central Investors Life Insurance Company of Illinois (CILIC). Citizens and its subsidiaries are collectively referred to as "the Company." American Liberty Financial Corporation (ALFC) and its subsidiaries, American Liberty Life Insurance Company (ALLIC), First American Investment Corp. (FAIC), and American Liberty Exploration Company (ALEC) were acquired by Citizens in September 1995. Effective January 1, 1997, ALFC was merged into Citizens and ALLIC was merged into CICA. American Investment Network (AIN), which was acquired in June 1997, owned USLIC. During 1998, AIN was liquidated into CICA. Insurance Investors and Holding Company (IIH), which was acquired in March 1996 owned CILIC. During 1998, IIH was liquidated and merged into CICA. Citizens provides life and health insurance policies through four of its subsidiaries - CICA, USLIC, NSLIC and CILIC. CICA sells ordinary whole-life policies internationally, burial insurance, pre-need policies, accident and health specified disease, hospital indemnity, and accidental death policies, throughout the southern United States and USLIC and NSLIC sell participating whole-life policies and specialty individual accident and health policies. CILIC does not actively market insurance policies, but does administer an in-force block of life insurance. III provides aviation transportation to the Company. CTI provides data processing systems and services to the Company. FHA is a funeral home operator. 54 55 (b) BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company and its wholly-owned subsidiaries have been prepared in conformity with generally accepted accounting principles (GAAP). All significant intercompany accounts and transaction have been eliminated. (C) INVESTMENTS, OTHER THAN AFFILIATES Investments are shown on the following basis: 1. Fixed maturities, primarily consisting of bonds which the Company has the ability and intent to hold to maturity are carried at amortized cost. Fixed maturities which may be sold prior to maturity to support the Company's investment strategies are considered held as available-for-sale and carried at fair value as of the balance sheet date. Unrealized appreciation (depreciation) of equity securities and fixed maturities held as available-for-sale are shown as a separate component of stockholders' equity, net of tax, and is not included in the determination of net income. 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. 2. Equity securities include non-redeemable preferred stock and are reported at fair value. 3. Mortgage loans on real estate, policy loans, and guaranteed student loans are reported at unpaid principal balances less an allowance for uncollectible amounts. Mortgage loans have an allowance for uncollectible amounts of $50,000 at December 31, 1998 and 1997. Guaranteed student loans had an allowance for uncollectible amounts of $10,000 at December 31, 1997. 4. Other long-term investments consist primarily of real estate which is recorded at the lower of fair value, minus estimated costs to sell, or cost. If the fair value of the real estate minus estimated costs to sell is less than cost, a valuation allowance is provided for the deficiency. Increases in the valuation allowance are charged to income. 5. Short-term investments consist of treasury bills and commercial paper with maturities of greater than ninety days but less than one year, or commercial paper, and are carried at cost, which approximates fair market value. 55 56 A decline in the fair 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. Policy loans and other investments are primarily reported at cost. The Company has assets with a fair value of $8,745,400 at December 31, 1998, and $10,652,298 at December 31, 1997, on deposit with various state regulatory authorities to fulfill statutory requirements. The Company holds no derivative investments. (d) PREMIUM REVENUE AND RELATED EXPENSES Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract periods. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the estimated life of the contracts. This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of deferred policy acquisition costs. Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments. Premium receipts are not reported as revenues but rather as deposit liabilities to annuity contracts. (e) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED Acquisition costs, consisting of commissions and policy issuance, underwriting and agency expenses which relate to and vary with the production of new business, are deferred. These deferred policy acquisition costs are amortized primarily over the estimated premium paying period of the related policies in proportion to the ratio of the annual premium recognized to the total premium revenue anticipated using the same assumptions as were used in computing liabilities for future policy benefits. 56 57 The Company uses the factor method to determine the amount of costs to be capitalized and the ending asset balance. This method limits the amount of deferred cost to their estimated realizable value. The value of insurance acquired in the Company's various acquisitions, which is included in cost of insurance acquired in the accompanying consolidated financial statements, was determined based on the present value of future profits discounted at a risk rate of return. The cost of insurance acquired is being amortized over the anticipated premium paying period of the related policies. (f) POLICY LIABILITIES AND ACCRUALS Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon the Company's and industry experience, which provide for possible unfavorable deviation (see Note 4). Annuity benefits are carried at accumulated contract values based on premiums paid by participants, annuity rates of return ranging from 3.0% to 7.0% (primarily at 4.0% to 5.5%) and annuity withdrawals. Premium deposits accrue interest at rates ranging from 3.5% to 8.25% per annum. Cost of insurance is included in premium when collected and interest is credited annually to the deposit account. Policy and contract claims are based on case-basis estimates for reported claims, and on estimates, based on experience, for incurred but unreported claims and loss expenses. (g) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS The excess of cost over the fair value of net assets acquired in mergers and acquisitions is amortized on a straight-line basis ranging from 5 to 20 years. Other intangible assets, primarily the value of state licenses, are amortized on a straight-line basis over 10 years. The Company continually monitors long-lived assets and certain intangible assets, such as excess of cost over net assets acquired and cost of insurance acquired, for impairment. An impairment loss is recorded in the period in which the carrying value of the assets exceeds the fair value or expected future cash flows. Any amounts deemed to be impaired are charged, in the period in which such impairment was determined, as an expense against earnings. 57 58 (h) PARTICIPATING POLICIES At December 31, 1998 and 1997, participating business approximated 59% and 82%, respectively, of life insurance in-force and premium income. The amount of dividends to be paid is determined annually by the Board of Directors. 58 59 (i) EARNINGS PER SHARE Basic and diluted earnings per share have been computed using the weighted average number of shares of common stock outstanding during each period. The weighted average shares outstanding for the years ended December 31, 1998, 1997 and 1996 were 21,386,137, 20,868,921, and 20,236,469, respectively. (j) INCOME TAXES For the years ended December 31, 1998 and 1997 the Company files six separate tax returns as follows: 1) Citizens, Inc., CICA and all direct non-life subsidiaries, excluding FAIC and AIN, 2) FAIC and its subsidiaries, 3) AIN, 4) USLIC, 5) NSLIC and 6) CILIC. For the year ended December 31, 1996 the Company filed three separate tax returns as follows: 1) Citizens, Inc., CICA, and all direct non-life subsidiaries, excluding FAIC, 2) CILIC, and 3) FAIC and its subsidiaries. Deferred tax asset and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (k) ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted and implemented the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." This Statement established standards for reporting information about a Company's operating segments. The adoption of SFAS No. 131 resulted in revised and additional disclosures but had no effect on the financial position, results of operations or liquidity of the Company. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which is effective January 1, 2000. SFAS No. 133 will not impact the Company since they intend to not invest in derivatives. On January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income" and restated prior years' financial statements to conform to the reporting standard. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by shareholders and distributions to 59 60 shareholders. The adoption of SFAS No. 130 resulted in revised and additional disclosures, but had no effect on the financial position, results of operations or liquidity of the Company. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share". SFAS No. 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. SFAS No. 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 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 the 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 Development 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 as incurred. In the past, the Company has expensed such costs as they were incurred. This SOP is also effective for fiscal years beginning December 15, 1998. The Company is currently completing its evaluation of the financial impact as well as the changes to its related disclosures. (l) CASH EQUIVALENTS The Company considers as cash equivalents all securities whose duration does not exceed ninety days at the date of acquisition. (m) DEPRECIATION Depreciation is calculated on a straight line basis using estimated useful lives ranging from 3 to 10 years. Leasehold improvements are depreciated over the estimated life of 30 years. (n) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 60 61 affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (o) RECLASSIFICATIONS Certain reclassifications have been made to the 1997 and 1996 amounts to conform with the 1998 presentation. 61 62 (2) INVESTMENTS The cost, gross unrealized gains and losses and fair value of investments of fixed maturities and equity securities available-for-sale, as of December 31, 1998 and 1997, are as follows:
1998 ------------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ------------ ------------ Fixed maturities held-to-maturity: US Treasury securities $ 5,606,374 $ 562,626 $ -- 6,169,000 ============ ============ ============ ============ Fixed maturities available-for-sale: US Treasury securities and obligations of US government corporations and agencies 44,081,875 1,821,645 65,070 45,838,450 Public Utilities 2,944,282 67,591 16,245 2,995,628 Debt securities issued by States of the United States and political subdivisions of the States 5,506,803 290,026 2,829 5,794,000 Corporate securities 14,540,959 928,747 31,986 15,437,720 Mortgage-backed securities 74,128,842 2,577,863 126,661 76,580,044 ------------ ------------ ------------ ------------ Total fixed maturities available-for-sale $141,202,761 $ 5,685,872 $ 242,791 $146,645,842 ============ ============ ============ ============ Total equity securities available-for-sale $ 815,271 $ 76,572 $ 29,556 $ 862,287 ============ ============ ============ ============
1997 ------------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ------------ ------------ Fixed maturities held-to-maturity: US Treasury securities $ 5,617,131 $ 86,869 $ -- $ 5,704,000 ============ ============ ============ ============ Total Fixed maturities available-for-sale: US Treasury securities and obligations of US government corporations and agencies 65,413,351 961,435 398,435 65,976,351 Public Utilities 5,227,886 42,574 67,761 5,202,699 Debt securities issued by States of the United States and political subdivisions of the States 1,192,979 75,127 -- 1,268,106
62 63 Debt securities issued by foreign governments 207,807 7,373 -- 215,180 Corporate securities 12,140,899 463,698 19,474 12,585,123 Mortgage-backed securities 46,438,498 1,477,627 141,903 47,774,222 ------------ ------------ ------------ ------------ Total fixed maturities available-for-sale $130,621,420 $ 3,027,834 $ 627,573 $133,021,681 ============ ============ ============ ============ Total equity securities available-for-sale $ 983,513 $ 49,226 $ 54,348 $ 978,391 ============ ============ ============ ============
The amortized cost and fair value of fixed maturities at December 31, 1998, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. FIXED MATURITIES HELD-TO-MATURITY
AMORTIZED COST FAIR VALUE ---------- ---------- Due after ten years $5,606,374 $6,169,000 ========== ==========
63 64 FIXED MATURITIES AVAILABLE-FOR-SALE
AMORTIZED COST FAIR VALUE ------------ ------------ Due in one year or less $ 1,802,690 $ 1,821,676 Due after one year through five years 16,163,912 16,690,404 Due after five years through ten years 16,171,951 16,523,648 Due after ten years 32,935,366 35,030,070 ------------ ------------ Mortgage-backed securities 74,128,842 76,580,044 ------------ ------------ Totals $141,202,761 $146,645,842 ============ ============
The Company had no investments in any one entity which exceeded 10% of stockholders' equity at December 31, 1998 other than investments guaranteed by the U.S. Government. The Company's investment in mortgage loans is concentrated 30% in Colorado, 41% in Texas, 28% in Mississippi and 1% in other states as of December 31, 1998. Major categories of net investment income are summarized as follows:
YEAR ENDED DECEMBER 31 -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Investment income on: Fixed maturities $ 9,070,636 $ 8,086,920 $ 6,999,425 Equity securities 61,623 37,042 -- Mortgage loans on real estate 145,325 140,629 178,330 Policy loans 1,492,733 1,425,301 1,442,423 Short-term investments 207,159 197,912 526,910 Other 1,310,075 1,156,090 910,223 ------------ ------------ ------------ 12,287,551 11,043,894 10,057,311 Investment expenses (1,008,426) (1,005,158) (871,805) ------------ ------------ ------------ Net investment income $ 11,279,125 $ 10,038,736 $ 9,185,506 ============ ============ ============
Equity securities of $58,874 as of December 31, 1998, did not produce income during the preceding 12 months. 64 65 Proceeds and gross realized gains (losses) from sales and maturities of fixed maturities available-for-sale for 1998, 1997 and 1996 are summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Proceeds $ 29,164,384 $ 23,563,883 $ 22,215,108 ============ ============ ============ Gross realized gains $ 452,105 $ 373,557 $ 175,125 ============ ============ ============ Gross realized (losses) $ (45,268) $ (178,296) $ (199,890) ============ ============ ============
Proceeds and gross realized gains (losses) from sales of equity securities available-for-sale for 1998, 1997 and 1996 are summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Proceeds $ 151,923 $ 619,277 $ 66,251 ============ ============ ============ Gross realized gains $ -- $ -- $ -- ============ ============ ============ Gross realized (losses) $ (16,319) $ (482,792) $ -- ============ ============ ============
Realized gains (losses) are as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Realized gains (losses): Fixed maturities $ 406,837 $ 195,261 $ (24,765) Equity securities (16,319) (480,819) -- Other 1,223,870 (34,567) 250,977 ------------ ------------ ------------ Net realized gains (losses) on investments $ 1,614,388 $ (320,125) $ 226,212 ============ ============ ============
(3) COST OF INSURANCE ACQUIRED AND EXCESS OF COST OVER NET ASSETS ACQUIRED Cost of insurance acquired is summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Balance at beginning of period $ 10,639,667 $ 7,219,594 $ 7,522,827 Increase (decrease) related to acquisitions (877,904) 4,253,354 121,000 Interest 797,975 541,470 564,212 Amortization (2,268,885) (1,374,751) (988,445) Balance at end of period -- -- -- $ 8,290,853 $ 10,639,667 $ 7,219,594 ============ ============ ============
Accretion of interest on cost of insurance acquired is calculated based on the rates of interest used in setting the related policy reserves. These rates range from 6.5% to 8.5%. 65 66 Estimated amortization in each of the next five years is as follows. These amounts are greater than the carrying value due to interest accretion. Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions. 1999 $1,566,486 2000 1,258,130 2001 1,125,372 2002 1,002,290 2003 920,128 Thereafter 2,418,447
Excess of cost over net assets acquired is summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- ACCUMULATED GROSS AMORTIZATION NET ------------ ------------ ------------ Balance at January 1, 1996 $ 17,819,626 $ (695,145) $ 17,124,481 Increase related to acquisitions 419,879 -- 419,879 Amortization -- (787,927) (787,927) ------------ ------------ ------------ Balance at December 31, 1996 18,239,505 (1,483,072) 16,756,433 Increase related to acquisitions 1,939,837 -- 1,939,837 Amortization -- (1,230,147) (1,230,147) ------------ ------------ ------------ Balance at December 31, 1997 20,179,342 (2,713,219) 17,466,123 Increase related to acquisitions 852,498 -- 852,498 Impairment loss (9,500,000) -- (9,500,000) Amortization -- (442,822) (442,822) ------------ ------------ ------------ Balance at December 31, 1998 $ 11,531,840 $ (3,156,041) $ 8,375,799 ============ ============ ============
During 1998, the Company recognized an impairment loss in the amount of $9,500,000 relating to the goodwill recorded in the 1995 acquisition of ALLIC. The impairment loss was the result of a decline in production from agents formerly associated with ALLIC. The acquisition of NSLIC was consummated on November 20,1997, therefore the balance of cost of insurance acquired as of December 31, 1997 was management's estimate based on the information available as of December 31, 1997. The Company revised its estimate related to this acquisition in 1998, which resulted in a reallocation of the purchase price. (4) POLICY LIABILITIES Various assumptions used to determine the future policy benefit reserves include the following: a) valuation interest rates from 4 to 9%, b) mortality assumptions are from the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and Ultimate mortality tables and c) withdrawals are based primarily on actual historical termination rates. The following table presents information on changes in the liability for accident and health policy and contract claims for the years ended December 31,1998 and 1997. 66 67
1998 1997 ------------ ------------ Policy and contract claims payable at January 1 $ 2,083,591 $ 1,238,729 Policy and contract claims payable, acquired through acquisition -- 686,903 Add claims incurred, related to: Current year 7,442,563 3,388,328 Prior years (1,281,597) (424,692) ------------ ------------ 6,160,966 2,963,636 Deduct claims paid, related to: Current year 5,295,960 2,190,820 Prior years 557,979 614,857 ------------ ------------ 5,853,939 2,805,677 Policy and contract claims payable, December 31 $ 2,390,618 2,083,591 ============ ============
In 1998 and 1997, as a result of changes in estimates of insured events in prior years, the liability for policy and contract claims decreased. (5) REINSURANCE In the normal course of business, the Company reinsures portions of certain policies that it underwrites to limit disproportionate risks. The Company retains varying amounts of individual insurance up to a maximum retention of $75,000 on any life and $35,000 on health policies. Amounts not retained are ceded to other insurance enterprises or reinsurers, through yearly renewable term insurance or coinsurance contracts. Risks are reinsured with other companies to permit the recovery of a portion of any direct losses. The Company remains contingently liable to the extent that the reinsuring companies cannot meet their obligations under these reinsurance treaties. Assumed and ceded reinsurance activity for 1998 and 1997 is summarized as follows:
1998 1997 ---------------- ---------------- Aggregate assumed life insurance in force $ 333,719,000 $ 334,953,000 ================ ================ Aggregate ceded life insurance in force $ (306,070,000) $ (318,630,000) ================ ================ Total life insurance in force $ 2,024,756,000 $ 2,250,197,000 ================ ================
67 68 Premiums and claims and surrenders assumed and ceded for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ------------ ------------ ------------ Premiums assumed $ 231,410 $ 284,632 $ 309,953 ============ ============ ============ Premiums ceded $ (3,368,690) $ (2,257,556) $ (2,582,599) ============ ============ ============ Claims and surrenders assumed $ 234,037 $ 269,000 $ 314,000 ============ ============ ============ Claims and surrenders ceded $ (1,690,643) $ (976,000) $ (264,000) ============ ============ ============
Amounts paid or deemed to have been paid for reinsurance contracts are recorded as reinsurance receivables. The cost of reinsurance related to long duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. (6) NOTES PAYABLE Notes payable as of December 31, 1998 and 1997 consist of:
1998 1997 ----------- ------------- Note A; payable to bank, 7%, dated June 20, 1988, payable in annual installments of $66,667 beginning June 30, 1989, with remainder due June 30, 2003. $ 333,333 $ 400,000 Note B; payable to bank, prime plus 1.5%, payable in monthly installments of $5,751 including interest, with a balloon payment due on December 19, 1999. -- 537,430 ----------- ------------- $ 333,333 $ 937,430 ============= =============
Note A is secured by proceeds from the surplus debenture between CICA and the Company. Note B was collateralized by property. The property was disposed of in 1998 and the proceeds were applied to the note. (7) STOCKHOLDERS' EQUITY AND RESTRICTIONS The two classes of stock of Citizens are equal in all respects, except (a) the Class B common stock elects a simple majority of the Board of Directors of Citizens and the Class A common stock elects the remaining directors; and (b) each Class A share receives twice the cash dividends paid on a per share basis to the Class B common stock. 68 69 Generally, the net assets of the insurance subsidiaries available for transfer to the Company are limited to the greater of the subsidiary net gain from operations during the preceding year or 10% of the subsidiary net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities. Payments of dividends in excess of such amounts would generally require approval by the regulatory authorities. Based upon statutory net gain from operation and surplus of the individual insurance companies as of and for the year ended December 31, 1998 approximately $5,489,797 of dividends could be paid to the Company without prior regulatory approval. CICA, USLIC, NSLIC, and CILIC have calculated their risk based capital (RBC) in accordance with the National Association of Insurance Commissioners' Model Rule and the RBC rules as adopted by their respective state of domicile. The RBC as calculated for CICA and CILIC exceeded levels requiring company or regulatory action. The RBC as calculated for USLIC and NSLIC at December 31, 1998, failed to maintain the minimum policyholder surplus equivalent under the RBC calculation. In 1999, CICA contributed $600,000 and $500,000 in capital to USLIC and NSLIC, respectively. USLIC and NSLIC expect to revise their 1998 statutory annual statements filed with regulatory authorities based upon an error in the calculation of claim reserves at December 31, 1998. The anticipated reduction in claim reserves and the additional capital contributions made during 1999 will be sufficient for USLIC and NSLIC to exceed the RBC levels as required by the National Association of Insurance Commissioners. (8) STOCK OPTIONS During 1989, the Company entered into an agreement granting, a financial public relations consultant providing services to the Company, the right and option to purchase 100,000 shares of Class A no par common stock of the Company at $2.50 per share, the fair market value of the common stock at the date of the agreement. The option which would have expired on February 8, 1994 was extended for an additional 36 months during 1993. During 1996, options to purchase 41,500 shares were exercised. During 1997, 52,200 shares were issued in conjunction with the exercise of this option. The remaining options expired in 1997. The outstanding options had no impact on diluted earnings per share for the years ended December 31, 1996. (9) MERGER AND ACQUISITIONS During March 1997, the Company acquired the 5.52% minority interest in FAIC, a 94.8% subsidiary of ALFC. The Company issued 134,125 shares of the Company's Class A stock to consummate this transaction. The excess of cost over net assets acquired amounted to $1,065,696 of which $399,353 was written off concurrent with the acquisition. Effective January 1, 1997, AFLC was merged into Citizens and FAIC was merged into CICA. On October 28, 1996, CICA announced that it had signed definitive written agreements for the acquisition of AIN, a Jackson, Mississippi, based life insurance holding company and 69 70 its wholly-owned subsidiary USLIC 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 AIN agreement provided that following the acquisition by CICA, AIN shareholders will receive 1 share of Citizens, Inc. Class A Common Stock for each 7.2 shares of AIN Common Stock owned. The Company issued approximately 700,000 Class A common shares in connection with the transaction, which was accounted for as a purchase. The transaction was consummated on June 19, 1997. During 1998, AIN was liquidated and USLIC was merged into CICA. On August 13, 1997, Citizens signed a definitive agreement to acquire 100% of the outstanding shares of NSLIC of Arlington, Texas for $1.7 million in cash and restricted stock. The transaction, which was accounted for as a purchase, was consummated on November 20, 1997. In conjunction with the acquisition the Company and two executives of NSLIC executed employment agreements which require the executives to provide services to the Company for 42 months. The employees will be compensated $8,333 a month for the first twelve months escalating to $12,500 a month for the remaining thirty months. The pro-forma unaudited results of operations for the years ended December 31, 1997 and 1996, assuming the purchase of AIN, NSLIC and the minority ownership in FAIC, had been consummated at the beginning of fiscal 1996, are presented below. Adjustments have been made for amortization of amounts assigned to the fair value of historical assets. It is assumed in the pro-forma basic earnings per share calculations that the shares issued in connection with the acquisitions were outstanding from the beginning of the period presented (stated in thousands other than per share amounts).
1997 1996 ---- ---- Revenue $ 70,931 $ 72,903 Net income 3,037 2,872 Basic earnings per share $ .14 $ .13
The IIH agreement closed on March 12, 1996 and provided that Investors' shareholders would receive one share of Citizens' Class A Common Stock for each eight shares of Investors Common Stock owned. Additionally, Citizens acquired all shares of CILIC (a 94% owned subsidiary of Investors) not already owned by Investors, based upon an exchange ratio of one share of Citizens' Class A common stock for each four shares of Central Investors owned. The acquisition of these two companies involved the issuance of approximately 171,000 of Citizens' Class A shares which was accounted for as a purchase. During 1998, IIH was liquidated and CILIC was merged into CICA. 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 approximately 610,000 shares of Citizens Class A Common stock. Investors is the parent of Excalibur 70 71 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. (10) CONTINGENCIES The Company is a party to various legal proceedings incidental to its business. Contingent liabilities that might arise from litigation are not considered material in relation to the financial position of the Company. Reserves for claims payable are based on the expected claim amount to be paid after a case by case review of the facts and circumstances relating to each claim. A contingency exists with regard to these reserves until such time as the claims are adjudicated and paid. (11) 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.
1998 1997 1996 ----------- ----------- ----------- REVENUES U.S. $21,189,781 $13,137,109 $ 3,870,814 Non-U.S. 51,495,134 51,890,189 59,951,346 ----------- ----------- ----------- Total Revenues $72,684,915 $65,027,298 $63,822,160 =========== =========== ===========
71 72 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 years ended December 31, 1998, 1997 and 1996, is as follows:
YEARS ENDED DECEMBER 31 1998 1997 1996 ------------- ------------- ------------- Revenue, excluding net investment income and realized gain (loss) on investments Domestic $ 17,430,945 $ 11,173,711 $ 3,299,993 International 42,360,457 44,134,976 51,110,449 ------------- ------------- ------------- Total consolidated revenue $ 59,791,402 $ 55,308,687 $ 54,410,442 ============= ============= ============= Net investment income: Domestic 3,288,195 2,028,071 557,101 International 7,990,930 8,010,665 8,628,405 ------------- ------------- ------------- Total consolidated net investment income $ 11,279,125 $ 10,038,736 $ 9,185,506 ============= ============= ============= Amortization expense: Domestic 12,383,209 2,411,331 704,800 International 7,006,737 9,524,501 10,915,976 ------------- ------------- ------------- Total consolidated amortization expense $ 19,389,946 $ 11,935,832 $ 11,620,776 ============= ============= ============= Realized gain (loss) on investments Domestic 470,641 (64,673) 13,720 International 1,143,747 (255,452) 212,492 ------------- ------------- ------------- Total consolidated realized gain (loss) on investments $ 1,614,388 $ (320,125) $ 226,212 ============= ============= ============= Net income (loss) before federal income tax: Domestic (1,655,089) 814,107 219,494 International (4,022,176) 3,215,637 3,399,537 ------------- ------------- ------------- Total consolidated net income (loss) before federal income taxes $ (5,677,265) $ 4,029,744 $ 3,619,031 ============= ============= ============= Year Ended December 31 1998 1997 ------------- ------------- Assets: Domestic 80,069,406 78,848,141 International 173,314,789 170,671,294 ------------- ------------- Total $ 253,384,195 $ 249,519,435 ============= =============
72 73 (12) INCOME TAXES A reconciliation of federal income tax expense computed by applying the federal income tax rate of 34% to income before federal income tax expense are as follows:
1998 1997 1996 ----------- ----------- ----------- Computed normal tax expense (benefit) $(1,930,270) $ 1,370,113 $ 1,230,470 Small life insurance company deduction (447,690) (441,356) (472,541) Change in valuation allowance (24,479) (575,147) (10,097) Small life deduction rate change -- -- 218,438 Amortization of excess of costs over net assets acquired 3,444,038 481,728 331,373 Other 1,829 (231,117) 107,662 ----------- ----------- ----------- Federal income tax expense $ 1,043,428 $ 604,221 $ 1,405,305 =========== =========== ===========
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 consists of:
1998 1997 1996 ----------- ----------- ----------- Current $ 2,521,377 $ 1,613,128 $ 1,812,531 Deferred (1,477,949) (1,008,907) (407,226) ----------- ----------- ----------- $ 1,043,428 $ 604,221 $ 1,405,305 =========== =========== ===========
73 74 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below.
1998 1997 ----------- ----------- Deferred tax assets: Future policy benefit reserves $14,568,354 $13,431,989 Net operating loss carryforwards and alternative minimum tax credits 589,233 614,598 Other 1,109,691 1,078,423 ----------- ----------- Total gross deferred tax assets 16,267,278 15,125,010 Less valuation allowance 173,350 197,829 ----------- ----------- Net deferred tax assets $16,093,928 $14,927,181 ----------- ----------- Deferred tax liabilities: Deferred policy acquisition costs $12,388,415 $ 9,181,507 Cost of insurance acquired 97,920 2,132,016 Investments available for sale 1,866,633 814,347 Other 1,041,112 2,226,881 ----------- ----------- Total gross deferred tax liabilities 15,394,080 14,354,751 ----------- ----------- Net deferred tax asset $ 699,848 $ 572,430 =========== ===========
During 1998 the Company released the valuation allowance associated with ALFC net operating losses as these losses can be utilized by Citizens, Inc. as a result of the merger of these two entities. The Company has established a valuation allowance for net operating losses of IIH and other entities which may not be used prior to their expiration. The Company and its subsidiaries have net operating losses at December 31, 1998 available to offset future taxable income of approximately $1,733,000 for Federal income tax which expire through 2008. The net operating loss carryforward is subject to limitations under Section 382 of the Internal Revenue Code. At December 31, 1998, the Company had accumulated approximately $3,291,000 in its "policyholders' surplus account." This is a special memorandum tax account into which certain amounts not previously taxed, under prior tax laws, were accumulated. No new additions will be made to this account. Federal income taxes will become payable thereon at the then current tax rate (a) when and if distributions to the shareholder, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income; or (b) when a company ceases to be a life insurance company as defined by the Internal Revenue Code and such termination is not due to another life insurance company acquiring its assets in a nontaxable transaction. The Company does not anticipate any transactions that would cause any part of this amount to become taxable. However, should the balance at December 31, 1998 become taxable, the tax computed at present rates would be approximately $1,119,000. 74 75 (13) FAIR VALUE OF FINANCIAL INSTRUMENTS Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instrument. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets at each year-end were:
1998 1997 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------ ------------ Financial assets: Fixed maturities $152,252,216 $152,814,842 $138,638,812 $138,725,681 Equity securities 862,287 862,287 978,391 978,391 Cash and short-term 10,168,728 10,168,728 6,754,956 6,754,956 investments Mortgage Loans 1,560,757 1,560,757 1,287,295 1,287,295 Student Loans 4,673 4,673 81,681 81,681 Financial Liabilities: Note Payable 333,333 333,333 937,430 937,430 Annuities 3,675,937 3,675,937 3,819,861 3,819,861
Fair values for fixed income securities and equity securities are based on quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including the discount rate and estimates of future cash flows. Mortgage loans are secured principally by residential properties. Weighted average interest rate for these loans as of December 31, 1998, was approximately 8.7% with maturities ranging from one to fifteen years. Management believes that reported amounts approximate fair value. Student loans are guaranteed by the government. Weighted average interest rate for these loans as of December 31, 1998, was approximately 7.44%. Management believes that the reported amounts approximate fair value as these loans are sold as soon as possible. The carrying value of the note payable approximates fair value as the interest rate charged on the note payable is indexed with the prime rate. The carrying value and fair values for the Company's liabilities under annuity contract policies are the same as the interest rates credited to these products and are periodically 75 76 adjusted by the Company to reflect market conditions. The fair values of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Policy loans have a weighted average interest rate of 7.15% as of December 31, 1998 and 1997 and have no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheet. These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves. Policy loans are an integral part of the life insurance policies which the Company has in force and cannot be valued separately. For cash, and short-term investments, accrued investment income, amounts recoverable from reinsurers, other assets, federal income tax payable and receivable, dividend accumulations, commissions payable, amounts held on deposit, and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments. (14) OTHER COMPREHENSIVE INCOME (LOSS) The changes in the components of other comprehensive income (loss) are reported net of income taxes of 34% for the periods indicated as follows:
YEAR ENDED DECEMBER 31, 1998 -------------------------------------------- PRE-TAX TAX NET AMOUNT EFFECT AMOUNT ------------ ------------ ------------ Unrealized gain on securities: Unrealized holding gain arising during the period $ 3,485,479 $ (1,185,063) $ 2,300,416 Less: reclassification adjustment for gains included in net income (390,518) 132,776 (257,742) ------------ ------------ ------------ Other comprehensive income $ 3,094,961 $ (1,052,287) $ 2,042,674 ============ ============ ============
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------- PRE-TAX TAX NET AMOUNT EFFECT AMOUNT ------------ ------------ ------------ Unrealized gain on securities: Unrealized holding gain arising during the period $ 3,185,587 $ (1,083,099) $ 2,102,488 Add: reclassification adjustment for losses included in net income 285,558 (97,090) 188,468 ------------ ------------ ------------ Other comprehensive income $ 3,471,145 $ (1,180,189) $ 2,290,956 ============ ============ ============
76 77
YEAR ENDED DECEMBER 31, 1996 -------------------------------------------- PRE-TAX TAX NET AMOUNT EFFECT AMOUNT ------------ ------------ ------------ Unrealized gain on securities: Unrealized holding (loss) arising during the period $ (3,021,603) $ 1,027,345 $ (1,994,258) Add: reclassification adjustment for losses included in net income 24,765 (8,420) 16,345 ------------ ------------ ------------ Other comprehensive (loss) $ (2,996,838) $ 1,018,925 $ (1,977,913) ============ ============ ============
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table contains selected unaudited consolidated financial data for each quarter.
1998 ------------------------------------------------------------ FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ Revenues $ 19,013,107 $ 19,049,146 $ 18,162,381 $ 16,460,281 Expenses 16,673,560 27,487,836 17,890,009 16,310,775 Other (733,120) (200,870) (72,516) (36,922) Net income (loss) 1,606,377 (8,639,510) 199,856 112,584 Basic and diluted earnings per share .08 (.40) .01 .01
1997 ------------------------------------------------------------ FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ Revenues $ 16,795,936 $ 18,172,671 $ 15,918,698 $ 14,139,993 Expenses 15,309,437 16,267,692 15,089,776 14,330,649 Other 178,033 (543,363) (307,863) 68,972 Net income 1,664,532 1,361,616 521,059 (121,684) Basic and diluted earnings per share .08 .06 .03 (.01)
1996 ------------------------------------------------------------ FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ Revenues $ 17,666,077 $ 16,976,294 $ 15,484,789 $ 13,695,000 Expenses 16,221,781 16,093,457 14,936,524 12,951,367 Other (542,568) (237,302) (366,799) (258,636) Net income 901,728 645,535 181,466 484,997 Basic and diluted earnings per share .04 .03 .01 .03
77 78 (16) YEAR 2000 ISSUES (UNAUDITED) The Company has investigated the potential impact of the Year 2000 on its systems, procedures, customers and business processes. The Year 2000 assessment provided information used to determine what system components must be changed or replaced to minimize the impact of the calendar change from 1999 to 2000. The Company continues to use internal resources to modify, replace and test the Year 2000 modifications. Management estimates 90% of the identified modifications to mission critical systems and 60% of the identified modifications to other systems have been completed for its Year 2000 project. The project completion is scheduled to occur prior to any anticipated impact on the Company operations. The total cost for the project is negligible as it is being performed with existing staff, with costs being expensed as incurred until completion. The Company faces the risk that one or more of its critical suppliers or customers (external relationships) will not be able to interact with the Company due to the third party's inability to resolve their own Year 2000 issues. The Company has identified its external relationships and has determined the overall Year 2000 readiness of its external relationships. The Company has received information as to those parties' Year 2000 plans and state of readiness. The Company has determined that all mission critical systems are either Year 2000 compliant or can be circumvented (at minimal cost and time) by using non-electronic transactions. In addition, any other systems that were deemed to not be Year 2000 compliant, have been reported to have no loss of data or functionality. 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. 78 79 SCHEDULE II CITIZENS, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CITIZENS, INC. (PARENT COMPANY) STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1998 AND 1997
1998 1997 ------------ ------------ Assets Investment in subsidiaries 71,163,025 76,379,058 Accrued investment income 14,410 17,254 Real estate 464,962 436,287 Cash 1,789,608 752,907 Notes receivable (1) 333,333 400,000 Other assets 1,536,456 2,072,751 ------------ ------------ $ 75,301,794 $ 80,058,257 ============ ============ Liabilities and Stockholders' Equity Liabilities: Notes payable $ 333,333 $ 400,000 Accrued expense and other 64,782 76,559 ------------ ------------ $ 398,115 $ 476,559 Stockholders' equity: Common stock: Class A $ 52,790,643 $ 52,790,643 Class B 283,262 283,262 Retained earnings 20,135,464 26,856,157 Accumulated other comprehensive income: Unrealized investment gain (loss) of securities held by subsidiaries, net 3,623,464 1,580,790 Treasury stock (1,929,154) (1,929,154) ------------ ------------ 74,903,679 79,581,698 ------------ ------------ $ 75,301,794 $ 80,058,257 ============ ============
(1) Eliminated in consolidation. See accompanying independent auditors' report. 79 80 SCHEDULE II, CONTINUED CITIZENS, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CITIZENS, INC. (PARENT COMPANY) STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 1998 AND 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Revenues: Management service fees (1) $ 13,033,492 $ 10,462,052 $ 10,428,468 Investment income (1) 79,882 125,746 83,957 Other 4,425 82,668 2,357 Realized gain (loss) -- -- 151,334 ------------ ------------ ------------ 13,117,799 10,670,466 10,666,116 ------------ ------------ ------------ Expenses: General 12,019,676 9,516,881 9,374,706 Interest 27,011 30,186 34,853 Taxes 533,098 323,635 447,450 ------------ ------------ ------------ $ 12,579,785 $ 9,870,702 $ 9,857,009 ------------ ------------ ------------ Income (loss) before equity in income of unconsolidated subsidiaries 538,014 799,764 809,107 Equity in income (loss) of unconsolidated subsidiaries (7,258,707) 2,625,759 1,404,619 ------------ ------------ ------------ Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726 ============ ============ ============
(1) Eliminated in consolidation. See accompanying independent auditors' report. 80 81 SCHEDULE II, CONTINUED CITIZENS, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CITIZENS, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726 Adjustments to reconcile net (loss) income to net cash used by operating activities: Realized gains on sales of investments -- -- (151,334) Equity in net (income) loss of unconsolidated subsidiaries 7,258,707 (2,625,759) (795,318) Accrued expenses and other liabilities (11,777) (105,565) (604,315) Accrued investment income 2,844 2,835 4,257 Other assets 536,295 (246,993) (393,323) ------------ ------------ ------------ Net cash provided by operating activities 1,065,376 450,041 273,693 ------------ ------------ ------------ Cash flows from investing activities: Acquisition of NSLIC -- (1,000,000) -- Capital contribution to subsidiaries -- (374,000) (400,000) Cash provided by merger -- 540,450 -- Payments on notes receivable 66,667 69,198 152,267 Investment in real estate (28,675) (79,948) -- Sale of real estate -- -- 82,974 ------------ ------------ ------------ Net cash provided (used) by investing activities 37,992 (844,300) (164,759) ------------ ------------ ------------ Cash flows from financing activities: Sale of common stock, net -- (104,388) 391,712 Payment on notes payable (66,667) (66,667) (66,666) ------------ ------------ ------------ Net cash provided (used) by financing activities (66,667) (171,055) 325,046 ------------ ------------ ------------ Net increase (decrease) in cash 1,036,701 (565,314) 433,980 Cash at beginning of year 752,907 1,318,221 884,241 ------------ ------------ ------------ Cash at end of year $ 1,789,608 $ 752,907 $ 1,318,221 ============ ============ ============
See accompanying independent auditors' report. 81 82 SCHEDULE IV CITIZENS, INC. AND SUBSIDIARIES REINSURANCE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CEDED ASSUMED PERCENTAGE GROSS TO OTHER FROM OTHER NET OF AMOUNT AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET -------------- -------------- -------------- -------------- -------------- Year ended December 31, 1998: Life insurance in-force $2,340,744,000 $ 306,070,000 $ 333,719,000 $2,368,393,000 16.3% ============== ============== ============== ============== Premiums: Life insurance 50,569,111 1,768,030 231,410 49,032,491 .5% Accident and health insurance 11,458,504 1,600,660 -- 9,857,844 -- -------------- -------------- -------------- -------------- Total premiums $ 62,027,615 3,368,690 231,410 58,890,335 .4% ============== ============== ============== ============== Year ended December 31, 1997: Life insurance in-force $2,250,197,000 $ 318,630,000 $ 334,953,000 $2,266,520,000 15.5% ============== ============== ============== ============== Premiums: Life insurance 51,364,382 1,952,316 284,632 49,696,698 .6% Accident and health insurance 5,605,023 305,240 0 5,299,783 -- -------------- -------------- -------------- -------------- Total premiums $ 56,969,405 2,257,556 284,632 54,996,481 .5% ============== ============== ============== ============== Year ended December 31, 1996: Life insurance in-force $2,231,017,000 $ 296,378,000 $ 304,380,000 $2,239,019,000 13.7% ============== ============== ============== ============== Premiums: Life insurance 52,075,038 2,511,318 309,953 49,873,673 0.6% Accident and health insurance 4,111,969 71,281 0 4,040,688 -% -------------- -------------- -------------- -------------- Total premiums $ 56,187,007 2,582,599 309,953 53,914,361 0.6% ============== ============== ============== ==============
See accompanying independent auditors' report. 82 83 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. CITIZENS, INC. Date: March 30, 1999 By: /s/ Mark A. Oliver ----------------------------------------- Mark A. Oliver, President By: /s/ Jeffrey J. Wood ----------------------------------------- Jeffrey J. Wood, Executive Vice President, Chief Financial Officer and Secretary/ Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each individual whose signature appears below hereby designates and appoints Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power of substitution and resubstitution, for each person and in such person's name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K, which amendments may make such changes in this Annual Report on Form 10-K as either Attorney-in-Fact deems appropriate and to file therewith, with the Securities and Exchange Commission, granting unto such Attorneys-in-Fact and each of them, full power and authority to do and perform each and every act and think requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that such Attorneys-in-Fact or either of them, in their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Mark A. Oliver /s/ Harold E. Riley - ------------------------------- ------------------------------------- Mark A. Oliver, Director Harold E. Riley, Chairman of the Board and Director /s/ Ralph M. Smith /s/ Joe R. Reneau - ------------------------------- ------------------------------------- Ralph M. Smith, Director Joe R. Reneau, Director /s/ James C. Mott /s/ Timothy T. Timmerman - ------------------------------- ------------------------------------- James C. Mott, Director Timothy T. Timmerman, Director /s/ Rick D. Riley /s/ Steve Shelton - ------------------------------- ------------------------------------- Rick D. Riley, Director Steve Shelton, Director /s/ T. Roby Dollar - ------------------------------- T. Roby Dollar, Director
83 84 INDEX TO EXHIBITS
EXHIBIT PAGE ------- ----- Exhibit 3.2 Exhibit 21 Exhibit 23 Exhibit 27
84 EX-3.2 2 AMENDED & RESTATED BYLAWS 1 EXHIBIT 3.2 CITIZENS, INC. AMENDED AND RESTATED BYLAWS FEBRUARY 22, 1999 2 INDEX
Page ---- ARTICLE I OFFICES.................................................................... 1 Section 1.01 Registered Office and Place of Business.................................... 1 Section 1.02 Other Offices.............................................................. 1 ARTICLE II MEETINGS OF SHAREHOLDERS................................................... 1 Section 2.01 Place of Meeting........................................................... 1 Section 2.02 Annual Meetings............................................................ 1 Section 2.03 Special Meetings........................................................... 2 Section 2.04 Voting Lists............................................................... 2 Section 2.05 Notice of Meetings......................................................... 2 Section 2.06 Quorum of Shareholders..................................................... 3 Section 2.07 Manner of Action........................................................... 3 Section 2.08 Voting of Shares........................................................... 3 Section 2.09 Record Date................................................................ 4 Section 2.10 Action Without Meeting..................................................... 4 Section 2.11 Corporation's Acceptance of Votes.......................................... 4 Section 2.12 Meetings by Telecommunication.............................................. 6 ARTICLE III DIRECTORS.................................................................. 6 Section 3.01 Management of the Corporation.............................................. 6 Section 3.02 Number and Qualification................................................... 6 Section 3.03 Change in Number........................................................... 6 Section 3.04 Removal.................................................................... 6 Section 3.05 Filling of Vacancies....................................................... 7 Section 3.06 Method of Election......................................................... 7 Section 3.07 Place of Meetings.......................................................... 7 Section 3.08 Annual Meetings............................................................ 7 Section 3.09 Regular Meetings........................................................... 7 Section 3.10 Special Meetings........................................................... 7 Section 3.11 Quorum and Manner of Acting................................................ 8 Section 3.12 Action Without Meeting..................................................... 8 Section 3.13 Compensation............................................................... 8 Section 3.14 Procedure.................................................................. 8 Section 3.15 Advisory Board.............................................................. 8 Section 3.16 Interested Directors, Officers and Shareholders............................. 9 (a) Validity...............................................................
i 3 (b) Disclosure; Approval................................................... (c) Non-exclusive.......................................................... Section 3.17 Telephonic Meetings......................................................... 10 Section 3.18 Standard of Care............................................................ 10 ARTICLE IV EXECUTIVE COMMITTEE......................................................... 11 Section 4.01 Designation................................................................. 11 Section 4.02 Authority................................................................... 11 Section 4.03 Procedure................................................................... 11 Section 4.04 Removal..................................................................... 11 ARTICLE V OTHER COMMITTEES OF THE BOARD............................................... 11 Section 5.01 Other Committees............................................................ 11 ARTICLE VI NOTICES..................................................................... 12 Section 6.01 Manner of Giving Notices.................................................... 12 Section 6.02 Waiver of Notice............................................................ 12 ARTICLE VII POWERS AND DUTIES OF OFFICERS............................................... 12 Section 7.01 Elected Officers............................................................ 12 Section 7.02 Election.................................................................... 12 Section 7.03 Appointive Officers......................................................... 13 Section 7.04 Two or More Offices......................................................... 13 Section 7.05 Compensation................................................................ 13 Section 7.06 Term of Office; Removal; Filling of Vacancies............................... 13 Section 7.07 Chairman of the Board....................................................... 13 Section 7.08 Vice Chairman of the Board.................................................. 14 Section 7.09 President................................................................... 14 Section 7.10 Vice Presidents............................................................. 15 Section 7.11 Assistant Vice Presidents................................................... 15 Section 7.12 Treasurer................................................................... 15 Section 7.13 Assistant Treasurers........................................................ 16 Section 7.14 Secretary................................................................... 16 Section 7.15 Assistant Secretaries....................................................... 16 Section 7.16 Additional Powers and Duties................................................ 16
ii 4 ARTICLE VIII STOCK AND TRANSFER OF STOCK................................................. 16 Section 8.01 Certificates Representing Shares............................................ 16 Section 8.02 Lost Certificates........................................................... 17 Section 8.03 Transfer of Shares.......................................................... 17 Section 8.04 Registered Shareholders..................................................... 17 Section 8.05 Pre-emptive Rights.......................................................... 18 ARTICLE IX MISCELLANEOUS PROVISIONS.................................................... 18 Section 9.01 Dividends................................................................... 18 Section 9.02 Reserves.................................................................... 18 Section 9.03 Signing of Negotiable Instruments........................................... 18 Section 9.04 Seal........................................................................ 18 Section 9.05 Indemnification............................................................. 19 Section 9.06 Right to Indemnification.................................................... 19 Section 9.07 Effect of Termination of Action............................................. 20 Section 9.08 Groups Authorized to Make Indemnification Determination..................... 20 Section 9.09 Court-ordered Indemnification............................................... 20 Section 9.10 Advance of Expenses......................................................... 20 Section 9.11 Witness Expenses............................................................ 21 Section 9.12 Report to Shareholders...................................................... 21 Section 9.13 Surety Bonds................................................................ 21 ARTICLE X AMENDMENTS.................................................................. 21 Section 10.01 Amendments.................................................................. 22
iii 5 AMENDED AND RESTATED B Y L A W S OF CITIZENS, INC. ARTICLE I. OFFICES Section 1.01. Registered Office and Place of Business. The registered office of the Corporation shall be located in Denver, Colorado. The registered office of the Corporation required by the Colorado Business Corporation Act to be maintained in Colorado may be, but need not be, identical with the principal or home office, and the address of the registered office or principal or home office may be changed from time to time by the board of directors. Section 1.02. Other Offices. The Corporation may have, in addition to its registered office, offices and places of business at such places, both within and without the State of Colorado, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II. MEETINGS OF SHAREHOLDERS Section 2.01. Place of Meeting. All meetings of shareholders for any purpose may be held at such times and at such place within or without the State of Colorado as shall be stated in the notice of the meeting or a duly executed waiver of notice thereof, except as may otherwise be required by law. Section 2.02. Annual Meetings. An annual meeting of the shareholders shall be held on the first Tuesday in June in each year, if not a legal holiday; if it is a legal holiday, then it will be held on the next secular day following, at which time a Board of Directors will be elected and such other business as may properly be brought before the meeting will be transacted. Section 2.03. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by statute, by the Articles of Incorporation, or by these Bylaws, may be called by the Chairman of the Board, a majority of the Board of Directors, or if the Corporation receives one or more written demands for the meeting, stating the purpose or purposes for which it is to be held, signed and dated by the holders of shares representing at least ten percent of all votes entitled to be cast on any issue proposed to be considered at the meeting. Business transacted at all special meetings shall be confined to the subjects stated in the notice of the meeting. 6 Section 2.04. Voting Lists. The Secretary shall make, at the earlier of ten days before each meeting of shareholders or two business days after notice of the meeting has been given, a complete list of the shareholders entitled to be given notice of such meeting or any adjournment thereof. The list shall be arranged by voting groups and within each voting group by class or series of shares, shall be in alphabetical order within each class or series, and shall show the address of and the number of shares of each class or series held by each shareholder. For the period beginning the earlier of ten days prior to the meeting or two business days after notice of the meeting is given and continuing through the meeting and any adjournment thereof, this list shall be kept on file at the principal office of the Corporation, or at a place (which shall be identified in the notice) in the city where the meeting will be held. Such list shall be available for inspection on written demand by any shareholder (including for the purpose of this Section 2 any holder of voting trust certificates) or his agent or attorney during regular business hours and during the period available for inspection. The original stock transfer books shall be prima facie evidence as to the shareholders entitled to examine such list or to vote at any meeting of shareholders. Section 2.05. Notice of Meetings. Written or printed notice, stating the date, time and place of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board or person calling the meeting, to each shareholder of record entitled to vote at the meeting, except that (i) if the number of authorized shares is to be increased, at least thirty days' notice shall be given, or (ii) any other longer notice period is required by the Colorado Business Corporation Act. Notice shall be given personally or by mail, private carrier, telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication by or at the direction of the Chairman of Board, the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed and if in a comprehensible form, such notice shall be deemed to be given and effective when deposited in the United States mail, addressed to the shareholder at such address as appears in the Corporation's current record of shareholders, with postage prepaid. If notice is given other than by mail, and provided that such notice is in a comprehensible form, the notice is given and effective on the date received by the shareholder. Section 2.06. Quorum of Shareholders. One-third of the votes entitled to be cast on a matter by a voting group shall constitute a quorum of that voting group for action on the matter. If less than one-third of such votes are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time 2 7 without further notice, for a period not to exceed 120 days for any one adjournment. If a quorum is present at such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, unless the meeting is adjourned and a new record date is set for the adjourned meeting. Section 2.07. Manner of Action. If a quorum exists, action on a matter other than the election of directors by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation. Section 2.08. Voting of Shares. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of the shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the Articles of Incorporation or any other certificate creating any class or series of stock. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such shareholder or by his duly authorized attorney-in-fact and bearing a date not more than eleven months prior to said meeting, unless said instrument provides for a longer period. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype or other electronic transmission providing a written statement of the appointment to the proxy, a proxy solicitor, proxy support service organization, or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the Corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. Any complete copy, including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment for any purpose for which the original appointment could be used. Revocation of a proxy does not affect the right of the Corporation to accept the proxy's authority unless (i) the Corporation had notice that the appointment was coupled with an interest and notice that such interest had been extinguished is received by the Secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment, or (ii) other notice of the revocation of the appointment is received by the Secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. Other notice of revocation may, in the discretion of the Corporation, be deemed to include the appearance at a 3 8 shareholders' meeting of the shareholder who granted the proxy and his voting in person on any matter subject to a vote at such meeting. The death or incapacity of the shareholder appointing a proxy does not affect the right of the Corporation to accept the proxy's authority unless notice of the death or incapacity is received by the Secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. The Corporation shall not be required to recognize an appointment made irrevocable if it has received a writing revoking the appointment signed by the shareholder (including a shareholder who is a successor to the shareholder who granted the proxy) either personally or by his attorney-in-fact, notwithstanding that the revocation may be a breach of an obligation of the shareholder to another person not to revoke the appointment. Such proxy shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. Except as otherwise provided in the Articles of Incorporation or in applicable law, shareholders shall not have a right to cumulative voting. Section 2.09. Record Date. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of the shareholders, the record date to be not less than ten nor more than sixty days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed shall be the record date. Section 2.10. Action Without Meeting. Any action required by statute to be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the shareholders entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of the shareholders. Any such signed consent, or a signed copy thereof, shall be placed in the minute book of the Corporation. Section 2.11. Corporation's Acceptance of Votes. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name of a shareholder, the Corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, proxy appointment or proxy appointment revocation does not correspond to the name of a shareholder, the Corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and to give it effect as the act of the shareholder if: 4 9 (i) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-tenants or fiduciaries, and the person signing appears to be acting on behalf of all the co-tenants or fiduciaries; or (vi) the acceptance of the vote, consent, waiver, proxy appointment or proxy appointment revocation is otherwise proper under rules established by the Corporation that are not inconsistent with this Section 2.11. The Corporation is entitled to reject a vote, consent, waiver, proxy appointment or proxy appointment revocation if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. Neither the Corporation nor its officers nor any agent who accepts or rejects a vote, consent waiver, proxy appointment or proxy appointment revocation in good faith and in accordance with the standards of this Section is liable in damages for the consequences of the acceptance or rejection. 5 10 Section 2.12. Meetings by Telecommunication. Any or all of the shareholders may participate in an annual or special shareholders' meeting by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE III. DIRECTORS Section 3.01. Management of the Corporation. The business and affairs of the Corporation shall be managed by its Board of Directors, who may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, by the Articles of Incorporation, or by these Bylaws directed or required to be exercised or done by the shareholders. Section 3.02. Number and Qualification. The Board of Directors shall consist of not less than five nor more than twenty-seven directors, none of whom need be shareholders or residents of the State of Colorado. The directors shall be elected at the annual meeting of the shareholders, except as hereinafter provided, and each director elected shall hold office until his successor shall be elected and shall qualify. Section 3.03. Change in Number. The minimum and maximum number of Directors may be increased or decreased from time to time by amendment to these Bylaws, provided that at no time shall the number of directors be less than five nor more than twenty-seven. No decrease shall have the effect of shortening the term of any incumbent director. Any directorship to be filled by reason of an increase in the number of directors shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose. Section 3.04. Removal. Any director may be removed either for or without cause in the manner set forth in the Colorado Business Corporation Act. Section 3.05. Filling of Vacancies. Any director may resign at any time by giving written notice to the Corporation. Such resignation shall take effect at the time the notice is received by the Corporation unless the notice specifies a later effective date. Unless otherwise specified in the notice of resignation, the Corporation's acceptance of such resignation shall not be necessary to make it effective. Any vacancy on the board of directors may be filled by the affirmative vote of a majority of the shareholders or the board of directors. If the directors remaining in office constitute fewer than a quorum of the board of directors, the directors may fill the 6 11 vacancy by the affirmative vote of a majority of all the directors remaining in office. If elected by the directors, the director shall hold office until the next annual shareholders' meeting at which directors are elected. If elected by the shareholders, the director shall hold office for the unexpired term of his predecessor in office; except that, if the director's predecessor was elected by the directors to fill a vacancy, the director elected by the shareholders shall hold office for the unexpired term of the last predecessor elected by the shareholders. Section 3.06. Method of Election. Cumulative voting shall not be permitted. As is provided in the Articles of incorporation, as amended, the voting rights of Class A common stock and Class B common stock shall be equal in all respects, with the exception that the holders of the Class B common stock shall have the exclusive right to elect a simple majority of the members of the Board of Directors and the holders of the Class A common stock shall have the exclusive right to elect the remaining directors. Accordingly, at each election of directors by shareholders the holders of the Class B common stock shall first elect a simple majority of the number to be elected and the holders of the Class A common stock shall elect the remaining directors. Section 3.07. Place of Meetings. The directors of the Corporation may hold their meetings, both regular and special, either within or without the State of Colorado. Section 3.08. Annual Meetings. The first meeting of each newly elected Board shall be held without further notice immediately following the annual meeting of shareholders and at the same place, unless by unanimous consent of the directors then elected and serving such time or place shall be changed. Section 3.09. Regular Meetings. Regular meetings of the Board of Directors may be held at such times and places as may be fixed from time to time by the Board of Directors. Except as otherwise provided by statute, the Articles of Incorporation or these Bylaws, any and all business may be transacted at any regular meeting. Section 3.10. Special Meetings. Special meetings of the board of directors may be called by the Chairman of the Board on one day's notice to each director, either personally or by mail, or by telegram; special meetings shall be called by the Chairman of the Board in like manner, and like notice, on the written request of a majority of the directors. Except as may be otherwise expressly provided by statute, the Articles of Incorporation or these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in the notice or waiver of notice. 7 12 Section 3.11. Quorum and Manner of Acting. At all meetings of the Board of Directors, the presence of a majority of the directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, the Articles of Incorporation or these Bylaws. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum shall be present. At any such adjourned meeting reconvened, any business may be transacted which might have been transacted at the meeting as originally convened. Section 3.12. Action Without Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors or any executive committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the Board of Directors or the executive committee, as the case may be. The signing of minutes setting forth the action taken constitutes consent in writing. Such consent shall have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State. Section 3.13. Compensation. The Board of Directors shall have authority to determine from time to time the amount of compensation, if any, which shall be paid to its members for their services as directors and as members of standing or special committees of the Board. The Board shall also have power in its discretion to provide for and to pay to directors rendering services to the Corporation not ordinarily rendered by directors as such, special compensation appropriate to the value of such services as determined by the Board from time to time. Nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. Section 3.14. Procedure. The Board of Directors shall keep regular minutes of its proceedings. The minutes shall be placed in the minute book of the Corporation. Section 3.15. Advisory Board. The Chairman of the Board may establish and appoint a member or members to an Advisory Board to act in an advisory capacity to the Board of Directors. 8 13 Section 3.16. Interested Directors, Officers and Shareholders. (1) As used in this section, "conflicting interest transaction" means any of the following: (a) A loan or other assistance by the Corporation to a director of the Corporation or to an entity in which a director of the Corporation is a director or officer or has a financial interest; (b) A guaranty by the Corporation of an obligation of a director of the Corporation or of an obligation of an entity in which a director of a Corporation is a director or officer or has a financial interest; or (c) A contract or transaction between the Corporation and a director of the Corporation or between the Corporation and an entity in which a director of the Corporation is a director or officer or has a financial interest. (2) No conflicting interest transaction shall be void or voidable or be enjoined, set aside, or give rise to an award of damages or other sanctions in a proceeding by a shareholder or by or in the right of the Corporation, solely because the conflicting interest transaction involves a director of the Corporation or an entity in which a director of the Corporation is a director or officer or has a financial interest or solely because the director is present at or participates in the meeting of the Corporation's Board of Directors or of the committee of the Board of Directors which authorizes, approves, or ratifies the conflicting interest transaction or solely because the director's vote is counted for such purpose if: (a) The material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes, approves, or ratifies the conflicting interest transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or (b) The material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the shareholders entitled to vote thereon, and the conflicting interest transaction is specifically authorized, approved, or ratified in good faith by a vote of the shareholders; or 9 14 (c) The conflicting interest transaction is fair to the Corporation as of the time it is authorized, approved, or ratified by the Board of Directors, a committee thereof, or the shareholders. (3) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes, approves, or ratifies the conflicting interest transaction. (4) The Board of Directors or a committee thereof shall not authorize a loan, by the Corporation to a director of the Corporation or to an entity in which a director of the Corporation is a director or officer or has a financial interest, or a guaranty, by the Corporation of an obligation of a director of the Corporation or of an obligation of an entity in which a director of the Corporation is a director or officer or has a financial interest, pursuant to paragraph (a) of subsection (2) of this section until at least ten days after written notice of the proposed authorization of the loan or guaranty has been given to the shareholders who would be entitled to vote thereon if the issue of the loan or guaranty were submitted to a vote of the shareholders. Section 3.17 Telephonic Meetings. The board of directors may permit any director (or any member of a committee designated by the board of directors) to participate in a regular or special meeting of the board of directors or a committee thereof through the use of any means of communication by which all directors participating in the meeting can hear each other during the meeting. A director participating in a meeting in this manner is deemed to be present at the meeting. Section 3.18 Standard of Care. A director shall perform his duties as a director, including without limitation his duties as a member of any committee of the board of directors, in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by the persons herein designated. However, he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A director shall not be liable to the Corporation or its shareholders for any action he takes or omits to take as a director if, in connection with such action or omission, he performs his duties in compliance with this Section 3.18. The designated persons on whom a director is entitled to rely are (i) one or more officers or employees of the Corporation whom the director reasonably believes 10 15 to be reliable and competent in the matters presented, (ii) legal counsel, public accountants, or other persons as to matters which the director reasonably believes to be within such person's professional or expert competence, or (iii) a committee of the board of directors on which the director does not serve if the director believes the committee merits confidence. ARTICLE IV. EXECUTIVE COMMITTEE Section 4.01. Designation. The Board of Directors may, by resolution adopted by a majority of the whole Board, designate an executive committee, to consist of at least three but not more than five directors of the Corporation, one of whom shall be the Chairman of the Board of Directors of the Corporation. Section 4.02. Authority. The executive committee shall have and may exercise all the authority of the Board of Directors in the management of the business and affairs of the Corporation, except where action of a majority of all members of the Board of Directors is required by the Colorado Business Corporation Act or by the Articles of Incorporation, or these Bylaws, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. Section 4.03. Procedure. The executive committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. The minutes of the proceedings of the executive committee shall be placed in the minute book of the Corporation. Section 4.04. Removal. Any member of the executive committee may be removed by the Board of Directors by the affirmative vote of a majority of the whole Board, whenever in its judgment the best interests of the Corporation will be served thereby. ARTICLE V. OTHER COMMITTEES OF THE BOARD Section 5.01. Other Committees. The Board of Directors may, by resolution adopted by affirmative vote of a majority of the whole Board, designate two or more directors (with such alternates, if any, as may be deemed desirable) to constitute another committee or committees for any purpose; provided that any such other committee or committees shall have and may exercise only the power of recommending action to the Board of Directors or the executive committee and of carrying out and implementing any instructions or any policies, plans, and programs 11 16 theretofore approved, authorized, and adopted by the Board of Directors or the executive committee. ARTICLE VI. NOTICES Section 6.01. Manner of Giving Notices. Whenever, under the provisions of the statutes or the Articles of Incorporation, or these Bylaws, notice is required to be given to any committee member, director, or shareholder, and no provisions are made regarding how such notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing, by mail, postage prepaid, addressed to such director or shareholder at such address as appears on the books of the Corporation or by telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same shall be thus deposited in the United States mail as aforesaid. Section 6.02. Waiver of Notice. Whenever any notice is required to be given to any committee member, shareholder, or director of the Corporation under the provisions of the statutes, the Articles of Incorporation, or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice (whether before or after the time stated in such notice) shall be deemed equivalent to the giving of such notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting. ARTICLE VII. POWERS AND DUTIES OF OFFICERS Section 7.01. Elected Officers. The officers of the Corporation shall be elected by the directors and shall be a Chairman of the Board, one or more Vice Chairmen (each of whom shall be a director), a President, one or more Vice Presidents as may be determined from time to time by the Board (and, in the case of each such Vice President, with such descriptive title, if any, as the Chairman of the Board of Directors shall deem appropriate), a Secretary and a Treasurer. No elected officer of the Corporation need be a shareholder or resident of the State of Colorado. Section 7.02. Election. The Board of Directors, at its first meeting after each annual meeting of shareholders, shall elect the said officers, with the Chairman of the Board and each Vice Chairman (if any) selected from among its members. Unless otherwise specified by the Board at the time of election or appointment, or in an 12 17 employment contract approved by the Board, each officer's term shall expire at the first meeting of directors after the next annual meeting of shareholders. Section 7.03. Appointive Officers. The Board of Directors may also appoint one or more Assistant Vice Presidents, one or more Assistant Secretaries, Assistant Treasurers, and such other officers and assistant officers (none of whom need to be a member of the Board, a shareholder, or a resident of the State of Colorado) as it shall from time to time deem necessary, who shall exercise such powers and perform such duties as shall be set forth in these Bylaws or determined from time to time by the Board of Directors or the executive committee. Section 7.04. Two or More Offices. The same person may hold any two or more offices, except that the President and Secretary shall not be the same person. Section 7.05. Compensation. The Board of Directors or the executive committee shall fix the compensation of all officers of the Corporation from time to time. The Board of Directors or the executive committee may from time to time delegate to the Chairman of the Board the authority to fix the compensation of any or all the other officers of the Corporation. Section 7.06. Term of Office; Removal; Filling of Vacancies. Each elected officer of the Corporation shall hold office until his successor is elected and qualifies in his stead or until his earlier death, resignation, or removal from office. Each appointive officer shall hold office at the pleasure of the Board of Directors without the necessity of periodic reappointment. Any officer or agent elected or appointed by the Board of Directors may be removed at any time by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors or the executive committee. Section 7.07. Chairman of the Board. The Chairman of the Board shall be the ranking officer of the Corporation. As such, he shall have the power to call special meetings of the shareholders and directors for any purpose or purposes, and he shall preside when present, if he so elects, at all meetings of the shareholders and the Board of Directors. The Chairman of the Board shall have general supervision of the affairs of the Corporation and general control of all its business. He shall have authority to sign stock certificates. He shall see that the books, reports, statements and certificates required by statutes or laws applicable to the Corporation are properly kept, made and filed according to law. The Chairman of the Board may exercise his general supervision and control of the business and affairs of the Corporation through a Vice 13 18 Chairman or the President and may delegate all or any of his powers or duties to a Vice Chairman or the President, if and to the extent deemed by the Chairman of the Board to be desirable or appropriate. In the absence or disability of the Chairman of the Board, his duties shall be performed and his powers may be exercised by a Vice Chairman, unless otherwise determined by the Chairman of the Board, the executive committee or the Board of Directors.. Section 7.08. Vice Chairman of the Board. Each Vice Chairman of the Board shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chairman of the Board may from time to time delegate. A Vice Chairman of the Board, in the absence or disability of the Chairman of the Board, shall perform the duties and exercise the powers of the Chairman of the Board. One Vice Chairman shall be designated as the Senior Vice Chairman, who shall serve as the Chief Administrative Officer of the Company. Subject to the review, supervision and approval of his actions by the Chairman of the Board, or the executive committee or the Board of Directors, he shall have the authority to: cause the employment or appointment of and the discharge of employees and agents of the Corporation under his supervision, other than officers; suspend for cause pending final action by the authority which shall have elected or appointed him subordinate to the Sr. Vice Chairman. The Chief Administrative Officer shall put into operation the business policies of the corporation as determined by the Chairman of the Board, the executive committee or the Board of Directors. In carrying out such business policies, the Chief Administrative Officer shall, subject to the supervision of the Chairman of the Board, the executive committee, or the Board of Directors, have general management of the day-to-day internal operations of the Corporation. Section 7.09. President. The President shall serve as the Chief Corporate Officer. He shall preside at meetings of the Board of Directors and shareholders in the absence of, or at the request of, the Chairman of the Board and/or Vice Chairman, and upon such request he shall have power to call special meetings of the Board of Directors and shareholders for any purpose or purposes. Subject to the supervision, approval and review of his actions by the Chairman of the Board or Vice Chairman, or the executive committee or the Board of Directors, he shall have authority to make and sign bonds, deeds, contracts, and agreements in the name of and on behalf of the Corporation and to affix the corporate seal thereto; and to sign stock certificates. As the Chief Corporate Officer, the President shall be responsible for: seeing that the Company's books and records are properly maintained by the various responsible officers, including, but not limited to all accounting records and minute books of the corporation; State and Federal regulatory relations and reporting; investments of the corporation; investor relations and reporting; legal affairs of the corporation; taxation and tax reporting; external and internal reporting; and acquisitions. The President 14 19 shall be subject only to the authority of the Chairman of the Board, the Vice Chairman, the executive committee and the Board of Directors in carrying out his duties. In the absence or disability of the President, his duties shall be performed and his powers may be exercised by a Vice Chairman, unless otherwise determined by these Bylaws, the Chairman of the Board, the Vice Chairman, the executive committee or the Board of Directors. Section 7.10. Vice Presidents. Each Vice President shall have such powers and perform such duties and services as shall from time to time be prescribed or delegated to him by the Chairman, Vice Chairman, President, the executive committee or the Board of Directors. Section 7.11 Assistant Vice Presidents. Each Assistant Vice President shall generally assist a Vice President and shall have such powers and perform such duties and services as shall from time to time be prescribed or delegated to him by a Vice President, the President, the Vice Chairman, Chairman, the executive committee, or the Board of Directors. Section 7.12. Treasurer. The Treasurer shall be the chief accounting and financial officer of the Corporation and shall have responsibility for all matters pertaining to the accounts and finances of the Corporation. He shall audit or cause to be audited all payrolls and vouchers of the Corporation and shall direct the manner of certifying the same; shall receive, audit or cause to be audited and consolidate all operating and financial statements of the books of account of the Corporation, their arrangement and classification; shall review the accounting and auditing practices of the Corporation and shall have charge of all matters relating to taxation. The Treasurer shall have the care and custody of all monies, funds, and securities of the Corporation; shall deposit or cause to be deposited all such funds in and with such depositories as the Board of Directors or the executive committee shall from time to time direct or as shall be selected in accordance with procedure established by the Board or executive committee; shall devise all terms of credit granted by the Corporation; shall be responsible for the collection of all its accounts and shall cause to be kept full and accurate accounts of all receipts and disbursements of the Corporation; and shall have the power to endorse, for deposit, collection, or otherwise, all checks, drafts, notes, bills of exchange, or other commercial papers payable to the Corporation, and to give proper receipts or discharges for all payments to the Corporation. The Treasurer shall generally perform all the duties usually appertaining to the office of Treasurer of a corporation. In his absence or disability, his duties shall be performed and his powers may be exercised by an Assistant Treasurer, unless otherwise determined by the Treasurer, the Chairman of the Board, the Vice Chairman, the President, the executive committee, or the Board of Directors. 15 20 Section 7.13. Assistant Treasurers. Each Assistant Treasurer shall generally assist the Treasurer and shall have such powers and perform such duties and services as shall from time to time be prescribed or delegated to him by the Treasurer, Chairman, the Vice Chairman, the President, the executive committee, or the Board of Directors. Section 7.14. Secretary. The Secretary shall give or cause to be given notice of all meetings of the shareholders and the Board of Directors, and shall attend such meetings and keep and attest to true records of all proceedings at all meetings of the shareholders, the executive committee, and the Board. He shall have charge of the corporate seal, with authority to attest to any and all instruments or writings to which the same may be affixed. He shall keep and account for all minute books, documents, papers, and records of the Corporation, except those for which some other officer or agent is properly accountable. He shall have authority to sign stock certificates and shall generally perform all the duties usually appertaining to the office of Secretary of a corporation. In the absence or disability of the Secretary, his duties shall be performed by an Assistant Secretary, unless otherwise determined by the Secretary, the Chairman of the Board, the Vice Chairman, the President, the executive committee, or the Board of Directors. Section 7.15. Assistant Secretaries. Each Assistant Secretary shall generally assist the Secretary and shall have such powers and perform such duties and services as shall from time to time be prescribed or delegated to him by the Secretary, Chairman, Vice Chairman, the President, the executive committee, or the Board of Directors. Section 7.16. Additional Powers and Duties. In addition to the foregoing especially enumerated duties, services, and powers, the several elected and appointive officers of the Corporation shall perform such other duties and services and exercise such further powers as may be provided by statute, the Articles of Incorporation, or these Bylaws, or as may from time to time be determined by the Board of Directors or the executive committee or as assigned to them by any superior officer. ARTICLE VIII. STOCK AND TRANSFER OF STOCK Section 8.01. Certificates Representing Shares. Certificates in such form as may be determined by the Board of Directors and as shall conform to the requirements of the statutes, the Articles of Incorporation and these Bylaws shall be delivered representing all shares to which shareholders are entitled. Such certificates shall be 16 21 consecutively numbered and shall be entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof that the Corporation is organized under the laws of Colorado, the holder's name, the number and class of shares which such certificate represents, and the par value of such shares or a statement that such shares are without par value. Each certificate shall be signed by the Chairman of the Board or Vice Chairman or the President and the Secretary or an Assistant Secretary, and may be sealed with the seal of the Corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent or registered by a registrar, either of which is other than the Corporation or an employee of the Corporation, the signature of any such officer may be a facsimile. Section 8.02. Lost Certificates. The Chairman of the Board of Directors, the Vice Chairman, the executive committee, the President, the Secretary or such other officer or officers of the Corporation as the Board of Directors may from time to time designate, in its or his discretion, may direct a new certificate or certificates representing shares to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors, the executive committee, the Chairman, the Vice Chairman, the President, the Secretary or any such other officer, in its or his discretion and as a condition precedent to the issuance thereof, may require the owner of such lost, stolen or destroyed certificate(s), or his legal representative, to advertise the same in such manner as it or he shall require and/or give the Corporation a bond in such form, in such sum, and with such surety or sureties as it or he may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates to have been lost, stolen or destroyed. Section 8.03. Transfer of Shares. Shares of stock shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate or certificates representing shares, duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, with all required stock transfer tax stamps affixed thereto and canceled or accompanied by sufficient funds to pay such taxes, it shall be the duty of the Corporation or the transfer agent of the Corporation to issue a new certificate or certificates to the person entitled thereto, cancel the old certificate or certificates, and record the transaction upon its books. Section 8.04. Registered Shareholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stocks as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or 17 22 interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. Section 8.05. Pre-emptive Rights. No shareholder or other person shall have any pre-emptive rights with regard to securities issued by the Company, except as otherwise provided in the Articles of Incorporation or in applicable law. ARTICLE IX. MISCELLANEOUS PROVISIONS Section 9.01. Dividends. The Board of Directors may, at any regular or special meeting, declare dividends upon the outstanding shares of the Corporation, if any, subject to the provisions of the Articles of Incorporation. Dividends may be paid in cash, in property, or in shares of the Corporation, subject to the provisions of the statutes and the Articles of Incorporation. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to receive payment of any dividend, such record date to be not more than fifty days prior to the payment date of such dividend. In the absence of any action by the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring such dividend shall be the record date. The cash dividends paid upon each share of Class B common stock shall be only one-half of the cash dividends paid on each share of Class A common stock. Section 9.02. Reserves. There may be created from time to time by resolution of the Board of Directors, out of the earned surplus of the Corporation, such reserve or reserves as the directors in their discretion think proper from time to time, to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the directors shall think beneficial to the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 9.03. Signing of Negotiable Instruments. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 9.04. Seal. The Corporation seal shall have inscribed thereon the name of the Corporation. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced. 18 23 Section 9.05. Indemnification. For purposes of Article IX, a "Proper Person" means any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, by reason of the fact that he is or was a director, officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any foreign or domestic profit or nonprofit corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company, or other enterprise or employee benefit plan. The Corporation shall indemnify any Proper Person against reasonably incurred expenses (including attorney's fees), judgments, penalties, fines (including any excise tax assessed with respect to an employee benefit plan) and amounts paid in settlement reasonably incurred by him in connection with such action, suit or proceeding if it is determined by the groups set forth in Section 9.08 of this Article that he conducted himself in good faith and in a manner he reasonably believed (i) in the case of conduct in his official capacity with the Corporation, that his conduct was in the Corporation's best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the Corporation's best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe his conduct was unlawful. A Proper Person will be deemed to be acting in his official capacity while acting as a director, officer, employee or agent on behalf of this Corporation and not while acting on the Corporation's behalf for some other entity. No indemnification shall be made under this Article IX to a Proper Person with respect to any claim, issue, or matter in connection with a proceeding by or in the right of the Corporation in which the Proper Person was adjudged liable to the Corporation or in connection with any proceeding charging that the Proper Person derived an improper personal benefit, whether or not involving action in an official capacity, in which he was adjudged liable on the basis that he derived an improper personal benefit. Further, indemnification under this Section in connection with a proceeding brought by or in the right of the Corporation shall be limited to reasonable expenses, including attorneys' fees, incurred in connection with the proceeding. Section 9.06. Right to Indemnification. The Corporation shall indemnify any Proper Person who was wholly successful, on the merits or otherwise, in defense of any action, suit, or proceeding as to which he was entitled to indemnification under Section 9.05 of this Article IX against expenses (including attorney's fees) reasonably incurred by him in connection with the proceeding without the necessity of any action by the Corporation other than the determination in good faith that the defense has been wholly successful. 19 24 Section 9.07. Effect of Termination of Action. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person seeking indemnification did not meet the standards of conduct described in Section 9.05 of this Article IX. Entry of a judgment by consent as part of a settlement shall not be deemed an adjudication of liability, as described in Section 9.06 of this Article IX. Section 9.08 Groups Authorized to Make Indemnification Determination. Except where there is a right to indemnification as set forth in Sections 9.05 or 9.06 of this Article or where indemnification is ordered by a court in Section 9.09, any indemnification shall be made by the Corporation only as authorized in the specific case upon a determination by a proper group that indemnification of the Proper Person is permissible under the circumstances because he has met the applicable standards of conduct set forth in Section 9.05 of this Article. This determination shall be made by the board of directors by a majority vote of those present at a meeting at which a quorum is present, which quorum shall consist of directors not parties to the proceeding ("Quorum"). If a Quorum cannot be obtained, the determination shall be made by a majority vote of a committee of the board of directors designated by the board of directors, which committee shall consist of two or more directors not parties to the proceeding, except that directors who are parties to the proceeding may participate in the designation of directors for the committee. If a Quorum of the board of directors cannot be obtained and the committee cannot be established, or even if a Quorum is obtained or the committee is designated and a majority of the directors constituting such Quorum or committee so directs, the determination shall be made by (i) independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in this Section 9.08 or, if a Quorum of the full board of directors cannot be obtained and a committee cannot be established, by independent counsel selected by a majority vote of the full board (including directors who are parties to the action) or (ii) a vote of the shareholders. Section 9.09 Court-ordered Indemnification. Any Proper Person may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction for mandatory indemnification under Section 9.06 of this Article, including indemnification for reasonable expenses incurred to obtain court-ordered indemnification. If the court determines that such Proper Person is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he met the standards of conduct set forth in Section 9.05 of this Article or was adjudged liable in the proceeding, the court may order such indemnification as the court deems proper except that if the Proper Person has been adjudged liable, indemnification shall be limited to reasonable expenses incurred in connection with 20 25 the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. Section 9.10 Advance of Expenses. Reasonable expenses (including attorneys' fees) incurred in defending an action, suit or proceeding as described in Section 9.05 may be paid by the Corporation to any Proper Person in advance of the final disposition of such action, suit or proceeding upon receipt of (i) a written affirmation of such proper Person's good faith belief that he has met the standards of conduct prescribed by Section 9.05 of this Article IX, (ii) a written undertaking, executed personally or on the Proper Person's behalf, to repay such advances if it is ultimately determined that he did not meet the prescribed standards of conduct (the undertaking shall be an unlimited general obligation of the Proper Person but need not be secured and may be accepted without reference to financial ability to make repayment), and (iii) a determination is made by the proper group (as described in Section 9.08 of this Article IX) that the facts as then known to the group would not preclude indemnification. Determination and authorization of payments shall be made in the same manner specified in Section 9.08 of this Article IX. Section 9.11 Witness Expenses. The sections of this Article IX do not limit the Corporation's authority to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when he has not been made a named defendant or respondent in the proceeding. Section 9.12 Report to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this Article IX, if arising out of a proceeding by or on behalf of the Corporation, shall be reported in writing to the shareholders with or before the notice of the next shareholders' meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. Section 9.13 Surety Bonds. Such officers and employees of the Corporation (if any) as the Chairman, Vice Chairman, President, the Board of Directors, or the executive committee may direct from time to time shall be bonded for the faithful performance of their duties and for the restoration to the Corporation, in case of their death, resignation, retirement, disqualification or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the Corporation, in such amounts and by such surety companies as the Chairman, Vice Chairman, President, the Board of Directors, or the executive committee may determine. The premiums on such bonds shall be paid by the Corporation, and the bonds so furnished shall be in the custody of the Secretary. 21 26 ARTICLE X. AMENDMENTS Section 10.01. Amendments. These Bylaws may be altered, amended or repealed or new bylaws may be adopted at any meeting of the Board of Directors at which a quorum is present by the affirmative vote of a majority of the directors present at such meeting. * * * * * * * The undersigned Secretary of the Corporation hereby certifies that the foregoing Amended and Restated Bylaws were adopted by unanimous consent of the directors as of February 22, 1999. --------------------------------------- Jeffrey J. Wood, Secretary 22 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
STATE OF PERCENTAGE COMPANY NAME INCORPORATION TAX I.D. OWNERSHIP ------------ ------------- -------- --------- Citizens Insurance Company of America Colorado 84-0583103 100% Direct Insurance Investors, Inc. Texas 74-1458561 100% Indirect Industrial Benefits, Inc. Texas 76-0159854 100% Indirect Computing Technology, Inc. Colorado 84-1037266 100% Indirect American Liberty Exploration Corporation Louisiana 72-0895903 100% Indirect American Liberty Exploration Corporation, 1981-1 Louisiana 72-0914867 100% Indirect American Liberty Exploration Corporation, 1982-1 Louisiana 72-0928484 100% Indirect Funeral Homes of America, Inc. Louisiana 72-1148400 100% Indirect United Security Life Insurance Company Mississippi 64-0442514 100% Indirect National Security Life and Accident Insurance Co. Texas 75-0947122 100% Indirect Central Investors Life Insurance Company of Illinois Illinois 37-0862705 100% Indirect
EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Citizens, Inc.: We consent to incorporation by reference in the registration statement on Form S-3 of Citizens, Inc. of our report dated March 18, 1999, relating to the consolidated balance sheets of Citizens, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 1998, and all related schedules, which report appears in the December 31, 1998 annual report on Form 10-K of Citizens, Inc. KPMG LLP Dallas, Texas March 18, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
7 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 0 5,606,374 146,645,842 862,287 1,560,757 595,271 176,572,123 9,868,728 1,755,561 37,259,386 253,384,195 160,176,329 0 11,633,737 1,873,588 333,333 0 0 53,073,905 21,829,774 253,384,195 59,154,329 11,279,125 1,614,388 664,084 43,333,572 10,926,749 0 (5,677,265) 1,043,428 (6,720,693) 0 0 0 (6,720,693) (0.31) (0.31) 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----